<PAGE>
As filed with the Securities and Exchange Commission on November 5, 1998
Registration No. 333-63469
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<S> <C>
PMC Capital I Pennsylvania Manufacturers Corporation
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(Exact name of registrant as specified (Exact name of registrant as specified
in its charter) in its charter)
Delaware Pennsylvania
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(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
Applied For 23-2217932
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(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
The PMA Building The PMA Building
380 Sentry Parkway 380 Sentry Parkway
Blue Bell, Pennsylvania 19422-2328 Blue Bell, Pennsylvania 19422-2328
(215) 665-5046 (215) 665-5046
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(address, including zip code, and (address, including zip code, and
telephone number, including area telephone number, including area
code, of registrant's principal code, of registrant's principal
executive offices) executive offices)
</TABLE>
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Francis W. McDonnell
Senior Vice President and Chief Financial Officer
Pennsylvania Manufacturers Corporation
1735 Market Street
Philadelphia, Pennsylvania 19103-7590
(215) 665-5070
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(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
--------------------
Copies to:
Robert L. Pratter, Esquire William D. Torchiana, Esquire
Duane, Morris & Heckscher LLP Sullivan & Cromwell
4200 One Liberty Place 125 Broad Street
Philadelphia, PA 19103-7396 New York, New York 10004
(215) 979-1000 (212) 558-4000
--------------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
<PAGE>
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933
other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. [_]
<PAGE>
____________________
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===========================================
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER ___, 1998
$100,000,000
PMC CAPITAL I
___ % CAPITAL SECURITIES, SERIES A
(Liquidation Amount $1,000 Per Capital Security)
Fully and Unconditionally Guaranteed, As Described Herein, By
PENNSYLVANIA MANUFACTURERS CORPORATION
------------------------
The ___% Capital Securities, Series A (the "Capital Securities") offered
hereby (the "Offering") represent undivided beneficial interests in the assets
of PMC Capital I, a statutory business trust formed under the laws of the State
of Delaware (the "Issuer" or the "Trust"). Pennsylvania Manufacturers
Corporation ("PMC"), a Pennsylvania corporation, will be the owner of all of the
beneficial interests represented by common securities (the "Common Securities")
of the Issuer. The Bank of New York is the Property Trustee of the Issuer. The
Issuer exists for the sole purpose of issuing the Capital Securities and the
Common Securities and investing the proceeds thereof in ___% Junior Subordinated
Debentures, Series A (the "Junior Subordinated Debentures") to be issued by PMC.
The Junior Subordinated Debentures will mature on _________, 2028 (the "Stated
Maturity"). The Capital Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities. See
"Description of the Capital Securities -- Subordination of Common Securities."
PMC and the Issuer do not intend to list the Capital Securities on any
securities exchange. See "Risk Factors -- Liquidity of Trading; Trading Price of
the Capital Securities May Not Fully Reflect Value of Unpaid Interest."
Holders of the Capital Securities will be entitled to receive preferential
cumulative cash distributions accruing from the date of original issuance and
payable semi-annually in arrears on and of each year, commencing , 1999, at the
annual rate of ___% of the liquidation amount of $1,000 per Capital Security
("distributions"). PMC has the right to defer payments of interest on the Junior
Subordinated Debentures, so long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, at any time (continued on next page)
See "Risk Factors" beginning on Page 19 hereof for certain information
Relevant to an investment in the Capital Securities.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
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Initial Public Offering Underwriting Proceeds to the
Price(1) Commissions(2) Issuer(3)(4)
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<S> <C> <C> <C>
Per Capital Security....... $1,000 (3)
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Total ..................... $100,000,000 (3)
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</TABLE>
(1) Plus accrued distributions, if any, from the date of original issuance.
(2) The Issuer, PMC and PMA Reinsurance Corporation have agreed to indemnify
the several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(3) In view of the fact that the proceeds of the sale of the Capital Securities
will be used to purchase the Junior Subordinated Debentures, PMC has agreed
to pay to the Underwriters as compensation ("Underwriters' Compensation")
for their arranging the investment therein of such proceeds, $____ per
Capital Security (or $_____ in the aggregate). See "Underwriting."
(4) Other expenses of issuance and distribution, which are payable by PMC, are
estimated to be $500,000.
The Capital Securities offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that the Capital Securities will be ready for delivery in book-entry form only
through the facilities of DTC, on or about ____________, 1998, against payment
therefor in immediately available funds.
Goldman, Sachs & Co.
Merrill Lynch & Co.
First Union Capital Markets
----------------
The date of this Prospectus is _____________, 1998
[Red Herring Legend]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CAPITAL
SECURITIES, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND
AFTER THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
(Continued from Cover Page)
and from time to time for a period not exceeding 10 consecutive semi-annual
periods with respect to each deferral period (each an "Extension Period"),
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any such Extension
Period and the payment of all interest then accrued and unpaid (together with
interest thereon at the rate of ___% per annum, compounded semi-annually, to the
extent permitted by applicable law), PMC may elect to begin a new Extension
Period subject to the requirements set forth herein. If interest payments are
so deferred, distributions on the Capital Securities will also be deferred and
PMC will not be permitted to declare or pay any distributions with respect to
PMC's capital stock or make any payment on any debt securities of PMC that rank
pari passu with or junior to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by PMC of the debt securities
of any subsidiary of PMC that rank pari passu with or junior to the Junior
Subordinated Debentures subject to certain exceptions described herein. During
an Extension Period, interest on the Junior Subordinated Debentures will
continue to accrue (and the amount of distributions to which holders of the
Capital Securities are entitled will accumulate) at the rate of ___% per annum,
compounded semi-annually from the relevant payment date for such interest and
holders of Capital Securities will be required to accrue interest income for
United States federal income tax purposes. See "Description of the Junior
Subordinated Debentures--Option to Extend Interest Payment Period" and "United
States Federal Income Taxation--Original Issue Discount."
PMC has, through the Guarantee, the Trust Agreement, the Capital
Securities, the Indenture and the Expense Agreement (each as defined herein),
taken together, fully, irrevocably and unconditionally guaranteed all of the
Issuer's obligations under the Capital Securities. See "Relationship Among the
Capital Securities, the Junior Subordinated Debentures and the Guarantee--Full
and Unconditional Guarantee." The Guarantee of PMC guarantees the payment of
distributions and payments on liquidation or redemption of the Capital
Securities, but only in each case to the extent of funds held by the Issuer, as
described herein (the "Guarantee"). See "Description of the Guarantee." If PMC
does not make interest payments on the Junior Subordinated Debentures held by
the Issuer, the Issuer will have insufficient funds to pay distributions on the
Capital Securities. The Guarantee does not cover payment of distributions when
the Issuer does not have sufficient funds to pay such distributions. In such
event, a holder of Capital Securities may institute a legal proceeding directly
against PMC pursuant to the terms of the Indenture to enforce payment of amounts
equal to such distributions to such holder. See "Description of the Junior
Subordinated Debentures--Debenture Events of Default and Consequent Rights of
Certain Holders--Rights of Holders of Capital Securities to Direct Action."
PMC's obligations under the Guarantee and the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Debt (as defined
herein) of PMC.
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<PAGE>
The Capital Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the Junior Subordinated Debentures at maturity or their
earlier redemption. See "Description of the Capital Securities--Redemption."
The Junior Subordinated Debentures are redeemable prior to their Stated Maturity
at the option of PMC (i) on or after ______________, 2008, in whole at any time
or in part from time to time or (ii) prior to , 2008, in whole (but not in
part), within 90 days following the occurrence of a Special Event (as defined
herein). For a description of redemption prices for the Capital Securities
pursuant to clause (i) or (ii) above, see "Description of the Capital
Securities--Redemption" and "Description of the Junior Subordinated Debentures--
Optional Redemption."
The Junior Subordinated Debentures are unsecured and subordinated and
junior in right of payment to all Senior Debt of PMC. After the completion of
this Offering and the repayment of debt with the proceeds thereof, PMC will have
approximately $104.5 million principal amount of indebtedness for borrowed money
constituting Senior Debt. The terms of the Junior Subordinated Debentures do not
limit PMC's ability to incur additional Senior Debt. PMC is an insurance holding
company and substantially all of the operating assets of PMC are owned by its
subsidiaries. PMC relies primarily on the receipt of sufficient funds from its
subsidiaries in the form of dividends, net payments under a tax-sharing
agreement between PMC and its subsidiaries and loans to meet its obligations for
payment of principal and interest on its outstanding debt obligations and
corporate expenses. Accordingly, the Junior Subordinated Debentures will be
effectively subordinated to all existing and future liabilities of PMC's
subsidiaries, which debt totalled approximately $2.4 billion at June 30, 1998,
and holders of Junior Subordinated Debentures should look only to the assets of
PMC for payments on the Junior Subordinated Debentures. The payment of dividends
by PMC's insurance subsidiaries is limited under the insurance laws of their
states of domicile (primarily Pennsylvania). PMC's insurance subsidiaries have
the ability to loan funds to PMC subject to certain regulatory restrictions. See
"Description of the Junior Subordinated Debentures--Subordination."
PMC will have the right at any time to terminate the Issuer and cause the
Junior Subordinated Debentures to be distributed to the holders of the Capital
Securities in liquidation of the Issuer. In the event of the termination of the
Issuer, after satisfaction of liabilities to creditors of the Issuer as required
by applicable law, the holders of the Capital Securities will be entitled to
receive for each Capital Security a Liquidation Amount of $1,000 per Capital
Security, plus accumulated and unpaid distributions thereon to the date of
payment, or a distribution of such Liquidation Amount in Junior Subordinated
Debentures, subject to certain limitations. See "Description of the Capital
Securities--Liquidation Distribution Upon Termination."
The Capital Securities will be represented by global certificates
registered in the name of The Depository Trust Company ("DTC") or its nominee.
Beneficial interests in the Capital Securities will be shown on, and transfers
thereof will be effected only through, records maintained by participants in
DTC. Except as described herein, Capital Securities in certificated form will
not be issued in exchange for the global certificates. See "Description of the
Capital Securities--Book-Entry-Only Issuance--The Depository Trust Company."
FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE
STATE OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR
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<PAGE>
HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
AVAILABLE INFORMATION
The Trust and PMC have filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement on Form S-3 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Capital Securities, the Junior Subordinated Debentures and the Guarantee. This
Prospectus, which forms a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the Rules and Regulations of the
Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the matter involved, and each such statement shall
be deemed qualified in its entirety by such reference.
PMC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports and other information with the Commission. In addition, the Trust
and PMC intend to furnish to holders of Capital Securities annual reports
containing consolidated financial statements of PMC certified by an independent
public accounting firm. Such reports and other information and the Registration
Statement, including the exhibits and schedules filed therewith, may be examined
without charge at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549,
and at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web Site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants who file electronically with the Commission. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330.
No separate financial statements of the Trust have been included herein.
PMC and the Trust do not consider such financial statements material to holders
of the Capital Securities because the Trust is a newly formed special purpose
entity, has no operating history or independent operations and is not engaged
in, and does not propose to engage in, any activity other than its holding as
trust assets the Junior Subordinated Debentures of PMC and its issuance of the
Capital Securities and the Common Securities. See "The Issuer," "Description of
the Capital Securities," "Description of the Guarantee" and "Description of the
Junior Subordinated Debentures." In addition, PMC does not expect that the
Trust will be filing reports under the Exchange Act with the Commission. The
Trust is a statutory business trust formed under the laws of the State of
Delaware. PMC, as of the date hereof, beneficially owns all of the beneficial
interests in the Trust. PMC's and the Trust's principal executive offices are
located at 380 Sentry Parkway, Blue Bell, Pennsylvania 19422-2328, telephone
number (215) 665-5046.
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<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements made throughout this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those expected by the Company. The factors that
could cause actual results to vary materially, some of which are described in
the forward-looking statements, include, but are not limited to, changes in
general economic conditions, including the performance of financial markets and
interest rates; regulatory or tax changes, including changes in risk-based
capital or other regulatory standards that affect the ability of the Company to
conduct its business; competitive or regulatory changes that affect the cost of
or demand for the Company's products; the effect of changes in workers'
compensation statutes and the administration thereof; the Company's ability to
predict and effectively manage claims related to insurance and reinsurance
policies; reliance on key management; adequacy of reserves for claims
liabilities; adequacy and collectibility of reinsurance purchased by the
Company; frequency and severity of natural disasters and other catastrophes; and
other factors disclosed from time to time in reports filed by the Company with
the Commission. Investors should not place undue reliance on any such forward-
looking statements.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information and consolidated financial statements appearing elsewhere
in this Prospectus. Certain insurance terms and other capitalized terms used
herein are defined in "Glossary of Certain Insurance and Other Defined Terms."
Unless the context otherwise requires, all references in this Prospectus to: (i)
"PMC" or the "Company" refers to Pennsylvania Manufacturers Corporation and,
depending on the context, its subsidiaries on a consolidated basis; (ii) "PMA
Re" refers to the Company's property and casualty reinsurance operations,
including PMA Reinsurance Corporation, a Pennsylvania insurance subsidiary of
the Company; (iii) "Property and Casualty Group" refers to the Company's
workers' compensation and standard commercial lines of property and casualty
insurance operations, which are written through the "Pooled Companies"
consisting of three Pennsylvania insurance subsidiaries of the Company,
including Pennsylvania Manufacturers Association Insurance Company ("PMAIC"),
which share underwriting results through an intercompany pooling arrangement;
(iv) "Caliber One" refers to the Company's specialty insurance operation,
including Caliber One Indemnity Company, a Delaware insurance subsidiary of the
Company; (v) "PMA Cayman" refers to PMA Insurance, Cayman Ltd., a Cayman Islands
run-off insurance subsidiary of the Company and (vi) "MASCCO" refers to Mid-
Atlantic States Casualty Company, a Pennsylvania run-off insurance subsidiary of
the Company.
Unless otherwise specified, all financial information is presented in
accordance with United States generally accepted accounting principles ("GAAP").
Statutory data included herein have been derived from the annual and quarterly
statements of PMC's insurance subsidiaries as filed with insurance regulatory
authorities and prepared in accordance with statutory accounting principles
("SAP") prescribed or permitted by such regulatory authorities.
Unless otherwise specified herein, the information contained herein assumes
no exercise of the Underwriters' over-allotment option.
The Company
General
The Company is an insurance holding company, whose subsidiaries operate in
three distinct segments of the property and casualty insurance industry: (i)
reinsurance, through PMA Re, which commenced business in 1980; (ii) standard
commercial lines of insurance, with an emphasis on workers' compensation,
through the Property and Casualty Group, which has been in business since 1915
and (iii) specialty insurance products, focusing on excess and surplus lines,
through the Company's recently-formed operation, Caliber One. PMA Re writes a
broad range of property and casualty reinsurance products with an emphasis on
risk-exposed casualty excess of loss reinsurance and operates in the United
States domestic brokered market. The Property and Casualty Group offers a broad
range of standard commercial lines including commercial general liability,
commercial automobile and commercial multi-peril, with an emphasis on
underwriting of workers' compensation products and services primarily in nine
contiguous jurisdictions in the Mid-Atlantic and Southern regions of the United
States, utilizing the PMA Group trade name. In 1998, Caliber One commenced
writing excess and surplus lines of insurance, including commercial general
liability, automobile and certain
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property exposures on a non-admitted basis. For the six months ended June 30,
1998, the Company's net premiums written of $257.0 million were derived 45.9%
from PMA Re, 53.8% from the Property and Casualty Group and 0.3% from Caliber
One. Net income for the Company for six months ended June 30, 1998 and the year
ended December 31, 1997 was $21.4 million and $15.0 million, respectively. As of
June 30, 1998, the Company had total assets of $3,075.4 million and
shareholders' equity of $496.4 million.
According to data provided by the Reinsurance Association of America
("RAA"), as of June 30, 1998, PMA Reinsurance Corporation was the 24th largest
reinsurer in the United States in terms of statutory surplus and 17th largest in
terms of net premiums written. Management believes that PMA Re competes on the
basis of its ability to offer prompt and responsive service and products
designed to meet clients needs and its excellent long-term relationships in the
broker and ceding company communities. PMA Re's net premiums written grew at a
compound annual rate of 13.2% between 1992 and 1997. As of June 30, 1998,
statutory surplus of PMA Reinsurance Corporation was $279.1 million, and for the
six months ended June 30, 1998, PMA Re's net premiums written were $117.9
million. PMA Re reported pre-tax operating income of $23.0 million and $23.2
million for the six-month periods ended June 30, 1998 and 1997, respectively,
and $46.0 million, $44.8 million and $39.8 million for the years ended December
31, 1997, 1996 and 1995, respectively.
The Property and Casualty Group markets a full range of workers'
compensation products and services, as well as other standard commercial lines
of property and casualty insurance, primarily to middle market accounts
(premiums ranging from $40,000 to $300,000) and smaller accounts (premiums less
than $40,000). The Property and Casualty Group distributes its products
primarily through approximately 240 regional brokers and agents throughout its
marketing territories and also utilizes an internal sales force in Pennsylvania
and Delaware, which accounted for approximately 13% of direct premiums written
in 1997. In 1997, workers' compensation insurance accounted for 60% of the
Property and Casualty Group's direct premiums written, and Pennsylvania workers'
compensation insurance accounted for 50% of the Property and Casualty Group's
workers' compensation direct premiums written. The Property and Casualty Group
offers a variety of workers' compensation products, such as third-party claims
administration services, rent-a-captives and high-deductible plans in addition
to traditional fixed-cost and loss-sensitive workers' compensation products, and
management believes that the Property and Casualty Group competes in workers'
compensation on the basis of its ability to provide prompt and responsive
service.
In 1996, the Company restructured the Property and Casualty Group with the
goal of restoring its profitability after three years of operating losses. The
operating losses resulted primarily from unfavorable underwriting experience and
adverse reserve development related to accident years 1987 through 1991, when
the Property and Casualty Group wrote a much higher volume of business than its
current volume. The principal components of the restructuring were: (i)
strengthening loss reserves; (ii) initiating a commutation program to settle a
significant number of open claims from the 1987 to 1991 period; (iii)
designating PMA Cayman and MASCCO as separate run-off companies to alleviate the
SAP impact on the
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<PAGE>
Pooled Companies of the loss reserve strengthening and to manage the capital
deployed in running off pre-1992 workers' compensation claims; (iv) initiating
an expense reduction program and (v) implementing management changes, including
the appointment of a new Chief Operating Officer and the creation of a new
position of Chief Underwriting Officer. In June 1998, the Company entered into a
letter of intent to sell PMA Cayman. Largely as a result of the restructuring,
the Property and Casualty Group recorded pre-tax operating income of $5.4
million for the six months ended June 30, 1998, compared to pre-tax operating
losses of $5.9 million for the six months ended June 30, 1997 and $3.7 million,
$215.7 million (including restructuring and other special charges of $223.1
million) and $3.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. At June 30, 1998, the Pooled Companies' statutory surplus was
$263.1 million, and for the six months ended June 30, 1998, the Property and
Casualty Group's net premiums written were $138.4 million. See "Business--The
Property and Casualty Group."
In December 1997, the Company acquired an insurance company, which was
renamed Caliber One Indemnity Company, to enter the excess and surplus lines
insurance business. Within the last year, the Company hired several experienced
specialty insurance executives to manage Caliber One, who have substantial
relationships within the wholesale brokerage community, which management
believes will have a favorable impact on Caliber One's ability to obtain market
acceptance. Caliber One distributes its products primarily through national
wholesale brokers, and Caliber One Indemnity Company is approved as a surplus
lines carrier in 38 states, Puerto Rico and the District of Columbia. As of
June 30, 1998, Caliber One Indemnity Company's statutory surplus was $25.5
million, and for the six months ended June 30, 1998, Caliber One's net premiums
written were $917,000.
The Company's insurance subsidiaries have the following ratings from A.M.
Best: PMA Reinsurance Corporation, A+ ("Superior"); the Pooled Companies, A-
("Excellent") and Caliber One Indemnity Company, A ("Excellent"). Management
believes that ratings from A.M. Best are material to its operations and that a
downgrade from the present rating classifications could have an adverse effect
on the Company's ability to market its products. A.M. Best's ratings are based
upon an assessment of an insurance company's perceived financial strength
regarding its ability to pay obligations to its policyholders and are not
directed toward the protection of investors.
The Company maintains its executive offices at 380 Sentry Parkway, Blue
Bell, PA 19422, and its telephone number is (215) 665-5046.
Business Strategy
Management believes that PMC's three insurance businesses are characterized
by the need for specialized expertise and a requirement for strong underwriting
skills. Management also believes that each of the operations targets
sophisticated customers who desire products designed for specific client needs
that require a high level of service. The following discussion sets forth the
main components of the Company's overall operating strategies and the
implementation thereof by the Company's operating units.
Underwriting Discipline
Management believes that risk selection and pricing is critical to the
Company's success. Maintenance of underwriting discipline has become more
difficult and more critical to the achievement of an acceptable level of
profitability for the Company given the present competitive conditions in
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<PAGE>
the property and casualty insurance and reinsurance industries. The Company's
three operations have rejected and non-renewed certain accounts because market
rates and contract terms for such risks did not provide the opportunity to
achieve a rate of return that management considers acceptable.
The Company relies on experienced underwriting management in order to
maintain underwriting discipline. The underwriting management at PMA Re, the
Property and Casualty Group and Caliber One averages 21, 22 and 16 years of
experience, respectively, in the property and casualty insurance industry. In
addition, in 1997 the Property and Casualty Group strengthened its underwriting
management by creating the new position of and appointing a Chief Underwriting
Officer, who has over 22 years of experience in the industry. Also, the Property
and Casualty Group reorganized the reporting structure so that field
underwriting management now reports functionally to the Chief Underwriting
Officer rather than to branch managers with primarily marketing
responsibilities.
For all of the Company's insurance operations, underwriting management is
evaluated and compensated with the emphasis on profit objectives.
Marketing
The Company markets its products on the basis of price, service, product
design and financial security. The Company attempts to price its products in
such a way that the prices charged to its clients are commensurate with the
overall marketplace. The current soft pricing environment has made competition
and marketing solely on the basis of price increasingly difficult. Therefore,
the Company has focused its marketing efforts on providing excellent service and
products designed for specific client needs, as well as maintaining stable and
solid relationships with the Company's distribution system.
Beginning in 1996, PMA Re undertook a target marketing program designed to
increase its business with certain existing accounts and obtain new ceding
company clients from a pre-screened list developed by the Company. Management
believes that PMA Re has been able to write certain business that has been
displaced as a result of the recent consolidation of the United States
reinsurance industry. As a result of these factors and PMA Re's other
competitive attributes, including management's relationships with broker and
ceding company communities, PMA Re's net premiums written grew 8.5% in 1997
compared to 1996 and increased 22.5% for the six months ended June 30, 1998
compared to the six months ended June 30, 1997, notwithstanding the non-renewal
or cancellation of a total of $68.2 million of business since January 1, 1997
primarily for underwriting reasons. The Property and Casualty Group's marketing
strategy is focused on: (i) reestablishing a portion of its historical market
share in its traditional marketing territories on a profitable basis; (ii)
implementing planned geographic expansion into selected territories bordering
its present marketing territories; (iii) increasing its business with national
brokerages and (iv) increasing its business with smaller accounts (less than
$40,000 in annual premium) in certain jurisdictions in response to workers'
compensation reforms which have made such business more attractive. Caliber
One's marketing strategy is based upon management's relationships within the
wholesale brokerage community and responsiveness to marketplace needs through
product design.
- 10 -
<PAGE>
Products and Services
Management believes that the Company's results depend on its ability to
offer products designed to meet client needs and services that distinguish the
Company from its competitors. The Company's service standards have been designed
to emphasize prompt turn-around time for underwriting submissions, access to
information and claims handling. PMA Re offers a full range of reinsurance
products, including traditional treaty reinsurance, facultative reinsurance,
finite risk and other specialized products. In addition, PMA Re has been at the
forefront of service initiatives within the brokered reinsurance market,
including fastrack claims, electronic data interchange and electronic funds
transfer. Fastrack claims is a process whereby certain claims are pre-approved
for payment as long as the request for payment falls within certain parameters,
thereby accelerating remittance to the client. The Property and Casualty Group
has developed products and services to serve the various segments of its market.
It offers its workers' compensation insureds the enhanced ability to control
medical costs, through its affiliation with First Health Group, Inc., a third
party preferred provider organization. The Property and Casualty Group has also
utilized aggressive claims settlement processes, including commutations, as part
of its strategy to assist clients in reducing the overall cost of their workers'
compensation benefits. The Property and Casualty Group offers alternative market
products, such as large deductible plans, rent-a-captive services and third
party administration of claims to self-insured clients. In addition, in 1998,
the Property and Casualty Group began marketing an integrated disability
product, PMA One, which combines occupational and non-occupational disability
coverages. Caliber One develops products for specialized segments of the market,
including coverages for clinical trials, environmental risks, special events,
toy manufacturers and retroactive liability.
- 11 -
<PAGE>
PMC Capital I
PMC Capital I is a statutory business trust formed under Delaware law. The
Issuer exists for the exclusive purposes of (i) issuing the Capital Securities
and the Common Securities representing undivided beneficial interests in the
assets of the Issuer, (ii) investing the gross proceeds of the sale of the
Capital Securities and the Common Securities in the Junior Subordinated
Debentures and (iii) engaging in only those other activities necessary or
incidental thereto. All of the Common Securities, having an aggregate
liquidation amount equal to 3% of the total capital of the Issuer, will be owned
by PMC. The Common Securities will rank pari passu, and payments will be made
thereon pro rata, with the Capital Securities, except that upon the occurrence
and continuance of an event of default under the Amended and Restated Trust
Agreement (the "Trust Agreement"), among PMC as Depositor, The Bank of New York
as Property Trustee and The Bank of New York (Delaware) as Delaware Trustee, and
the Administrative Trustees named therein, resulting from an event of default by
PMC on the Junior Subordinated Debentures, the rights of the holders of the
Common Securities to payment in respect of distributions and payments upon
liquidation, redemption and otherwise will be subordinated to the rights of the
holders of the Capital Securities. The Property Trustee and the Administrative
Trustees are referred to herein, collectively, as the "Trustees." Subject to the
right of holders of a majority in Liquidation Amount of the outstanding Capital
Securities to appoint a substitute Property Trustee upon the occurrence of
certain events described herein, PMC, as the owner of all of the Common
Securities, has the exclusive right (subject to the provisions of the Trust
Agreement) to appoint, remove or replace the Property Trustee, the duties and
obligations of which will be governed by the Trust Agreement. PMC will pay all
fees and expenses related to the Issuer and the offering of the Capital
Securities.
The Offering
Issuer PMC Capital I
Securities Offered $100,000,000 of ___% Capital Securities
Ownership The ownership interests in the Trust will be
evidenced by (i) a class of Capital Securities
representing approximately 97% of the ownership
interests in the Trust and (ii) a class of Common
Securities (together with the Capital Securities,
the "Trust Securities") representing approximately
3% of the ownership interest in the Trust.
Maturity of the Junior ________, 2028 (the "Stated Maturity"). The Capital
Subordinated Debentures Securities are mandatorily redeemable upon the
maturity or earlier redemption of the Junior
Subordinated Debentures.
Distribution Payment Dates ___________ 1 and __________ 1, commencing _______,
1999.
Extension of Interest PMC will have the right to extend the interest
Payment Period payment period on the Junior Subordinated
Debentures, so long as no Event of Default has
occurred and is continuing, for a period not
exceeding ten consecutive semi-annual periods
(each, an "Extension Period"), and, as a
consequence, during an Extension Period, semi-
annual distributions on the Capital Securities
would be deferred (and the amount of distributions
which holders of the Capital Securities are
entitled to will accumulate additional
distributions thereon at the rate of _____%
thereof, compounded semi-annually from the relevant
payment date for such
- 12 -
<PAGE>
distributions). During an Extension Period, neither
PMC nor any of its subsidiaries shall (i) declare
or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation
payment with respect to, any of PMC's outstanding
capital stock or (ii) make any payment of
principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities of
PMC that rank pari passu with or junior to the
Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by
PMC of the debt securities of any subsidiaries of
PMC that rank pari passu with or junior to the
Junior Subordinated Debentures (other than (a)
dividends or distributions in Common Stock or Class
A Common Stock of PMC, (b) payments under the
Guarantee and (c) purchases of Common Stock or
Class A Common Stock of PMC related to the issuance
of Common Stock or Class A Common Stock of PMC
under any of PMC's benefit plan for directors,
officers or employees). This deferral feature
cannot be used to extend the maturity of the Junior
Subordinated Debentures.
Guarantee Taken together, PMC's obligations under the Junior
Subordinated Debentures, the Indenture, the Trust
Agreement, the Expense Agreement and the Guarantee
provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of
distributions and other amounts due on the Capital
Securities. No single document standing alone or
operating in conjunction with fewer than all the
other documents constitutes such guarantee.
Mandatory Redemption The Capital Securities are subject to mandatory
redemption upon repayment of the Junior
Subordinated Debentures at maturity or their
earlier redemption. PMC will have the option at any
time on or after, _________________, 2008, to
redeem, in whole or in part, the Junior
Subordinated Debentures, at par, plus accrued and
unpaid interest, if any, through the redemption
date. PMC will also have the right at any time,
upon the occurrence of a Special Event (as defined
herein), to redeem, in whole but not in part, the
Junior Subordinated Debentures.
Liquidation Amount $1,000.00 per Capital Security (the "Liquidation
Amount").
Subordination of Common Income distributions, payments of redemption prices
Securities and amounts distributed in connection with the
liquidation of the Trust will be made pari passu
among holders of Capital Securities and PMC, as
holder of the common Securities, except that, in
the event of a default by PMC on the Junior
Subordinated Debentures, (i) full income
distributions and payments of redemption prices
will be made on the Capital Securities before
further income distributions or payments of
redemption prices are made on the Common Securities
and (ii) the full liquidation preference will be
paid on the Capital Securities in the event of a
liquidation of the Trust before any liquidating
distribution is made on the Common Securities.
Use of Proceeds All of the proceeds from the sale of Capital
Securities will be invested by the Trust in the
Junior Subordinated Debentures. PMC will use the
proceeds from issuance of the Junior Subordinated
Debentures to repay debt that is outstanding under
the Revolving Credit Facility. See "Use of
Proceeds."
The Company has elected not to provide pro forma financial statements to
give effect to the issuance of the Capital Securities because the issuance is
not expected to result in a change in the Company's overall level of
capitalization (only the components thereof will change), and the issuance of
the Capital Securities is not expected to result in a change in the Company's
ratio of earnings to fixed charges of more than 10%. See "Capitalization" and
"Ratio of Earnings to Fixed Charges."
- 13 -
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial and operating data set forth below as of
December 31, 1997, 1996 and 1995 and for each of the three years in the period
ended December 31, 1997 were derived from the audited consolidated financial
statements of the Company. The summary consolidated financial and operating
data as of June 30, 1998 and 1997 and for the six-month periods ended June 30,
1998 and 1997 were derived from the Company's unaudited consolidated financial
statements. The unaudited consolidated financial statements have been prepared
on the same basis as the Company's audited consolidated financial statements,
and, in the opinion of management, include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the Company's
financial position and results of operations for these periods. The results of
operations for the six months ended June 30, 1998 may not be indicative of
results of operations for the full year. All summary consolidated financial and
operating data set forth below should be read in conjunction with the
consolidated financial statements of the Company, together with the notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations, both appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Six Months Ended
June 30, Year Ended December 31,
----------------------- ------------------------------------
1998 1997 1997(1) 1996(1) 1995(1)
---- ---- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Net premiums written(2) $248,481 $248,285 $381,282 $432,975 $485,876
======== ======== ======== ======== ========
Consolidated Revenues:
Net premiums earned $221,576 $222,401 $375,951 $420,575 $484,952
Net investment income 65,200 68,459 136,698 133,936 139,355
Net realized investment gains (losses) 11,263 (1,931) 8,598 2,984 31,923
Service revenues 5,090 5,038 10,311 9,189 5,106
-------- -------- -------- -------- --------
Total consolidated revenues $303,129 $293,967 $531,558 $566,684 $661,336
======== ======== ======== ======== ========
Income (loss) before extraordinary item 21,445 5,277 19,753 (135,334) 24,130
Extraordinary loss from early extinguishment
of debt, net of related tax effect(3) --- (4,734) (4,734) --- ---
-------- -------- -------- -------- --------
Net income (loss) $ 21,445 $ 543 $ 15,019 ($135,334) $ 24,130
======== ======== ======== ======== ========
At June 30, At December 31,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
Consolidated Financial Position:
Total investments $2,159,303 $2,067,828 $2,194,738 $2,261,353 $2,455,949
Total assets 3,075,413 3,085,640 3,057,258 3,117,516 3,258,572
Reserves for unpaid losses and LAE 1,939,568 2,052,791 2,003,187 2,091,072 2,069,986
Long-term debt 203,000 203,049 203,000 204,699 203,848
Shareholders' equity 496,383 415,120 478,347 425,828 609,668
Six Months Ended
June 30, Year Ended December 31,
----------------------- ------------------------------------
1998 1997 1997(1) 1996(1) 1995(1)
---- ---- ------- -------- -------
Pre-tax operating income (loss)(4):
PMA Re $ 22,952 $ 23,187 $ 45,957 $ 44,807 $ 39,793
-------- -------- -------- -------- --------
The Property and Casualty Group(5):
Excluding Run-off Operations 4,954 (4,781) (3,607) (215,669) (3,885)
Run-off Operations 428 (1,107) (73) --- ---
-------- -------- -------- -------- --------
Total Property and Casualty Group 5,382 (5,888) (3,680) (215,669) (3,885)
Caliber One (1,070) --- --- --- ---
Corporate operations (5,548) (4,526) (9,954) (6,464) (14,184)
-------- -------- -------- -------- --------
Total pre-tax operating income
(loss) before interest expense 21,716 12,773 32,323 (177,326) 21,724
Interest expense 7,463 8,222 15,768 17,052 18,734
-------- -------- -------- -------- --------
Pre-tax operating income (loss) 14,253 4,551 16,555 (194,378) 2,990
Net realized investment gains (losses) 11,263 (1,931) 8,598 2,984 31,923
-------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary item 25,516 2,620 25,153 (191,394) 34,913
Provision (benefit) for income taxes 4,071 (2,657) 5,400 (56,060) 10,783
-------- -------- -------- -------- --------
Income (loss) before extraordinary item 21,445 5,277 19,753 (135,334) 24,130
Extraordinary loss from early extinguishment
of debt, net of related tax effect(3) --- (4,734) (4,734) --- ---
-------- -------- -------- -------- --------
Net income (loss) $ 21,445 $ 543 $ 15,019 $135,334 $ 24,130
======== ======== ======== ======== ========
</TABLE>
- 14 -
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges (6) 4.0x 1.3x 2.4x --- 2.7x
GAAP Ratios for Insurance Subsidiaries (7):
PMA Re:
Loss ratio 69.0% 73.1% 69.6% 73.7% 74.6%
Expense ratio 35.2% 29.3% 34.2% 28.9% 29.3%
----- ----- ----- ----- -----
Combined ratio (8) 104.2% 102.4% 103.8% 102.6% 103.9%
===== ===== ===== ===== =====
The Property and Casualty Group,
including Run-off Operations (5):
Loss ratio 85.5% 95.4% 91.1% 158.2% 92.5%
Expense ratio (9) 34.0% 35.0% 42.8% 47.1% 30.4%
Policyholders' dividend ratio 6.7% 4.8% 6.9% 6.1% 4.8%
----- ----- ----- ----- -----
Combined ratio (8) 126.2% 135.2% 140.8% 211.4% 127.7%
===== ===== ===== ===== =====
The Property and Casualty Group,
excluding Run-off Operations (5):
Loss ratio 77.7% 84.9% 83.7% --- ---
Expense ratio (9) 32.8% 33.9% 32.9% --- ---
Policyholders' dividend ratio 6.7% 4.8% 5.6% --- ---
----- ----- ----- ----- -----
Combined ratio (8) 117.2% 123.6% 122.2% --- ---
===== ===== ===== ===== =====
</TABLE>
__________________________
(1) Operating results in 1997, 1996 and 1995 were impacted by approximately
$12,100, $223,100 and $8,400, respectively, of restructuring and other
special charges. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for further information.
(2) Net premiums written were reduced by $2,072 for the six months ended June
30, 1998 and reduced by $37,000, $10,500, and 4,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, representing estimated
retrospective policy adjustments related to the current accident year and
retrospective policy adjustments paid. The corresponding adjustment for the
six months ended June 30, 1997 was not material. These adjustments to net
premiums written were made for presentation purposes only and had
previously been reflected in the Company's reported revenues, financial
position and results of operations.
(3) In 1997, the Company refinanced substantially all of its long-term debt,
resulting in a $4,734 extraordinary loss, net of tax effect. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
- 15 -
<PAGE>
(4) Pre-tax operating income (loss) excludes net realized investment gains
(losses). Pre-tax operating income by business segment for all periods is
unaudited and has been presented in accordance with SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information,"
which the Company adopted on January 1, 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's interim financial statements and notes thereto as of June 30,
1998 and 1997 included elsewhere in this Prospectus. The Company has
excluded net realized investment gains (losses) from the profit and loss
measurement it utilizes to assess the performance of its operating segments
because (i) net realized investment gains (losses) are unpredictable and
not necessarily indicative of future performance and (ii) in many
instances, decisions to buy and sell securities are made at the parent
holding company level, and such decisions result in net realized gains
(losses) that do not relate to the operations of the individual segments.
(5) Run-off operations ("Run-off Operations") of the Property and Casualty
Group are comprised of MASCCO, PMA Cayman and PMA Life Insurance Company
("PMA Life"), which were established in December 1996 to reinsure certain
obligations primarily associated with workers' compensation claims written
by the Pooled Companies for the accident years 1991 and prior. The Run-off
Operations are separate legal entities and substantially all of the assets
of the Run-off Operations are held in trust for the benefit of the Pooled
Companies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(6) For the purposes of determining this ratio, earnings (loss) consist of
income (loss) before income taxes and extraordinary loss, plus fixed
charges. Fixed charges consist of interest expense on debt, amortization of
debt issuance costs and the portion of operating leases that management
believes is representative of the interest factor. In 1996, earnings were
insufficient to cover fixed charges by $191,394. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(7) The results of operations of Caliber One are not material to the
underwriting ratios of the Company; accordingly, the ratios for Caliber One
have not been presented.
(8) The combined ratio computed on a GAAP basis is equal to losses and loss
adjustment expenses ("LAE") plus amortization of deferred acquisition
costs, operating expenses and policyholders' dividends (where applicable),
all divided by net premiums earned.
(9) The GAAP operating expense ratios exclude $4,718 and $4,506 for the six
months ended June 30, 1998 and 1997, respectively, and $9,316, $8,227 and
$5,300 for the years ended December 31, 1997, 1996 and 1995, respectively,
of PMA Management Corp. direct expenses related to service revenues, which
are not included in premiums earned. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
- 16 -
<PAGE>
RISK FACTORS
Potential investors should carefully consider the following risk factors
and other information in this prospectus prior to making an investment decision
regarding the Capital Securities. In addition, because holders of Capital
Securities may receive Junior Subordinated Debentures in exchange therefor upon
liquidation of the Trust, prospective purchasers of Capital Securities are also
making an investment decision with regard to the Junior Subordinated Debentures
and should carefully review all the information regarding the Junior
Subordinated Debentures and PMC herein.
Risk Factors Relating To the Capital Securities
Subordination of the Guarantee and the Junior Subordinated Debentures
PMC's obligations under the Guarantee and under the Junior Subordinated
Debentures are unsecured and rank subordinate and junior in right of payment to
all present and future Senior Debt of PMC and pari passu with obligations to or
rights of PMC's other general unsecured creditors. Substantially all of PMC's
debt constitutes senior debt. PMC is an insurance holding company and
substantially all of the operating assets of PMC are owned by its consolidated
subsidiaries. PMC relies primarily on the receipt of sufficient funds from its
subsidiaries in the form of dividends, net tax sharing payments and loans to
meet its obligations for payment of principal and interest on its outstanding
debt obligations and corporate expenses. Accordingly, the Junior Subordinated
Debentures will be effectively subordinated to all existing and future
liabilities of PMC's subsidiaries, and holders of the Junior Subordinated
Debentures should look only to the assets of PMC for payments on the Junior
Subordinated Debentures. The payment of dividends by PMC's insurance
subsidiaries is limited under the insurance laws of their states of domicile
(primarily Pennsylvania). At December 31, 1997, PMA Reinsurance Corporation and
the Pooled Companies could pay dividends of approximately $48.7 million to PMC
without regulatory permission. Through September 1, 1998, $18.0 million in
dividends has been declared, of which $10.0 million has been paid. See
"Supervision and Regulation." In addition, the ability of PMC's subsidiaries to
pay dividends is effectively restricted by certain minimum surplus and risk-
based capital requirements contained in the Company's revolving credit
agreement. See "Risk Factors Associated With the Company--Restrictions on
Subsidiary Dividends." None of the Capital Securities, the Junior Subordinated
Debentures or the Guarantee limit PMC's ability to incur additional
indebtedness, including Senior Debt. After the completion of this Offering and
the repayment of debt with the proceeds thereof, PMC will have outstanding
approximately $104.5 million of principal amount of indebtedness constituting
Senior Debt. PMC expects from time to time to incur additional indebtedness
constituting Senior Debt. See "Description of the Guarantee--Status of the
Guarantee" and "Description of the Junior Subordinated Debentures--
Subordination."
The ability of the Issuer to pay amounts due on the Capital Securities is
solely dependent upon PMC making payments on the Junior Subordinated Debentures
as and when required.
- 18 -
<PAGE>
Limited Rights Under the Guarantee
The Guarantee will be qualified as an indenture under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The Property Trustee
(herein sometimes called the "Trustee") will act as indenture trustee under the
Guarantee for the purposes of compliance with the Trust Indenture Act and to
hold the Guarantee for the benefit of the holders of the Capital Securities. The
Guarantee guarantees to the holders of the Capital Securities the following
payments, to the extent not paid by or on behalf of the Issuer: (i) any
accumulated and unpaid distributions that are required to be paid on the Capital
Securities, to the extent the Trust has funds available therefor at such time,
(ii) the redemption price with respect to the Capital Securities called for
redemption by the Trust, to the extent the Trust has funds available therefor at
such time and (iii) upon a voluntary or involuntary dissolution, winding-up or
termination of the Trust (other than in connection with the distribution of
Junior Subordinated Debentures to the holders of the Capital Securities), the
lesser of (a) the aggregate of the Liquidation Amount and all accumulated and
unpaid distributions on the Capital Securities to the date of the payment to the
extent the Trust has funds available therefor at such time and (b) the amount of
assets of the Trust remaining available for distribution to holders of the
Capital Securities in liquidation of the Trust. The holders of not less than a
majority in aggregate Liquidation Amount of the outstanding Capital Securities
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee or exercising any trust or power
conferred upon the Trustee under the Guarantee. Any holder of the Capital
Securities may institute a legal proceeding directly against PMC to enforce the
holder's rights under the Guarantee without first instituting a legal proceeding
against the Issuer, the Guarantee Trustee or any other person or entity. If PMC
were to default on its obligation to pay amounts payable under the Junior
Subordinated Debentures, the Issuer would lack funds for the payment of
distributions or amounts payable on redemption of the Capital Securities or
otherwise, and, in such event, holders of the Capital Securities would not be
able to rely upon the Guarantee for payment of such amounts. Instead, in the
event a Debenture Event of Default shall have occurred and be continuing and
such event is attributable to the failure of PMC for 30 days to pay interest on
the Junior Subordinated Debentures when due and payable or the failure of PMC to
pay principal on the Junior Subordinated Debentures when due and payable, then a
holder of Capital Securities may, pursuant to the terms of the Indenture and in
addition to its rights under the Guarantee, institute a legal proceeding
directly against PMC for enforcement of payment to such holder of the principal
of and interest on such Junior Subordinated Debentures having a principal amount
equal to the aggregate Liquidation Amount of the Capital Securities of such
holder (a "Direct Action"). In connection with such a Direct Action, PMC shall
have a right of set-off under the Indenture to the extent of any payment made by
PMC to such holder of Capital Securities in the Direct Action. See "Description
of Junior Subordinated Debentures--Set-Off." Except as set forth herein, holders
of Capital Securities will not be able to exercise directly any other remedy
available to the holders of the Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures. See
"Description of the Junior Subordinated Debentures--Debenture Events of Default
and Consequent Rights of Certain Holders--Rights of Holders of Capital
Securities to Direct Action" and "Description of the Guarantee." The Trust
Agreement provides that each holder of Capital Securities by acceptance thereof
agrees to the provisions of the Guarantee and the Indenture.
- 19 -
<PAGE>
Limited Voting Rights
Holders of Capital Securities will have generally limited voting rights
relating only to the conduct of proceedings for remedies available to the
Debenture Trustee, waiver of certain defaults, rescission of any declaration of
acceleration and certain modifications of the Capital Securities. Holders of
Capital Securities will not be entitled to vote to appoint, remove or replace
the Property Trustee, which voting rights are vested exclusively in the holder
of the Common Securities, except upon the occurrence of certain events described
herein. The Property Trustee, the Administrative Trustees and PMC may amend the
Trust Agreement without the consent of the holders of Capital Securities to
ensure that the Issuer will be classified for United States federal income tax
purposes as a grantor trust or as other than an association taxable as a
corporation to ensure that the Junior Subordinated Debentures will be treated as
indebtedness of PMC or to ensure that the Issuer will not be required to
register as an "investment company" under the Investment Company Act unless such
action adversely and materially affects the interests of such holders. See
"Description of the Capital Securities--Voting Rights."
Option to Defer Interest Payments; Tax Consequences and Market Price
So long as no Debenture Event of Default (as defined herein) has occurred
and is continuing, PMC has the right under the Indenture to defer payments of
interest on the Junior Subordinated Debentures at any time, and from time to
time for a period not exceeding 10 consecutive semi-annual periods with respect
to each deferral period (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. As a consequence of such a deferral, semi-annual
distributions on the Capital Securities will be deferred by the Trust during any
such Extension Period (and the amount of the distributions to which holders of
the Capital Securities are entitled will accumulate additional distributions
thereon at a rate of ___% per annum, compounded semi-annually from the relevant
payment date for such distributions). During any such Extension Period, PMC
shall not, and shall cause any subsidiary of PMC not to, (a) declare or pay
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of PMC's capital stock or (b) make any
payment of interest, principal or premium, if any, on or repay, repurchase or
redeem any debt securities of PMC that rank pari passu with or junior to the
Junior Subordinated Debentures (other than (a) dividends or distributions in
Common Stock or Class A Common Stock of PMC, (b) payments under the Guarantee
and (c) purchases of Common Stock or Class A Common Stock of PMC related to the
issuance of Common Stock or Class A Common Stock of PMC under any of PMC's
benefit plans for its directors, officers or employees). Prior to the
termination of any such Extension Period, PMC may further defer the payment of
interest, provided that no Extension Period shall exceed 10 consecutive semi-
annual periods or extend beyond the Stated Maturity of the Junior Subordinated
Debentures. Upon the termination of any Extension Period and the payment of all
interest then accrued and unpaid (together with interest thereon at the rate of
___% per annum, compounded semi-annually, to the extent permitted by applicable
law), PMC may commence a new Extension Period, subject to the above
requirements. There is no limitation on the number of times that PMC may elect
to begin an Extension Period. See "Description of the Capital Securities--
Distributions" and "Description of the Junior Subordinated Debentures--Option to
Extend Interest Payment Period."
- 20 -
<PAGE>
If interest payments are so deferred, each holder of Capital Securities may
be required to recognize income (in the form of original issue discount) in
respect of its pro rata share of the Junior Subordinated Debentures held by the
Issuer for United States federal income tax purposes. As a result, a holder of
Capital Securities may be required to include such income in gross income for
United States federal income tax purposes in advance of the receipt of cash
attributable to such income and will not receive the cash from the Trust related
to such income if such holder disposes of its Capital Securities prior to the
record date for distributions of such amounts. See "United States Federal Income
Taxation -- Interest Income and Original Issue Discount." PMC has no present
intention of exercising its right to defer payments of interest by extending the
interest payment period on the Junior Subordinated Debentures. However, if PMC
determines to exercise such right in the future, the market price of the Capital
Securities is likely to be affected. A holder that disposes of its Capital
Securities during an Extension Period, therefore, might not receive the same
return on its investment as a holder that continues to hold its Capital
Securities. In addition, as a result of the existence of PMC's right to defer
interest payments, the market price of the Capital Securities (which represent
an undivided beneficial interest in the Junior Subordinated Debentures) may be
more volatile than other securities on which original issue discount accrues
that are not subject to such deferrals.
Special Event Redemption or Exchange
Upon the occurrence and continuance of a Special Event (as defined herein),
prior to ___ 1, 2008, PMC shall have the right to redeem the Junior Subordinated
Debentures, in whole but not in part within 90 days following the occurrence of
such Special Event and therefore cause a mandatory redemption of the Capital
Securities. Any such redemption shall be at a price equal to the Make-Whole
Amount (as defined in "Description of the Capital Securities--Redemption")
together with accrued interest to but excluding the date fixed for redemption.
If a Special Event were to occur, there can be no assurance that PMC would have
sufficient funds to effectuate an optional redemption of the Junior Subordinated
Debentures and pay the redemption price. PMC's ability to exercise its option to
redeem the Junior Subordinated Debentures may be limited by the terms of its
then-existing borrowing and other agreements. "Special Event" means either an
Investment Company Event or a Tax Event. An "Investment Company Event" means the
receipt by the Issuer of an opinion of counsel experienced in such matters to
the effect that, as a result of the occurrence of a change in law or regulation
or change in interpretation or application of law or regulation by any
legislative body, court, governmental agency or regulatory authority (a "Change
in 1940 Act Law"), the Issuer is or will be considered an investment company
that is required to be registered under the Investment Company Act of 1940, as
amended, which Change in 1940 Act Law becomes effective on or after the date of
original issuance of the Capital Securities. A "Tax Event" means the receipt by
the Issuer of an opinion of counsel experienced in such matters to the effect
that, as a result of (a) any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein
affecting taxation or (b) any official administrative pronouncement or judicial
decision interpreting or applying such laws and regulations, which amendment or
change is effective or such pronouncement or decision is announced on or after
the date of issuance of the Capital Securities under the Trust Agreement, there
is more than an insubstantial risk that (i) the Issuer is, or will be within 90
days of the date of such opinion, subject to United States federal income tax
with respect to
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income received or accrued on the Junior Subordinated Debentures, (ii) interest
payable by PMC on the Junior Subordinated Debentures is not, or within 90 days
of the date of such opinion, will not be, deductible by PMC, in whole or in
part, for United States federal income tax purposes or (iii) the Issuer is, or
will be within 90 days of the date of such opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges. See
"Description of the Capital Securities--Redemption--Special Event Redemption or
Distribution of Junior Subordinated Debentures."
At any time, PMC has the right to terminate the Issuer and, after
satisfaction of the liabilities of creditors of the Issuer as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Capital Securities in liquidation of the Trust. See
"Description of the Capital Securities--Liquidation Distribution upon
Termination."
Tax Consequences
The receipt of cash by the holders of the Capital Securities upon a
termination of the Trust would be a taxable event to such holders. Under current
United States federal income tax law, a distribution of Junior Subordinated
Debentures upon the termination of the Trust generally would not be a taxable
event to holders of the Capital Securities. See "United States Federal Income
Taxation--Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of
the Trust."
Effect on Market Prices
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Capital Securities if a termination or liquidation of the Trust
were to occur. Accordingly, the Capital Securities that an investor may
purchase, whether pursuant to the offer made hereby or in the secondary market,
or the Junior Subordinated Debentures that a holder of Capital Securities may
receive on termination and liquidation of the Trust, may trade at a discount to
the price that the investor paid to purchase the Capital Securities offered
hereby.
Corresponding Investment Decision in Junior Subordinated Debentures
Because holders of Capital Securities may receive Junior Subordinated
Debentures in connection with a liquidation of the Trust, prospective purchasers
of the Capital Securities are also making an investment decision with regard to
the Junior Subordinated Debentures and should carefully review all the
information regarding the Junior Subordinated Debentures contained herein. See
"Description of the Capital Securities--Liquidation Distribution upon
Termination" and "Description of the Junior Subordinated Debentures."
Possible Tax Law Changes
Prospective investors should be aware that Enron Corporation has filed a
petition in the United States Tax Court challenging the proposed disallowance by
the Internal Revenue Service (the "IRS") of the deduction of interest expense on
securities issued by Enron Corporation in 1993 and 1994 that are similar to,
although different in a number of respects from, the Junior Subordinated
Debentures. It is
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possible that a decision in that case could give rise to a Tax Event, which
would permit PMC to cause a redemption of the Capital Securities, as described
more fully under "Description of Capital Securities--Redemption--Special Event
Redemption or Distribution of Junior Subordinated Debentures." Prospective
investors also should be aware that legislation has been proposed by the Clinton
Administration in the past that, if enacted, would have denied an interest
deduction to issuers of instruments such as the Junior Subordinated Debentures.
No such legislation is currently pending. There can be no assurance, however,
that similar legislation will not ultimately be enacted into law, or that other
developments will not occur on or after the date hereof that would adversely
affect that tax treatment of the Junior Subordinated Debentures or the Issuer.
Such changes also could give rise to a Tax Event.
Liquidity of Trading; Trading Price of the Capital Securities May Not Fully
Reflect Value of Unpaid Interest
PMC and the Issuer do not intend to have the Capital Securities listed on
any securities exchange. If the Underwriters do not make a market for the
Capital Securities, the liquidity of the Capital Securities could be adversely
affected.
The Capital Securities may trade at a price that does not fully reflect the
value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder who disposes of his Capital Securities between
record dates for payments of distributions thereon (and consequently does not
receive a distribution from the Issuer for the period prior to such disposition)
will nevertheless be required to include accrued but unpaid interest on the
Junior Subordinated Debentures through the date of disposition in income as
ordinary income, and to add such amount to his adjusted tax basis in the Capital
Securities disposed of. To the extent that the selling price (which may not
fully reflect the value of accrued but unpaid interest) is less than the
holder's adjusted tax basis (which will include accrued but unpaid interest),
the holder may recognize a capital loss. Subject to certain limited exceptions,
capital losses cannot be applied to offset ordinary income for United States
federal income tax purposes. See "United States Federal Income Taxation--
Interest Income and Original Issue Discount" and "--Sales of Capital
Securities."
Risk Factors Associated with the Company
Holding Company Structure
PMC is an insurance holding company and the right of PMC to participate in
any distribution of assets of any subsidiary upon such subsidiary's liquidation
or reorganization or otherwise (and thus the ability of holders of the Junior
Subordinated Debentures and the Capital Securities to benefit indirectly from
such distribution) is subject to the prior claims of creditors of that
subsidiary, except to the extent that the Company may itself be recognized as a
creditor of that subsidiary. Accordingly, the Junior Subordinated Debentures
will be effectively subordinated to all existing and future liabilities of the
subsidiaries of PMC, and the holders of Junior Subordinated Debentures should
look only to the assets of PMC for payments on the Junior Subordinated
Debentures. At June 30, 1998, the subsidiaries of PMC had total liabilities,
excluding liabilities owed to PMC and intercompany transactions, of
approximately $2.4 billion.
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Restrictions on Subsidiary Dividends and Other Payments
PMC is an insurance holding company whose assets consist principally of all
of the outstanding common stock of its insurance subsidiaries. PMC's ongoing
ability to pay dividends to its shareholders and meet its other obligations,
including operating expenses and any principal and interest on debt (including
the Junior Subordinated Debentures), is primarily dependent on the receipt of
sufficient funds from its insurance subsidiaries in the form of dividends, net
payments under a tax-sharing agreement between PMC and its subsidiaries and
loans. The payment of dividends by PMC's subsidiaries to PMC is regulated under
the insurance laws of Pennsylvania and Delaware (such laws are substantially
similar). In addition, to the extent tax-sharing payments and loans exceed
certain threshold amounts, notice to and non-disapproval by the Pennsylvania
Insurance Commissioner would be required. Under Pennsylvania law, PMC's
Pennsylvania-domiciled subsidiaries (PMA Reinsurance Corporation and the Pooled
Companies) may pay dividends only from unassigned surplus and future earnings
arising from their businesses and must receive prior approval of the
Pennsylvania Insurance Commissioner to pay a dividend if such dividend would
exceed the greater of (i) 10% of the insurer's policyholders' surplus, as shown
on its last annual statement on file with the Pennsylvania Insurance
Commissioner or (ii) the insurer's statutory net income for the previous
calendar year. Pennsylvania law gives the Pennsylvania Insurance Commissioner
broad discretion to disapprove requests for dividends in excess of these limits.
Based upon this limitation and the 1997 statutory results of PMA Reinsurance
Corporation and the Pooled Companies, PMA Reinsurance Corporation and the Pooled
Companies have the legal capacity to pay approximately $48.7 million in
dividends in the aggregate to PMC in 1998 without obtaining the approval of the
Pennsylvania Insurance Commissioner. Through September 1, 1998, $18.0 million in
dividends had been declared, of which $10.0 million has been paid. Pennsylvania
law also provides that following the payment of any dividend, the insurer's
policyholders' surplus must be reasonable in relation to its outstanding
liabilities and adequate for its financial needs, and permits the Pennsylvania
Insurance Commissioner to bring an action to rescind a dividend which violates
these standards.
Caliber One Indemnity Company is a Delaware-domiciled insurance subsidiary
of PMA Reinsurance Corporation. As a subsidiary of PMA Reinsurance Corporation,
Caliber One Indemnity Company's dividends are not directly available to PMC. As
noted above, the Delaware insurance law provisions restricting dividends by
insurers are substantially similar to such provisions under Pennsylvania
insurance laws. During 1998, Caliber One Indemnity Company may pay up to $2.5
million of dividends to PMA Reinsurance Corporation without prior approval of
the Delaware Insurance Commissioner. During 1998, no dividends have been
declared or paid by Caliber One Indemnity Company.
In the event that the ability of either the Pooled Companies or PMA
Reinsurance Corporation to pay dividends or make other payments to PMC in the
future is reduced or eliminated, PMC's ability to pay principal and interest on,
and/or redeem, the Junior Subordinated Debentures could be materially and
adversely affected, depending upon the extent of such reduction. See
"Supervision and Regulation."
In March 1997, the Company refinanced substantially all of its existing
debt facility with a $235.0 million revolving credit facility (the "Revolving
Credit Facility"). In addition to the Revolving Credit Facility, the Company
maintains a committed facility of $50.0 million for letters of credit (the
"Letter of Credit Facility"). The Revolving Credit Facility and the Letter of
Credit Facility are sometimes referred to herein as the "Credit Facilities." In
addition to the foregoing regulatory restrictions, the Credit Facilities also
impose restrictions on the ability of the Company's subsidiaries to pay
dividends. Under these restrictions, the statutory surplus of PMC's insurance
subsidiaries (as measured each calendar quarter) must not be less than $450
million and such subsidiaries
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must annually maintain certain minimum ratios of adjusted surplus to risk-based
capital (300% for PMA Reinsurance Corporation and 230% for the Pooled Companies
in 1998, increasing to 240% thereafter). As of June 30, 1998, the Company's
insurance subsidiaries reported combined statutory surplus of $561.1 million,
and as of December 31, 1997, PMA Reinsurance Corporation's risk-based capital
ratio was 355% and the Pooled Companies' risk-based capital ratios ranged from
293% to 324%.
Certain Risks Affecting the Property and Casualty Insurance Industry
The Company's operating results may be impacted by several factors that
broadly impact the property and casualty insurance industry. Such factors
include weather-related and other catastrophic losses, general economic
conditions, including interest rate changes and trends in inflation of claims
costs, legislative and regulatory initiatives, frequency of litigation and
trends in the size of awards, as well as competitive conditions.
In writing property and casualty insurance, the Company's insurance
subsidiaries are subject to the possibility of losses from catastrophic events.
In order to reduce risk and increase its underwriting capacity, the Company
actively manages its exposure to such events through the underwriting process
and through the purchase of reinsurance coverages; as a result, the Company's
historical underwriting results have not been significantly impacted by
catastrophes. However, catastrophic events could exceed the Company's
reinsurance and/or retrocessional protection, and materially and adversely
impact the Company's financial position. See "Business--The Company's
Reinsurance Ceded."
Overall economic trends, as well as legislative, regulatory and judicial
trends may impact the operations of the Company's insurance subsidiaries. In
addition, because the Company's earnings are substantially dependent on
investment income and capital gains, changes in interest rates or other factors
affecting the Company's investment portfolio and the credit quality and
performance thereof may reduce the Company's investment results and have a
material adverse effect on its results of operations. An economic downturn may
reduce the overall demand for the Company's insurance products. Also, management
believes that, in times of less favorable economic conditions, workers'
compensation claims (particularly indemnity claims) have a tendency to be more
severe. Legislative, regulatory and judicial issues that could adversely affect
the Company include (i) an environment of more frequent and severe claims, (ii)
increases in the overall cost of doing business, through increased capital
requirements, higher taxes and assessments, residual market charges or higher
overall costs of regulatory compliance, (iii) restrictions on premium rates and
policy terms and (iv) reduced demand for the Company's products. The impact of
these factors can dramatically impact the demand for the Company's products,
insurance capacity, pricing and claims experience and, ultimately, have a
material adverse effect on the Company's business, results of operations and
financial condition. See "--Certain Concentrations" below, "Business--Regulatory
Matters," "Business--The Property and Casualty Group--Workers' Compensation
Insurance" and "Supervision and Regulation."
Adequacy of Loss Reserves
In many cases, significant periods of time, ranging up to several years or
more, may elapse between the occurrence of an insured loss, the reporting of the
loss to the insurer and the insurer's payment of that loss. Liabilities for
reinsurers generally become known more slowly than for primary insurers and are
generally subject to more unforeseen development.
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In addition, the reserving for workers' compensation insurance is more difficult
than many other lines of insurance. The Company has recorded favorable (adverse)
development of $86.0 million, ($156.1) million and ($51.5) million in 1997, 1996
and 1995, respectively, of which $44.1 million, ($110.0) million and ($54.7)
million in 1997, 1996 and 1995, respectively, were associated with workers'
compensation. See "Business--Loss Reserves" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Estimating reserves for workers' compensation claims can be more difficult
than for many other lines of property and casualty insurance for several
reasons, including (i) the long payment "tail" associated with the business,
(ii) the impact of social, political and regulatory trends on benefit levels for
both medical and indemnity payments, (iii) the impact of economic trends and
(iv) the impact of changes in the mix of business. At various times, one or a
combination of such factors can make the interpretation of actuarial data
associated with workers' compensation loss development more difficult, and it
can take additional time to recognize changes in loss development patterns.
Under such circumstances, reserve adjustments will be made as loss patterns
develop and new information becomes available, and such adjustments may be
material.
As is common practice in the property and casualty insurance industry, the
Company discounts its workers' compensation unpaid losses; the average discount
rate presently utilized is approximately 5.0%. As such, future operating results
of the Company will be impacted by accretion of loss reserve discount. For the
six-month periods ended June 30, 1998 and 1997, respectively, accretion of
discount increased losses incurred by $14.4 million and $23.8 million, and for
the years ended December 31, 1997, 1996 and 1995, respectively, accretion of
discount increased losses incurred by $51.4 million, $57.5 million and $13.3
million (net of $35.0 million related to the change in discount rate from
approximately 4.0% to 5.0%). At June 30, 1998, the Company had loss reserve
discount of $437.0 million, comprised as follows: the Pooled Companies, $114.6
million; MASCCO, $55.4 million, PMA Cayman, $226.2 million; other Property and
Casualty Group entities, $6.5 million and PMA Re, $34.3 million. See "Business--
Loss Reserves."
Estimation of obligations for asbestos and environmental exposures
continues to be more difficult than for other loss reserves because of several
factors, including (i) evolving methodologies for the estimation of liabilities;
(ii) lack of reliable historical claim data; (iii) uncertainties with respect to
insurance and reinsurance coverage related to these obligations; (iv) changing
judicial interpretations and (v) changing government standards. The Company
recorded incurred losses for asbestos and environmental exposures of $1.0
million, $60.4 million and $25.3 million in 1997, 1996 and 1995, respectively,
and at December 31, 1997, the Company maintained loss reserves of $48.6 million
($76.7 million gross of reinsurance) for asbestos-related losses (of which $41.9
million was IBNR) and loss reserves of $31.7 million ($45.1 million gross of
reinsurance) for environmental-related losses (of which, $20.5 million was
IBNR). Management believes that its reserves for asbestos and environmental
claims are appropriately established based upon known facts, existing case law
and generally accepted actuarial methodologies. However, due to changing
interpretations by courts involving coverage issues, the potential for changes
in federal and state standards for clean-up liability and other factors, the
ultimate exposure to the Property and Casualty Group for these claims may vary
significantly from the reserves currently recorded, resulting in a potential
future
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adjustment in the claims reserves recorded. See "Business--Loss Reserves" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Estimating the Company's ultimate claims liability is necessarily a complex
and judgmental process as the amounts are based upon management's informed
estimates and judgments using data currently available. As additional
experience and data become available regarding claims payment and reporting
patterns, legislative developments and economic conditions, the estimates are
revised accordingly. If the Company's ultimate net losses prove to be
substantially greater than the reserves recorded, the related adjustments could
have a material adverse impact on the Company's financial condition and results
of operations.
Competitive Conditions
The domestic property and casualty insurance and reinsurance industries are
very competitive and consist of many companies, with no one company dominating
the market. Competitive conditions may vary from state to state and market to
market for a variety of reasons, including the regulatory climate, the number of
market participants and similar factors. In addition to other insurance
companies, the Company's insurance subsidiaries compete with certain alternative
market arrangements, such as captive insurers, risk-sharing pools and
associations, risk-retention groups and self-insurance programs. Many of the
Company's competitors are larger and have greater financial resources than the
Company and offer a broader range of products than the Company. Historically,
the financial performance of the property and casualty insurance industry has
tended to fluctuate in cyclical patterns of very competitive (soft) markets
followed by less competitive (hard) markets. Although an individual insurance
company's financial performance depends in part upon its own specific business
characteristics; the profitability of most property and casualty insurance
companies tends to follow this cyclical market pattern. At present, the
property and casualty insurance industry is experiencing a prolonged soft
market, and the extension of the current market conditions could have an adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that market conditions will improve or, if they do
improve that they will have a favorable impact on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
One of the bases of competition in the insurance industry, particularly in
the reinsurance segment, is size of capitalization. While management believes
that PMA Re's present level of capitalization is appropriate and has not
materially adversely affected its participation in business opportunities or
resulted in any significant erosion of its client base, PMA Re could be affected
by (i) changes in market perception of appropriate levels of capitalization or
(ii) the need to increase capitalization in response to market opportunities.
While the purpose of the Offering is to increase the Company's flexibility to
respond to such situations, there can be no assurance that PMC will have the
ability to increase PMA Re's capitalization to satisfy state insurance
regulators or to maintain the current A.M. Best ratings of PMC's insurance
subsidiaries. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Competition" and "Use of Proceeds."
The Property and Casualty Group must attract and retain productive agents
to sell its insurance products and services. Strong competition exists among
insurance companies for agents with demonstrated abilities. Competition among
insurance companies for such agents
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is based upon, among other things, the services provided to, and relationships
developed with, these agents in addition to compensation and product structure.
If the Property and Casualty Group is not able to continue to attract and retain
productive agents, there could be a material adverse effect on the Company.
The surplus lines of insurance offered by Caliber One are generally placed
by wholesale brokers and managing general agents who specialize in particular
lines of coverage or classes of insureds. These insureds tend to be
sophisticated and price-conscious insurance purchasers. As a result, surplus
lines insurers may experience increased premium rate competition in soft
markets. This could result in a material adverse effect on the Company.
Collectibility of Reinsurance
The Company follows the customary insurance practice of reinsuring with
other insurance companies a portion of the risks underwritten by its insurance
subsidiaries. This reinsurance is maintained to protect the Company against the
severity of losses on individual claims and unusually serious occurrences in
which a number of claims produces an aggregate extraordinary loss. Reinsurance
does not discharge the Company's insurance subsidiaries from their obligations
to their policyholders; however, it does make the assuming reinsurers liable to
the Company's insurance subsidiaries for the reinsured portion of the risk. At
June 30, 1998, the Company had $211.2 million in reinsurance receivables which
are not directly secured by letters of credit, trust arrangements, funds held or
other collateral. Although management believes that the Company's reinsurance
protection is placed with financially sound companies, there can be no assurance
that such reinsurers will pay reinsurance claims on a timely basis, if at all.
Further, although the Company has reinsurance it believes to be adequate, there
can be no assurance that the Company will continue to be able to obtain
reinsurance on acceptable terms and that the Company's reinsurance protection
will be adequate in the event of a catastrophe. See "Certain Risks Affecting the
Property and Casualty Insurance Industry" above and "Business--The Company's
Reinsurance Ceded."
Certain Concentrations
In 1997, the Property and Casualty Group derived 49% of its direct written
premiums from Pennsylvania, 61% of which was workers' compensation. Also in
1997, the Property and Casualty Group derived 60% of its direct written premiums
from workers' compensation in all of the states in which it conducts business.
This concentration exposes the Company to changes affecting the Pennsylvania
economy, as well as changes impacting benefit and/or rate levels for workers'
compensation in Pennsylvania and the other states in which it conducts business.
Since 1993, two major benefit reform laws have been passed in Pennsylvania,
which have had a favorable impact on workers' compensation loss costs. In 1993,
Act 44 introduced medical cost containment measures and improved the Property
and Casualty Group's ability to utilize managed care techniques. Specifically,
Act 44 introduced medical cost containment measures to the Pennsylvania workers'
compensation benefit system and increased the length of time in which an insurer
may require an employee to accept medical treatment from the employer's list of
designated health care providers from 14 days to 30 days. In addition, the law
reduced the minimum wage replacement benefit to injured workers, introduced a
credit for unemployment compensation benefits, restored the right of subrogation
against tort
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recoveries in work-related automobile accidents and created new anti-fraud
measures. In 1996, Act 57 introduced measures that primarily reduce indemnity
loss costs. Among its provisions, Act 57: (i) imposes application of American
Medical Association Impairment Guidelines for the assessment of permanent and
total claims after the first two years of total disability compensation payments
and limits indemnity benefits to an additional 500 weeks for workers who are not
at least 50% disabled (as measured by those guidelines); (ii) contains certain
Social Security and pension benefits offsets; (iii) further increases the time
frame for directed medical treatment; (iv) addresses certain inequities in the
average weekly wage calculation; (v) increases the ability of employers to
demonstrate that injured workers have earning capacity and (vi) facilitates the
use of full and final settlements of employers' workers' compensation
obligations on particular claims. As a result of these Acts, as well as reforms
in several other states in which the Property and Casualty Group operates, the
frequency and severity of workers' compensation claims have been decreasing,
which has contributed to the decreased accident year workers' compensation loss
ratios of the Property and Casualty Group since 1993. In conjunction with these
benefit reforms, manual rate levels in Pennsylvania decreased approximately 10%
in 1994, 25% in 1997 and 27% in the first six months of 1998 (although
management expects such rate of change to be a 19% decrease for the year ending
December 31, 1998) when compared to the respective preceding year. Management
believes the projected savings derived from the reforms will offset these manual
rate decreases. However, the ultimate cost of workers' compensation claims can
be difficult to predict and there can be no assurance that rates will remain
adequate. While management believes that the Company has benefited from workers'
compensation reform in Pennsylvania and elsewhere, as well as a generally good
economic climate in the states in which it conducts business, there can be no
assurance that: (i) there will not be initiatives, legislative or otherwise, to
reverse the effects of workers' compensation reforms; (ii) workers' compensation
rates will remain adequate or (iii) economic conditions will remain favorable.
See "Business--The Property and Casualty Group" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
PMA Re distributes its products through reinsurance intermediaries, known
as brokers. In 1997, three brokers each accounted for more than 10% of PMA Re's
gross premiums in force: Aon Reinsurance (35.7%); Guy Carpenter & Company
(23.3%); and E.W. Blanch (13.6%). PMA Re's top five brokers accounted for 90.8%
of its gross premiums in force in 1997. While management believes that these
relationships with these brokers are generally excellent, if relations with any
of its major brokers were to deteriorate, resulting in reduced premium flow, it
could have a material adverse effect on PMA Re and the Company. See "Business--
PMA Re--Marketing and Distribution."
Importance of Ratings
As insurers and reinsurers tend to compete on the basis of financial
stability, among other things, management believes that the ratings of the
Company's insurance subsidiaries by the major rating agencies are material to
its operations. Presently, A.M. Best has rated PMA Reinsurance Corporation, A+
("Superior"), the Pooled Companies, A- ("Excellent") and Caliber One Indemnity
Company, A ("Excellent"). The Company is also presently seeking ratings of its
insurance subsidiaries from Standard & Poor's and Moody's. The ratings of the
insurance subsidiaries from these rating agencies would be based upon an
analysis of the insurance company's perceived financial strength regarding its
ability to pay obligations to its
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policyholders and would not be directed toward the protection of investors. Such
ratings would be subject to changes and do not constitute recommendations to
buy, sell or hold securities. There can be no assurance that such ratings, if
obtained, or future changes therein will not affect the Company's competitive
position. There can be no assurance that PMA Reinsurance Corporation, the Pooled
Companies or Caliber One Indemnity Company will obtain or maintain any ratings,
and any downgrade could have a material adverse effect on their respective
businesses. In addition, there can be no assurance that any rating received
from Standard & Poor's and/or Moody's would not have a detrimental effect on the
Company's competitive position. See "Business--Competition."
Regulation
The Company is subject to regulation under applicable insurance statutes,
including the insurance holding company statutes of Pennsylvania. In addition,
the Company's insurance subsidiaries are subject to regulation in each of the
states in which they transact business. Insurance regulation is intended to
protect policyholders rather than to protect investors in insurance companies or
their holding companies. The extent of regulation by the states varies, but in
general, most jurisdictions have laws and regulations governing standards of
solvency, adequacy of reserves, reinsurance, capital adequacy and standards of
business conduct. In addition, statutes and regulations usually require the
licensing of insurers and their agents, the approval of policy forms for
admitted insurers and, for certain lines of insurance, including all of the
lines written by the Property and Casualty Group, approval of rates. In
supervising and regulating insurance companies, including reinsurers, state
insurance departments enjoy broad authority and discretion in applying
applicable insurance laws and regulations for the protection of policyholders
and the public. Inasmuch as they are subject to regulatory approval, the rates
that the Property and Casualty Group can charge for workers' compensation and
standard commercial lines of property and casualty insurance might not keep pace
with the underlying claim costs. In addition, any changes in these laws and
regulations or the failure of the Company to comply with such laws and
regulations could materially adversely affect the Company's operations. See
"Supervision and Regulation."
Workers' compensation insurers doing business in certain states are
required to provide insurance for risks which are not otherwise written on a
voluntary basis by the private market ("residual market business"). This system
exists in all of the Property and Casualty Group's current marketing
territories, except Pennsylvania and Maryland, in which separate governmental
entities write all of the workers' compensation residual market business.
Because residual market business consists of difficult to insure risks and
entities and classes with poor experience, the underwriting results of residual
market business tend to be worse than those of voluntary business. In 1997, the
Property and Casualty Group wrote $5.2 million of residual market business,
which constituted approximately 3% of its voluntary market volume. While
management believes that the Property and Casualty Group has a lesser exposure
to residual market business than many other companies writing workers'
compensation business, based upon the volume of residual market business
written, the Company is exposed to the possibility that its underwriting results
will be adversely affected by increases in the size of the residual market and
worsening experience in the residual market. See "Business--the Property and
Casualty Group--Workers' Compensation Residual Market Business."
- 30 -
<PAGE>
In recent years, various proposals have been introduced in Congress, which
call for the federal government to assume some role in the regulation of
insurance. To date, none of these proposals has been enacted, and the Company
cannot predict what form such future proposals might take or what effect, if
any, such proposals might have on PMC or its subsidiaries if enacted into law.
Year 2000 Issue
As a consequence of the programming convention which utilized a two-digit
date field rather than a four-digit date field, most computers require
relatively costly reprogramming to enable them to perform correctly date
operations involving year 2000 ("Year 2000") or later (the "Year 2000 Issue").
Many anticipate that the Year 2000 Issue will have substantial
repercussions on the business world, since computer operations involving date
calculations are pervasive.
With the assistance of outside consulting groups, the Company began
evaluating and reprogramming its own computer systems to address the Year 2000
Issue in late 1995. Management anticipates that by year-end 1998, it will have
substantially completed all necessary programming work. Accordingly, management
believes that Year 2000 Issues related to the Company's hardware and internal
software programs are not likely to result in any material adverse disruptions
in the Company's computer systems or its internal business operations. The cost
of this work through June 30, 1998 has been approximately $5.3 million,
including approximately $1.5 million incurred during the first six months of
1998. The Company estimates that the total remaining cost will be approximately
$175,000, which will be expensed throughout the remainder of 1998.
The Company is currently in the process of evaluating its relationships
with third parties with which the Company has a direct and material relationship
to determine whether they are Year 2000 compliant, such as banks, brokers,
reinsurers, third party service providers, software and other service vendors,
insureds and agents and other intermediaries. The responses by such third
parties to inquiries made by the Company as have been received to date indicate
that these third parties either are or expect to be compliant by the Year 2000.
Even assuming that all material third parties provide a timely
representation affirming such Year 2000 compliance, however, it is not possible
to state with certainty that such representations will turn out to have been
accurate, or that the operations of such third parties will not be materially
impacted in turn by other parties with whom they themselves have a material
relationship, and who fail to timely become Year 2000 compliant. Consequently,
it is not possible to predict whether or to what extent the Year 2000 Issues may
have an adverse material impact on the Company as a result of their impact on
the operations of third parties with whom the Company has a material
relationship. The failure of one or more third parties with whom the Company has
a material relationship to be Year 2000 compliant could cause significant
disruptions in the Company's ability to pay claims, receive and deposit funds
and make investments, which could have a material adverse effect on the
Company's financial condition and results of operations. The Company's
contingency plans in the event of failure of such third parties to be Year 2000
compliant include replacing the third party, performing directly the services
performed by the third party and maintaining liquidity under the Company's
Revolving Credit Facility, which may have a material impact on the Company.
Many experts now believe that Year 2000 Issues may have a material adverse
effect on the national and global economy generally. In addition, it seems
likely that if businesses are materially damaged as a result of Year 2000
Issues, at least some such businesses may attempt to recoup their losses by
claiming coverage under various types of insurance policies. Management
of the Property and Casualty Group and Caliber One believe that under a fair
reading of the various policies issued by them, no coverage for Year 2000 Issues
should exist. Management of PMA Re also believes that the policies of its ceding
company clients which are reinsured by PMA Re do not provide coverage for Year
2000 issues. However, in the event that claims for Year 2000 Issues are asserted
against the Property and Casualty Group, Caliber One or PMA Re, it is not
possible to predict whether or to what extent any such coverage could ultimately
be found to exist by courts in various jurisdictions, or, if found, the effect
thereof on any of such companies or the Company. In addition, to the extent that
the Property and Casualty Group, Caliber One or PMA Re contest the assertion of
Year 2000 coverage claims, it is likely that the costs of litigation could be
material, even if they are able to prevail in their coverage positions as to
which no assurance can be given.
- 31 -
<PAGE>
Dependence Upon Key Personnel
The Company depends upon its executive management, including the executive
management of its insurance subsidiaries, to execute its business strategy. The
loss of any of these individuals or a reduction in the time devoted by such
persons to the Company's business could have a material adverse effect on the
Company's business. The Company's future success will depend, in part, upon its
ability to attract and retain highly qualified personnel. The Company faces
competition for such personnel from other companies, many of which have
significantly greater resources than the Company. There can be no assurance
that the Company will be able to attract and retain the necessary personnel on
acceptable terms. See "Business" and "Management."
- 32 -
<PAGE>
THE COMPANY
The Company is an insurance holding company, whose subsidiaries operate in
three distinct segments of the property and casualty insurance industry: (i)
reinsurance, through PMA Re, which commenced business in 1980; (ii) standard
commercial lines of insurance, with an emphasis on workers' compensation through
the Property and Casualty Group, which has been in business since 1915 and (iii)
specialty insurance products, focusing on excess and surplus lines, through the
Company's recently-formed operation, Caliber One. PMA Re writes a broad range of
property and casualty reinsurance products with an emphasis on risk-exposed
casualty excess of loss reinsurance and operates in the United States domestic
brokered market. The Property and Casualty Group offers a broad range of
standard commercial lines products including commercial general liability,
commercial automobile and commercial multi-peril, with an emphasis on
underwriting of workers' compensation products and services primarily in nine
contiguous jurisdictions in the Mid-Atlantic and Southern regions of the United
States, utilizing the PMA Group trade name. In 1998, Caliber One commenced
writing excess and surplus lines of property and casualty insurance, including
commercial general liability, automobile and certain property exposures on a
non-admitted basis. For the six months ended June 30, 1998, the Company's net
premiums written of $257.0 million were derived 45.9% from PMA Re, 53.8% from
the Property and Casualty Group and 0.3% from Caliber One. Net income for the
Company for the six months ended June 30, 1998 and the year ended December 31,
1997 was $21.4 million and $15.0 million, respectively. As of June 30, 1998, the
Company had total assets of $3,075.4 million and shareholders' equity of $496.4
million.
According to data provided by the RAA, as of June 30, 1998, PMA Reinsurance
Corporation was the 24th largest reinsurer in the United States in terms of
statutory surplus and 17th largest in terms of net premiums written. Management
believes that PMA Re competes on the basis of its ability to offer prompt and
responsive service and products designed to meet client needs and its excellent
long-term relationships in the broker and ceding company communities. PMA Re's
net premiums written grew at a compound annual rate of 13.2% between 1992 and
1997. As of June 30, 1998, statutory surplus of PMA Reinsurance Corporation was
$279.1 million, and for the six months ended June 30, 1998, PMA Re's net
premiums written were $117.9 million. PMA Re reported pre-tax operating income
of $23.0 million and $23.2 million for the six-month periods ended June 30, 1998
and 1997, respectively, and $46.0 million, $44.8 million and $39.8 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
The Property and Casualty Group markets a full range of workers'
compensation products and services, as well as other standard commercial lines
of property and casualty insurance, primarily to middle market accounts
(premiums ranging from $40,000 to $300,000) and smaller accounts (premiums less
than $40,000). The Property and Casualty Group distributes its products
primarily through approximately 240 regional brokers and agents throughout its
marketing territories and also utilizes an internal sales force in Pennsylvania
and Delaware, which accounted for approximately 13% of direct premiums written
in 1997. In 1997, workers' compensation insurance accounted for 60% of the
Property and Casualty Group's direct premiums written, and Pennsylvania workers'
compensation insurance accounted for 50% of
- 33 -
<PAGE>
the Property and Casualty Group's workers' compensation direct premiums written.
The Property and Casualty Group offers a variety of workers' compensation
products, such as third-party claims administration services, rent-a-captives
and high-deductible plans in addition to traditional fixed-cost and loss-
sensitive workers' compensation products, and management believes that the
Property and Casualty Group competes in workers' compensation on the basis of
its ability to provide prompt and responsive service.
In 1996, the Company restructured the Property and Casualty Group with the
goal of restoring its profitability after three years of operating losses. The
losses resulted primarily from unfavorable underwriting experience and adverse
reserve development related to accident years 1987 through 1991, when the
Property and Casualty Group wrote a much higher volume of business than its
current volume. The principal components of the restructuring were: (i)
strengthening loss reserves; (ii) initiating a commutation program to settle a
significant number of open claims from the 1987 to 1991 period; (iii)
designating PMA Cayman and MASCCO as separate run-off companies to alleviate the
SAP impact on the Pooled Companies of the loss reserve strengthening and to
manage the capital deployed in running off pre-1992 workers' compensation
claims; (iv) initiating an expense reduction program and (v) implementing
management changes, including the appointment of a new Chief Operating Officer
and the creation of the position of Chief Underwriting Officer. In June 1998,
the Company entered into a letter of intent to sell PMA Cayman. Largely as a
result of the restructuring, the Property and Casualty Group recorded pre-tax
operating income of $5.4 million for the six months ended June 30, 1998,
compared to pre-tax operating losses of $5.9 million for the six months ended
June 30, 1997 and $3.7 million, $215.7 million (including restructuring and
other special charges of $223.1 million) and $3.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively. At June 30, 1998, the Pooled
Companies' statutory surplus was $263.1 million, and for the six months ended
June 30, 1998, the Property and Casualty Group's net premiums written were
$138.4 million. See "Business--The Property and Casualty Group."
In December 1997, the Company acquired an insurance company, which was
renamed Caliber One Indemnity Company, to enter the excess and surplus lines
insurance business. Within the last year, the Company hired several experienced
specialty insurance executives to manage Caliber One, who have substantial
relationships within the wholesale brokerage community, which management
believes will have a favorable impact on Caliber One's ability to obtain market
acceptance. Caliber One distributes its products primarily through national
wholesale brokers, and Caliber One Indemnity Company is approved as a surplus
lines carrier in 38 states, Puerto Rico and the District of Columbia. As of
June 30, 1998, Caliber One Indemnity Company's statutory surplus was $25.5
million, and for the six months ended June 30, 1998, Caliber One's net premiums
written were $917,000.
The Company's insurance subsidiaries have the following ratings from A.M.
Best: PMA Reinsurance Corporation, A+ ("Superior"); the Pooled Companies, A-
("Excellent") and Caliber One Indemnity Company, A ("Excellent"). Management
believes that ratings from A.M. Best are material to its operations and that a
downgrade from the present rating classifications could have an adverse effect
on the Company's ability to market its products. A.M. Best's ratings are based
upon an assessment of an insurance company's perceived financial strength
regarding its ability to pay obligations to its policyholders and are not
directed toward the protection of investors.
- 34 -
<PAGE>
The Company maintains its executive offices at 380 Sentry Parkway, Blue
Bell, PA 19422, and its telephone number is (215) 665-5046.
THE ISSUER
The Issuer is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement executed by PMC as Depositor, The Bank of New York, as
the Property Trustee of the Issuer, and The Bank of New York (Delaware), as
Trustee, and (ii) a certificate of trust filed with the Delaware
Secretary of State. The trust agreement will be amended and restated in its
entirety (as so amended and restated, the "Trust Agreement") substantially in
the form filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The Trust Agreement will be qualified as an indenture
under the Trust Indenture Act. The Issuer exists for exclusive purposes of (i)
issuing and selling the Capital Securities and the Common Securities, (ii) using
the proceeds from the sale of the Capital Securities and the Common Securities
to acquire the Junior Subordinated Debentures issued by PMC and (iii) engaging
in only those other activities necessary, or incidental thereto.
Accordingly, the Junior Subordinated Debentures, the rights of the Property
Trustee under the Guarantee and the right to reimbursement of expenses under the
Expense Agreement will be the sole assets of the Issuer, and payments under the
Junior Subordinated Debentures and the Expense Agreement will be the sole
revenue of the Issuer.
All of the Common Securities of the Issuer will be owned by PMC. The
Common Securities will rank pari passu, and payments will be made thereon pro
rata, with the Capital Securities, except that upon the occurrence and
continuance of an Event of Default under the Trust Agreement (as defined
therein) resulting from a Debenture Event of Default, the rights of PMC as
holder of the Common Securities to payment in respect of distributions and
payments upon liquidation, redemption or otherwise will be subordinated to the
rights of the holders of the Capital Securities. See "Description of the
Capital Securities -- Subordination of Common Securities." PMC will acquire
Common Securities in an aggregate liquidation amount equal to approximately 3%
of the total capital of the Issuer.
The Issuer has a term of approximately 55 years, but may terminate earlier
as provided in the Trust Agreement. The Issuer's business and affairs are
conducted by its trustees, each appointed by PMC as holder of the Common
Securities. The trustees for the Issuer will be The Bank of New York, as the
Property Trustee, The Bank of New York (Delaware), as Trustee, and three
individual Administrative Trustees who are employees or officers of or
affiliated with PMC. The Bank of New York, as Property Trustee, will act as sole
indenture trustee under the Trust Agreement for purposes of compliance with the
Trust Indenture Act. The Bank of New York will also act as Trustee under the
Guarantee and the Indenture (each as defined herein). See "Description of the
Guarantee" and "Description of the Junior Subordinated Debentures." The holder
of the Common Securities of the Issuer, or the holders of a majority in
Liquidation Amount of the Capital Securities if a Debenture Event of Default has
occurred and is continuing, will be entitled to appoint, remove or replace the
Property Trustee. In no event will the holders of the Capital Securities have
the right to vote to appoint, remove or replace the Administrative Trustees;
such voting rights are vested exclusively in the holder of the Common
Securities. The duties and obligations of the Property Trustee are governed by
the Trust Agreement. PMC will pay all fees and expenses related to the Issuer
and the
- 35 -
<PAGE>
offering of the Capital Securities and will pay, directly or indirectly, all
ongoing costs, expenses and liabilities of the Issuer.
The principal executive office of the Issuer is located at 380 Sentry
Parkway, Blue Bell, Pennsylvania 19422, and its telephone number is (215) 665-
5046.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the Company's ratio of earnings to fixed
charges for the six months ended June 30, 1998 and 1997 and the years ended
December 31, 1997, 1996, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Six Months
Ended Year ended December 31,
June 30,
----------- -------------------------------
1998 1997 1997 1996(2) 1995 1994 1993
----- ---- ---- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges(1) 4.0x 1.3x 2.4x -- 2.7x 5.5x 7.7x
</TABLE>
(1) For the purposes of determining this ratio, earnings (loss) consist of
income (loss) before income taxes and extraordinary loss (1997), plus fixed
charges. Fixed charges consist of interest expense on debt, amortization of
debt issuance costs and the portion of operating leases that management
believes is representative of the interest factor.
(2) In 1996, earnings were insufficient to cover fixed charges by $191.4
million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
- 36 -
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at June 30, 1998 on an actual basis and as adjusted to reflect the
issuance of the Junior Subordinated Debentures in connection with the Offering
as if the Offering had occurred on June 30, 1998, after deducting the estimated
underwriting discount and expenses of the Offering. This table should be read
in conjunction with the consolidated financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(dollar amounts in thousands, except per share data)
At June 30, 1998
(Unaudited)
Actual As Adjusted
------ -----------
Long-term debt:
<S> <C> <C>
Revolving Credit Facility(1) $203,000 $104,500
-------- --------
Company-obligated mandatorily
redeemable Capital Securities of
subsidiary trust holding solely Junior
Subordinated Debentures of the
Company(2) -- 100,000
-------- --------
Shareholders' equity:
Common stock, $5.00 par value, 40,000,000
shares authorized, 14,765,020 shares
issued and 14,329,013 shares
outstanding 73,825 73,825
Class A common stock, $5.00 par value,
40,000,000 shares authorized,
9,677,925 shares issued and 9,356,995
shares outstanding 48,389 48,389
Additional paid-in capital-Class A common
stock 339 339
Retained earnings 359,486 359,486
Accumulated other comprehensive income 26,297 26,297
Notes receivable from officers (198) (198)
Treasury stock, at cost (436,007 shares-
common stock and 320,930 shares-
Class A common stock) (11,755) (11,755)
-------- --------
Total shareholders' equity 496,383 496,383
-------- --------
Total capitalization $699,383 $700,883
======== ========
</TABLE>
(1) At June 30, 1998, $32,000 was available for borrowing under the Company's
Revolving Credit Facility. As adjusted, at June 30, 1998, available
borrowings under the Company's Revolving Credit Facility are $130,500.
(2) Represents the issuance of the Capital Securities by the Trust (net of
related issuance costs). One hundred percent of the assets of the Trust will
consist of approximately $103,093 of Junior Subordinated Debentures of PMC.
The financial statements of the Trust will be reflected in the consolidated
financial statements of the Company with the Capital Securities reflected as
Company-obligated mandatorily redeemable Capital Securities of subsidiary
trust holding solely Junior Subordinated Debentures of the Company. See
"Accounting Treatment."
- 37 -
<PAGE>
USE OF PROCEEDS
PMC currently estimates the net proceeds to be received from the Offering
will be $98.5 million, after giving effect to estimated underwriting discounts
and estimated offering expenses. All of the net proceeds from the sale of the
Capital Securities will be invested in the Junior Subordinated Debentures. PMC
intends to use the proceeds from the sale of such Junior Subordinated Debentures
to repay indebtedness under the Revolving Credit Facility, which will
increase the availability under the Revolving Credit Facility from $32 million
to $130.5 million. The final maturity of the Revolving Credit Facility is
December 31, 2002, with reductions in availability of $47.5 million on December
31, 1999 and level reductions in availability of $62.5 million each December 31
thereafter, commencing in 2000. The Revolving Credit Facility bears interest at
a variable interest rate of LIBOR plus .70% on the drawn amount (with such
spread adjustable downward based upon reductions in the Company's ratio of debt
to total capitalization), or 6.4% at June 30, 1998, and carries a .275% facility
fee on the undrawn portion (also adjustable downward based upon reductions in
the Company's ratio of debt to total capitalization). It is the Company's
intention to utilize availability under the Revolving Credit Facility, from time
to time in the future, to capitalize subsidiaries and make other strategic
investments as business opportunities arise, subject to the maintenance of
appropriate financial leverage ratios. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer will be treated as a
subsidiary of the Company, and, accordingly, the accounts of the Issuer will be
included in the consolidated financial statements of the Company. The Capital
Securities will be presented as a separate line item in the consolidated balance
sheets of the Company, entitled "Company-obligated mandatorily redeemable
Capital Securities of subsidiary trust holding solely Junior Subordinated
Debentures of the Company" and the audited notes to the consolidated financial
statements will contain disclosure that (a) the Common Securities of the Trust
are wholly owned by PMC, (b) the sole asset of the Trust is the ___% Junior
Subordinated Debentures of PMC in the approximate principal amount of $103.093
million, having a stated maturity of ___, 2028, and (c) PMC fully and
unconditionally guarantees the Trust's obligations under the Capital Securities.
For financial reporting purposes, the Company will record distributions payable
on the Capital Securities as an expense in its consolidated statements of
operations.
- 38 -
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial and operating data set forth below as
of December 31, 1997, 1996, 1995, 1994, and 1993 and for each of the five years
in the period ended December 31, 1997 were derived from the audited consolidated
financial statements of the Company. The selected consolidated financial and
operating data as of June 30, 1998 and 1997 and for the six-month periods ended
June 30, 1998 and 1997 were derived from the Company's unaudited consolidated
financial statements. The unaudited consolidated financial statements have been
prepared on the same basis as the Company's audited consolidated financial
statements, and, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the Company's financial position and results of operations for
these periods. The results of operations for the six months ended June 30, 1998
may not be indicative of results of operations for the full year. All selected
consolidated financial and operating data set forth below should be read in
conjunction with the consolidated financial statements of the Company, together
with the notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations, both appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
(dollar amounts in thousands, except per share data)
Six Months Ended
June 30, Year Ended December 31,
------------------------ --------------------------------------------------------------------
1998 1997 1997(1) 1996(1) 1995(1) 1994(1) 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net premiums written (2) $ 248,481 $ 248,285 $ 381,282 $ 432,975 $ 485,876 $ 465,502 $ 533,487
=========== =========== =========== =========== =========== =========== ===========
Consolidated Revenues:
Net premiums earned $ 221,576 $ 222,401 $ 375,951 $ 420,575 $ 484,952 $ 466,534 $ 547,407
Net investment income 65,200 68,459 136,698 133,936 139,355 138,719 153,842
Net realized investment
gains (losses) 11,263 (1,931) 8,598 2,984 31,923 47,521 69,798
Service revenues 5,090 5,038 10,311 9,189 5,106 3,380 1,321
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total consolidated revenues $ 303,129 $ 293,967 $ 531,558 $ 566,684 $ 661,336 $ 656,154 $ 772,368
=========== =========== =========== =========== =========== =========== ===========
Income (loss) before
cumulative effect of
accounting changes and
extraordinary item 21,445 5,277 19,753 (135,334) 24,130 57,250 68,297
Cumulative effect of
accounting changes, net of
related tax effects (3) --- --- --- --- --- --- 14,119
Extraordinary loss from
early extinguishment of
debt, net of related tax
effect (4) --- (4,734) (4,734) --- --- --- ---
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 21,445 $ 543 $ 15,019 $ (135,334) $ 24,130 $ 57,250 $ 82,416
=========== =========== =========== =========== =========== =========== ===========
Per Share Data:
Weighted average shares:
Basic (5) 23,770,912 23,832,562 23,855,031 23,800,791 23,816,088 23,897,263 24,231,071
Diluted (5), (6) 24,658,911 24,504,892 24,567,378 23,800,791 24,781,949 24,650,741 24,470,024
Income (loss) before
cumulative effect of
accounting changes and
extraordinary item per
share:
Basic (5) $ .90 $ .22 $ .83 $ (5.68) $ 1.01 $ 2.40 2.82
Diluted (5), (6) .87 .21 .80 (5.68) .97 2.32 2.79
Net income (loss) per share:
Basic (5) .90 .02 .63 (5.68) 1.01 2.40 3.40
Diluted (5), (6) .87 .02 .61 (5.68) .97 2.32 3.37
Dividends paid per common
share .16 .16 .32 .32 .32 .32 .28
Dividends paid per Class A
common share .18 .18 .36 .36 .36 .36 32
Shareholders' equity per
share 20.96 17.40 19.96 17.86 25.53 22.10 22.23
At June 30, At December 31,
----------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Consolidated Financial Position:
Total investments $ 2,159,303 $ 2,067,828 $ 2,194,738 $ 2,261,353 $ 2,455,949 $ 2,313,261 $ 2,374,208
Total assets 3,075,413 3,085,640 3,057,258 3,117,516 3,258,572 3,181,979 3,197,909
Reserves for unpaid losses
and LAE 1,939,568 2,052,791 2,003,187 2,091,072 2,069,986 2,103,714 2,150,665
Long-term debt 203,000 203,049 203,000 204,699 203,848 203,975 194,836
Shareholders' equity (7) 496,383 415,120 478,347 425,828 609,668 524,862 534,383
- ---------------------------
</TABLE>
- 39 -
<PAGE>
<TABLE>
<CAPTION>
(dollar amounts in thousands, except per share data)
Six Months Ended
June 30, Year Ended December 31,
------------------------ --------------------------------------------------------------------
1998 1997 1997(1) 1996(1) 1995(1) 1994(1) 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax operating income
(loss)(8):
PMA Re $ 22,952 $ 23,187 $ 45,957 $ 44,807 $ 39,793 $ 33,703 $ 33,511
----------- ----------- ----------- ----------- ----------- ----------- -----------
The Property and Casualty
Group (9):
Excluding Run-off
Operations 4,954 (4,781) (3,607) (215,669) (3,885) 3,893 (1,153)
Run-off Operations 428 (1,107) (73) --- --- --- ---
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Property and Casualty
Group 5,382 (5,888) (3,680) (215,669) (3,885) 3,893 (1,153)
Caliber One (1,070) --- --- --- --- --- ---
Corporate operations (5,548) (4,526) (9,954) (6,464) (14,184) (6,686) (885)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total pre-tax operating
income (loss) before
interest expense 21,716 12,773 32,323 (177,326) 21,724 30,910 31,473
Interest expense 7,463 8,222 15,768 17,052 18,734 13,051 11,650
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pre-tax operating income
(loss) 14,253 4,551 16,555 (194,378) 2,990 17,859 19,823
Net realized investment
gains (losses) 11,263 (1,931) 8,598 2,984 31,923 47,521 69,798
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and extraordinary
item 25,516 2,620 25,153 (191,394) 34,913 65,380 89,621
Provision (benefit) for
income taxes 4,071 (2,657) 5,400 (56,060) 10,783 8,130 21,324
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
cumulative effect of
accounting changes and
extraordinary item 21,445 5,277 19,753 (135,334) 24,130 57,250 68,297
Ratio of earnings to fixed
charges (10) 4.0x 1.3x 2.4x -- 2.7x 5.5x 7.7x
GAAP Ratios for Insurance
Subsidiaries (11):
PMA Re:
Loss ratio 69.0% 73.1% 69.6% 73.7% 74.6% 74.7% 80.6%
Expense ratio 35.2% 29.3% 34.2% 28.9% 29.3% 33.3% 29.4%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Combined ratio (12) 104.2% 102.4% 103.8% 102.6% 103.9% 108.0% 110.0%
=========== =========== =========== =========== =========== =========== ===========
The Property and Casualty
Group, including Run-off
Operations (9):
Loss ratio 85.5% 95.4% 91.1% 158.2% 92.5% 90.1% 96.3%
Expense ratio (13) 34.0% 35.0% 42.8% 47.1% 30.4% 31.4% 25.0%
Policyholders' dividend
ratio 6.7% 4.8% 6.9% 6.1% 4.8% 4.6% 3.5%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Combined ratio (12) 126.2% 135.2% 140.8% 211.4% 127.7% 126.1% 124.8%
=========== =========== =========== =========== =========== =========== ===========
The Property and Casualty
Group, excluding Run-off
Operations (9):
Loss ratio 77.7% 84.9% 83.7% -- -- -- --
Expense ratio (13) 32.8% 33.9% 32.9% -- -- -- --
Policyholders' dividend
ratio 6.7% 4.8% 5.6% -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Combined ratio (12) 117.2% 123.6% 122.2% -- -- -- --
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
___________________________
(1) Operating results in 1997, 1996 and 1995 were impacted by approximately
$12,100, $223,100 and $8,400, respectively, of restructuring and other
special charges. See "Management's Discussion and Analysis of Financial
Condition and Results of
- 40 -
<PAGE>
Operations" for further information. In addition,
1994 operating results included a charge of approximately $4,908 to write
down the value of the Company's former headquarters building.
(2) Net premiums written were reduced by $2,072 for the six months ended June
30, 1998 and reduced by $37,000, $10,500, $4,000, $1,000, and $3,500 for
the years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively,
representing estimated retrospective policy adjustments related to the
current accident year and retrospective policy adjustments paid. The
corresponding adjustment for the six months ended June 30, 1997 was not
material. These adjustments to net premiums written were made for
presentation purposes only and had previously been reflected in the
Company's reported revenues, financial position and results
of operations.
(3) In 1993, the Company recognized an after-tax net benefit of $14,119
resulting from the adoption of SFAS No. 109, "Accounting for Income Taxes,"
($21,500 benefit), and SFAS No. 106, "Employers' Accounting for Post-
retirement Benefits Other Than Pensions," ($7,381 after-tax charge).
(4) In 1997, the Company refinanced substantially all of its long-term debt
that resulted in a $4,734 extraordinary loss, net of tax effect. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(5) In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
requires the presentation of basic and diluted earnings per share (see
Notes 1-I and 16 to the audited consolidated financial statements appearing
elsewhere in this Prospectus). All prior periods' presentation of earnings
per share data has been restated to conform to SFAS No. 128.
(6) For the year ended December 31, 1996, common stock equivalents were not
taken into consideration in the computation of weighted-average diluted
shares as these common stock equivalents would have an anti-dilutive effect
on the net loss per share.
(7) In 1994, shareholders' equity increased $45,343 related to the adoption of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
(8) Pre-tax operating income (loss) excludes net realized investment gains
(losses). Pre-tax operating income by business segment for all periods is
unaudited and has been presented in accordance with SFAS No.131,
"Disclosures about Segments of an Enterprise and Related Information",
which the Company adopted on January 1, 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's interim financial statements and notes thereto as of June 30,
1998 and 1997 included elsewhere in this Prospectus. The Company has
excluded net realized investment gains (losses) from the profit and loss
measurement it utilizes to assess the performance of its operating segments
because (i) net realized investment gains (losses) are unpredictable and
not necessarily indicative of future performance and (ii) in many
instances, decisions to buy and sell securities are made at the parent
holding company level, and such decisions result in net realized gains
(losses) that do not relate to the operations of the individual segments.
(9) Run-off Operations of the Property and Casualty Group consist of MASCCO,
PMA Cayman and PMA Life, each of which was established in December 1996 to
reinsure certain obligations primarily associated with workers'
compensation claims written by the Pooled Companies for the accident years
1991 and prior. The Run-off Operations are separate legal entities and
substantially all of the assets of the Run-off Operations are held in trust
for the benefit of the Pooled Companies. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
- 41 -
<PAGE>
(10) For the purposes of determining this ratio, earnings (loss) consist of
income (loss) before income taxes and extraordinary loss, plus fixed
charges. Fixed charges consist of interest expense on debt, amortization of
debt issuance costs and the portion of operating leases that management
believes is representative of the interest factor. In 1996, earnings were
insufficient to cover fixed charges by $191,394. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(11) The results of operations of Caliber One are not material to the
underwriting ratios of the Company; accordingly, the ratios for Caliber One
have not been presented.
(12) The combined ratio computed on a GAAP basis is equal to losses and LAE,
plus amortization of deferred acquisition costs, operating expenses and
policyholders' dividends (where applicable), all divided by net premiums
earned.
(13) The GAAP operating expense ratios exclude $4,718 and $4,506 for the six
months ended June 30, 1998 and 1997, respectively, and $9,316, $8,227 and
$5,300, for the years ended December 31, 1997, 1996 and 1995, respectively,
of PMA Management Corp. direct expenses related to service revenues, which
are not included in premiums earned. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
- 42 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the Company's results of operations and its
liquidity and capital resources should be read in connection with the Selected
Consolidated Financial and Operating Data of the Company and the consolidated
financial statements of the Company and notes thereto, and the unaudited
financial statements and notes thereto included elsewhere in this Prospectus.
Results of Operations for the Three and Six Months Ended June 30, 1998 Compared
to the Three and Six Months Ended June 30, 1997
The table below presents the major components of net income for the Company
for the three and six months ended June 30, 1998 and 1997:
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pre-tax operating income (loss)(1) $ 7,026 $(4,018) $14,253 $ 4,551
Net realized investment gains (losses) 3,749 (680) 11,263 (1,931)
------- ------- ------- -------
Income before income taxes and
extraordinary loss 10,775 (4,698) 25,516 2,620
Provision (benefit) for income taxes 1,418 (5,218) 4,071 (2,657)
------- ------- ------- -------
Income before extraordinary loss 9,357 520 21,445 5,277
Extraordinary loss, net of related taxes -- -- -- (4,734)
------- ------- ------- -------
Net income $ 9,357 $ 520 $21,445 $ 543
======= ======= ======= =======
Per Basic Share:
Income before extraordinary loss $ 0.39 $ 0.02 $ 0.90 $ 0.22
Extraordinary loss -- -- -- (0.20)
------- ------- ------- -------
Net income $ 0.38 $ 0.02 $ 0.90 $ 0.02
======= ======= ======= =======
</TABLE>
- 43 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Per Diluted Share:
Income before extraordinary loss $ 0.38 $ 0.02 $ 0.87 $ 0.21
Extraordinary loss -- $ -- -- $ (0.19)
------- ------- ------- -------
Net income $ 0.38 $ 0.02 $ 0.87 $ 0.02
======= ======= ======= =======
</TABLE>
- -------------------------
(1) Pre-tax operating income (loss) is defined as income from continuing
operations before income taxes, but excluding net realized investment gains
(losses). The Company has excluded net realized investment gains (losses)
from the profit and loss measurement it utilizes to assess the performance
of its operating segments because (i) net realized investment gains (losses)
are unpredictable and not necessarily indicative of future performance and
(ii) in many instances, decisions to buy and sell securities are made at the
parent holding company level, and such decisions result in net realized
gains (losses) that do not relate to the operations of the individual
segments.
The following table indicates the Company's pre-tax operating income (loss)
by business segment for the three and six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
<S> <C>1998 <C> 1997(1) <C> <C>
1998 1997(1)
---- -------
PMA Re $11,580 $ 9,829 $22,952 $23,187
------- ------- ------- -------
The Property and Casualty Group:
Excluding Run-off Operations 2,353 (6,777) 4,954 (4,781)
Run-off Operations 293 (533) 428 (1,107)
------- ------- ------- -------
Total 2,646 (7,310) 5,382 (5,888)
------- ------- ------- -------
Caliber One (681) -- (1,070) --
Corporate and Other (2,757) (2,649) (5,548) (4,526)
------- ------- ------- -------
Pre-tax operating income (loss) before
interest expense 10,788 (130) 21,716 12,773
Interest expense 3,762 3,888 7,463 8,222
------- ------- ------- -------
Pre-tax operating income (loss) $ 7,026 $(4,018) $14,253 $ 4,551
======= ======= ======= =======
</TABLE>
(1) Pre-tax operating income (loss) by business segment has been reclassified
for 1997 to reflect the changes related to the implementation of SFAS No.
131 (See Note 3 to the interim consolidated financial statements included
elsewhere in this Prospectus for further discussion).
At June 30, 1998, the Company's total assets by business segment were as
follows:
(dollar amounts in thousands)
PMA Re $1,188,852
The Property and Casualty Group:
Excluding Run-Off Operations 1,469,795
Run-Off Operations 352,965
----------
Total 1,822,760
----------
Caliber One 62,465
Corporate and Other 1,336
----------
Total assets $3,075,413
==========
- ----------------------
On a consolidated basis, the Company reported pre-tax operating income of
$7.0 million and $14.3 million for the three and six months ended June 30, 1998,
respectively, compared to a pre-tax loss of $4.0 million for the second quarter
of 1997 and pre-tax operating income of $4.6 million for the six months ended
June 30, 1997. The increases in pre-tax operating income were primarily due to
increased
- 44 -
<PAGE>
operating income at PMA Re for the second quarter of 1998 and at the Property
and Casualty Group for both the first and second quarters of 1998 partially
offset by the Caliber One pre-tax operating loss of $1.1 million related to the
commencement of its operations. The increase in operating income for PMA Re for
the second quarter of 1998 was primarily related to higher premium volume, lower
loss ratios and higher investment income. Pre-tax operating income for PMA Re
for the first half of 1998 was flat relative to the first half of 1997, as
higher premium volumes, lower loss ratios and higher investment income were
offset by increases in acquisition costs as well as timing issues related to
certain operating expenses in the first six months of 1998. The increase in pre-
tax operating income for the Property and Casualty Group was due to lower losses
and expenses recorded in the first half of 1998 compared to 1997 as a result of
the restructuring efforts initiated during 1997. The pre-tax operating loss at
Corporate and Other for the second quarter of 1998 was comparable to the second
quarter of 1997, while the operating loss for the first half of 1998 was $1.0
million higher than the comparable 1997 period, related to certain compensation
programs, which were not adopted until the second half of 1997, partially offset
by costs incurred in the first six months of 1997 related to certain corporate
properties that were disposed of in the third quarter of 1997.
Interest expense for the second quarter of 1998 was comparable to the
second quarter of 1997 and decreased $759,000 for the six months ended June 30,
1998 compared to the same period in 1997 due to the March 1997 refinancing of
the Company's debt facility.
Net realized investment gains were $3.7 million and $11.3 million in the
three and six months ended June 30, 1998, respectively, compared to net realized
investment losses of $0.7 million and $1.9 million in the comparable 1997
periods due primarily to lower interest rates in the 1998 periods.
For the three months ended June 30, 1998, net income amounted to $9.4
million, or $0.39 per basic share and $0.38 per diluted share, as compared to
net income of $0.5 million, or $0.02 per basic and diluted share, for the three
months ended June 30, 1997. Net income on a consolidated basis before
extraordinary item was $21.4 million, or $0.90 per basic share and $0.87 per
diluted share, for the six months ended June 30, 1998 compared to $5.3 million,
or $0.22 per basic share and $0.21 per diluted share, for the six months ended
June 30, 1997. On March 14, 1997, the Company refinanced substantially all of
its outstanding credit agreements not already maturing in 1997. In connection
with this refinancing, the Company recognized an extraordinary loss in the first
six months of 1997 from the early extinguishment of debt of $4.7 million, or
$0.20 per basic share and $0.19 per diluted share, net of tax.
PMA Re Results of Operations
Summarized financial results of PMA Re for the three and six months ended
June 30, 1998 and 1997 are as follows:
(dollar amounts in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
Net premiums written $ 47,089 $ 36,789 $117,908 $ 96,279
======== ======== ======== ========
Net premiums earned $ 54,869 $ 45,791 $100,967 $ 85,087
Net investment income 13,671 12,134 27,171 25,288
-------- -------- -------- --------
Operating revenues 68,540 57,925 128,138 110,375
-------- -------- -------- --------
Losses and LAE incurred 36,864 32,386 69,678 62,231
- 45 -
<PAGE>
Acquisition and operating
expenses 20,096 15,710 35,508 24,957
-------- -------- -------- --------
Total losses and expenses 56,960 48,096 105,186 87,188
-------- -------- -------- --------
Pre-tax operating income $ 11,580 $ 9,829 $ 22,952 $ 23,187
======== ======== ======== ========
GAAP loss ratio 67.2% 70.7% 69.0% 73.1%
GAAP combined ratio 103.8% 105.0% 104.2% 102.4%
SAP loss ratio 66.2% 70.7% 68.4% 73.1%
SAP combined ratio 108.9% 105.1% 104.5% 103.5%
Premium Revenues
The following table indicates PMA Re's gross and net premiums written by
major category of business for the three and six months ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross premiums written:
Casualty lines $ 41,804 $32,861 $102,608 $83,289
Property lines 15,402 13,150 41,313 36,916
Other lines 107 48 501 501
-------- -------- -------- --------
Total $ 57,313 $ 46,059 $144,422 $120,706
======== ======== ======== ========
Net premiums written:
Casualty lines $ 35,122 $ 25,536 $ 83,535 $ 68,286
Property lines 11,845 11,214 33,849 27,501
Other lines 122 39 524 492
-------- -------- -------- --------
Total $ 47,089 $ 36,789 $117,908 $ 96,279
======== ======== ======== ========
</TABLE>
Gross premiums written increased $11.3 million, or 24.4% and $23.7 million,
or 19.6%, for the three and six months ended June 30, 1998, respectively,
compared to the same periods in 1997. For the three and six months ended June
30, 1998, gross premiums written increased 27.3% and 23.2% for casualty lines
and 17.1% and 11.9% for property lines compared to the same periods in 1997. The
main reasons for these increases in gross premiums written were increased
participations on reinsurance treaties and new programs with existing clients,
as well as contracts with new clients. During the first six months of 1998, PMA
Re added new programs with 30 existing clients and added contracts with 10 new
clients, which resulted in an 11% increase in premiums compared to the first six
months of 1997. The remaining increase in premiums relates to increased
participations with existing clients which was partially offset by the trend
toward large ceding companies increasing their retentions, which decreases PMA
Re's subject premium. In addition, highly competitive conditions in the United
States reinsurance market caused PMA Re to non-renew certain accounts due to
inadequate rates and/or other underwriting concerns; during the first six months
of 1998, primarily as a result of these underwriting issues, PMA Re non-renewed
contracts amounting to approximately $27.5 million of premiums.
Net premiums written increased $21.6 million, or 22.5%, for the six months
ended June 30, 1998 compared to the same period in 1997. PMA Re made changes to
its retrocessional program in the second half of 1997 and in 1998, which reduced
the percentage of premiums ceded to retrocessionaires in 1998. Net premiums
earned for PMA Re also increased $15.9 million, or 18.7%, for the six months
ended June 30, 1998, respectively, compared to the same period in 1997. Net
premiums earned generally follow growth patterns similar to net premiums written
after giving effect to a lag in premium earnings.
- 46 -
<PAGE>
Losses and Expenses
The following table reflects the components of PMA Re's combined ratios,
computed in accordance with GAAP for the three and six months ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
---- ---- ---- ----
Loss ratio 67.2% 70.7% 69.0% 73.1%
---- ---- ---- ----
Expense ratio:
Amortization of deferred
acquisition costs 30.5% 27.9% 28.5% 23.8%
Operating expenses 6.1% 6.4% 6.7% 5.5%
---- ---- ---- ----
Total expense ratio 36.6% 34.3% 35.2% 29.3%
---- ---- ---- ----
Combined ratio - GAAP (1) 103.8% 105.0% 104.2% 102.4%
===== ===== ===== =====
</TABLE>
- ---------------------
(1) The combined ratio computed on a GAAP basis is equal to losses and LAE, plus
amortization of deferred acquisition costs, operating expenses and
policyholders' dividends (where applicable), all divided by net premiums
earned.
For both the three and six-month periods ended June 30, 1998, PMA Re posted
lower loss ratios, reflecting higher levels of favorable loss reserve
development and the effects of more treaties written with ceding commissions,
which increased the proportion of the subject premium assumed by PMA Re. The
quarter ended June 30, 1998 and six-month period ended June 30, 1998 were also
impacted by higher acquisition costs, which reflected the aforementioned
increase in the number of treaties written with ceding commissions, as well as
competitive conditions.
The ratio of operating expenses to net premiums earned (the "Operating
Expense Ratio") for the quarter ended June 30, 1998 was comparable to the
quarter ended June 30, 1997. The Operating Expense Ratio increased 1.2 points
for the six months ended June 30, 1998 compared to the same period in 1997. The
increase in the Operating Expense Ratio relates to increases in staff relating
to higher activity levels, as well as the timing of certain expenses in 1997,
such as costs relating to the restructuring of PMA Re's compensation plans. PMA
Re increased staff by approximately 11% from June 30, 1997 to June 30, 1998 in
reponse to the higher activity levels from year to year. Also, during the third
quarter of 1997, the compenstion plans at PMA Re were restructured to provide
incentive compensation for management, which resulted in an accrual of
approximately $500,000 in the second half of 1997. In addition, the increase is
partially due to the Year 2000 compliance program, for which the majority of
expenses incurred began in the second half of 1997. PMA Re has incurred costs of
approximately $425,000 during 1998 related to the Year 2000 compliance program.
Management expects that PMA Re will incur approximately $175,000 of additional
expenses in 1998 related to the Year 2000 compliance program and that such
project will be completed in 1998. See "Liquidity and Capital Resources" for
further discussion.
Net Investment Income
Higher levels of investment income, which reflected higher levels of
invested assets, also impacted PMA Re's operating income. For the quarter ended
June 30, 1998, PMA Re's net investment income increased $1.5 million versus the
quarter ended June 30, 1997 and for the six months ended June 30, 1998, net
investment income increased $1.9 million versus the comparable 1997 period.
- 47 -
<PAGE>
The Property and Casualty Group Results of Operations
Net premiums written for the Property and Casualty Group were reduced by
$2.2 million and $2.1 million for the three and six months ended June 30, 1998,
respectively, representing estimated retrospective policy adjustments related to
the current and prior accident years and retrospective policy adjustments paid.
The corresponding adjustments for the 1997 periods were not material. These
adjustments were made for presentation purposes only and do not impact the
Property and Casualty Group's reported revenues, financial position or results
of operations because these adjustments have no effect on net premiums earned.
Summarized financial results of the Property and Casualty Group for the three
and six months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net premiums written:
Workers' compensation $ 33,507 $ 38,024 $ 98,395 $ 99,624
Commercial lines 13,778 23,545 31,432 52,382
------- -------- ------- --------
Total $ 47,285 $ 61,569 $129,827 $152,006
======== ======== ======== ========
Net premiums earned:
Workers' compensation $ 42,698 $ 45,897 $ 87,011 $ 95,616
Commercial lines 17,093 22,763 33,578 41,698
-------- -------- -------- --------
Total 59,791 68,660 120,589 137,314
-------- -------- -------- --------
Net investment income:
Excluding Run-off Operations 12,657 12,315 25,367 26,930
Run-off Operations 5,464 7,459 11,303 14,972
-------- -------- -------- --------
Total 18,121 19,774 36,670 41,902
-------- -------- -------- --------
Service revenues 2,655 2,490 5,090 5,038
-------- -------- -------- --------
Operating revenues 80,567 90,924 162,349 184,254
-------- -------- -------- --------
Losses and LAE incurred:
Excluding Run-off Operations 46,478 58,890 93,684 115,873
Run-off Operations 4,505 6,989 9,401 15,097
-------- -------- -------- --------
Total 50,983 65,879 103,085 130,970
-------- -------- -------- --------
Acquisition and operating expenses:
Excluding Run-off Operations 22,059 27,992 44,278 50,759
Run-off Operations 666 1,003 1,474 1,796
-------- -------- -------- --------
Total 22,725 28,995 45,752 52,555
-------- -------- -------- --------
Policyholders' dividends 4,213 3,360 8,130 6,617
-------- -------- -------- --------
Total losses and expenses 77,921 98,234 156,967 190,142
-------- -------- -------- --------
Pre-tax operating income (loss) $ 2,646 $ (7,310) $ 5,382 $ (5,888)
======== ======== ======== ========
GAAP loss ratio 85.3% 95.9% 85.5% 95.4%
GAAP combined ratio 126.3% 139.8% 126.2% 135.2%
SAP loss ratio(1) 78.4% 85.1% 77.9% 85.3%
SAP combined ratio(1) 119.0% 123.1% 113.4% 118.9%
</TABLE>
- --------------------------
(1) The SAP loss and combined ratios above relate to the Pooled Companies only.
- 48 -
<PAGE>
The Property and Casualty Group Excluding Run-off Operations
Premium Revenues
Direct premiums written for the Property and Casualty Group decreased $11.7
million and $19.9 million for three and six months ended June 30, 1998,
respectively, compared to the same periods in 1997. Direct premiums written for
commercial lines of business other than workers' compensation, such as
commercial auto, general liability, umbrella, multi-peril and commercial
property lines (collectively, "Commercial Lines") decreased $8.0 million and
$19.6 million for the three and six months ended June 30, 1998, respectively,
compared to the same periods in 1997. Direct premiums written for workers'
compensation decreased $3.7 million and $298,000 for the three and six months
ended June 30, 1998, respectively, compared to the same periods in 1997. For the
three months ended June 30, 1998 reinsurance premiums assumed increased $570,000
compared to the same period in 1997 and decreased $73,000 for the six months
ended June 30, 1998 compared to the same period in 1997. Reinsurance premiums
ceded increased $717,000 and decreased $1.5 million for the three and six months
ended June 30, 1998, respectively, compared to the same periods in 1997. The
percentage of net workers' compensation premiums written to total net premiums
written increased to 70% and 76% for the three and six months ended June 30,
1998, respectively, from 62% and 65% during the three and six months ended June
30, 1997, respectively. This increase was primarily due to a planned reduction
in Commercial Lines business, as described below, and continued competitive
conditions.
For three and six months ended June 30, 1998, net premiums written
decreased $14.3 million and $21.4 million compared to the same periods in 1997.
Earned premiums decreased by $8.9 million and $16.7 million for the three and
six months ended June 30, 1998, respectively, compared to the same periods in
1997. Net premiums earned generally follow growth patterns similar to net
premiums written after giving effect to a lag in premium earnings, absent any
significant adjustments to accrued retrospective premiums. Such adjustments did
not fluctuate materially between periods.
The decrease in direct premiums written for workers' compensation was
primarily due to continued intense price competition in the workers'
compensation market as well as the impact of rate changes associated with
workers' compensation benefit reforms in Pennsylvania. Workers' compensation
reform laws adopted in Pennsylvania ("Act 57") resulted in a reduction in manual
workers' compensation rates in excess of 25%, effective February 1997 for new
and renewal business. Management does not expect manual rate decreases to be as
significant for the 1998 policy year as compared to the 1997 policy year,
although manual rate levels in all of the Group's principal marketing states
continue to decrease.
The Property and Casualty Group has continued its marketing of alternative
market workers' compensation products for larger accounts, including large-
deductible policies and providing excess coverage to self-insured groups.
Typically, the Property and Casualty Group receives a lower up-front premium for
these types of alternative market product plans. However, under this type of
business, the insured retains a greater share of the underwriting risk than
under rate-sensitive or loss-sensitive products, which reduces the potential for
unfavorable claims activity on the accounts and encourages loss control on the
part of the insured. A substantial portion of related revenues are recorded as
service revenues. Such service revenues increased $165,000 and $52,000 for the
three and six months ended June 30, 1998, respectively, compared to the same
periods in 1997.
- 49 -
<PAGE>
Direct workers' compensation premiums written were also impacted by changes
in the level of premium adjustments, primarily related to audit premiums. For
the three and six months ended June 30, 1998, respectively, such adjustments
increased premiums written by $3.6 million and $8.1 million compared to
increases of $4.0 million and $8.3 million in the comparable 1997 periods.
The decreases in Commercial Lines direct writings for the three and six
months ended June 30, 1998 compared to the comparable 1997 periods were
primarily due to a planned reduction in net Commercial Lines business as well as
continued competitive conditions in Commercial Lines pricing in 1998. Rather
than lower prices to what it believes are unacceptable levels, the Property and
Casualty Group has chosen not to renew some of its Commercial Lines business. In
addition, the Property and Casualty Group has reduced its writings of new
Commercial Lines accounts in the first six months of 1998 compared to the same
period in 1997 because management believes that market rates and contract terms
for many of these accounts did not provide the opportunity to achieve what
management considers to be an acceptable return.
Losses and Expenses
The following table reflects the components of the Property and Casualty
Group's combined ratios, computed in accordance with GAAP for the three and six
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss ratio 77.7% 85.8% 77.7% 84.9%
----- ----- ----- -----
Expense ratio:
Amortization of deferred acquisition costs 20.7% 22.4% 19.2% 19.2%
Operating expenses(1) 12.1% 15.1% 13.6% 14.7%
----- ----- ----- -----
Total expense ratio 32.8% 37.5% 32.8% 33.9%
----- ----- ----- -----
Policyholders' dividend ratio 7.0% 4.9% 6.7% 4.8%
----- ----- ----- -----
Combined - GAAP(2) 117.5% 128.2% 117.2% 123.6%
===== ===== ===== =====
</TABLE>
- ------------------------------
(1) The GAAP Operating Expense Ratio excludes $2.4 million and $2.2 million for
the three and six months ended June 30, 1998 and 1997, respectively, and
$4.7 million and $4.5 million for the six months ended June 30, 1998 and
1997, respectively, of PMA Management Corp. direct expenses related to
service revenues, which are not included in premiums earned.
(2) The GAAP combined ratios for the Property and Casualty Group including the
Run-off Operations were 126.3% and 126.2% for the three and six months ended
June 30, 1998, respectively, compared to 139.8% and 135.2% for the three and
six months ended June 30, 1997, respectively. See "Run-off Operations."
For the three and six months ended June 30, 1998, respectively, the GAAP
loss ratio improved by 8.1 points and 7.2 points compared to the same periods in
1997. This improvement was primarily due to an improved loss and LAE ratio in
Commercial Lines and an improvement in medical costs and in LAE in the workers'
compensation line and a lower amount of discount accretion on workers'
compensation loss reserves.
- 50 -
<PAGE>
The improvement in the loss and LAE ratio in Commercial Lines favorably
impacted the overall loss ratio by 1.7 points and 1.4 points for three and six
months ended June 30, 1998, respectively, compared to the same periods in 1997.
This improvement in the Commercial Lines loss and LAE ratio was primarily due to
a reduction in exposures underwritten by the Property and Casualty Group in 1998
compared to the same period in 1997. The Property and Casualty Group believes
that reduced exposures, which have occurred primarily as a result of price
competition and more stringent underwriting, have improved the overall loss
ratio on its remaining Commercial Lines business.
Measures to control medical costs and LAE in workers' compensation improved
the overall loss and LAE ratio by 3.0 points and 2.5 points in the three and six
months ended June 30, 1998, respectively, compared to the same periods in 1997.
Medical costs improved primarily due to the Property and Casualty Group's
affiliation with a national preferred provider organization, which became
effective January 1998. This affiliation enabled the Property and Casualty Group
to lower its cost in providing medical benefits to injured workers. LAE
decreased primarily due to continued use of certain claims resolution practices.
By using techniques such as managed care and commutations, the Property and
Casualty Group has reduced the amount and number of outstanding claims and the
amount of time that a claim remains open. These techniques have lowered costs
associated with managing open claims.
In July 1997, the Property and Casualty Group completed a formal program
under which it commuted a large number of workers' compensation claims from
accident years 1991 and prior. The commutation program resulted in current
payments, which were less than the carried reserves. As substantially all of
these reserves were carried on a discounted basis, the ultimate level of
discount on the Property and Casualty Group's carried reserves decreased as
well. As the level of discount has decreased, the loss ratio has benefited from
lower amounts of discount accretion.
During the past five years, direct premiums written for workers'
compensation have declined significantly and the Property and Casualty Group has
underwritten less exposures in more recent years. As a result, loss reserve
levels have declined and the level of discount has declined as well. These
reductions have decreased the amount of discount accretion related to the
established loss reserves. As a result, this lower amount of discount accretion
improved the overall loss and LAE ratio by 2.6 points in the first six months of
1998 compared to the same period in 1997. The Property and Casualty Group has
initiated another commutation program, which is currently underway and expected
to continue through 1998. This program is expected to focus on claims from
accident years 1992 to 1996.
The increase in the percentage of net workers' compensation premiums
written and earned to total net premiums written and earned had a favorable
impact on the loss and LAE ratio, as workers' compensation business has had
better loss experience than other Commercial Lines in the Property and Casualty
Group's marketing territory. This mix of business caused a 0.8 point and 0.7
point reduction in the loss and LAE ratio for the three and six months ended
June 30, 1998, respectively, compared to the same periods in 1997.
The GAAP expense ratio decreased by 4.7 points and 1.1 points for the three
and six months ended June 30, 1998, respectively, compared to the same periods
in 1997 related to a corresponding reduction in the operating expense ratio.
Such reduction was due to decreases in operating expenses of $3.3 million and
$3.7
- 51 -
<PAGE>
million during the three and six months ended June 30, 1998, respectively,
compared to the same periods in 1997 as a result of the continuation of cost
reduction measures initiated during 1997.
The Property and Casualty Group incurred severance and other restructuring
costs of approximately $80,000 and $498,000, respectively, for the three and
six months ended June 30, 1998, compared with $1.7 million for the same periods
in 1997. In addition, approximately $875,000 and $1.0 million of costs related
to addressing the Year 2000 Issue were incurred during the three and six months
ended June 30, 1998, respectively, compared with $145,000 and $438,000 for the
same periods in 1997. The remaining Year 2000 costs are not expected to be
material and management anticipates that such project will be completed in
1998. See "Liquidity and Capital Resources" for further discussion.
The policyholders' dividend ratio was 7.0% and 6.7%, respectively, for the
three and six months ended June 30, 1998 compared to 4.9% and 4.8% for the same
periods in 1997. The increase in the dividend ratio is primarily due to improved
loss experience in the workers' compensation line of business and increased
writings of participating business.
Net Investment Income
Net investment income was $12.7 million and $25.4 million, respectively,
for the three and six months ended June 30, 1998 compared to $12.3 million and
$26.9 million for the same periods in 1997. Net investment income decreased for
the first six months of 1998 compared to the same period in 1997, primarily as a
result of lower fixed income yields, partially offset by slightly higher average
invested assets.
The Run-off Operations
----------------------
As a part of the Property and Casualty Group's 1996 restructuring plan, the
Property and Casualty Group established the Run-off Operations principally to
manage the capital supporting workers' compensation loss reserves from accident
years 1992 and prior. Such reserves primarily relate to the period of time from
1987 to 1991 when the Property and Casualty Group wrote a much higher volume of
business and experienced poor underwriting results. The reserves are mainly
indemnity related and relate to the pre-1992 periods. The Run-off Operations
consist of PMA Cayman, MASCCO and PMA Life.
PMA Cayman was incorporated in Grand Cayman, and had no material operations
until 1996. In 1996, the Pooled Companies ceded to PMA Cayman substantially all
of the Pooled Companies' remaining liability for workers' compensation claims
for accident years 1991 and prior other than the policies ceded to MASCCO. In
1997, the Pooled Companies also ceded to PMA Cayman a portion of the Pooled
Companies' workers compensation reserves from accident years 1992 to 1996. At
June 30, 1998, PMA Cayman had $233.0 million in total assets and $215.5 million
in total reserves. Substantially all of PMA Cayman's assets are held in trust
for the benefit of the Pooled Companies. The Company entered into a letter of
intent dated June 26, 1998, to sell PMA Cayman. The transaction is subject to
customary closing conditions, including regulatory approvals, and is expected to
be completed in the third quarter of 1998. In connection with the proposed
sale, the Company recorded a $2.4 million pre-tax loss in the second quarter of
1998, which is included in "Net Realized Investment Gains."
-52-
<PAGE>
MASCCO is a Pennsylvania insurance company and a wholly owned subsidiary of
the Company. Prior to December 31, 1996, MASCCO was a party to a pooling
agreement with the Pooled Companies. Effective December 31, 1996, and with the
approval of the Pennsylvania Commissioner, MASCCO withdrew from the pooling
agreement and ceased writing any new business. The Pooled Companies also ceded
to MASCCO the indemnity portion of Pennsylvania workers' compensation claims for
accident years 1991 and prior. At June 30, 1998, MASCCO had $97.0 million in
total assets and $80.1 million in total reserves. Substantially all of MASCCO's
assets are held in trust for the benefit of the Pooled Companies.
PMA Life is a Pennsylvania life insurance company that derives all of its
insurance revenues from intercompany transactions with the Pooled Companies. In
1997, the Property and Casualty Group reinsured substantially all of PMA Life's
insurance liabilities with a third party reinsurer and no longer places
insurance business with PMA Life. At June 30, 1998, PMA Life had assets of
$22.9 million and $17.7 million in total reserves.
The following table reflects the components of the Property and Casualty
Group - Run-off Operations' operating results for the three and six months ended
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net investment income $ 5,464 $ 7,459 $11,303 $14,972
Net premiums earned(1) -- -- -- 814
------- ------- ------- -------
Total operating revenues 5,464 7,459 11,303 15,786
------- ------- ------- -------
Losses and LAE incurred 4,505 6,989 9,401 15,097
Operating expenses 666 1,003 1,474 1,796
------- ------- ------- -------
Total expenses 5,171 7,992 10,875 16,893
------- ------- ------- -------
Pre-tax operating income (loss) $ 293 $ (533) $ 428 $(1,107)
======= ======= ======= =======
</TABLE>
- -----------------------
(1) Amount represents net premiums earned during the first six months of 1997
for PMA Life prior to the reinsurance transaction mentioned above, after
which PMA Life was placed into run-off.
Investment income for the Run-off Operations decreased by $2.0 million and
$3.6 million in the three and six months ended June 30, 1998, respectively,
compared to the same periods in 1997 primarily due to lower average invested
balances as the Run-off Operations paid claims aggregating $160.7 million in
1997 and $58.4 million in the first six months of 1998. The aforementioned
commutation program initiated by the Property and Casualty Group in late 1996
and completed in July 1997 accelerated payments to claimants, and a portion of
such payments were funded by the Run-off Operations.
-53-
<PAGE>
Losses and LAE of the Run-off Operations are comprised of discount
accretion on established loss reserves of the Run-off Operations. The decrease
in loss reserve discount accretion was primarily due to the payments made for
the underlying claims in 1997.
Caliber One Results of Operations
Summarized financial results of Caliber One for the three and six months
ended June 30, 1998 are as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
------------------ ----------------
<S> <C> <C>
Net premiums written $ 705 $ 917
====== ======
Net premiums earned $ 165 $ 191
Net investment income 371 714
------ ------
Operating revenues 536 905
------ ------
Losses and LAE incurred 133 153
Acquisition and operating expenses 1,084 1,822
------ ------
Total losses and expenses 1,217 1,975
------ ------
Pre-tax operating loss $ (681) $(1,070)
======== ========
</TABLE>
Due to the start-up nature of the business, the financial ratios for
Caliber One do not provide meaningful representation of its operating results
and, therefore, have been excluded from the table above. Gross premiums written
and net premiums written for Caliber One in the second quarter of 1998 were $1.3
million and $705,000, respectively, representing a 345% increase in gross
premiums written and a 233% increase in net premiums written compared to the
first quarter of 1998. The loss ratio for the second quarter of 1998 was 80.6%
and for the first six months of 1998 was 80.1%. As expected, operating expenses,
which include start-up costs, in the first half of 1998 were high relative to
the premium volume, which distorts the expense ratio. Management expects
operating expenses to be more commensurate with premium volume over time as
premium volume continues to grow. Net investment income was $317,000 and
$714,000 for the second quarter and first half of 1998, respectively.
Corporate and Other Results of Operations
Corporate and Other is primarily comprised of corporate overhead and the
operations of the Company's properties. For the three and six months ended June
30, 1998, respectively, Corporate and Other recorded pre-tax operating losses
before interest expense of $2.8 million and $5.5 million compared to $ 2.6
million and $4.5 million for the three and six months ended June 30, 1997,
respectively. The higher operating loss in 1998 compared to the same period in
1997 relates to increased corporate operating costs, primarily related to
compensation as the Company implemented a new management incentive compensation
plan in the second quarter of 1997 that increased expenses for 1998 relative to
the first half of 1997, partially offset by operating costs associated with
certain corporate properties disposed of in the third quarter of 1997.
-54-
<PAGE>
Net Realized Investment Gains
The Company recorded net realized investment gains of $3.7 million and
$11.3 million for the three and six months ended June 30, 1998, respectively,
compared to net realized investment losses of $680,000 and $1.9 million for the
comparable 1997 periods. Gains and losses on the sale of investments are
recognized as a component of net income, but the timing and recognition of such
gains and losses are unpredictable and are not indicative of future results. In
addition, the $2.4 million pre-tax loss related to the pending sale of PMA
Cayman was included in net realized investment gains for the six months ended
June 30, 1998.
Interest Expense and Income Taxes
Interest expense decreased $126,000 and $759,000 for the three and six
months ended June 30, 1998, respectively, compared to the similar 1997 periods
due to the refinancing of the Company's debt in March 1997. The Company's
effective tax rate was 13.2% and 16.0% for the three and six months ended June
30, 1998, respectively, compared to 111.1% and a benefit of 101.4% for the three
and six months ended June 30, 1997, respectively. The Company recorded a net
deferred tax asset of $63.0 million as of June 30, 1998 compared to $70.4
million as of December 31, 1997.
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of an entity's ability to secure enough cash to meet
its contractual obligations and operating needs. At the holding company level,
the Company requires cash to pay debt obligations and dividends to shareholders,
pay taxes to the federal government and capitalize subsidiaries from time to
time. The Company's primary sources of liquidity are dividends from
subsidiaries, net tax payments received from subsidiaries, and borrowings.
The Company paid interest of $7.5 million for the six months ended June 30,
1998 compared to $12.2 million for the six months ended June 30, 1997. The
decrease in interest paid for the first half of 1998 relates to the fact that
the March 1997 refinancing of PMC's debt obligations accelerated certain
interest payments to the first quarter of 1997. The Company paid $4.1 million
of dividends to shareholders in the six-month period ended June 30, 1998
compared to $4.0 million for the comparable period in 1997.
Dividends received from subsidiaries were $10.0 million for the six months
ended June 30, 1998 compared to $8.0 million for the comparable 1997 period.
Net tax cash flows from subsidiaries were $14.7 million for the six months ended
June 30, 1998 compared to $8.4 million for the comparable 1997 period.
The Company's domestic insurance subsidiaries' ability to pay dividends to
the holding company is limited by the insurance laws and regulations of
Pennsylvania and also by the Credit Facilities. Under such laws and regulations,
dividends may not be paid without prior approval of the Pennsylvania Insurance
Commissioner in excess of the greater of (i) 10% of surplus as regards to
policyholders as of the end of the preceding year or (ii) statutory net income
for the preceding year, but in no event to exceed unassigned
- 55 -
<PAGE>
funds. Under this standard, the Pooled Companies and PMA Reinsurance Corporation
can pay an aggregate of $48.7 million of dividends, without the prior approval
of the Pennsylvania Insurance Commissioner, during 1998. Caliber One Indemnity
Company is a direct subsidiary of PMA Reinsurance Corporation, and as such, its
dividends may not be paid directly to PMC. As noted above, the Delaware
insurance law provisions restricting dividends by insurers are substantially
similar to such provisions under Pennsylvania insurance laws. During 1998, $2.5
million of dividends are available to be paid to PMA Reinsurance Corporation by
Caliber One Indemnity Company without the prior approval of the Delaware
Insurance Commissioner, none of which have been declared or paid during 1998.
PMC's dividends to shareholders are restricted by its debt agreements.
Based upon the terms of the Company's Credit Facilities, under the most
restrictive debt covenant, PMC would be able to pay dividends to shareholders of
approximately $14.5 million in 1998.
Management believes that the Company's sources of funds will provide
sufficient liquidity to meet its short-term and long-term obligations.
Capital Resources
The Company's total assets increased $18.1 million to $3,075.4 million at
June 30, 1998 compared to $3,057.3 million at December 31, 1997. Total
investments decreased $35.4 million to $2,159.3 million at June 30, 1998. This
decrease was primarily attributable to the Property and Casualty Group's pay-
down of loss reserves from prior accident years. All other assets increased
$53.6 million, primarily due to increases in uncollected premiums of $40.9
million and reinsurance receivables of $15.4 million in comparison to December
31, 1997. The increase in uncollected premiums compared to December 31, 1997
was primarily related to the cyclical nature of the premium volume and
collection patterns throughout the year. The uncollected premiums are more
comparable to the balances at June 30, 1997. The increase in reinsurance
receivables compared to December 31, 1997 primarily relates to the Property and
Casualty Group's new reinsurance treaty for Commercial Lines entered into during
1997. Additional increases in other assets and deferred acquisition costs of
$24.9 million and $8.1 million, respectively, were offset by a decrease in cash
of $24.6 million related to settlement timing of investment transactions at
December 31, 1997. The increase in other assets at June 30, 1998 compared to
December 31, 1997 primarily relates to timing differences in prepaid expenses
and miscellaneous assets at the operating companies. The increase in deferred
acquisition costs at June 30, 1998 compared to December 31, 1997 is primarily
due to the higher acquisition costs at PMA Re (see "PMA Re Results of
Operations") as well as the cyclical nature of the premium writings which
increases acquisition costs in the beginning of the year.
Consolidated shareholders' equity at June 30, 1998 totaled $496.4 million,
or $20.96 per share, compared to $478.3 million, or $19.96 per share, at
December 31, 1997. As a result of changes in market interest rates, the
unrealized appreciation of investments, net of tax, was $26.3 million at June
30, 1998 compared to $18.8 million at December 31, 1997, resulting in an
increase in shareholders' equity of $7.5 million, or $0.32 per share.
At June 30, 1998, the Company had $203.0 million outstanding under its
existing credit facility, with $32.0 million available for additional
borrowings. Management also entered into an interest rate swap agreement which
is intended to manage the impact of the potential volatility of the interest
rate associated with the floating rates on the credit facility. The interest
rate swap covers a notional principal amount of $150.0 million and effectively
converts the floating rate on such portion of the credit facility to a fixed
rate of 7.24%. At June 30, 1998, the Company had $47.0 million of outstanding
letters of credit under the Letter of Credit Facility. See "Liquidity and
Capital Resources December 31, 1997 and 1996."
- 56 -
<PAGE>
The Company's interest rate swap agreement involves the exchange of
interest payment obligations without the exchange of underlying principal. The
differential to be paid or received is recognized as an adjustment of interest
expense. In the event that a counterparty fails to meet the terms of the
agreement, the Company's exposure is limited to the interest rate differential
on the notional principal amount ($150.0 million). Management believes such
credit risk is minimal and any loss would not be significant.
Year 2000 Issue
With the assistance of outside consulting groups, the Company began
evaluating and reprogramming its own computer systems to address the Year 2000
Issue in late 1995. Management anticipates that by year-end 1998, it will have
substantially completed all necessary programming work. Accordingly, management
believes that Year 2000 Issues related to the Company's hardware and internal
software programs are not likely to result in any material adverse disruptions
in the Company's computer systems or its internal business operations. The cost
of this work through June 30, 1998 has been approximately $5.3 million,
including approximately $1.5 million incurred during the first six months of
1998. The Company estimates that the total remaining cost will be approximately
$175,000, which will be expensed throughout the remainder of 1998.
The Company is currently in the process of evaluating its relationships
with third parties with which the Company has a direct and material relationship
to determine whether they are Year 2000 compliant, such as banks, brokers,
reinsurers, third party service providers, software and other service vendors,
insureds and agents and other intermediaries. The responses by such third
parties to inquiries made by the Company as have been received to date indicate
that these third parties either are or expect to be compliant by the Year 2000.
Even assuming that all material third parties provide a timely
representation affirming such Year 2000 compliance, however, it is not possible
to state with certainty that such representations will turn out to have been
accurate, or that the operations of such third parties will not be materially
impacted in turn by other parties with whom they themselves have a material
relationship, and who fail to timely become Year 2000 compliant. Consequently,
it is not possible to predict whether or to what extent the Year 2000 Issues may
have an adverse material impact on the Company as a result of their impact on
the operations of third parties with whom the Company has a material
relationship. The failure of one or more third parties with whom the Company has
a material relationship to be Year 2000 compliant could cause significant
disruptions in the Company's ability to pay claims, receive and deposit funds
and make investments, which could have a material adverse effect on the
Company's financial condition and results of operations. The Company's
contingency plans in the event of failure of such third parties to be Year 2000
compliant include replacing the third party, performing directly the services
performed by the third party and maintaining liquidity under the Company's
Revolving Credit Facility, which may have a material impact on the Company.
Many experts now believe that Year 2000 Issues may have a material adverse
effect on the national and global economy generally. In addition, it seems
likely that if businesses are materially damaged as a result of Year 2000
Issues, at least some such businesses may attempt to recoup their losses by
claiming coverage under various types of insurance policies. Management of the
Property and Casualty Group and Caliber One believe that under a fair reading of
the various policies issued by them, no coverage for Year 2000 Issues should
exist. Management of PMA Re also believes that the policies of its ceding
company clients which are reinsured by PMA Re do not provide coverage for Year
2000 Issues. However, in the event that claims for Year 2000 Issues are asserted
against the Property and Casualty Group, Caliber One or PMA Re, it is not
possible to predict whether or to what extent any such coverage could ultimately
be found to exist by courts in various jurisdictions, or, if found, the effect
thereof on any of such companies or the Company. In addition, to the extent that
the Property and Casualty Group, Caliber One or PMA Re contest the assertion of
Year 2000 coverage claims, it is likely that the costs of litigation could be
material, even if they are able to prevail in their coverage positions as to
which no assurance can be given.
- 57 -
<PAGE>
New Accounting Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Comprehensive Income" ("SFAS No. 130"), which
establishes standards for the reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses). SFAS No. 130
requires that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income includes a reclassification adjustment for net realized investment gains
included in net income of $8.9 million (after income taxes of $4.8 million) for
the six months ended June 30, 1998 and net realized investment losses of
$950,000 (after income taxes of $512,000) for the six months ended June 30,
1997. The new standard requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position or
results of operations.
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. In connection
with the adoption of SFAS No. 131, the Company has identified four reportable
segments: (i) PMA Re, which provides reinsurance products and services; (ii) the
Property and Casualty Group, which writes workers' compensation and other
standard lines of commercial insurance and includes run-off operations; (iii)
Caliber One, which writes specialty insurance focusing on excess and surplus
lines and (iv) Corporate and Other, which is primarily comprised of corporate
overhead and the operations of the Company's properties. The Company has
excluded net realized investment gains (losses) from the profit and loss
measurement it utilizes to assess the performance of its operating segments
because (1) net realized investment gains (losses) are unpredictable and not
necessarily indicative of future performance and (ii) in many instances,
decisions to buy and sell securities are made at the parent holding company
level, and such decisions result in net realized gains (losses) that do not
relate to the operations of the individual segments. Pursuant to the adoption of
SFAS No. 131, the Company has restated the information for the six-month period
ended June 30, 1997 for comparability, primarily related to certain corporate
expenses that were previously allocated to the operating segments. SFAS No. 131
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Supplemental financial information for annual periods prior to the date of
adoption of SFAS No. 131 are as follows:
- 58 -
<PAGE>
(dollar amounts in thousands)
Year ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
Pre-tax operating income (loss):
PMA Re $45,957 $ 44,807 $ 39,793
The Property and Casualty Group:
Excluding Run-off Operations (3,607) (215,669) (3,885)
Run-off Operations (73) -- --
------- --------- --------
Total (3,680) (215,669) (3,885)
Corporate and Other (9,954) (6,464) (14,184)
------- --------- --------
Total pre-tax operating income (loss) $32,323 ($177,326) $ 21,724
======= ========= ========
The difference between this supplemental information and the information in
the Company's audited financial statements and year end Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this Prospectus is primarily related to certain corporate expenses that were
previously allocated to the operating segments. The amount of this adjustment
was $6.5 million ($1.2 million allocated to PMA Re and $5.3 million to the
Property and Casualty Group), $6.0 million ($2.0 million allocated to PMA Re and
$4.0 million to the Property and Casualty Group) and $770,000 ($350,000
allocated to PMA Re and $420,000 to the Property and Casualty Group) for the
years ended December 31, 1997, 1996 and 1995, respectively. Amounts for previous
years were not material; accordingly no adjustment has been made.
The following table indicates the Company's pre-tax operating income (loss)
by principal business segment for the three and six months ended June 30, 1998
and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997(1) 1998 1997(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PMA Re $11,580 $ 9,829 $22,952 $23,187
-------- ------- ------- -------
The Property and Casualty Group:
Excluding Run-off Operations 2,353 (6,777) 4,954 (4,781)
Run-off Operations 293 (533) 428 (1,107)
-------- ------- ------- -------
Total 2,646 (7,310) 5,382 (5,888)
-------- ------- ------- -------
Caliber One (681) -- (1,070) --
Corporate and Other (2,757) (2,649) (5,548) (4,526)
-------- ------- ------- -------
Pre-tax operating income (loss) before
interest expense 10,788 (130) 21,716 12,773
Interest expense 3,762 3,888 7,463 8,222
-------- ------- ------- -------
Pre-tax operating income (loss) $ 7,026 $(4,018) $14,253 $ 4,551
======== ======= ======= =======
</TABLE>
(1) Pre-tax operating income (loss) by business segment has been reclassified
for 1997 to reflect the changes related to the implementation of SFAS No.
131 (See Note 3 to the interim consolidated financial statements for further
discussion).
The following table indicates the Company's total assets by principal business
segment at June 30, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------
<S> <C>
PMA Re $1,188,852
The Property and Casualty Group:
Excluding Run-off Operations 1,469,795
Run-off Operations 352,965
----------
Total 1,822,760
Caliber One 62,465
Corporate and Other 1,336
----------
Total assets $3,075,413
==========
</TABLE>
- 59 -
<PAGE>
In January 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"). SOP 97-3, which is effective for fiscal years
beginning after December 31, 1998, and provides guidance for determining when an
insurance company should recognize a liability for guaranty-fund and other
insurance related assessments and how to measure that liability. While the
Company is presently evaluating the impact of SOP 97-3, the adoption of SOP 97-3
is likely to result in an increase in the Company's liabilities for such
assessments, although such increase is not expected to exceed $5.0 million. The
impact of adopting SOP 97-3 will be reflected as a cumulative effect of an
accounting change in the first quarter of 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 requires that entities
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (i) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (ii) a hedge of the exposure to variable
cash flows of a forecasted transaction or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. While the Company
is presently evaluating the impact of SFAS No. 133, the adoption of SFAS No. 133
is not expected to have a material impact on the Company's financial condition
or results of operations.
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<PAGE>
Results of Operations for the Years Ended December 31, 1997, 1996 and 1995
The table below presents the major components of net income (loss) for the
years ended December 31, 1997, 1996 and 1995:
(dollar amounts in thousands, except per share data)
1997 1996 1995
-------- ---------- -------
Pre-tax operating income (loss) (1)........ $16,555 $(194,378) $ 2,990
Net realized investment gains.............. 8,598 2,984 31,923
------- --------- -------
Income (loss) before income taxes.......... 25,153 (191,394) 34,913
Provision (benefit) for income taxes....... 5,400 (56,060) 10,783
------- --------- -------
Income (loss) before extraordinary loss.... 19,753 (135,334) 24,130
Extraordinary loss, net of related taxes... (4,734) --- ---
------- --------- -------
Net income (loss).......................... $15,019 $(135,334) $24,130
======= ========= =======
Per basic share:
Income (loss) before extraordinary loss.. $ .83 $ (5.68) $ 1.01
Extraordinary loss....................... (.20) -- --
------- --------- -------
Net income (loss)........................ $ .63 $ (5.68) $ 1.01
======= ========= =======
Per diluted share:
Income (loss) before extraordinary loss.. $ .80 $ (5.68) $ .97
Extraordinary loss....................... (.19) -- --
------- --------- -------
Net income (loss)........................ $ .61 $ (5.68) $ .97
======= ========= =======
- --------------
(1) Pre-tax operating income (loss) is defined as income (loss) from continuing
operations before income taxes, but excluding net realized investment
gains.
The following table indicates the Company's pre-tax operating income (loss)
by principal business segment for the years ended December 31, 1997, 1996 and
1995:
(dollar amounts in thousands)
1997 1996 1995
-------- ---------- ---------
PMA Re.................................. $44,802 $ 42,783 $ 39,443
The Property and Casualty Group......... (9,038) (219,619) (4,305)
Corporate and Other..................... (3,441) (490) (13,414)
------- --------- --------
Pre-tax operating income (loss) before
interest expense...................... 32,323 (177,326) 21,724
Interest expense........................ 15,768 17,052 18,734
------- --------- --------
Pre-tax operating income (loss)......... $16,555 $(194,378) $ 2,990
======= ========= ========
In 1997, the Company reported consolidated pre-tax operating income of
$16.6 million, or $0.69 and $0.67 per basic and diluted share, respectively,
compared to a pre-tax operating loss of $194.4 million, or $8.17 per basic and
diluted share, in 1996. After-tax operating income for 1997 was $14.2 million,
or $0.59 and $0.58 per basic and diluted share, respectively, compared to an
after-tax operating loss of $137.3 million, or $5.77 per basic and diluted
share,
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<PAGE>
in 1996. The improvement in the 1997 results was due primarily to special
charges recorded in 1996, increased pre-tax operating income generated by PMA Re
and improved underwriting results by the Property and Casualty Group. The
increase in PMA Re's pre-tax operating income to $44.8 million in 1997 compared
to $42.8 million in 1996, was due to higher premium volume, improved
underwriting results and higher investment income. The pre-tax operating loss of
the Property and Casualty Group decreased in 1997 to $9.0 million compared to
$219.6 million in 1996, due primarily to special charges recorded in 1996, as
well as the impact of cost savings initiatives implemented in late 1996 and in
1997. Corporate and Other operations reported a pre-tax operating loss of $3.4
million in 1997 compared to a pre-tax operating loss of $500,000 in 1996. The
higher operating loss for Corporate and Other operations was due primarily to
increased operating costs related to certain corporate properties disposed of
during the third quarter of 1997. Interest expense decreased in 1997 by $1.3
million due to the refinancing of the Company's debt with the Revolving Credit
Facility. See "Liquidity and Capital Resources" herein for further discussion.
On a consolidated basis, the Company reported pre-tax operating income of
$3.0 million, or $0.13 and $0.12 per basic and diluted share, respectively, in
1995 compared to the $194.4 million pre-tax operating loss discussed above for
1996. After-tax operating income was $3.4 million, or $0.14 per basic and
diluted share, in 1995 compared to the $137.3 million after-tax operating loss
in 1996 mentioned above. The decrease from 1995 to 1996 was due primarily to
special charges recorded in 1996 at the Property and Casualty Group. In 1995,
PMA Re reported pre-tax operating income of $39.4 million, the Property and
Casualty Group had a pre-tax operating loss of $4.3 million and Corporate and
Other operations recorded a pre-tax operating loss of $13.4 million. The
improvement in the operating results of Corporate and Other from 1995 to 1996
was due primarily to an $8.4 million write-down in 1995 of certain real estate
properties owned by the Company as well as higher overhead expenses. Interest
expense decreased in 1996 by approximately $1.7 million as compared to 1995,
primarily reflecting lower average debt balances and the pay-down of higher
coupon debt.
Net income on a consolidated basis, before extraordinary items, was $19.8
million, or $0.83 per basic share and $0.80 per diluted share, respectively, in
1997 compared to a net loss of $135.3 million, or $5.68 per basic and diluted
share, in 1996. On March 14, 1997, the Company refinanced substantially all of
its outstanding credit agreements not already maturing in 1997 with the
Revolving Credit Facility. In connection with this refinancing, the Company
recognized an extraordinary loss from the early extinguishment of debt of $4.7
million, or $0.20 and $0.19 per basic and diluted share, respectively, net of
tax.
Over the past three years, restructuring charges and other special items
have impacted the Company's operating results. During 1997, the Company
recorded $7.0 million of severance and other restructuring charges, primarily
related to the Property and Casualty Group and Corporate and Other operations.
In addition, the Company recorded $2.2 million of operating costs for certain
corporate properties which were disposed of during 1997 (see "Corporate and
Other") and $2.0 million of Year 2000 expenses. See "Liquidity and Capital
Resources" for further discussion. In 1996, the Company's operating results
included a pre-tax charge of $221.3 million ($143.8 million after tax) recorded
by the Property and Casualty Group in order to strengthen its loss and LAE
reserves, to recognize restructuring costs in connection with staff reductions
and to write off certain accounts receivable. In addition, pre-tax Year 2000
costs in 1996 were $1.8 million. In 1995, the Company recorded a charge of $8.4
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<PAGE>
million to write down the Company's former headquarters building and certain
adjacent properties to their fair market values less costs to carry and sell the
properties. The charges over the three-year period consisted of the following:
(dollar amounts in millions)
1997 1996 1995
----- ------ -----
Severance and other restructuring charges.. $ 7.0 $ 7.6 $ --
Year 2000 costs............................ 2.0 1.8 --
Costs related to corporate properties...... 2.2 -- --
Write-down of corporate properties......... -- -- 8.4
Caliber One pre-opening costs.............. 0.9 -- --
Loss reserve strengthening................. -- 191.4 --
Receivables write-down..................... -- 17.5 --
Equipment write-down....................... -- 4.8 --
----- ------ ----
Total pre-tax charge....................... $12.1 $223.1 $8.4
===== ====== ====
The $7.6 million of severance and restructuring charges recorded in the
fourth quarter of 1996 related to the Voluntary Early Retirement Program
("VERIP") initiated in 1996. These amounts are expected to be paid out over time
in accordance with existing retirement and post-employment obligations. As
discussed further in Note 9 of the Consolidated Financial Statements, 50
employees opted to participate in the VERIP resulting in the following charges
being recorded as of December 31, 1996:
(dollar amounts in thousands)
- --------------------------------------------------------------------------------
Pension costs $ 4,300
Postemployment costs 2,360
Postretirement costs 975
Total $ 7,635
During 1997, the Property and Casualty Group recorded $5.2 million and
Corporate and Other recorded $1.8 million for severance and cost reduction
initiatives. The charges consisted primarily of costs associated with
nonvoluntary terminations of approximately 60 employees in various operational
and management positions. The cash outlays associated with these charges will
continue through 1998, and funding the cash outlays will not have a material
adverse effect on the Company's liquidity. As of December 31, 1997,
approximately $3.5 million of such charges remained in Other Liabilities on the
balance sheet.
PMA Re Results of Operations
Summarized financial results of PMA Re for the years ended December 31,
1997, 1996 and 1995 are as follows:
(dollar amounts in thousands)
1997 1996 1995
-------- -------- --------
Net premiums written................ $177,934 $164,053 $152,760
======== ======== ========
Net premiums earned................. $163,603 $151,974 $139,345
Net investment income............... 52,270 48,676 45,166
-------- -------- --------
Operating revenues.................. 215,873 200,650 184,511
-------- -------- --------
Losses and LAE incurred............. 113,931 111,937 103,947
Acquisition and operating expenses.. 57,140 45,930 41,121
-------- -------- --------
Total losses and expenses........... 171,071 157,867 145,068
-------- -------- --------
Pre-tax operating income............ $ 44,802 $ 42,783 $ 39,443
======== ======== ========
GAAP loss ratio..................... 69.6% 73.7% 74.6%
GAAP combined ratio................. 104.5% 103.9% 104.1%
SAP loss ratio...................... 69.5% 73.7% 74.6%
SAP combined ratio.................. 103.8% 104.4% 105.5%
Premium Revenues
In 1997 and 1996, net premiums written increased 8.5% and 7.4%,
respectively. The increases in 1997 and 1996 were primarily the result of
increased participation in reinsurance treaties and the writing of additional
layers and programs with existing clients. An increased number of programs
added for property lines during the second half of 1996 and during 1997 also
contributed to the aforementioned increases in net premiums written. These
increases were partially offset by the trend toward large ceding companies
increasing their retentions, which decreased PMA Re's subject premium. In
addition, highly competitive pricing
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<PAGE>
conditions in the United States reinsurance market caused PMA Re to non-renew
certain existing business and to decline certain new business opportunities.
The following table indicates PMA Re's gross and net premiums written by
major category of business for the years ended December 31, 1997, 1996 and 1995:
(dollar amounts in thousands)
% Change % Change
1997 1996
to to
1997 1996 1995 1996 1995
-------- -------- --------- -------- --------
Gross premiums written:
Casualty lines.......... $151,901 $143,991 $128,736 5.5 % 11.9 %
Property lines.......... 72,625 63,325 63,693 14.7 % (0.6)%
Other lines............. 795 842 (63) (5.6)% --
-------- -------- -------- ----- -----
Total.................... $225,321 $208,158 $192,366 8.2 % 8.2 %
======== ======== ======== ===== =====
Net premiums written:
Casualty lines.......... $118,889 $122,008 $107,383 (2.6)% 13.6 %
Property lines.......... 58,257 41,240 45,440 41.3 % (9.2)%
Other lines............. 788 805 (63) (2.1)% --
-------- -------- -------- ----- -----
Total.................... $177,934 $164,053 $152,760 8.5 % 7.4 %
======== ======== ======== ===== =====
PMA Re's net casualty premiums written decreased 2.6% in 1997 and increased
13.6% in 1996. The decrease in 1997 was primarily attributable to the purchase
of increased retrocessional protection, which offset increases in gross casualty
premiums relating to new business with existing clients and larger lines taken
on existing programs. The growth in 1996 was attributable to the expansion of
several programs covering specialty business, which included professional
liability, directors' and officers' liability and other coverages written on a
surplus lines basis.
PMA Re's net property business increased 41.3% during 1997 and decreased
9.2% during 1996. The increase in net property premiums written in 1997 was
primarily the result of additional property underwriting expertise that PMA Re
added to its underwriting staff in late 1996 to broaden its product offerings.
Such expertise enabled PMA Re to increase cross-selling opportunities with its
existing treaty reinsurance clients by offering additional and expanded property
coverages. In addition, property premiums ceded decreased primarily related to
changes in PMA Re's property retrocessional coverages in terms of premiums and
ceding commissions. The decrease in net premiums written in 1996 was primarily
attributable to higher ceding company retentions, competitive pricing conditions
and higher ceded property premiums.
The property programs written by PMA Re generally contain per occurrence
limits or are not considered significantly catastrophe exposed, either because
of the locations of the insured values or the nature of the underlying
properties insured. However, as is common in property reinsurance, PMA Re is
exposed to the possibility of loss from catastrophic events due to the
aggregation of per occurrence limits and similar issues. PMA Re actively
manages this exposure through aggregate management, minimizing the writing of
catastrophe business and retrocessional protection. See "Liquidity and Capital
Resources -- Capital Resources."
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<PAGE>
In 1997, PMA Re recorded $2.5 million of net facultative reinsurance
premiums, which represented 1.4% of total net premiums written for the year,
compared to $1.0 million, or 0.6%, in 1996. PMA Re commenced writing
facultative reinsurance in November 1995.
Net premiums earned increased 7.7% and 9.1% in 1997 and 1996, respectively.
These increases both correspond to the increases in net premiums written, as net
premiums earned generally follow growth patterns similar to net premiums written
adjusted for the customary lag related to the timing of premium writings within
the year.
Losses and Expenses
PMA Re's combined ratios have remained relatively stable from 1995 through
1997, ranging from 103.9% to 104.5% during the three-year period. This relative
stability is attributable to (i) consistently favorable development of unpaid
losses and LAE; (ii) prudent management of catastrophe exposures and (iii) lower
loss ratios offsetting generally increased acquisition costs related to writing
more business with ceding commissions.
The following table indicates the components of PMA Re's combined ratios
computed in accordance with GAAP for the years ended December 31, 1997, 1996 and
1995(1):
1997 1996 1995
------ ------ ------
Loss ratio................................... 69.6% 73.7% 74.6%
----- ----- -----
Expense ratio:
Amortization of deferred acquisition costs.. 27.6% 24.7% 24.2%
Operating expenses.......................... 7.3% 5.5% 5.3%
----- ----- -----
Total expense ratio.......................... 34.9% 30.2% 29.5%
----- ----- -----
Combined ratio-GAAP.......................... 104.5% 103.9% 104.1%
===== ===== =====
- ------------
(1) The combined ratio computed in accordance with GAAP is equal to the sum of
losses and LAE, amortization of deferred acquisition costs, operating
expenses and policyholders' dividends (where applicable), all divided by
net premiums earned.
For the three years ended December 31, 1997, PMA Re's loss ratios have
declined primarily as a result of increased ceding commissions and favorable
loss reserve development. PMA Re's loss ratio decreased to 69.6% in 1997 from
73.7% and 74.6% in 1996 and 1995, respectively. For contracts written on a pro
rata basis and other contracts containing ceding commissions, premiums tend to
be higher relative to the losses when compared to contracts that do not contain
ceding commissions. In the three years ended December 31, 1997, PMA Re has
written more contracts containing ceding commissions which has contributed to
the decreases in loss ratios. For such contracts, PMA Re pays the ceding company
a commission, but in return, PMA Re receives a higher proportion of the subject
premium. In addition, net favorable development on prior years' unpaid losses
and LAE was $23.3 million, $28.6 million and $15.0 million in 1997, 1996 and
1995, respectively, primarily for accident years 1993 and prior. Such favorable
development is attributable to losses emerging at a lower rate than was
anticipated (based upon historical loss development patterns) when the initial
accident year reserves were established. While loss emergence patterns have been
trending downward for the pre-1993 accident years, resulting in favorable loss
reserve development, there can be no assurance that such trend will continue in
the future.
The ratio of amortization of deferred acquisition costs to net premiums
earned ("Acquisition Expense Ratio") increased 2.9 points to 27.6% in 1997
compared to 1996 and 0.5 points in 1996 compared to 1995. These increases
predominantly relate to the fact that PMA
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<PAGE>
Re continues to write more contracts with ceding commissions. In addition, the
ceding commissions that PMA Re received related to its retrocessional
catastrophe cover were higher in 1996 than in 1997, which contributed to the
lower Acquisition Expense Ratio in 1996.
The ratio of operating expenses to net premiums earned (the "Operating
Expense Ratio") increased 1.8 points to 7.3% in 1997 compared to 5.5% in 1996.
This increase was attributable to increases in certain expenses, such as salary
and facility expenses, in connection with the addition of staff and expansion of
office facilities during 1997. During the three-year period ended December 31,
1997, PMA Re has continued to add staff in response to increased premium volume
and to increase the level of specialized services provided to customers.
Accordingly, the Operating Expense Ratio increased from 5.3% in 1995 to 7.3% in
1997.
The Company is presently undertaking a project to upgrade all of its
computer systems to be able to process records with dates beyond December 31,
1999. During 1997, PMA Re incurred costs amounting to approximately $400,000
related to the Year 2000 compliance program. Management expects that PMA Re
will incur approximately $600,000 in 1998 related to the Year 2000 compliance
program. Management expects that such project will be completed in 1998. See
"Liquidity and Capital Resources."
Net Investment Income
Net investment income increased 7.4% to $52.3 million in 1997 from $48.7
million in 1996, which represented a 7.8% increase from $45.2 million in 1995.
Such increases were primarily attributable to the overall increase in PMA Re's
invested assets, as well as changes in portfolio holdings. During 1997, PMA Re
shifted some of its holdings from government securities to high-quality
corporate securities, which generally yield higher levels of investment income.
In addition, the 1996 increase was due to a decrease in holdings of tax-exempt
securities for which pre-tax yields tend to be lower than other investment
vehicles. At amortized cost, PMA Re's cash and invested assets increased $49.0
million, or 5.9%, and $34.9 million, or 4.4%, during 1997 and 1996,
respectively.
Comparison of SAP and GAAP Results
The difference between the combined ratios presented in accordance with
GAAP compared to SAP is primarily attributable to the different accounting
treatment of acquisition costs. As PMA Re's premium volume has grown during
1997 and 1996, PMA Re has incurred additional acquisition costs, which are
deferred for GAAP. For SAP purposes, PMA Re is required to expense such costs
as incurred, resulting in an incremental expense recorded on a SAP basis
compared to GAAP.
The Property and Casualty Group Results of Operations
Summarized financial results of the Property and Casualty Group for the
years ended December 31, 1997, 1996 and 1995 are as follows:
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<PAGE>
(dollar amounts in thousands)
1997 1996 1995
-------- --------- --------
Net premiums written:
Workers' compensation............. $175,301 $ 189,338 $233,145
Commercial Lines.................. 65,047 90,084 103,971
-------- --------- --------
Total............................. $240,348 $ 279,422 $337,116
======== ========= ========
Net premiums earned:
Workers' compensation............. $152,773 $ 176,380 $243,175
Commercial Lines.................. 59,575 92,221 102,432
-------- --------- --------
Total............................. 212,348 268,601 345,607
Net investment income............... 82,098 82,455 92,275
Service revenues.................... 10,311 9,189 5,106
-------- --------- --------
Operating revenues.................. 304,757 360,245 442,988
-------- --------- --------
Losses and LAE incurred............. 193,530 424,900 319,644
Acquisition and operating expenses.. 105,549 138,709 110,906
Policyholder dividends.............. 14,716 16,255 16,743
-------- --------- --------
Total losses and expenses........... 313,795 579,864 447,293
-------- --------- --------
Pre-tax operating loss.............. $ (9,038) $(219,619) $ (4,305)
======== ========= ========
GAAP loss ratio..................... 91.1% 158.2% 92.5%
GAAP combined ratio................. 143.3% 212.9% 127.9%
SAP loss ratio(1)................... 84.0% 125.7% 77.3%
SAP combined ratio(1)............... 119.0% 175.6% 115.1%
- ----------------
(1) The SAP loss and combined ratios above relate to the operations of the
Pooled Companies only and do not include the results of other statutory
entities within the Property and Casualty Group.
Premium Revenues
Premiums for the Property and Casualty Group have decreased in the three-
year period ended December 31, 1997. Between 1997 and 1996, net premiums
written decreased 14.0%, and between 1996 and 1995, net premiums written
decreased 17.1%. Direct premiums written for workers' compensation decreased
$20.6 million and $36.5 million in 1997 and 1996, respectively. Direct premiums
written for Commercial Lines increased $11.7 million in 1997 compared to 1996,
and decreased $11.6 million in 1996 compared to 1995. Reinsurance premiums
assumed decreased $4.4 million between 1997 and 1996 and increased $0.8 million
between 1996 and 1995. Reinsurance premiums ceded increased $25.8 million in
1997 compared to 1996 and $10.4 million in 1996 compared to 1995. Net premiums
earned decreased $56.3 million between 1997 and 1996 and $77.0 million between
1996 and 1995.
The decline in premiums from 1995 to 1997 is due to a number of factors
discussed below, including the Property and Casualty Group's underwriting
decisions, competition and the impact of workers' compensation benefit reform
laws.
During the three years ended December 31, 1997, competition and manual rate
levels affected workers' compensation premium volume. During this period, the
Property and Casualty Group did not renew certain accounts due to inadequate
profit potential. Intense competition caused rates for certain accounts to be
unattractive relative to the risks assumed.
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<PAGE>
Rather than match the price merely to retain the volume, the Property and
Casualty Group declined to write the accounts. Average manual rate levels
declined 25.0%, 7.0% and 3.0% in 1997, 1996, and 1995, respectively. The rate
decreases had a substantially lower proportional impact on premiums written
during 1996 and 1995, because the Property and Casualty Group had reduced its
dependence on rate-sensitive business. The Property and Casualty Group increased
its focus on rate sensitive small account business in 1997 because it believes
that the impact of recently passed legislation in its principal marketing
states, including Act 57 in Pennsylvania, may make loss experience on such
business more predictable than it has been in recent years.
Workers' compensation premiums also declined during the three-year period
ended December 31, 1997 as a result of the enactment of workers' compensation
benefit reform laws. The decline in workers' compensation premiums has been
concentrated primarily in Pennsylvania. Direct workers' compensation premiums
for all other jurisdictions increased in 1997 compared to 1996, including an
increase of $3.8 million from new jurisdictions in 1997. The number of workers'
compensation policies increased to 3,184 in 1997 compared to 2,757 in 1996.
However, the increase in policies was offset by the rate decreases related to
the benefit reform laws. These benefit reform laws also have had a favorable
impact on loss and LAE reserves for business written on policies subject to such
reform laws. See "Losses and Expenses" below. The changes in workers'
compensation benefits that were promulgated under Act 57 in Pennsylvania were
accompanied by a change in the basic premium rate structure for workers'
compensation insurance, which lowered the rates charged to insureds by
approximately 25% effective February 1997. This change in rate structure was
reviewed by an independent actuarial firm on behalf of the Commonwealth of
Pennsylvania in connection with the approval of rates under Act 57. In
addition, the Company's actuaries reviewed the effect that the reforms would
have on workers' compensation benefits paid in relation to the changes in
premiums charged. It was the opinion of both groups of actuaries that the rate
changes mandated by Act 57 were consistent with the changes in benefits allowed
under Act 57, and the effect of the rate changes would be minimal with respect
to the profitability of the business. The premium charged on a fixed-cost
policy is based upon the manual rates filed with and approved by the state
insurance department and does not increase or decrease based upon the losses
incurred during the policy period. Under policies that are subject to dividend
plans, the customer may receive a dividend based upon loss experience during the
policy period. Since the late 1980's, the Property and Casualty Group has
reduced its proportion of rate-sensitive products from over 70% to approximately
62%. As a result of the enactment of regulatory reform in several jurisdictions
in the Property and Casualty Group's marketing territory, the Property and
Casualty Group may write more rate-sensitive accounts in such jurisdictions in
the future.
Direct workers' compensation premiums were also impacted by changes in the
level of premium adjustments, primarily related to audit premiums and
retrospective policies. In 1997, such adjustments decreased premiums written by
$4.4 million ($15.8 million in audit premiums billed and $20.2 million in
retrospective premiums returned), while in 1996, such adjustments reduced
premiums written by $6.1 million ($17.1 million in audit premiums billed and
$23.2 million in retrospective premiums returned) and in 1995, such adjustments
increased premiums written by $13.1 million ($26.9 million in audit premiums
billed and $13.8 million in retrospective premiums returned). The slightly
lower impact of premium adjustments in 1997 compared to 1996 was due primarily
to a decrease in retrospectively rated premiums
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<PAGE>
returned to insureds, resulting from a lower volume of workers' compensation
business written during the three years ended December 31, 1997. The decrease in
1996 compared to 1995 was due primarily to two factors: the lower amount of
billed audit premiums, which is attributable to better estimating of the
ultimate exposure base (generally, payroll) on such risks by the Property and
Casualty Group's underwriters and the increase in retrospectively rated premiums
returned to insureds, resulting from the favorable loss experience in more
recent accident years in workers' compensation. As the Property and Casualty
Group has expanded retrospectively rated business since 1989, proportionately
more policies had mature loss data, resulting in more premium adjustments.
Changes in actuarial estimates of future premium adjustments on retrospective
policies are recorded directly in net premiums earned (see below for further
discussion), and, therefore, such retrospective adjustments returned to insureds
do not impact net premiums earned.
Under retrospectively rated policies, the Property and Casualty Group
receives an up-front provisional premium that is adjusted based upon loss
experience of the insured. If losses are lower than expected, the insured
receives a refund, subject to a minimum premium and, if losses are higher than
expected, the insured owes additional premium, subject to a maximum premium.
Between the minimum and maximum premiums, the net impact on the Company's
operating results is negligible, because changes in loss estimates pertaining to
retrospectively rated contracts are offset by changes in premium estimates, net
of changes in estimates for accrued premium taxes and other loss-based costs.
While the premium is adjusted based upon loss experience, the Company's profit
load (or margin) portion of the premium is fixed at the policy's inception and
is not adjusted based upon loss experience, although the margin would be
impaired in the event losses exceed the maximum premium amount. Approximately
$50.1 million, $59.0 million and $85.0 million of the Property and Casualty
Group's workers' compensation premiums were derived from loss-sensitive products
in 1997, 1996 and 1995, respectively. The audit premiums referred to above were
derived from the Company's workers' compensation insurance policies. An
insured's workers' compensation premiums are determined by two factors:
aggregate payroll and employer business classification. The Company determines
its initial estimate of annual premium based on payroll records and business
classification data submitted to it by the insured. An audit of this data is
performed after the policy year ends, and an adjustment to the premium is then
made and billed to the insured.
Also reducing net premiums written is the fact that, since 1992, the
Property and Casualty Group has been increasing its focus on alternative market
workers' compensation products. These products include large-deductible
policies, offshore rent-a-captive programs and individual self-insurance
programs. Typically, the Property and Casualty Group receives a lower net
premium for these types of plans. However, under this type of business, the
insured retains a greater share of the underwriting risk than under rate-
sensitive or loss-sensitive products, which reduces the potential for
unfavorable claim activity on the accounts and encourages loss control on the
part of the insured. A substantial portion of related revenues are recorded as
service revenues rather than premiums. Such service revenues increased $1.1
million in 1997 compared to 1996 and $4.1 million in 1996 compared to 1995.
Companies writing workers' compensation in certain states generally must
share in the risk of insuring entities that cannot obtain insurance in the
voluntary market. Typically, an insurer's share of this residual market is
dependent upon its market share of direct premiums
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<PAGE>
in the voluntary market, and the assignments are accomplished either by direct
assignment or by assumption from pools. In 1997, the Property and Casualty
Group's direct assignments, which are included in direct written premiums,
decreased $3.1 million compared to 1996 and decreased $15.3 million in 1996
compared to 1995. These decreases reflect generally lower premium volume in
workers' compensation for the Property and Casualty Group, as well as
increasingly competitive conditions in the voluntary workers' compensation
market which has led to lower amounts of residual market business.
During 1997 compared to 1996, direct writings of Commercial Lines increased
$11.7 million assumed Commercial Lines premiums decreased $8.5 million and ceded
Commercial Lines premiums increased $28.2 million. The growth in direct
writings for Commercial Lines in 1997 was due primarily to rate increases on
existing business as well as additional companion commercial business associated
with new workers' compensation customers. The Property and Casualty Group is
continuing to review the profitability of these lines, and the net growth in
such lines has been limited as a result of this review and the new reinsurance
treaty discussed below. Also, market conditions have been extremely competitive
in these lines, and management has refused to compromise underwriting standards
merely to increase volume. During 1996 compared to 1995, direct writings of
Commercial Lines decreased $11.6 million assumed Commercial Lines premiums
increased $0.8 million and ceded Commercial Lines premiums increased $3.1
million.
In 1997, the Property and Casualty Group entered into a new reinsurance
treaty that covers substantially all of the Commercial Lines casualty business
at a $175,000 per risk attachment point, compared to a $500,000 per risk
attachment point in 1996 which accounted for the increase in ceded Commercial
Lines premiums.
Ceded premiums increased $25.8 million in 1997 compared to 1996, and
increased $10.4 million in 1996 compared to 1995. The increase in 1997 compared
to 1996 was due primarily to a reinsurance treaty effected at December 31, 1997,
ceding $15.4 million of annuity reserves held by PMA Life to a third party (the
"PMA Life transaction"). Ceded premiums also increased approximately $6.6
million due to the aforementioned lower attachment point of the Commercial Lines
casualty reinsurance treaty the Property and Casualty Group entered into
effective January 1, 1997. Finally, ceded reinsurance premiums increased an
additional $6.2 million, due to the increased direct writings of Commercial
Lines business in 1997 compared to 1996. In 1996 compared to 1995, ceded
premiums decreased, although the rate of decrease was less than the rate of
decrease in direct premiums due to the increased use of facultative reinsurance
for specific risks in Commercial Lines.
Fluctuations in net premiums earned were primarily attributable to changes
in net premiums written. In addition to the impact of fluctuations in premiums
written, premiums earned were also impacted by the change in accrued
retrospective premiums. Accrued retrospective premiums, which are a component
of uncollected premiums, are based upon actuarial estimates of expected ultimate
losses and resulting estimated premium adjustments relating to retrospectively
rated policies. The estimated ultimate premium adjustments under
retrospectively rated policies are recorded in the initial policy year based
upon estimated loss experience on the underlying policies and adjusted in
subsequent periods in conjunction with revisions of the estimated underlying
losses on such policies. In addition, accrued retrospective premiums are
increased or decreased based upon retrospective policy
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adjustments paid or billed. Such adjustments actually billed or paid do not
impact premium revenues because the Company records an offsetting amount through
net premiums written. The following table sets forth the components of the
change in accrued retrospective premiums for each of the three years in the
period ended December 31, 1997:
(dollar amounts in thousands)
1997 1996 1995
--------- --------- ---------
Estimated retrospective policy
adjustments related to the current
accident year........................ ($12,460) ($18,767) ($12,941)
Revision of estimate of retrospective
policy adjustments related to
prior accident years................. (44,719) (9,888) (4,845)
Retrospective policy adjustments paid.. 20,179 23,155 13,786
Uncollectible write-off................ --- (5,000) ---
-------- -------- --------
Total.................................. ($37,000) ($10,500) ($4,000)
======== ======== ========
In 1997, 1996 and 1995, the Property and Casualty Group reduced accrued
retrospective premiums by $37.0 million, $10.5 million and $4.0 million,
respectively. The primary reason for the additional reduction in 1997 compared
to 1996 was a $44.7 million revision of estimate of accrued retrospective
premiums, primarily due to the favorable development of claims liabilities for
more recent accident years ($35.7 million) and the commutation of claims for
accident years 1991 and prior in 1997 ($9.0 million). The reduction for policy
years 1991 and prior primarily relates to the commutation program for such years
initiated in late 1996. In July 1997, the Property and Casualty Group completed
a formal program under which it commuted a large number of claims associated
with workers' compensation claims from accident years 1991 and prior, including
loss reserves associated with retrospective policies. The commutation program
resulted in current payments to claimants that were less than the carried
reserves. As a result of the differences between the current commutation
payments to claimants and carried reserves on such claims, management reduced
its estimate of amounts recoverable under retrospectively rated policies and the
Property and Casualty Group also recognized a reduction in losses and LAE
associated with such policies. See "Losses and Expenses." The reduction for
the 1992 through 1996 policy years was related primarily to a corresponding
amount of favorable development on underlying loss reserves for such years. The
effects of the commutations on these prior loss reserves, as well as the intent
of the Property and Casualty Group to continue utilizing early intervention
techniques such as commutations on claims from more recent accident years, have
led to a re-estimation of policy liabilities for these more recent accident
years, and a re-estimation of amounts due under retrospectively rated policies
for these more recent accident years. The reduction in amounts due under
retrospectively rated policies and the corresponding reduction in loss reserves
resulting from commutation of the carried loss reserves and re-estimation of
more recent accident years resulted in a reduction of the GAAP loss ratio for
1997 compared to 1996 and 1995. See "Losses and Expenses." In addition, the
reduction of earned premiums caused both the GAAP expense ratio and the
policyholder dividend ratio to increase for 1997 compared to 1996 and 1995.
However, the impact of the reduction of the accrued
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retrospective premiums (net of the adjustment to underlying loss reserves) on
the Company's results of operations was negligible.
The increased adjustment to prior accident years recorded in 1996 compared
to 1995 reflects additional favorable loss reserve development in the prior
three accident years.
Management believes that it has made a reasonable estimate of the Company's
accrued retrospective premiums. While the eventual ultimate receivable may
differ from the current estimates, management does not believe that the
difference will have a material effect, either adversely or favorably, on the
Company's financial position or results of operations.
Losses and Expenses
The following table reflects the components of the Property and Casualty
Group's combined ratios, computed in accordance with GAAP for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
------ ------ ------
Loss ratio................................... 91.1% 158.2% 92.5%
----- ----- -----
Expense ratio:
Amortization of deferred acquisition costs.. 22.7% 19.7% 15.5%
Operating expenses(1)....................... 22.6% 28.9% 15.1%
----- ----- -----
Total expense ratio.......................... 45.3% 48.6% 30.6%
----- ----- -----
Policyholders' dividend ratio................ 6.9% 6.1% 4.8%
----- ----- -----
Combined ratio-GAAP.......................... 143.3% 212.9% 127.9%
===== ===== =====
- ----------
(1) The GAAP Operating Expense Ratio excludes $9.3 million, $8.2 million and
$5.3 million in 1997, 1996 and 1995, respectively, of PMA Management Corp.
direct expenses related to service revenues which are not included in
premiums earned.
The components of the loss and LAE ratio for the Property and Casualty
Group for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
------ ------ ------
Current accident year - undiscounted............ 81.3% 81.4% 83.8%
Accretion of discount for prior accident years
and discounting of current accident year....... 12.0% 5.5% (0.7%)
Adjustments to retrospectively rated business
and net effect of PMA Life transaction......... (1.5%) -- --
Change in discount rate......................... -- -- (9.8%)
Reserve (release) strengthening................. (0.7%) 71.3% 19.2%
---- ----- ----
Loss and LAE ratio.............................. 91.1% 158.2% 92.5%
==== ===== ====
In 1997, the calendar year loss ratio was impacted by a $31.7 million net
charge, which represented the accretion of discount on workers' compensation
loss reserves for prior accident years, partially offset by discounting of
current accident year reserves, while the 1996 calendar year loss ratio was
impacted by a $15.0 million net charge for accretion of discount
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on prior accident year workers' compensation loss reserves and discounting of
current accident year reserves. The increase in the net charge for discount
accretion is due primarily to higher overall reserve levels in 1997 and lower
levels of current accident year reserves being discounted in 1997 compared to
1996. The Property and Casualty Group expects lower levels of discount
associated with current accident year reserves to continue due to benefit
reforms which have been enacted in many of the states in which it does business
that reduce claims duration. Management also expects that the net charge
associated with accretion of discount of prior years' reserves will decrease in
1998 and forward because the accelerated payment of claims due to commutations
is expected to lower the level of discount in the Property and Casualty Group's
loss reserves. The increase in the loss ratio in 1996 compared to 1995 from the
accretion of discount was due primarily to higher overall reserves in 1996 and
to lower levels of earned premium in 1996 compared to 1995. Discounting of
reserves for workers' compensation claims is established in accordance with
applicable state laws, which permit discounting the estimated claim payments on
certain claims at various rates. The Property and Casualty Group uses a discount
rate of approximately 5% per year, which is within the range of permitted rates
in the states in which it does business. Loss reserves on other lines of
business as well as loss adjustment expense reserves for all lines of business
are not discounted.
In 1996 and 1995, the loss ratio included $191.4 million and $66.5 million,
respectively, of strengthening of unpaid losses and LAE of prior accident years.
For the years ended December 31, 1997, 1996 and 1995, the loss reserve (release)
strengthening, net of retrospectively rated policies and the PMA Life Insurance
Company transaction, was associated with the following lines of business:
(dollar amounts in millions)
1997 1996 1995
------ ------ -------
Pre-1992 workers' compensation......... $(7.1) $110.0 $ 54.7
Asbestos and environmental............. -- 60.4 23.4
Other lines of business................ 5.0 21.0 (11.6)
----- ------ ------
Total reserve (release) strengthening.. $(2.1) $191.4 $ 66.5
===== ====== ======
In 1997, the Property and Casualty Group recorded a reserve release of $53.9
million on prior year losses and LAE, excluding the accretion of discount. The
release primarily relates to favorable reserve development of $9.0 million for
workers' compensation retrospectively rated policies for accident years 1991 and
prior resulting from unanticipated additional savings from the Company's 1997
commutation program and favorable development of workers' compensation reserves
for accident years 1992 through 1996 of $35.1 million ($28.0 million related to
retrospectively rated policies), primarily resulting from greater than expected
savings associated with benefit reforms in Pennsylvania. Furthermore, incurred
losses on prior accident years were also affected by the cession of prior year
loss reserves included in the PMA Life transaction of $14.8 million. See
"-Premium Revenues" above. The reserve release pertaining to the
retrospectively rated policies and the PMA Life transaction were offset in the
consolidated statements of operations by a corresponding reduction in earned
premiums. The aforementioned reserve releases were partially offset by reserve
strengthening of $5.0 million in commercial multi-peril business for accident
year 1996. It is the opinion of management that these reserve adjustments are
not indicative of any future trend.
The 1996 aggregate workers' compensation adverse development was allocated
$102.0 million to Pennsylvania and $8.0 million to all other states in which the
Property and Casualty Group does business. Of the $102.0 million, the
allocation by year is as follows: prior to 1987: $16.0 million; 1987 to 1991:
$101.0 million and 1992 and subsequent years: ($15.0 million). In 1995,
substantially all of the workers compensation adverse development related to
accident years 1987 to 1991 in Pennsylvania. For accident years prior to 1992,
the traditional paid loss development schedules for workers' compensation had
begun to exhibit an increasing trend
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<PAGE>
in loss development factors by 1993. This trend was initially attributed to an
increase in commutation activity. In 1995, management began to question whether
loss data was developing in a manner that was consistent with the conclusion
that the loss development trends were impacted solely by commutation activity.
As a result, management began to accumulate additional data in order to
determine whether there were additional causes for the increase in the paid loss
development data and management obtained claim count data that was far more
detailed than had been historically utilized in the reserve setting process.
This data indicated that the paid loss development factors were not only
impacted by commutation activity, but also by a decline in the claims closure
rate in Pennsylvania. Management believes that the decline in the closure rates
was due to several interrelated factors. One factor related to the fact that
efforts to rehabilitate claimants and return them to work were not as successful
as anticipated. For accident years 1987 to 1991, in particular, extensive
efforts were made by the Company to rehabilitate claimants and return them to
work at either full or modified duty. By late 1995 and into 1996, it was
recognized, by a review of a slow down in the claims closure pattern, that these
rehabilitation efforts were not impacting the closure rates as expected. Another
factor negatively impacting claims closure rates related to the economic
conditions in Pennsylvania in the early 1990's. During the period from 1990 to
1994, economic conditions in Pennsylvania were considered to be depressed in the
Company's major industry niches for workers' compensation insurance
(construction and heavy manufacturing). Payrolls in these industries were
stagnant, and in many cases, employment was flat or declining. The Company
believes that in periods of declining employment opportunities, there is a
tendency for indemnity periods to increase, which occurred for workers who
suffered injuries in these industries.
The above factors, when considered with the fact that the benefits period
in Pennsylvania was unlimited, caused the Company to believe that a substantial
portion of claimants from the pre-1992 period, who had already been out of work
five to nine years, would not return to work in any capacity. In late 1995 and
during 1996, management undertook an effort to quantify the impact of the
declining closure rates compared to the increase in commutation activity.
During the fourth quarter of 1995, the Property and Casualty Group strengthened
its workers' compensation reserves by $54.7 million; however, the quantification
of the effect of the claims closure rate was an extremely complex process, and
as such, the data was not fully understood at that time. As the data under
analysis was more mature and refined in 1996, management determined that the
workers' compensation loss reserves for Pennsylvania for pre-1992 accident years
needed to be increased substantially; therefore, the Property and Casualty Group
increased its workers' compensation reserves by $110.0 million.
Benefit reforms enacted by states in which the Property and Casualty Group
transacts business, most significantly Pennsylvania, have had a beneficial
impact on more recent accident year loss ratios. Prior to 1996, the principal
revisions to the Pennsylvania system included medical cost containment measures
and an expansion of the period of time during which the insurer may require an
employee to accept medical treatment from the employer's list of designated
healthcare providers. In July 1996, Pennsylvania enacted Act 57, a workers'
compensation reform bill that is expected to reduce substantially indemnity
benefit periods in Pennsylvania. In addition to regulatory reforms, the loss
ratios have been favorably impacted by the conversion to loss sensitive and
alternative market products. Such a trend is evidenced by the fact that
accident year loss ratios (losses recorded for the year in which
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<PAGE>
the event occurred expressed as a percentage of the earned premiums for that
year) for workers' compensation have been generally lower in more recent
accident years, as the following chart indicates:
Property and Casualty Group Workers' Compensation Undiscounted
--------------------------------------------------------------
Accident Year Pure Loss Ratios at December 31, 1997
---------------------------------------------------
Accident Year Loss Ratio
------------- ----------
1990 100%
1991 86%
1992 80%
1993 64%
1994 64%
1995 63%
1996 63%
1997 66%
In addition, management took several steps to reduce the outstanding claims
associated with the Pennsylvania workers' compensation business written through
1991. A formal commutation program was initiated in the fourth quarter 1996 and
continued into late 1997. Commutations are agreements with claimants whereby the
claimants, in exchange for a lump sum payment, will forego their rights to
future indemnity payments from the Property and Casualty Group. Under
Pennsylvania workers' compensation laws, the claimant and the Pennsylvania
Workers' Compensation Board must approve all such commutation arrangements. The
Property and Casualty Group paid $101.1 million and $17.8 million in 1997 and
the fourth quarter of 1996, respectively, to commute workers' compensation
indemnity claims. Savings associated with these claims were consistent with
management's expectations. The number of open claims for accident years 1991
and prior was substantially reduced as a result of the commutation program.
This reduction in open claims is expected to reduce the possibility of further
adverse development on such reserves, although there can be no assurance that
the level of commutations will have a significant impact on the future
development of such reserves.
Estimating reserves for workers' compensation claims can be more difficult
than for many other lines of property and casualty insurance for several
reasons, including (i) the long payment "tail" associated with the business;
(ii) the impact of social, political and regulatory trends on benefit levels for
both medical and indemnity payments; (iii) the impact of economic trends and
(iv) the impact of changes in the mix of business. At various times, one or a
combination of such factors can make the interpretation of actuarial data
associated with workers' compensation loss development more difficult, and it
can take additional time to recognize changes in loss development patterns.
Under such circumstances, adjustments will be made to such reserves as loss
patterns develop and new information becomes available and such adjustments may
be material.
The adverse development in reserves associated with asbestos and
environmental claims is the result of a detailed analysis completed in 1996 of
loss and LAE reserves associated with asbestos and environmental liability
claims. The reserving for asbestos and environmental claims has undergone
change at both the Company and in the insurance
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<PAGE>
industry in general. For environmental and asbestos liability claims, reserving
methodology has been evolving in the recent past into accepted industry
practice. The Company has applied these methods to its asbestos and
environmental loss reserves in 1997 and 1996. To reserve for environmental
claims, the Company currently utilizes a calendar year development technique
known as aggregate loss development. This technique focuses on the aggregate
losses paid as of a particular date and aggregate payment patterns associated
with such claims. Several elements including remediation studies, remediation,
defense, declaratory judgment and third party bodily injury claims were
considered in estimating the costs and payment patterns of the environmental and
toxic tort losses. Prior to the development of these techniques, there was a
substantial range in estimating reserves for environmental and toxic tort
liabilities. The methods employed by the Company prior to the review completed
in 1996 included a review of aggregate loss and LAE paid and case incurred data
along with resulting "survival ratios" to establish IBNR for environmental and
toxic tort claims. For asbestos claims, the Company had previously reserved
costs to defend, and any indemnification payments anticipated on, claims for
which it had received notice that it was a responsible party, plus a bulk factor
applied to the estimated case reserves to provide for potential development of
indemnification and defense cost related to such claims. In 1996, the Company
performed a ground up analysis of asbestos loss reserves using an actuarially
accepted modeling technique. Using historical information as a base and
information obtained from a review of open claims files, assumptions were made
about future claims activity in order to estimate ultimate losses. For each
individual major account, projections were made regarding new plaintiffs per
year, the number of years new claims will be reported, the average loss severity
per plaintiff and the ratio of LAE to loss. In many cases involving larger
asbestos claims, the Company reserved up to the policy limits for the applicable
loss coverage parts for the affected accounts. Policy terms and reinsurance
treaties were applied in the modeling of future losses. Estimation of
obligations for asbestos and environmental exposures continues to be more
difficult than for other loss reserves because of several factors, including:
(i) evolving methodologies for the estimation of the liabilities; (ii) lack of
reliable historical claim data; (iii) uncertainties with respect to insurance
and reinsurance coverage related to these obligations; (iv) changing judicial
interpretations and (v) changing government standards.
The Company's asbestos-related loss reserves as of December 31, 1997, 1996
and 1995 which include reserves for PMA Re of $0.3 million, $0.3 million and
$0.6 million, gross and net, at December 31, 1997, 1996 and 1995, respectively:
(dollar amounts in thousands)
1997 1996 1995
-------- --------- --------
Gross of reinsurance:
Beginning reserves......................... $80,055 $ 27,611 $13,969
Incurred losses and LAE.................... 2,435 62,854 22,482
Calendar year payments for losses and LAE.. (5,764) (10,410) (8,840)
------- -------- -------
Ending reserves............................ $76,726 $ 80,055 $27,611
======= ======== =======
Net of reinsurance:
Beginning reserves......................... $53,300 $ 23,443 $ 8,168
Incurred losses and LAE.................... (36) 39,427 21,826
Calendar year payments for losses
and LAE.................................. (4,686) (9,570) (6,551)
------- -------- -------
Ending reserves............................ $48,578 $ 53,300 $23,443
======= ======== =======
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<PAGE>
The Company's environmental-related loss reserves as of December 31, 1997,
1996 and 1995, which include reserves for PMA Re of $3.8 million, $2.9 million
and $2.6 million, gross and net, at December 31, 1997, 1996 and 1995,
respectively, and $13.1 million gross and zero net for Caliber One Indemnity
Company at December 31, 1997 were as follows:
(dollar amounts in thousands)
1997 1996 1995
-------- -------- --------
Gross of reinsurance:
Beginning reserves..................... $35,626 $20,134 $20,952
Incurred losses and LAE................ 1,130 22,143 3,516
Reserves acquired through purchase of
Caliber One Indemnity Company(1)..... 13,060 --- ---
Calendar year payments for losses
and LAE.............................. (4,708) (6,651) (4,334)
------- ------- -------
Ending reserves........................ $45,108 $35,626 $20,134
======= ======= =======
Net of reinsurance:
Beginning reserves..................... $34,592 $20,134 $20,952
Incurred losses and LAE................ 1,068 21,109 3,516
Calendar year payments for losses
and LAE.............................. (3,965) (6,651) (4,334)
------- ------- -------
Ending reserves........................ $31,695 $34,592 $20,134
======= ======= =======
- ---------------
(1) Such acquired reserves have been reinsured by an affiliate of the former
parent. See "Liquidity and Capital Resources."
Of the total net asbestos reserves, $6.7 million, $6.8 million and $6.7
million related to established claims reserves at December 31, 1997, 1996 and
1995, respectively, and $41.9 million, $46.5 million and $16.7 million related
to IBNR at December 31, 1997, 1996 and 1995, respectively. Of the total net
environmental reserves, $11.2 million, $12.5 million and $10.3 million related
to established claims reserves at December 31, 1997, 1996 and 1995,
respectively, and $20.5 million, $22.1 million and $9.8 million related to
incurred but not reported losses at December 31, 1997, 1996 and 1995,
respectively. All incurred asbestos and environmental losses were for accident
years 1986 and prior.
Management believes that the Property and Casualty Group's reserves for
asbestos and environmental claims are appropriately established based upon known
facts, existing case law and generally accepted actuarial methodologies.
However, due to changing interpretations by courts involving coverage issues,
the potential for changes in federal and state standards for clean-up and
liability and other factors, the ultimate exposure to the Property and Casualty
Group for these claims may vary significantly from the amounts currently
recorded, resulting in a potential future adjustment in the claims reserves
recorded. In addition, issues involving policy provisions, allocation of
liability among participating insurers, proof of coverage and other factors make
quantification of liabilities exceptionally difficult and subject to adjustment
based upon newly available data.
In 1996, Commercial Lines experienced reserve strengthening of $21.0
million compared to a reserve release of $11.6 million in 1995. The reserve
strengthening in 1996 was principally
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<PAGE>
due to a re-estimation of loss adjustment costs associated with general
liability claims. Through 1991, the Property and Casualty Group's mix of general
liability insurance policies was weighted towards the manufacturing classes of
business. Subsequent to 1991, the Property and Casualty Group's mix of business
became more heavily weighted towards the construction and contracting classes of
business. These particular classes of business have experienced losses due to
alleged construction defects and similar matters that have taken longer to
emerge than the classes of business previously written by the Property and
Casualty Group. Defense costs associated with these claims have also exceeded
the original estimate of the Property and Casualty Group's management, which was
based on the patterns of indemnification payments associated with the earlier
classes of business written. When this issue was discovered, the Property and
Casualty Group factored the increased defense costs and the emergence pattern in
determining a more appropriate reserve amount for loss handling costs. The
release of reserves in 1995 was due primarily to favorable loss experience in
commercial automobile business.
The 1997 expense ratio declined by 3.3 points compared to the 1996 expense
ratio. The 1997 Acquisition Expense Ratio increased by 3.0 points compared to
1996, primarily due to a 4.2 point increase related to the aforementioned
adjustment to accrued retrospective premiums in 1997 ($37.0 million) and by the
1997 cession of premiums associated with the PMA Life transaction ($15.4
million), offset by the write-off in 1996 of $5.0 million in retrospectively
rated premiums. These actions reduced earned premiums without a commensurate
decrease in acquisition expenses. Such increase was partially offset by ceding
commissions received by the Property and Casualty Group on its reinsurance
arrangement for Commercial Lines casualty losses. Such commissions are recorded
as a reduction of acquisition expenses. In 1996, the Acquisition Expense Ratio
increased 4.2 points compared to 1995 primarily due to a change in the mix of
business to a greater proportion of alternative market products and self-insured
services, which have much lower, if any, net premium which caused acquisition
expenses to represent a larger proportion of net premiums earned.
The 1997 Operating Expense Ratio was 22.6%, a decrease of 6.3 points as
compared to 28.9% in 1996. After adjusting for the reduction in accrued
retrospective premiums and the PMA Life transaction, the adjusted Operating
Expense Ratio would have been 18.1% in 1997. The lower adjusted Operating
Expense Ratio is primarily attributable to expense containment programs begun at
the Property and Casualty Group, and the higher levels of restructuring charges
and valuation adjustments in 1996. Operating expenses in 1997 decreased by
$31.0 million compared to 1996, despite an increase of $1.1 million in expenses
associated with the Property and Casualty Group's service revenues. The 1996
Operating Expense Ratio was adversely impacted by several factors, including an
accrual of $7.6 million for a voluntary early retirement program ("VERIP"), a
$4.8 million charge associated with a change in depreciable lives of computer
equipment and a $10.1 million increase in premium balances written off. In
1997, the Property and Casualty Group recorded $5.2 million for severance and
related costs associated with the continued restructuring and cost reduction
initiatives. These initiatives lowered payroll and related expenses in 1997 by
$4.9 million. The 1996 Operating Expense Ratio increased 13.8 points in
comparison to 1995 primarily related to the aforementioned factors that
adversely impacted the 1996 ratio.
In 1997 and 1996, respectively, the Property and Casualty Group incurred
approximately $1.6 million and $1.8 million associated with the Year 2000 Issue.
Management
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<PAGE>
anticipates that the Property and Casualty Group will incur approximately
$700,000 in 1998 as a result of this conversion; it is expected that this
conversion will be completed by the end of 1998. See "Liquidity and Capital
Resources."
The policyholders' dividend ratios were 6.9%, 6.1% and 4.8% for the years
ended December 31, 1997, 1996 and 1995, respectively. The policyholders'
dividend ratio increased by 1.3 points in 1997 as a result of the adjustment to
retrospectively rated premiums and the PMA Life transaction. The ratios have
generally increased over the three-year period ended December 31, 1997 primarily
because of sliding-scale dividend plans. Under such plans, the insured receives
a dividend based upon the collective loss experience of the plan. As the loss
experience for the three underwriting years ended December 31, 1997 has improved
relative to the years prior to this period, the Property and Casualty Group has
incurred higher policyholders' dividends.
Net Investment Income
Net investment income was relatively flat in 1997 compared to 1996, as
lower average investment balances resulting from the pay-down of loss reserves
from prior accident years primarily related to the commutation program and
decreasing premium volume were offset by higher yields associated with the
purchase of high grade corporate bonds and asset-backed securities. Net
investment income decreased 10.6% in 1996 compared to 1995, primarily due to
lower average investment balances.
Comparison of SAP and GAAP Results
The results presented under SAP are those of the Pooled Companies. Prior
to December 31, 1996, the Pooled Companies were comprised of four domestic
insurance companies: PMAIC, Manufacturers Alliance Insurance Company,
Pennsylvania Manufacturers Indemnity Company and MASCCO. As part of a plan to
reduce the amount of indemnity reserves from accident years 1991 and prior in
the Pooled Companies, MASCCO was removed from the pooling arrangement effective
December 31, 1996, and indemnity reserves from accident years 1991 and prior
were transferred to MASCCO. The other significant difference relates to various
reinsurance agreements between the Pooled Companies and certain foreign
insurance subsidiaries. Prior to December 31, 1996, Chestnut Insurance Company,
Ltd. was the reinsurer under these agreements. At December 31, 1996, these
reinsurance arrangements were novated, and the assets and liabilities associated
with such contracts were sold to PMA Cayman, a foreign affiliate. At December
31, 1997, the Pooled Companies had reinsurance recoverables from MASCCO and PMA
Cayman of $96.2 million and $284.9 million, respectively.
In addition to the above and the different accounting treatment of
acquisition costs (see "PMA Re Results of Operations" for further discussion of
SAP to GAAP differences related to acquisition costs), the GAAP results for the
Property and Casualty Group include the results of other entities within the
Property and Casualty Group, but excluded from the aforementioned pooling
agreement, including PMA Life and other affiliated reinsurers and non-insurance
companies utilized in providing certain products and services to the Property
and Casualty Group's clients. The exclusion of such entities tends to decrease
the SAP combined ratio relative to the GAAP combined ratio.
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<PAGE>
Corporate and Other
The Corporate and Other segment is primarily comprised of corporate
overhead and the operations of the Company's properties. Corporate and Other
operations reported a pre-tax operating loss of $3.4 million in 1997 compared to
a pre-tax operating loss of $500,000 in 1996. The decline in the operating
results of Corporate and Other was due primarily to a $2.2 million increase in
operating costs related to certain corporate properties disposed of during the
third quarter of 1997. No material gain or loss was recorded in connection with
the disposal of such properties.
In 1995, management determined that the fair market values of the Company's
former headquarters building, which was disposed of in 1997, and certain
adjacent properties were less than the carrying values plus the costs to carry
and sell the properties. The Company recorded a charge of $8.4 million in 1995
to write down these properties to their fair market values less costs to carry
and sell the properties. No such charge was recorded during 1996.
During 1997, the Company incurred pre-operating charges of approximately
$900,000 in establishing Caliber One. The Corporate and Other segment also
incurred $1.8 million of severance and related restructuring costs in 1997.
Net Realized Investment Gains
Net realized investment gains amounted to $8.6 million, $3.0 million and
$31.9 million in 1997, 1996 and 1995, respectively. During the three-year
period ended December 31, 1997, the Company realized gains from investment sales
related to the following: (i) transactions to move holdings between taxable and
tax-exempt fixed-maturity investments in order to maximize after-tax yields;
(ii) transactions to expand the asset classes in which the Company invests to
capitalize on favorable yield spreads between such instruments and U.S. Treasury
securities; (iii) transactions based upon an assessment of the interest rate
environment and the shape of the yield curve and (iv) sales of equity
securities, as the Company has substantially reduced its holdings of this asset
class over the last three years. Gains and losses on the sale of investments
are recognized as a component of net income, but the timing and recognition of
such gains and losses are unpredictable and are not indicative of future
results.
In 1997, the Company repositioned its investment portfolio to improve its
pre-tax investment yield, while maintaining the maturity matching structure
between investments and liability cash flow projections. As interest rates
declined in the latter part of the year, these transactions resulted in a net
$8.6 million gain for 1997.
During 1996 and 1995, most of the investment sales activity resulted from
reducing the Company's holdings of tax-advantaged securities. Based upon an
assessment of the Company's position with respect to the alternative minimum tax
("AMT"), the Company reduced its tax-advantaged securities positions beginning
in late 1995 and throughout 1996. In 1996, these sales resulted in a net loss of
$900,000, compared to 1995 when such transactions resulted in a net gain of
$12.1 million. In addition to gains and losses arising from the sales of fixed
maturity investments, sales of equity securities generated net realized gains of
$3.9 million and $900,000 in 1996 and 1995, respectively.
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<PAGE>
Interest Expense and Income Taxes
Interest expense decreased $1.3 million in 1997 to $15.8 million from $17.1
million in 1996 due to the refinancing of the Company's debt with the Revolving
Credit Facility. See "Liquidity and Capital Resources" below. In 1996, interest
expense decreased to $17.1 million from $18.7 million in 1995. Such reduction
related to slightly lower average debt balances in 1996. In addition, principal
payments on the Company's higher coupon senior notes for which average coupon
rate of amounts paid was 9.49% were funded with drawdowns on the Company's
Revolving Credit Facility which had an average interest rate of 6.08% in 1996.
The Company's effective tax rates were 21.5%, (29.3)% and 30.9% in 1997,
1996 and 1995, respectively. The Company recorded a net deferred tax asset of
$70.4 million and $101.6 million in 1997 and 1996, respectively. See "Liquidity
and Capital Resources -- Capital Resources." In the normal course of business
the Company is examined by various taxing authorities, including the Internal
Revenue Service. Federal tax return examinations have been completed for the
years 1992 and 1993. The examinations for years 1994 and 1995 are currently in
progress. In management's opinion, the ultimate resolution of these matters will
not have an adverse impact on the Company's financial position or results of
operations .
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of an entity's ability to secure enough cash to meet
its contractual obligations and operating needs. At the holding company level,
the Company requires cash to pay debt obligations, dividends to shareholders and
taxes to the federal government, as well as to capitalize subsidiaries from time
to time. PMC's primary sources of liquidity are dividends from subsidiaries, net
tax payments received from subsidiaries and borrowings.
The Company paid interest of $19.8 million, $16.6 million and $15.1 million
in 1997, 1996 and 1995, respectively. The Company made scheduled debt
repayments in 1997, 1996 and 1995 of $7.3 million, $25.1 million and $125.1
million, respectively, and paid dividends to shareholders of $8.0 million in
1997 and $7.9 million in 1996 and 1995. PMC also made cash capital
contributions to its subsidiaries totaling $11.0 million, $50.0 million and
$61.0 million in 1997, 1996 and 1995, respectively. In 1995, PMC also utilized
cash to settle intercompany balances with its domestic insurance subsidiaries.
Dividends from subsidiaries were $22.5 million, $53.6 million and $103.2
million in 1997, 1996 and 1995, respectively. Net tax cash flows were $20.0
million, $12.0 million and $11.4 million in 1997, 1996 and 1995, respectively.
In addition to dividends and tax payments from subsidiaries, the Company
utilized the following sources to generate liquidity for the above needs. During
the first quarter of 1997, the Company made debt repayments of $8.0 million on
the revolving credit agreement before refinancing all of its credit agreements
not already maturing in 1997 with the Revolving Credit Facility. See "Capital
Resources." During 1996, the Company financed scheduled repayments on its senior
note facilities of $25.0 million through drawdowns on its revolving credit
agreement.
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<PAGE>
In 1995, the Company repaid its expiring revolving credit agreement by issuing
$107.0 million of 7.62% privately placed senior notes. In addition, in 1995, the
Company funded the scheduled debt repayments on its existing senior notes by
drawing down $18.0 million on a new $50.0 million revolving credit agreement
with a banking syndicate. At December 31, 1997, the Company had $32.0 million
available on the Revolving Credit Facility. In addition to the Revolving Credit
Facility, the Company maintains a committed facility of $50 million for letters
of credit. The Letter of Credit Facility is utilized primarily for securing
reinsurance obligations of the Company's insurance subsidiaries. As of December
31, 1997, the Company had $46.9 million outstanding in letters of credit under
the Letter of Credit Facility.
The Company's domestic insurance subsidiaries' ability to pay dividends to
the Company is limited by the insurance laws and regulations of Pennsylvania.
Under such laws and regulations, dividends may not be paid without prior
approval of the Pennsylvania Insurance Commissioner in excess of the greater of
(i) 10% of surplus as regards policyholders as of the end of the preceding year
or (ii) SAP net income for the preceding year, but in no event to exceed
unassigned funds.
Under this standard, the Pooled Companies and PMA Reinsurance Corporation
can pay an aggregate of $48.7 million of dividends during 1998 without the prior
approval of the Pennsylvania Insurance Commissioner. Caliber One Indemnity
Company had an unassigned deficit of $6.4 million as of December 31, 1997, and,
therefore, cannot pay non-extraordinary dividends; also, PMA Reinsurance
Corporation owns Caliber One Indemnity Company, and, as such, its dividends may
not be paid directly to PMC. Under its plan of operation filed with the
Pennsylvania Insurance Department, MASCCO must maintain a ratio of unpaid losses
and LAE to surplus of no more than eight to one; as of December 31, 1997, MASCCO
was in compliance with such requirement. The Credit Facilities also contain
limitations on the ability of the Company's insurance subsidiaries to pay
dividends. The Credit Facilities require the Company's insurance subsidiaries to
maintain combined statutory capital and surplus of $450.0 million. At December
31, 1997, the Company's insurance subsidiaries had combined statutory capital
and surplus of $552.2 million. In addition, the Credit Facilities require that
the Pooled Companies maintain an adjusted surplus to authorized control level
ratio, as calculated under risk-based capital rules, of not less than 220% as of
December 31, 1997, 230% as of December 31, 1998 and 240% as of December 31, 1999
and thereafter, and requires that PMA Reinsurance Corporation maintain such
ratio at 300%. At December 31, 1997, the ratios of the Pooled Companies ranged
from 293% to 324%, PMA Reinsurance Corporation's ratio was 355% and Caliber One
Indemnity Company's ratio was 1,922%.
In December 1997, PMA Reinsurance Corporation acquired 100% of the
outstanding common stock of Caliber One Indemnity Company (formerly known as
Lincoln Insurance Company) for approximately $16.0 million and made a capital
contribution of $11.3 million to Caliber One Indemnity Company. Immediately
prior to and in conjunction with this purchase, all of Caliber One Indemnity
Company's acquired loss reserves were reinsured by an affiliate of Caliber One
Indemnity Company's former parent for adverse development and uncollectible
reinsurance in the amount of the stated reserves plus $68.5 million. See Note 1
to the Consolidated Financial Statements and "Business--Loss Reserves."
Management believes that the reinsurance obtained as part of the purchase will
be adequate to cover any future adverse reserve development or uncollectible
reinsurance on the acquired
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<PAGE>
reserves. PMA Re intends to maintain Caliber One Indemnity Company's surplus at
not less than $25.0 million, the minimum capital and surplus required by many
states in order to be an eligible surplus lines carrier.
PMC's dividends to shareholders are restricted by its debt agreements.
Based upon the terms of the Revolving Credit Facility, on a pro forma basis,
under the most restrictive debt covenant, PMC would be able to pay dividends of
approximately $14.5 million in 1998. See "Liquidity and Capital Resources --
Capital Resources."
Management believes that the Company's sources of funds will provide
sufficient liquidity to meet short-term and long-term obligations.
Capital Resources
The Company's total assets decreased to $3,057.3 million at December 31,
1997 from $3,117.5 million at December 31, 1996. Total investments decreased
$66.6 million to $2,194.7 million at December 31, 1997. The decrease in
investments is primarily attributable to the Property and Casualty Group's pay-
down of loss reserves from prior accident years as part of the formal
commutation program that was initiated in the fourth quarter of 1996 and
continued into late 1997. All other assets increased $6.4 million in 1997,
mainly due to increases in reinsurance recoverables of $74.4 million and cash of
$25.0 million. The reinsurance recoverables increase primarily relates to the
purchase of Caliber One Indemnity Company during 1997 and the PMA Life
transaction, which included approximately $32.7 million and $15.4 million,
respectively, of ceded loss reserves. The increase in cash relates to
investment security purchases that did not settle until January 1, 1998, causing
a large cash balance at year-end. The above asset increases were partially
offset by a $33.6 million decrease in uncollected premiums primarily related to
the reduction in accrued retrospective premiums by the Property and Casualty
Group, a $31.2 million decrease in deferred income taxes and a $12.2 million
decrease in fixed assets primarily related to the disposal of certain corporate
properties during the third quarter of 1997. No material gain or loss was
recorded in connection with the disposal of such properties.
The Company's deferred income tax asset decreased to $70.4 million at
December 31, 1997 from $101.6 million at December 31, 1996. The $31.2 million
decrease from 1996 to 1997 resulted primarily from the $23.5 million charge
related to the fair value of Company's investments that is recorded as a
component of the deferred tax asset. The net deferred tax asset of $70.4
million reflects management's estimate of the amounts that the Company expects
to recover in future years primarily through the utilization of net operating
losses and AMT credit carryforwards. Under SFAS No. 109, a valuation allowance
should be provided to offset the effects of a deferred tax asset if management
believes that it is more likely than not that the benefit of a deferred tax item
will not be realized. Management believes that the benefit of its deferred tax
asset will be fully realized, and therefore has not provided for a valuation
allowance. At December 31, 1997, the Company had approximately $109.6 million of
net operating carryforwards (expiring in 2011), approximately $7.5 million of
AMT credit carryforwards (which do not expire) and approximately $188,000 of
general business credit carryforwards (expiring in 2010 and 2011).
- 83 -
<PAGE>
Unpaid losses and LAE decreased $87.9 million to $2,003.2 million at
December 31, 1997. This decrease reflects the Property and Casualty Group's
pay-down of loss reserves from prior accident years as part of the formal
commutation program which was initiated in the fourth quarter of 1996 and
continued into late 1997, partially offset by loss reserves acquired in
connection with the purchase of Caliber One Indemnity Company.
Estimating future claims costs is necessarily a complex and judgmental
process inasmuch as reserve amounts are based on management's informed estimates
and judgments using data currently available. As such, management reviews a
variety of information, and uses a number of actuarial methods applied to
historical claims data, which often produces a range of possible results. As
additional experience and other data are reviewed, these estimates and judgments
are revised, at which point reserves may be increased or decreased accordingly.
Such increases or decreases are reflected in operating results for the time
period in which the adjustments are made. While the estimate for unpaid losses
and LAE is subject to many uncertainties, management believes that it has made
adequate provision for the Company's claims liabilities. However, if actual
losses exceed the amounts recorded in the Company's financial statements, the
Company's financial condition and results of operations could be adversely
affected.
At December 31, 1997, the Company's loss reserves were stated net of $59.9
million of salvage and subrogation. $50.8 million of salvage and subrogation
related to the Property and Casualty Group, $46.0 million of which related to
workers' compensation and $4.8 million related to Commercial Lines. The
anticipated salvage and subrogation was $9.1 million for PMA Re. Incurred
salvage and subrogation (increased) reduced losses and LAE by ($18.5) million,
($0.6) million and $9.5 million in 1997, 1996 and 1995, respectively. The
Company's policy with respect to estimating the amounts and realizability of
salvage and subrogation is to develop accident year schedules of historic paid
salvage and subrogation by line of business, which are then projected to an
ultimate basis using actuarial projection techniques. The anticipated salvage
and subrogation is the estimated ultimate salvage and subrogation less any
amounts received by the Company. The realizability of anticipated salvage and
subrogation is reflected in the historical data that is used to complete the
projection, as historic paid data implicitly considers realization and
collectibility.
The Company actively manages its exposure to catastrophic events. In the
underwriting process, the Company generally minimizes the writing of insurable
values in catastrophe prone regions. Also, in writing property reinsurance
coverages, PMA Re typically requires per occurrence loss limitations for
contracts that could have catastrophe exposure. Through per risk reinsurance,
the Company also manages its net retention in each exposure. In addition, PMA Re
maintains retrocessional protection of $46.0 million excess of $2.0 million per
occurrence, and the Property and Casualty Group maintains catastrophe
reinsurance protection of $27.7 million excess of $850,000. As a result, the
Company's loss ratios have not been significantly impacted by catastrophes, and
management believes that the Company has adequate reinsurance to protect against
the estimated probable maximum gross loss from a catastrophic event; however,
although management believes it is unlikely, an especially severe catastrophic
event could exceed the Company's reinsurance and retrocessional protection, and
materially adversely impact the Company's financial position.
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<PAGE>
The Company also maintains reinsurance and retrocessional protection for
other lines of business at December 31, 1997 as follows:
Retention Limits
---------------- --------------
The Property and Casualty Group:
Per Occurrence:
Workers' compensation......... $ 1.5 million $ 103.5 million
Per Risk:
Property lines................ $ 0.5 million(1) $ 19.5 million
Auto physical damage.......... $ 0.5 million $ 2.0 million
Other casualty lines.......... $ 0.2 million(2) $ 4.8 million
PMA Re:...........................
Per Occurrence:
Casualty lines................ $ 2.8 million $ 12.5 million
Workers' compensation......... $ 2.0 million $ 53.0 million
Property lines................ $ 2.0 million $ 48.0 million
Per Risk:
Property lines................ $ 0.8 million $ 4.2 million
Casualty lines................ $ 1.5 million $ 6.0 million
- ----------------
(1) This coverage also provides protection of $48.5 million per occurrence over
its combined net retention of $0.5 million.
(2) This coverage also provides protection of $49.8 million per occurrence over
its combined net retention of $0.2 million.
PMA Re also maintains aggregate protection up to $22.3 million in excess of
$178.0 million for the current accident year. Effective January 1, 1998, PMA Re
added a new workers' compensation program which includes coverage of $98.0
million excess of $2.0 million per occurrence, $98.5 million excess of $1.5
million per program per occurrence and $18.5 million excess of $1.5 million per
person per occurrence.
The Company performs extensive credit reviews on its reinsurers, focusing
on, among other things, financial capacity, stability, trends and commitment to
the reinsurance business. Prospective and existing reinsurers failing to meet
the Company's standards are excluded from the Company's reinsurance programs.
In addition, the Company requires letters of credit to support balances due from
reinsurers not authorized to transact business in the applicable jurisdictions.
At December 31, 1997, the Company had reinsurance recoverables due from the
following unaffiliated single reinsurers in excess of 3% of shareholders'
equity:
(dollar amounts in thousands)
Gross amount A.M. Best
due to the Company Rating
------------------- ---------
Reinsurer
- ---------
United States Fidelity and Guaranty Company..... $74,041 A
Essex Insurance Company......................... $36,807 A
American Re-Insurance Corporation............... $35,411 A+
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<PAGE>
Kemper Reinsurance Corporation.................. $21,853 A
London Life International Reinsurance
Corporation.................................... $16,212 A+
Continental Casualty Company.................... $15,209 A
The Company maintained funds held to collateralize the above balances in
the amount of $66.2 million at December 31, 1997. The Company believes that it
would have the right to offset the funds withheld from a reinsurer against the
balances due from such reinsurer in the event of insolvency. Funds held under
reinsurance treaties decreased $17.3 million in 1997, primarily due to the
commutation of a prior underwriting year for one of the reinsurance covers at
the Property and Casualty Group as well as one of the retrocessional covers at
PMA Re, partially offset by retrocessional activity at PMA Re for the current
underwriting year.
Long-term debt remained essentially constant between 1997 and 1996. As
noted previously, management refinanced the Company's existing credit agreements
on March 14, 1997 under the Revolving Credit Facility, replacing the following
debt that was outstanding at that time:
(dollar amounts in thousands)
Senior notes 9.60%, due 2001.................. $ 46,428
Senior notes 7.62%, due 2001, Series A........ 71,000
Senior notes 7.62%, due 2000, Series B........ 36,000
Revolving credit agreement, expiring in 1998.. 36,000
--------
Total......................................... $189,428
========
The early extinguishment of the senior note agreements resulted in an
extraordinary loss of $4.7 million ($7.3 million pre-tax) which was recorded in
the first quarter of 1997. The Revolving Credit Facility bears interest at
LIBOR plus 0.70% on the utilized portion and carries a 0.275% facility fee on
the unutilized portion. The margin over LIBOR is adjustable downward based upon
future reductions in the Company's debt to capitalization ratio. As of December
31, 1997, the interest rate on the Revolving Credit Facility was 6.61% on the
utilized portion. The final expiration of the Revolving Credit Facility will be
December 31, 2002, maturing in an installment of $15.5 million in 1999 and
annual installments of $62.5 million commencing in 2000 through 2002. Management
also entered into an interest rate swap agreement that manages the impact of the
potential volatility of the interest rate associated with the floating rates on
the Revolving Credit Facility. The interest rate swap covers a notional
principal amount of $150.0 million and effectively converts the floating rate on
such portion of the Revolving Credit Facility to a fixed 7.24%.
Other liabilities, including taxes, licenses and fees, decreased $9.1
million in 1997 to $81.5 million compared to 1996 primarily due to lower
operating expenses at the Property and Casualty Group during 1997.
Consolidated shareholders' equity at December 31, 1997 totaled $478.3
million, or $19.96 per share, compared to $425.8 million, or $17.86 per share,
at December 31, 1996. As a result of changes in market interest rates, the
unrealized appreciation of investments, net of tax, was $18.8 million at
December 31, 1997 compared to an unrealized depreciation of investments, net of
tax, of $24.9 million at December 31, 1996, resulting in an increase in
shareholders'
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<PAGE>
equity of $43.7 million, or $1.82 per share. Consolidated shareholders' equity
decreased to $425.8 million, or $17.86 per share, at December 31, 1996, from
$609.7 million, or $25.53 per share, at December 31, 1995. This decrease was due
primarily to the net loss of $135.3 million in 1996, a decrease in shareholders'
equity of $42.4 million, net of tax, or $1.78 per share, related to unrealized
depreciation of investments and dividends declared of $7.9 million.
At December 31, 1997, the Company's capital structure consisted of $203.0
million of long-term debt and $478.3 million of shareholders' equity. The
Company utilizes long-term debt in its capital structure to fund internal
expansion through capital contributions to subsidiaries, to pursue investment
opportunities and to refinance existing debt. Due to the inherent risks
associated with the insurance industry, management strives to maintain a
relatively conservative capital structure. Management believes that a certain
amount of debt is necessary in order to enhance returns on shareholders' equity;
however, the level of debt must be appropriate in terms of the availability of
dividends from subsidiaries, operating income and the overall capital structure.
In determining the appropriate level of long-term debt, management focuses on
the following statistics: statutory dividends to interest expense, earnings
(loss) before interest and taxes to interest expense, pre-tax operating income
(loss) before interest to interest expenses and debt to capitalization ratio.
The following table indicates the Company's status with respect to these
statistics:
1997 1996 1995
----- ------ -----
Statutory dividends to interest expense (times)........ 1.4 3.1 3.8
Earnings (loss) before interest and taxes to interest
expense (times)...................................... 2.6 (10.2)(1) 2.9
Pre-tax operating income (loss) before interest to
interest expense (times)............................. 2.0 (10.4)(1) 1.2
Debt to total capitalization (excluding SFAS No. 115
adjustment).......................................... 30.6% 31.2% 25.6%
(1) Relates to the loss before interest and taxes and the pre-tax operating
loss of $191.4 million and $194.4 million, respectively, in 1996.
Investments
The Company's investment policy objectives are to (i) seek competitive
after-tax income and total return, (ii) maintain very high-grade asset quality
and marketability, (iii) maintain maturity distribution commensurate with the
Company's business objectives, (iv) provide portfolio flexibility for changing
business and investment climates and (v) provide liquidity to meet operating
objectives. The Company has established strategies, asset quality standards,
asset allocations and other relevant criteria for its fixed maturity and equity
portfolios. In addition, maturities are structured after projecting liability
cash flows with actuarial models. The Company also does not invest in various
types of investments, including speculative derivatives. The Company's
portfolio does not contain any significant concentrations in single issuers
(other than U.S. Treasury and agency obligations), industry segments or
geographic regions.
The Company's Board of Directors is responsible for the Company's
investment policy objectives. The Company retains outside investment advisers
to provide investment advice and guidance, supervise the Company's portfolio and
arrange securities transactions through brokers and dealers. The Executive and
Finance Committees of the Company's Board of Directors meet periodically with
the investment advisers to review the performance of the
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<PAGE>
investment portfolio and to determine what actions should be taken with respect
to the Company's investments. Investments by the Pooled Companies, MASCCO and
PMA Re must comply with the insurance laws and regulations of the Commonwealth
of Pennsylvania and investments for Caliber One Indemnity Company must comply
with the insurance laws and regulations of the State of Delaware. The Company's
capital not allocated to the Pooled Companies, MASCCO, PMA Re and Caliber One
Indemnity Company may be invested in securities and other investments that are
not subject to such insurance laws, but nonetheless conform to the Company's
investment policy.
The following table summarizes the Company's investments by carrying value
as of June 30, 1998 and as of December 31, 1997 and 1996:
(dollar amounts in millions)
<TABLE>
<CAPTION>
June 30, December 31,
------------------ ---------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Carrying Carrying Carrying
Value(1) Percent Value(1) Percent Value(1) Percent
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Investment
- ----------
U.S. Treasury securities and
obligations of U.S. Government
agencies........................... $1,007.4 46.7% $1,119.5 51.0% $1,602.8 70.8%
Obligations of states and political
subdivisions....................... 16.5 0.8% --- -- 76.5 3.4%
Corporate debt securities............ 805.4 37.3% 687.7 31.3% 372.8 16.5%
Mortgage backed securities........... 166.4 7.7% 122.3 5.6% 74.0 3.3%
Equity securities.................... --- -- --- -- 0.3 --
Short-term investments............... 163.6 7.5% 265.2 12.1% 135.0 6.0%
-------- ----- -------- ----- -------- -----
Total................................ $2,159.3 100.0% $2,194.7 100.0% $2,261.4 100.0%
======== ===== ======== ===== ======== =====
- ------------
</TABLE>
(1) Carrying value is equal to market value for all periods presented.
The Company has no investments which are not dollar denominated as of June
30, 1998.
The following table indicates the composition of the Company's fixed
maturities portfolio at carrying value, excluding short-term investments, by
rating as of June 30, 1998 and as of December 31, 1997 and 1996:
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<PAGE>
(dollar amounts in millions)
<TABLE>
<CAPTION>
June 30, December 31,
------------------ ----------------------------------------
1998 1997 1996
------------------ ------------------- -------------------
Carrying Carrying Carrying
Value(2) Percent Value(2) Percent Value(2) Percent
-------- -------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ratings(1)
- ----------
U.S. Treasury securities and AAA.. $1,480.6 74.2% $1,449.0 75.1 $1,882.4 88.5%
AA................................ 147.5 7.4% 150.0 7.8% 95.8 4.5%
A................................. 224.7 11.2% 282.2 14.6% 147.9 7.0%
BBB............................... 142.9 7.2% 48.3 2.5% --- --
-------- ----- -------- ----- -------- -----
Total............................. $1,995.7 100.0% $1,929.5 100.0% $2,126.1 100.0%
======== ===== ======== ===== ======== =====
- -----------
</TABLE>
(1) Ratings as assigned by Standard & Poor's. Such ratings are generally
assigned at the issuance of the securities, subject to revision on the
basis of ongoing evaluations. Ratings in the table are as of December 31 of
the years indicated.
(2) Carrying value is equal to market value.
The following table sets forth scheduled maturities for the Company's
investments in fixed maturities, excluding short-term investments, based on
stated maturity dates as of June 30, 1998. Expected maturities will differ from
contractual maturities because the issuers may have the right to call or prepay
obligations with or without call or prepayment penalties:
(dollar amounts in millions)
Carrying Value(1) Percent
-------------- --------
1 year or less $ 140.9 7.0%
Over 1 year through 5 years 659.6 33.1%
Over 5 years through 10 years 323.1 16.2%
Over 10 years through 20 years 209.5 10.5%
Over 20 years 496.1 24.9%
Mortgage backed securities 166.5 8.3%
-------- -----
Total $1,995.7 100.0%
======== =====
______________
(1) Carrying value is equal to market value.
The following table reflects the Company's investment results for the six
months ended June 30, 1998 and for each year in the three-year period ended
December 31, 1997:
(dollar amounts in millions)
Six Months
Ended Year Ended December 31,
June 30, -------------------------------------
1998 1997 1996 1995
---------- ---------- ------------ -----------
Average invested assets(1).. $2,177.0 $2,247.7 $2,366.8 $2,395.8
Net investment income(2).... $ 65.2 $ 136.7 $ 133.9 $ 139.4
Net effective yield(3)...... 5.99% 6.09% 5.66% 5.82%
Net realized investment
gains(4)................... $ 13.7 $ 8.6 $ 3.0 $ 31.9
- -------------
- 89 -
<PAGE>
(1) Average of beginning and ending amounts of cash and investments for the
period at carrying value (market value).
(2) After investment expenses, excluding net realized investment gains.
(3) Net investment income for the period divided by average invested assets for
the same period. The net effective yield for the six months ended June 30,
1998 has been annualized.
(4) Excludes loss on sale of PMA Cayman of $2.4 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As of June 30, 1998 and December 31, 1997, respectively, the effective
duration of the Company's investments was approximately 5.4 years and 5.3 years
and the effective duration of its liabilities was approximately 4.9 years and
5.1 years.
During 1997, the Company established a securities lending program through
which securities are loaned from the Company's portfolio to qualifying third
parties, subject to certain limits, via a lending agent for short periods of
time. Borrowers of these securities must provide collateral equal to a minimum
of 102% of the market value and accrued interest of the loaned securities.
Acceptable collateral may be in the form of either cash or securities. Cash
received as collateral is invested in short-term investments, and all securities
received as collateral are of similar quality to those securities lent by the
Company. In addition, the Company limits securities lending to 40% of statutory
admitted assets of its insurance subsidiaries, with a 2% limit on statutory
admitted assets to any individual borrower. The Company receives either a fee
from the borrower or retains a portion of the income earned on the collateral.
Under the terms of the securities lending program, the Company is indemnified
against borrower default, with the lending agent responsible to the Company for
any deficiency between the cost of replacing a security that was not returned
and the amount of collateral held by the Company. In the six-month period ended
June 30, 1998 and the year ended December 31, 1997, respectively, the Company
recognized income from securities lending transactions of approximately $406,000
and $524,000, net of lending fees, which was included in investment income. The
Company had approximately $632.9 million and $175.0 million, respectively, of
securities on loan as of June 30, 1998 and December 31, 1997.
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<PAGE>
BUSINESS
Company Overview
The Company is an insurance holding company, whose subsidiaries operate in
three distinct segments of the property and casualty insurance industry: (i)
reinsurance, through PMA Re, which commenced business in 1980; (ii) standard
commercial lines of insurance, with an emphasis on workers' compensation through
the Property and Casualty Group, which has been in business since 1915 and (iii)
specialty insurance products, focusing on excess and surplus lines, through the
Company's recently-formed operation, Caliber One. PMA Re writes a broad range of
property and casualty reinsurance products with an emphasis on risk-exposed
casualty excess of loss reinsurance and operates in the United States domestic
brokered market. The Property and Casualty Group offers a broad range of
standard commercial lines, including commercial general liability, commercial
automobile and commercial multi-peril, with an emphasis on workers' compensation
products and services primarily in nine contiguous jurisdictions in the Mid-
Atlantic and Southern regions of the United States, utilizing the PMA Group
trade name. In 1998, Caliber One commenced writing excess and surplus lines of
property and casualty insurance, including commercial general liability,
automobile and certain property exposures on a non-admitted basis. For the six
months ended June 30, 1998, the Company's net premiums written of $257.0 million
were derived 45.9% from PMA Re, 53.8% from the Property and Casualty Group and
0.3% from Caliber One. Net income for the Company for the six months ended June
30, 1998 and the year ended December 31, 1997 was $21.4 million and $15.0
million, respectively. As of June 30, 1998, the Company had total assets of
$3,075.4 million and shareholders' equity of $496.4 million.
The Company's insurance subsidiaries have the following ratings from A.M.
Best: PMA Reinsurance Corporation, A+ ("Superior"); the Pooled Companies, A-
("Excellent") and Caliber One Indemnity Company, A ("Excellent"). Management
believes that ratings from A.M. Best are material to its operations and that a
downgrade from the present rating classifications could have an adverse effect
on the Company's ability to market its products. A.M. Best's ratings are based
upon an assessment of an insurance company's perceived financial strength
regarding its ability to pay obligations to its policyholders and are not
directed toward the protection of investors.
After a period of rapid growth in the late 1980's, the Company's
consolidated total net premiums written declined from $552.0 million in 1992 to
$418.3 million in 1997. Since 1993, PMA Re's premium volume expanded as a
result of the increased demand for reinsurance in the markets in which PMA Re
participates as well as trends towards ceding companies restricting the number
of reinsurers with which they will do business. PMA Re has also obtained
additional business as a result of a target marketing program commenced in 1996
as well as from business displaced in the recent consolidation of the United
States reinsurance industry. Those trends have facilitated PMA Re's increased
participation on reinsurance treaties with its existing clients, the writing of
additional layers and programs with existing clients, and to a lesser extent,
the addition of business from new ceding companies. During this period, the
market for the products written by the Property and Casualty Group was very
competitive. The Property and Casualty Group restricted its premium volume,
rather than write business at rates that were not commensurate with the risks
assumed, and introduced loss-sensitive coverages and large-deductible programs,
under which insureds pay less
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<PAGE>
premium but bear a greater portion of loss exposure. Beginning in 1992, premiums
written were also reduced as a result of the Property and Casualty Group's re-
underwriting of its book of business and, commencing in 1993, rate reductions
associated with workers' compensation benefit reform laws. Management believes
that recent initiatives undertaken and workers' compensation reforms enacted in
recent years, including the restructuring and the loss reserve strengthening of
$257.9 million in 1995 and 1996, afford the Property and Casualty Group an
opportunity to increase its core business, workers' compensation insurance, on
terms acceptable to it. See "The Property and Casualty Group--Background and
Recent Developments" below.
In 1996, the Company restructured the Property and Casualty Group with the
goal of restoring its profitability after three years of operating losses. The
losses resulted primarily from unfavorable underwriting experience and adverse
reserve development related to accident years 1987 through 1991, when the
Property and Casualty Group wrote a much higher volume of business than its
current volume. The principal components of the restructuring were: (i)
strengthening loss reserves; (ii) initiating a commutation program to settle a
significant number of open claims from the 1987 to 1991 period; (iii)
designating PMA Cayman and MASCCO as separate run-off companies to alleviate the
SAP impact on the Pooled Companies of the loss reserve strengthening and to
manage the capital deployed in running off pre-1992 workers' compensation
claims; (iv) initiating an expense reduction program and (v) implementing
management changes, including the appointment of a new Chief Operating Officer
and the creation of the position of Chief Underwriting Officer. In June 1998,
the Company entered into a letter of intent to sell PMA Cayman. Largely as a
result of the restructuring, the Property and Casualty Group recorded pre-tax
operating income of $5.4 million for the six months ended June 30, 1998,
compared to pre-tax operating losses of $5.9 million for the six months ended
June 30, 1997 and $3.7 million, $215.7 million (including restructuring and
other special charges of $223.1 million) and $3.9 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
The composition of the Company's net premiums written for the six months
ended June 30, 1998 and the year ended December 31, 1997 was as follows:
(dollar amounts in thousands)
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
----------------------- -------------------------
Net Net
premiums % of premiums % of
written total written total
------- ----- ------- -----
PMA Re..................... $117,908 45.9% $177,934 42.5%
The Property and Casualty
Group:
Workers' compensation.... 106,952 41.6% 175,301 41.9%
Other commercial lines... 31,432 12.2% 65,047 15.6%
-------- ----- -------- -----
Total.................... 138,384 53.8% 240,348 57.5%
-------- ----- -------- -----
Caliber One................ 917 0.3% -- --
Eliminations............... (171) -- -- --
-------- ----- -------- -----
Total...................... $257,038 100.0% $418,282 100.0%
======== ===== ======== =====
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<PAGE>
PMA Re
Background
According to data provided by the RAA, as of June 30, 1998, PMA Reinsurance
Corporation was the 24th largest reinsurer in the United States in terms of
statutory capital and surplus and 17th largest in terms of net premiums written.
PMA Re writes a broad range of property and casualty reinsurance products with
an emphasis on risk-exposed casualty excess of loss reinsurance within the
United States domestic brokered market. Management believes that PMA Re
competes on the basis of its ability to offer prompt and responsive service and
specialized products to its clients and its excellent long-term relationships in
the broker and ceding company communities.
In the brokered reinsurance market, the products (reinsurance coverages)
are distributed to the ultimate customer (ceding companies) through reinsurance
intermediaries, known as brokers. In exchange for providing such distribution
services, the brokers are paid commissions, known as brokerage, which is
typically based upon a percentage of the premiums ceded under a particular
contract. The brokered reinsurance market differs from the direct reinsurance
market in which reinsurers maintain their own sales forces and distribute their
products directly to their ceding company clients.
During the five-year period ended December 31, 1997, PMA Re has expanded
its premium base without changing its underwriting standards. From 1992 to
1997, PMA Re reported premium volume growth that exceeded that of the overall
reinsurance industry. During such period, PMA Re's compound annual growth rate
for net premiums written was 13.2%, while it is estimated that the reinsurance
industry's compound annual growth rate was 8.2% for the same period based upon
information published by the RAA. PMA Re's premium volume increases have
largely taken the form of increased participation levels on clients' existing
programs, as well as writing of additional layers and programs with current
clients. To a lesser extent, volume growth has been attributable to business
written with new ceding company clients. Management believes that the expansion
of PMA Re's premium base has been attributable to several factors. First, PMA
Re's volume was impacted by industry trends between 1992 and 1995 that tended to
increase the demand for reinsurance. Specifically, much of the growth that
occurred in the primary insurance market in those years was attributable to
regional and niche companies. Typically, these companies demand more
reinsurance than their larger counterparts. Second, management believes that PMA
Re has benefited from the greater selectivity of ceding companies that have
restricted the number of reinsurers with which they will transact business. In
addition, commencing in 1996, PMA Re initiated a target marketing program, under
which certain existing accounts and new accounts identified as having certain
desirable characteristics (such as quality management and underwriting) were
pursued for additional or new business. Finally, PMA Re has been able to write
business for customers that was formerly written by reinsurers in the brokered
market that have been acquired by other reinsurers. These factors have more
than offset the recent trends in 1996 and 1997 of ceding companies retaining
more of their business and highly competitive conditions, which caused PMA Re to
non-renew certain accounts amounting to $68.2 million of in-
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<PAGE>
force premium in the 18 months ended June 30, 1998 and not accept certain new
business opportunities for underwriting or pricing reasons.
Reinsurance Products
The following table indicates PMA Re's gross and net premiums written by
major category of business:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Six Months Ended
June 30, Year Ended December 31,
------------------ ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written(1)
Casualty................. $102,608 $ 83,289 $151,901 $143,991 $128,736 $107,001 $ 94,482
Property................. 41,313 36,916 72,625 63,325 63,693 36,592 28,217
Other.................... 501 501 795 842 (63) 837 1,854
-------- -------- -------- -------- -------- -------- --------
Total.................... $144,422 $120,706 $225,321 $208,158 $192,366 $144,430 $124,553
======== ======== ======== ======== ======== ======== ========
Net premiums written(2)
Casualty................. $ 83,535 $ 68,286 $118,889 $122,008 $107,383 $ 88,585 $ 82,016
Property................. 33,849 27,501 58,257 41,240 45,440 23,929 18,407
Other.................... 524 492 788 805 (63) 837 1,854
-------- -------- -------- -------- -------- -------- --------
Total...................... $117,908 $ 96,279 $177,934 $164,053 $152,760 $113,351 $102,277
======== ======== ======== ======== ======== ======== ========
- --------------------
</TABLE>
(1) For the six months ended June 30, 1998, gross premiums written include $3.4
million of facultative reinsurance comprised of $1.5 million of property and
$1.9 million of casualty. For the six months ended June 30, 1997, gross
premiums written include $2.7 million of facultative reinsurance comprised
of $1.1 million of property and $1.6 million of casualty. For the years
ended December 31, 1997 and 1996, gross premiums written include $5.8
million and $3.5 million of facultative reinsurance, respectively, comprised
of the following: property, $2.4 million and $1.1 million, respectively;
casualty, $3.4 million and $2.3 million, respectively, and other lines,
$100,000 in 1996.
(2) For the six months ended June 30, 1998, net premiums written include $1.2
million of facultative reinsurance comprised of $700,000 of property and
$500,000 of casualty. For the six months ended June 30, 1997, net premiums
written include $700,000 of facultative reinsurance comprised of $300,000 of
property and $400,000 of casualty. In 1997 and 1996, net premiums written
include $2.5 million and $1.0 million of facultative reinsurance,
respectively, comprised of the following: property, $1.7 million and
$500,000, respectively; casualty, $800,000 and $500,000, respectively, and
other lines, less than $0.1 million in 1996.
Casualty Business
Casualty business accounted for 70.8% and 66.8% of net premiums written for
the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. In the five-year period ended December 31, 1997, casualty
business has increased at a compound
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<PAGE>
annual growth rate of 7.2%. The following table indicates the mix of casualty
business by class on the basis of net premiums written:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Umbrella.................. $13,777 $21,692 $ 30,967 $ 40,307 $ 51,558 $38,743 $34,189
Errors and Omissions...... 11,781 10,557 13,813 19,866 7,149 7,281 4,033
General Liability......... 12,072 5,597 15,174 11,702 7,460 8,936 8,665
Medical Malpractice....... 6,369 3,899 7,373 7,411 6,835 6,355 6,657
Directors' and Officers'.. 3,385 3,363 5,897 6,210 4,586 4,156 1,815
Miscellaneous Liability... 15,441 7,019 16,431 12,811 10,350 6,006 3,690
Auto Liability............ 16,992 11,313 22,268 17,056 13,032 10,134 12,616
Workers' Compensation..... 3,718 4,846 6,966 6,645 6,412 6,974 10,351
------- ------- -------- -------- -------- ------- -------
Total..................... $83,535 $68,286 $118,889 $122,008 $107,382 $88,585 $82,016
======= ======= ======== ======== ======== ======= =======
</TABLE>
Due to the competitive conditions in the casualty market, management has
maintained a relatively conservative growth posture for casualty business in the
five-year period. PMA Re has generally focused on other liability coverages
(which include general liability, products liability, professional liability and
other more specialized liability coverages), while maintaining a relatively
stable level of auto liability premiums and de-emphasizing workers' compensation
coverages. In 1998, casualty premiums increased primarily as a result of the
addition of certain large general liability and auto liability programs. The
decrease in 1997 casualty net premiums was primarily attributable to increased
retrocessional protection purchased which offset increases in gross casualty
premiums relating to new business with existing clients and larger lines taken
on existing programs. In 1998, 1997, 1996 and 1995, PMA Re decreased the amount
of its excess and umbrella business as rates and terms for this type of business
were no longer as attractive as they had been. Much of the growth in 1995 and
1996 related to the expansion and addition of several programs covering
specialty business (which includes professional liability, directors' and
officers' liability, environmental impairment liability, employment practices
liability and other miscellaneous specialized coverages). Such specialty
business now accounts for approximately 53.1% of in-force casualty treaty
business. In 1994, the growth in other liability was primarily attributable to
excess and umbrella business as PMA Re added several significant programs.
Property Business
Property business accounted for 28.7% and 32.7% of net premiums written for
the six months ended June 30, 1998 and the year ended December 31, 1997,
respectively. In the five-year period ended December 31, 1997, property
business has increased at a compound annual growth rate of 40.4%. The increases
in net property premiums written have been primarily the result of additional
property underwriting expertise that PMA Re added to its underwriting staff in
late 1996 to broaden its product offerings. Such expertise enabled PMA Re to
increase cross-selling opportunities with its existing treaty reinsurance
clients by offering additional and expanded property coverages. In addition,
property premiums ceded decreased primarily related to changes in PMA Re's
property retrocessional coverages in terms of premiums and ceding commissions.
The decrease in net premiums written in 1996 was primarily attributable to
higher ceding company retentions, competitive
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<PAGE>
pricing conditions and higher ceded property premiums. The growth in net
property business in 1995 and 1994, of 89.9% and 30.0%, respectively, was
attributable to the expansion of several programs covering auto physical damage,
inland marine risks and certain specialty property coverages written on a
surplus lines basis.
PMA Re has generally de-emphasized catastrophe coverages. As of June 30,
1998 and December 31, 1997, catastrophe business accounted for approximately
4.7% and 4.0%, respectively, of property premiums in force. The property
programs written by PMA Re generally contain per occurrence limits or are not
considered significantly catastrophe exposed, either because of the locations of
the insured values or the nature of the underlying properties insured. However,
as is common in property reinsurance, PMA Re is exposed to the possibility of
loss from catastrophic events due to the aggregation of per occurrence limits
and similar issues. PMA Re actively manages this exposure through aggregate
management, minimizing writings of catastrophe business and retrocessional
protection. As of June 30, 1998, PMA Re maintained catastrophe retrocessional
protection of $48 million excess of $2 million. Management believes that PMA
Re's catastrophe retrocessional coverage is adequate to protect PMA Re against
its probable maximum loss from a significant catastrophe; however, an especially
severe catastrophic event could exceed PMA Re's retrocessional protection and
materially and adversely affect the Company's financial position and results of
operations. See "Risk Factors--Certain Risks Affecting the Property and
Casualty Industry," "Underwriting" and "The Company's Reinsurance Ceded."
Facultative Reinsurance
Facultative reinsurance is a form of reinsurance coverage that is placed on
a risk-by-risk basis, and the reinsurer retains the right to accept or reject
each individual risk submitted by the ceding company.
Facultative reinsurance differs from treaty reinsurance in that treaty
reinsurance typically covers multiple risks within a particular classification,
the reinsurer does not retain the right to accept or reject individual risks as
long as such risks conform to the contract stipulations, and the ceding company
is obligated to cede the risks to the reinsurer. Companies typically purchase
facultative reinsurance for several reasons, including to (i) cover unusual
risks; (ii) cover high hazard risks; (iii) protect a ceding company's net
retention and treaty reinsurers; (iv) obtain additional capacity beyond that
provided by a company's treaty reinsurers; (v) cover risks excluded under a
company's treaties and (vi) cover risks under a company's new line of business.
There are some facultative products that are variations of the above
general concept, such as automatic and semi-automatic facultative contracts.
Under automatic facultative arrangements (sometimes known as facultative
obligatory treaties), the cession is not obligatory from the ceding company's
point of view, but the acceptance of the risk is automatic from the reinsurer's
standpoint. For semi-automatic facultative contracts, the cession is not
obligatory, but the acceptance of the risk is obligatory, unless the risk falls
outside certain stipulated criteria. If the risk falls outside such criteria,
the reinsurer has the option of either: (i) accepting the risk, (ii) declining
the risk or (iii) repricing the risk.
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<PAGE>
For the six months ended June 30, 1998, PMA Re recorded $1.2 million of net
facultative reinsurance premiums that represented 1.0% of total net premiums
written. For the year ended December 31, 1997, PMA Re recorded $2.5 million of
net facultative reinsurance premiums which represented 1.4% of total net
premiums written for the year, compared to $1.0 million, or 0.6%, for the year
ended December 31, 1996. PMA Re offers facultative products as a complement to
existing treaty business, as well as offering such products to companies with
whom PMA Re does not presently have a relationship. The products offered
include traditional facultative certificates and automatic or semi-automatic
programs for both property and casualty exposures.
Marketing and Distribution
PMA Re operates primarily through the domestic brokered reinsurance market
in which it has developed relationships with major reinsurance brokers enabling
it to gain access to a wide range of ceding companies with varying reinsurance
and related service needs. Brokers that accounted for more than 7% of PMA Re's
gross premiums in force were as follows:
(dollar amounts in thousands)
June 30, 1998 December 31, 1997
--------------------- --------------------
Gross Gross
Premiums Percentage Premiums Percentage
in Force of Total in Force of Total
-------- -------- -------- --------
Aon Reinsurance.......... $107,855 38.6% $99,151 35.7%
Guy Carpenter & Company.. 62,660 22.4% 64,803 23.3%
E. W. Blanch............. 38,121 13.6% 38,267 13.8%
Sedgwick Payne Company... 29,285 10.5% 27,322 9.8%
Towers Perrin Re......... 20,029 7.2% 22,669 8.2%
The above brokers are among the largest brokers in the reinsurance
industry.
Beginning in 1996, PMA Re began a target marketing program designed to
identify companies in the smaller and medium company segments with whom PMA Re
presently has either no or an insignificant relationship, but meet desired risk
profiles. After such identification, marketing and underwriting personnel work
with the ceding company's broker to enable PMA Re to have an opportunity to
participate in the reinsurance coverage.
As of June 30, 1998, PMA Re had approximately 212 clients, with no
individual client accounting for more than 6.5% of gross premiums in force .
Underwriting
In reinsurance, underwriting involves the selection of risks and
determining whether the market pricing is adequate given expected losses and
estimated volatility of such losses. Given the present soft-pricing environment,
maintaining underwriting discipline is more difficult and more critical to the
maintenance of acceptable results of operations. PMA Re's underwriting
management averages 21 years in the property and casualty industry.
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<PAGE>
PMA Re's underwriting process has two principal aspects: underwriting the
specific program to be reinsured and underwriting the ceding company.
Underwriting the specific program to be reinsured involves, in addition to
pricing, a review of the type of program, the total risk and the ceding
company's policy forms. Underwriting the ceding company involves an evaluation
of the expected future performance of the ceding company through an examination
of that company's management, financial strength, claims handling and
underwriting abilities. PMA Re generally conducts underwriting and claim
reviews at the offices of prospective ceding companies before entering into a
major treaty, as well as throughout the life of the reinsurance contract.
In underwriting excess-of-loss business, PMA Re has typically sought to
write treaties that are exposed to loss on a per occurrence basis within the
original policy limits of the ceding company. Management believes these layers
in general lend themselves more effectively to actuarial pricing techniques.
PMA Re's underwriters and actuaries work closely together to evaluate the
particular reinsurance program. Using the information provided by the broker,
the actuaries employ pricing models to estimate the ultimate exposure to the
treaty. The pricing models that are utilized employ various experience rating
and exposure rating techniques and are tailored in each case to the risk
exposures underlying each treaty. The underwriters then weigh the results of
the pricing models with the terms and conditions being offered to determine PMA
Re's selected price.
As noted above, PMA Re typically requires per occurrence limits for
property coverages and requires that the underlying insured values not be
catastrophe exposed. Also, PMA Re minimizes catastrophe reinsurance coverages
and has historically maintained sufficient retrocessional protection. Recent
natural catastrophes did not have a significant adverse impact on PMA Re's
combined ratio and earnings inasmuch as PMA Re has minimized assuming
catastrophe reinsurance business or catastrophe-exposed coverages and it has had
sufficient retrocessional arrangements.
The following table indicates PMA Re's gross, ceded and net losses from
recent catastrophes as of December 31, 1997:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Industry
Incurred PMA Re PMA Re PMA Re
Catastrophe Year Loss(1) Gross Loss Ceded Loss Net Loss
- ----------- ---- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Hurricane Hugo............. 1989 $ 4,200,000 $13,200 $11,400 $1,800
San Francisco Earthquake... 1989 1,000,000 2,300 1,000 1,300
Oakland Fires.............. 1991 1,700,000 2,700 1,400 1,300
Hurricane Andrew........... 1992 15,500,000 22,800 20,700 2,100
Hurricane Iniki............ 1992 1,600,000 4,100 2,900 1,200
Northridge, CA Earthquake.. 1994 12,500,000 17,600 11,700 5,900
Hurricane Fran............. 1996 1,500,000 1,300 900 400
- --------------------
</TABLE>
(1) Source: Property Claims Services.
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<PAGE>
PMA Re has no significant obligations to its reinsurers as a result of the
above catastrophes.
Claims Administration
PMA Re's claims department evaluates loss exposures, establishes individual
claim reserves, pays claims, provides claims-related services to PMA Re's
clients, audits the claims activities of current clients and assists in the
underwriting process by evaluating the claims departments of prospective
clients. PMA Re's claims department's evaluation of loss exposure includes
reviewing loss reports received from ceding companies to confirm that claims are
covered under the terms of the relevant reinsurance contract, establishing
reserves on an individual case basis and monitoring the adequacy of those
reserves. The claims department monitors the progress and ultimate outcome of
the claims to determine that subrogation, salvage and other cost recovery
opportunities have been adequately explored. The claims department performs
these functions in coordination with PMA Re's actuarial and underwriting
departments.
In addition to evaluating and adjusting claims, the claims department
conducts claims audits at the offices of prospective ceding companies.
Satisfactory audit results are required in order for reinsurance coverage to be
written by PMA Re. Also, the claims department conducts annual claims audits
for many current and former client ceding companies.
Management believes that PMA Re has been at the forefront of several
service initiatives in the brokered reinsurance market, involving improved
timeliness of claims remittances, including fastrack claims and electronic data
interchange. Fastrack claims involve the pre-approval of payment of certain
claims provided the claims meet predetermined criteria and electronically
disbursing funds to the clients. Electronic data interchange involves the
electronic transmission of data associated with transactions between PMA Re and
the client.
The Property and Casualty Group
Background
The Property and Casualty Group provides workers' compensation insurance,
other commercial property and casualty insurance coverages and related services
to entities located primarily in nine contiguous jurisdictions in the Mid-
Atlantic and Southern regions of the United States, utilizing the PMA Group
trade name. As a result primarily of the Property and Casualty Group's
underwriting decisions, the introduction of loss-sensitive coverages and large
deductible programs, competition and the impact of workers' compensation benefit
reform laws, the Property and Casualty Group's statutory net premiums written
declined from $434.7 million in 1993 to $240.3 million in 1997. For the six
months ended June 30, 1998, net written premiums were $138.4 million compared to
$156.8 million for the six months ended June 30, 1997.
The operating results of the Property and Casualty Group improved in 1997
compared to 1996, primarily as a result of reserve strengthening that the
Property and Casualty Group effectuated in 1996 and expense initiatives
instituted by the Property and Casualty Group in 1997. This improvement has
continued through the first six months of 1998. In 1996, the Property and
Casualty Group strengthened its loss reserves by $191.4 million. Of this amount,
$110.0 million related to workers' compensation, $60.4 million related to
asbestos and environmental claims and $21.0 million related to other lines and
LAE. The adverse development arising from workers' compensation had reduced the
Property and Casualty Group's earnings by a cumulative $251.6 million between
1992 and 1995. The reform legislation enacted in Pennsylvania, the Property and
Casualty Group's principal marketing territory, in 1993 and 1996 has introduced
various controls and limitations on disability and medical benefits. Management
believes that the reforms and more stringent underwriting standards adopted by
the Property and Casualty Group since 1991 have had and continue to have a
beneficial effect on the Property and Casualty Group's accident year loss
ratios. The strengthening recorded for asbestos and environmental claims was
based upon a detailed loss analysis that examined data on an account-by-account
and site-by-site basis for asbestos, and an actuarial calendar year aggregate
loss development technique for environmental claims. The Property and Casualty
Group's net survival ratio was 7.4 years at December 31, 1997 (8.2 years at
December 31, 1996). At June 30, 1998, the Property and Casualty Group's net
survival ratio was 8.2 years. In 1997 and through the first six months of 1998,
the Property and Casualty Group did not record any adverse loss reserve
development (see "Loss Reserves"), and, in addition, the impact of a lower
expense base has contributed to improved operating results for the Property and
Casualty Group. See "Loss Reserves."
In 1997, the Property and Casualty Group completed a formal commutation
program in which it paid approximately $118.9 million, of which $17.8 million
was paid in the fourth quarter of 1996, to injured workers in exchange for a
release from any future indemnity
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<PAGE>
payments. Commutations are agreements with claimants whereby the claimants, in
exchange for a lump sum payment, release their rights to future indemnity
payments from the Property and Casualty Group. Under Pennsylvania workers'
compensation law, the claimant, who is generally represented by legal counsel
and the Pennsylvania Workers' Compensation Board, must approve all such
commutation agreements. Savings associated with these claims were consistent
with management's expectations. The number of open claims for accident years
1991 and prior was substantially reduced as a result of the commutation program.
This reduction in open claims is expected to reduce the possibility of further
adverse development on such reserves, although there can be no assurance that
the level of commutations will have a significant impact on the future
development of such reserves. As a result of the success of this formal
commutation program, the Property and Casualty Group has continued its efforts
to commute additional claims from accident years 1991 and prior and also has
started to commute claims for accident years 1992 through 1996. During the six
months ended June 30, 1998, the Property and Casualty Group paid approximately
$60.1 million to injured workers in exchange for a release from any future
indemnity payments.
The Property and Casualty Group continues to emphasize its traditional core
business, workers' compensation. Management believes that it can capitalize on
the recent regulatory reforms, attract additional business based upon the
Property and Casualty Group's expertise in workers' compensation and reduce
acquisition expenses, because acquisition costs are lower for workers'
compensation than for other lines of commercial insurance. In addition, the
Property and Casualty Group has aligned itself with network health care
providers in order to offer medical cost containment practices to its insureds.
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In Pennsylvania, the Property and Casualty Group will seek to expand and retain
more of its premium base in territories that meet the Property and Casualty
Group's underwriting and actuarial criteria. Recent regulatory reforms in
Pennsylvania (Acts 44 and 57) have made workers' compensation business more
attractive from an underwriting perspective than it had been in the early
1990's. The workers' compensation system in certain other states in which the
Property and Casualty Group does business (specifically, New Jersey, North
Carolina and Virginia) has also improved in recent years. It is management's
intention to seek to recapture a portion of the workers' compensation market
share in those states where the Property and Casualty Group has lost market
share since the early 1990's.
In addition, the Property and Casualty Group intends to expand into certain
new territories. In 1997, the Property and Casualty Group began writing business
in Georgia, and, in 1996, in New York and South Carolina. In all new
territories, the Property and Casualty Group will undertake a target marketing
effort by identifying profiles of entities that it desires to insure. These
profiles will be communicated to the key producers in these states. It is also
contemplated that the Property and Casualty Group will seek to expand its
relationships with larger national and regional brokerage operations in both its
existing and new states. However, no assurance can be given that the Property
and Casualty Group will be able to accomplish these marketing objectives.
The Property and Casualty Group intends to continue writing other lines of
property and casualty insurance, but generally only if such writings are
supported by its core workers' compensation business. Effective January 1,
1997, the Property and Casualty Group reduced its retention on commercial
casualty lines of business to $175,000 per risk from $500,000 per risk.
Business Written
The following table sets forth net premiums written for the Property and
Casualty Group for the periods indicated:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Six Months ended
June 30, Year Ended December 31,
------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Workers' Compensation........... $ 98,395 $ 99,624 $138,301 $187,698 $232,742 $266,033 $338,684
Commercial Auto................. 13,002 16,918 28,938 35,224 39,834 38,984 48,108
Commercial Multi-Peril.......... 15,420 25,438 41,713 35,108 40,659 31,123 27,306
General Liability and Umbrella.. 1,903 6,550 8,751 8,204 11,370 12,691 16,788
Other........................... 1,107 3,476 (14,355) 6,245 8,511 3,320 324
-------- -------- -------- -------- -------- -------- --------
Total........................... $129,827 $152,006 $203,348 $272,479 $333,116 $352,151 $431,210
======== ======== ======== ======== ======== ======== ========
</TABLE>
Workers' Compensation Insurance
Workers' compensation is a statutory system that requires employers to
provide workers' compensation benefits to their employees and their employees'
dependents for
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injuries and occupational diseases arising out of employment, regardless of
whether such injuries result from the employer's or the employee's negligence.
Employers may insure their workers' compensation obligations or, subject to
regulatory approval, self-insure such liabilities. State workers' compensation
statutes require that a policy cover three types of benefits: medical expenses,
disability (indemnity) benefits and death benefits. The amounts of disability
and death benefits payable for various types of claims are established by
statute, but no maximum dollar limitation exists for medical benefits.
Workers' compensation benefits vary among states, and insurance rates are
subject to differing forms of state regulation. Based upon direct written
premium information published by A.M. Best for the most recently available year
(1998), the Property and Casualty Group is the fourth largest private writer of
workers' compensation insurance in Pennsylvania and between the 2nd and 12th
largest writer of workers' compensation insurance in the other jurisdictions
listed in the table below (except for North Carolina). The Property and Casualty
Group has focused on these jurisdictions based upon its knowledge of their
workers' compensation systems and the Property and Casualty Group's assessment
of their business, economic and regulatory climates. Rate adequacy, regulatory
climate, economic conditions and other factors in each state are closely
monitored and taken into consideration in the underwriting process. Management
intends to employ similar analyses in determining whether and to what extent the
Property and Casualty Group will sell its products in additional jurisdictions.
See "Underwriting." The following table sets forth statutory direct workers'
compensation business written by jurisdiction for the five years ended December
31, 1997 and for the six months ended June 30, 1998 and 1997.
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------- ---------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Pennsylvania $ 43,820 $ 53,348 $ 91,126 $134,171 $142,234 $169,448 $224,067
New Jersey 21,857 15,486 26,327 17,995 24,388 31,287 47,745
Virginia 12,538 13,077 19,552 17,449 26,395 29,938 31,545
Maryland 7,726 7,750 16,538 11,406 17,993 14,391 15,318
North Carolina 4,966 5,420 9,501 8,195 14,035 11,649 21,216
Delaware 4,024 3,463 7,041 7,545 5,763 4,831 4,274
Other 8,630 6,946 11,470 5,403 7,889 4,864 7,165
-------- -------- -------- -------- -------- -------- --------
Total $103,561 $105,490 $181,555 $202,164 $238,697 $266,408 $351,330
======== ======== ======== ======== ======== ======== ========
</TABLE>
Management of the Property and Casualty Group believes that conditions in
the workers' compensation market have been improving in the last several years.
In addition, several states, including Pennsylvania, have enacted reforms to the
workers' compensation benefit system.
In 1993, Pennsylvania enacted Act 44, which introduced medical cost
containment measures to the workers' compensation benefit system and expanded
the period of time during which the insurer may require an employee to accept
medical treatment from the employer's list of designated health care providers
from 14 to 30 days. Act 44 also reduced the minimum wage replacement benefit to
injured workers, introduced a credit for unemployment compensation
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<PAGE>
benefits, restored the right of subrogation against tort recoveries in work-
related automobile accidents and created new anti-fraud measures. In June 1996,
Pennsylvania enacted Act 57, which further reformed the workers' compensation
system in the state. Among other provisions, Act 57: (i) imposes application of
American Medical Association Impairment Guidelines for the assessment of
permanent and total claims after the first two years of total disability
compensation payments and limits indemnity benefits to an additional 500 weeks
for workers who are not at least 50% disabled (as measured by those guidelines);
(ii) contains certain Social Security and pension benefit offsets; (iii) further
increases the time frame for directed medical treatment; (iv) addresses certain
inequities in the average weekly wage calculation; (v) increases the ability
of employers to demonstrate that injured workers have earning capacity and (vi)
facilitates the use of full and final settlements of employers' workers'
compensation obligations on particular claims.
To date, Act 44 has had a favorable impact on medical loss costs in
Pennsylvania and Act 57 has had a favorable impact on indemnity loss costs. In
recognition of these developments, in the respective first years following the
enactments of Act 44 and Act 57, the average manual rate level in Pennsylvania
decreased approximately 10% in 1994 and approximately 25% in 1997. The benefit
reforms, management's re-underwriting of the Property and Casualty Group's book
of business and the use of loss-sensitive and alternative market products have
had a favorable impact on the Property and Casualty Group's accident year loss
ratios, as evidenced by the table below:
Property and Casualty Group's Workers' Compensation Undiscounted Accident Year
------------------------------------------------------------------------------
Pure Loss Ratios as of December 31, 1997
----------------------------------------
Accident
Year Loss Ratio
---- ----------
1990 100%
1991 86%
1992 80%
1993 64%
1994 64%
1995 63%
1996 63%
1997 66%
Workers' Compensation Products
The Property and Casualty Group offers a variety of workers' compensation
products to its customers. Certain of these products are based on rates filed
and approved by state insurance departments ("rate-sensitive products"), while
others are priced to a certain extent on the basis of the insured's own loss
experience ("loss-sensitive products"). In the last five years, the Property
and Casualty Group has also developed and sold large deductible products and
other programs and services to customers who agree to assume an even greater
exposure to loss than under more traditional loss-sensitive products
("alternative market products"). The Property and Casualty Group decides which
type of product to offer a customer based upon the customer's needs and the
underwriting review. See "Underwriting." Set forth below is percentage
information on the voluntary workers' compensation direct premiums written by
product type for the policy years indicated:
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<PAGE>
<TABLE>
<CAPTION>
1998(1) 1997 1996 1995 1994 1993 1992 1991 1990
------- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive products 64% 62% 57% 52% 50% 54% 53% 54% 60%
Loss-sensitive products 28% 27% 30% 34% 39% 40% 46% 46% 40%
Alternative market products 8% 11% 13% 14% 11% 6% 1% 0% 0%
---- ---- ---- ---- ---- ---- ---- ---- ----
Total 100% 100% 100% 100% 100% 100% 100% 100% 100%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ------------------------------------
(1) 1998 data is through June 30, 1998.
Rate-Sensitive Workers' Compensation Products
Rate-sensitive products include fixed-cost policies and dividend paying
policies. The premium charged on a fixed-cost policy is based upon the manual
rates filed with and approved by the state insurance department and does not
increase or decrease based upon the losses incurred during the policy period.
Under policies that are subject to dividend plans, the customer may receive a
dividend based upon loss experience during the policy period. With the enactment
of regulatory reform in several states in which the Property and Casualty Group
does business, the Property and Casualty Group has become more interested in
this type of business and increased its writings of rate-sensitive accounts in
such jurisdictions in 1997 and 1998.
Loss-Sensitive Workers' Compensation Products
The Property and Casualty Group's loss-sensitive products adjust the amount
of the insured's premiums after the policy period expires based upon the
insured's actual losses incurred during the policy period. These loss-sensitive
products are generally subject to less price regulation than rate-sensitive
products and reduce, but do not eliminate, risk to the insurer. Under these
types of policies, claims professionals and actuaries periodically evaluate the
reserves on losses after the policy period expires to determine whether
additional premiums or refunds are owed under the policy. Such policies are
typically open for adjustments for an average of five years after policy
expiration. The Property and Casualty Group generally restricts such loss-
sensitive products to accounts developing annual minimum premiums in excess of
$100,000.
Alternative Market Workers' Compensation Products
Since 1992, the Property and Casualty Group has developed a variety of
alternative market products for larger accounts, including large deductible
policies and offshore captive programs. Typically, the Property and Casualty
Group receives a lower up-front premium for these types of alternative market
product plans. However, under this type of business, the insured retains a
greater share of the underwriting risk than under rate-sensitive or loss-
sensitive products, which reduces the potential for unfavorable claim activity
on the accounts and encourages loss control on the part of the insured. For
example, under a large deductible policy, the customer is responsible for paying
its own losses up to the amount of the deductible for each occurrence. The
deductibles under such policies generally range from $250,000 to $1.0 million.
In addition to these products, the Property and Casualty Group
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<PAGE>
offers certain workers' compensation services to its clients unbundled from the
insurance products. See "PMA Management Corp."
PMA One
In 1997, the Property and Casualty Group developed PMA One, a new product
that provides for group integrated occupational and non-occupational disability
coverages. The Property and Casualty Group believes that it can be successful
in this product line as it will utilize its expertise in managed care to reduce
disability periods. The Property and Casualty Group recorded premiums of $1.1
million for the six months ended June 30, 1998 for PMA One.
Workers' Compensation Residual Market Business
Workers' compensation insurers doing business in certain states are
required to provide insurance for risks which are not otherwise written on a
voluntary basis by the private market ("residual market business"). This system
exists in all of the states in which the Property and Casualty Group does
business, except Pennsylvania and Maryland. In these two states, separate
governmental entities write all of the workers' compensation residual market
business. In 1997, the Property and Casualty Group wrote $5.2 million of
residual market business, which constituted approximately 3% of its voluntary
net workers' compensation premiums written. The Property and Casualty Group
wrote $1.6 million of residual market business for the six months ended June 30,
1998 compared to $2.5 million for the six months ended June 30, 1997. Based upon
data for policy year 1997 reported by the National Council on Compensation
Insurance, the percentage for the industry as a whole, in all states, was 9.7%.
Commercial Lines
The Property and Casualty Group writes property and liability coverages for
larger and middle market accounts that satisfy its underwriting standards. See
"Underwriting" below. These coverages feature package, umbrella and commercial
automobile business. During the present soft market, prices for commercial
coverages have been particularly competitive. The Property and Casualty Group
intends to continue offering these products, but generally only if they support
the core workers' compensation business. As a result, the Property and Casualty
Group has been selectively non-renewing accounts that do not meet its
underwriting standards. In addition, effective January 1, 1997, the Property
and Casualty Group has reduced its retention on commercial casualty lines of
business to $175,000 per risk from $500,000 per risk. See "The Company's
Reinsurance Ceded" below.
Home Office and Field Operations
As of June 30, 1998, approximately 230 employees worked in the home office
located in Blue Bell, Pennsylvania, and approximately 660 employees were
assigned to field offices located throughout the states in which the Property
and Casualty Group does business.
Senior executives, financial operations, management information systems,
human resources, actuarial services and legal services are headquartered in the
home office. The
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<PAGE>
definition of overall underwriting standards and major account and alternative
market underwriting support also take place in the home office. The home office
works in conjunction with senior managers from the field to establish the
Property and Casualty Group's business plan and underwriting standards, which
are then implemented by the field organization.
The field organization currently consists of three regional offices in
Valley Forge, Pennsylvania, Harrisburg, Pennsylvania and Richmond, Virginia, as
well as branch offices in each of Georgia, Maryland, New Jersey, Pennsylvania,
Virginia and North Carolina. In addition, the Property and Casualty Group
operates smaller satellite offices in Ohio and New York. The branch offices
deliver a full range of services directly to customers located in their service
territory, and the satellite offices offer primarily underwriting and claim
adjustment services.
Distribution
The Property and Casualty Group distributes its products through
approximately 20 direct sales employees and approximately 240 independent
brokers and agents. The direct sales employees are generally responsible for
certain business located in Pennsylvania. For the year ended December 31, 1997,
these employees produced $39.2 million in direct premiums written, constituting
13% of the Property and Casualty Group's direct written business. For the six
months ended June 30, 1998, these employees produced $16.9 million in direct
premiums written, constituting 12% of the Property and Casualty Group's direct
written business. The brokers and agents write business throughout the
marketing territory. In 1997, the top ten brokers and agents accounted for 28%
of the Property and Casualty Group's business, the largest of which accounted
for not more than 8% of its business. All brokers and agents are required to
submit business to the Property and Casualty Group's underwriting process before
business may be accepted.
The Property and Casualty Group monitors several statistics relating to its
producer force, including the number of years the producer has been associated
with the Property and Casualty Group, the percentage of the producer's business
that is underwritten by the Property and Casualty Group, the ranking of the
Property and Casualty Group within the producer's business, and the
profitability of the producer's business. The distribution network generally
consists of large regional agents and brokers, local agents and national brokers
that specialize in larger to middle market accounts that require the variety of
workers' compensation, commercial lines and alternative market products offered
by the Property and Casualty Group.
Underwriting
Home office underwriters, in consultation with casualty actuaries,
determine the general types of business to be written using a number of
criteria, including past performance, relative exposure to hazard, premium size,
type of business and other indicators of potential loss. The home office
underwriting team also establishes classes of business that the Property and
Casualty Group generally will not write, such as most coastal property
exposures, certain hazardous products and activities and certain environmental
coverages. The home office establishes the overall business goals and the
underwriting authority for each regional and
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<PAGE>
branch office. It also identifies specific types of business that must be
referred to home office underwriting specialists and actuaries for individual
pricing; including large accounts over a specified dollar limit and alternative
market workers' compensation products. In 1997, the Property and Casualty Group
changed the reporting structure so that underwriters and risk-control
professionals in the field report functionally to the Chief Underwriting Officer
rather than to branch managers with marketing responsibilities; however,
underwriters also work as a team with the field marketing force to identify
business that meets prescribed underwriting standards and to develop specific
strategies to write the desired business. In performing this assessment, the
field office professionals also consult with actuaries who have been assigned to
the specific field office regarding loss trends and pricing and utilize
actuarial loss rating models to assess the projected underwriting results of
accounts. The Property and Casualty Group's underwriting management averages 22
years of experience in the property and casualty industry.
The Property and Casualty Group also employs credit analysts. These
employees review the financial strength and stability of customers whose
business is written on loss-sensitive and alternative market products and
specify the type and amount of collateral that customers must provide under
these arrangements.
Rehabilitation and Managed Care
The Property and Casualty Group uses a variety of managed care techniques
to reduce costs and losses. Disability management coordinators and point-of-
service case managers, all of whom are registered nurses, work together with
claims professionals to provide expeditious medical and disability management to
injured workers and to investigate injuries. The case managers and
professionals also help employers identify opportunities that allow injured
employees to make a gradual transition to full-time, full-duty jobs. The
Property and Casualty Group also has contracts with First Health Group, Inc. for
most of its marketing territory and with other preferred provider networks
consisting of medical practitioners and hospitals selected for their expertise
in treating injured workers. Specialties include occupational medicine, physical
medicine, orthopedics and neurology. There are also preferred pharmacy networks
to reduce the cost of medication. In addition, the Property and Casualty Group
uses an outside network to check medical bills for accuracy, duplication,
unrelated charges and overcharges. Questionable bills are forwarded to the Cost
Containment Unit, which is staffed by registered nurses and resolves disputed or
suspect charges.
Claims Administration
Claims services are delivered to customers primarily through employees in
the field offices. Certain specialized matters, such as asbestos and
environmental claims, are referred to a special unit in the home office. The
Property and Casualty Group maintains a centralized call center for loss
reporting and has automated and centralized the processing of claims payments in
its Allentown, Pennsylvania facility. This centralization allows the claims
adjusters to reduce substantially the time that they spend with clerical and
repetitive functions. The Property and Casualty Group also employs in-house
attorneys who represent customers in workers' compensation cases and other
insurance matters.
The Property and Casualty Group has a separate, anti-fraud unit that
investigates suspected false claims and other irregularities and cooperates with
regulatory and law enforcement officials in prosecuting violators.
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<PAGE>
PMA Management Corp.
PMA Management Corp. offers claims, risk management and related services
primarily to self-insureds on an unbundled basis. In addition, PMA Management
Corp. offers "rent-a-captive" products for certain insureds and associations.
The purpose of a rent-a-captive program is to offer a customer an alternative
method of managing its loss exposures by obtaining many of the benefits of a
captive insurer without establishing and capitalizing its own captive; in
effect, the insured is "renting" a captive facility that the Company has already
established. Under this arrangement, the client purchases an insurance policy
from the Pooled Companies and chooses a participation level. The Pooled
Companies then cede this portion of the premium and loss exposures to a Bermuda
subsidiary of PMC. The client participates in the loss and investment
experience of the portion ceded to the Bermuda subsidiary through a dividend
mechanism. The client is responsible for any loss that may arise within its
participation level, and such potential obligation is typically secured through
a letter of credit or similar arrangement. The Company's principal sources of
income from its rent-a-captive program are the premium income on the excess risk
retained by the Pooled Companies and captive management fees earned by PMA
Management Corp.
Run-off Operations
As a part of the Property and Casualty Group's 1996 restructuring plan, the
Property and Casualty Group established the Run-off Operations principally to
manage the capital supporting workers' compensation loss reserves from accident
years 1992 and prior. Such reserves primarily relate to the period of time from
1987 to 1991 when the Property and Casualty Group wrote a much higher volume of
business and experienced poor underwriting results. The reserves are mainly
indemnity related and are relatively mature. The Run-off Operations consist of
PMA Cayman, MASCCO and PMA Life.
MASCCO is a Pennsylvania insurance company and a wholly owned subsidiary of
the Company. Prior to December 31, 1996, MASCCO was a party to a pooling
agreement with the Pooled Companies. Effective December 31, 1996, and with the
approval of the Pennsylvania Insurance Commissioner MASCCO withdrew from the
pooling agreement and ceased writing any new business. The Pooled Companies also
ceded to MASCCO the indemnity portion of Pennsylvania workers' compensation
claims for accident years 1991 and prior. Pursuant to a surplus maintenance
agreement between PMC and the Pennsylvania Insurance Commissioner, MASCCO is
required to discount its reserves utilizing a rate of not more than 5%, maintain
a reserve to surplus ratio not in excess of 8 to 1 and continue to invest its
assets only in investment grade securities. At June 30, 1998, MASCCO had $97.0
million in total assets and $80.1 million in total reserves and its reserve to
surplus ratio was 5 to 1. Substantially all of MASCCO's assets are held in trust
for the benefit of the Pooled Companies.
PMA Cayman was incorporated in Grand Cayman, and had no material operations
until 1996. In 1996, the Pooled Companies ceded to PMA Cayman substantially all
of their remaining liability for workers' compensation claims for accident years
1991 and prior. In 1997, the Pooled Companies also ceded to PMA Cayman a
portion of their workers' compensation reserves from accident years 1992 to
1996. At June 30, 1998, PMA Cayman had $233.0 million in total assets and
$215.5 million in total reserves. Substantially all of PMA
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<PAGE>
Cayman's assets are held in trust for the benefit of the Pooled Companies. The
Company entered into a letter of intent to sell PMA Cayman. The transaction is
subject to the customary closing conditions, including regulatory approvals, and
is expected to be completed in the third quarter of 1998. In connection with the
announced sale, the Company recorded a $2.4 million pre-tax loss in the second
quarter, which is included in "Net Realized Investment Gains."
PMA Life is a Pennsylvania life insurance company that derived all of its
insurance revenues from intercompany structured settlement annuity transactions
with the Pooled Companies. In 1997, the Property and Casualty Group reinsured
substantially all of PMA Life's insurance liabilities with a third party
reinsurer and the Property and Casualty Group no longer places insurance
business with PMA Life. At June 30, 1998, PMA Life had assets of $22.9 million
and $17.7 million in total reserves.
The following table reflects the components of the Property and Casualty
Group -- Run-off Operations' operating results for the six months ended June 30,
1998 and 1997 and for the year ended December 31, 1997:
(dollar amounts in thousands)
Year
Six Months Ended Ended
June 30, December 31,
-------------- ------------
1998 1997 1997
---- ---- ----
Net investment income.................. $11,303 $14,972 $28,131
Net premiums earned(1)................. -- 814 (51,622)
------- ------- --------
Total operating revenues............... $11,303 15,786 (23,491)
------- ------- --------
Losses and LAE incurred................ 9,401 15,097 (27,460)
Operating expenses..................... 1,474 1,796 4,042
------- ------- --------
Total expenses......................... $10,875 $16,893 $(23,418)
------- ------- --------
Pre-tax operating income (loss)........ $428 $(1,107) $(73)
======= ======= ========
- ----------------------------
(1) Amount represents net premiums earned during the first six months of 1997
for PMA Life prior to the reinsurance transaction mentioned above, after
which PMA Life was placed into run-off.
Caliber One
In 1997, the Company established a specialty insurance operation, Caliber
One. In starting Caliber One, the Company's intention was to expand PMC's
access to the insurance market by offering products and marketing to classes of
business in which neither PMA Re nor the Property and Casualty Group were
involved. The Company has hired an experienced senior underwriting professional
to be the Chief Operating Officer of this unit as well as other individuals with
experience in underwriting and claims management for specialty insurance. See
"Management."
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<PAGE>
Products, Underwriting and Distribution
Caliber One's present focus is on excess and surplus lines of insurance for
difficult risks that are typically declined by the standard market. Caliber One
offers liability coverages for low frequency/high severity classes, including
pharmaceuticals, chemicals, machinery manufacturers, toy makers, medical product
manufacturers and other difficult-to-insure product liability risks. In
addition, Caliber One markets environmental impairment liability coverages,
clinical trials coverage for emerging biotechnology products and intellectual
property rights liability coverages as well as property coverages for
unprotected and vacant buildings. Caliber One's policy forms contain
appropriate and flexible manuscript endorsements and exclusions, and in some
cases, will contain defense costs within the policy limits rather than offering
such coverage on an unlimited basis. Through June 30, 1998, Caliber One had
$1.6 million and $917,000 in gross premiums and net premiums written,
respectively.
The underwriting of these specialty products involves a significant amount
of judgment. The senior underwriters that Caliber One has hired have a
significant amount of experience in dealing with esoteric high severity risks,
and average 16 years of specialty insurance experience. The underwriting
process involves reviewing the claim experience of an account, if any, the claim
experience of the particular class or similar classes and responding to special
risks that an account has through the use of policy features that can be changed
for the circumstances, such as retentions, exclusions and endorsements. Caliber
One's underwriting teams for casualty products have been divided into three
regions within the United States, each led by a regional underwriting vice
president who reports to the Chief Operating Officer. For property products,
one underwriting team supports the activities of the three regions.
Caliber One distributes its excess and surplus lines products on a
nationwide basis through approximately 45 appointed surplus lines brokers. For
most product offerings, Caliber One does not grant underwriting or binding
authority to its brokers.
Acquisition of Caliber One Indemnity Company
In December 1997, PMA Re acquired 100% of the common stock of a Delaware
domiciled insurance company which it renamed Caliber One Indemnity Company. PMA
Re paid $16.0 million to acquire the company and made an $11.3 million capital
contribution to bring Caliber One Indemnity Company's statutory surplus to $25.0
million, the minimum surplus level required by several states to be an
authorized excess and surplus lines carrier. Caliber One Indemnity Company was
essentially a shell company, as affiliates of the former parent had taken over
the business that had been previously written. In addition, an affiliate of the
former parent entered into a reinsurance transaction immediately prior to the
acquisition whereby such company assumed all of the Company's existing loss
reserves and is providing protection against adverse loss reserve development
and uncollectible reinsurance of up to $68.5 million. See "Loss Reserves" below.
Also, PMA Re has entered into a surplus maintenance agreement with Caliber One
Indemnity Company whereby PMA Re will maintain Caliber One Indemnity Company's
statutory surplus such that the amount is not less than $25.0 million and so
that the net premiums written to surplus ratio does not exceed 1.0 to 1.0.
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<PAGE>
Caliber One Indemnity Company is presently authorized as an excess and
surplus lines carrier in 38 states, and it is management's intention to be
authorized in 49 states so that products can be offered on a national basis.
Caliber One Indemnity Company has obtained an "A" (Excellent) rating from A.M.
Best.
The Company's Reinsurance Ceded
The Company follows the customary insurance practice of reinsuring with
other insurance companies a portion of the risks under the policies written by
the Insurance Subsidiaries. This reinsurance is maintained to protect the
Insurance Subsidiaries against the severity of losses on individual claims and
unusually serious occurrences in which a number of claims produce an aggregate
extraordinary loss. Although reinsurance does not discharge the Insurance
Subsidiaries from their primary maximum liabilities to their policyholders for
the full amount of the losses insured under the insurance policies, it does make
the assuming reinsurer liable to the Insurance Subsidiaries for the reinsured
portion of the risk.
The Insurance Subsidiaries' reinsurance ceded agreements generally may be
terminated at their annual anniversary by either party upon 30 to 90 days'
notice. In general, the reinsurance agreements are of the treaty variety, which
cover all underwritten risks of the types specified in the treaties. Presently,
the maximum gross lines that PMA Re will write are $5.0 million for property
covers, $1.0 million for property catastrophe covers and $7.5 million for
casualty covers. Net retentions on any one claim are $750,000 for property
covers and $1.5 million for casualty covers.
PMA Re maintains property catastrophe retrocession programs in an aggregate
amount of $48.0 million in excess of $2.0 million for multiple claims arising
from two or more risks in a single occurrence or event.
PMA Re also maintains casualty retrocession programs. PMA Re has a
casualty retrocession contract, written on a funds withheld basis, which covers
individual casualty losses and provides low-layer clash protection. For
individual losses, the contract covers $6.0 million in excess of $1.5 million on
a per occurrence basis. The contract has clash limits for losses arising from
two or more risks of $1.3 million in excess of $1.5 million. The term of the
contract is three years, and the term aggregate limit is $25.0 million plus the
amount of funds withheld.
In addition to the above programs, PMA Re maintains casualty clash
protection of $17.5 million in excess of $2.8 million per occurrence.
Effective January 1, 1998, PMA Re's workers' compensation program was
modified to include coverage of $98.0 million excess of $2.0 million per
occurrence, $98.5 million excess of $1.5 million per program per occurrence and
$18.5 million excess of $1.5 million per person per occurrence.
The Property and Casualty Group has its own ceded reinsurance program, and
carries excess-of-loss per occurrence reinsurance for $103.5 million over a net
retention of $1.5 million on workers' compensation. The Property and Casualty
Group also carries excess-of-loss per risk reinsurance for $4.8 million ($49.8
million per occurrence) over a net retention of $175,000
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<PAGE>
on other casualty lines; $2.0 million on automobile physical damage and $19.5
million ($48.5 million per occurrence) on property claims over its combined net
retention of $500,000. A property catastrophe program with a per occurrence
limit of $27.7 million in excess of an $850,000 retention is maintained to
provide protection for multiple property losses involved in one occurrence. The
Property and Casualty Group also maintains reinsurance protection for its
umbrella risks at $9.0 million over a net retention of $1.0 and purchases
facultative reinsurance for certain other risks.
Effective January 1, 1998, Caliber One maintains reinsurance protection of
$4.5 million excess of $500,000 per policy. For primary coverages, the
reinsurance is written on an excess of loss basis, and for excess coverages, the
reinsurance is written on a surplus share basis. Caliber One Indemnity Company
is also reinsured by an affiliate of its former parent relating to all business
written prior to its acquisition by PMA Re in December 1997.
The Company actively manages its exposure to catastrophic events. In the
underwriting process, the Company generally minimizes the accumulation of
insurable values in catastrophe prone regions. Also, in writing property
reinsurance coverages, PMA Re typically requires per occurrence loss limitations
for contracts that could have catastrophe exposure. Through per risk
reinsurance, the Company also manages its net retention in each exposure. As a
result, the Company's loss ratios have not been significantly impacted by
catastrophes, and management believes that the Company has adequate reinsurance
to protect against the estimated probable maximum gross loss from a catastrophic
event; however, an especially severe catastrophic event could exceed the
Company's reinsurance and retrocessional protection and materially adversely
impact the Company's financial position.
The Company performs extensive credit reviews on its reinsurers, focusing
on, among other things, financial capacity, stability, trends and commitment to
the reinsurance business. Prospective and existing reinsurers failing to meet
the Company's standards are excluded from the Company's reinsurance programs.
In addition, the Company requires letters of credit to support balances due from
reinsurers not authorized to transact business in the applicable jurisdictions.
Loss Reserves
In many cases significant periods of time, ranging up to several years or
more, may elapse between the occurrence of an insured loss, the reporting of the
loss to the insurer and the insurer's payment of that loss. Liabilities for
reinsurers generally become known more slowly than for primary insurers and are
generally subject to more unforeseen development.
To recognize liabilities for unpaid losses, insurers establish reserves,
which are balance sheet liabilities representing estimates of future amounts
needed to pay claims with respect to insured events which have occurred,
including events that have not been reported to the insurer. Reserves are also
established for LAE representing the estimated expenses of settling claims,
including legal and other fees, and general expenses of administering the claims
adjustment process.
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<PAGE>
When a claim is reported, claims personnel establish a case reserve for the
estimated amount of the ultimate payment. The estimate reflects the informed
judgment of such personnel, based on general corporate reserving practices and
the experience and knowledge of such personnel regarding the nature and value of
the specific type of claim. Reserves are also established on an aggregate basis
to provide for losses incurred but not yet reported to the insurer, for the
overall adequacy of case reserves and the estimated expenses of settling claims.
Such reserves are estimated using various generally accepted actuarial
techniques.
As part of the reserving process, historical data is reviewed and
consideration is given to the anticipated impact of various factors such as
legal developments, changes in social attitudes and economic conditions,
including the effects of inflation. This process relies on the basic assumption
that past experience, adjusted for the effect of current developments and likely
trends, is an appropriate basis for predicting future events. The reserving
process provides implicit recognition of the impact of inflation and other
factors affecting claims payments by taking into account changes in historic
payment patterns and perceived probable trends. There is generally no precise
method, however, for subsequently evaluating the adequacy of the consideration
given to inflation or to any other specific factor, since the eventual
deficiency or redundancy of reserves is affected by many factors, some of which
are interdependent.
Estimating the Company's ultimate claims liability is necessarily a complex
and judgmental process as the amounts are based on management's informed
estimates and judgments using data currently available. As additional
experience and data become available regarding claims payment and reporting
patterns, legislative developments and economic conditions, the estimates are
revised accordingly. If the Company's ultimate net losses prove to be
substantially greater than the amounts recorded in the financial statements, the
related adjustments could have a material adverse impact on the Company's
financial condition and results of operations.
The components of the Company's incurred losses and LAE for prior accident
years as of December 31, 1997, 1996 and 1995 excluding accretion of discount,
are as follows (favorable loss reserve development is denoted by the bracketed
figures):
(dollar amounts in millions)
Year Ended December 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
PMA Re............................ $(32.1) $(35.3) $(15.0)
The Property and Casualty Group:
Workers' compensation........... (44.1) 110.0 54.7
Asbestos and environmental...... -- 60.4 23.4
PMA Life........................ (14.8) -- --
Other losses and LAE............ 5.0 21.0 (11.6)
------ ------ ------
Total........................... (53.9) 191.4 66.5
------ ------ ------
Total............................. $(86.0) $156.1 $ 51.5
====== ====== ======
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<PAGE>
The following table shows the composition of changes in the reserves for
losses and LAE for each of the three years ended December 31, 1997:
(dollar amounts in thousands)
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Balance at beginning of period.......... $2,091,072 $2,069,986 $2,103,714
Less: Reinsurance recoverable on unpaid
losses and LAE......................... 256,576 261,492 247,856
---------- ---------- ----------
Net balance at beginning of period.... 1,834,496 1,808,494 1,855,858
---------- ---------- ----------
Losses and LAE incurred, net:
Current period........................ 341,880 323,069 357,787
Prior periods......................... (86,006) 156,074 51,491
Accretion of discount (includes
($35,000) effect of the change in the
discount rate for the Property and
Casualty Group's workers'
compensation unpaid losses from 4% to
5% in 1995).......................... 51,407 57,480 13,300
---------- ---------- ----------
Total losses and LAE incurred, net...... 307,281 536,623 422,578
---------- ---------- ----------
Losses and LAE paid, net:
Current period........................ (72,399) (72,194) (71,126)
Prior periods......................... (398,475) (438,427) (398,816)
---------- ---------- ----------
Total losses and LAE paid, net:......... (470,874) (510,621) (469,942)
---------- ---------- ----------
Net balance at end of period............ 1,670,903 1,834,496 1,808,494
Reinsurance recoverable on unpaid
losses and LAE......................... 332,284 256,576 261,492
---------- ---------- ----------
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<PAGE>
Balance at end of period................ $2,003,187 $2,091,072 $2,069,986
========== ========== ==========
The following table shows how the Company's losses have been paid and
reserves re-estimated over time compared to the liability initially estimated:
Consolidated Loss and Loss Adjustment Expense Development
<TABLE>
<CAPTION>
(dollar amounts in millions)
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial estimated liability
for unpaid losses and
LAE net of reinsurance
recoverables................... $1,246 $1,457 $1,632 $1,735 $1,824 $1,941 $1,932 $1,856 $1,809 $1,835 $1,671
Amount of reserve paid,
net of reinsurance through:
- - one year later............... 305 322 445 471 491 442 408 399 438 399 ---
- - two years later.............. 504 601 772 842 849 779 746 764 780
- - three years later............ 692 826 1,043 1,134 1,127 1,067 1,056 1,073
- - four years later............. 834 1,011 1,258 1,353 1,365 1,329 1,331
- - five years later............. 956 1,166 1,421 1,539 1,585 1,574
- - six years later.............. 1,063 1,284 1,553 1,715 1,789
- - seven years later............ 1,143 1,380 1,685 1,882
- - eight years later............ 1,214 1,479 1,817
- - nine years later............. 1,288 1,584
- - ten years later.............. 1,367
Reestimated liability, net of
reinsurance as of:
- - one year later............... 1,280 1,468 1,696 1,795 1,967 1,998 1,932 1,907 1,965 1,749 ---
- - two years later.............. 1,304 1,512 1,743 1,950 2,068 2,007 1,983 2,073 1,867
- - three years later............ 1,339 1,553 1,876 2,034 2,082 2,061 2,164 1,987
- - four years later............. 1,359 1,607 1,938 2,041 2,135 2,258 2,078
- - five years later............. 1,368 1,652 1,935 2,123 2,302 2,170
- - six years later.............. 1,391 1,649 1,985 2,273 2,209
- - seven years later............ 1,393 1,684 2,098 2,205
- - eight years later............ 1,425 1,784 2,052
- - nine years later............. 1,504 1,752
- - ten years later.............. 1,485
Indicated deficiency
(redundancy)................... $ 239 $ 294 $ 420 $ 471 $ 385 $ 229 $ 146 $ 131 $ 58 $ (86) $ --
Net liability - December 31.... $1,932 $1,856 $1,809 $1,835 $1,671
Reinsurance recoverables....... 219 248 262 257 332
Gross liability - December 31.. $2,151 $2,104 $2,070 $2,091 $2,003
Reestimated net liability...... $2,078 $1,987 $1,867 $1,749 $1,671
Reestimated reinsurance
recoverables.................. 178 221 254 251 332
Reestimated gross liability.... $2,256 $2,208 $2,120 $1,999 $2,003
</TABLE>
The columns in the above exhibit are not mutually exclusive. For example,
if a reserve established in 1987 for a claim incurred during that year had been
re-estimated during 1989, the re-estimate would be reflected in the table for
each of the statement years from 1987 and 1988 during calendar years 1989
through 1997. Conditions and trends that have affected the reserve development
reflected in the table may change and care should be exercised in making
conclusions about the relative adequacy of reserves from such development.
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<PAGE>
For PMA Re, gross favorable loss reserve development on prior years' unpaid
losses and LAE was $32.1 million, $35.3 million and $15.0 million in 1997, 1996
and 1995, respectively, primarily for accident years 1993 and prior. Such
favorable loss reserve development is attributable to losses emerging at a lower
rate than was anticipated (based upon historical loss development patterns) when
the initial accident year reserves were established. While loss emergence
patterns have been trending downward for the pre-1993 accident years, resulting
in favorable loss reserve development, there can be no assurance that such
trend will continue in the future.
In 1997, the Property and Casualty Group recorded a release of $53.9
million on prior year losses and LAE, excluding the accretion of discount. The
release primarily relates to favorable reserve development of $9.0 million for
workers' compensation retrospectively rated policies for accident years 1991 and
prior, resulting from unanticipated additional savings from the Company's 1997
commutation program and favorable development of workers' compensation reserves
for accident years 1992 through 1996 of $35.1 million ($28.0 million related to
retrospectively related policies), primarily resulting from greater than
expected savings associated with benefit reforms in Pennsylvania. Furthermore,
incurred losses on prior accident years were also affected by the cession of
prior year loss reserves included in the PMA Life transaction of $14.8 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The reserve release pertaining to the retrospectively rated
policies and the PMA Life transaction were offset in the consolidated statements
of operations by a corresponding reduction in earned premiums. The
aforementioned reserve releases were partially offset by reserve strengthening
of $5.0 million in commercial multi-peril business for accident year 1996. It is
the opinion of management that these reserve adjustments are not indicative of
any future trend.
The 1996 aggregate workers' compensation adverse development was allocated
$102.0 million to Pennsylvania and $8.0 million to all other states in which the
Company does business. Of the $102.0 million, the allocation by year is as
follows: prior to 1987: $16.0 million; 1987 to 1991: $101.0 million and 1992 and
subsequent years: ($15.0 million). In 1995, substantially all of the workers'
compensation adverse development related to accident years 1987 to 1991 in
Pennsylvania. For accident years prior to 1992, the traditional paid loss
development schedules for workers' compensation had begun to exhibit an
increasing trend in loss development factors by 1993. This trend was initially
attributed to an increase in commutation activity. In 1995, management began to
question whether loss data was developing in a manner that was consistent with
the conclusion that the loss development trends were impacted solely by
commutation activity. As a result, management began to accumulate additional
data in order to determine whether there were additional causes of the increase
in the paid loss development data, and management obtained claim count data that
was far more detailed than had been historically utilized in the reserve setting
process. This data indicated that the paid loss development factors were not
only impacted by commutation activity, but also by a decline in the claims
closure rate in Pennsylvania. Management believes that the decline of the
closure rates was due to several interrelated factors. One factor related to
the fact that efforts to rehabilitate claimants and return them to work were not
as successful as anticipated. For accident years 1987 to 1991, in particular,
extensive efforts were made by the Company to rehabilitate claimants and return
them to work at either full or modified duty. By late 1995 and into 1996, it
was recognized by a review of a slow down in the claims closure pattern that
these rehabilitation efforts were not impacting the closure rates as expected.
Another factor negatively impacting claims closure rates related to the economic
conditions in Pennsylvania in the early 1990's. During the period from 1990 to
1994, economic conditions in Pennsylvania were considered to be depressed in the
Company's major industry niches for workers' compensation insurance
(construction and heavy manufacturing). Payrolls in these industries were
stagnant, and in many cases, employment was flat or declining. The Company
believes that in periods of declining employment opportunities, there is a
tendency for indemnity periods to increase, which occurred for workers who
suffered injuries in these industries.
The above factors, when considered with the fact that the benefits period
in Pennsylvania was unlimited, caused the Company to believe that a substantial
portion of claimants from the pre-1992 period, who had already been out of work
five to nine years, would not return to work in any capacity. In late 1995 and
during 1996, management undertook an effort to quantify the impact of the
declining closure rates versus the increase in commutation activity. During the
fourth quarter of 1995, management strengthened the Property and Casualty
Group's workers' compensation reserves by $54.7 million; however, the
quantification of the effect of the claims closure rate was an extremely complex
process and as such, the data was not fully understood at that time. As the
data under analysis was more mature and refined in 1996, management determined
that the workers' compensation loss reserves for Pennsylvania in the pre-1992
accident years needed to be increased substantially; therefore, the Property and
Casualty Group increased its workers' compensation reserves by $110.0 million.
Benefit reforms enacted by states in which the Property and Casualty Group
transacts business, most significantly Pennsylvania, have had a beneficial
impact on more recent accident year loss ratios. Prior to 1996, the principal
revisions of the Pennsylvania system
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<PAGE>
included medical cost containment measures and an expansion of the period of
time during which the insurer may require an employee to accept medical
treatment from the employer's list of designated health care providers. In July
1996, Pennsylvania enacted Act 57, a workers' compensation reform bill which is
expected to reduce substantially indemnity benefit periods in Pennsylvania. In
addition to regulatory reforms, the loss ratios have been favorably impacted by
the conversion to loss-sensitive and alternative market products. Such a trend
is evidenced by the fact that accident year pure loss ratios (losses recorded
for the year in which the event occurred expressed as a percentage of the earned
premiums for that year) for workers' compensation have been generally lower in
more recent accident years, as the following chart indicates:
Property and Casualty Group's Workers' Compensation Undiscounted Accident Year
------------------------------------------------------------------------------
Pure Loss Ratios as of December 31, 1997
----------------------------------------
Accident Years Loss Ratios
-------------- -----------
1990 100%
1991 86%
1992 80%
1993 64%
1994 64%
1995 63%
1996 63%
1997 66%
In addition, management took several steps to reduce the outstanding claims
associated with the Pennsylvania workers' compensation business written through
1991. A formal commutation program was initiated in the fourth quarter of 1996
and continued into late 1997. Commutations are agreements with claimants whereby
the claimants, in exchange for a lump sum payment, release their rights to
future indemnity payments from the Property and Casualty Group. Under
Pennsylvania workers' compensation laws, the claimant and the Pennsylvania
Workers' Compensation Board must approve all such commutation arrangements. The
Property and Casualty Group paid $101.1 million and $17.8 million in 1997 and
the fourth quarter of 1996, respectively, to commute workers' compensation
indemnity claims. Savings associated with these claims were consistent with
management's expectations. The number of open claims for accident years 1991
and prior was substantially reduced as a result of the commutation program.
This reduction in open claims is expected to reduce the possibility of any
further adverse development on such reserves, although there can be no assurance
that the level of commutations will have a significant impact on the future
development of such reserves.
Estimating reserves for workers' compensation claims can be more difficult
than many other lines of property and casualty insurance for several reasons,
including (i) the long payment "tail" associated with the business; (ii) the
impact of social, political and regulatory trends on benefit levels for both
medical and indemnity payments; (iii) the impact of economic trends and (iv) the
impact of changes in the mix of business. At various times, one or a
combination of such factors can make the interpretation of actuarial data
associated with workers' compensation loss development more difficult, and it
can take additional time to recognize changes in loss development patterns.
Under such circumstances, adjustments will
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<PAGE>
be made to such reserves as loss patterns develop and new information becomes
available and such adjustments may be material.
The adverse development in reserves associated with asbestos and
environmental claims is the result of a detailed analysis completed in 1996 of
loss and LAE reserves associated with asbestos and environmental liability
claims. The reserving for asbestos and environmental claims has undergone
change at both the Company and in the insurance industry in general. For
environmental and asbestos liability claims, reserving methodology has been
evolving into accepted industry practice in the recent past. The Company's
actuaries were able to apply these methods to the Company's loss reserves in
1997 and 1996. To reserve for environmental claims, the Company currently
utilizes a calendar year development technique known as aggregate loss
development. This technique focuses on the aggregate losses paid as of a
particular date and aggregate payment patterns associated with such claims.
Several elements including remediation studies, remediation, defense,
declaratory judgment and third party bodily injury claims were considered in
estimating the costs and payment patterns of the environmental and toxic tort
losses. Prior to the development of these techniques, there was a substantial
range in the method of reserving for environmental and toxic tort liabilities.
The methods employed by the Company prior to the review performed in 1996
included a review of aggregate loss and loss adjustment paid and case incurred
data along with resulting "survival ratios" to establish IBNR for environmental
and toxic tort claims. For asbestos claims, the Company had previously reserved
costs to defend, and any indemnification payments anticipated on, claims for
which it had received notice that it was a responsible party, plus a bulk factor
applied to the estimated case reserves to provide for potential development of
indemnification and defense cost related to such claims. In 1996, the Company
performed a ground up analysis of asbestos loss reserves using an actuarially
accepted modeling technique. Using historical information as a base and
information obtained from a review of open claims files, assumptions were made
about future claims activity in order to estimate ultimate losses. For each
individual major account, projections were made regarding new plaintiffs per
year, the number of years new claims will be reported, the average loss severity
per plaintiff and the ratio of loss adjustment expense to loss. In many cases
involving larger asbestos claims, the Company reserved up to the policy limits
for the applicable loss coverage parts for the affected accounts. Policy terms
and reinsurance treaties were applied in the modeling of future losses.
Estimation of obligations for asbestos and environmental exposures continues to
be more difficult than for other loss reserves because of several factors,
including: (i) evolving methodologies for the estimation of the liabilities;
(ii) lack of reliable historical claim data; (iii) uncertainties with respect to
insurance and reinsurance coverage related to these obligations; (iv) changing
judicial interpretations and (v) changing government standards.
The Company's asbestos-related loss reserves for the years ended December
31, 1997, 1996 and 1995 were as follows:
(dollar amounts in thousands)
1997 1996 1995
-------- --------- --------
Gross of reinsurance:
Beginning reserves......................... $80,055 $ 27,611 $13,969
Incurred losses and LAE.................... 2,435 62,854 22,482
Calendar year payments for losses and LAE.. (5,764) (10,410) (8,840)
------- -------- -------
Ending reserves............................ $76,726 $ 80,055 $27,611
======= ======== =======
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<PAGE>
Net of reinsurance:
Beginning reserves......................... $53,300 $ 23,443 $ 8,168
Incurred losses and LAE.................... (36) 39,427 21,826
Calendar year payments for losses and LAE.. (4,686) (9,570) (6,551)
------- -------- -------
Ending reserves............................ $48,578 $ 53,300 $23,443
======= ======== =======
The Company's environmental-related loss reserves for the years ended
December 31, 1997, 1996 and 1995 were as follows:
(dollar amounts in thousands)
1997 1996 1995
-------- -------- --------
Gross of reinsurance:
Beginning reserves............................. $35,626 $20,134 $20,952
Incurred losses and LAE........................ 1,130 22,143 3,516
Reserves acquired through purchase of Caliber
One Indemnity Company(1).................... 13,060 -- --
Calendar year payments for losses and LAE...... (4,708) (6,651) (4,334)
------- ------- -------
Ending reserves................................ $45,108 $35,626 $20,134
======= ======= =======
Net of reinsurance:
Beginning reserves............................. $34,592 $20,134 $20,952
Incurred losses and LAE........................ 1,068 21,109 3,516
Calendar year payments for losses and LAE...... (3,965) (6,651) (4,334)
------- ------- -------
Ending reserves................................ $31,695 $34,592 $20,134
======= ======= =======
- ----------------------
(1) Such acquired reserves have been reinsured by an affiliate of the former
parent. See "Caliber One."
Of the total net asbestos reserves, $6.7 million, $6.8 million and $6.7
million related to established claims reserves at December 31, 1997, 1996 and
1995, respectively, and $41.9 million, $46.5 million and $16.7 million related
to IBNR at December 31, 1997, 1996 and 1995, respectively. Of the total net
environmental reserves, $11.2 million, $12.5 million and $10.3 million related
to established claims reserves at December 31, 1997, 1996 and 1995,
respectively, and $20.5 million, $22.1 million and $9.8 million related to IBNR
at December 31, 1997, 1996 and 1995, respectively. All incurred asbestos and
environmental losses were for accident years 1986 and prior.
Management believes that the Property and Casualty Group's reserves for
asbestos and environmental claims are appropriately established based upon known
facts, existing case law and generally accepted actuarial methodologies.
However, due to changing interpretations by courts involving coverage issues,
the potential for changes in federal and state standards for clean-up and
liability and other factors, the ultimate exposure to the Property and Casualty
Group for these claims may vary significantly from the amounts currently
recorded, resulting in a potential future adjustment in the claims reserves
recorded. In addition, issues involving policy provisions, allocation of
liability among participating insurers, proof of coverage and other factors make
quantification of liabilities exceptionally difficult and subject to adjustment
based upon newly available data.
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<PAGE>
In 1996, Commercial Lines experienced reserve strengthening of $21.0
million compared to a reserve release of $11.6 million in 1995. The reserve
strengthening in 1996 was principally due to a re-estimation of loss adjustment
costs associated with general liability claims. Through 1991, the Property and
Casualty Group's mix of general liability insurance policies were weighted
towards the manufacturing classes of business. Subsequent to 1991, the Property
and Casualty Group's mix of business became more heavily weighted towards the
construction and contracting classes of business. These particular classes of
business have experienced losses due to construction defects and similar matters
that have taken longer to emerge than the classes of business previously written
by the Property and Casualty Group. Defense costs associated with these claims
have also exceeded the original estimate of the Property and Casualty Group's
management, which was based on the patterns of indemnification payments
associated with the earlier classes of business written. When this issue was
discovered, the Property and Casualty Group factored the increased defense costs
and the emergence pattern in determining a more appropriate reserve amount for
loss handling costs. The release of reserves in 1995 was primarily due to
favorable loss experience in commercial automobile business.
Unpaid losses on workers' compensation claims for the Company were
approximately $816.0 million and $1,012.0 million, net of discount of $460.2
million and $514.2 million, at December 31, 1997 and 1996, respectively. The
approximate discount rate utilized was 5.0% at December 31, 1997 and 1996. In
1995, the Property and Casualty Group's domestic insurance subsidiaries changed
the discount rate with respect to their workers' compensation unpaid losses from
approximately 4% to 5% for SAP and GAAP purposes. This change was approved and
is permitted by the Pennsylvania Insurance Department. The effect on losses
incurred in 1995 was a reduction of $35.0 million. Loss reserves on other lines
of business as well as reserves for LAE for all lines of business are not
discounted.
For the six-month period ended June 30, 1998 and 1997, respectively,
accretion of discount amounted to $14.4 million and $23.8 million. As of June
30, 1998, the total discount was approximately $437.0 million, comprised as
follows: the Pooled Companies, $114.6 million; MASCCO, $55.4 million, PMA
Cayman, $226.2 million; other Property and Casualty Group entities, $6.5 million
and PMA Re, $34.3 million.
PMA Re has reported net favorable development of unpaid losses and LAE of
$23.3 million in 1997, $28.6 million in 1996 and $15.0 million in 1995 primarily
for accident years 1993 and prior. Such favorable development is attributable to
losses emerging at a lower rate than was anticipated (based upon historical loss
development patterns) when the initial accident year reserves were established.
While loss emergence patterns have been trending downward for the pre-1993
accident years, resulting in favorable loss reserve development, there can be no
assurance that such trend will continue in the future.
Immediately prior to and in conjunction with the acquisition of Caliber One
Indemnity Company (see "Caliber One"), all of Caliber One Indemnity Company's
acquired loss reserves were reinsured by an insurance affiliate of its former
parent (the "Reserve Guarantee"). The Reserve Guarantee covers adverse
development and uncollectible reinsurance in an amount equal to the stated
amount of the reserves acquired, plus an additional $68.5 million. Upon the
purchase of Caliber One Indemnity Company, management of the Company valued the
amount of the Reserve Guarantee at approximately $5.0 million in excess of the
stated acquired reserves . Management of the Company believes that the Reserve
Guarantee will be adequate to cover any future adverse reserve development or
uncollectible reinsurance on the acquired reserves. At December 31, 1997, $36.8
million was recoverable under the Reserve Guarantee, which is included in
reinsurance receivables as of that date. The Compnay is accounting for the
Reserve Guarantee in conformity with EITF Topic D-54, "Accounting by the
Purchaser for a Seller's Guarantee of the Adequacy of Liabilities for Losses and
Loss Adjustment Expenses of an Insurance Enterprise Acquired in a Purchase
Business Combination," and accordingly, any future revisions to the estimates of
the amount of underlying loss reserves and the amount recoverable under the
Reserve Guarantee will be recognized in losses and loss adjustment expenses in
the period in which the estimates are changed.
At December 31, 1997, the Company's loss reserves were stated net of $59.9
million of salvage and subrogation, of which $50.8 million related to the
Property and Casualty Group, which was comprised of $46.0 million related to
workers' compensation and $4.8 million related to Commercial Lines. The
anticipated salvage and subrogation was $9.1 million for PMA Re. Incurred
salvage and subrogation (increased) reduced losses and LAE by ($18.5) million,
($0.6) million and $9.5 million in 1997, 1996 and 1995, respectively. The
Company's policy with respect to estimating the amounts and realizability of
salvage and subrogation is to develop accident year schedules of historic paid
salvage and subrogation by line of business, which are then projected to an
ultimate basis using actuarial projection techniques.
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The anticipated salvage and subrogation is the estimated ultimate salvage and
subrogation less any amounts received by the Company. The realizability of
anticipated salvage and subrogation is reflected in the historical data that is
used to complete the projection, as historic paid data implicitly considers
realization and collectibility.
Recent Developments
PMA Re and the Property and Casualty Group posted favorable loss reserve
development during the six-month period ended June 30, 1998 of $8.3 million and
$1.7 million ($1.5 million excluding Run-off Operations), respectively.
PMA Re's favorable loss reserve development is attributable to losses
emerging at a lesser rate than was expected when the reserves for the applicable
accident years were established, resulting in downward revisions of loss reserve
estimates.
The favorable development of the Property and Casualty Group's loss
reserves is primarily attributable to recently established programs to control
medical costs further and reductions in LAE for workers' compensation. Medical
costs have improved primarily due to the Property and Casualty Group's
affiliation with a national preferred provider organization, which became
effective January 1998. This affiliation has enabled the Property and Casualty
Group to lower its cost in providing medical benefits to injured workers. Loss
adjustment expenses have decreased primarily due to continued use of certain
claims resolution practices. By using techniques such as managed care and
commutations, the Property and Casualty Group has reduced the amount and number
of outstanding claims and the amount of time that a claim remains open, which in
turn has lowered costs associated with managing open claims.
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Competition
The domestic property and casualty insurance and reinsurance industries are
very competitive and consist of many companies, with no one company dominating
the market. In addition, the degree and nature of competition varies from state
to state for a variety of reasons, including the regulatory climate and other
market participants in each state. In addition to competition from other
insurance companies, the Property and Casualty Group and Caliber One compete
with certain alternative market arrangements, such as captive insurers, risk-
sharing pools and associations, risk retention groups, and self-insurance
programs. PMA Re competes with other reinsurers in the brokered market as well
as reinsurers that directly underwrite reinsurance business. Many of the
Company's competitors are larger and have greater financial resources than the
Company.
The main factors upon which entities in the Company's markets compete are
price, service, product capabilities and financial security. The Property and
Casualty Group, PMA Re and Caliber One attempt to price their products in such a
way that the prices charged to their clients are commensurate with the overall
marketplace while still meeting return targets. Given the present soft pricing
environment, competing solely on the basis of price has become increasingly
difficult for the Property and Casualty Group and PMA Re, and both have had to
reject risks submitted and non-renew certain accounts in recent years, as the
market rates for such risks did not provide the opportunity to achieve what
management considers to be an acceptable return.
In terms of service, management maintains service standards to ensure that
clients are satisfied with the products and services provided by the Company.
Such standards have been designed to emphasize prompt turn-around time for
underwriting submissions, access to information, claims handling and the quality
of other services. Management periodically participates in surveys of
intermediaries and clients to gain an understanding of the perceptions of the
Company's service compared to its competitors.
Management attempts to design products that meet the needs of clients in
the Company's markets. In recent years, the Property and Casualty Group has
developed products that reflect the evolving nature of the workers' compensation
market. Specifically,
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management has increased its focus on rehabilitation and managed care to keep
workers' compensation costs lower for the employers. In addition, the Property
and Casualty Group has introduced and refined alternative market products, as
well as unbundled risk management and claims administration services. See "The
Property and Casualty Group." PMA Re has also expanded its product line in
recent years to satisfy the needs of its client base. Products introduced by PMA
Re in the last two years include facultative reinsurance, finite risk
reinsurance and integrated capital management (which involves providing
reinsurance as well as some type of direct investment in a ceding company). See
"PMA Re." For Caliber One, it is management's intention to design products that
meet the needs of new classes of business and that cover emerging risks. See
"Caliber One." Management continues to review new product opportunities for the
Property and Casualty Group, PMA Re and Caliber One.
For many intermediaries and clients, financial security is measured by the
ratings assigned by independent rating agencies. Therefore, management believes
that the ratings assigned by independent rating agencies, particularly A.M.
Best, are material to the Company's operations. A.M. Best has currently assigned
an "A+" (Superior) rating to PMA Reinsurance Corporation, an "A-" (Excellent)
rating to the Pooled Companies and an "A" (Excellent) to Caliber One Indemnity
Company. A.M. Best's ratings are based on an analysis of an insurance company's
perceived financial strength and its ability to pay obligations to its
policyholders and are not directed toward the protection of investors. No
assurance can be given that PMA Reinsurance Corporation, the Pooled Companies
and Caliber One Indemnity Company can maintain these ratings. The Company is
also presently seeking ratings of its insurance subsidiaries from Standard &
Poor's and Moody's. In addition, there can be no assurance that ratings to be
received from Standard & Poor's and Moody's will not have a detrimental effect
on the Company's competitive position.
Employees
As of June 30, 1998, the Company had 986 full-time employees. None of the
employees of the Company is represented by a labor union and the Company is not
a party to any collective bargaining agreements. The Company considers its
employee relations to be good.
Properties
The Company's headquarters are located in a four story, 110,000 square foot
building in Blue Bell, Pennsylvania. PMA Re's headquarters are located in
78,000 square feet of leased space in Mellon Bank Center, Philadelphia,
Pennsylvania.
Through various wholly owned subsidiaries, the Company also owns and
occupies additional office facilities in three other locations and rents
additional office space for its insurance operations in 15 other locations. The
Company believes that such properties are suitable and adequate for its current
business operations.
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Legal Proceedings
The Company's insurance subsidiaries are defendants in actions arising out
of their insurance business and from time to time are involved in various
governmental and administrative proceedings. These actions include lawsuits
seeking coverage for alleged damages relating to exposure to asbestos and other
toxic substances and environmental clean-up actions under federal and state law.
In the opinion of management, the resolution of these matters will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows. See "Business-Loss Reserves" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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SUPERVISION AND REGULATION
General
PMA Reinsurance Corporation is licensed or accredited to transact its
reinsurance business in, and is subject to regulation and supervision by 50
states and the District of Columbia. The Pooled Companies are licensed to
transact insurance business in, and are subject to regulation and supervision by
45 states and the District of Columbia. Caliber One Indemnity Company is
licensed in one state and is approved as a surplus lines carrier in 38 states,
Puerto Rico and the District of Columbia. The Company's insurance subsidiaries
are authorized and regulated in all jurisdictions where they conduct insurance
business. Inasmuch as PMA Reinsurance Corporation and the Pooled Companies are
domiciled in Pennsylvania, however, the Pennsylvania Insurance Department
exercises principal regulatory jurisdiction over them, and the Delaware
Insurance Department exercises principal jurisdiction over Caliber One Indemnity
Company. The extent of regulation by the states varies, but in general, most
jurisdictions have laws and regulations governing standards of solvency,
adequacy of reserves, reinsurance, capital adequacy and standards of business
conduct. In addition, statutes and regulations usually require the licensing of
insurers and their agents, the approval of policy forms and related material
and, for certain lines of insurance, including all lines of business written by
the Pooled Companies, the approval of rates. Property and casualty reinsurers
and excess and surplus lines carriers are generally not subject to filing or
other regulatory requirements applicable to primary standard lines insurers with
respect to rates, policy forms or contract wording. The form and content of
statutory financial statements are regulated. State insurance departments in
jurisdictions in which the Company's insurance subsidiaries do business also
conduct periodic examinations of their respective operations and accounts and
require the filing of annual and other reports relating to their financial
condition.
Approximately once every three to five years as part of their routine
regulatory oversight process, state insurance departments conduct detailed
examinations of the books, records and accounts of insurance companies domiciled
in their states. Such examinations are generally conducted in cooperation with
the departments of two or three other states under guidelines promulgated by the
NAIC. The Pennsylvania Insurance Department last issued examinations reports
for PMA Reinsurance Corporation and the Pooled Companies as of December 31,
1992, and the Delaware Department of Insurance last conducted an examination of
Caliber One Indemnity Company as of December 31, 1996. No adjustments to
previously filed statutory financial statements were required as a result of
such examinations. In addition, there were no substantive qualitative matters
indicated in the examination reports that had or are expected to have a material
adverse impact on the operations of PMA Reinsurance Corporation, the Pooled
Companies or Caliber One Indemnity Company. The Pennsylvania Insurance
Department is currently conducting examinations of PMA Reinsurance Corporation
and the Pooled Companies as of December 31, 1997. The Pennsylvania Insurance
Department has raised no material issues in connection with the pending
examination. In supervising and regulating insurance companies, including
reinsurers, state insurance departments, charged primarily with protecting
policyholders and the public rather than investors, enjoy broad authority and
discretion in applying applicable insurance laws and regulations for the
protection of policyholders and the public.
Every state in which the Company's insurance subsidiaries are licensed
administers a guaranty fund, which provides for assessments of licensed insurers
for the protection of policyholders of insolvent insurance companies. There has
been an increase in the number of insurance companies that are under supervision
that has resulted in an increase in the
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amount of assessments to cover losses to policyholders of such companies. The
Company's insurance subsidiaries have made accruals for their portion of
assessments related to such insolvencies based upon the most current information
furnished by the guaranty associations. During the five years ended December 31,
1997 and the six months ended June 30, 1998, the amount of such insolvency
assessments paid by the Company's insurance subsidiaries has not been material.
Management cannot reasonably predict the amount of future assessments, if any.
Recently, the insurance regulatory framework has been placed under
increased scrutiny by various states, the federal government and the NAIC.
Various states have considered or enacted legislation which changes, and in many
cases increases, the state's authority to regulate insurance companies.
Although legislation has been under consideration for several years in Congress,
which, if enacted, would result in the federal government assuming some role in
the regulation of insurance companies, management does not expect the current
Congress to enact federal insurance regulation. The NAIC, in conjunction with
the state regulators, has been reviewing existing insurance laws and
regulations. The NAIC recently approved and recommended to the states for
adoption and implementation several regulatory initiatives designed to reduce
the risk of insurance company insolvencies. Through the NAIC accreditation
program, these recommendations for state legislation have taken an increased
significance. Two such initiatives that have been adopted by the NAIC are risk-
based capital standards ("RBC") and a model investment law.
Insurance Holding Company Regulation
The Company and its insurance subsidiaries are subject to regulation
pursuant to the insurance holding company laws of Pennsylvania and Delaware.
These state insurance holding company laws generally require an insurance
holding company and insurers and reinsurers that are members of such insurance
holding company's system to register with the state regulatory authorities, to
file with those authorities certain reports disclosing information including
their capital structure, ownership, management, financial condition, certain
intercompany transactions including material transfers of assets and
intercompany business agreements, and to report material changes in such
information. Such laws also require that intercompany transactions be fair and
reasonable and that an insurer's surplus as regards policyholders following any
dividends or distributions to shareholder affiliates be reasonable in relation
to the insurer's outstanding liabilities and adequate for its financial needs.
Under Pennsylvania and Delaware law, no person may acquire, directly or
indirectly, a controlling interest in the capital stock of the Company unless
such person, corporation or other entity has obtained prior approval from the
Commissioner(s) for such acquisition of control. Pursuant to Pennsylvania
and Delaware law, any person acquiring, controlling or holding with the power to
vote, directly or indirectly, ten percent or more of the voting securities of an
insurance company, is presumed to have "control" of such company. This
presumption may be rebutted by a showing that control does not exist in fact.
The respective Commissioner(s), however, may find that "control" exists in
circumstances in which a person owns or controls a smaller amount of voting
securities. To obtain approval from the Commissioner(s) of any acquisition of
control of an insurance company, the proposed acquirer
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must file with the Commissioner(s) an application containing information
regarding the identity and background of the acquirer and its affiliates, the
nature, source and amount of funds to be used to effect the acquisition, the
financial statements of the acquirer and its affiliates, any potential plans for
disposition of the securities or business of the insurer, the number and type of
securities to be acquired, any contracts with respect to the securities to be
acquired, any agreements with broker-dealers and other matters.
Other jurisdictions in which the Company's insurance subsidiaries are
licensed to transact business may have requirements for prior approval of any
acquisition of control of an insurance or reinsurance company licensed or
authorized to transact business in such jurisdictions. Additional requirements
in such jurisdictions may include re-licensing or subsequent approval for
renewal of existing licenses upon an acquisition of control. As further
described below, laws also govern the holding company structure payment of
dividends by the Company's insurance subsidiaries to the Company.
Restrictions on Subsidiaries' Dividends and Other Payments
PMC is an insurance holding company whose assets consist principally of all
of the outstanding common stock of its insurance subsidiaries. PMC's ongoing
ability to pay dividends to its shareholders and meet its other obligations,
including operating expenses and any principal and interest on debt (including
the Junior Subordinated Debentures), is primarily dependent on the receipt of
sufficient funds from its insurance subsidiaries in the form of dividends, net
payments under a tax-sharing agreement between PMC and its subsidiaries and
loans. The payment of dividends by PMC's subsidiaries to PMC is regulated under
the insurance laws of Pennsylvania and Delaware (such laws are substantially
similar). In addition, to the extent tax-sharing payments and loans exceed
certain threshold amounts, notice to and non-disapproval by the Pennsylvania
Insurance Commissioner would be required. Under Pennsylvania law, PMC's
Pennsylvania-domiciled subsidiaries (PMA Reinsurance Corporation and the Pooled
Companies) may pay dividends only from unassigned surplus and future earnings
arising from their businesses and must receive prior approval of the
Pennsylvania Insurance Commissioner to pay a dividend if such dividend would
exceed certain statutory limitations. The current statutory limitation is the
greater of (i) of 10% of the insurer's policyholders' surplus, as shown on its
last annual statement on file with the Pennsylvania Insurance Commissioner or
(ii) the insurer's statutory net income for the previous calendar year.
Pennsylvania law gives the Pennsylvania Insurance Commissioner broad discretion
to disapprove requests for dividends in excess of these limits. Based upon this
limitation and the 1997 statutory results of PMA Reinsurance Corporation and the
Pooled Companies, PMA Reinsurance Corporation and the Pooled Companies have the
legal capacity to pay $48.7 million in dividends in the aggregate to PMC in 1998
without obtaining the approval of the Pennsylvania Insurance Commissioner.
Through September 1, 1998, $18.0 million of dividends had been declared, of
which $10.0 million has been paid. Pennsylvania law also provides that following
the payment of any dividend, the insurer's policyholders' surplus must be
reasonable in relation to its outstanding liabilities and adequate for its
financial needs, and permits the Pennsylvania Insurance Commissioner to bring an
action to rescind a dividend which violates these standards.
Caliber One Indemnity Company is a Delaware-domiciled insurance subsidiary
of PMA Reinsurance Corporation. As a subsidiary of PMA Reinsurance Corporation,
Caliber One Indemnity Company's dividends are not directly available to PMC. As
noted above, the Delaware insurance law provisions restricting dividends by
insurers are substantially similar to such provisions under Pennsylvania
insurance laws. During 1998, Caliber One Indemnity Company may pay up to $2.5
million of dividends to PMA Reinsurance Corporation without the prior approval
of the Delaware Insurance Commissioner. During 1998, no dividends have been
declared or paid by Caliber One Indemnity Company.
In the event that the ability of either the Pooled Companies or PMA
Reinsurance Corporation to pay dividends or make other payments to PMC in the
future is reduced or eliminated, PMC's ability to pay
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principal and interest on and redeem the Junior Subordinated Debentures could be
materially and adversely affected, depending upon the extent of such reduction.
The Pennsylvania Insurance Commissioner could use his or her broad discretionary
authority to seek to require PMC to apply payments received from one insurance
subsidiary for the benefit of another insurance subsidiary of PMC.
In addition to regulatory restrictions on dividends, the Company's Credit
Facilities also impose restrictions on the ability of the Company's insurance
subsidiaries to pay dividends. Under these restrictions, the statutory surplus
of PMC's insurance subsidiaries (as measured each calendar quarter) must not be
less than $450 million and such subsidiaries must annually maintain certain
minimum ratios of adjusted surplus to risk-based capital (300% for PMA
Reinsurance Corporation and 230% for the Pooled Companies in 1998, increasing to
240% thereafter). As of June 30, 1998, the Company's insurance subsidiaries
reported combined statutory surplus of $561.1 million, and, as of December 31,
1997, PMA Reinsurance Corporation's risk-based capital ratio was 355% and the
Pooled Companies' ratios ranged from 293% to 324%.
Risk-Based Capital
The NAIC has adopted risk-based capital requirements for property/casualty
insurance companies to evaluate the adequacy of statutory capital and surplus in
relation to investment and insurance risks such as asset quality, asset and
liability matching, loss reserve adequacy and other business factors.
Under RBC requirements, regulatory compliance is determined by the ratio of
a Company's total adjusted capital, as defined by the NAIC, to its authorized
control level, also as defined by the NAIC. Companies below prescribed trigger
points in terms of such ratio are classified as follows:
Company action level............. 200%
Regulatory action level.......... 150%
Authorized control level......... 100%
Mandatory control level.......... 70%
At December 31, 1997, the ratios of the Pooled Companies ranged from 293%
to 324%, PMA Reinsurance Corporation's ratio was 355% and Caliber One Indemnity
Company's ratio was 1,922%. As a result, the RBC requirements are not expected
to have an adverse impact on the operations, financial condition or operating
results of the Company's insurance subsidiaries.
RBC requirements for property and casualty insurance companies allow a
discount for workers' compensation reserves to be included in the adjusted
surplus calculation. However, the calculation for RBC requires the phase-out of
non-tabular reserve discount previously taken for workers' compensation
reserves by 1998. As a result, this phase-out negatively impacts the RBC ratios
of companies that write workers' compensation insurance and discount such
reserves on a non-tabular basis to companies that write other types of property
and casualty insurance. Management believes that the Pooled Companies will be
able to maintain their RBC in excess of regulatory requirements through prudent
underwriting and claims
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handling, investing and capital management. However, no assurances can be given
that developments affecting the Property and Casualty Group, many of which could
be outside of management's control, including but not limited to changes in the
regulatory environment, economic conditions and competitive conditions in the
jurisdictions in which the Property and Casualty Group writes business, will
cause the Pooled Companies' RBC to fall below required levels resulting in a
corresponding regulatory response.
IRIS Ratios
One method utilized by state insurance regulators to monitor the solvency of
insurers are twelve financial ratios (the "IRIS ratios") developed by the NAIC.
The IRIS ratios were developed by insurance regulators, in conjunction with
other regulatory and financial monitoring systems (such as risk-based capital),
to provide an early warning system for determining whether an insurer is
experiencing financial difficulties. The general categories of IRIS ratios are
operating leverage and growth, liquidity, surplus/surplus quality, historical
profitability and loss reserves. The ratios are formula-driven based upon line
items in an insurer's annual statement provided to state insurance regulators,
and each ratio has a guideline which stipulates the range of reported values
considered to be normal. Such guideline ranges are the same for all companies.
Generally, if a company reports four of more ratios outside of the normal ranges
(i.e., "unusual values"), it prompts additional inquiries from state insurance
regulators.
In 1997 and 1996, the Pooled Companies and MASCCO reported unusual values in
certain IRIS ratios primarily resulting from the reserve strengthening and
restructuring charges recorded during 1996 and the establishment of the Run-off
Operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In 1997, the Pooled Companies reported unusual values for three of the
twelve IRIS ratios: the Two-year Overall Operating Ratio, its Two-year Reserve
Development to Surplus Ratio and Estimated Current Reserve Deficiency to Surplus
Ratio. During 1996, the Pooled Companies reported unusual values in five IRIS
ratios, which included the One-year Reserve Development to Surplus Ratio and
Change in Surplus Ratio in addition to the IRIS ratios for which the Pooled
Companies reported unusual values in 1997.
The Two-year Overall Operating Ratio is the sum of a company's two-year loss
ratio and two-year expense ratio (underwriting expenses divided by net premiums
written) offset by its two-year investment income ratio (net investment income
divided by net premiums earned). The Pooled Companies' results for the Two-year
Overall Operating Ratio ranged from 123% to 130% at December 31, 1997, compared
to the guideline ratio of 100%. These unusual values resulted from the reserve
strengthening and restructuring charges recorded during 1996.
The Two-year Reserve Development to Surplus Ratio, which is the average of
the prior two years' development of loss reserves divided by surplus, ranged
from 20% to 21% for the Pooled Companies at December 31, 1997 or slightly in
excess of the guideline ratio of 20%. These unusual values resulted from the
aforementioned reserve strengthening which occurred during 1996.
The Estimated Current Reserve Deficiency to Surplus Ratio is the difference
between a formula driven estimate of loss reserves (which is based on paid
losses compared to earned premiums and is not an actuarial calculation) and the
reserves carried on the financial statements, divided by surplus. The Pooled
Companies' ratios ranged from 50% to 64% at December 31, 1997 compared to a
guideline ratio range of 25%. These unusual values resulted from the commutation
program initiated by the Pooled Companies in 1997, which accelerated loss
payments in 1997 compared to earned premiums in prior years.
In 1996, in addition to reporting unusual values for the above three IRIS
ratios, the Pooled Companies had unusual values for two additional IRIS ratios,
Change in Surplus Ratio (the difference in surplus between the current and prior
year divided by the prior year's surplus) and One-year Reserve Development to
Surplus Ratio (one-year loss reserve development divided by surplus), due to the
reserve strengthening and restructuring charges recorded in 1996.
In 1997 and 1996, MASCCO reported unusual values for three of the twelve
IRIS ratios. The Two-year Overall Operating Ratio and Change in Surplus Ratio
reflected unusual values for both years. MASCCO's Two-year Overall Operating
Ratio was 159% and 117% for 1997 and 1996, respectively, compared to a guideline
ratio of 100%, and MASCCO's Change in Surplus Ratio was -13% and 132% for 1997
and 1996, respectively, compared to a guideline range of -10% to 50%. These
unusual values were the result of an intercompany reinsurance agreement which
was consummated at the end of 1996 relating to the establishment of the Run-off
Operations. During 1997, the ratio for Change in Net Writings was -99% compared
to a guideline ratio of -33% resulting from the discontinuance of premium
writings in MASCCO at December 31, 1996.
During 1996, Investment Yield for MASCCO was lower than the guideline range
due to a large increase in investments in December of 1996 that resulted from an
intercompany transfer of investments and loss reserves related to the
aforementioned intercompany reinsurance agreement.
The reporting of the above unusual values did not result in any significant
unresolved issues with insurance regulators.
MANAGEMENT
The executive officers and directors of the Company are as follows:
Name Age Position
- --------------------------- --- ----------------------------------------------
Frederick W. Anton III..... 64 Chairman of the Board
John W. Smithson........... 52 President and Chief Executive Officer
Francis W. McDonnell....... 42 Senior Vice President, Chief Financial Officer
and Treasurer
Vincent T. Donnelly........ 45 President and Chief Operating Officer - The
Property and Casualty Group
Stephen G. Tirney.......... 45 President and Chief Operating Officer - PMA Re
Ronald S. Austin........... 41 President and Chief Operating Officer -
Caliber One
Paul I. Detwiler, Jr....... 65 Director
Joseph H. Foster........... 70 Director
Anne S. Genter............. 63 Director
James F. Malone III........ 55 Director
A. John May................ 70 Director
Louis N. McCarter III...... 69 Director
John W. Miller, Jr., M.D... 64 Director
Edward H. Owlett........... 71 Director
Louis I. Pollock........... 68 Director
Roderic H. Ross............ 68 Director
L.J. Rowell, Jr............ 66 Director
Frederick W. Anton III has served as Chairman of the Board since 1995 and
as a director of the Company since 1972. Mr. Anton's current term as a director
of the Company expires in 2000. Mr. Anton served as Chairman of the Board and
Chief Executive Officer from 1995 to May 1997, as President and Chief Executive
Officer from 1981 to 1995, as President
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of The Property and Casualty Group from 1972 to 1989 and as Secretary and
General Counsel of PMAIC from 1962 to 1972.
John W. Smithson has served as President and Chief Executive Officer of the
Company since May 1997, and as a director of the Company since 1987. Mr.
Smithson's current term as a director of the Company expires in 1999. Mr.
Smithson has served as President and Chief Operating Officer of the Company from
1995 to May 1997, as Chairman, President and Chief Executive Officer of PMA Re
from 1984 to 1997 and as Chairman, President and Chief Executive Officer of the
Property and Casualty Group from April 1995 to 1997, and was employed by PMAIC
from 1972 to 1984. Mr. Smithson is a designated Chartered Property-Casualty
Underwriter.
Francis W. McDonnell has served as Senior Vice President and Chief
Financial Officer of the Company since 1995 and as Treasurer since 1997, and has
served as Senior Vice President and Chief Financial Officer of PMA Re since
1995. From 1993 to 1995, Mr. McDonnell served as Vice President Finance of PMA
Re. Prior to joining PMA Re in 1993, Mr. McDonnell served in various
controllership positions with Reliance Insurance Company from 1985 to 1993. Mr.
McDonnell is a certified public accountant and a designated Chartered Property-
Casualty Underwriter.
Vincent T. Donnelly has served as President and Chief Operating Officer of
the Property and Casualty Group since February 1997. Mr. Donnelly served as
Senior Vice President - Finance and Chief Actuary of the Property and Casualty
Group from 1992 to 1997. Prior to joining the Property and Casualty Group, Mr.
Donnelly served as Vice President and Actuary of Continental Insurance Company
from 1987 to 1992 and as Actuary of American International Group, a property and
casualty insurance company, from 1978 to 1987. Mr. Donnelly is a Fellow of the
Casualty Actuarial Society and a member of the American Academy of Actuaries.
Stephen G. Tirney has served as President and Chief Operating Officer of
PMA Re since 1997. Mr. Tirney served as Executive Vice President of PMA Re from
1993 to 1997, as Senior Vice President of PMA Re from 1989 to 1993 and has been
an employee of PMA Re since 1976.
Ronald S. Austin was hired in 1997 as the President and Chief Operating
Officer of Caliber One. From 1988 to 1997, Mr. Austin served as an officer and
director of General Star Management Company, a member of the General Reinsurance
Group.
Paul I. Detwiler, Jr., a director since 1984, has served as Chairman of the
Board of New Enterprise Stone & Lime Co., a quarrying and construction company,
since 1990. Mr. Detwiler's current term as a director of the Company expires in
1999. Mr. Detwiler is also a director of Keystone Financial, Inc.
Joseph H. Foster, a director since 1982, has been a partner of White &
Williams, a law firm, since 1958. Mr. Foster's current term as a director of the
Company expires in 2000.
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Anne S. Genter, a director since 1991, has served as President of Anne S.
Genter Interior Design, an interior design company, since 1975. Ms. Genter's
current term as a director of the Company expires in 1999.
James F. Malone III, a director since 1974, has been a partner of Malone,
Larchuk & Middleman, P.C., a law firm, since 1997 and from 1980 to 1997 was a
partner of Dickie, McCamey & Chilcote, P.C., a law firm. Mr. Malone's current
term as a director of the Company expires in 2000.
A. John May, a director since 1977, has been a partner of Duane, Morris &
Heckscher LLP, a law firm, since 1963. Mr. May's current term as a director of
the Company expires in 1999.
Louis N. McCarter III a director since 1975, has been President of the
McCarter Corp., a manufacturer of specialized mixing machinery, since 1954. Mr.
McCarter's current term as a director of the Company expires in 2001.
John W. Miller, Jr., M.D., a director since 1988, has been a physician and
has served as President of Ear, Nose and Throat Associates of Lancaster since
1970. Dr. Miller's current term as a director of the Company expires in 2001.
Edward H. Owlett, a director since 1964, has been a partner of Owlett,
Lewis & Ginn, P.C., a law firm, since 1981. From 1960 to 1981, Mr. Owlett served
as a partner of Cox, Wilcox, Owlett & Lewis, a law firm. Mr. Owlett's current
term as a director of the Company expires in 2001. Mr. Owlett is also a
director of Citizens and Northern Corporation.
Louis I. Pollock, a director since 1984, has served as President and Chief
Executive Officer of Morris Coupling Company, a manufacturer of pipe and tubing,
since 1957. Mr. Pollock's current term as a director of the Company expires in
2001.
Roderic H. Ross, a director since 1981, has served as Chairman of the Board
and Chief Executive Officer of Keystone State Life Insurance Company since 1985.
Prior to 1985, Mr. Ross held various positions at Philadelphia Life Insurance
Company and was an employee of Philadelphia Life Insurance Company from 1970 to
1984. Mr. Ross' current term as a director of the Company expires in 1999. Mr.
Ross is also a director of Hunt Manufacturing Co. and PNC Bank Corp.
L. J. Rowell, Jr., a director since 1992, was Chairman, President and Chief
Executive Officer of Provident Mutual Life Insurance Company from 1992 until his
retirement in July 1996. Prior to 1992, Mr. Rowell held various positions at
Provident Mutual and was an employee of Provident Mutual from 1980 until July
1996. Mr. Rowell's current term as a director of the Company expires in 2000.
The Board of Directors of the Company is divided into three classes, and
the directors of each class are elected for a term of three years and until
their successors are elected and qualified or until their earlier death,
resignation or removal. Prior to each election of a class of directors, the
Board of Directors must fix the size of that class of directors at a minimum of
four and a maximum of eight directors. Every director must be a shareholder of
the
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Company. No person may be considered as a candidate, and no votes may be counted
for any person, unless written notice of such person's nomination or candidacy
has been filed with the Secretary of the Company not less than 60 days prior to
the date of election; provided, however, that nominees selected by the then
existing Board of Directors or nominating committee appointed by the Board of
Directors may be candidates and voted for without such notice.
DESCRIPTION OF THE CAPITAL SECURITIES
The trust agreement between PMC as Depositor and The Bank of New York
(Delaware), as Delaware Trustee, authorized and created the Issuer. The Amended
and Restated Trust Agreement among PMC as Depositor, The Bank of New York
(Delaware) as Delaware Trustee and The Bank of New York as Property Trustee and
the Administrative Trustees named therein is referred to herein as the "Trust
Agreement". The Trust Agreement will be qualified under the Trust Indenture Act.
The Property Trustee, The Bank of New York, will act as the indenture trustee
for purposes of compliance with the provisions of the Trust Indenture Act. The
Capital Securities and the Common Securities (together, the "Trust Securities")
will be issued by the Administrative Trustees on behalf of the Issuer pursuant
to the terms of the Trust Agreement. The Capital Securities represent undivided
beneficial interests in the Issuer and entitle the holders thereof to a
preference in certain circumstances with respect to distributions and amounts
payable on redemption or liquidation over the Common Securities, as well as
other benefits as described in the Trust Agreement. The following statements
relating to the provisions of the Trust Agreement summarize the material
provisions of the Trust Agreement. Reference is made to the provisions of the
Trust Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, and the Trust Indenture Act for
a more complete description of the provisions summarized herein, and each such
statement shall be deemed qualified in its entirety by such reference. Wherever
particular sections of the Trust Agreement are referred to, such sections are
incorporated herein by reference. Section references used herein are references
to provisions of the Trust Agreement, unless otherwise noted.
General
The Issuer is a Delaware statutory business trust. PMC, the Depositor, will
own, directly or indirectly, all of the outstanding Common Securities of the
Trust. The Common Securities rank pari passu, and payments will be made thereon
pro rata, with the Capital Securities except as described under "--Subordination
of Common Securities." (Section 4.03.) The Junior Subordinated Debentures will
be owned by the Property Trustee and held in trust for the benefit of the Trust
and the holders of the Trust Securities. (Section 2.09.) Pursuant to the
Guarantee, PMC fully and unconditionally guarantees the payment of distributions
(as defined below) and amounts payable on redemption of the Capital Securities
or liquidation of the Issuer, but does not guarantee such payments when the
Issuer does not have funds available to pay such amounts.
The Trustees
Pursuant to the Trust Agreement, the number of the Issuer's trustees (the
"Trustees") initially will be four. (Section 8.17.) In addition to the Property
Trustee, the Issuer initially will have three Administrative Trustees who will
be officers or employees of, or otherwise affiliated
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with PMC. The Administrative Trustees are authorized and directed to conduct the
affairs of the Issuer and to operate the Issuer such that the Issuer will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or fail or cease to qualify as a grantor trust for United
States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of PMC for United States federal
income tax purposes. In this connection, PMC and the Administrative Trustees are
authorized to take any action, not inconsistent with applicable law, the
certificate of trust of the Issuer or the Trust Agreement, that each of PMC and
the Administrative Trustees determines in its discretion to be necessary or
desirable for such purposes, as long as such action does not adversely affect,
in any material respect, the interests of the holders of the Capital Securities.
(Section 2.07(d).)
Subject to the specific authority and duties of the Property Trustee, the
Trust Agreement provides the Administrative Trustees with exclusive and complete
authority to operate and carry out the purposes of the Issuer. As among the
Trustees, the Administrative Trustees have the power, duty and authority to act
on behalf of the Issuer with respect to (A) the issuance and sale of the Trust
Securities, (B) to cause the Issuer to enter into, and to execute, deliver and
perform on behalf of the Issuer, certain agreements necessary or desirable in
connection with the purposes and function of the Trust, (C) assisting in any
registration of the Capital Securities under the Securities Act and under state
securities or blue sky laws, and the qualification of the Trust Agreement under
the Trust Indenture Act, (D) assisting in any quotation or listing of the
Capital Securities upon the Nasdaq National Market or such securities exchange
or exchanges as determined by PMC and the registration of the Capital Securities
under the Securities Exchange Act, and the preparation and filing of all
periodic and other reports and other documents pursuant to the foregoing, (E)
the sending of notices (other than notices of default) and other information
regarding the Trust Securities and the Junior Subordinated Debentures to the
holders of Trust Securities, (F) the consent to the appointment of certain
agents in accordance with the Trust Agreement and (G) certain other functions
relating to the registration of stock transfers, the winding up and liquidation
of the Issuer and the execution of documents and actions incidental to the
foregoing. As set forth in greater detail below, the Property Trustee has the
power, duty and authority to act on behalf of the Issuer with respect to (A)
establishment of a payment account, (B) the receipt of the Junior Subordinated
Debentures, (C) the collection and distribution of amounts due under the Junior
Subordinated Debentures, (D) the exercise of all of the rights, powers and
privileges of a holder of the Junior Subordinated Debentures, (E) the sending of
notices of default and other information regarding the Trust Securities and the
Junior Subordinated Debentures to the holders of the Trust Securities, (F) the
distribution of the Trust Property in accordance with the Trust Agreement and
certain other functions relating to the winding up and liquidation of the Issuer
and the protection and conservation of the Trust Property after an Event of
Default (as defined below). (Section 2.07(a).)
The Property Trustee, other than during the occurrence and continuance of
an Event of Default, undertakes to perform only such duties as are specifically
set forth in the Trust Agreement and pursuant to the Trust Indenture Act and,
after such Event of Default, must exercise the same degree of care and skill as
a prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Trust Agreement at the request of
any holder of Capital Securities unless it is offered reasonable indemnity
against the costs, expenses and liabilities that might be
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incurred thereby. (Section 8.01(a) and (c).) If no Event of Default has
occurred and is continuing and the Property Trustee is required to decide
between alternative causes of action, construe ambiguous provisions in the Trust
Agreement or is unsure of the application of any provision of the Trust
Agreement, and the matter is not one on which holders of Capital Securities are
entitled under the Trust Agreement to vote, then the Property Trustee shall take
such action as is directed by PMC and if not so directed, shall take such action
as it deems advisable and in the best interests of the holders of the Trust
Securities and will have no liability except for its own bad faith, negligence
or willful misconduct. (Section 8.03.)
Distributions
The Capital Securities represent undivided beneficial interests in the
assets of the Issuer, and the distributions on each Capital Security will be
payable at a rate per annum of __% of the stated amount of $1,000 per Capital
Security (the "Liquidation Amount"). The amount of distributions payable for any
period will be computed on the basis of a 360-day year of twelve 30-day months.
(Section 4.01(a).) See "Description of the Junior Subordinated Debentures--
Interest" and "Description of the Junior Subordinated Debentures--Option to
Extend Interest Payment Period."
Distributions on the Capital Securities will be cumulative, will accumulate
from the date of original issuance and will be payable semi-annual in arrears,
on ____ and ____ of each year, commencing ________, 1999 (each a "Distribution
Date"). In the event that any date on which distributions are otherwise payable
on the Capital Securities is not a Business Day, payment of the distribution
payable on such date will be made on the next succeeding day that is a Business
Day (and without any additional distribution or other payment in respect of any
such delay) except that, if such Business Day is in the next succeeding calendar
year, payment of such distribution shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the date
such payment was originally payable. "Business Day" means any day other than a
Saturday or Sunday, or a day on which banking institutions in The City of New
York are authorized or required by law or executive order to remain closed or a
day on which the principal office of the Property Trustee or Debenture Trustee
(as defined below) is closed for business. (Section 4.01(a).)
PMC has the right under the Indenture pursuant to which it will issue the
Junior Subordinated Debentures, so long as no Event of Default under the
Indenture (also referred to herein as a "Debenture Event of Default" and defined
below, see "Description of the Junior Subordinated Debentures--Debenture Events
of Default and Consequent Rights of Certain Holders") has occurred and is
continuing, to defer the payment of interest at any time and from time to time
on the Junior Subordinated Debentures for a period not exceeding 10 consecutive
semi-annual periods with respect to each deferral period (each, an "Extension
Period"), provided that no Extension Period may extend beyond 2028, the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
election, the Issuer will defer semi-annual distributions on the Capital
Securities during any such Extension Period. Distributions to which holders of
the Capital Securities are entitled will accumulate additional distributions
thereon at a rate per annum of ___% thereof, compounded semi-annually from the
relevant payment date for such distributions. The term, "distributions" as used
herein shall include any such additional distributions. In the event that PMC
exercises this right, during such Extension Period PMC may not, and shall cause
any subsidiary of PMC not to,
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(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of PMC's capital
stock or (ii) make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities of PMC that rank pari passu with
or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by PMC of the debt securities
of any subsidiary of PMC that by their terms rank pari passu or junior in
interest to the Junior Subordinated Debentures (other than (a) dividends or
distributions in Common Stock or Class A Common Stock of PMC, (b) payments under
the Guarantee, and (c) purchases of Common Stock or Class A Common Stock of PMC
related to the issuance of Common Stock or Class A Common Stock of PMC under any
of PMC's benefit plans for its directors, officers or employees). Prior to the
termination of any such Extension Period, PMC may further extend the interest
payment period, provided that no Extension Period together may exceed 10
consecutive semi-annual periods or extend beyond the Stated Maturity of the
Junior Subordinated Debentures. Upon the termination of any Extension Period and
the payment of all amounts then accrued and unpaid (together with interest
thereon at the rate of ___% per annum compounded semi-annually to the extent
permitted by applicable law), PMC may elect to begin a new Extension Period.
There is no limitation on the number of times that PMC may elect to begin an
Extension Period. See "Description of the Junior Subordinated Debentures--
Interest" and "Description of the Junior Subordinated Debentures--Option to
Extend Interest Payment Period."
It is anticipated that the income of the Issuer available for distribution
to the holders of the Capital Securities will be limited to payments under the
Junior Subordinated Debentures in which the Issuer will invest the proceeds from
the issuance and sale of the Capital Securities and the Common Securities. See
"Description of the Junior Subordinated Debentures." If PMC does not make
interest payments on the Junior Subordinated Debentures, the Property Trustee
will not have funds available to pay distributions on the Capital Securities.
The payment of distributions (if and to the extent the Issuer has funds legally
available for the payment of such distributions and cash sufficient to make such
payment therefor at such time) is guaranteed by PMC as set forth herein under
"Description of the Guarantee."
Distributions on the Capital Securities will be payable to the holders
thereof as they appear on the register of the Issuer on the relevant record
dates, which, as long as the Capital Securities remain in book-entry-only form,
will be one Business Day prior to the relevant Distribution Date. Subject to any
applicable laws and regulations and the provisions of the Trust Agreement, each
such payment will be made as described under "--Book-Entry-Only Issuance--The
Depository Trust Company" below. In the event the Capital Securities do not
remain in book-entry-only form, the relevant record date shall be the date
15 days prior to the relevant Distribution Date. (Section 4.01(b).)
Redemption
Mandatory Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures at Stated Maturity or upon earlier redemption as
provided in the Indenture (each, a "Redemption Date"), the proceeds from such
repayment or redemption shall be applied by
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the Trustee to redeem a Like Amount of Capital Securities, upon not less than 30
nor more than 60 days' notice. See "Description of the Junior Subordinated
Debentures-- Optional Redemption." "Like Amount" means (i) with respect to a
redemption of Trust Securities, Trust Securities having a Liquidation Amount
equal to the principal amount of Junior Subordinated Debentures to be
contemporaneously redeemed in accordance with the Indenture and the proceeds of
which will be used to pay the Redemption Price of such Trust Securities, and
(ii) with respect to a distribution of Junior Subordinated Debentures to holders
of Trust Securities in connection with a dissolution or liquidation of the
Issuer, Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Trust Securities of the holder to whom such Junior
Subordinated Debentures are distributed. If less than all of the Junior
Subordinated Debentures are to be repaid or redeemed on a redemption date then
the proceeds from such repayment or redemption shall be allocated to the
redemption pro-rata of the Capital Securities and the Common Securities. The
amount of the premium, if any, paid by PMC upon the redemption of all or any
part of the Junior Subordinated Debentures to be repaid or redeemed on a
Redemption Date shall be allocated to the redemption pro rata of the Capital
Securities and the Common Securities (Section 4.02).
PMC has the right to redeem the Junior Subordinated Debentures (i) on or
after ____, 2008, in whole at any time or in part from time to time, subject to
the conditions described under "Description of Junior Subordinated Debentures--
Optional Redemption", or (ii) at any time prior to ____, 2008, in whole but not
in part, within 90 days following the occurrence of a Tax Event or an Investment
Company Event (each, as defined below, a "Special Event") and subject to the
further conditions described under "Description of the Junior Subordinated
Debentures--Optional Redemption."
The Redemption Price, in the case of a redemption under (i) above (which
includes redemption at Stated Maturity), shall equal the following prices
expressed in percentages of the Liquidation Amount together with accrued
distributions to but excluding the Redemption Date. If redeemed during the 12-
month period beginning __________ 1:
Year Redemption Price
---- ----------------
2008 ................. 10x.xxxx%
2009 ................. 10x.xxxx%
2010 ................. 10x.xxxx%
2011 ................. 10x.xxxx%
2012 ................. 10x.xxxx%
2013 ................. 10x.xxxx%
2014 ................. 10x.xxxx%
2015 ................. 10x.xxxx%
2016 ................. 10x.xxxx%
2017 ................. 10x.xxxx%
and 100% on and after _________ 1, 2018.
Special Event Redemption or Distribution of Junior Subordinated Debentures
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If prior to __________, 2008 a Special Event shall occur and be continuing,
PMC has the right within 90 days following the occurrence of such Special Event
to redeem the Junior Subordinated Debentures in whole (but not in part) and
thereby cause a mandatory redemption of the Capital Securities and Common
Securities in whole (but not in part) at the Redemption Price set forth below.
If a Special Event were to occur, there can be no assurance that PMC would have
sufficient funds to effectuate an optional redemption of the Junior Subordinated
Debentures and pay the Redemption Price. PMC's ability to exercise its option
to redeem the Junior Subordinated Debentures may be limited by the terms of its
then-existing borrowing and other agreements. At any time, PMC has the right to
terminate the Issuer and, after satisfaction of the liabilities of creditors of
the Issuer as provided by applicable law, cause a Like Amount (defined above) of
the Junior Subordinated Debentures to be distributed to the holders of the
Capital Securities and Common Securities in liquidation of the Issuer (after
which such Capital Securities and Common Securities will no longer be deemed to
be outstanding). If PMC does not elect either option described above, the
Capital Securities will remain outstanding and, in the event a Tax Event has
occurred and is continuing, Additional Sums (as defined below) may be payable on
the Junior Subordinated Debentures. "Additional Sums" means the additional
amounts as may be necessary in order that the amount of distributions then due
and payable by the Issuer on the outstanding Capital Securities and Common
Securities shall not be reduced as a result of any additional taxes, duties and
other governmental charges to which the Issuer has become subject as a result of
a Tax Event.
"Investment Company Event" means the receipt by the Issuer of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority (a "Change in 1940 Act Law"), the Issuer is or
will be considered an "investment company" that is required to be registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), which Change in 1940 Act Law becomes effective on or after the date of
original issuance of the Junior Subordinated Debentures. PMC has the right,
within 90 days following the occurrence of an Investment Company Event, to
redeem the Junior Subordinated Debentures in whole (but not in part).
"Tax Event" means the receipt by the Issuer of an opinion of counsel
experienced in such matters to the effect that, as a result of (a) any amendment
to, clarification of, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or (b) any official
administrative pronouncement (including any private letter ruling, technical
advice memorandum or field service advice) or regulatory procedure ("an
Administrative Action") or judicial determination, regardless of whether such
judicial decision or Administrative Action is issued to or in connection with a
proceeding involving PMC or the Issuer and whether or not subject to review or
appeal, which amendment, clarification, change, Administrative Action or
decision is enacted, promulgated or announced, in each case, on or after the
date of issuance of the Junior Subordinated Debentures, there is more than an
insubstantial risk that (i) the Issuer is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
interest income received or accrued on the Junior Subordinated Debentures, (ii)
interest payable by PMC on the Junior Subordinated Debentures is not, or within
90 days of the date of such opinion, will not be, deductible by PMC, in whole or
in part, for United States federal income tax purposes or (iii) the Issuer is,
or will be within 90 days of the date of such opinion, subject to more than a de
minimis amount of other taxes, duties or other governmental charges. PMC has the
right, within 90 days following the occurrence of a Tax Event, to redeem the
Junior Subordinated Debentures in whole (but not in part).
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The Redemption Price, in the case of a redemption following a Special Event
prior to _____ 1, 2008 (as described above) shall equal for each Capital
Security, the Make-Whole Amount for a corresponding $1,000 principal amount of
Junior Subordinated Debentures together with accrued distributions to but
excluding the Redemption Date. The "Make-Whole Amount" shall be equal to the
greater of (i) 100% of the principal amount of such Junior Subordinated
Debentures or (ii) as determined by a Quotation Agent (as defined below), the
sum of the present values of the principal amount and premium payable as part of
the Redemption Price with respect to an optional redemption of such Junior
Subordinated Debentures on _____ 1, 2008, together with scheduled payments of
interest from the Redemption Date to ____ 1, 2008 (the "Remaining Life"), in
each case discounted to the Redemption Date on a semi-annual basis (assuming a
360-day year consisting of 30-day months) at the Adjusted Treasury Rate (as
defined below).
"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
Treasury Rate (as defined below) plus (i) _____% if such Redemption Date occurs
on or before _______ 1, 1999 or (ii) ______% if such Redemption Date occurs
after _________ 1, 1999.
"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the maturity corresponding to the
Remaining Life (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Remaining Life shall be determined and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month) or (ii) if such release (or any successor
release) is not published during the week preceding the calculation date or does
not contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue, calculated using a price for
the Comparable Treasury Issue (expressed as a percentage of its principal
amount) equal to the Comparable Treasury Price for such Redemption Date. The
Treasury Rate shall be calculated on the third Business Day preceding the
Redemption Date.
"Comparable Treasury Issue" means, with respect to any Redemption Date, the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States Treasury security has a maturity which is within a
period from three months before to three months after ____ 1, 2008, the two most
closely corresponding United States Treasury securities shall be used as the
Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities.
"Quotation Agent" means Goldman, Sachs & Co. and their successors;
provided, however, that if the foregoing shall cease to be a primary United
States Government securities dealer in New York City (a "Primary Treasury
Dealer"), PMC shall substitute therefor another Primary Treasury Dealer.
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"Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any
other Primary Treasury Dealer selected by the Debenture Trustee after
consultation with PMC.
"Comparable Treasury Price" means (A) the average of five Reference
Treasury Dealer Quotations for such Redemption Date, after excluding the highest
and lowest such Reference Treasury Dealer Quotations or (B) if the Debenture
Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the
average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any Redemption Date, the average, as determined by
the Debenture Trustee, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case, as a percentage of its principal amount) quoted
in writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00
p.m., New York City time, on the third Business Day preceding such Redemption
Date.
With certain limited exceptions, after the liquidation date fixed for any
distribution of Junior Subordinated Debentures to holders of Capital Securities
(the "Liquidation Date") (i) the Capital Securities will no longer be deemed to
be outstanding, (ii) The Depository Trust Company ("DTC") or its nominee, as the
record holder of the Capital Securities, will receive a registered global
certificate or certificates representing the Junior Subordinated Debentures to
be delivered upon such distribution, (iii) any certificates representing Capital
Securities not held by DTC or its nominee will be deemed to represent Junior
Subordinated Debentures having a principal amount equal to the stated
Liquidation Amount of the Capital Securities, and bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid distributions on such
Capital Securities until such certificates are surrendered and (iv) all rights
of the holders of Capital Securities will cease, except the right of such
holders to receive Junior Subordinated Debentures upon surrender of the
certificates representing Capital Securities. (Section 9.04(c).)
There can be no assurance as to the market prices for the Capital
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Capital Securities if a termination and liquidation of the Issuer
were to occur. Accordingly, the Capital Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive
upon termination and liquidation of the Issuer, may trade at a discount to the
price that the investor paid to purchase the Capital Securities offered hereby.
Redemption Procedures
Capital Securities redeemed on each Redemption Date shall be redeemed at
the Redemption Price stated above with the proceeds from the contemporaneous
redemption of Junior Subordinated Debentures. Redemptions of the Capital
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer has funds available for the
payment of such Redemption Price. (Section 4.02(c).) See also "--Subordination
of Common Securities."
If the Property Trustee gives a notice of redemption in respect of Capital
Securities, then, by 12:00 noon, New York time, on the Redemption Date, to the
extent that funds are available, the Property Trustee will, so long as the
Capital Securities are in book-entry-only
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form, irrevocably deposit with DTC funds sufficient to pay the applicable
Redemption Price and will give DTC irrevocable instructions and authority to pay
the Redemption Price to the holders of the Capital Securities. See
"--Book-Entry- Only Issuance--The Depository Trust Company." If the Capital
Securities are no longer in book-entry-only form, the Property Trustee, to the
extent funds are available, will irrevocably deposit with the paying agent for
the Capital Securities funds sufficient to pay the applicable Redemption Price
and will give such paying agent irrevocable instructions and authority to pay
the Redemption Price to the holders thereof upon surrender of their certificates
representing Capital Securities. Notwithstanding the foregoing, distributions
payable on or prior to the Redemption Date for any Capital Securities called for
redemption shall be payable to the holders of such Capital Securities on the
relevant record dates for the related Distribution Dates. If notice of
redemption shall have been given and funds deposited as required, then upon the
Redemption Date, all rights of holders of such Capital Securities so called for
redemption will cease, except the right of the holders of such Capital
Securities to receive the Redemption Price, including any distributions payable
in respect of the Capital Securities on or prior to the Redemption Date but
without interest on such Redemption Price, and such Capital Securities will
cease to be outstanding. In the event that any date fixed for redemption of
Capital Securities is not a Business Day, then payment of the Redemption Price
payable on such date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any such delay),
except that, if such Business Day falls in the next calendar year, such payment
shall be made on the immediately preceding Business Day in each case, with the
same force and effect as if made on such date. In the event that payment of the
Redemption Price in respect of any Capital Securities called for redemption is
improperly withheld or refused and not paid either by the Issuer or by PMC
pursuant to the Guarantee described under "Description of the Guarantee,"
distributions on such Capital Securities will continue to accumulate, at the
then applicable rate, from the original Redemption Date to the date of payment,
in which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price. (Section 4.02(d).)
Payment of the Redemption Price on the Capital Securities and distribution
of Junior Subordinated Debentures to holders of Capital Securities shall be made
to the record holders thereof as they appear on the register for the Capital
Securities on the relevant record date, which shall be one Business Day prior to
the relevant Redemption Date or Liquidation Date, as applicable; provided,
however, that in the event that the Capital Securities do not remain in book-
entry-only form, the relevant record date shall be the date 15 days prior to the
Redemption Date or Liquidation Date, as applicable. (Section 4.02(e).)
If less than all the outstanding Trust Securities are to be redeemed on a
Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be
redeemed shall be allocated pro rata among the Common Securities and the Capital
Securities according to their relative aggregate Liquidation Amounts. The
particular Capital Securities to be redeemed shall be selected on a pro rata
basis (based upon Liquidation Amounts) not more than 60 days prior to the
Redemption Date by the Property Trustee from the outstanding Capital Securities
not previously called for redemption, by such method (including, without
limitation, by lot) as the Property Trustee shall deem fair and appropriate and
which may provide for the selection for redemption of portions (equal to $1,000
or an integral multiple of $1,000 in excess thereof) of the Liquidation Amount
of Capital Securities of a denomination larger than $1,000. See "--Book-Entry
Only Issuance--The Depository Trust Company." The Property Trustee shall
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promptly notify the Securities Registrar in writing of the Capital Securities
selected for redemption and, in the case of any Capital Securities selected for
partial redemption, the Liquidation Amount thereof to be redeemed. For all
purposes of the Trust Agreement, unless the context otherwise requires, all
provisions relating to the redemption of Capital Securities shall relate, in the
case of any Capital Securities redeemed or to be redeemed only in part, to the
portion of the Liquidation Amount of Capital Securities which has been or is to
be redeemed. The Bank of New York is the initial Securities Registrar.
(Sections 4.02(f) and 5.04.)
Subject to applicable law (including, without limitation, United States
federal securities law), PMC or its subsidiaries may at any time and from time
to time purchase outstanding Capital Securities by tender, in the open market or
by private agreement.
Subordination of Common Securities
Payment of distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of the Trust Securities; provided, however, that if on any Distribution
Date, Redemption Date or Liquidation Date any Event of Default (as defined
below, see "--Events of Default; Notice") under the Trust Agreement resulting
from a Debenture Event of Default (as defined below) shall have occurred and be
continuing, no payment of any distribution on, or Redemption Price of, or
Liquidation Distribution (as defined below) in respect of any Common Security,
and no other payment on account of the redemption, liquidation or other
acquisition of Common Securities, shall be made unless payment in full in cash
of all accumulated and unpaid distributions on all outstanding Capital
Securities for all distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all outstanding Capital Securities, or in the case of payment of the
Liquidation Distribution the full amount of such Liquidation Distribution on all
outstanding Capital Securities, shall have been made or provided for, and all
funds available to the Property Trustee shall first be applied to the payment in
full in cash of all distributions on, or the Redemption Price of, Capital
Securities then due and payable. (Section 4.03(a).)
In the case of the occurrence of any Event of Default under the Trust
Agreement resulting from a Debenture Event of Default, the holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default under the Trust Agreement with respect to the Common
Securities until the effect of all such Events of Default have been cured,
waived or otherwise eliminated. Until any such Events of Default under the
Trust Agreement with respect to the Capital Securities have been cured, waived
or otherwise eliminated, the Property Trustee shall act solely on behalf of the
holders of the Capital Securities and not the holder of the Common Securities,
and only the holders of the Capital Securities will have the right to direct the
Property Trustee to act on their behalf. (Section 4.03(b).)
Liquidation Distribution upon Termination
Pursuant to the Trust Agreement, the Issuer shall be terminated by the
Trustees on the first to occur of: (i) the expiration of the term of the Issuer;
(ii) the occurrence of certain events of bankruptcy or insolvency in respect of,
or the dissolution or liquidation of, PMC; (iii) the distribution of the Junior
Subordinated Debentures to the holders of Capital Securities and
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Common Securities if PMC, as Depositor, has given written direction to the
Property Trustee to terminate the Issuer (which direction is optional and wholly
within the discretion of PMC, as Depositor); (iv) the redemption of all of the
Trust Securities and (v) the entry of an order for dissolution of the Issuer by
a court of competent jurisdiction. (Sections 9.01 and 9.02.)
If a termination event specified in clause (ii), (iii) or (v) above occurs,
the Issuer shall be liquidated by the Trustees as expeditiously as the Trustees
determine to be possible by distributing, after satisfaction of liabilities to
creditors of the Trust as provided by applicable law, to each holder of Capital
Securities and Common Securities a Like Amount of Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of the Issuer available for distribution to holders after
satisfaction of liabilities to creditors, an amount equal to, in the case of
the Capital Securities, the aggregate of the Liquidation Amount plus
accumulated and unpaid distributions thereon to the date of payment (such amount
being the "Liquidation Distribution"). If such Liquidation Distribution can be
paid only in part because the Issuer has insufficient assets available to pay in
full the aggregate Liquidation Distribution, then, subject to the next
succeeding sentence, the amounts payable by the Issuer on the Capital Securities
shall be paid on a pro rata basis (based on Liquidation Amounts). The holder of
the Common Securities will be entitled to receive Liquidation Distributions upon
any such liquidation pro rata with the holders of the Capital Securities, except
that if a Debenture Event of Default has occurred and is continuing, the Capital
Securities shall have a priority over the Common Securities. (Sections
9.04(a)and 9.04(d).)
Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under the
Trust Agreement with respect to the Capital Securities issued thereunder
(whatever the reason for such Event of Default and whether it shall be voluntary
or involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default under the
Indenture (as defined in "Description of Junior Subordinated Debentures--
Debenture Events of Default and Consequent Rights of Certain Holders"); or
(ii) default by the Property Trustee in the payment of any
distribution, other than payment of principal, when it becomes due and payable,
and continuation of such default for a period of 30 days; or
(iii) default by the Property Trustee in the payment of any
Redemption Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect,
of any covenant or warranty of the Trustees in the Trust Agreement (other than a
covenant or warranty a default in the performance of which or the breach of
which is dealt with in clause (ii) or (iii) above), and continuation of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting Trustee or Trustees by the
holders of at least 25% in aggregate Liquidation Amount of the outstanding
Capital
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Securities a written notice specifying such default or breach and requiring it
to be remedied and stating that such notice is a "Notice of Default" under the
Trust Agreement; or
(v) The occurrence of certain events of bankruptcy or insolvency
with respect to the Property Trustee and the failure by PMC to appoint a
successor Property Trustee within 60 days thereof. (Section 1.01.)
Within five Business Days after the occurrence of any Event of Default, the
Property Trustee shall transmit notice of any Event of Default actually known to
the Property Trustee to the holders of Trust Securities, the Administrative
Trustees and PMC, as Depositor, unless such Event of Default shall have been
cured or waived. (Section 8.02.) Each of PMC, as Depositor, and the
Administrative Trustees on behalf of the Trust is required to provide annually
to the Property Trustee a certificate as to whether or not they are in
compliance with all of the conditions and covenants applicable to them under the
Trust Agreement. (Section 8.15.)
If a Debenture Event of Default has occurred and is continuing, the Capital
Securities shall have a preference over the Common Securities as described
above. See "--Liquidation Distribution Upon Termination." The existence of an
Event of Default does not entitle the holders of Capital Securities to
accelerate the maturity thereof.
Removal of Trustees
Unless a Debenture Event of Default shall have occurred and be continuing
the holder of the Common Securities may remove any Trustee at any time. The
holders of at least a majority in aggregate Liquidation Amount of the
outstanding Capital Securities may remove the Property Trustee or if a Debenture
Event of Default has occurred and is continuing, the Property Trustee, may be
removed at such time by the holders of a majority in aggregate Liquidation
Amount of the outstanding Capital Securities with or without cause. In no event
will the holders of the Capital Securities have the right to vote to appoint,
remove or replace the Administrative Trustees, which voting rights are vested
exclusively in PMC as the holder of the Common Securities. No resignation or
removal of any Trustee and no appointment of a successor Trustee shall be
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable provisions of the Trust Agreement. (Section
8.10.)
Merger or Consolidation of Trustees
Any entity into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which any such Trustee shall be a party, or any
entity succeeding to all or substantially all of the corporate trust business of
any such Trustee, shall be the successor of such Trustee under the Trust
Agreement, provided such entity shall be otherwise qualified and eligible.
(Section 8.12.)
Merger, Consolidation, Amalgamation or Replacement of the Issuer
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The Issuer may not merge consolidate amalgamate with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other entity, except as
described below. The Issuer may, at the request of PMC, with the consent of the
Administrative Trustees and with the consent of the holders of at least a
majority in aggregate Liquidation Amount of the Capital Securities or the
Property Trustee, merge, consolidate, or amalgamate with or into, or be replaced
by or convey, transfer or lease its properties and assets substantially as an
entirety to a trust organized as such under the laws of any state; provided,
that (i) such successor entity either (a) expressly assumes all of the
obligations of the Issuer with respect to the Capital Securities or (b)
substitutes for the Capital Securities other securities having substantially the
same terms as the Capital Securities (the "Successor Securities") so long as the
Successor Securities rank the same as the Capital Securities rank in priority
with respect to distributions and payments upon liquidation, redemption and
otherwise, (ii) PMC expressly appoints a trustee of such successor entity
possessing the same powers and duties as the Property Trustee as the holder of
the Junior Subordinated Debentures, (iii) the Successor Securities are listed or
quoted, or any Successor Securities will be listed or quoted upon notification
of issuance, on any national securities exchange, the Nasdaq National Market or
other organization on which the Capital Securities are then listed or quoted, if
any, (iv) such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease does not cause the Capital Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, (v) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Capital Securities (including any Successor
Securities) in any material respect, (vi) such successor entity has a purpose
identical to that of the Issuer, (vii) prior to such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, PMC has received an
opinion from independent counsel to the Issuer experienced in such matters to
the effect that (a) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not adversely affect the rights, preferences
and privileges of the holders of the Capital Securities (including any Successor
Securities) in any material respect and (b) following such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, neither
the Issuer nor such successor entity will be required to register as an
investment company under the Investment Company Act and (viii) PMC or any
permitted successor or assignee owns all of the Common Securities of such
successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee.
Notwithstanding the foregoing, the Issuer shall not, except with the consent of
holders of 100% in Liquidation Amount of the Capital Securities, consolidate,
amalgamate, or merge with or into or be replaced by or convey, transfer or lease
its properties and assets substantially as an entirety to any other entity or
permit any other entity to consolidate, amalgamate merge with or into, or
replace it if such consolidation, amalgamation, merger, replacement, conveyance,
transfer or lease would cause the Issuer or the successor entity to be
classified as other than a grantor trust for United States federal income tax
purposes. (Section 9.05.)
Voting Rights
Except as provided below and under "Description of the Guarantee--
Amendments and Assignment" and "Description of the Junior Subordinated
Debentures--Modification of the
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Indenture" and as otherwise required by law and the Trust Agreement, the holders
of the Capital Securities will have no voting rights. (Section 6.01(a).)
The Trust Agreement may be amended from time to time by PMC, the Property
Trustee and the Administrative Trustees, without the consent of the holders of
the Capital Securities (i) to cure any ambiguity, correct or supplement any
provision in the Trust Agreement that may be inconsistent with any other
provision or to make any other provisions with respect to matters or questions
arising under the Trust Agreement, which shall not be inconsistent with the
other provisions of the Trust Agreement or (ii) to modify, eliminate or add to
any provisions of the Trust Agreement to such extent as shall be necessary to
ensure that the Issuer will be classified for United States federal income tax
purposes as a grantor trust at all times that any Trust Securities are
outstanding or to ensure that the Issuer will not be required to register as an
"investment company" under the Investment Company Act; provided, however, that
in the case of either clause (i) or clause (ii), such action shall not adversely
affect in any material respect the interests of any holder of Capital
Securities, and any amendments of such Trust Agreement shall become effective
when notice thereof is given to the holders of Trust Securities. The Trust
Agreement may be amended by PMC, the Property Trustee and the Administrative
Trustees with (i) the consent of holders representing not less than a majority
(based upon Liquidation Amounts) of the outstanding Trust Securities and (ii)
receipt by the Trustees of an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the Trustees in accordance
with such amendment will not affect the Issuer's status as a grantor trust for
United States federal income tax purposes or the Issuer's exemption from status
as an "investment company" under the Investment Company Act, provided that
without the consent of each affected holder of Trust Securities, such Trust
Agreement may not be amended to (i) change the amount or timing of any
distribution on the Trust Securities or otherwise adversely affect the amount of
any distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a holder of Trust Securities to
institute suit for the enforcement of any such payment on or after such date.
(Section 10.03.)
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
executing any trust or power conferred on the Debenture Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is waivable
under Section 513 of the Indenture, (iii) exercise any right to rescind or annul
a declaration that the principal of all the Junior Subordinated Debentures shall
be due and payable or (iv) consent to any amendment, modification or termination
of the Indenture or the Junior Subordinated Debentures, where such consent shall
be required, without, in each case, obtaining the prior approval of the holders
of at least a majority in Liquidation Amount of the outstanding Capital
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of Junior Subordinated Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior consent of each holder of Capital Securities. The Trustees shall not
revoke any action previously authorized or approved by a vote of the holders of
Capital Securities except by subsequent vote of the holders of Capital
Securities. The Property Trustee shall notify all holders of the Capital
Securities of any notice of default received from the Debenture Trustee. In
addition to obtaining the foregoing approvals of the holders of the Capital
Securities, prior to taking any of the foregoing actions, the Trustees shall, at
the expense of PMC, obtain an
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opinion of counsel experienced in such matters to the effect that the Issuer
will not fail to be classified as a grantor trust for United States federal
income tax purposes on account of such action. (Section 6.01(b).)
Any required approval of holders of Capital Securities may be given at a
separate meeting of holders of Capital Securities convened for such purpose or
pursuant to written consent. The Administrative Trustees will cause a notice of
any meeting at which holders of Capital Securities are entitled to vote, or of
any matter upon which action by written consent of such holders is to be taken,
to be given to each holder of record of the outstanding Capital Securities in
the manner set forth in the Trust Agreement. (Sections 6.02 and 6.06.)
No vote or consent of the holders of Capital Securities will be required
for the Issuer to redeem and cancel Capital Securities in accordance with the
Trust Agreement. Notwithstanding that holders of Capital Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Capital Securities that are owned by PMC, any Trustee or any affiliate of PMC or
any Trustee, shall, for purposes of such vote or consent, be treated as if they
were not outstanding. (Section 1.01.)
Co-Trustees and Separate Trustee
Unless an Event of Default under the Trust Agreement shall have occurred
and be continuing, at any time or times, for the purpose of meeting the legal
requirements of the Trust Indenture Act or of any jurisdiction in which any part
of the Trust Property may at the time be located, the Administrative Trustees
and PMC shall have power to appoint, and upon the written request of the
Administrative Trustees, PMC, as Depositor, shall for such purpose join with the
Administrative Trustees in the execution, delivery, and performance of all
instruments and agreements necessary or proper to appoint one or more persons or
entities approved by the Property Trustee either to act as co-trustee, jointly
with the Property Trustee, of all or any part of such Trust Property, or to act
as separate trustee of any such property, in either case with such powers as may
be provided in the instrument of appointment, and to vest in such person(s) or
entity(s) in such capacity, any property, title, right or power deemed necessary
or desirable, subject to the provisions of the Trust Agreement. If the Depositor
does not join in such appointment within 15 days after the receipt by it of a
request so to do, or in case a Debenture Event of Default has occurred and is
continuing, the Property Trustee alone shall have power to make such
appointment. (Section 8.09.) "Trust Property" means (a) the Junior Subordinated
Debentures, (b) any cash on deposit in, or owing to, the payment account
maintained by the Property Trustee, (c) all proceeds and rights in respect of
the foregoing and any other property and assets for the time being held or
deemed to be held by the Property Trustee pursuant to the trusts of the Trust
Agreement and (d) the rights of the Property Trustee under the Guarantee.
(Section 1.01.)
Book-Entry Only Issuance--The Depository Trust Company
DTC will act as securities depositary for the Capital Securities. The
Capital Securities will be issued only as fully registered securities registered
in the name of Cede & Co. (DTC's nominee). One or more fully registered global
Capital Security certificates will be issued, representing in the aggregate the
total number of Capital Securities, and will be deposited with DTC. (Section
5.11.)
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DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange
Inc. (the "New York Stock Exchange"), the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with Direct
Participants, either directly or indirectly ("Indirect Participants"). The
rules applicable to DTC and its Participants are on file with the Commission.
Purchases of Capital Securities within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Capital
Securities on DTC's records. The ownership interest of each actual purchaser of
each Capital Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Capital Securities.
Transfers of ownership interests in the Capital Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners. Beneficial Owners will not receive certificates representing
their ownership interests in Capital Securities, unless use of the book-entry
system for the Capital Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Capital
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Capital Securities are credited, which may or may not be
the Beneficial Owners. The Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Capital Securities are being redeemed, DTC will reduce the amount of the
interest of each Direct Participant in such Capital Securities in accordance
with its procedures. DTC's current practice is to determine by lot the amount
of the interest of each Direct Participant to be redeemed.
Although voting with respect to the Capital Securities is limited to the
holders of record of the Capital Securities, in those cases where a vote is
required, neither DTC nor Cede & Co.
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will itself consent or vote with respect to Capital Securities. Under its usual
procedures, DTC would mail an omnibus proxy to the Property Trustee as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Capital Securities are credited on the record date (identified in a listing
attached to the omnibus proxy).
The Issuer will make distribution payments on the Capital Securities to
DTC. DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial Owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participant and not of DTC, the Issuer or PMC, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
distributions to DTC is the responsibility of the Issuer, disbursement of such
payments to Direct Participants is the responsibility of DTC, and disbursements
of such payments to the Beneficial Owners is the responsibility of Direct and
Indirect Participants.
A global security shall be exchangeable for Capital Securities registered
in the names of persons other than DTC or its nominee only if (i) DTC properly
notifies PMC, the Trustees, and the Registrar and Transfer Agent that it is
unwilling or unable to continue as a depositary for such global security and no
successor depositary shall have been appointed, or if at any time, DTC ceases to
be a clearing agency registered under the Exchange Act, at a time when DTC is
required to be so registered to act as such depositary, (ii) the Issuer in its
sole discretion determines that such global security shall be so exchangeable
or (iii) there shall have occurred and be continuing a Debenture Event of
Default. Any global security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for definitive certificates registered in such
names, as DTC shall direct. It is expected that such instructions will be based
upon directions received by DTC from its Participants with respect to ownership
of beneficial interests in such global security. In the event that Capital
Securities are issued in definitive form, such Capital Securities will be in
denominations of $1,000 and integral multiples thereof and may be transferred or
exchanged at the offices described below.
In the event Capital Securities are issued in certificated form, the
Liquidation Amount and distributions will be payable, the transfer of the
Capital Securities will be registrable and Capital Securities will be
exchangeable for Capital Securities of other denominations of a like aggregate
Liquidation Amount, at the corporate office of the Property Trustee, or at the
offices of any paying agent or transfer agent; provided that payment of any
distribution may be made at the option of the Administrative Trustees by check
mailed to the address of the persons entitled thereto or by wire transfer. In
addition, if the Capital Securities are issued in certificated form, the record
dates for payment of distributions will be the date 15 days prior to the
relevant Distribution Date (whether or not a Business Day).
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Issuer and PMC believe to be reliable.
Neither the Issuer nor PMC has any responsibility for the performance by DTC or
its Participants of their respective obligations as described hereunder or under
the rules and procedures governing their respective operations.
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Registrar and Transfer Agent
The Bank of New York will act as Securities Registrar and Transfer Agent
for the Capital Securities. (Section 5.04.)
Registration of transfers and exchanges of Capital Securities will be
effected without charge by or on behalf of the Issuer, but the Securities
Registrar may require payment (with the giving of such indemnity as the Issuer
or PMC may require) of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any transfer or exchange. The
Securities Registrar will not be required to register the transfer of any
Capital Securities that have been called for redemption. (Section 5.04.)
Miscellaneous
Payment And Paying Agency
Payments in respect of the Capital Securities shall be made to DTC (so long
as the Capital Securities are held by DTC), which shall credit the relevant
participants' accounts at DTC on the applicable Distribution Dates or, if the
Capital Securities are not held by DTC, such payments shall be made at the
corporate office of the Property Trustee, or at the offices of any paying agent
or transfer agent; provided that payment of any distribution may be made at the
option of the Administrative Trustees by check mailed to the address of the
person entitled thereto as such address shall appear on the Security Register or
by wire transfer. The Paying Agent shall initially be The Bank of New York, and
any co-paying agent chosen by The Bank of New York and acceptable to the
Administrative Trustees and PMC. The Paying Agent shall be permitted to resign
as Paying Agent upon 30 days' written notice to the Administrative Trustees, the
Property Trustee and PMC. In the event that The Bank of New York shall no longer
be the Paying Agent or a successor Paying Agent shall resign or its authority to
act be revoked, the Administrative Trustees shall appoint a successor to act as
Paying Agent (which shall be a bank or trust company acceptable to the Property
Trustee and PMC). (Sections 4.04 and 5.09.)
Holders of the Capital Securities have no preemptive or similar rights.
(Section 5.14(a).)
The Issuer may not borrow money or issue debt (other than the Capital
Securities and the Common Securities) or mortgage or pledge any of its assets.
(Section 2.07(b).)
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of the material provisions of the Guarantee
that will be executed and delivered by PMC for the benefit of the holders from
time to time of the Capital Securities. The Guarantee will be qualified under
the Trust Indenture Act, and The Bank of New York will act as indenture trustee
(the "Guarantee Trustee") under the Guarantee for purposes of compliance with
the Trust Indenture Act. The terms of the Guarantee will be those set forth in
such Guarantee and those made part of such Guarantee by the Trust Indenture Act.
Reference is made to the provisions of the Guarantee, the form of which is filed
as an
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exhibit to the Registration Statement of which this Prospectus forms a part, and
the Trust Indenture Act for a more complete description of the provisions
summarized herein, and each statement set forth below shall be deemed qualified
in its entirety by such reference. Whenever particular provisions in the
Guarantee are referred to herein, such provisions are incorporated by reference
herein. Section references used herein are references to provisions of the
Guarantee unless otherwise noted. The Guarantee Trustee will hold the Guarantee
for the benefit of the holders of the Capital Securities.
General
PMC will irrevocably and unconditionally agree, to the extent set forth
herein, to pay the Guarantee Payments (as defined below) in full to the holders
of the Capital Securities (without duplication of amounts theretofore paid by or
on behalf of the Issuer), as and when due, regardless of any defense, right of
set-off or counterclaim which the Issuer may have or assert other than the
defense of payment. The following payments with respect to Capital Securities,
to the extent not paid by or on behalf of the Issuer (the "Guarantee Payments"),
will be subject to the Guarantee: (i) any accumulated and unpaid distributions
required to be paid on the Capital Securities, to the extent the Issuer shall
have funds available therefor at such time, (ii) the Redemption Price with
respect to any Capital Securities called for redemption by the Issuer, to the
extent the Issuer shall have funds available therefor at such time and (iii)
upon a voluntary or involuntary dissolution, winding-up or termination of the
Issuer (other than in connection with a redemption of all of the outstanding
Capital Securities or the distribution of Junior Subordinated Debentures to the
holders of Capital Securities as provided in the Trust Agreement), the lesser of
(a) the aggregate of the Liquidation Amount and all accumulated and unpaid
distributions on the Capital Securities to the date of payment to the extent the
Issuer shall have funds available therefor at such time and (b) the amount of
assets of the Issuer remaining available for distribution to holders of Capital
Securities after satisfaction of liabilities to creditors of the Issuer as
required by applicable law. PMC's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by PMC to the holders of
Capital Securities or by causing the Issuer to pay such amounts to such holders.
(Section 5.01.)
The Guarantee will be a full and unconditional guarantee on a subordinated
basis with respect to the Capital Securities issued by the Issuer from the time
of issuance of the Capital Securities, but will apply only to the extent that
the Issuer has sufficient funds to make such payments, and is not a guarantee of
collection of payment. (Sections 5.01 and 5.05.) If PMC does not make interest
payments on the Junior Subordinated Debentures held by the Issuer, it is
expected that the Issuer will not pay distributions on the Capital Securities
and will not have funds available therefor. The Guarantee will rank subordinate
and junior in right of payment to all Senior Debt of PMC.
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to PMC whether or not such claim for
post-petition interest is allowed in such proceeding), on Debt, whether incurred
on or prior to the date of the Guarantee or thereafter incurred, unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are not superior in right of
payment to the Guarantee or to other Debt which is pari passu with, or
subordinated to, the Guarantee; provided, however, that Senior Debt shall not be
deemed to include (i) any Debt of PMC which, when incurred and without respect
to any election under Section 1111(b)
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of the Bankruptcy Code, was without recourse to PMC, (ii) any Debt of PMC to any
of its subsidiaries, (iii) Debt to any employee of PMC, (iv) trade accounts
payable of PMC, (v) accrued liabilities of PMC or any of its subsidiaries
arising in the ordinary course of business of PMC, (vi) the Junior Subordinated
Debentures, and (vii) the Guarantee. (Section 1.01.) "Debt" for purposes of the
Guarantee, has the same meaning as that specified under "Description of the
Junior Subordinated Debentures--Subordination" below.
PMC's obligations under the Trust Agreement, the Guarantee, the Indenture,
the Junior Subordinated Debentures and the Expense Agreement taken together
provide a full, irrevocable, and unconditional guarantee on a subordinated basis
by PMC of all of the Issuer's obligations under the Capital Securities. See "--
Status of the Guarantee."
PMC is an insurance holding company and substantially all of the operating
assets of PMC are owned by its consolidated subsidiaries, principally PMA
Reinsurance Corporation and the Pooled Companies. PMC relies primarily on the
receipt of sufficient funds from PMA Re and the Pooled Companies in the form of
dividends, net payments under tax-sharing agreements or loans to meet its
obligations for payment of principal and interest on outstanding debt
obligations (including the Junior Subordinated Debentures) and corporate
expenses. Accordingly, PMC's obligations under the Guarantee will be effectively
subordinated to all existing and future liabilities of PMC's subsidiaries, and
claimants should look only to the assets of PMC for payments thereunder.
Pennsylvania law limits the payment of dividends by PMA Reinsurance Corporation
and the Pooled Companies. PMA Reinsurance Corporation and the Pooled Companies
have the ability to loan funds to PMC subject to certain regulatory
restrictions. See "Risk Factors--Subordination of the Guarantee and the Junior
Subordinated Debentures," "--Holding Company Structure and Restrictions on
Subsidiary Dividends" and "Supervision and Regulation".
Certain Covenants of PMC
In the Guarantee, PMC will covenant that, so long as any Capital Securities
remain outstanding, PMC will not, and will cause its subsidiaries not to, (a)
declare or pay any dividends or distributions on (other than dividends or
distributions in Common Stock or Class A Common Stock of PMC), or redeem,
purchase, acquire or make a liquidation payment with respect to, any of PMC's
outstanding capital stock or (b) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities that rank
pari passu with or junior to the Junior Subordinated Debentures or make any
guarantee payments with respect to the foregoing if at such time (i) PMC shall
be in default with respect to its Guarantee Payments under the Guarantee, (ii)
there shall have occurred and be continuing any Debenture Event of Default or
(iii) PMC shall have given notice of its selection of an Extension Period and
such period, or any extension thereof, is continuing. (Section 6.01.)
Amendments And Assignment
Except with respect to any changes that do not materially adversely affect
the rights of holders of Capital Securities (in which case no consent of holders
of Capital Securities will be required), the terms of the Guarantee may be
amended only with the prior approval of the holders of not less than a majority
of the Liquidation Amount of the outstanding Capital Securities. (Section 8.02.)
All guarantees and agreements contained in the Guarantee shall bind
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the successors, assigns, receivers, trustees and representatives of PMC and
shall inure to the benefit of the holders of the Capital Securities then
outstanding. (Section 8.01.)
Events of Default
An event of default under the Guarantee (a "Guarantee Event of Default")
will occur upon the failure of PMC to perform any of its payment obligations
thereunder or the failure to perform any non-payment obligations thereunder if
any such non-payment obligation remains unremedied for 30 days. (Section 1.01.)
The holders of a majority in Liquidation Amount of the Capital Securities have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Guarantee Trustee in respect of the Guarantee or
exercising any trust or power conferred upon the Guarantee Trustee under the
Guarantee. (Section 5.04.)
Any holder of Capital Securities may institute a legal proceeding directly
against PMC to enforce the holder's rights under such Guarantee without first
instituting a legal proceeding against the Issuer, the Guarantee Trustee or any
other person or entity. (Section 5.04.)
PMC will be required to provide annually to the Guarantee Trustee an
officer's certificate as to PMC's compliance with all conditions and covenants
under the Guarantee. PMC will also be required to provide annually to the
Guarantee Trustee an officer's certificate as to PMC's compliance with all
conditions precedent, if any, provided for in the Guarantee that relate to any
action to be taken by the Guarantee Trustee at PMC's request. (Sections 2.04 and
2.05.)
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of
a Guarantee Event of Default, undertakes to perform only such duties as are
specifically set forth in the Guarantee and, in case a Guarantee Event of
Default has occurred (that has not been cured or waived), the Guarantee Trustee
must exercise such of the rights and powers vested in it by the Guarantee, and
use the same degree of care and skill in its exercise thereof, as a prudent
individual would exercise or use under the circumstances in the conduct of his
or her own affairs. (Section 3.01(c).) Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the powers vested in it by the
Guarantee at the request of any holder of Capital Securities unless it is
provided with reasonable indemnity against the costs, expenses and liabilities
that might be incurred thereby. (Section 3.02. (a)(v).)
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon (i)
full payment of the Redemption Price of all Capital Securities, (ii) the
distribution of Junior Subordinated Debentures to holders of Capital Securities
in exchange for all of the Capital Securities or (iii) payment in full of the
amounts payable in accordance with the Trust Agreement upon liquidation of the
Issuer. Notwithstanding the foregoing, the Guarantee will continue to be
effective or will be reinstated, as the case may be, if at any time any holder
of Capital Securities must restore payment of any sums paid with respect to the
Capital Securities or the Guarantee. (Section 7.01.)
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Status of the Guarantee
The Guarantee will constitute an unsecured obligation of PMC and will rank
(i) subordinate and junior in right of payment to all Senior Debt of PMC in the
same manner as the Junior Subordinated Debentures, (ii) pari passu with any
similar guarantee agreements issued by PMC on behalf of the holders of capital
securities issued by a business trust or similar entity whose common securities
are owned, directly or indirectly, by PMC and (iii) senior to PMC's Common Stock
and the Class A Common Stock. The Trust Agreement provides that each holder of
Trust Securities by acceptance thereof accepts the subordination provisions and
other terms of the Guarantee. (Sections 6.02 and 6.03.) The Guarantee will
constitute a guarantee of payment and not of collection (i.e., the guaranteed
party may institute a legal proceeding directly against PMC to enforce its
rights under the Guarantee without first instituting a legal proceeding against
any other person or entity). (Section 5.05.)
The Guarantee will be held for the benefit of the holders of the Capital
Securities. The Guarantee will not be discharged except by payment of the
Guarantee Payments in full to the extent not paid by the Issuer or upon
distribution to the holders of the Capital Securities of the Junior Subordinated
Debentures. The Guarantee does not place a limitation on the amount of
additional Senior Debt that may be incurred by PMC. PMC expects from time to
time to incur additional indebtedness constituting Senior Debt. (Sections
3.01(a) and 5.05.)
Governing Law
The Guarantee Agreement will be governed by, and construed in accordance
with, the laws of the State of New York. (Section 8.06.)
The Expense Agreement
Pursuant to the Expense Agreement entered into by PMC under the Trust
Agreement (the "Expense Agreement"), PMC will irrevocably and unconditionally
guarantee to each person or entity to whom the Issuer is or becomes indebted or
liable, the full payment of any and all indebtedness, expenses or liabilities of
the Issuer including, without limitation, the fees, expenses and indemnities of
the Trustees, other than obligations of the Issuer to pay to the holders of any
Capital Securities or other similar interests in the Issuer of the amounts due
such holders pursuant to the terms of the Capital Securities or such other
similar interests, as the case may be. The Expense Agreement will be enforceable
by third parties.
DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES
Set forth below is a summary of the material terms of the Junior
Subordinated Debentures in which the Issuer will invest the proceeds of the
issuance and sale of the Trust Securities. The Junior Subordinated Debentures
will be qualified under the Trust Indenture Act. Reference is made to the
provisions in the Indenture, (the "Indenture"), between PMC and The Bank of New
York, as trustee with respect to the Junior Subordinated Debentures (the
"Debenture Trustee"), the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and the Trust
Indenture Act for a more complete description of the provisions summarized
herein, and each such statement shall be deemed qualified in its entirety by
such reference. Whenever particular provisions in the
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Indenture are referred to herein, such provisions are incorporated by reference
herein. Section references used herein are references to provisions of the
Indenture unless otherwise noted.
Under certain circumstances involving the termination of the Issuer, after
satisfaction of liabilities to creditors of the Issuer as required under
applicable law, Junior Subordinated Debentures may be distributed to the holders
of the Capital Securities in exchange for the Capital Securities in liquidation
of the Issuer. See "Description of the Capital Securities--Redemption--Special
Event Redemption or Distribution of Junior Subordinated Debentures" and
"Description of the Capital Securities--Liquidation Distribution upon
Termination."
General
The Junior Subordinated Debentures will be limited in aggregate principal
amount to a sum equal to the aggregate stated Liquidation Amount of the Capital
Securities plus PMC's concurrent investment in the Common Securities. The Junior
Subordinated Debentures will be unsecured subordinated obligations of PMC which
rank junior to all PMC's Senior Debt (as defined below).
The Junior Subordinated Debentures will initially mature on ____, 2028 (the
"Stated Maturity").
PMC is an insurance holding company and substantially all of the operating
assets of PMC are owned by its consolidated subsidiaries, principally PMA
Reinsurance Corporation and the Pooled Companies. PMC relies primarily on the
receipt of sufficient funds from PMA Reinsurance Corporation and the Pooled
Companies in the form of dividends, net payments under tax-sharing agreements or
loans to meet its obligations for payment of principal and interest on its
outstanding debt obligations (including the Junior Subordinated Debentures) and
corporate expenses. Accordingly, PMC's obligations under the Junior Subordinated
Debentures will be effectively subordinated to all existing and future
liabilities of PMC's subsidiaries, and claimants should look only to the assets
of PMC for payments thereunder. Pennsylvania law limits the payment of dividends
by PMA Reinsurance Corporation and the Pooled Companies. PMA Reinsurance
Corporation and the Pooled Companies have the ability to loan funds to PMC
subject to certain regulatory restrictions. See "Risk Factors--Subordination of
the Guarantee and the Junior Subordinated Debentures", "--Restrictions on
Subsidiary Dividends and Other Payments" and "Supervision and Regulation."
Optional Redemption
The Junior Subordinated Debentures are redeemable prior to maturity at the
option of PMC (i) on or after ____, 2008, in whole at any time or in part from
time to time, or (ii) prior to ____, 2008, in whole (but not in part) and within
90 days following the occurrence of a Special Event, in each case at the
Redemption Price described below.
The Redemption Price in the case of a redemption under (i) above shall
equal the following prices, expressed in percentages of the principal amount,
together with accrued interest to but excluding the Redemption Date. If
redeemed during the 12-month period beginning _________ 1:
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Year Redemption Price
---- ----------------
2008................... 10x.xxxx%
2009................... 10x.xxxx%
2010................... 10x.xxxx%
2011................... 10x.xxxx%
2012................... 10x.xxxx%
2013................... 10x.xxxx%
2014................... 10x.xxxx%
2015................... 10x.xxxx%
2016................... 10x.xxxx%
2017................... 10x.xxxx%
and 100% on and after __________ 1, 2018. (Section 1207.)
The Redemption Price, in the case of a redemption following a Special Event
as described under (ii) above, shall equal the Make-Whole Amount (as defined
under "Description of the Capital Securities--Redemption"), together with
accrued interest to but excluding the Redemption Date. (Section 1207.)
Junior Subordinated Debentures in denominations larger than $1,000.00 may
be redeemed in part but only in integral multiples of $1,000. (Section 1203.)
Unless PMC defaults in payment of the Redemption Price, on and after the
Redemption Date, interest ceases to accrue on such Junior Subordinated
Debentures or portions thereof called for redemption. (Section 1206.)
For so long as the Issuer is the holder of all the outstanding Junior
Subordinated Debentures, the proceeds of any such redemption described above
will be used by the Issuer to redeem Capital Securities in accordance with their
terms. PMC may not redeem the Junior Subordinated Debentures in part unless all
accrued and unpaid interest has been paid in full on all outstanding Junior
Subordinated Debentures for all semi-annual interest periods terminating on or
prior to the Redemption Date. (Section 1207.)
Notice of any redemption will be mailed at least 45 days but not more than
75 days before the Redemption Date to each holder of Junior Subordinated
Debentures to be redeemed at its registered address. (Section 1204.)
Distribution of Junior Subordinated Debentures
Under certain circumstances involving the termination of the Issuer, Junior
Subordinated Debentures may be distributed to the holders of the Capital
Securities in liquidation of the Issuer after the satisfaction of liabilities to
creditors of the Issuer as provided by applicable law. If distributed to holders
of Capital Securities in liquidation, the Junior Subordinated Debentures will
initially be issued in the form of one or more global securities and DTC, or any
successor depositary for the Capital Securities will act as depositary for the
Junior Subordinated Debentures. (Section 904.) It is anticipated that the
depositary arrangements for the Junior Subordinated Debentures would be
substantially identical to those in effect for the
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Capital Securities. There can be no assurance as to the market price of any
Junior Subordinated Debentures that may be distributed to the holders of the
Capital Securities. See "Description of the Capital Securities--Redemption--
Special Event Redemption or Distribution of Junior Subordinated Debentures" and
"Description of the Capital Securities--Liquidation Distribution upon
Termination." For a description of DTC and the terms of the depositary matters,
see "Description of the Capital Securities--Book-Entry-Only Issuance--The
Depositary Trust Company."
Interest
The Junior Subordinated Debentures shall bear interest at the rate of ___%
per annum. Such interest is payable semi-annual in arrears on ___ 1 and ____ 1
of each year (each, an "Interest Payment Date"), commencing ______ 1, 1999, to
the person in whose name each Junior Subordinated Debenture is registered at the
close of business on the Business Day next preceding such Interest Payment Date.
(Sections 301 and 307.) It is anticipated that, until the liquidation, if any,
of the Issuer, each Junior Subordinated Debenture will be held in the name of
the Property Trustee in trust for the benefit of the Issuer and the holders of
the Capital Securities.
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. (Section 310). In the event that any
date on which interest is payable on the Junior Subordinated Debentures is not a
Business Day (as defined above), then payment of the interest payable on such
date will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment shall be
made on the immediately preceding Business Day, in each case with the same force
and effect as if made on the date the payment was originally payable. Accrued
interest that is not paid on the applicable Interest Payment Date will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of ___% thereof, compounded semi-annually. The term
"interest" as used herein shall include semi-annual interest payments, interest
on semi-annual interest payments not paid on the applicable Interest Payment
Date and Additional Sums (as described below), as applicable. (Section 301.)
Option To Extend Interest Payment Period
So long as no Event of Default under the Indenture has occurred and is
continuing, PMC shall have the right at any time during the term of the Junior
Subordinated Debentures to defer the payment of interest on such Junior
Subordinated Debentures from time to time for a period not exceeding 10
consecutive semi-annual periods (each, an "Extension Period"), provided that no
Extension Period may extend beyond the Stated Maturity of the Junior
Subordinated Debentures. PMC shall have the right to make partial payments of
interest on any Interest Payment Date. At the end of any such Extension Period,
PMC must pay all interest then accrued and unpaid (together with interest
thereon at the rate of ___% per annum, compounded semi-annually, to the extent
permitted by applicable law). During an Extension Period, interest will
continue to accrue and holders of Junior Subordinated Debentures (or holders of
Capital Securities while outstanding) will be required to accrue interest income
for United States federal income tax purposes. See "United States Federal
Income Taxation--Original Issue Discount." However, during any such Extension
Period, PMC
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shall not, and shall cause any subsidiary of PMC not to, (a) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of PMC's capital stock or (b) make any
payment of principal, interest or premium, if any, on or repay, repurchase or
redeem any debt securities of PMC that rank pari passu with or junior in
interest to the Junior Subordinated Debentures or make any guarantee payments
with respect to any guarantee by PMC of the debt securities of any subsidiary of
PMC that by their terms rank pari passu or junior in interest to the Junior
Subordinated Debentures (other than (a) dividends or distributions in Common
Stock or Class A Common Stock of PMC, (b) payments under the Guarantee and (c)
purchases of Common Stock or Class A Common Stock of PMC related to the issuance
of Common Stock or Class A Common Stock of PMC under any of PMC's benefit plans
for its directors, officers or employees). Prior to the termination of any such
Extension Period, PMC may further extend the interest payment period, provided
that such Extension Period, together with all such previous and further
extensions thereof, shall not exceed 10 consecutive semi-annual periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any Extension Period and the payment of all interest then
accrued and unpaid (together with interest thereon at the rate of ____% per
annum, compounded semi-annually, to the extent permitted by applicable law), PMC
may elect to begin a new Extension Period, subject to the above requirements. No
interest shall be due and payable during an Extension Period, except at the end
thereof. PMC must give the Debenture Trustee and the Administrative Trustees
notice of its election to begin any Extension Period at least one Business Day
prior to the earliest of (i) the date interest on the Junior Subordinated
Debentures would have been payable except for the election to begin such
Extension Period or (ii) the date the distributions on the Capital Securities
are payable or (iii) the date the Administrative Trustees are required to give
notice to the New York Stock Exchange, the Nasdaq National Market or other
applicable self-regulatory organization or to holders of the Capital Securities
of the record date or the date such distributions are payable, but in any event
not less than one Business Day prior to such record date. The Debenture Trustee
shall give notice of PMC's election to begin any Extension Period to the holders
of the outstanding Capital Securities. There is no limitation on the number of
times that PMC may elect to begin an Extension Period. (Section 301.)
Set-Off
Notwithstanding anything to the contrary in the Indenture, PMC shall have
the right to set-off any payment it is otherwise required to make thereunder
with respect to any Junior Subordinated Debenture and to the extent PMC has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee or under the provisions of the Indenture which
permit any holder of the Capital Securities, upon the occurrence of a Debenture
Event of Default (as defined below) relating to nonpayment of interest or
principal on the Junior Subordinated Debentures to institute suit for the
enforcement of the payment of interest or principal. (Section 311.) This
provision prevents double collection from PMC of identical amounts due under the
various provisions of the Indenture and the Guarantee. To the extent PMC makes
a payment of unpaid distributions to holders of Capital Securities under the
Guarantee, PMC is not then also required to make a like payment of interest on
the Junior Subordinated Debentures (since such interest payment would be paid
out to such holders as the same unpaid distribution). Likewise, if holders of
Capital Securities bring an action directly against PMC under the Indenture and
collect unpaid distributions in such
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action, PMC may deduct the amounts so paid from any aggregate amount it owes on
the Junior Subordinated Debentures. Therefore, to the extent PMC makes payments
directly to holders of Capital Securities under the Guarantee or the Indenture,
the Property Trustee may not also collect such amounts under the Junior
Subordinated Debentures.
Subordination
The Junior Subordinated Debentures are subordinate and junior in right of
payment to all Senior Debt (as defined below) of PMC as provided in the
Indenture. No payment or distribution on account of principal of (or premium, if
any) or interest, if any, on, the Junior Subordinated Debentures or on account
of the purchase or other acquisition of Junior Subordinated Debentures by PMC or
any subsidiary may be made (a) in the event and during the continuation of any
default in the payment of principal of (or premium, if any) or interest on any
Senior Debt, or if the maturity of any Senior Debt has been accelerated because
of a default until such event of default shall have been cured or waived or
shall have ceased to exist and such acceleration shall have been rescinded or
annulled or (b) in the event of any judicial proceeding with respect to any such
default in payment or such event of default. (Section 1104.) In the case of the
pendency of any liquidation, reorganization, bankruptcy, insolvency,
receivership, arrangement, adjustment, composition or other judicial proceeding
relative to PMC, all principal of, and premium, if any, and interest, if any, on
all Senior Debt must be paid in full or provision must be made for such payment
in cash or cash equivalents or otherwise in a manner satisfactory to the holders
of Senior Debt, before the holders of the Junior Subordinated Debentures are
entitled to receive or retain any payment or distribution thereon. (Section
1102.)
In the event that, notwithstanding the foregoing, any payment or
distribution of cash, property or securities shall be received or collected by a
holder of the Junior Subordinated Debentures in contravention of the foregoing
provisions, such payment or distribution shall be held for the benefit of and
shall be paid over to the holders of Senior Debt or their representative or
representatives or to the trustee or trustees under any indenture under which
any instrument evidencing Senior Debt may have been issued, as their respective
interests may appear, to the extent necessary to pay in full all Senior Debt
then due, after giving effect to any concurrent payment to the holders of Senior
Debt, but only to the extent that the holders of the Senior Debt (or their
representative or representatives) notify the Trustees in writing, within 90
days of such payment, of the amounts then due and owing on such Senior Debt and
only the amounts specified in such notice to the Trustees shall be paid to the
holders of such Senior Debt. (Section 1104.) Subject to the prior payment of all
Senior Debt, the rights of the holders of the Junior Subordinated Debentures
will be subrogated to the rights of the holders of Senior Debt to the extent of
the payments or distributions made to the holders of such Senior Debt until all
amounts owing on the Junior Subordinated Debentures are paid in full. (Section
1106.)
"Debt" means with respect to any entity, whether recourse is to all or a
portion of the assets of such entity and whether or not contingent, (i) every
obligation of such entity for money borrowed; (ii) every obligation of such
entity evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such entity with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such entity; (iv) every obligation of such entity issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such entity; and (vi) every
obligation of the type referred to in clauses (i) through (v) of another entity
and all dividends of another entity the payment of which, in either case, such
entity has guaranteed or is responsible or liable for, directly or indirectly,
as obligor or otherwise. (Section 101.)
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to PMC whether or not such claim for
post-petition interest is allowed in such proceeding), on Debt, whether incurred
on or prior to the date of the Indenture or thereafter incurred, unless, in the
instrument creating or evidencing the same or pursuant to
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which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Junior Subordinated Debentures or to other
Debt which is pari passu with, or subordinated to, the Junior Subordinated
Debentures; provided, however, that Senior Debt shall not be deemed to include
(i) any Debt of PMC which, when incurred and without respect to any election
under Section 1111(b)of the Bankruptcy Code, was without recourse to PMC, (ii)
any Debt of PMC to any of its subsidiaries, (iii) Debt to any employee of PMC,
(iv) trade accounts payable of PMC, (v) accrued liabilities arising in the
ordinary course of business of PMC, (vi) the Junior Subordinated Debentures, and
(vii) the Guarantee.
PMC is an insurance holding company and substantially all of the operating
assets of PMC are owned by its consolidated subsidiaries, principally PMA
Reinsurance Corporation and the Pooled Companies. PMC relies primarily on the
receipt of sufficient funds from PMA Reinsurance Corporation and the Pooled
Companies in the form of dividends, net payments under tax-sharing agreements or
loans to meet its obligations for payment of principal and interest on
outstanding debt obligations (including to Junior Subordinated Debentures) and
corporate expenses. Accordingly, PMC's obligations under the Junior Subordinated
Debentures will be effectively subordinated to all existing and future
liabilities of PMC's subsidiaries, and claimants should look only to the assets
of PMC for payments thereunder. Pennsylvania insurance law limits the payment of
dividends by PMA Reinsurance Corporation and the Pooled Companies. PMA
Reinsurance Corporation and the Pooled Companies have the ability to loan funds
to PMC subject to certain regulatory restrictions. See "Risk Factors--
Subordination of the Guarantee and the Junior Subordinated Debentures," and
"--Holding Company Structure--Restrictions on Subsidiary Dividends and Other
Payments" and "Supervision and Regulation".
The Indenture does not limit the aggregate amount of Senior Debt that may
be issued. After the completion of this Offering and the repayment of debt with
the proceeds thereof, PMC will have approximately $104.5 million of principal
amount of indebtedness for borrowed money constituting Senior Debt. PMC expects
from time to time to incur additional indebtedness constituting Senior Debt.
Certain Covenants of PMC
PMC will covenant in the Indenture that if and so long as (i) the Issuer is
the holder of all of the outstanding Junior Subordinated Debentures, (ii) a Tax
Event (as defined above) has occurred and is continuing and (iii) PMC has not
redeemed the Junior Subordinated Debentures pursuant to the Indenture or
terminated the Issuer pursuant to the Trust Agreement, PMC will pay to the
Issuer, for so long as the Issuer is the registered holder of any Junior
Subordinated Debentures, such additional amounts as may be necessary in order
that the amount of distributions then due and payable by the Issuer on the
outstanding Capital Securities and Common Securities of the Issuer shall not be
reduced as a result of any additional taxes, duties and other governmental
charges to which the Issuer has become subject from time to time as a result of
a Tax Event (the "Additional Sums"). (Section 1005). PMC will also covenant that
it will not, and it will not permit any subsidiary to, (a) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of PMC's outstanding capital stock or
(b) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities that rank pari passu with or junior to
the Junior Subordinated Debentures or make any guarantee payments with respect
to any guarantee by PMC of the debt securities of any subsidiary of PMC that by
their terms rank pari passu or junior in interest to the Junior
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Subordinated Debentures, (other than (a) dividends or distributions in Common
Stock or Class A Common Stock of PMC, (b) payments under the Guarantee, and (c)
purchases of Common Stock or Class A Common Stock of PMC related to the issuance
of Common Stock or Class A Common Stock of PMC under any of PMC's benefit plans
for its directors, officers or employees) if at such time (i) there shall have
occurred and be continuing any event that, with the giving of notice or the
lapse of time, or both, would constitute a Debenture Event of Default and in
respect of which PMC shall not have taken reasonable steps to cure, (ii) PMC
shall be in default with respect to its payment of any obligations under the
Guarantee or (iii) PMC shall have given notice of its selection of an Extension
Period as provided in the Indenture and shall not have rescinded such notice and
such Extension Period, or any extension thereof, shall be continuing (Section
1006.) PMC will also covenant (i) to maintain directly or indirectly 100%
ownership of the Common Securities of the Issuer (provided, however, that any
permitted successor of PMC may succeed to such ownership), (ii) not to
voluntarily dissolve, wind-up or terminate the Issuer, except in connection with
a distribution of the Junior Subordinated Debentures to the holders of the
Capital Securities in exchange for the Capital Securities and in liquidation of
the Issuer or in connection with certain mergers, consolidations or
amalgamations permitted by the Trust Agreement and (iii) to use its reasonable
efforts, consistent with the terms and provisions of the Trust Agreement, to
cause the Issuer to remain a business trust and to be classified as a grantor
trust for United States federal income tax purposes, except in connection with a
distribution of the Junior Subordinated Debentures to the holders of the Capital
Securities in liquidation of the Issuer. (Section 1006.)
Debenture Events of Default And Consequent Rights of Certain Holders
The Indenture provides that any one or more of the following described
events, that has occurred and is continuing constitutes an "Event of Default"
(also referred to herein as a "Debenture Event of Default") with respect to the
Junior Subordinated Debentures:
(a) failure for 30 days to pay interest on the Junior Subordinated
Debentures when due (subject to the deferral of any due date in the
case of an Extension Period); or
(b) failure to pay principal (or premium, if any) on the Junior
Subordinated Debentures when due whether at Stated Maturity, upon
redemption, by declaration or otherwise; or
(c) failure to observe or perform in any material respect any other
covenant contained in the Indenture for 90 days after written notice
to PMC from the Debenture Trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Junior Subordinated
Debentures; or
(d) Certain events in bankruptcy, insolvency or reorganization of PMC.
(Section 501.)
Each of the above events is a Debenture Event of Default regardless of the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body. (Section 501.) There is no
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requirement that any such event must be declared by anyone to be a Debenture
Event of Default.
The holders of a majority in principal amount of the outstanding Junior
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee,
under certain conditions. (Section 512.)
Acceleration of Maturity; Rescission and Annulment
The Debenture Trustee or the holders of not less than 25% in principal
amount of the outstanding Junior Subordinated Debentures may declare the
principal of all the Junior Subordinated Debentures due and payable immediately
upon the occurrence and continuation of a Debenture Event of Default, and should
the Debenture Trustee or such holders of Junior Subordinated Debentures fail to
make such declaration, the holders of at least 25% in aggregate Liquidation
Amount of Capital Securities then outstanding shall have such right. The holders
of a majority in principal amount of the outstanding Junior Subordinated
Debentures may rescind and annul such declaration. If the holders of a
majority in principal amount of the outstanding Junior Subordinated Debentures
fail to annul such declaration and its consequences, the holders of a majority
in aggregate Liquidation Amount of the Capital Securities may rescind and annul
such declaration and its consequences. (Section 502.)
Waiver of Defaults
Subject to certain limitations, the holders of not less than a majority in
aggregate principal amount of the outstanding Junior Subordinated Debentures
affected thereby may, on behalf of the holders of all the Junior Subordinated
Debentures, waive any past default under the Indenture and its consequences,
except a default in the payment of principal of or interest on any Junior
Subordinated Debentures (unless such default has been cured and a sum sufficient
to pay all matured installments of interest and principal due otherwise than by
acceleration has been deposited with the Debenture Trustee) or a default in
respect of a covenant or provision of the Indenture which under the Indenture
cannot be modified or amended without the consent of the holder of each
outstanding Junior Subordinated Debenture affected. If the holders of such
Junior Subordinated Debentures fail to waive such default, the holders of a
majority in aggregate Liquidation Amount of the Capital Securities shall have
such right. (Section 513.) PMC is required to deliver annually to the Debenture
Trustee a certificate stating whether or not to the best knowledge of the
signers thereof PMC is in default in the performance, observance or fulfillment
of or compliance with any of the material terms, provisions, covenants and
conditions of the Indenture (without regard to any period of grace or
requirement of notice provided under the Indenture) and, if PMC shall be in
default, specifying all such defaults and the nature and status thereof of which
they may have knowledge. (Section 1004.)
Creditor's Rights of The Debenture Trustee
In case a Debenture Event of Default shall occur and be continuing, the
Debenture Trustee will have the right to declare the principal (or specific
portions thereof) of and the interest on the Junior Subordinated Debentures, and
any other amount payable under the Indenture, to be forthwith due and payable
and to enforce its other rights as a creditor with
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respect to the Junior Subordinated Debentures. (Sections 502 and 503.) If the
Debenture Trustee obtains a judgment against PMC following the occurrence of a
Debenture Event of Default, the provisions of Pennsylvania law regulating
insurance holding companies would limit the ability of the Debenture Trustee to
realize upon the assets of PMC by conveying or transferring the capital stock of
PMA Reinsurance Corporation or the Pooled Companies owned by PMC. Any
conveyance, transfer, assignment, or alienation of a ten percent or greater
interest in the voting shares of PMA Reinsurance Corporation or any of the
Pooled Companies would require the prior approval of the Pennsylvania
Commissioner. See "Supervision and Regulation."
Rights of Holders of Capital Securities to Direct Action
As explained more fully above (see "--Debenture Events of Default and
Consequent Rights of Certain Holders" and--Waiver of Defaults"), holders of less
than all of the outstanding Junior Subordinated Debentures or holders of less
than all of the Capital Securities may waive any past default (with certain
limited exceptions identified above). If so waived, any such Debenture Event of
Default shall cease to be "continuing" for purposes of the Indenture. However,
such holders may not waive any default in the payment of principal of or
interest on any Junior Subordinated Debentures unless such default has been
cured and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration has been deposited with the
Debenture Trustee. If a Debenture Event of Default has occurred and is
continuing and such event is attributable to the failure of PMC for 30 days to
pay interest on or the failure of PMC to pay principal of the Junior
Subordinated Debentures on the date such interest or principal is otherwise
payable, any holder of Capital Securities may institute a suit directly against
PMC for enforcement of payment to such holder of the principal of and interest
on such Junior Subordinated Debentures having a principal amount equal to the
aggregate Liquidation Amount of the Capital Securities of such holder (a "Direct
Action") (Section 508). PMC may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of the holders
of all of the outstanding Capital Securities. (Section 902). If the right to
bring a Direct Action is removed, the Issuer may become subject to the
regulatory obligations under the Exchange Act.
The holders of the Capital Securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been a Debenture Event of Default and the holders of the Junior
Subordinated Debentures fail to exercise such remedies. See "--Debenture Events
of Default and Consequent Rights of Certain Holders" "--Acceleration of
Maturity; Rescission and Annulment" and "Debenture Events of Default and
Consequent Rights of Certain Holders", and --"Waiver of Defaults".
Form, Exchange and Transfer
The Junior Subordinated Debentures will be issuable only in registered
form, without coupons, and only in denominations of $1,000 and integral
multiples thereof. (Section 302.)
Subject to the terms of the Indenture, Junior Subordinated Debentures may
be presented for registration of transfer (duly endorsed or with the form of
transfer endorsed thereon duly executed) at the office of the Security Registrar
or at an office or agency of PMC designated by PMC for such purpose. No service
charge will be made to a holder of Junior
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Subordinated Debentures for any registration of transfer or exchange of Junior
Subordinated Debentures, but PMC or the Security Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith. Such transfer or exchange will be effected upon
the Securities Registrar or PMC, as the case may be, being satisfied with the
documents of title and identity of the person making the request. PMC has
appointed the Debenture Trustee as Securities Registrar. (Section 305.) PMC may
at any time designate additional transfer agents or rescind the designation of
any transfer agent or approve a change in the office through which any transfer
agent acts. (Section 1002.)
Neither PMC nor the Securities Registrar will be required (i) to issue,
transfer or exchange any Junior Subordinated Debenture during a period beginning
at the opening of business 15 days before the day of selection for redemption of
any such Junior Subordinated Debentures pursuant to the Indenture and ending at
the close of business on the day of mailing of notice of redemption or (ii) to
transfer or exchange any Junior Subordinated Debentures so selected for
redemption, in whole or in part, except the unredeemed portion of any such
Junior Subordinated Debentures being redeemed in part. (Section 305.)
Payment And Paying Agents
Payment of interest on a Junior Subordinated Debenture on any Interest
Payment Date will be made to the person in whose name such Junior Subordinated
Debenture (or predecessor security) is registered at the close of business on
the Business Day next preceding such Interest Payment Date except in the case of
interest which is payable but is not paid or provided for on such Interest
Payment Date. (Section 307.)
Principal of and any interest on the Junior Subordinated Debentures will be
payable at the office of such Paying Agent or Paying Agents as PMC may designate
for such purpose from time to time, provided, however, that at the option of
PMC, payment of any interest may be made (i) by check mailed to the address of
the person entitled thereto as such address shall appear in the Securities
Register or (ii) by wire transfer in immediately available funds at such place
and to such account as may be designated by the person entitled thereto as
specified in the Securities Register. The Bank of New York will act as Paying
Agent with respect to the Junior Subordinated Debentures. PMC may at any time
designate additional Paying Agents or rescind the designation of any Paying
Agent or approve a change in the office through which any Paying Agent acts.
(Section 301.)
Modification of The Indenture
From time to time, PMC and the Debenture Trustee may, without the consent
of the holders of Junior Subordinated Debentures, amends waive or supplement the
Indenture for specified purpose, including, among other things, curing
ambiguities, defects or inconsistencies (provided that any such action does not
materially adversely affect the interest of the holders of any Junior
Subordinated Debentures or the holders of Capital Securities so long as they
remain outstanding) and qualifying, or maintaining the qualification of, the
Indenture under the Trust Indenture Act. The Indenture contains provisions
permitting PMC and the Debenture Trustee, with the consent of the holders of not
less than a majority in principal amount of the outstanding Junior Subordinated
Debentures, to modify the Indenture in a manner adversely affecting the rights
of the holders of the Junior Subordinated
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Debentures; provided that no such modification may, without the consent of the
holder of each outstanding Junior Subordinated Debenture affected thereby, (i)
except as set forth in "--Option to Extend Interest Payment Period" above,
change the Stated Maturity of, the principal of, or any installment of interest
on, any Junior Subordinated Debenture or reduce the principal amount thereof, or
the rate of interest thereon or reduce any premium payable upon the redemption
thereof or change the place of payment where, or the coin or currency in which,
any Junior Subordinated Debenture or interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or in the case of redemption, on or after the
Redemption Date), or modify the provisions of the Indenture with respect to the
subordination of the Junior Subordinated Debentures in a manner adverse to the
holders thereof (except such change or extension as is contemplated thereby,
(ii) reduce the percentage in principal amount of the outstanding Junior
Subordinated Debentures, the consent of the holders of which is required for any
waiver provided for in the Indenture or (iii) modify certain provisions of the
Indenture providing for waiver of defaults, waiver of covenants and modification
of the Indenture, except to increase the percentage or to provide that certain
other provisions of the Indenture cannot be modified or waived without the
consent of the holder of each outstanding Junior Subordinated Debenture affected
thereby; provided, that, so long as any of the Capital Securities remains
outstanding, (a) no such modification may be made that adversely affects the
holders of the Capital Securities in any material respect, and no termination of
the Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture shall be effective, without the
prior consent of the holders of at least a majority of the aggregate Liquidation
Amount of the outstanding Capital Securities unless and until the principal of
and any premium on the Junior Subordinated Debentures and all accrued and unpaid
interest thereon have been paid in full and (b) where a consent under the
Indenture would require the consent of each holder of Junior Subordinated
Debentures, no such consent will be given by the Property Trustee without the
prior consent of each holder of the Capital Securities. (Section 902.)
Consolidation, Merger And Sale
PMC, without the consent of the holders of any outstanding Junior
Subordinated Debentures, may consolidate with or merge into, or convey, transfer
or lease its properties and assets substantially as an entirety to any person,
and may permit any person to consolidate with or merge into, or convey, transfer
or lease its properties and assets substantially as an entirety to PMC, provided
(i) that any successor person must be a corporation, partnership, trust or other
entity organized and validly existing under the laws of any domestic
jurisdiction and must expressly assume PMC's obligations on the Junior
Subordinated Debentures and under the Indenture, (ii) that immediately after
giving effect to the transaction no Debenture Event of Default, and no event
which, after notice or lapse of time or both, would become a Debenture Event of
Default, shall have occurred and be continuing, (iii) that such transaction is
permitted under the Trust Agreement and the Guarantee and does not give rise to
any breach or violation of, the Trust Agreement or the Guarantee and (iv) that
certain other conditions as prescribed by the Indenture are met. (Section 801).
The general provisions of the Indenture do not afford holders of Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving PMC that may adversely affect holders of the Junior
Subordinated Debentures. Since the Indenture
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does not limit the aggregate amount of Senior Debt that may be issued and the
Junior Subordinated Debentures are subordinate to all Senior Debt, including
such Debt incurred after the date of the Indenture (see "--Subordination"
above), if the PMC chooses to engage in a highly leveraged transaction whereby
it would incur a substantial amount of Debt, the obligations under the Junior
Subordinated Debentures would become more deeply subordinated and the holders of
the Junior Subordinated Debentures would not be able to avoid this consequence
provided that the conditions set forth in the immediately preceding paragraph
are met. Similarly, PMC could be involved in a reorganization, restructuring,
merger or similar transaction that could adversely affect the holders of the
Junior Subordinated Debentures but, provided that the conditions set forth in
the immediately preceding paragraph are met, such holders could not avoid such
adverse affects.
Satisfaction and Discharge
Under the terms of the Indenture, the Indenture will cease to be of further
effect and PMC will be deemed to have satisfied and discharged the Indenture
(except as to PMC's obligations to pay all other sums due pursuant to the
Indenture and to provide the officers' certificates and opinions of counsel
described therein), if all Junior Subordinated Debentures not previously
delivered to the Debenture Trustee for cancellation have become due and payable,
or will become due and payable at their Stated Maturity within one year of the
date of deposit, and PMC deposits with the Debenture Trustee, in trust, cash, or
cash equivalents in an amount sufficient to pay all the principal of, premium,
if any, and interest on the Junior Subordinated Debentures to the date of such
deposit or to the Stated Maturity, as the case may be. (Section 401.)
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by,
and construed in accordance with, the laws of the State of New York. (Section
112.)
Miscellaneous
PMC will have the right of all times to assign any of its rights or
obligations under the Indenture to a direct or indirect wholly-owned subsidiary
of PMC, provided that, in the event of any such assignment, PMC will remain
liable for all such obligations. The Issuer may not assign any of its rights
under the Indenture without the prior written consent of PMC. The Indenture is
not otherwise assignable by the parties thereto. Subject to the foregoing, the
Indenture will be binding upon and inure to the benefit of the parties thereto
and their respective successors and assigns. (Section 109.)
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RELATIONSHIP AMONG THE CAPITAL SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of distributions and other amounts due on the Capital Securities
(to the extent the Issuer has funds available for the payment of such
distributions) are irrevocably guaranteed by PMC as and to the extent set forth
under "Description of the Guarantee." Taken together, PMC's obligations under
the Junior Subordinated Debentures, the Indenture, the Trust Agreement, the
Expense Agreement, and the Guarantee provide, in the aggregate, a full,
irrevocable and unconditional guarantee of payments of distributions and other
amounts due on the Capital Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents constitutes
such guarantee. It is only the combined operation of these documents that has
the effect of providing a full, irrevocable and unconditional guarantee of the
Issuer's obligations under the Capital Securities. If and to the extent that
PMC does not make payments on the Junior Subordinated Debentures, the Issuer
will not pay distributions or other amounts due on its Capital Securities. The
Guarantee does not cover payment of distributions when the Issuer does not have
sufficient funds to pay such distributions. In such event, the remedy of a
holder of Capital Securities is to institute a legal proceeding directly against
PMC under the terms of the Indenture for enforcement of payment of such
distributions to such holder. The Indenture likewise provides for such a direct
action by holders of the Junior Subordinated Debentures. The obligations of PMC
under the Guarantee are subordinate and junior in right of payment to all Senior
Debt of PMC.
Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
distributions and other payments due on the Capital Securities, primarily
because (i) the aggregate principal amount of the Junior Subordinated Debentures
will be equal to the sum of the aggregate stated Liquidation Amount of the
Capital Securities and the Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match the distribution rate and distribution and other payment dates for the
Capital Securities; (iii) PMC shall pay for all and any costs, expenses and
liabilities of the Issuer except the Issuer's obligations to holders of its
Capital Securities under the Capital Securities and (iv) the Trust Agreement
further provides that the Issuer will not engage in any activity that is not
consistent with its limited purposes.
Notwithstanding anything to the contrary in the Indenture, PMC has the
right to set-off any payment it is otherwise required to make thereunder with
and to the extent PMC has theretofore made, or is concurrently on the date of
such payment making, a payment under the Guarantee. See "Description of the
Junior Subordinated Debentures--Set-Off."
Enforcement Rights of Holders of Capital Securities
A holder of any Capital Security may, to the extent permissible under
applicable law, institute a legal proceeding directly against PMC to enforce its
rights under the Guarantee
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without first instituting a legal proceeding against the Guarantee Trustee, the
Issuer or any other person or entity.
A default or event of default under any Senior Debt of PMC would not
constitute a default or Debenture Event of Default under the Indenture. However,
in the event of payment defaults under, or acceleration of Senior Debt of PMC,
the subordination provisions of the Indenture provide that no payments may be
made in respect of the Junior Subordinated Debentures until such Senior Debt has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on Junior Subordinated Debentures would
constitute a Debenture Event of Default.
Limited Purpose of Issuer
The Issuer's Capital Securities evidence a beneficial interest in the
Issuer, and the Issuer exists for the sole purpose of issuing its Capital
Securities and Common Securities and investing the proceeds thereof in the
Junior Subordinated Debentures. A principal difference between the rights of a
holder of a Capital Security and a holder of a Junior Subordinated Debenture is
that a holder of a Junior Subordinated Debenture is entitled to receive from PMC
the principal amount of and interest accrued on the Junior Subordinated
Debentures held, while a holder of Capital Securities is entitled to receive
distributions from the Issuer (or, to the extent such distributions are not made
by or on behalf of the Issuer, from PMC under the Guarantee) if and to the
extent the Issuer has funds available for payment of such distributions.
Rights Upon Termination
Upon any voluntary or involuntary dissolution, winding-up or termination of
the Issuer, after satisfaction of the liabilities of the Issuer to creditors as
required by applicable law, the holders of Capital Securities will be entitled
to receive, out of assets available for distribution to holders, the Liquidation
Distribution in cash or Junior Subordinated Debentures. See "Description of the
Capital Securities--Liquidation Distribution upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of PMC, the Property Trustee,
as holder of the Junior Subordinated Debentures, would be a subordinated
creditor of PMC, subordinated in right of payment to all Senior Debt, but
entitled to receive payment in full of principal, premium, if any, and interest,
before any shareholders of PMC receive payments or distributions. Since PMC is
Guarantor under the Guarantee and has agreed, under the Expense Agreement, to
pay for all indebtedness, expenses and liabilities of the Issuer (other than the
Issuer's obligations to Capital Security holders under the Capital Securities),
the positions of a holder of Capital Securities and a holder of Junior
Subordinated Debentures relative to other creditors and to shareholders of PMC
in the event of liquidation or bankruptcy of PMC would be substantially the
same.
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UNITED STATES FEDERAL INCOME TAXATION
General
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of Capital
Securities, based upon the opinion of Duane, Morris & Heckscher LLP, counsel to
PMC. Unless otherwise stated, this summary deals only with Capital Securities
held as capital assets by a holder that purchases the Capital Securities upon
original issuance at their original issue price and that is (i) a citizen or
resident of the United States, (ii) a domestic corporation, (iii) an estate the
income of which is subject to the United States federal income tax without
regard to its source or (iv) a trust if a United States court is able to
exercise primary supervision over administration of the trust and one or more
United States persons have authority to control all substantial decisions of the
trust (a "United States Holder"). This summary does not address all the tax
consequences that may be relevant to holders that may be subject to special tax
treatment such as, for example, banks, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies,
traders that elect to mark to market, tax-exempt investors, persons whose
functional currency is other than the United States dollar, persons who hold
Capital Securities as part of a straddle, hedging or conversion transaction or,
except as specifically described herein, foreign taxpayers. In addition, this
summary does not address any aspects of state, local or foreign laws. This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. Each holder should also consult its tax
advisor as to its particular tax consequences of acquiring, holding, and
disposing of the Capital Securities, including the tax consequences under state,
local and foreign laws.
Classification of the Junior Subordinated Debentures
It is a condition to the issuance of the Capital Securities that Duane,
Morris & Heckscher LLP, counsel to PMC, render its opinion to the effect that,
under current United States federal income tax law, the Junior Subordinated
Debentures held by the Trust will be classified for United States federal income
tax purposes as indebtedness of PMC. Accordingly, corporate United States
Holders of Capital Securities will not be entitled to a dividends-received
deduction with respect to any income recognized with respect to the Capital
Securities.
Classification of the Trust
Duane, Morris & Heckscher LLP, counsel to PMC and the Trust, has rendered
its opinion to the effect that, under current United States federal income tax
law, the Trust will be classified for United States federal income tax purposes
as a grantor trust and not as an association taxable as a corporation.
Accordingly, for United States federal income tax purposes, each United States
Holder of Capital Securities will generally be considered the owner of an
undivided interest in the Junior Subordinated Debentures, and each United States
Holder will be required to include in its gross income any interest paid or
accrued or any original issue discount ("OID") accrued with respect to its
allocable share of those Junior Subordinated Debentures. Investors
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should be aware that the foregoing opinions of Duane, Morris & Heckscher LLP
will not be confirmed by the IRS by private ruling or otherwise, and will not be
binding on the Service or the courts. By its acceptance of a Capital Security, a
holder agrees to treat the Capital Security and the Junior Subordinated
Debentures consistently with the foregoing opinions.
Interest Income and Original Issue Discount
PMC has the option, under the terms of the Junior Subordinated Debentures,
to defer payments of interest by extending interest payments for up to 10 semi-
annual periods. See "Description of the Junior Subordinated Debentures--Option
to Extend Interest Payment Period." Under applicable Treasury regulations (the
"Regulations"), a contingency that stated interest will not be timely paid that
is "remote", because of the terms of the relevant debt instrument, will be
ignored in determining whether such debt instrument is issued with OID. As a
result of the terms and conditions of the Junior Subordinated Debentures that
prohibit certain payments with respect to PMC's capital stock and indebtedness
if PMC elects to extend interest payment periods, PMC believes that the
likelihood of its exercising its option to defer payments is remote. See
"Description of the Junior Subordinated Debentures--Option to Defer Interest
Payment Period." Based on the foregoing, PMC believes that the Junior
Subordinated Debentures will not be considered to be issued with OID at the time
of their original issuance and, accordingly, a United States Holder should
include in gross income such holder's allocable share of interest on the Junior
Subordinated Debentures in accordance with such holder's normal method of
accounting for tax purposes.
If the option to defer any payment of interest was determined not to be
"remote" or if PMC exercises its option to defer any payment of interest, the
Junior Subordinated Debentures would be treated as issued with OID at the time
of issuance or at the time of such exercise, as the case may be, and all stated
interest on the Junior Subordinated Debentures would thereafter be treated as
OID as long as the Junior Subordinated Debentures remained outstanding. In such
event, all of a United States Holder's taxable interest income with respect to
the Junior Subordinated Debentures would be accounted for as OID on a constant
yield method regardless of such holder's method of tax accounting, and actual
distributions of stated interest would not be reported as taxable income.
Consequently, a United States Holder would be required to include OID in gross
income even though PMC would not make any actual cash payments during an
Extension Period.
The IRS has not addressed the Regulations in any rulings or other
interpretations, and it is possible that the IRS could take a position contrary
to the interpretation herein.
Because income on the Capital Securities will constitute interest or OID,
corporate United States Holders of the Capital Securities will not be entitled
to a dividends received deduction with respect to any income recognized with
respect to the Capital Securities.
Market Discount and Premium
United States Holders of Capital Securities other than holders that
purchased the Capital Securities upon original issuance at their original issue
price may be considered to
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have acquired their undivided interest in the Junior Subordinated Debentures
with market discount, amortizable bond premium or acquisition premium as such
terms are defined for United States federal income tax purposes. Such holders
are urged to consult their tax advisors as to the income tax consequences of
the acquisition, ownership and disposition of the Capital Securities.
Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of the Trust
Under certain circumstances, as described under the caption "Description of
the Capital Securities--Redemption--Special Event Redemption or Distribution of
Junior Subordinated Debentures" and "Description of the Capital Securities--
Liquidation Distribution upon Termination," Junior Subordinated Debentures may
be distributed to holders in exchange for the Capital Securities and in
liquidation of the Trust. Such a distribution would generally be a non-taxable
event to each United States Holder, and each United States Holder would have an
aggregate tax basis in the Junior Subordinated Debentures equal to such holder's
aggregate tax basis in its Capital Securities. A United States Holder's holding
period in the Junior Subordinated Debentures so received in liquidation of the
Trust would include the period during which such holder held the Capital
Securities. If, however, the liquidation of the Trust were to occur because the
Trust is subject to United States federal income tax with respect to income
accrued or received on the Junior Subordinated Debentures, as would be the case
if, for example, the Trust were treated as an association taxable as a
corporation, the distribution of Junior Subordinated Debentures to a United
States Holder by the Trust would be a taxable event to the Trust and each United
States Holder, and each United States Holder would recognize a gain or loss as
if the United States Holder had exchanged its Capital Securities for the Junior
Subordinated Debentures it received upon liquidation of the Trust. A United
States Holder will include interest in income in respect of Junior Subordinated
Debentures received from the Trust in the manner described above under
"--Interest Income and Original Issue Discount."
Under certain circumstances described herein (see "Description of the
Capital Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Capital Securities. Such a redemption would be a taxable event to each
United States Holder, and a United States Holder would recognize gain or loss as
if it sold such redeemed Capital Securities for cash. See "-- Sales of Capital
Securities."
Sales of Capital Securities
A United States Holder that sells Capital Securities will recognize gain or
loss equal to the difference between such holder's adjusted tax basis in the
Capital Securities and the amount realized on the sale of such Capital
Securities. Assuming that PMC does not exercise its option to defer payment of
interest on the Junior Subordinated Debentures, and the Junior Subordinated
Debentures are not considered issued with OID, a holder's adjusted tax basis in
the Capital Securities generally will be its initial purchase price. If the
Junior Subordinated Debentures are deemed to be issued with OID, a holder's
adjusted tax basis in the Capital Securities generally will be its initial
purchase price, increased by OID previously includible in such holder's gross
income to the date of disposition and decreased by distributions or other
payments received on the Capital Securities since and including the date the
Junior Subordinated Debentures were treated as issued with OID. Such gain or
loss will generally be capital gain or loss and will generally be long-term
capital gain or loss if the Capital Securities have been held for more than one
year. Long-term capital gain of a non-corporate United States Holder is
generally subject to a maximum tax rate of 20%.
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The Capital Securities may trade at prices that do not accurately reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A United States Holder that disposes of Capital
Securities between record dates for payments of distributions thereon will be
required to include accrued but unpaid interest on the Junior Subordinated
Debentures through the date of disposition in income as ordinary income, and to
add such amount to such holder's adjusted tax basis in the pro rata share of the
underlying Junior Subordinated Debentures deemed disposed of. To the extent
that the selling price is less than such holder's adjusted tax basis (so
determined) a United States Holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes.
United States Alien Holders
For purposes of this discussion, a "United States Alien Holder" is any
corporation, individual, partnership, estate or trust that is, for United States
federal income tax purposes, a foreign corporation, a nonresident alien
individual, a foreign partnership, or a nonresident fiduciary of a foreign
estate or trust. The discussion assumes that income with respect to the Capital
Securities is not effectively connected with a trade or business in the United
States in which the United States Alien Holder is engaged.
Under current United States federal income tax law, and subject to the
discussion of backup withholding in the following section: (1) payments with
respect to principal and interest (including OID) by the Trust or any of its
paying agents to any holder of Capital Securities that is a United States Alien
Holder will not be subject to withholding of United States federal income tax;
provided that, in the case of interest, (a) the beneficial owner of the Capital
Securities does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of PMC entitled to vote, (b) the
beneficial owner of the Capital Securities is not a controlled foreign
corporation that is related, directly or indirectly, to PMC through stock
ownership and (c) either (A) the beneficial owner of the Capital Securities
certifies to the Trust or its agent, under penalties of perjury, that it is a
United States Alien Holder and provides its name and address or (B) a securities
clearing organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business (a "Financial
Institution"), and holds the Capital Securities in such capacity, certifies to
the Trust or its agent, under penalties of perjury, that such statement has
been received from the beneficial owner by it or by a Financial Institution
between it and the beneficial owner and furnishes the Trust or its agent with a
copy thereof and (2) a United States Alien Holder of Capital Securities will
generally not be subject to withholding of United States federal income tax on
any gain realized upon the sale or other disposition of a Capital Securities
(however, gains recognized by an individual United States Alien Holder that
holds the Capital Securities as a capital asset and is in the United States for
183 or more days in the taxable year of sale may be subject to United States
federal income tax).
Backup Withholding Tax And Information Reporting
Under current United States federal income tax law, information reporting
requirements apply to interest (including OID) and principal payments made to,
and to the proceeds of sales before maturity by, certain non-corporate persons.
In addition, a 31% backup
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withholding tax applies if a non-corporate person (i) fails to furnish such
person's Taxpayer Identification Number ("TIN") (which, for an individual, would
be his or her Social Security Number) to the payor in the manner required, (ii)
furnishes an incorrect TIN and the payor is so notified by the Service, (iii) is
notified by the Service that such person has failed properly to report payments
of interest and dividends or (iv) in certain circumstances, fails to certify,
under penalties of perjury, that such person has not been notified by the
Service that such person is subject to backup withholding for failure properly
to report interest and dividend payments. Backup withholding does not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations.
In the case of a United States Alien Holder, backup withholding and
information reporting do not apply to payments of principal and interest with
respect to a Capital Security with respect to which such Holder has provided the
required certification under penalties of perjury that such Holder is a United
States Alien Holder or has otherwise established an exemption, provided that
certain conditions are satisfied.
In general, (i) principal or interest payments with respect to a Capital
Security collected outside the United States by a foreign office of a custodian,
nominee or other agent acting on behalf of a beneficial owner of a Capital
Security and (ii) payments on the sale, exchange or retirement of a Capital
Security to or through a foreign office of a broker are not subject to backup
withholding or information reporting. However, if such custodian, nominee,
agent or broker is (i) a United States person, (ii) a controlled foreign
corporation for United States federal income tax purposes, (iii) a foreign
person 50% or more of whose gross income is effectively connected with the
conduct of a United States trade or business for a specified three-year period
or (iv) with respect to payments made after December 31, 1999, a foreign
partnership, if at any time during its tax year, one or more of its partners are
United States persons (as defined in United States Treasury regulations) who in
the aggregate hold more than 50% of the income or capital interest in the
partnership or if at any time during its tax year, such foreign partnership is
engaged in a United States trade or business, such custodian, nominee, agent or
broker may be subject to certain information reporting (but not backup
withholding) requirements with respect to such payments.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a person under the backup withholding rules are
allowed as a refund or a credit against such person's United States federal
income tax, provided that the required information is furnished to the Service.
Possible Tax Law Changes
Prospective investors should be aware that Enron Corporation has filed a
petition in the United States Tax Court challenging the proposed disallowance by
the IRS of the deduction of interest expense on securities issued by Enron
Corporation in 1993 and 1994 that are similar to, although different in a number
of respects from, the Junior Subordinated Debentures. It is possible that a
decision in that case could give rise to a Tax Event, which would permit PMC to
cause a redemption of the Capital Securities, as described more fully under
"Description of the Capital Securities--Redemption--Special Event Redemption or
Distribution of Junior Subordinated Debentures." Prospective investors should
also be aware that legislation has been proposed by the Clinton Administration
in the past that, if enacted,
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would have denied an interest deduction to issuers of instruments such as the
Junior Subordinated Debentures. No such legislation is currently pending. There
can be no assurance, however, that similar legislation will not ultimately be
enacted into law, or that other developments will not occur on or after the date
hereof that would adversely affect the tax treatment of the Junior Subordinated
Debentures or the Trust. Such changes also could give rise to a Tax Event.
CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the Capital Securities. Accordingly, among other factors, the fiduciary
should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other liabilities under ERISA and/or Section 4975 of the Code for such persons,
unless exemptive relief is available under an applicable statutory or
administrative exemption. Employee benefit plans that are governmental plans (as
defined in Section 3(32) of ERISA), certain church plans (as defined in Section
3(33) of ERISA) and foreign plans (as described in Section (4)(b)(5) of ERISA
are not subject to the requirements of ERISA or Section 4975 of the Code;
governmental plans may be subject to similar provisions under applicable state
laws.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the Issuer would be deemed to be
"plan assets" of a Plan for purposes of ERISA and Section 4975 of the Code if
"plan assets" of the Plan were used to acquire an equity interest in the Issuer
and no exception were applicable under the Plan Assets Regulation. An "equity
interest" is defined under the Plan Assets Regulation as any interest in an
entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features and
specifically includes a beneficial interest in a trust.
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Issuer would not be deemed to be "plan assets" of investing Plans
if, immediately after the most recent acquisition of any equity interest in the
Issuer, less than 25% of the value of each class of equity interests in the
Issuer were held by Plans, other employee benefit plans not subject to ERISA or
Section 4975 of the Code (such as governmental, church and foreign plans), and
entities holding assets deemed to be "plan assets" of any Plan (collectively,
"Benefit Plan Investors"), or if the Capital Securities were "publicly-offered
securities" for purposes of the Plan Assets Regulation. No assurance can be
given that the value of the Capital Securities held by Benefit Plan Investors
will be less than 25% of the total value of such Capital
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Securities at the completion of the initial offering or thereafter, and no
monitoring or other measures will be taken with respect to the satisfaction of
the conditions to this exception. In addition, no assurance can be given that
the Capital Securities would be considered to be "publicly-offered securities"
under the Plan Assets Regulation. All of the Common Securities will be purchased
and initially held by PMC.
Certain transactions involving the Issuer could be deemed to constitute
direct or indirect prohibited transactions under ERISA and Section 4975 of the
Code with respect to a Plan if the Capital Securities were acquired with "plan
assets" of such Plan and the assets of the Issuer were deemed to be "plan
assets" of such Plan and the assets were deemed to be "plan assets" of Plans
investing in the Issuer. For example, if PMC is a Party in Interest with
respect to an investing Plan (either directly or by reason of its ownership of
its subsidiaries), extensions of credit between PMC and the Issuer (as
represented by the Junior Subordinated Debentures and the Guarantee) would
likely be prohibited by Section 406(a)(1)(B) of ERISA and Section 4975(c)(1)(B)
of the Code unless exemptive relief were available under an applicable
administrative exemption (see below). In addition, if PMC were considered to be
a fiduciary with respect to the Issuer as a result of certain powers it holds
(such as the powers o remove and replace the Property Trustee and the
Administrative Trustee), the optional redemption or acceleration of the Junior
Subordinated Debentures could be considered to be prohibited transactions under
Section 406(b) of ERISA and Section 4975(c)(1)(E) of the Code. In order to avoid
such prohibited transactions, each investing Plan by purchasing the Capital
Securities will be deemed to have directed the Issuer to invest in the Junior
Subordinated Debentures and to have appointed the Property Trustee.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief if required for direct or indirect prohibited
transactions that may arise from the purchase or holding of the Capital
Securities if assets of the Issuer were deemed to be "plan assets" of Plans
investing in the Issuer as described above. Those class exemptions are PTCE 96-
23 (for certain transactions determined by in-house asset managers), PTCE 95-60
(for certain transactions involving insurance company general accounts), PTCE
91-38 (for certain transactions involving bank collective investment funds),
PTCE 90-1 (for certain transactions involving insurance company separate
accounts), and PTCE 84-14 (for certain transactions determined by independent
qualified professional asset managers).
Because the Capital Securities may be deemed to be equity interests in the
Issuer for purposes of applying ERISA and Section 4975 of the Code, the Capital
Securities may not be purchased or held by any Plan, any entity whose underlying
assets include "plan assets" by reasons of any Plan's investment in the entity
(a "Plan Asset Entity") or any person investing "plan assets" of any Plan,
unless such purchaser or holder is eligible for the exemptive relief available
under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable exemption.
Any purchaser or holder of the Capital Securities or any interest therein will
be deemed to have represented by its purchase and holding thereof that it either
(a) is not a Plan or a Plan Asset Entity and is not purchasing such securities
on behalf of or with "plan assets" of any Plan or (b) is eligible for the
exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or
another applicable exemption with respect to such purchase or holding. If a
purchaser or holder of the Capital Securities that is a Plan or a Plan Asset
Entity elects to rely on an exemption other than PTCE 96-23, 95-60, 91-38, 90-1
or 84-14, PMC and the Issuer may require
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a satisfactory opinion of counsel or other evidence with respect to the
availability of such exemption for such purchase and holding.
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in non-exempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the Capital
Securities on behalf of or with "plan assets" of any Plan consult with their
counsel regarding the potential consequences if the assets of the issuer were
deemed to be "plan assets" and the availability of exemptive relief under PTCE
96-23, 95-60, 91-38, 90-1 or 84-14 or any other applicable exemption.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Capital
Securities, the enforceability of the Trust Agreement and the formation of the
Issuer will be passed upon by Duane, Morris & Heckscher LLP, counsel to PMC and
the Issuer. The validity of the Guarantee and the Junior Subordinated Debentures
will be passed upon for PMC by Duane, Morris & Heckscher LLP and for the
Underwriters by Sullivan & Cromwell, New York, New York. Sullivan & Cromwell
will rely on the opinions of Duane, Morris & Heckscher LLP as to matters of
Delaware and Pennsylvania law. Certain matters relating to the United States
federal income tax considerations will be passed upon for PMC by Duane, Morris &
Heckscher LLP. A John May, a director of the Company, is a member of Duane,
Morris & Heckscher LLP. Mr. May beneficially owns an aggregate of 257,200 shares
of the Company's Common Stock and 66,200 shares of the Company's Class A Common
Stock. Of these shares, 11,250 shares of Common Stock and 2,650 shares of Class
A Common Stock are owned jointly by Mr. May and his wife; 1,550 shares of Class
A Common Stock are owned by Mr. May's wife as custodian for their minor
grandchildren and 17,250 shares of Class A Common Stock are held by a
partnership of which Mr. May is a general partner. Members of Duane, Morris &
Heckscher LLP, including Mr. May, hold an aggregate of 259,700 shares of Common
Stock and 67,270 shares of Class A Common Stock of the Company.
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement"), PMC and the Issuer have agreed that the Issuer will
sell to each of the Underwriters named below, and each of such Underwriters, for
whom Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
and First Union Capital Markets, a division of Wheat First Securities, Inc. are
acting as representatives, has severally agreed to purchase from the Issuer, the
respective number of Capital Securities set forth opposite its name below:
Underwriter Number of Capital Securities Purchased
-------------------- --------------------------------------
Goldman, Sachs & Co.
Merrill Lynch, Pierce,
Fenner & Smith Incorporated
First Union Capital Markets
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Capital Securities
offered hereby, if any are taken.
The Underwriters propose to offer the Capital Securities in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of $___ per Capital Security. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $______ per Capital Security
to certain brokers and dealers. After the Capital Securities are released
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for sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
In view of the fact that the proceeds from the sale of the Capital
Securities will be used to purchase the Junior Subordinated Debentures issued by
PMC, the Underwriting Agreement provides that PMC will pay as Underwriters'
Compensation for the Underwriters' arranging the investment therein of such
proceeds an amount of $___ per Capital Security for the accounts of the several
Underwriters.
In connection with the Offering, the Underwriters may purchase and sell the
Capital Securities in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover short positions
created by the Underwriters in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Capital Securities, and short
positions created by the Underwriters involve the sale by the Underwriters of a
greater number of the Capital Securities than they are required to purchase from
PMC in the Offering. The Underwriters may also impose a penalty bid, whereby
selling concessions allowed to broker-dealers in respect of the Capital
Securities sold in the offering may be reclaimed by the Underwriters if such
Capital Securities are repurchased by the Underwriters in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the Capital Securities, which may be higher than the
price that might otherwise prevail in the open market, and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
in the over-the-counter market or otherwise.
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Capital Securities offered hereby as interests in a direct
participation program, the Offering is being made in compliance with Rule 2810
of the NASD's Conduct Rules. Offers and sales of Capital Securities will be made
only to (i) "qualified institutional buyers", as defined in Rule 144A under the
Securities Act of 1933, as amended (the Act") or (ii) institutional "accredited
investors", as defined in Rule 501(a)(1)-(3) of Regulation D under the Act.
Sales to discretionary accounts may not be made without the prior written
approval of the customer.
PMC and the Issuer have agreed that, during the period beginning from the
date of this Prospectus and continuing to and including the earlier of (i) the
termination of trading restrictions on the Capital Securities, as determined by
the Underwriters, or (ii) 30 days after the closing date, they will not offer,
sell, contract to sell, or otherwise dispose of any Capital Securities, any
other interests of the Issuer, or any capital stock or any other securities of
the Issuer or PMC which are substantially similar to the Capital Securities,
including but not limited to any guarantee of such security, or any securities
convertible into or exchangeable for or representing the right to receive,
Capital Securities, preferred stock or such substantially similar securities of
either the Issuer or PMC, without the prior written consent of Goldman, Sachs &
Co., except for the Capital Securities offered in connection with this Offering,
the Common Securities and the Guarantee.
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There is no established public trading market for the Capital Securities.
The Underwriters have advised PMC that they intend to make a market in the
Capital Securities, but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as the liquidity of
the trading market for the Capital Securities.
The Issuer, PMC and PMA Reinsurance Corporation have agreed to indemnify
the several Underwriters against certain liabilities, including liabilities
under the Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to PMC and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
EXPERTS
The consolidated financial statements and schedules of the Company as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997, have been included herein and in the Registration
Statement in reliance upon the reports of PricewaterhouseCoopers LLP,
independent accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been previously filed by the Company with the
Commission and are hereby incorporated by reference in this Prospectus as of
their respective dates:
(i) The Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (filed March 23, 1998);
(ii) The Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1998 (filed May 15, 1998) and June 30, 1998
(filed August 13, 1998);
(iii) information included under the captions "Beneficial Ownership of
Common Stock," "Section 16(a) Beneficial Reporting Compliance,"
"Election of Directors," "Information Regarding Management"
(except for information under "Report of Compensation Committee
on the Compensation of Executive Officers of the Company for the
Year Ended December 31, 1997" and "Comparison of Total Return on
the Company's Class A Common Stock with Certain Indices" which
shall not be deemed incorporated by reference in this
Prospectus) and "Certain Transactions" of the Company's
definitive proxy statement (filed March 26, 1998); and
(iv) The Company's Current Reports on Form 8-K dated February 5, 1998
and February 9, 1998.
In addition, all documents filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus and prior to the termination of the Offering shall
be deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement or information
contained herein or in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement or information contained herein or in any other
subsequently filed document that is also incorporated by reference herein
modifies or replaces such a statement or such information. Any such statement or
information so modified or replaced shall not be deemed, except as so modified
or replaced, to be a part of this Prospectus.
The Company will furnish without charge, including any beneficial owner, to
each person to whom this Prospectus is delivered, upon written or oral request,
a copy of any and all of the documents that have been incorporated by reference
in this Prospectus, other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference into the documents that this
Prospectus incorporates. Requests should be submitted by telephone to (215)
665-5046 or in writing to Pennsylvania Manufacturers Corporation, 1735 Market
Street, Philadelphia, Pennsylvania, 19103-7590, Attention: Investor Relations.
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GLOSSARY OF CERTAIN INSURANCE AND OTHER DEFINED TERMS
Actuarial
analysis..... Evaluation of risks in order to attempt to assure that
premiums and loss reserves adequately reflect expected future
loss experience and claims payments; in evaluating risks,
mathematical models are used to predict future loss experience
and claims payments based on past loss ratios and loss
development patterns and other relevant data and assumptions.
Affiliate..... With respect to any Person, any other person which directly or
indirectly controls, is controlled by or is under common control
with such Person.
Adverse....... loss development Increases in losses and ALAE exceeding
anticipated loss and ALAE experience over a given period of time.
Aggregate
excess
reinsurance
arrangements. Reinsurance arrangements under which a reinsurer assumes the
risks and/or loss reserves of certain business of a ceding
company in their entirety.
Allocated loss
adjustment
expenses
("ALAE")..... Allocated loss adjustment expenses include all legal expenses and
other expenses incurred by a company in connection with the
investigation, adjustment, settlement or litigation of claims or
losses under business covered. ALAE does not include costs of "in
house" counsel, claims staff or other overhead or general expense
of the reinsured.
A.M. Best..... A.M. Best Company, Inc. A.M. Best financial condition ratings
are opinions of an insurance company's financial strength,
operating performance and ability to meet its obligations to
policyowners. Such ratings are based upon a comprehensive review
of a company's financial performance, which is supplemented by
certain data, including responses to A.M. Best's questionnaires,
quarterly NAIC filings, state insurance department examination
reports, loss reserve reports, annual reports and reports filed
with state insurance departments. A.M. Best undertakes a
quantitative evaluation based on profitability, leverage and
liquidity and a qualitative evaluation based upon a company's
book of business or spread of risk, the amount, appropriateness
and soundness of reinsurance, the quality, diversification and
estimated market value of its assets, the adequacy of its loss
reserves and policyowners' surplus and the experience and
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competence of its management. A.M. Best Company, Inc. uses the
following rating scale:
A++ and A+ Superior
A and A- Excellent
B++ and B+ Very Good
B and B- Adequate
C++ and C+ Fair
C and C- Marginal
D Very Vulnerable
E Under State Supervision
F In Liquidation
Annualized
premium...... The expected premium payment for a 12-month period for each
policy, excluding single premium policies. Actual premium
payments may be higher or lower than annualized premiums.
Attachment
point........ The amount of losses above which excess of loss reinsurance
becomes operative.
Automatic
facultative
arrangements. Facultative insurance contracts whereby the ceding company has
the right, but not the obligation, to cede risks to a reinsurer
and the reinsurer is obligated to accept such risks pursuant to
the contract terms.
Broker;
intermediary. One who negotiates contracts of reinsurance between a primary
insurer or other reinsured and a reinsurer on behalf of the
primary insurer or reinsured. The broker receives from the
reinsurer a commission for placement and other services rendered.
Broker
reinsurer.... A reinsurer that markets and sells reinsurance through brokers
rather than through its own employees.
Case reserves. Loss reserves established with respect to individual reported
claims.
Casualty
insurance
and/or
reinsurance.. Insurance and/or reinsurance that is concerned primarily with the
losses caused by injuries to third persons (in other words,
persons other than the policyholder) and the legal liability
imposed on the insured resulting therefrom.
Catastrophe
reinsurance.. A form of excess of loss property reinsurance that, subject to a
specified limit, indemnifies the ceding company for the amount of
loss in excess of a specified retention with
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respect to an accumulation of losses resulting from a
catastrophic event. The actual reinsurance document is called a
"catastrophe cover."
Cede; ceding
company;
cedent....... When a company reinsures its risk with another, it "cedes"
business and is referred to as the "ceding company" or the
"cedent".
Claim closure
rate......... The number of closed lost time workers' compensation claims
divided by total reported lost time workers' compensation claims
by accident year as of a given evaluation date.
Clash cover... A form of excess of loss casualty reinsurance policy covering
losses arising from a single set of circumstances covered by more
than one primary policy. For example, if an insurer covers both
motorists involved in an accident, a clash cover would protect
the insurer from suffering a net loss in the full amount of both
parties. The clash cover would pay to the insurer a portion of
the loss in excess of the coverage of one of the two parties.
Combined
ratio........ A combination of the underwriting expense ratio, the loss and
LAE ratio, and the policyholder dividend ratio. The loss and LAE
ratio measures the ratio of net incurred losses and LAE to net
earned premiums. The underwriting expense ratio measures the
ratio of underwriting expenses to net premiums written. The
policyholder dividend ratio measures policyholder dividends as a
percent of net premiums earned. Generally, companies that write
predominately long-tailed liability risks will have a higher
combined ratio than those companies writing predominately
property risks.
Commutation... An agreement with a claimant whereby the claimant, in exchange
for a lump sum payment, releases his or her rights to future
indemnity payments.
Direct
reinsurer,
direct
underwriter,
direct writer A reinsurer that markets and sells reinsurance directly to its
reinsureds without the assistance of brokers.
- 183 -
<PAGE>
Excess and
surplus lines Surplus lines risks are those risks not fitting normal under-
writing patterns, involving a degree of risk that is not
commensurate with standard rates and/or policy forms, or that
will not be written by standard carriers because of general
market conditions. Excess insurance refers to coverage that
attaches for an insured over the limits of a primary policy or a
stipulated self-insured retention. Policies are bound or accepted
by carriers not licensed in the jurisdiction where the risk is
located, and generally are not subject to regulations governing
premium rates or policy language.
Excess of loss
reinsurance.. The generic term describing reinsurance that indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified dollar
amount, called a "layer" or "retention." Also known as
nonproportional reinsurance or stop loss coverage.
Facultative
reinsurance.. The reinsurance of all or a portion of the insurance provided by
a single policy. Each policy reinsured is separately negotiated.
GAAP.......... United States generally accepted accounting principles for
property and casualty insurance companies
Gross premiums
written...... Total premiums for direct insurance and reinsurance assumed
during a given period.
Incurred but
not reported
- 184 -
<PAGE>
("IBNR")
reserves..... Loss reserves for estimated losses that have been
incurred but not yet reported to the insurer or reinsurer.
Incurred
losses....... The total losses sustained by an insurance company under a policy
or policies, whether paid or unpaid. Incurred losses include a
provision for estimated losses that have been incurred but have
not yet been reported to the insurer ("IBNR").
IRIS ratios... Financial ratios annually calculated by the NAIC to assist state
insurance departments in monitoring the financial condition of
insurance companies.
Layers........ The division of a particular reinsurance program delineated by an
attachment point and a maximum limit. Often, a reinsurance
program will be divided into several layers, with the lower
layers (See "Low or working layer excess of loss reinsurance")
typically having higher premiums and higher claim frequency and
the higher layers typically having lower premiums and claim
frequency.
Loss
adjustment
expenses
("LAE")...... The expenses of settling claims, including legal and other fees
and the portion of general expenses allocated to claim settlement
costs.
Loss ratio/
pure loss
ratio........ Loss ratio is equal to losses and LAE divided by earned premiums.
The pure loss ratio refers to losses divided by earned premiums.
Undiscounted loss ratios refer to loss ratios that do not
consider the net effect of discounting of loss reserves; the
Company's current practice is to discount loss reserves for
workers' compensation insurance.
Loss reserves. Liabilities established by insurers and reinsurers to reflect the
estimated cost of claims payments that the insurer or reinsurer
ultimately will be required to pay in respect of insurance or
reinsurance it has written. Reserves are established for losses
and for LAE and consist of case reserves and IBNR reserves.
Low or working
layer excess
of loss
reinsurance.. Reinsurance that absorbs the losses immediately above
the reinsured's retention layer. A low layer excess of loss
reinsurer will pay up to a certain dollar amount at which point a
higher layer reinsurer (or the ceding company) will be liable for
additional losses.
- 185 -
<PAGE>
Manual rates.. Refers to insurance rates for lines and classes of business
approved and published by state insurance departments.
Manual rate
level or
average
manual
rate level... Refers to the manual rates for lines and classes of
business relative to a benchmark; within this document, the term
refers to the manual rates, as compared to other periods, such as
a prior policy year.
Moody's....... Moody's Investors Service, Inc. Moody's financial strength
ratings are opinions of an operating insurance company's ability
to discharge senior policyowner claims and obligations pursuant
to its insurance policies. Moody's financial strength ratings are
based on information provided by the company and federal and
state regulators. Moody's Investors Service, Inc. uses the
following rating scale:
Aaa Exceptional
Aa1, Aa2 and Aa3 Excellent
A1, A2 and A3 Good
Baa1, Baa2 and Baa3 Adequate
Ba1, Ba2 and Ba3 Questionable
B1, B2 and B3 Poor
Caa Very Poor
Ca Extremely Poor
C Lowest
NAIC.......... The National Association of Insurance Commissioners, an
association of the chief insurance supervisory officials of each
state, territory and insular possession of the United States.
Net leverage.. Sum of net premiums written and liabilities divided by surplus.
Net premiums
earned....... The portion of net premiums written that is recognized for
accounting purposes as income during a period.
Net premiums
written...... Gross premiums written for a given period less premiums ceded to
reinsurers during such period.
Non-admitted
basis........ Refers to the fact that a company marketing excess and surplus
lines of insurance in a particular jurisdiction is not required
to be fully licensed in such jurisdiction buy may write insurance
on an excess and surplus lines basis in that jurisdiction. In
addition, unlike standard lines of insurance, premium rates and
policy forms for coverages written on a non-admitted basis do not
require the approval of the insurance department of the
jurisdiction.
Operating
ratio........ The combined ratio reduced by the net investment income ratio.
The net investment income ratio is the ratio of net investment
income to net premiums earned. The ratio measures a company's
operating profitability, exclusive of realized gains and federal
income taxes.
- 186 -
<PAGE>
Per occurrence A form of insurance or reinsurance under which the date of the
loss event is deemed to be the date of the occurrence, regardless
of when reported and permits all losses arising out of one event
to be aggregated instead of being handled on a risk-by-risk
basis.
Premium....... Payments received on insurance policies issued or reinsured by an
insurance company.
Primary
insurer...... An insurance company that issues insurance policies to the
general public or to certain noninsurance entities.
Pro rata
reinsurance.. A generic term describing all forms of reinsurance in which the
reinsurer shares a proportional part of the original premiums and
losses of the reinsured. Pro rata reinsurance also is known as
proportional reinsurance, quota share reinsurance and
participating reinsurance.
Property
insurance
and/or
reinsurance.. Insurance and/or reinsurance that indemnifies a person with an
insurable interest in tangible property for his property loss,
damage or loss of use.
Pure loss
ratio........ See "Loss ratio/pure loss ratio" above.
Reinsurance... The practice whereby one party, called the reinsurer or assuming
company, in consideration of a premium paid to such party, agrees
to indemnify another party, called the reinsured, for part or all
of the liability assumed by the reinsured under a policy or
policies of insurance that it has issued. The reinsured may be
referred to as the original or primary insurer, the direct
writing company or the ceding company. Reinsurance provides a
primary insurer with three major benefits: it reduces net
liability on individual risks; it helps to protect against
catastrophic losses and it helps to maintain acceptable surplus
and reserve ratios. Reinsurance provides a primary insurer with
additional underwriting capacity in that the primary insurer can
accept larger risks and can expand the volume of business it
writes without increasing its capital base. The ceding company
remains liable on its obligations under the policies reinsured if
the reinsurer fails to pay claims on a reinsured policy.
Rent-a
-captive..... Refers to an arrangement pursuant to which an insurer's client
purchases a policy from the insurer and chooses a participation
level. The insurer, in turn, cedes the portion of the premium and
loss exposure representative of the participation level to an
affiliate, typically located in an offshore jurisdiction, such as
Bermuda. The client then participates in the loss and investment
experience within the participation level, generally through a
dividend mechanism. The client is responsible for any losses that
may arise within its participation level, and such potential
obligation is typically secured through a letter of credit or
similar collateral.
Reserves...... Liabilities established by insurers to reflect the estimated
discounted present value of costs of claims, payments or contract
liabilities and the related expenses that the insurer
- 187 -
<PAGE>
will ultimately be required to pay in respect of insurance it has
written.
Retention,
retention
layer........ The amount or portion of risk that an insurer or reinsurer
retains for its own account. Losses in excess of the retention
layer are paid by the reinsurer or retrocessionaire. In
proportional treaties, the retention may be a percentage of the
original policy's limit. In excess of loss business, the
retention is a dollar amount of loss, a loss ratio or a
percentage.
Retrocession;
retrocession-
aire......... A transaction whereby a reinsurer cedes to another reinsurer (the
"retrocessionaire") all or part of the reinsurance it has
assumed. Retrocession does not legally discharge the ceding
reinsurer from its liability with respect to its obligations to
the reinsured.
Risk-based
capital
requirements
or RBC....... Regulatory and rating agency targeted surplus based on the
relationship of statutory surplus, with certain adjustments, to
the sum of stated percentages of each element of a specified list
of company risk exposures.
Risk-exposed.. Reinsurance coverages that attach within the underlying policy
limits of the ceding company, which differs from catastrophe
reinsurance and clash coverages.
Semiautomatic
facultative
arrangements. Facultative reinsurance contracts where the ceding company has
the right, but not the obligation to cede risks to a reinsurer
and the reinsurer is obligated to accept such risks as long as
they are within stated criteria. If a risk falls outside such
criteria, the reinsurer has the option of either: (i) accepting
the risk, (ii) declining the risk, or (iii) repricing the risk.
SFAS.......... Statement of Financial Accounting Standards.
Standard
& Poor's..... Standard & Poor's Ratings Group. Standard & Poor's claims-paying
ability ratings are opinions of an operating insurance company's
financial ability to meet its obligations under its insurance
policies. Standard & Poor's claims-paying ability ratings are
based on current information provided by the subject insurance
company and other reliable sources. Standard & Poor's Rating
Group uses the following rating scale:
- 188 -
<PAGE>
AAA Superior
AA+, AA and AA- Excellent financial security
A+, A and A- Good financial security
BBB+, BBB and BBB- Adequate
BB+, BB and BB- Financial security may be adequate
B+, B and B- Vulnerable
CCC Extremely Vulnerable
R Regulatory actions
A\\pi\\, BBB\\pi\\,
BB\\pi\\ and B\\pi\\ Qualified solvency ratings
Statutory
accounting
principles.
("SAP")...... Recording transactions and preparing financial statements
in accordance with the rules and procedures prescribed or
permitted by state insurance regulatory authorities including the
NAIC, which in general reflect a liquidating, rather than going
concern, concept of accounting.
Statutory
reserves..... Monetary amounts established by state insurance law that an
insurer must have available to provide for future obligations
with respect to all policies. Statutory reserves are liabilities
on the balance sheet of financial statements prepared in
conformity with SAP.
Statutory or
policy-
holder's
surplus;
statutory
capital and
surplus...... The excess of statutory admitted assets over statutory
liabilities (including loss reserves) as shown on an insurer's
statutory financial statements.
Stop loss..... See "Excess of loss reinsurance".
Survival ratio For asbestos and environmental (A&E) claims, the survival ratio
is equal to the average normalized loss and LAE payments for A&E
over three years divided by loss reserves established for A&E.
Treaty
reinsurance.. The reinsurance of a specified type or category of risks defined
in a reinsurance agreement (a "treaty") between a primary insurer
or other reinsured and a reinsurer. Typically, in treaty
reinsurance, the primary insurer or reinsured is obligated to
offer and the reinsurer is obligated to accept a specified
portion of all such type or category of risks originally written
by the primary insurer or reinsured.
Underwriting.. The insurer's process of reviewing applications submitted for
insurance coverage, deciding whether to accept all or
- 189 -
<PAGE>
part of the coverage requested and determining the applicable
premiums.
Underwriting
cycle........ An historical pattern in which property and casualty insurance
and reinsurance premiums, profits and availability of
coverage rise and fall with some regularity over time.
Underwriting
expenses..... The aggregate of policy acquisition costs, including commissions,
and the portion of administrative, general and other expenses
attributable to underwriting operations.
Unearned
premium...... The portion of a premium representing the unexpired portion of
the exposure period as of a certain date.
Unearned
premium
reserve...... Liabilities established by insurers and reinsurers to reflect
unearned premiums that are refundable to policyholders if an
insurance or reinsurance contract is canceled prior to expiration
of the contract term.
- 190 -
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
<S> <C>
Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheet at June 30, 1998 F-2
Consolidated Statements of Operations for the three and six months ended June
30, 1998 and 1997 F-3
Consolidated Statements of Comprehensive Income for the three and six months ended
June 30, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the six months ended June 30, 1998
and 1997 F-5
Notes to Consolidated Financial Statements F-6
Audited Consolidated Financial Statements
Consolidated Financial Statements:
Report of Independent Accountants F-9
Consolidated Balance Sheets at December 31, 1997 and 1996 F-10
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1997 F-11
Consolidated Statements of Changes in Shareholders' Equity for each of the
three years in the period ended December 31, 1997 F-12
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1997 F-14
Notes to Consolidated Financial Statements F-15
</TABLE>
F-1
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(Unaudited)
(in thousands, except share data) June 30,
1998
-------------------
<S> <C>
Assets
Investments:
Fixed maturities available for sale, at fair value
(amortized cost of $1,955,206) $ 1,995,653
Equity securities, at fair value (cost of $5) 15
Short-term investments, at amortized cost which approximates fair value 163,635
-----------
Total investments 2,159,303
Cash 7,585
Investment income due and accrued 20,808
Uncollected premiums (net of allowance for uncollectible accounts
of $18,495) 293,303
Reinsurance receivables (net of allowance for uncollectible reinsurance
of $2,085) 347,821
Property and equipment (net of accumulated depreciation
of $49,822) 37,901
Deferred income taxes, net 62,978
Deferred acquisition costs 53,363
Other assets 92,351
-----------
Total assets $ 3,075,413
===========
Liabilities
Unpaid losses and loss adjustment expenses $ 1,939,568
Unearned premiums 243,012
Long-term debt 203,000
Dividends to policyholders 10,779
Funds held under reinsurance treaties 75,806
Taxes, licenses and fees, and other expenses 52,543
Other liabilities 54,322
-----------
Total liabilities 2,579,030
-----------
Shareholders' Equity
Common stock, $5 par value (40,000,000 shares authorized;
14,765,020 shares issued and 14,329,013 outstanding) 73,825
Class A common stock, $5 par value (40,000,000 shares authorized;
9,677,925 shares issued and 9,356,995 outstanding) 48,389
Additional paid-in capital - Class A common stock 339
Retained earnings 359,486
Accumulated other comprehensive income 26,297
Notes receivable from officers (198)
Treasury stock, at cost:
Common stock (436,007 shares) (5,582)
Class A common stock (320,930 shares) (6,173)
-----------
Total shareholders' equity 496,383
-----------
Total liabilities and shareholders' equity $ 3,075,413
===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-2
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(in thousands, except per share data) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 94,908 $ 98,358 $ 248,481 $ 248,285
Change in net unearned premiums 19,746 16,093 (26,905) (25,884)
--------- --------- --------- ---------
Net premiums earned 114,654 114,451 221,576 222,401
Net investment income 32,685 32,612 65,200 68,459
Net realized investment gains (losses) 3,749 (680) 11,263 (1,931)
Service revenues 2,655 2,490 5,090 5,038
--------- --------- --------- ---------
Total revenues 153,743 148,873 303,129 293,967
--------- --------- --------- ---------
Losses and expenses:
Losses and loss adjustment expenses 87,900 98,230 172,757 193,134
Acquisition expenses 29,060 28,130 51,763 46,469
Operating expenses 18,033 19,963 37,500 36,905
Dividends to policyholders 4,213 3,360 8,130 6,617
Interest expense 3,762 3,888 7,463 8,222
--------- --------- --------- --------
Total losses and expenses 142,968 153,571 277,613 291,347
--------- --------- --------- --------
Income before income taxes and
extraordinary item 10,775 (4,698) 25,516 2,620
Provision (benefit) for income taxes:
Current 481 -- 691 (353)
Deferred 937 (5,218) 3,380 (2,304)
--------- --------- --------- --------
Total 1,418 (5,218) 4,071 (2,657)
--------- --------- --------- --------
Income before extraordinary item 9,357 520 21,445 5,277
Extraordinary loss from early
extinguishment of debt (net of
income tax benefit of $2,549) -- -- -- (4,734)
--------- --------- --------- --------
Net income $ 9,357 $ 520 $ 21,445 $ 543
========= ========= ========= ========
Earnings per common and equivalent share:
Basic:
Earnings before extraordinary loss $ 0.39 $ 0.02 $ 0.90 $ 0.22
Extraordinary item -- -- -- (0.20)
--------- --------- --------- --------
Net income $ 0.39 $ 0.02 $ 0.90 $ 0.02
========= ========= ========= ========
Diluted:
Earnings before extraordinary loss $ 0.38 $ 0.02 $ 0.87 $ 0.21
Extraordinary item -- -- -- (0.19)
--------- --------- --------- --------
Net income $ 0.38 $ 0.02 $ 0.87 $ 0.02
========= ========= ========= ========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 9,357 $ 520 $21,445 $ 543
------- ------- ------- -------
Other comprehensive income (loss), net of tax:
Unrealized losses on securities:
Holding gains (losses) arising during the period 15,433 30,637 16,399 (8,230)
Less: reclassification adjustment for (gains)
losses included in net income (4,024) 137 (8,908) 950
------- ------- ------ -------
Other comprehensive income (loss) 11,409 30,774 7,491 (7,280)
------- ------- ------- -------
Comprehensive income (loss) $20,766 $31,294 $28,936 $(6,737)
======= ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------
(in thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,445 $ 543
Adjustments to reconcile net income to net cash flows used by
operating activities:
Depreciation 2,773 3,945
(Accretion) amortization (1,307) 3,160
Provision (benefit) for deferred income taxes 3,380 (2,304)
Extraordinary loss from early extinguishment of debt -- (4,734)
Net realized investment (gains) losses (11,263) 1,931
Change in uncollected premiums and unearned premiums, net (9,321) (16,998)
Change in dividends to policyholders 579 883
Change in reinsurance receivables (15,415) (26,482)
Change in unpaid losses and loss adjustment expenses (63,619) (38,281)
Change in investment income due and accrued 3,010 4,333
Other, net (3,801) (15,789)
--------- ---------
Net cash flows used in operating activities (73,539) (89,793)
--------- ---------
Cash flows from investing activities:
Fixed maturity investments available for sale:
Purchases (927,342) (771,135)
Maturities or calls 84,915 75,400
Sales 802,825 790,994
Net sales of short-term investments 101,572 81,974
Net purchases of property and equipment (2,053) (2,239)
--------- ---------
Net cash flows provided by investing activities 59,917 174,994
--------- ---------
Cash flows from financing activities:
Dividends paid to shareholders (4,059) (3,982)
Proceeds from long-term debt -- 210,000
Repayments of long-term debt -- (211,650)
Repayments of notes receivable from officers -- 507
Treasury stock transactions, net (6,882) 486
--------- ---------
Net cash flows used in financing activities (10,941) (4,639)
--------- ---------
Net (decrease) increase in cash (24,563) 80,562
Cash January 1 32,148 7,176
--------- ---------
Cash June 30 $ 7,585 $ 87,738
========= =========
Supplementary cash flow information:
Cash received for income taxes $ -- $ (2,900)
Cash paid for interest $ 7,467 $ 12,161
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(dollar amounts in thousands, except per share data)
1. General
The accompanying consolidated financial statements include the accounts of
Pennsylvania Manufacturers Corporation (PMC) and its wholly and majority owned
subsidiaries (the Company). PMC is an insurance holding company that sells
property and casualty reinsurance and insurance through its insurance
subsidiaries. PMC's insurance subsidiaries are domiciled in Pennsylvania, except
for its excess and surplus lines affiliate which is domiciled in Delaware, and
certain foreign subsidiaries.
Reinsurance -- PMC's reinsurance subsidiary, PMA Reinsurance Corporation (PMA
Re), emphasizes risk-exposed, excess of loss reinsurance and operates in the
brokered market. PMA Re's business is predominantly in casualty lines of
reinsurance.
Workers' Compensation and Primary Standard Insurance -- PMC's property and
casualty insurance subsidiaries (the Property and Casualty Group) write workers'
compensation and other standard lines of commercial insurance primarily in the
Mid-Atlantic and Southern regions of the U.S.
Specialty Property and Casualty -- In January of 1998, the Company's specialty
insurance unit, Caliber One, commenced writing business. It is management's
intention that Caliber One will write primarily casualty business through
surplus lines brokers on a nationwide basis. Caliber One's excess and surplus
lines insurance affiliate, Caliber One Indemnity Company, is presently
authorized as a surplus lines carrier in 37 states, Washington, DC, and Puerto
Rico, with applications either pending or being prepared for the remaining
states.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. It is management's opinion that all adjustments, including normal recurring
accruals, considered necessary for a fair presentation have been included.
Certain reclassifications of prior year amounts have been made to conform with
the 1998 presentation. Additionally, net premiums written were reduced by
($2,239) and ($2,072) for the three and six months ended June 30, 1998,
respectively, and ($31) for the three months ended June 30, 1997, and increased
$14 for the six months ended June 30, 1998, representing estimated retrospective
policy adjustments related to the current accident year and retrospective policy
adjustments paid. These adjustments were made for presentation purposes only and
do not impact the Company's reported revenues, financial position or results of
operations as these adjustments have no effect on net premiums earned.
Operating results for the three and six months ended June 30, 1998, are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the December 31, 1997 audited consolidated
financial statements and footnotes thereto included elsewhere in this
Prospectus.
F-6
<PAGE>
2. Per Share Data
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"),
which supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and Related Interpretations. The Company adopted SFAS No. 128 during
1997. In accordance with SFAS No. 128, all prior period data presented has been
restated to conform with the provisions of this statement. SFAS No. 128
replaces the presentation of primary earnings per share with a presentation of
basic earnings per share and requires the presentation of both basic and diluted
earnings per share on the face of the income statement. SFAS No. 128 also
requires a reconciliation of the numerators and denominators used in the basic
earnings per share calculation to the numerators and denominators used in the
diluted earnings per share calculation. Such reconciliation is provided below:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Control number - income
before extraordinary loss........... $ 9,357 $ 520 $ 21,445 $ 5,277
Denominator:
Basic shares - weighted average
Common and Class A common
shares outstanding.................. 23,692,071 23,828,248 23,770,912 23,832,562
Dilutive stock options................ 1,002,385 613,862 887,999 672,330
----------- ----------- ----------- -----------
Total diluted shares.................. 24,694,456 24,442,110 24,658,911 24,504,892
=========== =========== =========== ===========
</TABLE>
Basic earnings per share: For the three and six months ended June 30, 1998 and
1997, basic earnings per share calculations were based upon the weighted average
number of common and Class A common shares outstanding for the period.
Diluted earnings per share: For the three and six months ended June 30, 1998 and
1997, diluted earnings per share calculations were based upon the weighted
average number of common and Class A common shares outstanding during the
periods and the assumed exercise price of dilutive stock options, less the
number of treasury shares assumed to be purchased from the proceeds using the
average market price of the Company's Class A common stock.
3. Accounting Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" ("SFAS No. 130"), which establishes
standards for the reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains and losses). SFAS No. 130 requires that
all items required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income
includes a reclassification adjustment for net realized investment gains
included in net income of $4,024 (after income taxes of $2,167) and $8,908
(after income taxes of $4,797) for the three and six months ended June 30, 1998,
respectively, and net realized investment losses of $137 (after income taxes of
$74) and $950 (after income taxes of $512) for the three and six months ended
June 30, 1997, respectively. The new standard requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations.
F-7
<PAGE>
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. In connection
with the adoption of SFAS No. 131, the Company has identified four reportable
segments: (i) PMA Re, which provides reinsurance products and services; (ii) the
Property and Casualty Group, which writes workers' compensation and other
standard lines of commercial insurance and includes run-off operations; (iii)
Caliber One, which writes specialty insurance focusing on excess and surplus
lines; and (iv) Corporate and Other, which is primarily comprised of corporate
overhead and the operations of the Company's properties. Management has excluded
net realized investment gains (losses) from the profit and loss measurement it
utilizes to assess the performance of its operating segments because (i) net
realized investment gains (losses) are unpredictable and not necessarily
indicative of future performance and (ii) in many instances, decisions to buy
and sell securities are made at the parent holding company level, and such
decisions result in net realized gains (losses) that do not relate to the
operations of the individual segments. Pursuant to the adoption of SFAS No. 131,
the Company has restated the information for the three and six-month periods
ended June 30,1997 for comparability, primarily related to certain corporate
expenses that were previously allocated to the operating segments. SFAS No. 131
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Supplemental financial information for the annual periods prior to the date of
adoption of SFAS No. 131 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1996 1995
---------------- ---------------- -----------------
<S> <C> <C> <C>
Pre-tax operating income (loss):
PMA Re $45,957 $ 44,807 $ 39,793
The Property and Casualty Group:
Excluding Run-off Operations (3,607) (215,669) (3,885)
Run-off Operations (73) - -
---------------------------------------------------------
Total (3,680) (215,669) (3,885)
Corporate and Other (9,954) (6,464) (14,184)
---------------------------------------------------------
Total pre-tax operating income (loss) $32,323 $(177,326) $ 21,724
=========================================================
</TABLE>
The difference between this supplemental financial information and the
information in the Company's audited financial statements included elsewhere in
this Prospectus is primarily related to certain corporate expenses that were
previously allocated to the operating segments. The amount of this adjustment
was $6,513 ($1,155 allocated to PMA Re and $5,358 to the Property and Casualty
Group), $5,974 ($2,024 allocated to PMA Re and $3,950 to the Property and
Casualty Group) and $770 ($350 allocated to PMA Re and $420 to the Property and
Casualty Group) for the years ended December 31, 1997, 1996, and 1995,
respectively. Amounts for previous years were not material; accordingly, no
adjustments have been made.
The following table indicates the Company's pre-tax operating income (loss) by
principal business segment for the three and six months ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997(1) 1998 1997(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PMA Re $11,580 $ 9,829 $22,952 $23,187
The Property and Casualty Group:
Excluding Run-off Operations 2,353 (6,777) 4,954 (4,781)
Run-off Operations 293 (533) 428 (1,107)
------- -------- ------- -------
Total 2,646 (7,310) 5,382 (5,888)
Caliber One (681) -- (1,070) --
Corporate and Other (2,757) (2,649) (5,548) (4,526)
------- -------- ------- -------
Pre-tax operating income (loss) before
interest expense 10,788 (130) 21,716 12,773
Interest expense 3,762 3,888 7,463 8,222
------- -------- ------- -------
Pre-tax operating income (loss) 7,026 (4,018) 14,253 4,551
------- -------- ------- -------
Net realized investment gains (losses) 3,749 (680) 11,263 (1,931)
------- -------- ------- -------
Income (loss) before income taxes and
extraordinary items $10,775 $ (4,698) $25,516 $ 2,620
======= ======== ======= =======
</TABLE>
The following table indicates the Company's total assets by principal business
segment at June 30, 1998:
<TABLE>
<CAPTION>
1998
- -----------------------------------------------------
<S> <C>
PMA Re $1,188,852
The Property and Casualty Group:
Excluding Run-off Operations 1,469,795
Run-off Operations 352,965
----------
Total 1,822,760
Caliber One 62,465
Corporate and Other 1,336
----------
Total assets $3,075,413
==========
</TABLE>
(1) Pre-tax operating income (loss) by business segment has been reclassified
for 1997 to reflect the changes related to the implementation of SFAS No.
131 (see Note 3 to the Consolidated Financial Statements for further
discussion).
In January 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"). SOP 97-3, which is effective for fiscal years
beginning after December 15, 1998, provides guidance for determining when an
insurance company should recognize a liability for guaranty fund and other
insurance related assessments and how to measure that liability. While the
Company is presently evaluating the impact of SOP 97-3, the adoption of SOP 97-3
is likely to result in an increase in the Company's liabilities for such
assessments, although such increase is not expected to exceed $5,000. The impact
of adopting SOP 97-3 will be reflected as a cumulative effect of an accounting
change in the first quarter of 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
"derivatives") and for hedging activities. SFAS No. 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as (i) a hedge
of the exposure to changes in the fair value of a recognized asset or liability
or an unrecognized firm commitment, (ii) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (iii) a hedge of the foreign currency
exposure of a net investment in a foreign operation, an unrecognized firm
commitment, an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. While the
Company is presently evaluating the impact of SFAS No. 133, the adoption of SFAS
No. 133 is not expected to have a material impact on the Company's financial
condition or results of operations.
4. Sale of Subsidiary
The Company entered into a definitive letter of intent, dated June 26, 1998, to
sell PMA Insurance, Cayman Ltd., one of the run-off entities included in the
Property and Casualty Group's Run-off Operations. The transaction is subject to
customary closing conditions, including regulatory approvals, and is expected to
be completed in the third quarter of 1998. In connection with the announced
sale, the Company recorded a pre-tax loss of $2,442 in the second quarter of
1998, which is included in "Net Realized Investment Gains."
5. Cost Reduction Initiatives
During 1997, the Company recorded a $7,000 charge to operating expenses for
costs associated with nonvoluntary terminations of approximately 60 employees in
various operational and management positions. During the first six months of
1998, the Company recorded an additional charge of approximately $500 to
operating expenses for such terminations. As of June 30, 1998, approximately
$2,400 of such charges remained in Other Liabilities on the balance sheet.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Pennsylvania Manufacturers Corporation:
We have audited the accompanying consolidated balance sheets of
Pennsylvania Manufacturers Corporation and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pennsylvania Manufacturers Corporation and subsidiaries as of December 31, 1997
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
One South Market Square
Harrisburg, Pennsylvania
February 6, 1998
F-9
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
(in thousands, except share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value (amortized cost:
1997-$1,900,594; 1996-$2,164,391) $1,929,518 $2,126,120
Equity securities, at fair value (cost: 1997-$5; 1996-$259) 13 262
Short-term investments, at amortized cost which approximates fair value 265,207 134,971
-------------------------------
Total investments 2,194,738 2,261,353
Cash 32,148 7,176
Investment income due and accrued 23,818 30,268
Uncollected premiums (net of allowance for uncollectible accounts:
1997-$18,406; 1996-$18,877) 252,425 285,982
Reinsurance receivables (net of allowance for uncollectible
reinsurance: 1997-$2,096; 1996-$3,901) 332,406 257,983
Property and equipment (net of accumulated depreciation:
1997-$42,771; 1996-$41,219) 38,621 50,861
Deferred income taxes, net 70,391 101,642
Deferred acquisition costs 45,288 44,006
Other assets 67,423 78,245
-------------------------------
Total assets $3,057,258 $3,117,516
-------------------------------
LIABILITIES
Unpaid losses and loss adjustment expenses $2,003,187 $2,091,072
Unearned premiums 211,455 205,982
Long-term debt 203,000 204,699
Dividends to policyholders 10,200 12,524
Funds held under reinsurance treaties 69,545 86,804
Taxes, licenses and fees, and other expenses 49,410 39,226
Other liabilities 32,114 51,381
-------------------------------
Total liabilities 2,578,911 2,691,688
-------------------------------
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Common stock, $5 par value (40,000,000 shares authorized;
15,286,263 shares issued and 14,850,789 outstanding - 1997;
16,095,416 shares issued and 15,670,052 outstanding - 1996) 76,431 80,477
Class A common stock, $5 par value (40,000,000 shares authorized;
9,156,682 shares issued and 9,117,735 outstanding - 1997;
8,247,804 shares issued and 8,173,023 outstanding - 1996) 45,783 41,239
Additional paid-in capital - Class A common stock 339 -
Retained earnings 343,368 336,921
Unrealized gain (loss) on investments (net of deferred income taxes:
1997-$(10,126); 1996-$13,394) 18,806 (24,874)
Notes receivable from officers (198) (1,162)
Treasury stock, at cost:
Common stock (1997-435,474 shares; 1996-425,364 shares) (5,572) (5,408)
Class A common stock (1997-38,947 shares; 1996-74,781 shares) (610) (1,365)
-------------------------------
Total shareholders' equity 478,347 425,828
-------------------------------
Total liabilities and shareholders' equity $3,057,258 $3,117,516
-------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-10
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
for the years ended December 31,
(in thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUES:
<S> <C> <C> <C>
Net premiums written $418,282 $ 443,475 $489,876
Change in net unearned premiums (5,331) (12,400) (924)
Change in accrued retrospective premiums (37,000) (10,500) (4,000)
-----------------------------------------
Net premiums earned 375,951 420,575 484,952
Net investment income 136,698 133,936 139,355
Net realized investment gains 8,598 2,984 31,923
Service revenues 10,311 9,189 5,106
-----------------------------------------
Total revenues 531,558 566,684 661,336
-----------------------------------------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses (includes $(35,000)
effect of the change in discount rate on the Property and
Casualty Group's workers' compensation unpaid losses from
4% to 5% in 1995) 307,281 536,623 422,578
Amortization of deferred acquisition costs 93,501 90,292 87,207
Operating expenses 75,139 97,856 81,161
Dividends to policyholders 14,716 16,255 16,743
Interest expense 15,768 17,052 18,734
-----------------------------------------
Total losses and expenses 506,405 758,078 626,423
-----------------------------------------
Income (loss) before income taxes and extraordinary item 25,153 (191,394) 34,913
-----------------------------------------
Provision (benefit) for income taxes:
Current (4,506) (44,572) (4,570)
Deferred 9,906 (11,488) 15,353
-----------------------------------------
Total 5,400 (56,060) 10,783
-----------------------------------------
Income (loss) before extraordinary item 19,753 (135,334) 24,130
Extraordinary loss from early extinguishment
of debt (net of income tax benefit of $2,549) (4,734) - -
-----------------------------------------
Net income (loss) $ 15,019 $(135,334) $ 24,130
-----------------------------------------
EARNINGS (LOSS) PER COMMON AND EQUIVALENT SHARE
Basic:
Earnings (loss) before extraordinary item $ 0.83 $ (5.68) $ 1.01
Extraordinary item (0.20) - -
-----------------------------------------
Net earnings (loss) $ 0.63 $ (5.68) $ 1.01
-----------------------------------------
Diluted:
Earnings (loss) before extraordinary item $ 0.80 $ (5.68) $ 0.97
Extraordinary item (0.19) - -
-----------------------------------------
Net earnings (loss) $ 0.61 $ (5.68) $ 0.97
-----------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK CLASS A COMMON STOCK
----------------------------------------------------
(in thousands, except share and per share data) SHARES AMOUNTS SHARES AMOUNTS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance-January 1, 1995 17,606,850 $88,034 6,736,370 $33,682
Net income
Common stock dividends declared ($.32 per
share)
Class A common stock dividends declared
($.36 per share)
Conversion of common stock into Class A
common stock (562,270) (2,811) 562,270 2,811
Unrealized gain on investments available for
sale (net of tax effect of $(36,063))
Repayment of notes
Purchase of treasury shares, net
Effect of other treasury stock transactions
- -----------------------------------------------------------------------------------------------------------
Balance-December 31, 1995 17,044,580 85,223 7,298,640 36,493
Net loss
Common stock dividends declared ($.32 per
share)
Class A common stock dividends declared
($.36 per share)
Conversion of common into Class A
common stock (949,164) (4,746) 949,164 4,746
Unrealized loss on investments available for
sale (net of tax effect of $22,823)
Repayment of notes
Purchase of treasury shares, net
- -----------------------------------------------------------------------------------------------------------
Balance-December 31, 1996 16,095,416 80,477 8,247,804 41,239
Net income
Common stock dividends declared ($.32 per
share)
Class A common stock dividends declared
($.36 per share)
Conversion of common stock into Class A
common stock (809,153) (4,046) 809,153 4,046
Class A common stock issued under
stock option plans and other issuances
of Class A common stock 99,725 498
Unrealized gain on investments available for
sale (net of tax effect of $(23,520))
Repayment of notes
(Purchase) reissuance of treasury shares, net
- -----------------------------------------------------------------------------------------------------------
Balance-December 31, 1997 15,286,263 $76,431 9,156,682 $45,783
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the consolidated financial statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
ADDITIONAL
PAID IN
CAPITAL- UNREALIZED NOTES
CLASS A GAIN (LOSS) RECEIVABLE
COMMON REATINED ON FROM
STOCK EARNINGS INVESTMENTS OFFICERS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance-January 1, 1995 $ - $ 463,952 $(49,465) $(4,374)
Net income 24,130
Common stock dividends declared ($.32 per
share) (5,396)
Class A common stock dividends declared
($.36 per share) (2,505)
Conversion of common stock into Class A
common stock 66,976
Unrealized gain on investments available for
sale (net of tax effect of $(36,063))
Repayment of notes 478
Purchase of treasury shares, net
Effect of other treasury stock transactions
- -----------------------------------------------------------------------------------------------------------------
Balance-December 31, 1995 - 480,181 17,511 (3,896)
Net loss (135,334)
Common stock dividends declared ($.32 per
share) (5,138)
Class A common stock dividends declared
($.36 per share) (2,788)
Conversion of common into Class A
common stock
Unrealized loss on investments available for
sale (net of tax effect of $22,823) (42,385)
Repayment of notes 2,734
Purchase of treasury shares, net
- -----------------------------------------------------------------------------------------------------------------
Balance-December 31, 1996 - 336,921 (24,874) (1,162)
Net income 15,019
Common stock dividends declared ($.32 per
share) (4,842)
Class A common stock dividends declared
($.36 per share) (3,147)
Conversion of common stock into Class A
common stock 339
Class A common stock issued under
stock option plans and other issuances
of Class A common stock 43,680
Unrealized gain on investments available for
sale (net of tax effect of $(23,520))
Repayment of notes
(Purchase) reissuance of treasury shares, net (583) 964
- ------------------------------------------------------------------------------------------------------------------
$339 $ 343,368 $ 18,806 $ (198)
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
TREASURY STOCK, AT COST
-------------------------------------------------------
COMMON STOCK CLASS A COMMON STOCK
-----------------------------------------------------
SHARES AMOUNTS SHARES AMOUNTS TOTAL
<S> <C> <C> <C> <C> <C>
Balance-January 1, 1995 388,514 $(4,706) 200,498 $(2,261) $ 524,862
Net income 24,130
Common stock dividends declared ($.32 per
share) (5,396)
Class A common stock dividends declared
($.36 per share) (2,505)
Conversion of common stock into Class A
common stock -
Unrealized gain on investments available for
sale (net of tax effect of $(36,063)) 66,976
Repayment of notes 478
Purchase of treasury shares, net 4,050 (63) 150,442 (2,355) (2,418)
Effect of other treasury stock transactions (277,532) 3,541 3,541
- ----------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1995 392,564 (4,769) 73,408 (1,075) 609,668
Net loss (135,334)
Common stock dividends declared ($.32 per
share) (5,138)
Class A common stock dividends declared
($.36 per share) (2,788)
Conversion of common into Class A
common stock -
Unrealized loss on investments available for
sale (net of tax effect of $22,823) (42,385)
Repayment of notes 2,734
Purchase of treasury shares, net 32,800 (639) 1,373 (290) (929)
- ----------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1996 425,364 (5,408) 74,781 (1,365) 425,828
Net income 15,019
Common stock dividends declared ($.32 per
share) (4,842)
Class A common stock dividends declared
($.36 per share) (3,147)
Conversion of common stock into Class A
common stock -
Class A common stock issued under
stock option plans and other issuances
of Class A common stock 837
Unrealized gain on investments available for
sale (net of tax effect of $(23,520)) 43,680
Repayment of notes 964
(Purchase) reissuance of treasury shares, net 10,110 (164) (35,834) 755 8
- ----------------------------------------------------------------------------------------------------------------------------
435,474 $(5,572) 38,947 $ (610) $ 478,347
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
for the years ended December 31,
(in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,019 $ (135,334) $ 24,130
Adjustments to reconcile net income (loss) to net cash flows
(used) provided by operating activities:
Depreciation 8,672 12,511 7,652
Amortization 4,054 7,243 35
Provision (benefit) for deferred income taxes 9,906 (11,488) 15,353
Extraordinary loss from early extinguishment of debt (4,734) - -
Net realized investment gains (8,598) (2,984) (31,923)
Change inuncollected premiums and unearned premiums, net 39,030 17,983 22,381
Change in dividends to policyholders (2,324) (632) 910
Change in unpaid losses and loss adjustment expenses (87,885) 21,086 (33,728)
Change in investment income due and accrued 6,577 5,188 4,961
Change in deferred acquisition costs (1,282) (6,105) (5,665)
Other, net (85,795) (23,413) 11,807
------------------------------------------------
Net cash flows (used) provided by operating activities (107,360) (115,945) 15,913
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Fixed maturity investments held to maturity:
Maturities or calls - - 3,809
Fixed maturity investments available for sale:
Purchases (1,963,492) (1,227,173) (2,147,600)
Maturities or calls 168,304 52,280 75,861
Sales 2,072,842 1,210,114 2,085,864
Equity securities:
Purchases - (5,196) (18,104)
Sales 254 16,984 28,793
Net (purchases) sales of short-term investments (130,391) 78,935 (35,445)
Sale of corporate properties 7,145 - -
Net purchases of property and equipment (3,577) (6,723) (6,017)
Purchase of Caliber One Indemnity Company (15,990) - -
Cash acquired in purchase of Caliber One Indemnity Company 4,509 - -
------------------------------------------------
Net cash flows provided (used) by investing activities 139,604 119,221 (12,839)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 210,000 26,000 125,000
Repayments of long-term debt (211,699) (25,149) (125,127)
Dividends paid to shareholders (7,965) (7,926) (7,885)
Proceeds from exercised stock options and
issuance of Class A common stock 837 - -
Treasury stock transactions, net 591 (929) 480
Repayments of notes receivable from officers 964 2,734 478
-------------------------------------------------
Net cash flows used by financing activities (7,272) (5,270) (7,054)
------------------------------------------------
Net increase (decrease) in cash 24,972 (1,994) (3,980)
Cash January 1 7,176 9,170 13,150
------------------------------------------------
Cash December 31 $ 32,148 $ 7,176 $ 9,170
------------------------------------------------
SUPPLEMENTARY CASH FLOW INFORMATION:
Amounts (received) paid for income taxes $ (19,112) $ 5,525 $ (951)
Amounts paid for interest $ 19,776 $ 16,622 $ 15,062
Fair value of securities transferred from held to maturity
classification to available for sale classification $ - $ - $ 1,238,077
</TABLE>
See accompanying notes to the consolidated financial statements.
F-14
<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(Dollar amounts in thousands, except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of
Pennsylvania Manufacturers Corporation (PMC) and its wholly and majority owned
subsidiaries (the Company). PMC is an insurance holding company that sells
property and casualty reinsurance and insurance through its insurance
subsidiaries. PMC's insurance subsidiaries are domiciled in Pennsylvania,
except for its newly established excess and surplus lines writer, discussed
below, which is domiciled in Delaware, and certain foreign subsidiaries.
Reinsurance -- PMC's reinsurance subsidiary, PMA Reinsurance Corporation (PMA
Re), emphasizes risk-exposed, excess of loss reinsurance and operates in the
brokered market. PMA Re's business is predominantly in casualty lines of
reinsurance.
Workers' Compensation and Primary Standard Insurance -- PMC's property and
casualty insurance subsidiaries (the Property and Casualty Group) write workers'
compensation and other standard lines of commercial insurance primarily in the
Mid-Atlantic and Southern regions of the U.S.
Specialty Property and Casualty -- During 1997, the Company established a
separate specialty insurance operation focusing on excess and surplus lines,
Caliber One Management Company (Caliber One). In December 1997, PMA Re acquired
100% of the outstanding common stock of Caliber One Indemnity Company (formerly
known as Lincoln Insurance Company) for approximately $16,000 and made a capital
contribution of approximately $11,300 to Caliber One Indemnity Company. All of
Caliber One Indemnity Company's acquired loss reserves were reinsured by an
insurance affiliate of Caliber One Indemnity Company's former parent immediately
prior to and in conjunction with the purchase (the "Reserve Guarantee"). The
Reserve Guarantee covers adverse development and uncollectible reinsurance in an
amount equal to the stated amount of the reserves acquired, plus an additional
$68,500. Upon the purchase of Caliber One Indemnity Company, management valued
the amount of the Reserve Guarantee at approximately $5,000 in excess of the
stated acquired reserves. Management believes that the Reserve Guarantee will be
adequate to cover any future adverse reserve development or uncollectible
reinsurance on the acquired reserves. At December 31, 1997, $36,807 was
recoverable under the Reserve Guarantee, which is included in reinsurance
receivables. Management is accounting for the Reserve Guarantee in conformity
with EITF Topic D-54, "Accounting by the Purchaser for a Seller's Guarantee of
the Adequacy of Liabilities for Losses and Loss Adjustment Expenses of an
Insurance Enterprise Acquired in a Purchase Business Combination", and,
accordingly, any future revisions to the estimates of the amount of underlying
loss reserves and the amount recoverable under the Reserve Guarantee will be
recognized in losses and loss adjustment expenses in the period in which the
estimates are changed. Management believes that the reinsurance obtained as part
of the purchase will be adequate to cover any future adverse reserve development
or uncollectible insurance on the acquired reserves. PMA Re intends to maintain
Caliber One Indemnity Company's surplus at not less than $25,000, the minimum
capital and surplus required for many states in order to be an eligible excess
and surplus lines carrier. Management anticipates that Caliber One will
primarily write multi-line business consisting of primary and excess commercial
general liability, professional liability, excess automobile and certain
property exposures. Because Caliber One's results were not significant in 1997,
Caliber One's financial information has been included within the Corporate and
Other segment, including pre-opening costs of approximately $900, which have
been expensed as incurred.
The Company's significant accounting policies and practices are as follows:
A. BASIS OF PRESENTATION -- The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP).
All significant intercompany accounts and transactions have been eliminated in
consolidation. The preparation of consolidated financial statements in
conformity with GAAP requires management to make certain estimates and
assumptions that affect the amounts reported in its consolidated financial
statements and accompanying notes. Actual results may differ from those
estimates. These consolidated financial statements vary in certain respects
from statutory accounting practices prescribed or permitted by the Pennsylvania
Insurance Department and the Delaware Insurance Department, (collectively SAP).
Prescribed SAP includes state laws, regulations and general administrative
rules, as well as a variety of NAIC publications. Permitted SAP encompasses all
accounting practices that are not prescribed. The NAIC has a project to codify
SAP, the result of which is expected to constitute the only source of prescribed
SAP. The project, when completed, will change the definitions of what comprises
prescribed versus permitted SAP and may result in changes to the accounting
policies that insurance companies use to prepare SAP financial statements. See
Note 18 for additional SAP information and a reconciliation of SAP net income
and surplus to GAAP net income and shareholders' equity.
F-15
<PAGE>
B. INVESTMENTS -- Fixed maturity investments include U.S. Treasury securities
and obligations of U.S. Government agencies, obligations of states and political
subdivisions, where applicable, corporate debt securities and mortgage-backed
securities. Under SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," fixed maturities which the Company may hold for an
indefinite period of time are classified as available-for-sale and, accordingly,
are carried at fair value with changes in fair value, net of income tax effects,
reflected in shareholders' equity. Fixed maturities which the Company has the
positive intent and ability to hold to maturity are carried at amortized cost.
In 1995, the Company re-evaluated the classifications of its fixed maturity
investments. As a result, effective June 30, 1995, the Company reclassified its
entire held-to-maturity portfolio, which had an amortized cost of $1,241,774, to
the available-for-sale designation in order to match more closely the Company's
investment strategy. This reclassification resulted in a $1,238,077 increase in
available-for-sale securities and a $2,403 unrealized loss (net of deferred
taxes), with no impact on net income. As of December 31, 1997, the Company's
entire fixed income portfolio remains designated as available for sale.
Equity securities for all periods are stated at fair value with changes in fair
value, net of income tax effects, reflected in shareholders' equity.
Realized gains and losses, determined by specific identification, are reflected
in income in the period in which the sale transaction occurs.
C. PREMIUMS -- Premiums, including estimates of additional premiums resulting
from audits of insureds' records, are earned principally on a pro rata basis
over the terms of the policies. Premiums applicable to the unexpired terms of
policies in-force are reported as unearned premiums. Estimated premiums
receivable on retrospectively rated policies are reported as a component of
uncollected premiums (See Note 1-P).
The Company follows Emerging Issues Task Force Consensus Position No. 93-6,
"Accounting for Multiple Year Retrospectively Rated Contracts by Ceding and
Assuming Enterprises" (EITF 93-6). EITF 93-6 requires that the Company reflect
adjustments to future premiums, as the result of past experience under multiple
year reinsurance contracts, in earnings currently. The impact of EITF 93-6 has
been immaterial.
D. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES -- Unpaid losses and loss
adjustment expenses are stated net of estimated salvage and subrogation and are
determined using claims adjusters' evaluations, estimates of losses and loss
adjustment expenses on known claims, and estimates of losses and loss adjustment
expenses incurred but not reported (IBNR). IBNR reserves are calculated
utilizing various actuarial methods. Unpaid losses on certain workers'
compensation claims are discounted to present value using the Company's payment
experience and SAP mortality and interest assumptions (See Note 3). The methods
of making such estimates and establishing the resulting reserves are continually
reviewed and updated and any adjustments resulting therefrom are reflected in
earnings currently.
E. DEFERRED ACQUISITION COSTS -- The costs of acquiring new and renewal
business are deferred and amortized over the period during which the related
premiums are earned. Such costs include direct acquisition costs, including
commissions, brokerage, and premium taxes as well as other policy issuance costs
and underwriting expenses that directly relate to and vary with the production
of business. The Company determines whether deferred acquisition costs are
recoverable considering future losses and loss adjustment expenses, maintenance
costs, and anticipated investment income. To the extent that deferred
acquisition costs are not recoverable, the deficiency is charged to income
currently.
F. DIVIDENDS TO POLICYHOLDERS -- The Property and Casualty Group issues certain
workers' compensation insurance policies with dividend payment features. These
policyholders share in the operating results in the form of dividends declared
at the discretion of the Company's board of directors. Dividends to
policyholders are accrued during the period in which the related premiums are
earned and are determined based on the terms of the individual policies.
G. INCOME TAXES -- The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 is an asset and liability approach,
whereby deferred tax assets and liabilities are recorded to the extent of the
tax effect of differences between the financial statement carrying values and
tax bases of assets and liabilities. A valuation allowance is recorded for
deferred tax assets where it appears more likely than not that the Company will
not be able to recover the deferred tax asset. In addition, PMC and a majority
of its subsidiaries have a written tax-sharing agreement which allocates to
F-16
<PAGE>
each entity subject to the agreement its Federal income taxes on a separate
return basis. The benefit of any net operating losses is retained by PMC.
H. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is calculated on the straight-line
method utilizing useful lives ranging from 3 to 40 years. During 1996, the
Property and Casualty Group changed the depreciable lives for its mainframe
computer equipment from five years to three years. The effect of this adjustment
was to increase 1996 depreciation expense by approximately $4,800.
I. PER SHARE INFORMATION -- In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "Earnings Per Share", which supersedes
Accounting Principles Board Opinion No. 15, "Earnings Per Share," and Related
Interpretations, and which the Company adopted during 1997. In accordance with
SFAS No. 128, all prior period data presented has been restated to conform with
the provisions of this statement. SFAS No. 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share and
requires the presentation of both basic and diluted earnings per share on the
face of the income statement. SFAS No. 128 also requires a reconciliation of
the numerators and denominators used in the basic earnings per share calculation
to the numerators and denominators used in the diluted earnings per share
calculation. Such reconciliation is provided in Note 16.
Basic earnings per share: For years 1997, 1996 and 1995, basic earnings per
share was based upon the weighted average number of common and Class A common
shares outstanding for the period.
Diluted earnings per share: For years 1997 and 1995, diluted earnings per share
was based upon the weighted average number of common and Class A common shares
outstanding during the year and the assumed exercise price of dilutive stock
options, less the number of treasury shares assumed to be purchased from the
proceeds using the average market price of the Company's Class A common stock.
In 1996, diluted earnings per share was based upon the weighted average common
and Class A common shares outstanding during the year; the assumed exercise
price of stock options using the average market price of the Company's Class A
common stock was not taken into consideration as these stock options would have
had an anti-dilutive effect on the net loss per share (See Note 16).
J. STOCK-BASED COMPENSATION -- The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's Class A common stock at the date of the grants over the amount an
employee must pay to acquire the Class A common stock.
K. COMPUTER SOFTWARE COSTS RELATED TO THE YEAR 2000 -- In 1996, the Company
adopted Emerging Issues Task Force Consensus Position No. 96-14, "Accounting for
the Costs Associated with Modifying Computer Software for the Year 2000" (EITF
96-14). EITF 96-14 states that external and internal costs specifically
associated with modifying internal-use software for the Year 2000 should be
charged to expense as incurred. In accordance with EITF 96-14, the Company
charged approximately $2,000 and $1,800 to operating expenses during the years
ended December 31, 1997 and 1996, respectively, for costs associated with
modifying internal-use software.
L. SERVICE REVENUES -- Service revenues are earned over the term of the related
contracts in proportion to the actual services rendered.
M. RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year presentation. Additionally, in 1995, the Company
elected to change its method of reporting cash flows from the direct method to
the indirect method.
N. RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1996, the Financial
Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125, which is effective for transfers and extinguishments occurring after
December 31, 1996, provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
Property and Casualty Group's domestic insurance subsidiaries participated in a
transfer arrangement of certain accounts receivable. This arrangement has been
terminated
F-17
<PAGE>
as a result of SFAS No. 125. The termination did not have a material impact on
the Company's financial condition or results of operations.
During 1997, the FASB issued SFAS No. 130, "Comprehensive Income," which
establishes standards for the reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses). SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. In addition, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
will adopt the provisions of these pronouncements in 1998. The adoption of
these pronouncements will not have an impact on the Company's financial position
and results of operations, but may change the presentation of certain of the
Company's financial statements and related notes and data thereto.
O. LONG-LIVED ASSETS -- It is management's policy to review long-lived assets,
such as the Company's properties, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Such changes in circumstances include such things as significant
decline in market value or change in use of the asset. Periodically, management
reviews appraisals and/or cash flow projections from properties and other long-
lived assets and compares such amounts to the carrying values to determine
whether or not there has been an impairment. If such an impairment exists, it
is management's policy to write down the carrying value of the asset to fair
value less costs to carry and dispose of the asset, where applicable.
P. ACCRUED RETROSPECTIVE PREMIUMS -- Accrued retrospective premiums, which are
a component of uncollected premiums, are based upon actuarial estimates of
expected ultimate losses and resulting estimated premium adjustments relating to
retrospectively rated policies. The change in accrued retrospective premiums is
a component of net premiums earned. The estimated ultimate premium adjustments
under retrospectively rated policies are recorded in the initial accident year
based upon estimated loss experience on the underlying policies and adjusted in
subsequent periods in conjunction with revisions of the estimated underlying
losses on such policies. In addition, accrued retrospective premiums are
increased (decreased) based upon retrospective policy adjustments paid (billed);
such adjustments actually billed or paid do not impact premium revenues as the
Company records an offsetting amount through net premiums written.
The following sets forth the components of the change in accrued retrospective
premiums for each of the past three years:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Estimated retrospective policy
adjustments related to current
accident year.......................... $(12,460) $(18,767) $(12,941)
Revision of estimate of retrospective
policy adjustments related to
prior accident years................... (44,719) (9,888) (4,845)
Retrospective policy adjustments paid.... 20,179 23,155 13,786
Uncollectible write-off.................. -- (5,000) --
-------- -------- --------
Total.................................... $(37,000) $(10,500) $ (4,000)
======== ======== ========
</TABLE>
In 1997, 1996 and 1995, the Property and Casualty Group reduced accrued
retrospective premiums by $37,000, $10,500 and $4,000, respectively. The
primary reason for the additional reduction in 1997 relative to 1996 was a
$44,719 revision of estimate of accrued retrospective premiums, primarily due to
the favorable development of claims liabilities for more recent accident years
($35,719) and the commutation of claims for accident years 1991 and prior in
1997 ($9,000). The reduction for policy years 1991 and prior primarily relates
to the commutation program for such years initiated in late 1996. In July 1997,
the Property and Casualty Group completed a formal program where it commuted a
large number of claims associated with workers' compensation claims from
accident years 1991 and prior, including loss reserves associated with
retrospective policies (See Note 3). The commutation program resulted in
current
F-18
<PAGE>
payments to claimants which were less than the carried reserves. As a result of
the differences between the current commutation payments to claimants and
carried reserves on such claims, management reduced its estimate of amounts
recoverable under retrospectively rated policies and also recognized a reduction
in losses and LAE associated with such policies. The reduction related to 1992
through 1996 policy years was primarily related to a corresponding amount of
favorable development on underlying loss reserves for such years (See Note 3).
The effects of the commutations on these prior loss reserves, as well as the
intent of the Property and Casualty Group to continue utilizing early
intervention techniques such as commutations on claims from more recent accident
years, have led to a re-estimation of policy liabilities for these more recent
accident years, and a re-estimation of amounts due under retrospectively rated
policies for these more recent accident years.
Management believes that it has made a reasonable estimate of the Company's
accrued retrospective premiums. While the eventual ultimate receivable may
differ from the current estimates, management does not believe that the
difference will have a material effect, either adversely or favorably, on the
Company's financial position or results of operations.
2. INVESTMENTS
The Company's investment portfolio is well diversified and contains no
significant concentrations in any specific industry, business segment, or
individual issuer. The Company principally invests in U.S. Treasury securities
and obligations of U.S. Government agencies, high-quality obligations of states
and political subdivisions and corporations, and mortgage backed securities.
Equity securities consist entirely of common stocks of financial institutions,
public utilities, and industrial and service entities.
F-19
<PAGE>
The amortized cost and fair value of the Company's investment portfolio are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturities available for sale:
U.S. Treasury securities and obligations of
U.S. Government agencies....................... $1,105,689 $17,267 $ 3,390 $1,119,566
Corporate debt securities....................... 675,218 12,845 392 687,671
Mortgage backed securities...................... 119,687 2,657 63 122,281
---------- ------- ------- ----------
Total fixed maturities available for sale......... 1,900,594 32,769 3,845 1,929,518
Equity securities................................. 5 8 -- 13
Short-term investments............................ 265,207 -- -- 265,207
---------- ------- ------- ----------
Total investments................................. $2,165,806 $32,777 $ 3,845 $2,194,738
========== ======= ======= ==========
DECEMBER 31, 1996
Fixed maturities available for sale:
U.S. Treasury securities and obligations of
U.S. Government agencies....................... $1,640,881 $ 4,045 $42,182 $1,602,744
Obligations of states and political subdivisions 77,562 194 1,229 76,527
Corporate debt securities....................... 372,620 3,203 2,977 372,846
Mortgage backed securities...................... 73,328 728 53 74,003
---------- ------- ------- ----------
Total fixed maturities available for sale......... 2,164,391 8,170 46,441 2,126,120
Equity securities................................. 259 3 -- 262
Short-term investments............................ 134,971 -- -- 134,971
---------- ------- ------- ----------
Total investments................................. $2,299,621 $ 8,173 $46,441 $2,261,353
========== ======= ======= ==========
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because the issuers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
1998.......................................... $ 129,047 $ 128,919
1999-2002..................................... 634,888 633,643
2003-2007..................................... 394,704 396,459
2008 and thereafter........................... 622,268 648,216
Mortgage backed securities.................... 119,687 122,281
---------- ----------
$1,900,594 $1,929,518
========== ==========
</TABLE>
Net investment income consists of the following:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities......................... $128,400 $131,530 $129,883
Equity securities........................ -- 148 503
Short-term investments................... 7,282 7,711 11,764
Other.................................... 4,422 3,251 4,303
-------- -------- --------
Total investment income................ 140,104 142,640 146,453
Investment expenses...................... 3,406 8,704 7,098
-------- -------- --------
Net investment income.................. $136,698 $133,936 $139,355
======== ======== ========
</TABLE>
F-20
<PAGE>
Net realized investment gains consist of the following:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Realized gains:
Fixed maturities......................... $20,899 $12,762 $37,900
Equity securities........................ -- 4,351 3,117
Other.................................... -- 4 --
------- ------- -------
20,899 17,117 41,017
------- ------- -------
Realized losses:
Fixed maturities......................... 12,203 12,861 5,956
Equity securities........................ -- 436 2,200
Other.................................... 98 836 938
------- ------- -------
12,301 14,133 9,094
------- ------- -------
Total net realized investment gains........ $ 8,598 $ 2,984 $31,923
======= ======= =======
</TABLE>
On December 31, 1997, the Company had securities with a total amortized cost and
fair value of $30,925 and $31,105, respectively, on deposit with various
governmental authorities, as required by law. In addition, at December 31,
1997, securities with a total amortized cost and fair value of $11,603 and
$11,547, respectively, were pledged as collateral for letters of credit issued
on behalf of the Company.
Change in unrealized appreciation (depreciation) of investments consists of the
following:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Fixed maturities available for sale........ $67,195 $(62,457) $ 99,874
Equity securities.......................... 5 (2,751) 3,165
------- -------- --------
Change in unrealized appreciation
(depreciation) of investments....... $67,200 $(65,208) $103,039
======= ======== ========
</TABLE>
During 1997, the Company established a securities lending program through which
securities are loaned from the Company's portfolio to qualifying third parties,
subject to certain limits, via a lending agent for short periods of time.
Borrowers of these securities must provide collateral equal to a minimum of 102%
of the market value and accrued interest of the loaned securities. Acceptable
collateral may be in the form of either cash or securities. Cash received as
collateral is invested in short-term investments, and all securities received as
collateral are of similar quality to those securities lent by the Company.
Additionally, the Company limits securities lending to 40% of statutory admitted
assets of its insurance subsidiaries, with a 2% limit on statutory admitted
assets to any individual borrower. The Company receives either a fee from the
borrower or retains a portion of the income earned on the collateral. Under the
terms of the securities lending program, the Company is indemnified against
borrower default, with the lending agent responsible to the Company for any
deficiency between the cost of replacing a security that was not returned and
the amount of collateral held by the Company. In 1997, the Company recognized
income from securities lending transactions of $524, net of lending fees, which
was included in investment income. The Company had approximately $175,000 of
securities on loan as of December 31, 1997.
F-21
<PAGE>
3. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses (LAE)
is summarized as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance at January 1......................................... $2,091,072 $2,069,986 $2,103,714
Less: reinsurance recoverable on unpaid losses and LAE....... 256,576 261,492 247,856
---------- ---------- ----------
Net balance at January 1..................................... 1,834,496 1,808,494 1,855,858
---------- ---------- ----------
Losses and LAE incurred, net:
Current year............................................... 341,880 323,069 357,787
Prior years................................................ (86,006) 156,074 51,491
Accretion of discount (includes ($35,000) effect of the
change in the discount rate for the Property and Casualty
Group's workers' compensation unpaid losses from 4% to 5%
in 1995).................................................. 51,407 57,480 13,300
---------- ---------- ----------
Total losses and LAE incurred, net........................... 307,281 536,623 422,578
---------- ---------- ----------
Losses and LAE paid, net:
Current year............................................... (72,399) (72,194) (71,126)
Prior years................................................ (398,475) (438,427) (398,816)
---------- ---------- ----------
Total losses and LAE paid, net............................... (470,874) (510,621) ( 469,942)
---------- ---------- ----------
Net balance at December 31................................... 1,670,903 1,834,496 1,808,494
Reinsurance recoverable on unpaid losses and LAE............. 332,284 256,576 261,492
---------- ---------- ----------
Balance at December 31....................................... $2,003,187 $2,091,072 $2,069,986
========== ========== ==========
</TABLE>
The Company's results of operations included a decrease in estimated incurred
losses and LAE related to prior accident years of $86,006 in 1997, and an
increase of $156,074 and $51,491 in 1996 and 1995, respectively.
During 1997, PMA Re recorded favorable reserve development on prior accident
years of approximately $32,100. PMA Re has consistently recorded favorable
reserve development on prior accident years for the past several years. The
remaining decrease in estimated losses and LAE on prior accident years during
calendar year 1997 can be attributed primarily to the following: the cession of
prior year reserves by PMA Life Insurance Company to a third party reinsurer of
approximately $14,800 (See Note 5); favorable reserve development at the
Property and Casualty Group in conjunction with the formal commutation program,
discussed below, of approximately $9,000 pertaining to retrospectively rated
policies for accident years 1991 and prior; favorable reserve development at the
Property and Casualty Group of approximately $28,000 related to retrospectively
rated policies pertaining to accident years 1992 through 1996; and favorable
development on pre-1992 workers' compensation reserves of $7,100, partially
offset by reserve strengthening in commercial multi-peril business for accident
year 1996 of $5,000.
The increase in estimated incurred losses and LAE during 1996 is primarily due
to a loss reserve strengthening charge of $191,400. This loss reserve
strengthening was associated with the following lines of business:
<TABLE>
<CAPTION>
1996
------------
<S> <C>
Workers' compensation..................... $110,000
Asbestos and environmental................ 60,400
Other lines of business................... 21,000
--------
$191,400
========
</TABLE>
The 1996 aggregate workers' compensation adverse development was allocated
$102,000 to Pennsylvania and $8,000 to all other states in the Company's
marketing territory. Of the $102,000, the allocation by accident year is as
follows: prior to 1987: $16,000; 1987 to 1991: $101,000; and 1992 and subsequent
years: $(15,000). In 1995, substantially all of the workers' compensation
adverse development related to accident years 1987 to 1991 in Pennsylvania. For
accident years prior to 1992, the traditional paid loss development schedules
for workers' compensation had begun to exhibit an increasing trend in loss
development factors by 1993. This trend was initially attributed to an increase
in commutation activity. In 1995, management began to question whether loss
data was developing in a manner that was consistent
F-22
<PAGE>
with the conclusion that the loss development trends were impacted solely by
commutation activity. As a result, management began to accumulate additional
data in order to determine whether there were additional causes of the increase
in the paid loss development data; management obtained claim count data that was
far more detailed than had been historically utilized in the reserve setting
process. This data indicated that the paid loss development factors were not
only impacted by commutation activity, but also by a decline in the claims
closure rate in Pennsylvania. Management believes that the decline of the
closure rates was due to several interrelated factors. One factor related to the
fact that efforts to rehabilitate claimants and return them to work were not as
successful as anticipated. For accident years 1987 to 1991, in particular,
extensive efforts were made by the Company to rehabilitate claimants and return
them to work at either full or modified duty. By late 1995 and into 1996, it was
recognized, by a review of a slow down in the claims closure pattern that these
rehabilitation efforts were not impacting the closure rates as expected. Another
factor negatively impacting claims closure rates related to the economic
conditions in Pennsylvania in the early 1990's. During the period from 1990 to
1994, economic conditions in Pennsylvania were considered to be depressed in the
Company's major industry niches for workers' compensation insurance
(construction, heavy manufacturing). Payrolls in these industries were stagnant,
and in many cases, employment was flat or declining. The Company believes that
in periods of declining employment opportunities, there is a tendency for
indemnity periods to increase, which occurred for workers who suffered injuries
in these industries.
The above factors, when considered with the fact that the benefits period in
Pennsylvania was unlimited, caused the Company to believe that a substantial
portion of claimants from the pre-1992 period, who had already been out of work
five to nine years, would not return to work in any capacity. In late 1995 and
during 1996, management undertook an effort to quantify the impact of the
declining closure rates versus the increase in commutation activity. During the
fourth quarter of 1995, management strengthened the Property and Casualty
Group's workers' compensation reserves by $54,700; however, the quantification
of the effect of the claims closure rate was an extremely complex process, and
as such, the data was not fully understood at that time. As the data under
analysis was more mature and refined in 1996, management determined that the
workers' compensation loss reserves for Pennsylvania in the pre-1992 accident
years needed to be increased substantially; therefore, the Property and Casualty
Group increased its workers' compensation reserves by $110,000 in 1996.
Workers' compensation reform legislation enacted in Pennsylvania in 1993 and
1996 introduced various controls and limitations on medical and disability
benefits. Management believes that these reforms have had and will continue to
have a favorable impact on workers' compensation loss ratios for accident years
1993 and subsequent. In addition, management took several steps to reduce the
outstanding claims associated with the Pennsylvania workers' compensation
business written through 1991. A formal commutation program was initiated in
the fourth quarter 1996 and continued into late 1997. Commutations are
agreements with claimants whereby the claimants, in exchange for a lump sum
payment, will forego their rights to future indemnity payments from the Property
and Casualty Group. Under Pennsylvania workers' compensation laws, all such
commutation arrangements must be approved by the claimant and the Pennsylvania
Workers' Compensation Board. The Property and Casualty Group paid approximately
$101,100 and $17,800 in 1997 and the fourth quarter of 1996, respectively, to
commute workers' compensation indemnity claims. Savings associated with these
claims were consistent with management's expectations. The number of open
claims for accident years 1991 and prior was substantially reduced as a result
of the commutation program. This reduction in open claims is expected to reduce
the possibility of any further adverse development on such reserves, although
there can be no assurances that the level of commutations will have a
significant impact on the future development of such reserves.
Estimating reserves for workers' compensation claims can be more difficult than
many other lines of property and casualty insurance for several reasons,
including (i) the long payment `tail' associated with the business; (ii) the
impact of social, political and regulatory trends on benefit levels; (iii) the
impact of economic trends; and (iv) the impact of changes in the mix of
business. At various times, one or a combination of such factors can make the
interpretation of actuarial data associated with workers' compensation loss
development more difficult, and it can take additional time to recognize changes
in loss development patterns. Under such circumstances, adjustments will be
made to such reserves as loss patterns develop and new information becomes
available and such adjustments may be material.
The adverse development in reserves associated with asbestos and environmental
claims during 1996 was due to the completion of a detailed analysis of loss and
LAE reserves associated with asbestos and environmental liability claims in
1996. The reserving for asbestos and environmental claims has undergone
F-23
<PAGE>
change at both the Company and in the insurance industry in general. For
environmental and asbestos liability claims, reserving methodology has been
evolving into accepted industry practice in the recent past; the Company's
actuaries were able to apply these methods to its loss reserves in 1997 and
1996. To reserve for environmental claims, the Company currently utilizes a
calendar year development technique known as aggregate loss development. This
technique focuses on the aggregate losses paid as of a particular date and
aggregate payment patterns associated with such claims. Several elements
including remediation studies, remediation, defense, declaratory judgment, and
third party bodily injury claims were considered in estimating the costs and
payment patterns of the environmental and toxic tort losses. Prior to the
development of these techniques, there was a substantial range in the nature of
reserving for environmental and toxic tort liabilities. The methods employed by
the Company prior to the review performed in 1996 included a review of aggregate
loss and loss adjustment paid and case incurred data along with resulting
"survival ratios" to establish IBNR for environmental and toxic tort claims. For
asbestos claims, the Company had previously reserved costs to defend, and any
indemnification payments anticipated on, claims for which it had received notice
that it was a responsible party, plus a bulk factor applied to the estimated
case reserves to provide for potential development of indemnification and
defense costs related to such claims. In 1996, the Company performed a ground up
analysis of asbestos loss reserves using an actuarially accepted modeling
technique. Using historical information as a base and information obtained from
a review of open claims files, assumptions were made about future claims
activity in order to estimate ultimate losses. For each individual major
account, projections were made regarding new plaintiffs per year, the number of
years new claims will be reported, the average loss severity per plaintiff, and
the ratio of loss adjustment expense to loss. In many cases involving larger
asbestos claims, the Company reserved up to the policy limits for the applicable
loss coverage parts for the affected accounts. Policy terms and reinsurance
treaties were applied in the modeling of future losses. Estimation of
obligations for asbestos and environmental exposures continues to be more
difficult than other loss reserves because of several factors, including: (i)
evolving methodologies for the estimation of the liabilities; (ii) lack of
reliable historical claim data; (iii) uncertainties with respect to insurance
and reinsurance coverage related to these obligations; (iv) changing judicial
interpretations; and (v) changing government standards.
The Company's asbestos-related losses were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
-------------- -------------- --------------
Gross of reinsurance:
<S> <C> <C> <C>
Beginning reserves............................... $80,055 $ 27,611 $13,969
Incurred losses and LAE.......................... 2,435 62,854 22,482
Calendar year payments for losses and LAE........ (5,764) (10,410) (8,840)
------- -------- -------
Ending reserves.................................. $76,726 $ 80,055 $27,611
======= ======== =======
1997 1996 1995
-------------- -------------- --------------
Net of reinsurance:
Beginning reserves............................... $53,300 $23,443 $ 8,168
Incurred losses and LAE.......................... (36) 39,427 21,826
Calendar year payments for losses and LAE....... (4,686) (9,570) (6,551)
------- ------- -------
Ending reserves.................................. $48,578 $53,300 $23,443
======= ======= =======
</TABLE>
F-24
<PAGE>
The Company's environmental-related losses were as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
-------------- -------------- --------------
Gross of reinsurance:
<S> <C> <C> <C>
Beginning reserves............................... $35,626 $20,134 $20,952
Incurred losses and LAE.......................... 1,130 22,143 3,516
Reserves acquired through purchase of Caliber
One Indemnity Company(1).................. 13,060 -- --
Calendar year payments for losses and LAE........ (4,708) (6,651) (4,334)
------- ------- -------
Ending reserves.................................. $45,108 $35,626 $20,134
======= ======= =======
Net of reinsurance:
Beginning reserves............................... $34,592 $20,134 $20,952
Incurred losses and LAE.......................... 1,068 21,109 3,516
Calendar year payments for losses and LAE....... (3,965) (6,651) (4,334)
------- ------- -------
Ending reserves.................................. $31,695 $34,592 $20,134
======= ======= =======
</TABLE>
(1) Such acquired reserves have been reinsured by an affiliate of the former
parent (See Note 1).
Of the total net asbestos reserves, approximately $6,700, $6,800, and $6,700
related to established claims reserves at December 31, 1997, 1996, and 1995,
respectively, and $41,900, $46,500, and $16,700 related to incurred but not
reported losses at December 31, 1997, 1996, and 1995, respectively. Of the
total net environmental reserves, approximately $11,200, $12,500, and $10,300
related to established claims reserves at December 31, 1997, 1996, and 1995,
respectively, and $20,500, $22,100, and $9,800 related to incurred but not
reported losses at December 31, 1997, 1996, and 1995, respectively. All
incurred asbestos and environmental losses were for accident years 1986 and
prior.
Management believes that its reserves for asbestos and environmental claims are
appropriately established based upon known facts, existing case law, and
generally accepted actuarial methodologies. However, due to changing
interpretations by courts involving coverage issues, the potential for changes
in federal and state standards for clean-up and liability and other factors, the
ultimate exposure to the Company for these claims may vary significantly from
the amounts currently recorded, resulting in a potential adjustment in the
claims reserves recorded. Additionally, issues involving policy provisions,
allocation of liability among participating insurers, proof of coverage, and
other factors make quantification of liabilities exceptionally difficult and
subject to adjustment based upon newly available data.
In 1996, other commercial lines for the Property and Casualty Group experienced
reserve strengthening of $21,000, as compared to a reserve release of $11,600 in
1995. The reserve strengthening was principally due to a re-estimation of loss
adjustment costs associated with general liability claims. Through 1991, the
Property and Casualty Group's mix of general liability insurance policies were
weighted towards the manufacturing classes of business. Subsequent to 1991, the
Property and Casualty Group's mix of business became more heavily weighted
towards the construction and contracting classes of business. These particular
classes of business have experienced losses due to construction defects and
similar matters, that have taken longer to emerge than the classes of business
previously written by the Property and Casualty Group. Defense costs associated
with these claims have also exceeded the original estimate of the Property and
Casualty Group's management, which was based on the patterns of indemnification
payments associated with the earlier classes of business written. When this
issue was discovered, the Property and Casualty Group factored the increased
defense costs and the emergence pattern in determining a more appropriate
reserve amount for loss handling costs. The release of reserves in 1995 was
primarily due to favorable loss experience in commercial automobile business.
Unpaid losses on workers' compensation claims for the Company include
approximately $816,000 and $1,012,000, net of discount of $460,230 and $514,248,
at December 31, 1997 and 1996, respectively. The approximate discount rate used
was 5% at December 31, 1997 and 1996. In 1995, the Property and Casualty Group
changed its discount rate with respect to its workers' compensation unpaid
losses from approximately 4% to 5% for SAP and GAAP purposes. This change was
approved and is permitted by the Pennsylvania Insurance Department. The effect
on net income (net of tax effect of $12,250) in 1995 was $22,750 ($0.96 per
basic share and $0.92 per diluted share).
F-25
<PAGE>
The Company's loss reserves were stated net of salvage and subrogation of
approximately $59,900 and $75,000 at December 31, 1997 and 1996, respectively.
The following table presents the salvage and subrogation by segment and product
line:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Property and Casualty Group:
Workers' compensation $46,000 $61,900
Other Commercial Lines 4,800 3,900
------- -------
Total Property and Casualty Group 50,800 65,800
PMA Re 9,100 9,200
------- -------
Total salvage and subrogation $59,900 $75,000
======= =======
</TABLE>
The Company's policy with respect to estimating the amounts and realizability of
salvage and subrogation is to develop historical accident year schedules of paid
salvage and subrogation by line of business, which are then projected to an
ultimate basis using actuarial projection techniques. The anticipated salvage
and subrogation is the estimated ultimate salvage and subrogation less any
amounts received by the Company. The realizability of anticipated salvage and
subrogation is reflected in the historical data that is used to complete the
projection, as historical paid data implicitly considers realization and
collectibility.
4. DEFERRED ACQUISITION COSTS
The following represents the components of deferred acquisition costs and the
amounts that were charged to expense:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Balance at January 1........................... $ 44,006 $ 37,901 $ 32,236
Deferral of acquisition costs.................. 94,783 96,397 92,872
Amortization of deferred acquisition costs..... (93,501) (90,292) (87,207)
-------- -------- --------
Balance at December 31......................... $ 45,288 $ 44,006 $ 37,901
======== ======== ========
</TABLE>
5. REINSURANCE
In the ordinary course of business, PMC's reinsurance and insurance subsidiaries
assume and cede reinsurance with other insurance companies and are members of
various pools and associations. The reinsurance and insurance subsidiaries cede
business, primarily on an excess of loss basis, in order to limit the maximum
net loss from large risks and limit the accumulation of many smaller losses from
a catastrophic event. The reinsurance and insurance subsidiaries remain
primarily liable to their clients in the event their reinsurers are unable to
meet their financial obligations.
Amounts receivable from reinsurers related to paid and unpaid losses are
displayed separately on the consolidated balance sheets, net of an allowance for
uncollectible accounts.
F-26
<PAGE>
The components of net premiums earned and losses and LAE incurred are as
follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earned Premiums:
Direct.......................... $ 277,871 $299,386 $370,590
Assumed......................... 216,357 209,688 149,838
Ceded........................... (118,277) (88,499) (35,476)
--------- -------- --------
Net............................... $ 375,951 $420,575 $484,952
========= ======== ========
Losses and LAE Incurred:
Direct.......................... $ 244,429 $420,157 $317,552
Assumed......................... 166,202 163,799 127,910
Ceded........................... (103,350) (47,333) (22,884)
--------- -------- --------
Net............................... $ 307,281 $536,623 $422,578
========= ======== ========
</TABLE>
The Company performs extensive credit reviews on its reinsurers, focusing on,
among other things, financial capacity, stability, trends, and commitment to the
reinsurance business. Prospective and existing reinsurers failing to meet the
Company's standards are excluded from the Company's reinsurance programs. In
addition, the Company requires letters of credit to support balances due from
reinsurers not authorized to transact business in the applicable jurisdictions.
At December 31, 1997, the Company had reinsurance recoverables due from the
following unaffiliated single reinsurers in excess of 3% of shareholders'
equity:
<TABLE>
<CAPTION>
Gross amount due
Reinsurer to the Company A.M. Best Rating
- --------- -------------- ----------------
<S> <C> <C>
United States Fidelity and Guaranty Company......... $74,041 A
Essex Insurance Company............................. 36,807 A
American Re-Insurance Corporation................... 35,411 A+
Kemper Reinsurance Corporation...................... 21,853 A
London Life International Reinsurance Corporation 16,212 A+
Continental Casualty Company........................ 15,209 A
</TABLE>
The Company maintained funds held to collateralize the above balances in the
amount of $66,891 at December 31, 1997. The Company believes that it would have
the right to offset the funds withheld from a reinsurer against the balances due
from such reinsurer in the event of insolvency.
During 1997, PMA Life Insurance Company reinsured the majority of its in force
annuity business with a third party reinsurer via a quota-share reinsurance
agreement for approximately $15,400. The transaction effectively makes PMA Life
Insurance Company a dormant company.
All of Caliber One Indemnity Company's acquired loss reserves were reinsured
with an affiliate of its former parent in conjunction with its purchase by PMA
Re, as discussed in Note 1. Management believes that such reinsurance is
adequate to cover any future reserve development or uncollectible reinsurance on
the acquired reserves.
F-27
<PAGE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Senior notes 9.53%, due 1997......................... $ -- $ 7,143
Senior notes 9.60%, due 2001......................... -- 46,428
Senior notes 7.62%, due 2001, Series A............... -- 71,000
Senior notes 7.62%, due 2000, Series B............... -- 36,000
Revolving credit agreement, expiring in 1998......... -- 44,000
Revolving credit facility, expiring in 2002(1)....... 203,000 --
Mortgage notes....................................... -- 128
-------- --------
Long-term debt....................................... $203,000 $204,699
======== ========
</TABLE>
(1) Maturing in an installment of $15,500 in 1999 and annual installments of
$62,500 commencing in 2000 through 2002.
On March 14, 1997, the Company refinanced substantially all of its existing
credit agreements not already maturing in 1997 through the completion of a new
$235,000 revolving credit facility (New Credit Facility). Utilizing the New
Credit Facility, the Company refinanced the following obligations:
<TABLE>
<S> <C>
Senior notes 9.60%, due 2001......................... $ 46,428
Senior notes 7.62%, due 2001, Series A............... 71,000
Senior notes 7.62%, due 2000, Series B............... 36,000
Revolving credit agreement, expiring in 1998(1)...... 36,000
--------
Total................................................ $189,428
========
</TABLE>
(1) The Company repaid $8,000 of the revolving credit agreement prior to March
14, 1997.
The early extinguishment of the senior note agreements resulted in an
extraordinary loss of $4,734 ($7,283 pre-tax). The New Credit Facility bears
interest at LIBOR plus 0.70% on the utilized portion and carries a 0.275%
facility fee on the unutilized portion. The spread over LIBOR and the facility
fee are adjustable downward based upon the Company's debt to capitalization
ratios in the future. As of December 31, 1997, the interest rate on the
utilized portion of the New Credit Facility was 6.61%.
In November of 1996, the Company entered into a letter of credit agreement with
a group of banks, which currently extends through November of 1998. The
original agreement allowed the issuing bank to issue letters of credit having an
aggregate outstanding face amount up to $75,000. Effective March 14, 1997, this
facility was reduced to an aggregate outstanding face amount not to exceed
$50,000. The agreement requires the Company to pay a commitment fee during the
existence of the agreement equal to 0.1875% per annum on the average daily
available amount. At December 31, 1997 and 1996, the aggregate outstanding face
amount of letters of credit issued was $46,881 and $47,461, respectively. This
agreement primarily secures reinsurance liabilities of the insurance
subsidiaries of the Company.
The debt covenants supporting the revolving credit facility and the letter of
credit agreement contain provisions which, among other matters, limit the
Company's ability to incur additional indebtedness, merge, consolidate and
acquire or sell assets. The debt covenants also require the Company to satisfy
certain ratios related to net worth, debt-to-capitalization, and interest
coverage. Additionally, the debt covenants place restrictions on dividends to
shareholders (See Note 15).
F-28
<PAGE>
The Company has entered into an interest rate swap agreement in its management
of its existing interest rate exposures. This transaction effectively changed
the Company's interest rate exposure on a portion of the New Credit Facility,
which has a floating rate, to a fixed obligation as follows:
<TABLE>
<CAPTION>
Notional Principal
Balance at
Debt Agreement December 31, 1997 Fixed Rate Floating Rate
- -------------- ----------------- ---------- -------------
<S> <C> <C> <C>
Revolving Credit Facility, 2002 $150,000 7.24% 6.61%
</TABLE>
The variable rate resets every three months. This agreement involves the
exchange of interest payment obligation without the exchange of underlying
principal. The differential to be paid or received is recognized as an
adjustment of interest expense. In the event that a counterparty fails to meet
the terms of the agreement, the Company's exposure is limited to the interest
rate differential on the notional principal amount ($150,000). Management
believes such credit risk is minimal and any loss would not be significant.
7. STOCK OPTIONS
The Company currently has six stock option plans in place for options granted to
officers and other key employees for the purchase of the Company's Class A
common stock, under which 3,864,903 Class A common shares are reserved for
issuance. The stock options are granted under terms and conditions determined
by a committee appointed by the Company's board of directors. Granted stock
options have a maximum term of ten years, vest over periods ranging between zero
and five years, and are typically granted with an exercise price equal to the
fair market value of the stock. Information regarding these option plans for
1997, 1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 3,242,160 $ 12.43 3,087,260 $ 11.80 2,926,000 $ 10.41
Options granted.......... 324,500 17.00 325,000 17.00 775,000 15.59
Options exercised........ (162,248) (8.78) (99,150) (8.33) (205,199) (8.66)
Options canceled......... (286,800) (11.53) (70,950) (11.55) (408,541) (10.65)
--------- ------- --------- ------- --------- -------
Options outstanding,
end of year............ 3,117,612 $ 13.18 3,242,160 $ 12.43 3,087,260 $ 11.80
========= ======= ========= ======= ========= =======
</TABLE>
<TABLE>
<S> <C> <C> <C>
Option price range at
end of year............ $8.00 to $17.00 $8.00 to $17.00 $6.60 to $16.00
Option price range for
exercised shares....... $8.00 to $15.00 $6.60 to $10.00 $6.60 to $11.50
Options available for
grant at end of year... 747,291 921,566 425,616
</TABLE>
F-29
<PAGE>
Stock options outstanding at December 31, 1997 and related exercise price and
weighted average remaining life information is as follows:
<TABLE>
<CAPTION>
Weighted
Options Options Average
Outstanding at Exercisable at Remaining Life
Exercise Prices December 31, 1997 December 31, 1997 (in years)
- --------------- ----------------- ----------------- ----------
<S> <C> <C> <C>
$8.00............................. 254,357 246,857 3.49
10.00............................. 438,690 438,690 4.46
11.50............................. 799,000 799,000 5.65
12.75............................. 271,500 271,500 6.17
15.00............................. 296,580 287,580 7.45
16.00............................. 411,485 283,735 7.43
17.00............................. 646,000 228,725 9.15
--------- ---------
3,117,612 2,556,087
========= =========
</TABLE>
The fair value of options at date of grant was estimated using a binomial model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997(1) 1996(2) 1995(3) 1995(4)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Expected life (years)............. 10 10 10 10
Interest rate..................... 6.3% 6.3% 6.1% 6.2%
Volatility........................ 18% 18% 18% 18%
Dividend yield.................... 2.3% 2.3% 2.3% 2.3%
</TABLE>
(1) Options granted on September 3, 1997
(2) Options granted on July 23, 1996
(3) Options granted on June 5, 1995
(4) Options granted on September 1, 1995
The Company has adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation costs for the
Company's stock option plans been determined based on the fair value at the
grant date for awards granted during the year, pretax income would have been
reduced by $1,878 ($1,221 after tax, or $0.05 per basic share), $2,079 ($1,352
after tax, or $0.06 per basic share), and $4,308 ($2,800 after tax, or $0.12 per
basic share) in 1997, 1996, and 1995, respectively.
8. INCOME TAXES
The components of income tax provision (benefit) from continuing operations are:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal.................................... $(4,506) $(44,572) $(4,570)
------- -------- -------
(4,506) (44,572) (4,570)
------- -------- -------
Deferred:
Federal.................................... 9,906 (11,488) 15,353
------- -------- -------
9,906 (11,488) 15,353
------- -------- -------
Income tax provision (benefit) from
continuing operations....................... $ 5,400 $(56,060) $10,783
======= ======== =======
</TABLE>
F-30
<PAGE>
The components of income tax benefit from extraordinary item are:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................... $ (374) $ -- $ --
------- ---------- ----------
(374) -- --
------- ---------- ----------
Deferred:
Federal.................................... (2,175) -- --
------- ---------- ----------
(2,175) -- --
------- ---------- ----------
Income tax benefit from
extraordinary item.......................... $(2,549) $ -- $ --
======= ========== ==========
</TABLE>
A reconciliation between the total provision (benefit) for income taxes and the
amounts computed at the Statutory Federal income tax rate of 35% for the years
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Computed at the Statutory tax rate............. $ 8,804 $(66,988) $ 12,220
(Decrease) increase in taxes resulting from:
Excludable dividends......................... -- (36) (107)
Tax-exempt interest.......................... (61) (4,547) (12,917)
Losses of foreign reinsurance affiliate...... -- 16,060 8,469
Reversal of income tax accruals.............. (3,703) -- --
Other........................................ 360 (549) 3,118
------- -------- --------
Provision (benefit) for income taxes........... $ 5,400 $(56,060) $ 10,783
======= ======== ========
</TABLE>
The tax effects of significant temporary differences between the financial
statement carrying amounts and tax bases of assets and liabilities that
represent the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Allowance for uncollectible accounts.......... $ 6,839 $ 9,037
Unearned premiums............................. 13,756 13,386
Discounting of unpaid losses and LAE.......... 63,743 51,086
Unrealized depreciation of investments........ -- 13,394
Depreciation.................................. -- 5,646
Postretirement benefit obligation............. 5,139 5,111
Tax carryforwards............................. 46,088 67,014
Other......................................... 18,919 9,458
-------- --------
Gross deferred tax asset...................... 154,484 174,132
-------- --------
Deferred acquisition costs.................... (15,723) (15,352)
Pension asset................................. (371) (1,348)
Depreciation.................................. (574) --
Unrealized appreciation of investments........ (10,126) --
Losses of foreign reinsurance affiliate....... (55,087) (55,790)
Other......................................... (2,212) --
-------- --------
Gross deferred tax liability.................. (84,093) (72,490)
-------- --------
Net deferred tax asset........................ $ 70,391 $101,642
======== ========
</TABLE>
At December 31, 1997, the Company had approximately $109,622 of net operating
loss carryforwards (expiring in 2011), approximately $7,532 of alternative
minimum tax credit carryforwards (which do not expire) and approximately $188 of
general business credit carryforwards (expiring in 2010 and 2011).
Under SFAS 109, a valuation allowance should be provided to offset the effects
of a deferred tax asset if management believes that it is more likely than not
that the benefit of a deferred tax item will not be
F-31
<PAGE>
realized. Management believes that the benefit of its deferred tax asset will be
fully realized, and therefore has not provided for a valuation allowance.
U.S. Federal tax return examinations have been completed for the years 1992 and
1993. The examinations for years 1994 and 1995 are currently in progress. In
management's opinion, the ultimate resolution of these matters will not have an
adverse impact on the Company's financial position or results of operations.
9. EMPLOYEE RETIREMENT, POSTRETIREMENT, AND POSTEMPLOYMENT BENEFITS
During 1996, the Property and Casualty Group initiated a Voluntary Early
Retirement Program ("VERIP"). Eligibility to participate in the VERIP was
contingent upon an employee's age and years of service with the Company. Of the
approximately 85 employees eligible to participate in the VERIP, approximately
50 employees opted to participate. At December 31, 1996, the Company accrued
$7,635 in connection with the VERIP. The components of this accrual are as
follows:
<TABLE>
<S> <C>
Pension costs..................................................... $4,300
Postemployment costs.............................................. 2,360
Postretirement costs.............................................. 975
------
$7,635
======
</TABLE>
The Company did not offer a VERIP in 1997, and as such, did not incur any VERIP
expenses. The Company did, however, incur certain restructuring and other
charges during 1997 (See Note 20).
A. PENSION AND RETIREMENT PLANS -- The Company sponsors a qualified non-
contributory defined benefit pension plan (Qualified Pension Plan) covering
substantially all employees. After meeting certain qualifications, an employee
acquires a vested right to future benefits. The benefits payable under the plan
are generally determined on the basis of an employee's length of employment and
career average salary. The Company's policy is to fund pension cost accrued in
accordance with the Employee Retirement Income Security Act of 1974. The
Company also maintains a non-qualified unfunded supplemental defined benefit
pension plan (Non-qualified Pension Plan) for the benefit of certain key
employees.
The following tables set forth the amounts recognized in the Company's financial
statements with respect to the Qualified and Non-qualified pension plans:
<TABLE>
<CAPTION>
For the year ended December 31, 1997 For the year ended December 31,
1996
Non- Non-
Qualified Qualified Qualified Qualified
Plan Plan Total Plan Plan Total
------------ ----------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned
during the period......... $ 1,375 $ 93 $ 1,468 $ 1,665 $ 98 $ 1,763
Interest cost on projected
benefit obligation........ 3,034 166 3,200 2,948 150 3,098
Actual return on plan assets . (2,490) -- (2,490) (2,830) -- (2,830)
Net amortization and
deferral.................. (884) 93 (791) (842) 94 (748)
VERIP......................... -- -- -- 4,300 -- 4,300
------- ---- ------- ------- ---- -------
Net pension cost.............. $ 1,035 $352 $ 1,387 $ 5,241 $342 $ 5,583
======= ==== ======= ======= ==== =======
For the year ended December 31,
1995
Non-
Qualified Qualified
Plan Plan Total
---------- --------- --------
<C> <C> <C>
Service cost-benefits earned
during the period......... $ 1,132 $ 108 $ 1,240
Interest cost on projected 2,770 158 2,928
benefit obligation........ (8,712) -- (8,712)
Actual return on plan assets .
Net amortization and 5,803 94 5,897
deferral.................. -- -- --
VERIP......................... ------- ------ -------
$ 993 $ 360 $ 1,353
Net pension cost.............. ======= ====== =======
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Non- Non-
Qualified Qualified Qualified Qualified
Plan Plan Total Plan Total
---------- ---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation......... $36,405 $ 1,238 $37,643 $41,932 $ 1,069 $43,001
Non-vested benefit obligation..... 3,919 79 3,998 3,487 68 3,555
------- ------- ------- ------- ------- -------
Accumulated benefit obligation........ $40,324 $ 1,317 $41,641 $45,419 $ 1,137 $46,556
======= ======= ======= ======= ======= =======
Projected benefit obligation.......... $44,653 $ 2,472 $47,125 $49,331 $ 2,133 $51,464
Fair value of Pension Plan assets..... 40,600 -- 40,600 46,739 -- 46,739
------- ------- ------- ------- ------- -------
Excess of projected benefit obligation
over Pension Plan assets........ (4,053) (2,472) (6,525) (2,592) (2,133) (4,725)
Unrecognized net loss (gain).......... 4,830 29 4,859 588 (63) 525
Unrecognized transition asset......... (810) 1,123 313 (1,081) 1,216 135
Unrecognized prior service benefit.... (1,101) -- (1,101) (1,199) -- (1,199)
------- ------- ------- ------- ------- -------
Pension liability..................... $(1,134) $(1,320) $(2,454) $(4,284) $ (980) $(5,264)
======= ======= ======= ======= ======= =======
</TABLE>
Qualified Pension Plan assets consist of equity securities, fixed maturity
securities, fixed income contracts, and the Company's common stock.
Actuarial assumptions utilized by the Qualified and Non-qualified Pension Plan
are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Discount rate..................................... 7.0% 7.5% 7.0%
Rate of compensation increase..................... 4.5% 5.0% 5.0%
Expected long-term rate of return on plan assets.. 8.0% 8.0% 8.0%
</TABLE>
The Company also maintains a voluntary defined contribution savings plan
covering all employees who work a minimum of 20 hours per week. The Company
matches employee contributions up to 5% of compensation. Contributions under
such plans charged to income were $1,735, $2,153 and $1,726 in 1997, 1996 and
1995, respectively.
B. POSTRETIREMENT BENEFITS -- In addition to providing pension benefits, the
Company provides certain health care benefits for retired employees.
Substantially all of the Company's employees may become eligible for those
benefits if they have worked fifteen or more years with the Company and have
attained the age of fifty while in the service of the Company. For employees
who retire on or subsequent to January 1, 1993, the Company will pay a fixed
portion of medical insurance premiums. Retirees will absorb future increases in
medical premiums.
The funded status of this liability is as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents.......................... $ 6,076 $ 6,931
Fully eligible active employees.................. 1,214 952
Active employees not fully eligible.............. 2,383 1,871
------- -------
Total............................................ 9,673 9,754
Unrecognized prior service cost.................. 1,317 1,436
Unrecognized net gain............................ 3,455 4,031
------- -------
Accrued postretirement benefit liability......... $14,445 $15,221
======= =======
</TABLE>
F-33
<PAGE>
The components of postretirement benefit cost include the following:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Service cost.......................... $ 237 $ 248 $ 330
Interest cost......................... 655 561 658
Amortization.......................... (242) (251) (209)
VERIP................................. -- 975 --
----- ------ -----
Postretirement benefit cost........... $ 650 $1,533 $ 779
===== ====== =====
</TABLE>
Assumptions used in the computation of the funded status and postretirement
benefit cost are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Discount rate......................... 7.5% 7.0% 7.0%
Health care inflation rate:
Next year........................... 7.5% 8.0% 8.5%
Ultimate............................ 5.5% 5.5% 5.5%
</TABLE>
The assumed health care cost trend rate used to measure the expected cost of
benefits covered by the plan has been established at 7.5% for 1998 and is
expected to decline gradually to 5.5% in 2002 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported. A 1% increase in the trend rate for health care costs
would have increased the accumulated postretirement benefit obligation by $405
and the annual service and interest cost by $27.
C. POSTEMPLOYMENT BENEFITS -- SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," establishes the accounting standards for employers who
provide benefits to employees subsequent to their employment, but prior to
retirement. These benefits include severance, long-term and short-term
disability payments, salary continuation, postemployment health benefits,
supplemental unemployment benefits, and other related payments. SFAS No. 112
requires that benefit obligations attributable to prior service and/or that
relate to benefits that vest or accumulate must be accrued presently if the
payments are probable and reasonably estimable. Postemployment benefits that do
not meet such criteria are accrued when payments are probable and reasonably
estimable. In connection with the VERIP described above, the Company recorded
$2,360 of postemployment costs in 1996. While a VERIP was not offered in 1997,
the Company incurred approximately $7,000 of severance and other restructuring
charges during 1997 (See Note 20).
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table represents the carrying amounts and estimated fair values of
the Company's financial instruments. Estimated fair value is defined as the
amount at which the instrument could be exchanged in a current transaction
between willing parties. Certain financial instruments, specifically amounts
relating to insurance contracts, are excluded from this disclosure.
F-34
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available for sale...... $1,929,518 $1,929,518 $2,126,120 $2,126,120
Equity securities........................ 13 13 262 262
Financial liabilities:
Long-term debt........................... 203,000 203,000 204,699 218,101
Interest rate swap agreements............ -- 3,388 -- 52
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
values:
<TABLE>
<CAPTION>
<S> <C>
Fixed maturities: The fair values are estimated based upon quoted market prices.
Equity securities: The fair values are estimated based upon quoted market prices.
Long-term debt: The fair value is estimated using discounted cash flow calculations
based upon the Company's current incremental borrowing rate for
similar types of borrowing facilities or the rate utilized to
prepay obligations, where applicable.
Interest rate swaps: The fair values are estimated by obtaining quotes from dealers.
Guarantees: The fair values are determined based upon the likelihood of the
Company being required to satisfy the underlying obligations.
Management believes that it is a remote possibility that the
Company would have to act upon any guarantees. Therefore, the fair
value of the guarantees is zero.
Other financial instruments
(excluded from the above table): The carrying values approximate the fair values.
</TABLE>
11. DISCLOSURE OF CERTAIN RISKS AND UNCERTAINTIES
A. BUSINESS SEGMENTS AND CONCENTRATIONS -- As stated in Note 1, PMC is an
insurance holding company that sells property and casualty reinsurance and
insurance through its insurance subsidiaries.
The following summarizes the relative importance of the segments and lines of
insurance in terms of net premiums written:
<TABLE>
<CAPTION>
Percent of the Company's
Net Premiums Written
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
PMA Re-total................................... 42.5% 37.0% 31.2%
PMA Re-casualty reinsurance lines.............. 28.4 27.5 21.9
The Property and Casualty Group-total.......... 57.5 63.0 68.8
The Property and Casualty Group-workers'
compensation................................. 43.2 45.6 42.8
</TABLE>
PMA Re distributes its products through major reinsurance brokers. PMA Re's top
five such brokers accounted for 90.8% of PMA Re's gross premiums in force at
December 31, 1997.
The Property and Casualty Group's operations are concentrated in six contiguous
states in the Mid-Atlantic and Southern regions of the U.S. As such, economic
trends in individual states may not be independent of one another. Also, the
Property and Casualty Group's products are highly regulated by each of these
states. For many of the Property and Casualty Group's products, the insurance
departments of the states in which it conducts business must approve rates and
policy forms. In addition, workers' compensation benefits are determined by
statutes and regulations in each of these states. While the Property and
Casualty Group considers factors such as rate adequacy, regulatory climate, and
economic factors in its underwriting
F-35
<PAGE>
process, unfavorable developments in these factors could have an adverse impact
on the Company's financial condition and results of operations.
The Company actively manages its exposure to catastrophic events. In the
underwriting process, the Company generally avoids the accumulation of insurable
values in catastrophe prone regions. Also, in writing property reinsurance
coverages, PMA Re typically requires per occurrence loss limitations for
contracts that could have catastrophe exposure. Through per risk reinsurance,
the Company also manages its net retention in each exposure. In addition, PMA
Re maintains retrocessional protection of $46,000 excess of $2,000 per
occurrence, and the Property and Casualty Group maintains catastrophe
reinsurance protection of $27,700 excess of $850. As a result, the Company's
loss ratios have not been significantly impacted by catastrophes, and management
believes that the Company has adequate reinsurance to protect against the
estimated probable maximum gross loss from a catastrophic event; however, though
management believes it is unlikely, an especially severe catastrophic event
could exceed the Company's reinsurance and/or retrocessional protection, and
adversely impact the Company's financial position, perhaps materially.
B. USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS -- The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
Unpaid Losses and Loss Adjustment Expenses -- At December 31, 1997, the Company
carried $2,003,187 of unpaid losses and loss adjustment expenses. Unpaid losses
and loss adjustment expenses reflect management's best estimate of future
amounts needed to pay claims and related settlement costs with respect to
insured events which have occurred, including events that have not been reported
to the Company. In many cases, significant periods of time, ranging up to
several years or more, may elapse between the occurrence of an insured loss, the
reporting of the loss to the Company and the Company's payment of that loss. In
general, liabilities for reinsurers become known more slowly than for primary
insurers and are subject to more unforeseen development. As part of the process
in determining these amounts, historical data is reviewed and consideration is
given to the impact of various factors, such as legal developments, changes in
social attitudes, and economic conditions. In addition, estimating reserves for
workers' compensation claims can be more difficult than many other lines of
property and casualty insurance for several reasons, including (i) the long
payment `tail' associated with the business; (ii) the impact of social,
political and regulatory trends on benefit levels for both medical and indemnity
payments; (iii) the impact of economic trends; and (iv) the impact of changes in
the mix of business. At various times, one or a combination of such factors can
make the interpretation of actuarial data associated with workers' compensation
loss development more difficult, and it can take additional time to recognize
changes in loss development patterns. Under such circumstances, adjustments
will be made to such reserves as loss patterns develop and new information
becomes available and such adjustments may be material.
Management believes that its unpaid losses and loss adjustment expenses are
fairly stated at December 31, 1997, in accordance with GAAP. However,
estimating the ultimate claims liability is necessarily a complex and judgmental
process inasmuch as the amounts are based on management's informed estimates and
judgments using data currently available. As additional experience and data
become available regarding claims payment and reporting patterns, legislative
developments, and economic conditions, the estimates are revised accordingly.
If the Company's ultimate net losses prove to be substantially greater than the
amounts recorded at December 31, 1997, the related adjustments could have a
material adverse impact on the Company's financial condition and results of
operations (See also Note 3).
C. YEAR 2000 ISSUE -- The unprecedented advances in computer technology over
the past several decades have resulted in dramatic changes in the way companies
do business. Most of these developments have been tremendously beneficial, but
some have proven costly, as businesses have struggled to adapt to various
features of the new technological landscape. One such well-publicized problem
has arisen out of the worldwide use of the so-called "Year 2000" programming
convention, in which two digit numbers were generally used instead of four digit
numbers to identify the years used in dates. As a consequence, most computers
require relatively costly reprogramming to enable them to correctly perform date
operations involving years 2000 or later, a problem anticipated to have
substantial repercussions on the business world, since computer operations
involving date calculations are pervasive.
F-36
<PAGE>
With the assistance of outside consulting groups, the Company began evaluating
and reprogramming its own computer systems to address the Year 2000 problem in
late 1995. Management anticipates that by no later than year end 1998, it will
have completed substantially all necessary programming work so that Year 2000
issues are not likely to result in any material adverse disruption in the
Company's computer systems or its internal business operations. The cost of
this work through year-end 1997 has been approximately $3,800. The Company
estimates that the total remaining cost will be approximately $1,300, and will
be expensed in 1998.
Many experts now believe that Year 2000 problem may have a material adverse
impact on the national and global economy generally. In addition, it seems
likely that if businesses are materially damaged as a result of Year 2000
problems, at least some such businesses may attempt to recoup their losses by
claiming coverage under various types of insurance policies. And, although
management has concluded that under a fair reading of the various policies of
insurance issued by it no coverage for Year 2000 problems should be considered
to exist, it is not possible to predict whether or to what extent any such
coverage could ultimately be found to exist by courts in the various
jurisdictions. Accordingly, important factors which could cause actual results
to differ materially from those expressed in the forward looking statements
include but are not limited to the inability of the Company to accurately
estimate the impact of the Year 2000 problem on the insurance, or other business
operations, of the Company.
12. TRANSACTIONS WITH RELATED PARTIES
The Company's largest shareholder is PMA Foundation (the "Foundation"), formerly
known as Pennsylvania Manufacturers' Association, which is a not-for-profit
corporation qualified under Section 501(c)(6) of the Internal Revenue Code,
whose purposes include the promotion of the common business interests of its
members and the economic prosperity of the Commonwealth of Pennsylvania. As of
December 31, 1997, the Foundation owned 4,561,225 shares of common stock (30.7%
of the class) and 912,225 shares of Class A common stock (10.0% of the class),
which constitutes 29.5% of the total number of votes available to be cast in
matters brought before the Company's shareholders. All of the members of the
Company's Board of Directors currently serve as members of the Foundation's
Board of Trustees. Also, Frederick W. Anton III, Chairman of the Company,
serves as President and Chief Executive Officer of the Foundation. The Company
and certain of its subsidiaries provide certain administrative services to the
Foundation for which the Company and its subsidiaries receive reimbursement.
Total reimbursements amounted to $34, $82, and $269 for the years ended December
31, 1997, 1996, and 1995, respectively. The Foundation also leases its
Harrisburg, Pennsylvania headquarters facility from a subsidiary of the Company
under a monthly operating lease presently requiring rent payments of $20 per
month and reimburses a subsidiary of the Company for its use of office space in
the Blue Bell, Pennsylvania facility. Rent and related reimbursements paid to
the Company's affiliates by the Foundation amounted to $250, $247, and $294, for
the years ended December 31, 1997, 1996, and 1995, respectively.
In addition, the Company has arranged an executive loan program with a financial
institution whereby such institution will provide prime rate personal loans to
officers of the Company and its subsidiaries collateralized by common stock and
Class A common stock at a maximum 50% loan to value ratio. The Company has
agreed to purchase any loan made under this program from the financial
institution in the event that the borrower defaults on such loan. The amount of
loans outstanding at December 31, 1997 under this program was $4,642.
The Company incurred legal and consulting fees aggregating approximately $6,506,
$7,917, and $6,279 in 1997, 1996 and 1995, respectively, from firms in which
directors of the Company are partners or principals.
The Company has notes receivable from officers which are accounted for as a
reduction of shareholders' equity in the accompanying balance sheets. Such
notes receivable had balances of $198 and $1,162 as of December 31, 1997 and
December 31, 1996, respectively. The interest rate on the notes range between
6.0% and 8.0%.
F-37
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
For the years ended December 31, 1997, 1996 and 1995, total rent expense was
$5,745, $6,114 and $4,536 respectively. At December 31, 1997, the Company was
obligated under noncancelable operating leases for office space with aggregate
minimum annual rentals as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
<S> <C>
1998.................................. $ 3,972
1999.................................. 2,940
2000.................................. 1,811
2001.................................. 1,820
2002.................................. 1,566
Thereafter............................ 2,133
-------
Total................................. $14,242
=======
</TABLE>
In the event a property and casualty insurer, operating in a jurisdiction where
the Company's insurance subsidiaries also operate becomes or is declared
insolvent state insurance regulations provide for the assessment of other
insurers to fund any capital deficiency of the insolvent insurer. Generally,
this assessment is based upon the ratio of an insurer's voluntary premiums
written to the total premiums written for all insurers in that particular
jurisdiction. The Company is not aware of any material potential assessments at
December 31, 1997.
The Company has provided guarantees of approximately $11,048 related to loans on
properties in which the Company has an interest.
The Company is named in various legal proceedings arising in the normal course
of business. In the opinion of management, the resolution of these matters will
not have a material adverse effect on the Company's financial condition, results
of operations, or cash flows.
14. SALE OF UNCOLLECTED PREMIUMS
Insurance subsidiaries of PMC, from time to time, engage in the practice of
selling uncollected premiums to a third-party financial institution. No such
sales were transacted during 1997. The proceeds received from such sales were
$10,628 and $19,509 in 1996 and 1995, respectively. These receivables were
excluded from uncollected premiums in the accompanying balance sheets. However,
the Company had recorded an allowance for doubtful accounts related to the
estimated uncollectible accounts since the Company had retained risk under the
recourse provisions. At December 31, 1997, the Company had no contingent
obligations outstanding related to the sale of uncollected premiums.
15. SHAREHOLDERS' EQUITY
The Company has two classes of common stock, Class A common stock and common
stock. The Company's common stock and Class A common stock generally vote
without regard to class on matters submitted to shareholders, with the common
stock having ten votes per share and the Class A common stock having one vote
per share.
With respect to dividend rights, the Class A common stock is entitled to cash
dividends at least 10% higher than those declared and paid on the common stock.
The Company's bylaws limit the classes of persons who may own the common stock.
Holders of common stock may elect to convert any or all such shares into Class A
common stock on a share-for-share basis.
Under the insurance laws and regulations of Pennsylvania, PMC's insurance
subsidiaries may not pay dividends to PMC without prior regulatory approval,
over a twelve-month period in excess of the greater of (a) 10% of the preceding
year-end's policyholders surplus or (b) the preceding year's SAP net income, but
in no event to exceed unassigned funds. At December 31, 1997, the maximum
amount available to be paid as dividends from the Company's insurance
subsidiaries to PMC, without the prior consent of the Pennsylvania Insurance
Department, was $51,220.
F-38
<PAGE>
PMC's dividends to shareholders are restricted by its debt agreements. On March
14, 1997, the Company refinanced certain debt agreements through the completion
of the New Credit Facility (See Note 6). Under the terms of the New Credit
Facility under the most restrictive debt covenant, the Company could pay
dividends of approximately $14,500 in 1998.
PMA Re intends to maintain Caliber One Indemnity Company's surplus at not less
than $25,000, the minimum capital and surplus required for many states in order
to be an eligible surplus lines carrier (See Note 1).
16. EARNINGS PER SHARE
In accordance with SFAS No. 128 discussed in Note 1-I, the Company is required
to present a reconciliation of the numerators and denominators used in the basic
earnings per share calculation to the numerators and denominators used in the
diluted earnings per share calculation. The computation of diluted earnings per
share is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if all dilutive potential common shares, such as
outstanding stock options with exercise prices below the average market price,
had been issued. For all years presented, there were no differences in the
numerator for the basic and diluted earnings per share calculation. For
entities that report an extraordinary item, as the Company did in 1997, SFAS No.
128 requires that income before extraordinary item be used as the control number
in determining whether or not potential common shares are dilutive. The
Company's income (loss) before extraordinary item, which was equal to net income
in 1996 and 1995, and a reconciliation of the denominator of the basic and
diluted earnings per share computations are presented below.
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------- ------------------
<S> <C> <C> <C>
NUMERATOR:
Control number - income (loss)
before extraordinary item........... $ 19,753 $ (135,334) $ 24,130
DENOMINATOR:
Basic shares - weighted
average common and
Class A common shares outstanding... 23,855,031 23,800,791 23,816,088
Dilutive stock options................ 712,347 -- 965,861
----------- ----------- -----------
Total diluted shares.................. 24,567,378 23,800,791 24,781,949
=========== =========== ===========
</TABLE>
Options to purchase 646,000 shares of Class A common stock at $17.00 per share
were outstanding at December 31, 1997, but were not included in the computation
of diluted earnings per share because the options' exercise price was greater
than the average market price of the Class A common shares. Options to purchase
3,242,160 shares of Class A common stock at prices ranging between $8.00 and
$17.00 were outstanding during at December 31, 1996, but were excluded from the
computation of diluted earnings per share as they would have been anti-dilutive.
F-39
<PAGE>
17. BUSINESS SEGMENTS
Operating revenues, income (loss) before income taxes, and identifiable assets
of the Company's business segments were as follows:
<TABLE>
<CAPTION>
For the year ending December 31,
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES (1)
PMA Re
Net premiums earned................................... $163,603 $ 151,974 $139,345
Net investment income................................. 52,270 48,676 45,166
-------- --------- --------
215,873 200,650 184,511
-------- --------- --------
The Property and Casualty Group
Net premiums earned - workers' compensation.... 152,773 176,380 243,175
Net premiums earned - commercial lines......... 59,575 92,221 102,432
-------- --------- --------
Net premiums earned - total.................... 212,348 268,601 345,607
Net investment income................................. 82,098 82,455 92,275
Service revenues...................................... 10,311 9,189 5,106
-------- --------- --------
304,757 360,245 442,988
-------- --------- --------
Corporate, Other and Consolidating Eliminations
Net investment income................................. 2,330 2,805 1,914
-------- --------- --------
2,330 2,805 1,914
-------- --------- --------
Total operating revenues.................................. $522,960 $ 563,700 $629,413
======== ========= ========
(1) Operating revenues exclude net realized investment gains.
<CAPTION>
For the year ending December 31,
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES
PMA Re.................................................... $ 44,802 $ 42,783 $ 39,443
The Property and Casualty Group........................... (9,038) (219,619) (4,305)
Corporate, Other and Consolidating Eliminations........... (3,441) (490) (13,414)
-------- --------- --------
Pre-tax operating income (loss) before interest expense... 32,323 (177,326) 21,724
Net realized investment gains............................. 8,598 2,984 31,923
Interest expense.......................................... (15,768) (17,052) (18,734)
-------- --------- --------
Total income (loss) before income taxes................... $ 25,153 $(191,394) $ 34,913
======== ========= ========
<CAPTION>
December 31,
1997 1996
--------------- --------------
<S> <C> <C>
IDENTIFIABLE ASSETS
PMA Re................................................... $1,126,176 $1,031,149
The Property and Casualty Group.......................... 1,863,975 2,050,648
Corporate, Other and Consolidating Eliminations.......... 67,107 35,719
---------- ----------
Total identifiable assets................................ $3,057,258 $3,117,516
========== ==========
</TABLE>
F-40
<PAGE>
18. SAP INFORMATION
SAP net income (loss) and capital and surplus for PMC's domestic insurance
subsidiaries as reported to the Insurance Departments of Pennsylvania and
Delaware are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------------- ---------------- ---------------
<S> <C> <C> <C>
SAP NET INCOME (LOSS)
PMA Re................................................... $ 25,752 $ 26,338 $ 36,854
The Property and Casualty Group.......................... 10,785 (191,640) 30,925
-------- --------- --------
Total(1)................................................. $ 36,537 $(165,302) $ 67,779
======== ========= ========
(1) Caliber One Indemnity Company had no SAP net income or loss during 1997.
December 31,
1997 1996 1995
-------- --------- --------
SAP CAPITAL AND SURPLUS
PMA Re(1)................................................ $271,154 $ 260,853 $254,088
The Property and Casualty Group.......................... 281,071 279,764 402,968
-------- --------- --------
Total.................................................... $552,225 $ 540,617 $657,056
======== ========= ========
</TABLE>
(1) The SAP capital and surplus of PMA Re includes PMA Re's investment in
Caliber One Indemnity Company, equal to Caliber One Indemnity Company's SAP
capital and surplus of $25,039 at December 31, 1997.
A reconciliation of PMC's domestic insurance subsidiaries' SAP net income (loss)
and capital and surplus to the Company's GAAP net income (loss) and
shareholders' equity is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
NET INCOME (LOSS)
SAP net income (loss):
Domestic insurance subsidiaries......................... $ 36,537 $(165,302) $ 67,779
GAAP adjustments:
Change in deferred acquisition costs.................... 1,282 6,105 5,665
Benefit (provision) for deferred income taxes........... 4,725 11,488 (15,353)
Allowance for doubtful accounts......................... 307 (5,317) 4,105
Retirement accruals..................................... 275 (76) (3,613)
Other................................................... 549 (938) (306)
-------- --------- --------
GAAP net income (loss) - domestic insurance subsidiaries.. 43,675 (154,040) 58,277
Other entities and eliminations........................... (23,922) 18,706 (34,147)
Extraordinary loss (4,734) -- --
-------- --------- --------
GAAP net income (loss)................................... $ 15,019 $(135,334) $ 24,130
======== ========= ========
</TABLE>
F-41
<PAGE>
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
SHAREHOLDERS' EQUITY
SAP capital and surplus:
Domestic insurance subsidiaries............................ $ 552,225 $ 540,617 $ 657,056
GAAP adjustments:
Deferred acquisition costs................................. 45,288 44,006 37,901
Deferred income taxes...................................... 52,571 101,642 67,331
Allowance for doubtful accounts............................ (19,700) (26,214) (20,897)
Retirement accruals........................................ (10,653) (14,571) (14,495)
Reversal of non-admitted assets............................ 21,330 25,599 32,841
Unrealized gain (loss) on fixed maturity investments
available for sale..................................... 19,380 (38,271) 24,186
Other...................................................... 3,254 (338) 958
--------- --------- ---------
GAAP shareholders' equity - domestic insurance subsidiaries. 663,695 632,470 784,881
Other entities and eliminations.............................. (185,348) (206,642) (175,213)
--------- --------- ---------
GAAP shareholders' equity.................................... $ 478,347 $ 425,828 $ 609,668
========= ========= =========
</TABLE>
19. SUBSEQUENT EVENTS
In February of 1998, the Company's Board of Directors authorized a plan to
repurchase, over the next two years, up to a maximum of 1,500,000 shares of
common stock and Class A common stock, in an amount not to exceed $25,000.
Repurchases may be made, from time to time, at the discretion of the Company in
the open market or directly from shareholders at prevailing market prices. The
1.5 million share limit equated to approximately 6.25% of the total common and
Class A common stock outstanding at December 31, 1997.
Effective February 5, 1998, the Company's Class A common stock began trading on
the Nasdaq National Market under the ticker symbol, "PMFRA". Previously, the
Company's Class A common stock traded on the OTC Bulletin Board under the same
ticker symbol.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
As noted in Note 19, the Company's Class A common stock began trading on the
Nasdaq National Market during 1998. As of December 31, 1997 and 1996, neither
class of common equity was traded on an established exchange. Transactions in
the common stock were conducted privately among persons qualified to own the
common stock. No price information was available for such transactions.
Throughout 1997 and 1996, Class A common stock traded under the symbol, "PMFRA",
on the OTC Bulletin Board through approximately ten broker/dealers who
voluntarily made a market in the Class A common stock. The stock price data
presented below for 1997 and 1996 for the Class A common stock are based upon
over-the-counter market bid quotations, which reflect interdealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions. As of February 28, 1998, the Company had 186 and 404 record
holders of common stock and Class A common stock, respectively.
Over the past two years, the Company's operating results have been impacted by
restructuring charges and other related items.
During 1997, the Company incurred restructuring and other charges of
approximately $775, $3,500, $2,660 and $5,165 for the first, second, third and
fourth quarters, respectively. The components of the charges for 1997, which
were included in operating expenses, were as follows: $7,000, for costs
associated with nonvoluntary terminations of approximately 60 employees in
various operational and management positions; $2,000, for converting internal
computer programs to address the Year 2000 problem, as further discussed in Note
11 to the Consolidated Financial Statements: $2,200, for operating costs
associated with certain corporate properties which were disposed of during 1997;
and $900, for costs to establish the new specialty insurance operation in 1997.
As of December 31, 1997, approximately $3.5 million of such charges remained in
Other Liabilities on the balance sheet.
During 1996, the Company incurred approximately $31,700 of restructuring and
other charges, excluding loss reserve strengthening, during the fourth quarter.
The components of the charges for 1996, which were included in operating
expenses, were as follows: $7,600, for costs associated with the VERIP which is
discussed further in Note 9 to the Consolidated Financial Statements; $2,000,
for converting internal computer programs to address the Year 2000 problem, as
further discussed in Note 11 to the Consolidated Financial Statements; $17,500,
for a valuation adjustment related to premium balances; and $4,800, associated
with a change in depreciable lives of computer equipment. Excluding the Year
2000 issue, these initiatives were completed in 1996 with no material difference
from original estimates. The Company recorded $10,000 and $181,400 of loss
reserve strengthening in the third and fourth quarters of 1996, respectively
(See Note 3).
F-42
<PAGE>
The following tables provide a summary of quarterly financial information:
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net premiums written $149,882 $ 98,389 $104,487 $ 65,524
======== ======== ======== ========
Net premiums earned $107,950 $114,451 $ 62,970 $ 90,580
Net investment income 35,847 32,612 34,353 33,886
Net realized investment (losses) gains (1,251) (680) 5,531 4,998
Service revenues 2,548 2,490 2,674 2,599
-------- -------- -------- --------
Total revenues 145,094 148,873 105,528 132,063
-------- -------- -------- --------
Losses and loss adjustment expenses 94,904 98,230 47,785 66,362
Operating expenses 35,281 48,093 38,858 46,408
Dividends to policyholders 3,257 3,360 3,566 4,533
Interest expense 4,334 3,888 3,803 3,743
-------- -------- -------- --------
Total losses and expenses 137,776 153,571 94,012 121,046
-------- -------- -------- --------
Income before income taxes and
extraordinary item 7,318 (4,698) 11,516 11,017
Provision (benefit) for income tax 2,561 (5,218) 4,172 3,885
-------- -------- -------- --------
Income before extraordinary item 4,757 520 7,344 7,132
Extraordinary item, net of tax (4,734) - -- --
-------- -------- -------- --------
Net income $ 23 $ 520 $ 7,344 $ 7,132
======== ======== ======== ========
- -------------------------------------------------------------------------------------------
PER SHARE DATA:
Basic:
Income before extraordinary
item $ 0.20 $ 0.02 $ 0.31 $ 0.30
Extraordinary item (0.20) -- -- --
-------- -------- -------- --------
Net income $ -- $ 0.02 $ 0.31 $ 0.30
======== ======== ======== ========
Diluted:
Income before extraordinary item $ 0.19 $ 0.02 $ 0.30 $ 0.29
Extraordinary item ( 0.19) -- -- --
-------- -------- -------- --------
Net income $ -- $ 0.02 $ 0.30 $ 0.29
======== ======== ======== ========
- -------------------------------------------------------------------------------------------
CLASS A COMMON STOCK PRICES:
High $ 16.125 $ 16.000 $ 16.750 $ 18.000
Low $ 15.625 $ 14.000 $ 15.000 $ 16.000
Close $ 16.000 $ 15.000 $ 16.750 $ 16.000
</TABLE>
F-43
<PAGE>
<TABLE>
<CAPTION>
1996
- -----------------------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net premiums written $147,444 $ 96,336 $116,745 $ 82,950
======== ======== ======== =========
Net premiums earned $117,937 $102,226 $106,034 $ 94,378
Net investment income 33,420 32,511 32,732 35,273
Net realized investment gains (losses) 943 (1,412) 5,972 (2,519)
Service revenues 1,748 2,264 2,642 2,535
-------- -------- -------- ---------
Total revenues 154,048 135,589 147,380 129,667
-------- -------- -------- ---------
Losses and loss adjustment expenses 99,943 85,512 97,013 254,155
Operating expenses 38,310 42,012 40,748 67,078
Dividends to policyholders 3,122 2,730 3,566 6,837
Interest expense 4,472 4,358 4,331 3,891
-------- -------- -------- ---------
Total losses and expenses 145,847 134,612 145,658 331,961
-------- -------- -------- ---------
Income before income taxes and
extraordinary item 8,201 977 1,722 (202,294)
Provision (benefit) for income tax 2,572 (139) (734) (57,759)
-------- -------- -------- ---------
Net income (loss) $ 5,629 $ 1,116 $ 2,456 $(144,535)
======== ======== ======== =========
- -----------------------------------------------------------------------------------------------
PER SHARE DATA:
Basic:
Net income (loss) $ 0.23 $ 0.05 $ 0.11 $ (6.07)
======== ======== ======== =========
Diluted:
Net income (loss) $ 0.22 $ 0.05 $ 0.10 $ (6.07)
======== ======== ======== =========
- -----------------------------------------------------------------------------------------------
CLASS A COMMON STOCK PRICES:
High $ 20.500 $ 18.500 $ 17.500 $ 17.500
Low $ 18.250 $ 16.500 $ 17.000 $ 15.625
Close $ 18.875 $ 17.000 $ 17.500 $ 15.750
</TABLE>
F-44
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of PMC since the date hereof or that the information contained herein is
correct as of any time subsequent to its date.
TABLE OF CONTENTS
-----------------
Page
Available Information........................................
Prospectus Summary...........................................
Risk Factors.................................................
The Company..................................................
The Issuer...................................................
Ratio of Earnings to Fixed Charges...........................
Capitalization...............................................
Use of Proceeds..............................................
Accounting Treatment.........................................
Selected Consolidated Financial and Operating Data...........
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................
Business.....................................................
Supervision and Regulation...................................
Management...................................................
Description of the Capital Securities........................
Description of the Guarantee.................................
Description of the Junior Subordinated Debentures............
Relationship Among the Capital Securities, the Junior
Subordinated Debentures and the Guarantee..................
United States Federal Income Taxation........................
Certain ERISA Considerations.................................
Validity of Securities.......................................
Underwriting.................................................
Experts......................................................
Incorporation of Certain Documents by Reference..............
Glossary of Certain Insurance and Other Defined Terms........
Index to Consolidated Financial Statements................... F-1
$ 100,000,000
PMC Capital I
___% Capital Securities,
Series A
Fully and unconditionally
guaranteed, as described herein, by
Pennsylvania Manufacturers
Corporation
--------------------
PROSPECTUS
--------------------
Goldman, Sachs & Co.
Merrill Lynch & Co.
First Union Capital Markets
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
- ------- -------------------------------------------
The following table sets forth an itemized statement of all estimated
expenses to be paid by Pennsylvania Manufacturers Corporation (the "Company") in
connection with the issuance and distribution of the Capital Securities being
registered other than underwriting discounts and commissions:
Securities and Exchange Commission registration fee......... $ 29,500
NASD filing fee............................................. 10,500
Trustees' fees and expenses................................. *
Legal fees and expenses..................................... *
Accountants fees and expenses............................... *
Printing and engraving expenses............................. *
Rating agencies' fees....................................... *
Blue sky fees and expenses.................................. *
Miscellaneous............................................... *
____________
Total............. $ 500,000
===========
* TO BE FILED BY AMENDMENT
Except for the Securities and Exchange Commission registration fee, all
fees and expenses are estimated and subject to future contingencies.
II-1
<PAGE>
Item 16. Exhibits.
- ------- --------
Exhibit No. Description of Exhibit
----------- --------------------------------------------------------
* 1.1 Form of Underwriting Agreement among the Issuer, the
Company and Goldman, Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and First Union Capital
Markets as representatives of the Underwriters
** 3.1 Amended and Restated Articles of Incorporation of the
Company
*** 3.2 Amended and Restated By-laws of the Company
*** 3.3 Certificate of Trust of the Issuer
*** 3.4 Trust Agreement
3.5 Form of Amended and Restated Trust Agreement (filed
herewith)
4.1 Form of Indenture between the Company and The Bank of
New York as Indenture Trustee
4.2 Form of Capital Security (included in Exhibit 3.5)
4.3 Form of Junior Subordinated Debenture (included in
Exhibit 3.5)
4.4 Form of Guarantee Agreement between the Company and
Bank of New York
* 5.1 Opinion of Duane, Morris & Heckscher LLP re legality of
securities offered hereby
* 5.2 Opinion of Duane, Morris & Heckscher LLP re certain
matters of Delaware and Pennsylvania Law
8.1 Form of Opinion of Duane, Morris & Heckscher LLP re
certain tax matters
** 10.1 Employment Agreement dated April 1, 1995 between the
Company and Frederick W. Anton III
II-2
<PAGE>
** 10.2 Employment Agreement dated May 1, 1995 between the
Company and John W. Smithson
** 10.3 The PMC EDC Plan Trust Agreement dated as of 1994
** 10.4 The PMC Supplemental Executive Retirement Plan (SERP)
dated July 1995
** 10.5 The Company's Amended and Restated 1987 Incentive Stock
Option Plan
** 10.6 The Company's Amended and Restated 1991 Equity Incentive
Plan
** 10.7 The Company's Amended and Restated 1993 Equity Incentive
Plan
** 10.8 The Company's Amended and Restated 1994 Equity Incentive
Plan
** 10.9 The Company's 1995 Equity Incentive Plan
** 10.10 The Company's 1996 Equity Incentive Plan
** 10.11 Federal Tax Allocation Agreement
** 10.12 Office lease between Nine Penn Center Associates, L.P.,
as Landlord, and Lorjo Corp., as Tenant, covering
premises located at Mellon Bank Center, 1735 Market
Street, Philadelphia, Pennsylvania, dated May 26, 1994
** 10.13 Credit Agreement dated as of March 14, 1997 by and among
the Company, The Bank of New York, First Union National
Bank of North Carolina, Fleet National Bank, PNC Bank,
National Association, Mellon Bank, N.A., CoreStates
Bank, N.A. and Dresdener Bank AG, New York Branch and
Grand Cayman Branch
** 10.14 Master Agreement dated as of February 7, 1997 between
the Company and First Union National Bank of North
Carolina
** 10.15 First Amended and Restated Letter of Credit Agreement by
and among the Company, the Bank of New York, Mellon
Bank, N.A., Fleet Bank, National Association, PNC Bank,
National Association and First Union Bank of North
Carolina
**** 10.16 Amendment No. 1 to Tax Allocation Agreement dated
January 7, 1998
II-3
<PAGE>
**** 10.17 Caliber One Indemnity Company Purchase Agreement dated
December 15, 1997
**** 11.1 Statement regarding computation of per share earnings
12.1 Statement regarding computation of earnings to fixed
charges
**** 21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith)
* 23.2 Consent of Duane, Morris & Heckscher LLP (included in
Exhibits 5.1, 5.2 and 8.1)
*** 24.1 Powers of Attorney (included as part of signature pages
to initial filing of this Registration Statement on
September 16, 1998)
25.1 Statement of Eligibility of The Bank of New York as to
the Guarantee (Form T-1)
25.2 Statement of Eligibility of The Bank of New York as to
the Capital Securities (Form T-1)
25.3 Statement of Eligibility of The Bank of New York as to
the Junior Subordinated Debentures (Form T-1)
**** 27 Financial Data Schedule
______________
* to be filed by Amendment.
** incorporated by reference to like-numbered exhibit in the Company's
Form 10 Registration Statement as filed with the Commission on June 26,
1997.
*** previously filed as part of this registration statement on
September 16, 1998.
**** incorporated by reference to like-numbered exhibit in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and
the Company's Report on Form 10-Q for the quarter ended June 30, 1998.
The following financial statement schedules are included:
<TABLE>
<CAPTION>
<S> <C>
Consolidated Financial Statement Schedules:
Report of Independent Accountants S-1
Schedule I- Summary of Investments Other Than Investments in Related Parties S-2
Schedule II- Condensed Financial Information of Registrant as of December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996, and 1995 S-3
Schedule III- Supplementary Insurance Information for the years ended December
31, 1997, 1996, and 1995 S-6
Schedule IV- Reinsurance for the years ended December 31, 1997, 1996, and 1995 S-7
Schedule V- Valuation and Qualifying Accounts for the years ended December
31, 1997, 1996, and 1995 S-8
Schedule VI- Supplementary Information Concerning Property & Casualty
Insurance Operations for the years ended December 31, 1997, 1996, and 1995 S-9
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Pennsylvania
Manufacturers Corporation and subsidiaries has been included in this
Registration Statement on page F-9. In connection with our audit of such
financial statements, we have also audited the financial statement schedules
listed in the index in Item 16 of this Registration Statement.
In our opinion, these financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as whole, present
fairly, in all material respects, the information required to be included
therein.
/s/ PricewaterhouseCoopers LLP
One South Market Square
Harrisburg, Pennsylvania
February 6, 1998
S-1
<PAGE>
Pennsylvania Manufacturers Corporation
Schedule I
Summary of Investments-Other Than Investments in Related Parties
December 31, 1997
<TABLE>
<CAPTION>
Amount at
which shown in
Type of investment Cost Value the balance sheet
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollar amounts in thousands)
Fixed maturities:
Bonds:
U.S. Treasury Securities and obligations of U.S.
Government agencies $ 1,105,689 $ 1,119,566 $ 1,119,566
Corporate debt securities 675,218 687,671 687,671
Mortgage-backed securities 119,687 122,281 122,281
----------- ----------- -----------
Total fixed maturities 1,900,594 1,929,518 1,929,518
----------- ----------- -----------
Equity securities:
Common Stocks:
Industrial, miscellaneous and all other 5 13 13
----------- ----------- -----------
Total equity securities 5 13 13
----------- ----------- -----------
Short-term investments 265,207 265,207 265,207
----------- ----------- -----------
Total investments $ 2,165,806 $ 2,194,738 $ 2,194,738
=========== =========== ===========
</TABLE>
S-2
<PAGE>
Pennsylvania Manufacturers Corporation
Schedule II
Balance Sheets
(Parent Company Only)
<TABLE>
<CAPTION>
as of December 31 (in thousands, except share data) 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 253 $ -
Investments in subsidiaries 632,680 584,608
Deferred tax asset, net 29,163 36,602
Related party receivables 7,074 727
Other assets 22,545 21,096
----------------------
Total assets $ 691,715 $ 643,033
======================
LIABILITIES
Long term debt $ 203,000 $ 204,571
Related party payables - 1,605
Dividends payable to shareholders 2,008 1,983
Other liabilities 8,360 9,046
----------------------
Total liabilities 213,368 217,205
----------------------
SHAREHOLDERS' EQUITY
Common stock, $5 par value (40,000,000 shares authorized;
15,286,263 shares issued and 14,850,789 outstanding - 1997
16,095,416 shares issued and 15,670,052 outstanding - 1996) 76,431 80,477
Class A common stock, $5 par value (40,000,000 shares authorized;
9,156,682 shares issued and 9,117,735 outstanding - 1997
8,247,804 shares issued and 8,173,023 outstanding - 1996) 45,783 41,239
Additional paid-in capital - Class A common stock 339 -
Retained earnings 343,368 336,921
Unrealized gain (loss) on investments of subsidiaries (net of
deferred income taxes: 1997 - $(10,126); 1996 - $13,394) 18,806 (24,874)
Notes receivable from officers (198) (1,162)
Treasury stock, at cost:
Common stock (1997 - 435,474 shares; 1996 - 425,364 shares (5,572) (5,408)
Class A common stock (1997 - 38,947 shares; 1996 - 74,781
shares) (610) (1,365)
----------------------
Total shareholders' equity 478,347 425,828
----------------------
Total liabilities and shareholders' equity $ 691,715 $ 643,033
======================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto.
S-3
<PAGE>
Pennsylvania Manufacturers Corporation
Schedule II
Statements of Operations
(Parent Company Only)
<TABLE>
<CAPTION>
for the years ended December 31, (in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net investment income $ 263 $ 354 $ 217
Net realized investment gains - 35 4
Management fees 8,977 5,974 350
Other related party income - 263 1,642
-----------------------------------
Total revenues 9,240 6,626 2,213
-----------------------------------
Expenses:
General expenses 9,375 7,082 6,982
Interest expense 15,764 17,039 18,712
-----------------------------------
Total expenses 25,139 24,121 25,694
-----------------------------------
Loss before income taxes and equity in earnings (losses) of subsidiaries (15,899) (17,495) (23,481)
Benefit for income taxes (14,271) (60,345) (13,210)
-----------------------------------
(Loss) income before equity in earnings (losses) of subsidiaries and
extraordinary item (1,628) 42,850 (10,271)
Equity in earnings (losses) of subsidiaries 21,381 (178,184) 34,401
-----------------------------------
Income (loss) before extraordinary item 19,753 (135,334) 24,130
Extraordinary loss from early extinguishment of debt
(net of income tax benefit of $2,549) (4,734) - -
-----------------------------------
Net income (loss) $ 15,019 $ (135,334) $ 24,130
===================================
</TABLE>
These financial statements should be read in conjunction with the
Consolidated Financial Statements and the notes thereto.
S-4
<PAGE>
Pennsylvania Manufacturers Corporation
Schedule II
Statements of Cash Flows
(Parent Company Only)
<TABLE>
<CAPTION>
for the years ended December 31, (in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 15,019 $(135,334) $ 24,130
Adjustments to reconcile net income to net cash flows provided
by operating activities:
Equity in (earnings) losses of subsidiaries (21,381) 178,184 (34,401)
Net realized investment gains - (35) (4)
Provision (benefit) for deferred income taxes 9,614 (19,822) 7,000
Extraordinary loss from early extingusihment of debt (4,734) - -
Dividends received from subsidiaries 22,500 53,634 103,213
Other, net 5,331 (33,283) (20,384)
-----------------------------------
Net cash flows provided by operating activities 26,349 43,344 79,554
-----------------------------------
Cash Flows From Investing Activities:
Cash contributions to subsidiaries (11,000) (50,000) (61,000)
Sales of fixed maturity investments, net - 45 2,122
Sales (purchases) of equity investments, net - 70 (16)
-----------------------------------
Net cash flows used by investing activities (11,000) (49,885) (58,894)
-----------------------------------
Cash Flows From Financing Activities:
Change in related party receivables and payables (7,952) 10,863 (12,939)
Proceeds from issuance of long-term debt 210,000 26,000 125,000
Repayments of long-term debt (211,571) (25,000) (125,000)
Dividends paid to shareholders (7,965) (7,926) (7,885)
Proceeds from exercised stock options and issuance of Class A
common stock 837 - -
Treasury stock transactions, net 591 (929) 480
Repayments of notes receivable from officers 964 2,734 478
-----------------------------------
Net cash flows (used) provided by financing activities (15,096) 5,742 (19,866)
-----------------------------------
Net increase (decrease) in cash 253 (799) 794
Cash January 1 - 799 5
-----------------------------------
Cash December 31 $ 253 $ - $ 799
===================================
</TABLE>
These financial statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto.
S-5
<PAGE>
Pennsylvania Manufacturers Corporation
Schedule III
Supplementary Insurance Information
<TABLE>
<CAPTION>
Future policy
benefits, losses, Net
Deferred policy claims, and loss Unearned Premium investment
(in thousands) acquisition costs expenses premiums revenue income(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
The Property and Casualty Group $20,010 $1,353,917 $115,998 $212,348 $ 82,098
PMA Re 25,278 622,484 95,457 163,603 52,270
Corporate and Other - 26,786 - - 2,330
- -----------------------------------------------------------------------------------------------------------------------------------
Total $45,288 $2,003,187 $211,455 $375,951 $136,698
===================================================================================================================================
Year ended December 31, 1996:
The Property and Casualty Group $23,488 $1,501,897 $127,986 $268,601 $ 82,455
PMA Re 20,518 589,175 77,996 151,974 48,676
Corporate and Other - - - - 2,805
- -----------------------------------------------------------------------------------------------------------------------------------
Total $44,006 $2,091,072 $205,982 $420,575 $133,936
===================================================================================================================================
Year ended December 31, 1995:
The Property and Casualty Group $20,747 $1,518,163 $124,988 $345,607 $ 92,275
PMA Re 17,154 551,823 67,734 139,345 45,166
Corporate and Other - - - - 1,914
- -----------------------------------------------------------------------------------------------------------------------------------
Total $37,901 $2,069,986 $192,722 $484,952 $139,355
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Benefits, claims, Amortization of Other
losses and settlement deferred policy operating Net premiums
(in thousands) expenses acquisition costs expenses(2) written
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
The Property and Casualty Group $ 193,530 $48,343 $57,206 $240,348
PMA Re 113,931 45,158 11,982 177,934
Corporate and Other (180) - 5,951 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 307,281 $93,501 $75,139 $418,282
==================================================================================================================================
Year ended December 31, 1996:
The Property and Casualty Group $ 424,900 $52,706 $86,003 $279,422
PMA Re 111,937 37,586 8,344 164,053
Corporate and Other (214) - 3,509 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 536,623 $90,292 $97,856 $443,475
===================================================================================================================================
Year ended December 31, 1995:
The Property and Casualty Group $ 319,644 $53,420 $57,486 $337,116
PMA Re 103,947 33,787 7,334 152,760
Corporate and Other (1,013) - 16,341 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 422,578 $87,207 $81,161 $489,876
==================================================================================================================================
</TABLE>
(1) Net investment income is based on each segment's invested assets.
(2) Other operating expenses are allocated primarily on the specific
identification basis. When indirect expenses cannot be directly related to
a segment, these expenses are allocated depending on the nature of the
expense.
S-6
<PAGE>
Pennsylvania Manufacturers Corporation
Schedule IV
Reinsurance
<TABLE>
<CAPTION>
Ceded to Percentage of
Direct other Assumed from amount assumed to
(dollar amounts in thousands) Amount companies other companies Net amount net
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Premiums:
Property and liability insurance $ 277,871 $ 118,277 $ 216,357 $ 375,951 58%
========= ========= ========= ========= =========
Year Ended December 31, 1996:
Premiums:
Property and liability insurance $ 299,386 $ 88,499 $ 209,688 $ 420,575 50%
========= ========= ========= ========= =========
Year Ended December 31, 1995:
Premiums:
Property and liability insurance $ 370,590 $ 35,476 $ 149,838 $ 484,952 31%
========= ========= ========= ========= =========
</TABLE>
S-7
<PAGE>
<TABLE>
<CAPTION>
Pennsylvania Manufacturers Corporation
Schedule V
Valuation and Qualifying Accounts
Description Balance at beginning of Charged to cost and Deductions - write-offs
period expenses uncollectible accounts
<S> <C> <C> <C>
Year ended December 31, 1997:
Allowance for uncollectible accounts:
Uncollected premiums $18,877 - 471
Year ended December 31, 1996:
Allowance for uncollectible accounts:
Uncollected premiums $16,330 19,532 16,985
Year ended December 31, 1995:
Allowance for uncollectible accounts:
Uncollected premiums $22,402 - 6,072
</TABLE>
<TABLE>
<CAPTION>
Description Balance at end of period
<S> <C>
Year ended December 31, 1997:
Allowance for uncollectible accounts:
Uncollected premiums $18,406
Year ended December 31, 1996:
Allowance for uncollectible accounts:
Uncollected premiums $18,877
Year ended December 31, 1995:
Allowance for uncollectible accounts:
Uncollected premiums $16,330
</TABLE>
S-8
<PAGE>
Pennsylvania Manufacturers Corporation
Schedule VI
Supplemental Information Concerning Property and Casualty Insurance Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Discount on
Reserves for
Reserves for Unpaid Unpaid Claims and
Deferred policy Claims and Claim Claim Adjustment
Affiliation with Registrant acquisition costs Adjustment Expenses Expenses(1) Unearned Premiums Earned Premiums
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated property-casualty
subsidiaries:
Year Ended December 31, 1997 $45,288 $2,003,187 $ 460,230 $ 211,455 $375,951
Year Ended December 31, 1996 $44,006 $2,091,072 $ 514,248 $ 205,982 $420,575
Year Ended December 31, 1995 $37,901 $2,069,986 $ 587,025 $ 192,722 $484,952
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Claims and claim adjustment
expenses incurred related to
---------------------------- Amortization of
Net Investment Prior deferred policy Paid claims and Net Premiums
Affiliation with Registrant Income Current Year Years(2) acquisition costs adjustment expenses Written
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated property-casualty
subsidiaries:
Year Ended December 31, 1997 $134,368 $ 341,880 $(86,006) $93,501 $470,874 $ 418,282
Year Ended December 31, 1996 $131,133 $ 323,069 $156,074 $90,292 $510,621 $ 443,475
Year Ended December 31, 1995 $137,441 $ 357,787 $ 51,491 $87,207 $469,942 $ 489,876
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) - Workers' compensation reserves discounted at approximately 5%.
(2) - Excludes accretion of loss reserve discount of $51,407, $57,480 and
$13,300 in 1997, 1996 and 1995, respectively.
S-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Pennsylvania
Manufacturers Corporation certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and that it has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Philadelphia,
Pennsylvania on November 4, 1998.
PENNSYLVANIA MANUFACTURERS
CORPORATION
By:/s/ John W. Smithson
--------------------------------------
John W. Smithson, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- -------------------------- ---------------------------- ------------------
* Chairman of the Board and November 4, 1998
- --------------------------- a Director
Frederick W. Anton, III
* President, Chief Executive November 4, 1998
- --------------------------- Officer and a Director
John W. Smithson (principal executive officer)
/s/ Francis W. McDonnell Senior Vice President, Chief November 4, 1998
- --------------------------- Financial Officer and
Francis W. McDonnell Treasurer (principal financial
and accounting officer)
II-5
<PAGE>
* Director November 4, 1998
- --------------------------
Paul I. Detwiler, Jr.
* Director November 4, 1998
- --------------------------
Joseph H. Foster
* Director November 4, 1998
- --------------------------
Anne S. Genter
* Director November 4, 1998
- --------------------------
James F. Malone, III
* Director November 4, 1998
- --------------------------
A. John May
* Director November 4, 1998
- --------------------------
Louis N. McCarter, III
* Director November 4, 1998
- --------------------------
John W. Miller, Jr.
* Director November 4, 1998
- --------------------------
Edward H. Owlett
* Director November 4, 1998
- --------------------------
Louis I. Pollock
* Director November 4, 1998
- --------------------------
Roderic H. Ross
* Director November 4, 1998
- --------------------------
L.J. Rowell, Jr.
*By: Francis W. McDonnell
---------------------
Attorney-in-Fact
II-6
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, PMC Capital I
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and that it has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Philadelphia, Pennsylvania on November 4, 1998.
PMC CAPITAL I
By Pennsylvania Manufacturers Corporation,
as Depositor
By: /s/ Francis W. McDonnell
---------------------------------------
Francis W. McDonnell,
Senior Vice President,
Chief Financial Officer and Treasurer
II-7
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit
----------- --------------------------------------------------------
* 1.1 Form of Underwriting Agreement among the Issuer, the
Company and Goldman, Sachs & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and First Union Capital
Markets as representatives of the Underwriters
** 3.1 Amended and Restated Articles of Incorporation of the
Company
*** 3.2 Amended and Restated By-laws of the Company
*** 3.3 Certificate of Trust of the Issuer (filed herewith)
*** 3.4 Trust Agreement (filed herewith)
3.5 Form of Amended and Restated Trust Agreement
4.1 Form of Indenture between the Company and Bank of New
York as Indenture Trustee
4.2 Form of Capital Security (included in Exhibit 3.5)
4.3 Form of Junior Subordinated Debenture (included in
Exhibit 3.5)
4.4 Form of Guarantee Agreement between the Company and
Bank of New York
* 5.1 Opinion of Duane, Morris & Heckscher LLP re legality of
securities offered hereby
* 5.2 Opinion of Duane, Morris & Heckscher LLP re certain
matters of Delaware and Pennsylvania Law
8.1 Form of Opinion of Duane, Morris & Heckscher LLP re
certain tax matters
** 10.1 Employment Agreement dated April 1, 1995 between the
Company and Frederick W. Anton III
** 10.2 Employment Agreement dated May 1, 1995 between the
Company and John W. Smithson
** 10.3 The PMC EDC Plan Trust Agreement dated as of 1994
** 10.4 The PMC Supplemental Executive Retirement Plan (SERP)
dated July 1995
** 10.5 The Company's Amended and Restated 1987 Incentive Stock
Option Plan
** 10.6 The Company's Amended and Restated 1991 Equity Incentive
Plan
** 10.7 The Company's Amended and Restated 1993 Equity Incentive
Plan
** 10.8 The Company's Amended and Restated 1994 Equity Incentive
Plan
** 10.9 The Company's 1995 Equity Incentive Plan
** 10.10 The Company's 1996 Equity Incentive Plan
** 10.11 Federal Tax Allocation Agreement
** 10.12 Office lease between Nine Penn Center Associates, L.P.,
as Landlord, and Lorjo Corp., as Tenant, covering
premises located at Mellon Bank Center, 1735 Market
Street, Philadelphia, Pennsylvania, dated May 26, 1994
** 10.13 Credit Agreement dated as of March 14, 1997 by and among
the Company, The Bank of New York, First Union National
Bank of North Carolina, Fleet National Bank, PNC Bank,
National Association, Mellon Bank, N.A., CoreStates
Bank, N.A. and Dresdener Bank AG, New York Branch and
Grand Cayman Branch
** 10.14 Master Agreement dated as of February 7, 1997 between
the Company and First Union National Bank of North
Carolina
** 10.15 First Amended and Restated Letter of Credit Agreement by
and among the Company, the Bank of New York, Mellon
Bank, N.A., Fleet Bank, National Association, PNC Bank,
National Association and First Union Bank of North
Carolina
**** 10.16 Amendment No. 1 to Tax Allocation Agreement dated
January 7, 1998
**** 10.17 Caliber One Indemnity Company Purchase Agreement dated
December 15, 1997
**** 11.1 Statement regarding computation of per share earnings
12.1 Statement regarding computation of earnings to fixed
charges (filed herewith)
**** 21.1 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith)
* 23.2 Consent of Duane, Morris & Heckscher LLP (included in
Exhibits 5.1, 5.2 and 8.1)
*** 24.1 Powers of Attorney (included as part of signature pages
hereto)
25.1 Statement of Eligibility of Bank of New York as to the
Guarantee (Form T-1) (Filed herewith)
25.2 Statement of Eligibility of Bank of New York as to the
Capital Securities (Form T-1) (Filed herewith)
25.3 Statement of Eligibility of Bank of New York as to the
Junior Subordinated Debentures (Form T-1) (Filed
herewith)
*** 27 Financial Data Schedule
______________
* to be filed by Amendment.
** incorporated by reference to like-numbered exhibit in the Company's
Form 10 Registration Statement as filed with the Commission on June 26,
1997.
*** previously filed as part of this registration statement on
September 16, 1998.
**** incorporated by reference to like-numbered exhibit in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and
the Company's Report on Form 10-Q for the quarter ended June 30, 1998.
<PAGE>
Exhibit 3.5
================================================================================
AMENDED AND RESTATED
TRUST AGREEMENT
among
PENNSYLVANIA MANUFACTURERS CORPORATION,
as Depositor,
THE BANK OF NEW YORK (DELAWARE),
as Trustee,
THE BANK OF NEW YORK,
as Property Trustee,
and
THE ADMINISTRATIVE TRUSTEES NAMED HEREIN
Dated as of ______________________________, 1998
PMC CAPITAL I
================================================================================
<PAGE>
PMC Capital I
Certain Sections of this Trust Agreement relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:
Trust Indenture Trust Agreement
Act Section Section
- --------------------- ------------------
(S) 310(a)(1).................................... 8.07
(a)(2)................................. 8.07
(a)(3)................................. 8.09
(a)(4)................................. Not Applicable
(b).................................... 8.08
(S) 311(a)....................................... 8.13
(b).................................... 8.13
(S) 312(a)....................................... 5.07
(b).................................... 5.07
(c).................................... 5.07
(S) 313(a)....................................... 8.14(a)
(a)(4)................................. 8.14(b)
(b).................................... 8.14(b)
(c).................................... 8.14(a)
(d).................................... 8.14(a), 8.14(b)
(S) 314(a)....................................... 8.15
(b).................................... Not Applicable
(c)(1)................................. 8.16
(c)(2)................................. 8.16
(c)(3)................................. 8.16
(d).................................... Not Applicable
(e).................................... 1.01
(S) 315(a)....................................... 8.01
(b).................................... 8.02, 8.14(b)
(c).................................... 8.01(a)
(d).................................... 8.01, 8.03
(e).................................... Not Applicable
(S) 316(a)....................................... Not Applicable
(a)(1)(A).............................. Not Applicable
(a)(1)(B).............................. Not Applicable
(a)(2)................................. Not Applicable
(b).................................... Not Applicable
(c).................................... Not Applicable
<PAGE>
(S) 317(a)(1).................................... Not Applicable
(a)(2)................................. Not Applicable
(b).................................... 5.09
(S) 318(a)....................................... 10.10
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
Defined Terms
<S> <C> <C>
Section 1.01. Definitions................................................................. 1
ARTICLE II
Establishment of the Trust
Section 2.01. Name........................................................................ 9
Section 2.02. Office of the Trustee; Office of the Property Trustee; Principal Place of
Business.................................................................... 9
Section 2.03. Initial Contribution of Trust Property; Organizational Expenses............. 9
Section 2.04. Issuance of the Capital Securities.......................................... 9
Section 2.05. Purchase of Debentures; Issuance of the Common Securities................... 10
Section 2.06. Declaration of Trust........................................................ 10
Section 2.07. Authorization to Enter into Certain Transactions............................ 10
Section 2.08. Assets of Trust............................................................. 14
Section 2.09. Title to Trust Property..................................................... 14
ARTICLE III
Payment Account
Section 3.01. Payment Account............................................................. 14
ARTICLE IV
Distributions; Redemption
Section 4.01. Distributions............................................................... 14
Section 4.02. Redemption.................................................................. 15
Section 4.03. Subordination of Common Securities.......................................... 17
Section 4.04. Payment Procedures.......................................................... 18
Section 4.05. Withholding Tax............................................................. 18
Section 4.06. Tax Returns and Reports..................................................... 19
Section 4.07. Payment of Taxes, Duties, Etc. of the Trust................................. 20
Section 4.08. Payments under Indenture.................................................... 20
ARTICLE V
Trust Securities Certificates
Section 5.01. Initial Ownership........................................................... 19
Section 5.02. The Trust Securities Certificates........................................... 19
Section 5.03. Delivery of Trust Securities Certificates................................... 20
Section 5.04. Registration of Transfer and Exchange of Capital Securities Certificates.... 20
Section 5.05. Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates.......... 21
Section 5.06. Persons Deemed Securityholders.............................................. 21
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Section 5.07. Access to List of Securityholders' Names and Addresses...................... 21
Section 5.08. Maintenance of Office or Agency............................................. 21
Section 5.09. Appointment of Paying Agent................................................. 22
Section 5.10. Ownership of Common Securities by Depositor................................. 22
Section 5.11. Book-Entry Capital Securities Certificates; Common Securities
Certificate................................................................. 22
Section 5.12. Notices to Clearing Agency.................................................. 23
Section 5.13. Definitive Capital Securities Certificates.................................. 24
Section 5.14. Rights of Securityholders................................................... 25
ARTICLE VI
Acts of Securityholders; Meetings; Voting
Section 6.01. Limitations on Voting Rights................................................ 27
Section 6.02. Notice of Meetings.......................................................... 28
Section 6.03. Meetings of Capital Securityholders......................................... 28
Section 6.04. Voting Rights............................................................... 28
Section 6.05. Proxies, etc................................................................ 28
Section 6.06. Securityholder Action by Written Consent.................................... 29
Section 6.07. Record Date for Voting and Other Purposes................................... 29
Section 6.08. Acts of Securityholders..................................................... 29
Section 6.09. Inspection of Records....................................................... 30
ARTICLE VII
Representations and Warranties
Section 7.01. Representations and Warranties of the Bank and the Property
Trustee..................................................................... 30
Section 7.02. Representations and Warranties of Parent.................................... 31
ARTICLE VIII
The Trustees
Section 8.01. Certain Duties and Responsibilities......................................... 32
Section 8.02. Certain Notices............................................................. 34
Section 8.03. Certain Rights of Property Trustee.......................................... 34
Section 8.04. Not Responsible for Recitals or Issuance of Securities...................... 36
Section 8.05. May Hold Securities......................................................... 36
Section 8.06. Compensation; Indemnity; Fees............................................... 36
Section 8.07. Corporate Property Trustee Required; Eligibility of Trustees................ 37
Section 8.08. Conflicting Interests....................................................... 37
Section 8.09. Co-Trustees and Separate Trustee............................................ 37
Section 8.10. Resignation and Removal; Appointment of Successor........................... 39
Section 8.11. Acceptance of Appointment by Successor...................................... 40
Section 8.12. Merger, Conversion, Consolidation or Succession to Business
of a Trustee................................................................ 41
Section 8.13. Preferential Collection of Claims Against Depositor or Trust................ 41
Section 8.14. Reports by Property Trustee................................................. 42
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
Section 8.15. Reports to the Property Trustee............................................. 43
Section 8.16. Evidence of Compliance with Conditions Precedent............................ 43
Section 8.17. Number of Trustees.......................................................... 43
Section 8.18. Delegation of Power......................................................... 43
ARTICLE IX
Termination and Liquidation
Section 9.01. Termination Upon Expiration Date............................................ 44
Section 9.02. Early Termination........................................................... 44
Section 9.03. Termination................................................................. 44
Section 9.04. Liquidation................................................................. 44
Section 9.05. Merger, Consolidation, Amalgamation or Replacement of the Trust............. 46
ARTICLE X
Miscellaneous Provisions
Section 10.01. Expense Agreement.......................................................... 47
Section 10.02. Limitation of Rights of Securityholders.................................... 47
Section 10.03. Amendment.................................................................. 47
Section 10.04. Separability............................................................... 49
Section 10.05. Governing Law.............................................................. 49
Section 10.06. Payments Due on Non-Business Day........................................... 49
Section 10.07. Successors................................................................. 49
Section 10.08. Headings................................................................... 49
Section 10.09. Reports, Notices and Demands............................................... 49
Section 10.10. Agreement Not to Petition.................................................. 50
Section 10.11. Trust Indenture Act; Conflict with Trust Indenture Act..................... 50
Section 10.12. Rights Under Indenture..................................................... 50
Section 10.13. Effectiveness.............................................................. 51
Section 10.14. Intention of the Parties................................................... 51
EXHIBITS
--------
Exhibit A Certificate of Trust
Exhibit B Form of Certificate Depository Agreement
Exhibit C Form of Common Securities Certificate
Exhibit D Form of Capital Securities Certificate
</TABLE>
-iii-
<PAGE>
AMENDED AND RESTATED TRUST AGREEMENT, dated as of ______________, 1998,
among (i) Pennsylvania Manufacturers Corporation, a Pennsylvania corporation
(the "Depositor" or "Parent"), (ii) The Bank of New York (Delaware), a banking
corporation duly organized and existing under the laws of the State of Delaware,
as Delaware trustee (the "Trustee"), (iii) The Bank of New York, a banking
corporation duly organized and existing under the laws of the State of New York,
as Property Trustee (the "Property Trustee" and, in its separate corporate
capacity and not in its capacity as Property Trustee, the "Bank"), (iv) John W.
Smithson, an individual, Francis W. McDonnell, an individual, and Edward S.
Hochberg, an individual, each of whose address is Pennsylvania Manufacturers
Corporation, 1735 Market Street, Philadelphia, Pennsylvania 19103-7590 (each an
"Administrative Trustee" and collectively the "Administrative Trustees") (the
Trustee, the Property Trustee and the Administrative Trustees being referred to
collectively as the "Trustees") and (v) of the several Holders, as hereinafter
defined.
WITNESSETH:
----------
WHEREAS, the Depositor and the Trustee have heretofore duly declared and
established a business trust pursuant to the Delaware Business Trust Act by the
entering into of that certain Trust Agreement, dated as of September 15, 1998
(the "Original Trust Agreement"), and by the execution and filing by the Trustee
with the Secretary of State of the State of Delaware of the Certificate of
Trust, filed on September 15, 1998, attached as Exhibit A; and
WHEREAS, the Depositor, the Trustee and the Property Trustee desire to amend
and restate the Original Trust Agreement in its entirety as set forth herein to
provide for, among other things, (a) the acquisition by the Trust from the
Depositor of all of the right, title and interest in the Debentures, (b) the
issuance of the Common Securities by the Trust to the Depositor, (c) the
issuance and sale of the Capital Securities by the Trust pursuant to the
Underwriting Agreement and (d) the appointment of the Administrative Trustees;
NOW THEREFORE, in consideration of the agreements and obligations set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, each party, for the benefit of the
other parties and for the benefit of the Securityholders, hereby amends and
restates the Original Trust Agreement in its entirety and agrees as follows:
ARTICLE I
Defined Terms
Section 1.01. Definitions. For all purposes of this Trust Agreement,
-----------
except as otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to them in
this Article and include the plural as well as the singular;
(b) all other terms used herein that are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
-1-
<PAGE>
(c) unless the context otherwise requires, any reference to an "Article" or
a "Section" refers to an Article or a Section, as the case may be, of this Trust
Agreement; and
(d) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Trust Agreement as a whole and not to any particular
Article, Section or other subdivision.
"Act" has the meaning specified in Section 6.08.
---
"Additional Amount" means, with respect to Trust Securities of a given
-----------------
Liquidation Amount and/or a given period, the amount of Additional Interest (as
defined in the Indenture) paid by the Depositor on a Like Amount of Debentures
for such period.
"Additional Sums" has the meaning specified in Section 1005 of the
---------------
Indenture.
"Administrative Trustee" means each of the individuals identified as an
----------------------
"Administrative Trustee" in the preamble to this Trust Agreement, solely in his
capacity as Administrative Trustee of the Trust formed and continued hereunder
and not in his individual capacity, or such Administrative Trustee's successor
in interest in such capacity, or any successor Administrative Trustee appointed
as herein provided.
"Affiliate" of any specified Person means any other Person directly or
---------
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Applicable Procedures" means, with respect to any transfer or transaction
----------------------
involving a Book-Entry Capital Security, the rules and procedures of the
Clearing Agency for such Book-Entry Capital Security, in each case to the extent
applicable to such transaction and as in effect from time to time.
"Bank" has the meaning specified in the preamble to this Trust Agreement.
----
"Bankruptcy Event" means, with respect to any Person:
----------------
(a) the entry of a decree or order by a court having jurisdiction in the
premises judging such Person a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjudication or
composition of or in respect of such Person under any applicable Federal or
State bankruptcy, insolvency, reorganization or other similar law, or appointing
a receiver, liquidator, assignee, trustee, sequestrator or other similar
official of such Person or of any substantial part of its property, or ordering
the winding up or liquidation of its affairs, and the continuance of any such
decree or order unstayed and in effect for a period of 60 consecutive days; or
(b) the institution by such Person of proceedings to be adjudicated a
bankrupt or insolvent, or of the consent by it to the institution of bankruptcy
or insolvency proceedings
-2-
<PAGE>
against it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law, or the consent by it to the
filing of such petition or to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator or similar official of such Person or of any
substantial part of its property or the admission by it in writing of its
inability to pay its debts generally as they become due and its willingness to
be adjudicated as a bankrupt, or the making by it of an assignment for the
benefit of creditors, or the taking of action by such Person in furtherance of
any such action.
"Bankruptcy Laws" has the meaning specified in Section 10.10.
---------------
"Board Resolution" means a copy of a resolution certified by the Secretary
----------------
or an Assistant Secretary of the Depositor to have been duly adopted by the
Depositor's Board of Directors or a duly authorized committee thereof or
officers of the Depositor to which authority to act on behalf of the Board of
Directors has been delegated and to be in full force and effect on the date of
such certification, and delivered to the Property Trustee.
"Book-Entry Capital Securities Certificate" means a Capital Securities
-----------------------------------------
Certificate evidencing ownership of Book-Entry Capital Securities.
"Book-Entry Capital Security" means a Capital Security, the ownership and
---------------------------
transfers of which shall be made through book entries by a Clearing Agency as
described in Section 5.11.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a day on
------------
which banking institutions in The City of New York are authorized or obligated
by law or executive order to remain closed or (c) a day on which the Property
Trustee's Corporate Trust Office or the Debenture Trustee's Corporate Trust
Office is closed for business.
"Capital Securities Certificate" means a certificate evidencing ownership of
------------------------------
Capital Securities, substantially in the form attached as Exhibit D.
"Capital Security" means an undivided beneficial interest in the assets of
----------------
the Trust, having a Liquidation Amount of $1,000 and having rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.
"Certificate Depository Agreement" means the agreement among the Trust, the
--------------------------------
Depositor and The Depository Trust Company, as the initial Clearing Agency,
dated as of the Closing Date, relating to the Capital Securities Certificates,
substantially in the form attached as Exhibit B, as the same may be amended and
supplemented from time to time.
"Clearing Agency" means an organization registered as a "clearing agency"
---------------
pursuant to Section 17A of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Depository Trust Company will be the initial Clearing
Agency.
"Clearing Agency Participant" means a broker, dealer, bank, other financial
---------------------------
institution or other Person for whom from time to time a Clearing Agency effects
book-entry transfers and pledges of securities deposited with the Clearing
Agency.
-3-
<PAGE>
"Closing Date" means the First Time of Delivery as defined in the
------------
Underwriting Agreement, which date is also the date of execution and delivery of
this Trust Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Commission" means the Securities and Exchange Commission, as from time to
----------
time constituted, created under the Exchange Act or, if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Securities Certificate" means a certificate evidencing ownership of
-----------------------------
Common Securities, substantially in the form attached as Exhibit C.
"Common Security" means an undivided beneficial interest in the assets of
---------------
the Trust, having a Liquidation Amount of $1,000 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.
"Corporate Trust Office" means the principal office of either the Property
----------------------
Trustee or the Trustee named in the Indenture. So long as The Bank of New York
serves in both capacities, such principal office is located in ________________.
"Debenture Event of Default" means an "Event of Default" as defined in the
--------------------------
Indenture.
"Debenture Redemption Date" means "Redemption Date" as defined in the
-------------------------
Indenture.
"Debenture Trustee" means The Bank of New York, a banking corporation duly
-----------------
organized and existing under the laws of the State of New York.
"Debentures" means the $103,093,000 aggregate principal amount of the
----------
Parent's ____% Junior Subordinated Debentures, Series A issued pursuant to the
Indenture.
"Definitive Capital Securities Certificates" means either or both (as the
------------------------------------------
context requires) of (a) Capital Securities Certificates issued as Book-Entry
Capital Securities Certificates as provided in Section 5.11(a) and (b) Capital
Securities Certificates issued in certificated, fully registered form as
provided in Section 5.13.
"Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
---------------------------
Code, 12 Del. C. (S) 3801, et seq., as it may be amended from time to time.
"Depositor" has the meaning specified in the preamble to this Trust
---------
Agreement and includes Pennsylvania Manufacturers Corporation in its capacity as
Holder of the Common Securities.
"Direct Action" has the meaning specified in Section 5.14(c).
-------------
"Distribution Date" has the meaning specified in Section 4.01(a).
-----------------
-4-
<PAGE>
"Distributions" means amounts payable in respect of the Trust Securities as
-------------
provided in Section 4.01.
"Event of Default" means any one of the following events (whatever the
----------------
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) the occurrence of a Debenture Event of Default; or
(b) default by the Property Trustee in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a period of 30
days; or
(c) default by the Property Trustee in the payment of any Redemption Price
of any Trust Security when it becomes due and payable; or
(d) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Trustees in this Trust Agreement (other than a
covenant or warranty a default in the performance of which or the breach of
which is dealt with in clause (b) or (c), above) and continuation of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting Trustee or Trustees by the
Holders of at least 25% in aggregate Liquidation Amount of the Outstanding
Capital Securities a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice of
Default" hereunder; or
(e) the occurrence of a Bankruptcy Event with respect to the Property
Trustee and the failure by the Depositor to appoint a successor Property Trustee
within 60 days thereof.
"Expense Agreement" means the Agreement as to Expenses and Liabilities
-----------------
between the Parent and the Trust, substantially in the form attached as Exhibit
A to the Indenture, as amended from time to time.
"Guarantee" means the Guarantee Agreement executed and delivered by the
---------
Parent and The Bank of New York, a banking corporation, as trustee,
contemporaneously with the execution and delivery of this Trust Agreement, for
the benefit of the Holders of the Capital Securities, as amended from time to
time.
"Indenture" means the Junior Subordinated Indenture, dated as of
---------
_____________________, 1998, between the Parent and the Debenture Trustee, as
trustee, as amended or supplemented from time to time.
"Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of trust,
----
adverse ownership interest, hypothecation, assignment, security interest or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever.
"Like Amount" means (a) with respect to a redemption of Trust Securities,
-----------
Trust Securities having a Liquidation Amount equal to the principal amount of
Debentures to be
-5-
<PAGE>
contemporaneously redeemed in accordance with the Indenture and the proceeds of
which will be used to pay the Redemption Price of such Trust Securities, (b)
with respect to a distribution of Debentures to Holders of Trust Securities in
connection with a dissolution or liquidation of the Trust, Debentures having a
principal amount equal to the Liquidation Amount of the Trust Securities of the
Holder to whom such Debentures are distributed and (c) with respect to any
distribution of Additional Amounts to Holders of Trust Securities, Debentures
having a principal amount equal to the Liquidation Amount of the Trust
Securities in respect of which such distribution is made.
"Liquidation Amount" means the stated amount of $1,000 per Trust Security.
------------------
"Liquidation Date" means the date of dissolution, winding-up or termination
----------------
and liquidation of the Trust pursuant to Section 9.04(a).
"Liquidation Distribution" has the meaning specified in Section 9.04(d).
------------------------
"Majority in Liquidation Amount of the Capital Securities" or "Majority in
-------------------------------------------------------- ------------
Liquidation Amount of the Common Securities" means, except as provided by the
- -------------------------------------------
Trust Indenture Act, Capital Securities or Common Securities, as the case may
be, representing more than 50% of the aggregate Liquidation Amount of all then
Outstanding Capital Securities or Common Securities, as the case may be.
"Officers' Certificate" means a certificate signed by the Chairman of the
---------------------
Board, the President or a Senior Vice President and by the Treasurer, Chief
Financial Officer or the Vice President of Finance of the Depositor, and
delivered to the appropriate Trustee. One of the officers signing an Officers'
Certificate given pursuant to Section 8.16 shall be the principal executive,
financial or accounting officer of the Depositor. Any Officers' Certificate
delivered with respect to compliance with a condition or covenant provided for
in this Trust Agreement shall include:
(a) a statement that each officer signing the Officers' Certificate has
read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;
(c) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(d) a statement as to whether, in the opinion of each such officer, such
condition or covenant has been complied with.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
------------------
for the Trust, the Property Trustee or the Depositor, and may be an employee of
any thereof, and who shall be acceptable to the Property Trustee.
"Original Trust Agreement" has the meaning specified in the recitals to this
------------------------
Trust Agreement.
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<PAGE>
"Outstanding", when used with respect to Trust Securities, means, as of the
-----------
date of determination, all Trust Securities theretofore executed, authenticated
and delivered under this Trust Agreement, except:
(a) Trust Securities theretofore canceled by the Administrative Trustees or
delivered to the Administrative Trustees for cancellation;
(b) Trust Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Property Trustee or any Paying
Agent; provided that, if such Trust Securities are to be redeemed, notice of
such redemption has been duly given pursuant to this Trust Agreement; and
(c) Trust Securities that have been paid or in exchange for or in lieu of
which other Capital Securities have been executed, authenticated and delivered
pursuant to this Trust Agreement; provided, however, that in determining whether
the Holders of the requisite Liquidation Amount of the Outstanding Capital
Securities have given any request, demand, authorization, direction, notice,
consent or waiver hereunder, Capital Securities owned by the Depositor, any
Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded
and deemed not to be Outstanding, except that (a) in determining whether any
Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Capital Securities
which such Trustee knows to be so owned shall be so disregarded and (b) the
foregoing shall not apply at any time when all of the Outstanding Capital
Securities are owned by the Depositor, one or more of the Trustees and/or any
such Affiliate. Capital Securities so owned which have been pledged in good
faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Administrative Trustees the pledgee's right so to act with
respect to such Capital Securities and that the pledgee is not the Depositor or
any Affiliate of the Depositor.
"Owner" means each Person who is the beneficial owner of a Book-Entry
-----
Capital Securities Certificate as reflected in the records of the Clearing
Agency or, if a Clearing Agency Participant is not the Owner, then as reflected
in the records of a Person maintaining an account with such Clearing Agency
(directly or indirectly, in accordance with the rules of such Clearing Agency).
"Parent" has the meaning specified in the preamble to this Trust Agreement.
------
"Paying Agent" means any paying agent or co-paying agent appointed pursuant
------------
to Section 5.09 and shall initially be the Bank.
"Payment Account" means a segregated non-interest-bearing corporate trust
---------------
account maintained by the Property Trustee with the Bank in its corporate trust
department for the benefit of the Securityholders in which all amounts paid in
respect of the Debentures will be held and from which the Property Trustee shall
make payments to the Securityholders in accordance with Section 4.01.
"Person" means any individual, corporation, partnership, joint venture,
------
trust, limited liability company or corporation, unincorporated organization or
government or any agency or political subdivision thereof.
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<PAGE>
"Property Trustee" means the commercial bank or trust company identified as
----------------
the "Property Trustee" in the preamble to this Trust Agreement solely in its
capacity as Property Trustee of the Trust heretofore formed and continued
hereunder and not in its individual capacity, or its successor in interest in
such capacity, or any successor Property Trustee appointed as herein provided.
"Redemption Date" means, with respect to any Trust Security to be redeemed,
---------------
the date fixed for such redemption by or pursuant to this Trust Agreement;
provided that each Debenture Redemption Date and the stated maturity of the
Debentures shall be a Redemption Date for a Like Amount of Trust Securities.
"Redemption Price" means, with respect to any date fixed for redemption of
----------------
any Trust Security, the Liquidation Amount of such Trust Security, plus
accumulated and unpaid Distributions to such date, plus the amount of the
premium, if any, paid by the Depositor upon the concurrent redemption of a Like
Amount of Debentures allocated on a pro rata basis (based on Liquidation
Amounts) among the Trust Securities.
"Relevant Trustee" shall have the meaning specified in Section 8.10.
----------------
"Securities Register" and "Securities Registrar" have the respective
------------------- --------------------
meanings specified in Section 5.04.
"Securityholder" or "Holder" means a Person in whose name a Trust Security
-------------- ------
or Securities is registered in the Securities Register; any such Person shall be
deemed to be a beneficial owner within the meaning of the Delaware Business
Trust Act; provided, however, that in determining whether the Holders of the
requisite amount of Capital Securities have voted on any matter provided for in
this Trust Agreement, then for the purpose of any such determination, so long as
Definitive Capital Securities Certificates have not been issued, the term
Securityholders or Holders as used herein shall refer to Owners.
"Transfer Agent" shall be the person specified in or pursuant to Section
--------------
5.04.
"Trust" means the Delaware business trust created and continued hereby and
-----
identified on the cover page to this Trust Agreement.
"Trust Agreement" means this Amended and Restated Trust Agreement, as the
---------------
same may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
-------------------
the date as of which this instrument was executed; provided, however, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
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<PAGE>
"Trust Property" means (a) the Debentures, (b) any cash on deposit in, or
--------------
owing to, the Payment Account, (c) all proceeds and rights in respect of the
foregoing and any other property and assets for the time being held or deemed to
be held by the Property Trustee pursuant to the trusts of this Trust Agreement
and (d) the rights of the Property Trustee under the Guarantee.
"Trust Security" means any one of the Common Securities or the Capital
--------------
Securities.
"Trust Securities Certificate" means any one of the Common Securities
----------------------------
Certificates or the Capital Securities Certificates.
"Trustee" means the commercial bank or trust company identified as the
-------
"Trustee" in the preamble to this Trust Agreement solely in its capacity as
Trustee of the Trust heretofore formed and continued hereunder and not in its
individual capacity, or its successor in interest in such capacity, or any
successor Trustee appointed as herein provided.
"Trustees" has the meaning specified in the preamble to this Trust
--------
Agreement.
"Underwriting Agreement" means the Underwriting Agreement, dated as of
----------------------
_________________________, 1998, among the Trust, the Parent, PMA Reinsurance
Corporation and the several underwriters named therein.
ARTICLE II
Establishment of the Trust
Section 2.01. Name. The Trust created and continued hereby shall be known
----
as "PMC Capital I," as such name may be modified from time to time by the
Administrative Trustees following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may conduct the
business of the Trust, make and execute contracts and other instruments on
behalf of the Trust and sue and be sued.
Section 2.02. Office of the Trustee; Office of the Property Trustee;
------------------------------------------------------
Principal Place of Business. The office of the Trustee in the State of Delaware
- ---------------------------
is _____________________________, Attention: Corporate Trust Administration, or
such other address in the State of Delaware as the Trustee may designate by
written notice to the Securityholders and the Depositor. The office of the
Property Trustee is _______________________________, New York, New York, or such
other address as the Property Trustee may designate by written notice to the
Securityholders and the Depositor. The principal place of business of the Trust
is c/o Pennsylvania Manufacturers Corporation, The PMA Building, 380 Sentry
Parkway, Blue Bell, Pennsylvania 19422-2328.
Section 2.03. Initial Contribution of Trust Property; Organizational
------------------------------------------------------
Expenses. The Trustee acknowledges receipt in trust from the Depositor in
- --------
connection with the Original Trust Agreement of the sum of $10, which
constituted the initial Trust Property. The Depositor shall pay organizational
expenses of the Trust as they arise or shall, upon request of any Trustee,
promptly reimburse such Trustee for any such expenses paid by
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<PAGE>
such Trustee. The Depositor shall make no claim upon the Trust Property for the
payment of such expenses.
Section 2.04. Issuance of the Capital Securities. On
----------------------------------
_______________________, 1998 the Depositor, both on its own behalf and on
behalf of the Trust and pursuant to the Original Trust Agreement, executed and
delivered the Underwriting Agreement. Contemporaneously with the execution and
delivery of this Trust Agreement, an Administrative Trustee, on behalf of the
Trust, shall execute and deliver to the underwriters named in the Underwriting
Agreement Capital Securities Certificates, registered in the name of the nominee
of the initial Clearing Agency, in an aggregate amount of 100,000 Capital
Securities having an aggregate Liquidation Amount of $100,000,000, against
receipt of the aggregate purchase price of such Capital Securities of
$100,000,000, which amount the Administrative Trustee shall promptly deliver to
the Property Trustee.
Section 2.05. Purchase of Debentures; Issuance of the Common Securities.
---------------------------------------------------------
Contemporaneously with the execution and delivery of this Trust Agreement, an
Administrative Trustee, on behalf of the Trust, shall purchase from the
Depositor Debentures, registered in the name of the Trust and having an
aggregate principal amount equal to $100,000,000, and, in satisfaction of the
purchase price for such Debentures, (w) the Property Trustee, on behalf of the
Trust, shall deliver to the Depositor the sum of $100,000,000, and (x)
contemporaneously therewith, an Administrative Trustee, on behalf of the Trust,
shall execute and deliver to the Depositor Common Securities Certificates,
registered in the name of the Depositor, in an aggregate amount of 3,093 Common
Securi ties having an aggregate Liquidation Amount of $3,093,000.
Section 2.06. Declaration of Trust. The exclusive purposes and functions
--------------------
of the Trust are (a) to issue and sell the Trust Securities and use the proceeds
from such sale to acquire the Debentures and (b) to engage in those activities
necessary, convenient or incidental thereto. The Depositor hereby appoints the
Trustees as trustees of the Trust, to have all the rights, powers and duties set
forth herein and the Trustees hereby accept such appointment. The Property
Trustee hereby declares that it will hold the Trust Property in trust upon and
subject to the conditions set forth herein for the benefit of the Trust and the
Securityholders. The Administrative Trustees shall have all rights, powers and
duties set forth herein and in accordance with applicable law with respect to
accomplishing the purposes of the Trust.
Section 2.07. Authorization to Enter into Certain Transactions.
------------------------------------------------
(a) The Trustee, the Property Trustee and the Administrative Trustees shall
conduct the affairs of the Trust in accordance with the terms of this Trust
Agreement. Subject to the limitations set forth in paragraph (b) of this
Section, and in accordance with the following provisions (i) and (ii), the
Property Trustee and the Administrative Trustees shall have the authority to
enter into all transactions and agreements determined by the Trustees to be
appropriate in exercising the authority, express or implied, otherwise granted
to the Trustees under this Trust Agreement, and to perform all acts in
furtherance thereof, including without limitation, the following:
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<PAGE>
(i) As among the Trustees, the Administrative Trustees shall have the
power, duty and authority to act on behalf of the Trust with respect to the
following matters:
(A) the issuance and sale of the Trust Securities;
(B) to cause the Trust to enter into, and to execute, deliver and
perform on behalf of the Trust, the Expense Agreement and the Certificate
Depository Agreement and such other agreements as may be necessary or desirable
in connection with the purposes and function of the Trust;
(C) assisting in any registration of the Capital Securities under the
Securities Act of 1933, as amended, and under state securities or blue sky laws,
and the qualification of this Trust Agreement under the Trust Indenture Act;
(D) assisting in any quotation or listing of the Capital Securities
upon the Nasdaq National Market System ("Nasdaq") or such securities exchange or
exchanges as shall be determined by the Depositor and the registration of the
Capital Securities under the Exchange Act and the preparation and filing of all
periodic and other reports and other documents pursuant to the foregoing;
(E) the sending of notices (other than notices of default) and other
information regarding the Trust Securities and the Debentures to the
Securityholders in accordance with this Trust Agreement;
(F) the consent to the appointment of a Paying Agent, authenticating
agent, Securities Registrar and Transfer Agent in accordance with this Trust
Agreement (which consent shall not be unreasonably withheld);
(G) registering transfers of the Trust Securities in accordance with
this Trust Agreement;
(H) to the extent provided in this Trust Agreement, the winding up of
the affairs of and liquidation of the Trust and the preparation, execution and
filing of the certificate of cancellation with the Secretary of State of the
State of Delaware;
(I) unless otherwise determined by the Property Trustee or the Holders
of at least a majority in Liquidation Amount of the Capital Securities, or as
otherwise required by the Delaware Business Trust Act or the Trust Indenture
Act, to execute on behalf of the Trust (either acting alone or together with any
or all of the Administrative Trustees) any documents that the Administrative
Trustees have the power to execute pursuant to this Trust Agreement; and
(J) the taking of any action incidental to the foregoing as the
Trustees may from time to time determine is necessary or advisable to give
effect to the terms of this Trust Agreement and protect and conserve the Trust
Property for the benefit of the Securityholders (without consideration of the
effect of any such action on any particular Securityholder).
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<PAGE>
(ii) As among the Trustees, the Property Trustee shall have the power,
duty and authority to act on behalf of the Trust with respect to the following
matters:
(A) the establishment of the Payment Account;
(B) the receipt of the Debentures;
(C) the collection of interest, principal and any other payments made
in respect of the Debentures in the Payment Account;
(D) the distribution through the Paying Agent of amounts distributable
to the Securityholders in respect of the Trust Securities;
(E) the exercise of all of the rights, powers and privileges of a
holder of the Debentures;
(F) the sending of notices of default and other information regarding
the Trust Securities and the Debentures to the Securityholders in accordance
with this Trust Agreement;
(G) the distribution of the Trust Property in accordance with the
terms of this Trust Agreement;
(H) to the extent provided in this Trust Agreement, the winding up of
the affairs of and liquidation of the Trust and the preparation, execution
and filing of the certificate of cancellation with the Secretary of State of
the State of Delaware;
(I) after an Event of Default (other than under paragraph (b), (c), (d)
or (e) of the definition of such term if such Event of Default is by or with
respect to the Property Trustee) the taking of any action incidental to the
foregoing as the Property Trustee may from time to time determine is
necessary or advisable to give effect to the terms of this Trust Agreement
and protect and conserve the Trust Property for the benefit of the
Securityholders (without consideration of the effect of any such action on
any particular Securityholder); and
(J) any of the duties, liabilities, powers or the authority of the
Administrative Trustees set forth in Section 2.07(a)(i)(E) and (I) herein;
and in the event of a conflict between the action of the Administrative
Trustees and the action of the Property Trustee, the action of the Property
Trustee shall prevail.
(b) So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, neither the Trustees nor the Trust shall (i) acquire any
investments or engage in any activities not authorized by this Trust Agreement,
(ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise
dispose of any of the Trust Property or interests therein, including to the
Securityholders, except as expressly provided herein, (iii) take any action that
would result in more than an insubstantial risk that the Trust would be taxable
as a corporation or would fail or cease to qualify as a "grantor trust" for
United States federal income tax
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<PAGE>
purposes, (iv) incur any indebtedness for borrowed money or issue any other debt
or (v) take or consent to any action that would result in the placement of a
Lien on any of the Trust Property. The Administrative Trustees shall defend all
claims and demands of all Persons at any time claiming any Lien on any of the
Trust Property adverse to the interest of the Trust or the Securityholders in
their capacity as Securityholders.
(c) In connection with the issue and sale of the Capital Securities, the
Depositor shall have the right and responsibility to assist the Trust with
respect to, or effect on behalf of the Trust, the following (and any actions
taken by the Depositor in furtherance of the following prior to the date of this
Trust Agreement are hereby ratified and confirmed in all respects as actions of
the Trust):
(i) to prepare for filing by the Trust with the Commission and to execute
on behalf of the Trust a registration statement on Form S-3 in relation to the
Capital Securities, including any amendments thereto, and to take any action
necessary or desirable to sell the Capital Securities in a transaction;
(ii) to determine the States in which to take appropriate action to
qualify or register for sale all or part of the Capital Securities and to do any
and all such acts, other than actions which must be taken by or on behalf of the
Trust, and advise the Trustees of actions they must take on behalf of the Trust,
and prepare for execution and filing any documents to be executed and filed by
the Trust or on behalf of the Trust, as the Depositor deems necessary or
advisable in order to comply with the applicable laws of any such States and in
connection with the sale of the Capital Securities;
(iii) to prepare for filing by the Trust and to execute any application to
Nasdaq or any national stock exchange for quotation or listing upon notice of
issuance, as applicable, of any Capital Securities;
(iv) to prepare for filing by the Trust with the Commission and to
execute a registration statement on Form 8-A relating to the registration of the
Capital Securities under Section 12(b) or 12(g) of the Exchange Act, including
any amendments thereto;
(v) to negotiate the terms of, and execute and deliver, the Underwriting
Agreement providing for the sale of the Capital Securities; and
(vi) to take any other actions necessary or desirable to carry out any of
the foregoing activities.
(d) Notwithstanding anything herein to the contrary, the Administrative
Trustees are authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that the Trust will not (i) be deemed to be an "investment
company" required to be registered under the Investment Company Act of 1940, as
amended, or (ii) fail or cease to qualify as a grantor trust for United States
federal income tax purposes and so that the Debentures will be treated as
indebtedness of the Depositor for United States federal income tax purposes. In
this connection, the Depositor and the Administrative Trustees are authorized to
take any action, not inconsistent with applicable law, the Certificate of Trust
or this Trust Agreement, that each of the Depositor and the Administrative
Trustees determines in its discretion to be necessary or desirable for such
purposes as long as such
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<PAGE>
action does not adversely affect in any material respect the interests of the
Holders of the Capital Securities. In no event shall the Trustees be liable to
the Trust or the Holders for any failure to comply with this Section that
results from a change in law or regulation or in the interpretation thereof.
(e) All prior actions taken by John W. Smithson, Francis W. McDonnell and
Edward S. Hochberg on behalf of the Parent in furtherance of the Parent's
powers, duties and obligations under the Original Trust Agreement are hereby
ratified and affirmed as actions of the Trust.
Section 2.08. Assets of Trust. The assets of the Trust shall consist of
---------------
the Trust Property.
Section 2.09. Title to Trust Property. Legal title to all Trust Property
-----------------------
shall be vested at all times in the Property Trustee (in its capacity as such)
and shall be held and administered by the Property Trustee for the benefit of
the Trust and the Securityholders in accordance with this Trust Agreement.
ARTICLE III
Payment Account
Section 3.01. Payment Account.
---------------
(a) On or prior to the Closing Date, the Property Trustee shall establish
the Payment Account. The Property Trustee and any agent of the Property Trustee
shall have exclusive control and sole right of withdrawal with respect to the
Payment Account for the purpose of making deposits in and withdrawals from the
Payment Account in accordance with this Trust Agreement. All monies and other
property deposited or held from time to time in the Payment Account shall be
held by the Property Trustee in the Payment Account for the exclusive benefit of
the Securityholders and for distribution as herein provided, including (and
subject to) any priority of payments provided for herein.
(b) The Property Trustee shall deposit in the Payment Account, promptly
upon receipt, all payments of principal of or interest on, and any other
payments or proceeds with respect to, the Debentures. Amounts held in the
Payment Account shall not be invested by the Property Trustee pending
distribution thereof.
ARTICLE IV
Distributions; Redemption
Section 4.01. Distributions.
-------------
(a) The Trust Securities represent undivided beneficial interests in the
Trust Property, and Distributions (including of Additional Amounts) will be made
on the Trust Securities at the rate and on the dates that payments of interest
(including of Additional Interest, as defined in the Indenture) are made on the
Debentures. Accordingly:
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<PAGE>
(i) Distributions on the Trust Securities shall be cumulative, and will
accumulate whether or not there are funds of the Trust available for the payment
of Distributions. Distributions shall accumulate from ____________________,
1998, and, except in the event (and to the extent) that the Parent exercises its
right to defer interest payments on the Debentures pursuant to Section 301 of
the Indenture, shall be payable semi-annually in arrears on
________________________ 1 and ___________________ 1 of each year, commencing on
____________________, 1999. If any date on which Distributions are otherwise
payable on the Trust Securities is not a Business Day, then the payment of such
Distribution shall be made on the next succeeding day which is a Business Day
(and without any additional distribution or other payment in respect of any such
delay) except that, if such Business Day is in the next succeeding calendar
year, payment of such Distribution shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on the date
on which such payment was originally payable (each date on which distributions
are payable in accordance with this Section 4.01(a), a "Distribution Date").
(ii) Subject to Section 4.03 hereof, all Distributions will be made pro
rata on each of the Trust Securities. Distributions payable on the Capital
Securities shall be fixed at a rate of ________% per annum of the Liquidation
Amount of the Capital Securities. Distributions payable on the Common Securities
shall be fixed at a rate of ________% per annum of the Liquidation Amount of the
Common Securities. The amount of Distributions payable for any full semi-annual
period shall be computed on the basis of twelve 30-day months and a 360-day year
and, for any period shorter than a full monthly period, shall be computed on the
basis of the actual number of days elapsed in such period. Distributions
payable for each full Distribution period shall be computed by dividing the rate
per annum by two. The amount of Distributions payable for any period shall
include the Additional Amounts, if any.
(iii) Distributions on the Trust Securities shall be made by the
Property Trustee from the Payment Account and shall be deemed payable on each
Distribution Date only to the extent that the Trust has funds available in the
Payment Account for the payment of such Distributions.
(b) Distributions on the Trust Securities with respect to a Distribution
Date shall be payable to the Holders thereof as they appear on the Securities
Register for the Trust Securities at the close of business on the relevant
record date, which shall be one Business Day prior to such Distribution Date;
provided, however, that in the event that the Capital Securities do not remain
in book-entry-only form, the relevant record date shall be the date 15 days
prior to the relevant Distribution Date.
Section 4.02. Redemption.
----------
(a) On each Debenture Redemption Date and on the maturity of the
Debentures, the Trust will be required to redeem a Like Amount of Trust
Securities at the Redemption Price.
(b) Notice of redemption shall be given by the Property Trustee by first-
class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior
to the Redemption Date to each Holder of Trust Securities to be redeemed, at
such Holder's address appearing in the Security Register. All notices of
redemption or liquidation shall state:
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<PAGE>
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the CUSIP number or numbers of the Capital Securities affected;
(iv) if less than all the Outstanding Trust Securities are to be
redeemed, the identification and the aggregate Liquidation Amount of the
particular Trust Securities to be redeemed;
(v) that on the Redemption Date the Redemption Price will become due and
payable upon each such Trust Security to be redeemed and that Distributions
thereon will cease to accrue on and after said date, except as provided in
Section 4.2(d) below; and
(vi) the place or places where the Trust Securities are to be surrendered
for the payment of the Redemption Price.
(c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the proceeds from the contemporaneous redemption of
Debentures. Redemptions of the Trust Securities shall be made and the
Redemption Price shall be payable on each Redemption Date only to the extent
that the Trust has funds available in the Payment Account for the payment of
such Redemption Price.
(d) If the Property Trustee gives a notice of redemption in respect of any
Capital Securities, then, by 12:00 noon, New York time, on the Redemption Date,
subject to Sec tion 4.02(c), the Property Trustee will, so long as the Capital
Securities are in book-entry-only form, irrevocably deposit with the Clearing
Agency for the Capital Securities, funds sufficient to pay the applicable
Redemption Price and will give such Clearing Agency irrevocable instructions and
authority to pay the Redemption Price to the Holders thereof. If the Capital
Securities are no longer in book-entry-only form, the Property Trustee, subject
to Section 4.02(c), will irrevocably deposit with the Paying Agent funds
sufficient to pay the applicable Redemption Price and will give the Paying Agent
irrevocable instruc tions and authority to pay the Redemption Price to the
Holders thereof upon surrender of their Capital Securities Certificates.
Notwithstanding the foregoing, Distributions payable on or prior to the
Redemption Date for any Trust Securities called for redemption shall be payable
to the Holders of such Trust Securities as they appear on the Securities
Register for the Trust Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of
Securityholders holding Trust Securities so called for redemption will cease,
except the right of such Securityholders to receive the Redemption Price, and
any Distribution payable in respect of the Trust Securities on or prior to the
Redemption Date, but without interest on such Redemption Price, and such Trust
Securities will cease to be outstanding. In the event that any date fixed for
redemption of the Trust Securities is not a Business Day, then payment of the
Redemption Price payable on such date will be made on the next succeeding day
which is a Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day, in
each case, with the same force and effect as if made on such date. In the event
that payment of the Redemption Price in respect of any
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<PAGE>
Trust Securities called for redemption is improperly withheld or refused and not
paid either by the Trust or by the Depositor pursuant to the Guarantee,
Distributions on such Trust Securities will continue to accumulate, as set forth
in Section 4.01, from the Redemption Date originally established by the Trust
for such Trust Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price.
(e) Payment of the Redemption Price on the Trust Securities and
distribution of the Debentures to holders of Capital Securities shall be made to
the recordholders thereof as they appear on the Securities Register for the
Trust Securities on the relevant record date, which shall be one Business Day
prior to the relevant Redemption Date or Liquidation Date, as applicable;
provided, however, that in the event that the Capital Securities do not remain
in book-entry-only form, the relevant record date shall be the date 15 days
prior to the Redemption Date or Liquidation Date, as applicable.
(f) Subject to Section 4.03(a), if less than all the Outstanding Trust
Securities are to be redeemed on a Redemption Date, then the aggregate
Liquidation Amount of the Trust Securities to be redeemed shall be allocated
proportionally between the Common Securities and the Capital Securities
according to their aggregate Liquidation Amounts. The particular Capital
Securities to be redeemed shall be selected on a pro rata basis (based upon
Liquidation Amounts) not more than 60 days prior to the Redemption Date by the
Property Trustee from the Outstanding Capital Securities not previously called
for redemption, by such method (including, without limitation, by lot) as the
Property Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to $1,000 or an integral multiple of
$1,000 in excess thereof) of the Liquidation Amount of the Capital Securities of
a denomination larger than $1,000; provided that so long as the Capital
Securities are in book-entry-only form, such selection shall be made in
accordance with the customary procedures for the Clearing Agency for the Capital
Securities. The Property Trustee shall promptly notify the Security Registrar
in writing of the Capital Securities selected for redemption and, in the case of
any Capital Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of this Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of the
Capital Securities shall relate, in the case of any aggregate Capital Securities
redeemed or to be redeemed only in part, to the portion of the aggregate
Liquidation Amount of the Capital Securities which has been or is to be
redeemed.
Section 4.03. Subordination of Common Securities.
----------------------------------
(a) Payment of Distributions (including Additional Amounts, if applicable)
on, the Redemption Price of and the Liquidation Distribution in respect of the
Trust Securities, as applicable, shall be made, subject to Section 4.02(f), pro
rata among the Capital Securities and the Common Securities based on the
Liquidation Amount of the Trust Securities; provided, however, that if on any
Distribution Date, Redemption Date or Liquidation Date any Event of Default
resulting from a Debenture Event of Default specified in Section 501(a) or
501(b) of the Indenture shall have occurred and be continuing, no payment of any
Distribution (including Additional Amounts, if applicable) on, or Redemption
Price of, or Liquidation Distribution in respect of, any Common Security, and no
other payment on account of the redemption, liquidation or other acquisition of
the Common Securities, shall
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be made unless payment in full in cash of all accumulated and unpaid
Distributions (including Additional Amounts, if applicable) on all Outstanding
Capital Securities for all distribution periods terminating on or prior thereto,
or in the case of payment of the Redemption Price the full amount of such
Redemption Price on all Outstanding Capital Securities then called for
redemption, or in the case of payment of the Liquidation Distribution the full
amount of such Liquidation Distribution on all Outstanding Capital Securities,
shall have been made or provided for, and all funds available to the Property
Trustee shall first be applied to the payment in full in cash of all
Distributions (including Additional Amounts, if applicable) on, or the
Redemption Price of, the Capital Securities then due and payable.
(b) In the case of the occurrence of any Event of Default resulting from
any Debenture Event of Default, the Holder of the Common Securities will be
deemed to have waived any right to act with respect to any such Event of Default
under this Trust Agreement until the effect of all such Events of Default with
respect to the Capital Securities have been cured, waived or otherwise
eliminated. Until all such Events of Default under this Trust Agreement with
respect to the Capital Securities have been so cured, waived or otherwise
eliminated, the Property Trustee shall act solely on behalf of the Holders of
the Capital Securities and not on behalf of the Holder of the Common Securities,
and only the Holders of the Capital Securities will have the right to direct the
Property Trustee to act on their behalf.
Section 4.04. Payment Procedures. Payments of Distributions (including
------------------
Additional Amounts if applicable) in respect of the Capital Securities shall be
made at (a) the Corporate Trust Office of the Property Trustee, (b) the
principal office of any Paying Agent or (c) the principal office of the
Securities Registrar and Transfer Agent; provided that payment of any
Distribution may be made, at the option of the Administrative Trustees, by check
mailed to the address of the Person entitled thereto as such address shall
appear on the Securities Register or by wire transfer in immediately available
funds at such place and to such account as may be designated by the Person
entitled thereto as specified in the Securities Register; if the Capital
Securities are held by a Clearing Agency, such payments shall be made either by
check or by wire transfer, at the option of the Paying Agent, to the Clearing
Agency in immediately available funds, which shall credit the relevant Persons'
accounts at such Clearing Agency on the applicable Distribution Dates. Payments
in respect of the Common Securities shall be made in such manner as shall be
mutually agreed between the Property Trustee and the Holder of the Common
Securities.
Section 4.05. Withholding Tax.
---------------
The Trust and the Administrative Trustees shall comply with all withholding
and backup withholding tax requirements under United States federal, state and
local law. The Trust shall request, and the Holders shall provide to the Trust,
such forms or certificates as are necessary to establish an exemption from
withholding and backup withholding tax with respect to each Holder, and any
representations and forms as shall reasonably be requested by the Trust to
assist it in determining the extend of, and in fulfilling, its withholding and
backup withholding tax obligations. The Administrative Trustees shall file
required forms with applicable jurisdictions and, unless an exemption from
withholding and backup withholding tax is properly established by a Holder,
shall remit amounts withheld with respect to the Holder applicable
jurisdictions. To the extent that
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the Trust is required to withhold and pay over any amounts to any authority with
respect to Distributions or allocations to any Holder, the amount withheld shall
be deemed to be a Distribution in the amount of the withholding to the Holder.
In the event of any claimed overwithholding, Holders shall be limited to an
action against the applicable jurisdiction. If the amount required to be
withheld was not withheld from actual Distributions made, the Trust may reduce
subsequent Distributions by the amount of such required withholding.
Section 4.06. Tax Returns and Reports.
-----------------------
(a) The Administrative Trustees shall prepare (or cause to be prepared), at
the Depositor's expense, and file by January 31 following each calendar year all
federal, state and local tax and information returns and reports required to be
filed by or in respect of the Trust. In this regard, by January 31 following
each calendar year the Administrative Trustees shall (i) prepare and file (or
cause to be prepared or filed) the Internal Revenue Service Form 1041 (or any
successor form) required to be filed in respect of the Trust in each taxable
year of the Trust and (ii) prepare and furnish (or cause to be prepared and
furnished) to each Securityholder the related Internal Revenue Service Form 1099
(or any successor form). The Administrative Trustees shall provide the
Depositor and the Property Trustee with a copy of all such returns, reports and
schedules promptly after such filing or furnishing.
(b) In the event that any withholding tax is imposed on the Trust's payment
to a Securityholder, such tax shall reduce the amount otherwise distributable to
the Securityholder in accordance with this Section. Any Securityholder who is a
nonresident alien individual or which is organized under the laws of a
jurisdiction outside the United States shall, on or prior to the date such
Securityholder becomes a Securityholder, (i) so notify the Trust and the
Trustees, and (ii) either (A) provide the Trust and the Trustees with Internal
Revenue Service Form 1001, 4224, 8709 or W-8, as appropriate, or (b) notify the
Trust and the Trustees that it is not entitled to an exemption from United
States withholding tax or a reduction in the rate thereof on payments of
interest. Any such Securityholder agrees by its acceptance of a Capital
Security, on an ongoing basis, to provide like certification for each taxable
year for which it is necessary to provide such information and to notify the
Trust and the Trustees should subsequent circumstances arise affecting the
information provided the Trustees in clauses (i) and (ii) above. The Trustees
shall be fully protected in relying upon, and each Securityholder by its
acceptance of a Capital Security hereunder agrees to indemnify and hold the
Trustees harmless against all claims or liability of any kind arising in
connection with or related to the Trustees' reliance upon any documents, forms
or information provided by any Securityholder to the Trustees. In addition, if
the Trustees have not withheld taxes on any payment made to any Securityholder,
and the Trustees are subsequently required to remit to any taxing authority any
such amount not withheld, such Securityholder shall return such amount to the
Trustees upon written demand by the Trustees. The Trustees shall be liable only
for direct (but not consequential) damages to any Securityholder due to the
Trustees' violation of the Code and only to the extent such liability is caused
by the Trustees' failure to act in accordance with its standard of care under
this Agreement. The Trustees shall comply with United States federal
withholding and backup withholding tax
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laws and information reporting requirements with respect to any payments to
Securityholders under the Trust Securities.
Section 4.07. Payment of Taxes, Duties, Etc. of the Trust. Upon receipt
-------------------------------------------
under the Debentures of Additional Sums (as defined in the Indenture), the
Property Trustee shall promptly pay any taxes, duties or governmental charges of
whatsoever nature (other than withholding taxes) imposed on the Trust by the
United States or any other taxing authority.
Section 4.08. Payments under Indenture. Any amount payable hereunder to
------------------------
any Holder of Capital Securities (and any Owner with respect thereto) shall be
reduced by the amount of any corresponding payment such Holder (and Owner with
respect to a Holder's Capital Securities) has directly received pursuant to
Section 508 of the Indenture or Section 5.14 of this Trust Agreement.
ARTICLE V
Trust Securities Certificates
Section 5.01. Initial Ownership. Upon the formation of the Trust and the
-----------------
contribution by the Depositor pursuant to Section 2.03 and until the issuance of
the Trust Securities, and at any time during which no Trust Securities are
outstanding, the Depositor shall be the sole beneficial owner of the Trust.
Section 5.02. The Trust Securities Certificates. The Capital Securities
---------------------------------
Certificates shall be issued in minimum denominations of $1,000 Liquidation
Amount and integral multiples of $1,000 in excess thereof, and the Common
Securities Certificates shall be issued in denominations of $1,000 Liquidation
Amount and integral multiples thereof. The Trust Securities Certificates shall
be executed on behalf of the Trust by manual signature of at least one
Administrative Trustee. Trust Securities Certificates bearing the manual
signatures of individuals who were, at the time when such signatures shall have
been affixed, authorized to sign on behalf of the Trust, shall be validly issued
and entitled to the benefits of this Trust Agreement, notwithstanding that such
individuals or any of them shall have ceased to be so authorized prior to the
delivery of such Trust Securities Certificates or did not hold such offices at
the date of delivery of such Trust Securities Certificates. A transferee of a
Trust Securities Certificate shall become a Securityholder, and shall be
entitled to the rights and subject to the obligations of a Securityholder
hereunder, upon due registration of such Trust Securities Certificate in such
transferee's name pursuant to Section 5.04.
Section 5.03. Delivery of Trust Securities Certificates. On the Closing
-----------------------------------------
Date, the Administrative Trustees shall cause Trust Securities Certificates, in
an aggregate Liquidation Amount as provided in Sections 2.04 and 2.05, to be
executed on behalf of the Trust and delivered to or upon the written order of
the Depositor, executed by one authorized officer thereof, without further
corporate action by the Depositor, in authorized denominations.
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Section 5.04. Registration of Transfer and Exchange of Capital Securities
-----------------------------------------------------------
Certificates. The Property Trustee shall keep or cause to be kept, at the office
- ------------
or agency maintained pursuant to Section 5.08, a register or registers for the
purpose of registering Trust Securities Certificates and transfers and exchanges
of Trust Securities Certificates (the "Securities Register") in which, subject
to such reasonable regulations as it may prescribe, the Securities Registrar
shall provide for the registration of Capital Securities Certificates and Common
Securities Certificates (subject to Section 5.10 in the case of Common
Securities Certificates) and registration of transfers and exchanges of Capital
Securities Certificates as herein provided. The Bank shall be the initial
Securities Registrar and Transfer Agent. The provisions of Sections 8.01, 8.03
and 8.06 shall apply to the Bank also in its role as Securities Registrar and
Transfer Agent, for so long as the Bank shall act as Securities Registrar and
Transfer Agent.
Upon surrender for registration of transfer of any Capital Securities
Certificate at the office or agency maintained pursuant to Section 5.08, the
Administrative Trustees or any one of them shall execute and shall cause to be
delivered to the Property Trustee, and the Property Trustee shall deliver, in
the name of the designated transferee or transferees, one or more new Capital
Securities Certificates in authorized denominations of a like aggregate
Liquidation Amount dated the date of execution by such Administrative Trustee or
Trustees. The Securities Registrar shall not be required to register the
transfer of any Capital Securities that have been called for redemption. At the
option of a Holder, Capital Securities Certificates may be exchanged for other
Capital Securities Certificates in autho rized denominations and of a like
aggregate Liquidation Amount upon surrender of the Capital Securities
Certificates to be exchanged at the office or agency maintained pursuant to
Section 5.08.
Every Capital Securities Certificate presented or surrendered for
registration of transfer or exchange shall be accompanied by a written
instrument of transfer in form satisfactory to an Administrative Trustee and the
Securities Registrar duly executed by the Holder or his attorney duly authorized
in writing. Each Capital Securities Certificate surrendered for registration of
transfer or exchange shall be canceled and subsequently disposed of by the
Securities Registrar, in accordance with its customary practice.
No service charge shall be made for any registration of transfer or exchange
of Capital Securities Certificates, but the Securities Registrar may require
payment (with the giving of such indemnity as the Trust or the Parent may
require) of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer or exchange of Capital Securities
Certificates.
Section 5.05. Mutilated, Destroyed, Lost or Stolen Trust Securities
-----------------------------------------------------
Certificates. If (a) any mutilated Trust Securities Certificate shall be
- ------------
surrendered to the Securities Regis trar, or if the Securities Registrar shall
receive evidence to its satisfaction of the destruction, loss or theft of any
Trust Securities Certificate and (b) there shall be delivered to the Securities
Registrar and the Administrative Trustees such security or indemnity as may be
required by them to save each of them harmless, then in the absence of notice
that such Trust Securities Certificate shall have been acquired by a bona fide
purchaser, the Administrative Trustees, or any one of them, on behalf of the
Trust shall execute and cause to be made available for delivery, in exchange for
or in lieu of any such mutilated, destroyed, lost or stolen Trust Securities
Certificate, a new Trust Securities Certificate of
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like class, tenor and denomination. In connection with the issuance of any new
Trust Securities Certificate under this Section, the Administrative Trustees or
the Securities Registrar may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection
therewith. Any duplicate Trust Securities Certificate issued pursuant to this
Section shall constitute conclusive evidence of an undivided beneficial interest
in the assets of the Trust, as if originally issued, whether or not the lost,
stolen or destroyed Trust Securities Certificate shall be found at any time.
Section 5.06. Persons Deemed Securityholders. Prior to due presentation of
------------------------------
a Trust Securities Certificate for registration of transfer, the Administrative
Trustees or the Securities Registrar shall treat the Person in whose name any
Trust Securities Certificate shall be registered in the Securities Register as
the owner of such Trust Securities Certificate for the purpose of receiving
distributions and for all other purposes whatsoever, and neither the Trustees
nor the Securities Registrar shall be bound by any notice to the contrary.
Section 5.07. Access to List of Securityholders' Names and Addresses. The
------------------------------------------------------
duties and responsibilities of the Depositor and any other party to provide any
list of Securityholders shall be as set forth in the Trust Indenture Act,
including Section 312 of such Trust Indenture Act. Each Holder, by receiving
and holding a Trust Securities Certificate, and each Owner shall be deemed to
have agreed not to hold either the Depositor, the Property Trustee, the Trustee
or the Administrative Trustees accountable by reason of the disclosure of its
name and address, regardless of the source from which such information was
derived.
Section 5.08. Maintenance of Office or Agency. The Property Trustee shall
-------------------------------
maintain, with the consent of the Administrative Trustees, an office or offices
or agency or agencies where Capital Securities Certificates may be surrendered
for registration of transfer or exchange and where notices and demands to or
upon the Trustees in respect of the Trust Securities Certificates may be served.
Such offices or agencies shall consist of (a) the Corporate Trust Office of the
Property Trustee which address is, c/o The Bank of New York (Delaware),
__________________________________________________, Attention: Corporate Trust
Administration, (b) the principal office of any Paying Agent or (c) the
principal office of the Securities Registrar and Transfer Agent. The
Administrative Trustees shall give prompt written notice to the Depositor and to
the Securityholders of any change in the location of the Securities Register or
any such office or agency.
Section 5.09. Appointment of Paying Agent. The Paying Agent shall make
---------------------------
distributions to Securityholders from the Payment Account and shall report the
amounts of such distributions to the Property Trustee and the Administrative
Trustees. Any Paying Agent shall have the revocable power to withdraw funds
from the Payment Account for the purpose of making the distributions referred to
above. The Administrative Trustees may revoke such power and remove the Paying
Agent in their sole discretion. The Paying Agent shall initially be the Bank,
and any co-paying agent chosen by the Bank, and acceptable to the Administrative
Trustees and the Depositor. Any Person acting as Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the
Administrative Trustees, the Property Trustee and the Depositor. In the event
that the Bank shall no longer be the Paying Agent or a successor Paying Agent
shall resign or its authority to act be revoked, the Administrative Trustees
shall appoint a successor that is
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acceptable to the Property Trustee and the Depositor to act as Paying Agent
(which shall be a bank or trust company). The Administrative Trustees shall
cause such successor Paying Agent or any additional Paying Agent appointed by
the Administrative Trustees to execute and deliver to the Trustees an instrument
in which such successor Paying Agent or additional Paying Agent shall agree with
the Trustees that as Paying Agent, such successor Paying Agent or additional
Paying Agent will hold all sums, if any, held by it for payment to the
Securityholders in trust for the benefit of the Securityholders entitled thereto
until such sums shall be paid to such Securityholders. The Paying Agent shall
return all unclaimed funds to the Property Trustee and upon removal of a Paying
Agent such Paying Agent shall also return all funds in its possession to the
Property Trustee. The provisions of Sections 8.01, 8.03 and 8.06 shall apply to
the Bank also in its role as Paying Agent, for so long as the Bank shall act as
Paying Agent and, to the extent applicable, to any other paying agent appointed
hereunder. Any reference in this Agreement to the Paying Agent shall include any
co-paying agent unless the context requires otherwise.
Section 5.10. Ownership of Common Securities by Depositor. On the Closing
-------------------------------------------
Date the Depositor shall acquire and thereafter shall retain beneficial and
record ownership of the Common Securities. Any attempted transfer of the Common
Securities other than as set forth in the preceding sentence shall be void;
provided that any permitted successor of the Depositor under the Indenture may
succeed to the Depositor's ownership of the Common Securities. The
Administrative Trustees shall cause each Common Securities Certificate issued to
the Depositor to contain a legend stating substantially "THIS CERTIFICATE IS NOT
TRANSFERABLE".
Section 5.11. Book-Entry Capital Securities Certificates; Common
--------------------------------------------------
Securities Certificate.
- ----------------------
(a) The Capital Securities Certificates, upon original issuance, will be
issued in the form of a typewritten Capital Securities Certificate or
Certificates representing Book-Entry Capital Securities Certificates, to be
delivered to The Depository Trust Company, the initial Clearing Agency, by, or
on behalf of, the Trust. Such Capital Securities Certificate or Certificates
shall initially be registered on the Securities Register in the name of Cede &
Co., the nominee of the initial Clearing Agency, and no Book-Entry Capital
Securities Certificate may be exchanged in whole or in part for Capital
Securities Certificates registered, and no transfer of a Book-Entry Capital
Securities Certificate in whole or in part may be registered, in the name of any
Person other than the Clearing Agency for such Book-Entry Capital Securities
Certificates of a nominee thereof, except as provided in Section 5.13. Unless
and until Definitive Capital Securities Certificates have been issued to Owners
pursuant to Section 5.13:
(i) the provisions of this Section 5.11(a) shall be in full force and
effect;
(ii) the Clearing Agency or its nominee, as registered owner of a Book-
Entry Capital Securities Certificate, shall be the Holder of such Book-Entry
Capital Securities Certificate for all purposes under this Trust Agreement and
the Book-Entry Capital Securities Certificate, and Owners with respect to a
Book-Entry Capital Securities Certificate shall hold such interests pursuant to
the Applicable Procedures; the Securities Registrar and the Trustees shall be
entitled to deal with the Clearing Agency for all purposes of this Trust
Agreement relating to the Book-Entry Capital Securities Certificates
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(including the payment of the Liquidation Amount of and Distributions on the
Book-Entry Capital Securities and the giving of instructions or directions to
Owners of Book-Entry Capital Securities) as the sole Holder of the Book-Entry
Capital Securities and shall have no obligations to the Owners thereof;
(iii) to the extent that the provisions of this Section 5.11 conflict with
any other provisions of this Trust Agreement, the provisions of this Section
5.11 shall control;
(iv) the rights of the Owners of the Book-Entry Capital Securities
Certificates shall be exercised only through the Clearing Agency and shall be
limited to those established by law, the Applicable Procedures and agreements
between such Owners and the Clearing Agency and/or the Clearing Agency
Participants. Pursuant to the Certificate Depository Agreement, unless and
until Definitive Capital Securities Certificates are issued pursuant to Section
5.13, the initial Clearing Agency will make book-entry transfers among the
Clearing Agency Participants and receive and transmit payments on the Capital
Securities to such Clearing Agency Participants; and
(v) whenever this Trust Agreement requires or permits actions to be taken
based upon instructions or directions of Holders of Trust Certificates
evidencing a specified percentage of the aggregate Liquidation Amount, the
Clearing Agency shall be deemed to represent such percentage only to the extent
that it has received instructions to such effect from Owners and/or Clearing
Agency Participants owning or representing, respectively, such required
percentage of the beneficial interest in the applicable class of Trust
Certificates and has delivered such instructions to the Administrative Trustees.
(b) A single Common Securities Certificate representing the Common
Securities shall be issued to the Depositor in the form of a definitive Common
Securities Certificate.
Section 5.12. Notices to Clearing Agency. To the extent that a notice or
--------------------------
other communication to the Owners is required under this Trust Agreement, unless
and until Definitive Capital Securities Certificates shall have been issued to
Owners pursuant to Section 5.13, the Trustees shall give all such notices and
communications specified herein to be given to the Clearing Agency, and shall
have no obligations to the Owners.
Section 5.13. Definitive Capital Securities Certificates. If (a) the
------------------------------------------
Clearing Agency advises the Trustees, the Securities Registrar and Transfer
Agent and Parent by giving ninety (90) days' prior written notice (provided,
however, that if the Clearing Agency is required to discontinue its services as
depositary with respect to the Capital Securities pursuant to any governmental,
judicial or regulatory order or decree, and such discontinuation is required in
less than 90 days from the date of such order or decree, then the Clearing
Agency may discontinue such services by giving notice to Parent, the Trustees
and the Securities Registrar and Transfer Agent as soon as reasonably possible),
that it is no longer willing or able to properly discharge its responsibilities
with respect to the Capital Securities Certificates, and the Depositor is unable
to locate a qualified successor, (b) the Clearing Agency ceases to be a clearing
agency registered under the Exchange Act, at a time when the Clearing Agency is
required to be so registered to act as such clearing agency, (c) the Trust at
its option advises the Depositary in writing that it elects to terminate the
book-entry system through the Clearing Agency or (d) a Debenture Event of
Default has occurred and is continuing, then the Administrative Trustees shall
notify the
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Clearing Agency and the Clearing Agency shall notify all Owners of Capital
Securities Certificates and the Trustees of the occurrence of any such event and
of the availability of the Definitive Capital Securities Certificates to Owners
of such class or classes, as applicable, requesting the same.
If any Book-Entry Capital Securities Certificate is to be exchanged for
other Capital Securities Certificates or canceled in part, or if any other
Capital Securities Certificate is to be exchanged in whole or in part for Book-
Entry Capital Securities represented by a Book-Entry Capital Securities
Certificate, then either (a) such Book-Entry Capital Securities Certificate
shall be so surrendered for exchange or cancellation as provided in this Article
V or (b) the aggregate Liquidation Amount represented by such Book-Entry Capital
Securities Certificate shall be reduced, subject to Section 5.02, or increased
by an amount equal to the Liquidation Amount represented by that portion of the
Book-Entry Capital Securities Certificate to be so exchanged or canceled, or
equal to the Liquidation Amount represented by such other Capital Securities
Certificates to be so exchanged for Book-Entry Capital Securities represented
thereby, as the case may be, by means of an appropriate adjustment made on the
records of the Securities Registrar, whereupon the Property Trustee, in
accordance with the Applicable Procedures, shall instruct the Clearing Agency or
its authorized representative to make a corresponding adjustment to its records.
Upon surrender to the Administrative Trustees of the typewritten Capital
Securities Certificate or Certificates representing the Book-Entry Capital
Securities Certificates by the Clearing Agency, accompanied by registration
instructions, the Administrative Trustees, or any one of them, shall execute the
Definitive Capital Securities Certificates in accordance with the instructions
of the Clearing Agency. In the event that Capital Securities are issued in
definitive form, such Capital Securities will be in denominations of $1,000 and
integral multiples thereof. Neither the Securities Registrar nor the Trustees
shall be liable for any delay in delivery of such instructions and may
conclusively rely on, and shall be protected in relying on, such instructions.
Upon the issuance of Definitive Capital Securities Certificates, the Trustees
shall recognize the Holders of the Definitive Capital Securities Certificates as
Securityholders. The Definitive Capital Securities Certificates shall be
printed, lithographed or engraved or may be produced in any other manner as is
reasonably acceptable to the Administrative Trustees, as evidenced by the
execution thereof by the Administrative Trustees or any one of them and may have
such letters, numbers or other marks of identification or designation and such
legends or endorsements as the Administrative Trustees may deem appropriate, or
as may be required to comply with any law or rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which Capital
Securities may be listed, or to conform to usage.
Section 5.14. Rights of Securityholders.
-------------------------
(a) The legal title to the Trust Property is vested exclusively in the
Property Trustee (in its capacity as such) in accordance with Section 2.09, and
the Securityholders shall not have any right or title therein other than the
undivided beneficial interest in the assets of the Trust conferred by their
Trust Securities and they shall have no right to call for any partition or
division of property, profits or rights of the Trust except as described below.
The Trust Securities shall be personal property giving only the rights
specifically set forth therein and in this Trust Agreement. The Trust
Securities shall have no preemptive or similar rights and when issued and
delivered to the Securityholders against payment of the purchase price therefor
and upon such payment will be fully paid and nonassessable
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by the Trust. The Holders of the Trust Securities, in their capacities as such,
shall be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the General
Corporation Law of the State of Delaware.
(b) For so long as any Capital Securities remain Outstanding, if, upon a
Debenture Event of Default, the Debenture Trustee fails or the holders of not
less than 25% in aggregate principal amount of the outstanding Debentures fail
to declare the principal of all of the Debentures to be immediately due and
payable, the Holders of at least 25% in Liquidation Amount of the Capital
Securities then Outstanding shall have such right by a notice in writing to the
Depositor and the Debenture Trustee; and upon any such declaration such
principal amount of and the accrued interest on all of the Debentures shall
become immediately due and payable, provided that the payment of principal and
interest on such Debentures remains subordinated to the extent provided in the
Indenture.
At any time after such a declaration of acceleration with respect to the
Debentures has been made and before a judgment or decree for payment of the
money due has been obtained by the Debenture Trustee as in the Indenture
provided, if the holders of a majority in aggregate principal amount of the
outstanding Debentures fail to annul any such declaration and waive such
default, the Holders of a majority in Liquidation Amount of the Capital
Securities, by written notice to the Depositor and the Debenture Trustee, may
rescind and annul such declaration and its consequences if:
(i) the Depositor has paid or deposited with the Debenture Trustee a sum
sufficient to pay:
(A) all overdue installments of interest (including any Additional
Interest as defined in the Indenture) on all of the Debentures,
(B) the principal of (and premium, if any, on) any Debenture which have
become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Debentures, and
(C) all sums paid or advanced by the Debenture Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Debenture Trustee and the Property Trustee, their agents and counsel; and
(ii) all Debenture Events of Default, other than the non-payment of the
principal of the Debentures which has become due solely by such acceleration,
have been cured or waived as provided in Section 513 of the Indenture.
The holders of a majority in aggregate Liquidation Amount of the Capital
Securities may, on behalf of the Holders of all the Capital Securities, waive
any past default under the Indenture, except a default in the payment of
principal of (or premium, if any) or interest (including any Additional
Interest, as defined in the Indenture) on any Debenture (unless such default has
been cured and a sum sufficient to pay all matured installments of interest
(including any Additional Interest, as defined in the Indenture) and principal
due otherwise than by acceleration (and premium, if any) has been deposited with
the Debenture Trustee) or a default in respect of a covenant or provision which
under the
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Indenture cannot be modified or amended without the consent of the holder of
each outstanding Debenture. No such rescissions shall affect any subsequent
default or impair any right consequent thereon.
Upon receipt by the Property Trustee of written notice declaring such an
acceleration, or rescission and annulment thereof, by Holders of the Capital
Securities all or part of which are represented by Book-Entry Capital Securities
Certificates, a record date shall be established for determining Holders of
Outstanding Capital Securities entitled to join in such notice, which record
date shall be at the close of business on the day the Property Trustee receives
such notice. The Holders on such record date, or their duly designated proxies,
and only such Persons, shall be entitled to join in such notice, whether or not
such Holders remain Holders after such record date; provided, that, unless such
declaration of acceleration, or rescission and annulment, as the case may be,
shall have become effective by virtue of the requisite percentage having joined
in such notice prior to the day which is 90 days after such record date, such
notice of declaration or acceleration, or rescission and annulment, as the case
may be, shall automatically and without further action by any Holder be canceled
and of no further effect. Nothing in this paragraph shall prevent a Holder, or
a proxy of a Holder, from giving, after expiration of such 90-day period, a new
written notice of declaration of acceleration, or rescission and annulment
thereof, as the case may be, that is identical to a written notice which has
been canceled pursuant to the proviso to the preceding sentence, in which event
a new record date shall be established pursuant to the provisions of this
Section 5.14(b).
(c) For so long as any Capital Securities remain outstanding, to the fullest
extent permitted by law and subject to the terms of this Trust Agreement and the
Indenture, upon a Debenture Event of Default specified in Section 501(a) or
501(b) of the Indenture, any Holder of Capital Securities shall have the right
to institute a proceeding directly against the Depositor, pursuant to Section
508 of the Indenture, for enforcement of payment to such Holder of the principal
amount of (and premium, if any) or interest (including any Additional Interest,
as defined in the Indenture) on the Debentures having a principal amount equal
to the aggregate Liquidation Amount of the Capital Securities of such Holder (a
"Direct Action"). Except as set forth in Section 5.14(b) and (c), the Holders
of Capital Securities shall have no right to exercise directly any right or
remedy available to the holders of, or in respect of, the Debentures.
(d) Except as otherwise provided in paragraphs (a), (b) and (c) of this
Section 5.14, the Holders of at least a Majority in Liquidation Amount of the
Capital Securities may, on behalf of the Holders of all the Capital Securities,
waive any past default or Event of Default and its consequences. Upon such
waiver, any such default or Event of Default shall cease to exist, and any
default or Event of Default arising therefrom shall be deemed to have been
cured, for every purpose of this Trust Agreement, but no such waiver shall
extend to any subsequent or other default or Event of Default or impair any
right consequent thereon.
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ARTICLE VI
Acts of Securityholders; Meetings; Voting
Section 6.01. Limitations on Voting Rights.
----------------------------
(a) Except as provided in this Section, in Section 10.03 and in the
Indenture and as otherwise required by law, no Holder of Capital Securities
shall have any right to vote or in any manner otherwise control the
administration, operation and management of the Trust or the obligations of the
parties hereto, nor shall anything herein set forth, or contained in the terms
of the Trust Securities Certificates, be construed so as to constitute the
Securityholders from time to time as partners or members of an association.
(b) So long as any Debentures are held by the Property Trustee, the
Trustees shall not (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or executing any
trust or power conferred on the Debenture Trustee with respect to such
Debentures, (ii) waive any past default which is waivable under Section 513 of
the Indenture, (iii) exercise any right to rescind or annul a declaration that
the principal of all the Debentures shall be due and payable or (iv) consent to
any amendment, modification or termination of the Indenture or the Debentures,
where such consent shall be required, without, in each case, obtaining the prior
approval of the Holders of at least a majority in Liquidation Amount of the
Outstanding Capital Securities; provided, however, that where a consent under
the Indenture would require the consent of each holder of Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior written consent of each Holder of Capital Securities. The Trustees shall
not revoke any action previously authorized or approved by a vote of the Holders
of Capital Securities, except by a subsequent vote of the Holders of Capital
Securities. The Property Trustee shall notify all Holders of the Capital
Securities of any notice of default received from the Debenture Trustee. In
addition to obtaining the foregoing approvals of the Holders of the Capital
Securities, prior to taking any of the foregoing actions, the Trustees shall, at
the expense of the Depositor, obtain an Opinion of Counsel experienced in such
matters to the effect that such action shall not cause the Trust to be taxable
as a corporation or classified as other than a grantor trust for United States
federal income tax purposes on account of such action.
(c) Except as provided in Section 10.03, if any proposed amendment to the
Trust Agreement provides for, or the Trustees otherwise propose to effect, (i)
any action that would adversely affect in any material respect the powers,
preferences or special rights of the Capital Securities, whether by way of
amendment to the Trust Agreement or otherwise, or (ii) the dissolution, winding-
up or termination of the Trust, other than pursuant to the terms of this Trust
Agreement, then the Holders of Outstanding Capital Securities as a class will be
entitled to vote on such amendment or proposal and such amendment or proposal
shall not be effective except with the approval of the Holders of at least a
majority in Liquidation Amount of the Outstanding Capital Securities. No
amendment to this Trust Agreement may be made if, as a result of such amendment,
it would cause the trust to be taxable as a corporation or classified as other
than a grantor trust for United States federal income tax purposes or would lose
its exemption from status as an "investment company" under the Investment
Company Act.
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Section 6.02. Notice of Meetings. Notice of all meetings of the Capital
------------------
Securityholders, stating the time, place and purpose of the meeting, shall be
given by the Administrative Trustees pursuant to Section 10.09 to each Capital
Securityholder of record, at his registered address, at least 15 days and not
more than 90 days before the meeting. At any such meeting, any business properly
before the meeting may be so considered whether or not stated in the notice of
the meeting. Any adjourned meeting may be held as adjourned without further
notice.
Any and all notices to which any Capital Securityholder hereunder may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Capital Securityholder of record at
his last known address as recorded on the Securities Register.
Section 6.03. Meetings of Capital Securityholders. No annual meeting of
-----------------------------------
Securityholders is required to be held. The Administrative Trustees, however,
shall call a meeting of Securityholders to vote on any matter upon the written
request of the Capital Securityholders of record of at least 25% in aggregate
Liquidation Amount of the Outstanding Capital Securities and the Administrative
Trustees or the Property Trustee may, at any time in their discretion, call a
meeting of Capital Securityholders to vote on any matters as to the which
Capital Securityholders are entitled to vote.
Capital Securityholders of record of at least 50% in aggregate Liquidation
Amount of the Outstanding Capital Securities present in person or by proxy,
shall constitute a quorum at any meeting of Securityholders.
If a quorum is present at a meeting, an affirmative vote by the Capital
Securityholders of record present, in person or by proxy, holding at least a
majority in aggregate Liquidation Amount of the Capital Securities held by the
Capital Securityholders of record present, either in person or by proxy, at such
meeting shall constitute the action of the Securityholders, unless this Trust
Agreement requires a greater number of affirmative votes.
Section 6.04. Voting Rights. Securityholders shall be entitled to one
-------------
vote for each $1,000 of Liquidation Amount represented by their Trust Securities
in respect of any matter as to which such Securityholders are entitled to vote.
Section 6.05. Proxies, etc. At any meeting of Securityholders, any
-------------
Securityholder entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Administrative Trustees, or with such other officer or agent of the
Trust as the Administrative Trustees may direct, for verification prior to the
time at which such vote shall be taken. Pursuant to a resolution of the
Property Trustee, proxies may be solicited in the name of the Property Trustee
or one or more officers of the Property Trustee. Only Securityholders of record
shall be entitled to vote. When Trust Securities are held jointly by several
persons, any one of them may vote at any meeting in person or by proxy in
respect of such Trust Securities, but if more than one of them shall be present
at such meeting in person or by proxy, and such joint owners or their proxies so
present disagree as to any vote to be cast, such vote shall not be received in
respect of such Trust Securities. A proxy purporting to be executed by or on
behalf of a Securityholder shall be deemed valid unless challenged at or prior
to its
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exercise, and the burden of proving invalidity shall rest on the challenger. No
proxy shall be valid more than three years after its date of execution.
Section 6.06. Securityholder Action by Written Consent. Any action which
----------------------------------------
may be taken by Securityholders at a meeting may be taken without a meeting if
Securityholders holding at least a majority in aggregate Liquidation Amount of
all Outstanding Trust Securities entitled to vote in respect of such action (or
such larger proportion thereof as shall be required by any express provision of
this Trust Agreement) shall consent to the action in writing. The
Administrative Trustees shall cause a notice of any matter upon which action by
written consent of the Securityholders is to be taken, to be given to each
Holder of record of the Outstanding Capital Securities in the same manner as
that set forth in Section 6.02 for notice of meetings.
Section 6.07. Record Date for Voting and Other Purposes. For the purposes
-----------------------------------------
of determining the Securityholders who are entitled to notice of and to vote at
any meeting or by written consent, or to participate in any Distribution on the
Trust Securities in respect of which a record date is not otherwise provided for
in this Trust Agreement, or for the purpose of any other action, the
Administrative Trustees or the Property Trustee may from time to time fix a
date, not more than 90 days prior to the date of any meeting of Securityholders
or the payment of Distribution or other action, as the case may be, as a record
date for the determination of the identity of the Securityholders of record for
such purposes.
Section 6.08. Acts of Securityholders. Any request, demand,
-----------------------
authorization, direction, notice, consent, waiver or other action provided or
permitted by this Trust Agreement to be given, made or taken by Securityholders
or Owners may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Securityholders or Owners in person
or by an agent duly appointed in writing; and, except as otherwise expressly
provided herein, such action shall become effective when such instrument or
instruments are delivered to an Administrative Trustee. Such instrument or
instruments (and the action embodied therein and evidenced thereby) are herein
sometimes referred to as the "Act" of the Securityholders or Owners signing such
instrument or instruments. Proof of execution of any such instrument or of a
writing appointing any such agent shall be sufficient for any purpose of this
Trust Agreement and (subject to Section 8.01) conclusive in favor of the
Trustees, if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is
by a signer acting in a capacity other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which any Trustee receiving the same deems sufficient.
The ownership of Trust Securities shall be proved by the Securities
Register.
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Any request, demand, authorization, direction, notice, consent, waiver or
other Act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.
Without limiting the foregoing, a Securityholder entitled hereunder to take
any action hereunder with regard to any particular Trust Security may do so with
regard to all or any part of the Liquidation Amount of such Trust Security or by
one or more duly appointed agents each of which may do so pursuant to such
appointment with regard to all or any part of such Liquidation Amount.
If any dispute shall arise between the Securityholders of Trust Securities
and the Administrative Trustees or among such Securityholders or Trustees with
respect to the authenticity, validity or binding nature of any request, demand,
authorization, direction, consent, waiver or other Act of such Securityholder or
Trustee under this Article VI, then the determination of such matter by the
Property Trustee shall be conclusive with respect to such matter.
A Securityholder may institute a legal proceeding directly against the
Depositor under the Guarantee to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee (as defined
in the Guarantee), the Trust or any person or entity.
Section 6.09. Inspection of Records. Upon reasonable notice to the
---------------------
Administrative Trustees and the Property Trustee, the records of the Trust shall
be open to inspection by Securityholders during normal business hours for any
purpose reasonably related to such Securityholder's interest as a
Securityholder.
ARTICLE VII
Representations and Warranties
Section 7.01. Representations and Warranties of the Bank, the Property
--------------------------------------------------------
Trustee and the Trustee. The Bank, the Property Trustee and the Trustee, each
- -----------------------
severally on behalf of and as to itself, hereby represents and warrants as to
itself only and for the benefit of the Depositor and the Securityholders that:
(a) the Bank is a banking corporation duly organized, validly existing and
in good standing under the laws of the State of New York;
(b) the Bank has full corporate power, authority and legal right to
execute, deliver and perform its obligations under this Trust Agreement and has
taken all necessary action to authorize the execution, delivery and performance
by it of this Trust Agreement;
(c) the Trustee is a Delaware banking corporation;
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(d) the Trustee has full corporate power, authority and legal right to
execute, deliver and perform its obligations under this Trust Agreement and has
taken all necessary action to authorize the execution, delivery and performance
by it of this Trust Agreement.
(e) this Trust Agreement has been duly authorized, executed and delivered
by the Bank and the Trustee and constitutes the valid and legally binding
agreement each of the Bank and the Trustee enforceable against each of them in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
(f) the execution, delivery and performance by the Bank of this Trust
Agreement have been duly authorized by all necessary corporate and other action
on the part of the Bank, the Trustee and the Property Trustee, and do not
require any approval of stockholders of the Bank or the Trustee and such
execution, delivery and performance will not (i) violate the Charter or By-laws
of the Bank or the Trustee, (ii) violate any provision of, or constitute, with
or without notice or lapse of time, a default under, or result in the creation
or imposition of, any Lien on any properties included in the Trust Property
pursuant to the provisions of, any indenture, mortgage, credit agreement,
license or other agreement or instrument to which the Bank, the Property Trustee
or the Trustee is a party or by which it is bound or (iii) violate any law,
governmental rule or regulation of the State of New York, the State of Delaware
or the United States governing the banking or trust powers of the Bank, the
Trustee and the Property Trustee or any order, judgment or decree applicable to
the Bank, the Property Trustee or the Trustee;
(g) neither the authorization, execution or delivery by the Bank or the
Trustee of this Trust Agreement nor the consummation of any of the transactions
by the Bank, the Trustee or the Property Trustee contemplated herein or therein
require the consent or approval of, the giving of notice to, the registration
with or the taking of any other action with respect to any governmental
authority or agency under any existing federal law governing the banking or
trust powers of the Bank or under the laws of the United States, the State of
Delaware or the State of New York;
(h) there are no proceedings pending or, to the best of each of the Bank's
and the Trustee's knowledge, threatened against or affecting the Bank, the
Trustee or the Property Trustee in any court or before any governmental
authority, agency or arbitration board or tribunal which, individually or in the
aggregate, would materially and adversely affect the Trust or would question the
right, power and authority of the Bank or the Trustee, as the case may be, to
enter into or perform its obligations as one of the Trustees under this Trust
Agreement; and
(i) the principal place of business of the Trustee is located in the State
of Delaware.
Section 7.02. Representations and Warranties of Parent. The Parent
----------------------------------------
hereby represents and warrants for the benefit of the Securityholders that:
(a) this Trust Agreement has been duly authorized, executed and delivered
by Parent and constitutes the valid and legally binding agreement of Parent
enforceable against Parent in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent
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transfer, reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity principles;
(b) the Trust Securities Certificates issued on the Closing Date on behalf
of the Trust have been duly authorized and will have been, as of each such date,
duly and validly executed, issued and delivered by the Trustees pursuant to the
terms and provisions of, and in accordance with the requirements of, this Trust
Agreement and the Securityholders will be, as of such date, entitled to the
benefits of this Trust Agreement; and
(c) there are no taxes, fees or other governmental charges payable by the
Trust (or the Trustees on behalf of the Trust) under the laws of the State of
Delaware or any political subdivision thereof in connection with the execution,
delivery and performance by the Bank or the Property Trustee, as the case may
be, of this Trust Agreement.
ARTICLE VIII
The Trustees
Section 8.01. Certain Duties and Responsibilities.
-----------------------------------
(a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the Property Trustee, by the Trust
Indenture Act. Notwithstanding the foregoing, no provision of this Trust
Agreement shall require the Trustees to expend or risk their own funds or
otherwise incur any financial liability in the performance of any of their
duties hereunder, or in the exercise of any of their rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it. Whether or not therein expressly so provided, every provision of this Trust
Agreement relating to the conduct or affecting the liability of or affording
protection to the Trustees shall be subject to the provisions of this Section.
Nothing in this Trust Agreement shall be construed to release an Administrative
Trustee from liability for such Person's own negligent action, such Person's own
negligent failure to act or such Person's own willful misconduct. To the extent
that, at law or in equity, any Trustee has duties and liabilities relating to
the Trust or to the Holders, such Trustee shall not be liable to the Trust or to
any Holder for such Trustee's good faith reliance on the provisions of this
Trust Agreement. The provisions of this Trust Agreement, to the extent that
they restrict the duties and liabilities of the Trustees otherwise existing at
law or in equity, are agreed by the Depositor and the Holders to replace such
other duties and liabilities of the Trustees.
(b) All payments made by the Property Trustee or a Paying Agent in respect
of the Trust Securities shall be made only from the revenue and proceeds from
the Trust Property and only to the extent that there shall be sufficient revenue
or proceeds from the Trust Property to enable the Property Trustee or a Paying
Agent to make payments in accordance with the terms hereof. Each
Securityholder, by its acceptance of a Trust Security, agrees that it will look
solely to the revenue and proceeds from the Trust Property to the extent legally
available for distribution to it as herein provided and that
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the Trustees are not personally liable to it for any amount distributable in
respect of any Trust Security or for any other liability in respect of any Trust
Security. This Section 8.01(b) does not limit the liability of the Trustees
expressly set forth elsewhere in this Trust Agreement or, in the case of the
Property Trustee, in the Trust Indenture Act.
(c) The Property Trustee, before the occurrence of any Event of Default and
after the curing of all Events of Default that may have occurred, shall
undertake to perform only such duties as are specifically set forth in this
Trust Agreement and no implied covenants shall be read into this Trust Agreement
against the Property Trustee. In case an Event of Default has occurred (that
has not been cured or waived), the Property Trustee shall exercise such of the
rights and powers vested in it by this Trust Agreement, and use the same degree
of care and skill in their exercise, as a prudent person would exercise or use
under the circumstances in the conduct of his own affairs.
(d) No provision of this Trust Agreement shall be construed to relieve the
Property Trustee from liability for its own negligent action, its own negligent
failure to act or its own willful misconduct, except that:
(i) the Property Trustee shall not be liable for any error of judgment
made in good faith by an authorized officer of the Property Trustee, unless it
shall be proved that the Property Trustee was negligent in ascertaining the
pertinent facts;
(ii) the Property Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of not less than a majority in Liquidation Amount of
the Capital Securities relating to the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or exercising any
trust or power conferred upon the Property Trustee under this Trust Agreement;
(iii) the Property Trustee's sole duty with respect to the custody, safe
keeping and physical preservation of the Debentures and the Payment Account
shall be to deal with such property in a similar manner as the Property Trustee
deals with similar property for its own account, subject to the protections and
limitations on liability afforded to the Property Trustee under this Trust
Agreement and the Trust Indenture Act;
(iv) the Property Trustee shall not be liable for any interest on any
money received by it except as it may otherwise agree with the Depositor. Money
held by the Property Trustee need not be segregated from other funds held by it
except in relation to the Payment Account maintained by the Property Trustee
pursuant to Section 3.01 and except to the extent otherwise required by law; and
(v) the Property Trustee shall not be responsible for monitoring the
compliance by the Administrative Trustees or the Depositor with their respective
duties under this Trust Agreement, nor shall the Property Trustee be liable for
the default or misconduct of the Administrative Trustees or the Depositor.
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Section 8.02. Certain Notices.
---------------
Within five Business Days after the occurrence of any Event of Default, the
Property Trustee shall transmit, in the manner and to the extent provided in
Section 10.09, notice of any Event of Default actually known to the Property
Trustee to the Securityholders, the Administrative Trustees and the Depositor,
unless such Event of Default shall have been cured or waived.
Within five Business Days after the receipt of notice of the Depositor's
exercise of its right to defer the payment of interest on the Debentures
pursuant to the Indenture, the Administrative Trustees shall transmit, in the
manner and to the extent provided in Section 10.09, notice of such exercise to
the Securityholders and the Property Trustee, unless such exercise shall have
been revoked.
Section 8.03. Certain Rights of Property Trustee. Subject to the
----------------------------------
provisions of Section 8.01 and except as provided by law:
(a) the Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;
(b) if (i) in performing its duties under this Trust Agreement the Property
Trustee is required to decide between alternative courses of action or (ii) in
construing any of the provisions in this Trust Agreement the Property Trustee
finds the same ambiguous or inconsistent with any other provisions contained
herein or (iii) the Property Trustee is unsure of the application of any
provision of this Trust Agreement, then, except as to any matter as to which the
Capital Securityholders are entitled to vote under the terms of this Trust
Agreement, the Property Trustee shall deliver a notice to the Depositor
requesting written instructions of the Depositor as to the course of action to
be taken. The Property Trustee shall take such action, or refrain from taking
such action, as the Property Trustee shall be instructed in writing to take, or
to refrain from taking, by the Depositor; provided, however, that if the
Property Trustee does not receive such instructions of the Depositor within ten
Business Days after it has delivered such notice, or such reasonably shorter
period of time set forth in such notice (which to the extent practicable shall
not be less than two Business Days), it may, but shall be under no duty to, take
or refrain from taking such action not inconsistent with this Trust Agreement as
it shall deem advisable and in the best interests of the Securityholders, in
which event the Property Trustee shall have no liability except for its own bad
faith, negligence or willful misconduct;
(c) any direction or act of the Depositor or the Administrative Trustees
contemplated by this Trust Agreement shall be sufficiently evidenced by an
Officer's Certificate;
(d) whenever in the administration of this Trust Agreement, the Property
Trustee shall deem it desirable that a matter be established before undertaking,
suffering or
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omitting any action hereunder, the Property Trustee (unless other evidence is
herein specifically prescribed) may, in the absence of bad faith on its part,
request and rely upon an Officer's Certificate which, upon receipt of such
request, shall be promptly delivered by the Depositor or the Administrative
Trustees;
(e) the Property Trustee shall have no duty to see to any recording, filing
or registration of any instrument (including any financing or continuation
statement or any filing under tax or securities laws) or any rerecording,
refiling or reregistration thereof;
(f) the Property Trustee may (at the expense of the Depositor) consult with
counsel (which counsel may be counsel to the Depositor or any of its Affiliates,
and may include any of its employees) and the written advice of such counsel
shall be full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in reliance
thereon; the Property Trustee shall have the right at any time to seek
instructions concerning the administration of this Trust Agreement from any
court of competent jurisdiction;
(g) the Property Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Trust Agreement at the request or
direction of any of the Securityholders pursuant to this Trust Agreement, unless
such Securityholders shall have offered to the Property Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(h) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
debenture, note or other evidence of indebtedness or other paper or document,
unless requested in writing to do so by one or more Securityholders, but the
Property Trustee may make such further inquiry or investigation into such facts
or matters as it may see fit;
(i) the Property Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through its agents or
attorneys, provided that the Property Trustee shall be responsible for its own
negligence or misconduct with respect to selection of any agent or attorney
appointed by it hereunder;
(j) whenever in the administration of this Trust Agreement the Property
Trustee shall deem it desirable to receive instructions with respect to
enforcing any remedy or right or taking any other action hereunder, the Property
Trustee (i) may request instructions from the Holders of the Trust Securities
which instructions may only be given by the Holders of the same proportion in
Liquidation Amount of the Trust Securities as would be entitled to direct the
Property Trustee under the terms of the Trust Securities in respect of such
remedy, right or action, (ii) may refrain from enforcing such remedy or right or
taking such other action until such instructions are received and (iii) shall be
protected in acting in accordance with such instructions; and
(k) except as otherwise expressly provided by this Trust Agreement, the
Property Trustee shall not be under any obligation to take any action that is
discretionary under the provisions of this Trust Agreement.
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No provision of this Trust Agreement shall be deemed to impose any duty or
obligation on the Property Trustee to perform any act or acts or exercise any
right, power, duty or obligation conferred or imposed on it, in any jurisdiction
in which it shall be illegal, or in which the Property Trustee shall be
unqualified or incompetent in accordance with applicable law, to perform any
such act or acts, or to exercise any such right, power, duty or obligation. No
permissive power or authority available to the Property Trustee shall be
construed to be a duty.
Section 8.04. Not Responsible for Recitals or Issuance of Securities. The
------------------------------------------------------
recitals contained herein and in the Trust Securities Certificates shall be
taken as the statements of the Trust and the Depositor, and the Trustees do not
assume any responsibility for their correctness. The Trustees shall not be
accountable for the use or application by the Depositor of the proceeds of the
Debentures.
Section 8.05. May Hold Securities. Except as provided in the definition
-------------------
of the term "Outstanding" in Article I, any Trustee or any other agent of any
Trustee or the Trust, in its individual or any other capacity, may become the
owner or pledgee of Trust Securities and, subject to Sections 8.8 and 8.13, may
otherwise deal with the Trust with the same rights it would have if it were not
a Trustee or such other agent.
Section 8.06. Compensation; Indemnity; Fees.
-----------------------------
The Trust shall:
(a) pay to the Trustees from time to time reasonable compensation for all
services rendered by them hereunder and in the case of the Property Trustee,
such compensation as is separately agreed by the Depositor and the Property
Trustee (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust); and
(b) except as otherwise expressly provided herein, reimburse the Trustees
upon request for all reasonable expenses, disbursements and advances incurred or
made by the Trustees in accordance with any provision of this Trust Agreement
(including the reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith.
The Depositor agrees to indemnify each of the Trustees or any predecessor
Trustee for, and to hold the Trustees harmless against, any loss, damage,
claims, liability, tax, penalty or expense of any kind and nature whatsoever
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of this Trust Agreement,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder. The provisions of this Section 8.06 shall survive the
termination of this Trust Agreement. No Trustee or Paying Agent may claim any
lien on any Trust Property as a result of any amount due pursuant to this
Section 8.06.
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Section 8.07. Corporate Property Trustee Required; Eligibility of
---------------------------------------------------
Trustees.
(a) There shall at all times be a Property Trustee hereunder with respect
to the Trust Securities. The Property Trustee shall be a Person that is a
national or state chartered bank and eligible pursuant to the Trust Indenture
Act to act as such and has a combined capital and surplus of at least
$50,000,000. If any such Person publishes reports of condition at least
annually, pursuant to law or to the requirements of its supervising or examining
authority, then for the purposes of this Section and to the extent permitted by
the Trust Indenture Act, the combined capital and surplus of such Person shall
be deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Property Trustee with
respect to the Trust Securities shall cease to be eligible in accordance with
the provisions of this Section, it shall resign immediately in the manner and
with the effect hereinafter specified in this Article.
(b) There shall at all times be one or more Administrative Trustees
hereunder with respect to the Trust Securities. Each Administrative Trustee
shall be either a natural person who is at least 21 years of age or a legal
entity that shall act through one or more persons authorized to bind that
entity.
(c) There shall at all times be a Trustee with respect to the Trust
Securities that shall either be (i) a natural person who is at least 21 years of
age and a resident of the State of Delaware or (ii) a legal entity with its
principal place of business in the State of Delaware and that otherwise meets
the requirements of applicable Delaware law that shall act through one or more
persons authorized to bind such entity.
Section 8.08. Conflicting Interests.
---------------------
(a) If the Property Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Property Trustee shall either
eliminate such interest or resign, to the extent and in the manner provided by,
and subject to the provisions of, the Trust Indenture Act and this Trust
Agreement.
(b) The Guarantee Agreement and the Indenture shall be deemed to be
specifically described in this Trust Agreement for the purposes of clause (i) of
the first proviso contained in Section 310(b) of the Trust Indenture Act.
Section 8.09. Co-Trustees and Separate Trustee. Unless an Event of
--------------------------------
Default shall have occurred and be continuing, at any time or times, for the
purpose of meeting the legal requirements of the Trust Indenture Act or of any
jurisdiction in which any part of the Trust Property may at the time be located,
the Depositor and the Administrative Trustees, by agreed action of the majority
of such Trustees, shall have power to appoint, and upon the written request of
the Administrative Trustees, the Depositor shall for such purpose join with the
Administrative Trustees in the execution, delivery and performance of all
instruments and agreements necessary or proper to appoint one or more Persons
approved by the Property Trustee either to act as co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to the extent
required by law, to act as separate trustee of any such property, in either case
with such powers as may be provided in the instrument of appointment, and to
vest in such Person or
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Persons in the capacity aforesaid, any property, title, right or power deemed
necessary or desirable, subject to the other provisions of this Trust Agreement.
If the Depositor does not join in such appointment within 15 days after the
receipt by it of a request so to do, or in case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone shall also have the power
to make such appointment. Any co-trustee or separate trustee appointed pursuant
to this Section shall satisfy the requirements of Section 8.07.
Should any written instrument from the Depositor be required by any co-
trustee or separate trustee so appointed for more fully confirming to such co-
trustee or separate trustee such property, title, right or power, any and all
such instruments shall, on request, be executed, acknowledged and delivered by
the Depositor.
Every co-trustee or separate trustee shall, to the extent permitted by law,
but to such extent only, be appointed subject to the following terms, namely:
(a) The Trust Securities shall be executed by one or more Administrative
Trustees, and the Trust Securities shall be delivered by the Property Trustee,
and all rights, powers, duties and obligations hereunder in respect of the
custody of securities, cash and other personal property held by, or required to
be deposited or pledged with, the Trustees specified hereunder, shall be
exercised solely by such Trustees and not by such co-trustee or separate
trustee.
(b) The rights, powers, duties, and obligations hereby conferred or imposed
upon the Property Trustee in respect of any property covered by such appointment
shall be conferred or imposed upon and exercised or performed by the Property
Trustee or by the Property Trustee and such co-trustee or separate trustee
jointly, as shall be provided in the instrument appointing such co-trustee or
separate trustee, except to the extent that under any law of any jurisdiction in
which any particular act is to be performed, the Property Trustee shall be
incompetent or unqualified to perform such act, in which event such rights,
powers, duties and obligations shall be exercised and performed by such co-
trustee or separate trustee.
(c) The Property Trustee at any time, by an instrument in writing executed
by it, with the written concurrence of the Depositor, may accept the resignation
of or remove any co-trustee or separate trustee appointed under this Section,
and, in case a Debenture Event of Default has occurred and is continuing, the
Property Trustee shall have power to accept the resignation of, or remove, any
such co-trustee or separate trustee without the concurrence of the Depositor.
Upon the written request of the Property Trustee, the Depositor shall join with
the Property Trustee in the execution, delivery and performance of all
instruments and agreements necessary or proper to effectuate such resignation or
removal. A successor to any co-trustee or separate trustee so resigned or
removed may be appointed in the manner provided in this Section.
(d) No co-trustee or separate trustee hereunder shall be personally liable
by reason of any act or omission of the Property Trustee or any other trustee
hereunder.
(e) The Property Trustee shall not be liable by reason of any act of a co-
trustee or separate trustee.
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(f) Any Act of Holders delivered to the Property Trustee shall be deemed to
have been delivered to each such co-trustee and separate trustee.
Section 8.10. Resignation and Removal; Appointment of Successor. No
-------------------------------------------------
resignation or removal of any Trustee (the "Relevant Trustee") and no
appointment of a successor Relevant Trustee pursuant to this Article shall
become effective until the acceptance of appointment by the successor Relevant
Trustee in accordance with the applicable requirements of Section 8.11.
Subject to the immediately preceding paragraph, the Relevant Trustee may
resign at any time with respect to the Trust Securities by giving written notice
thereof to the Securityholders. If the instrument of acceptance by a successor
Relevant Trustee required by Section 8.11 shall not have been delivered to the
Relevant Trustee within 30 days after the giving of such notice of resignation,
the resigning Relevant Trustee may petition, at the expense of the Trust, any
court of competent jurisdiction for the appointment of a successor Relevant
Trustee with respect to the Trust Securities.
Subject to the following sentence, any of the Trustees may be removed at any
time by Act of the Common Securityholder. The Holders of at least a Majority in
Liquidation Amount of the Outstanding Securities may remove the Property Trustee
or the Trustee, or both of them, for cause, or if a Debenture Event of Default
shall have occurred and be continuing, the Property Trustee or the Trustee, as
the case may be, may be removed at such time by Act of the Holders of a Majority
in Liquidation Amount of the Outstanding Capital Securities with or without
cause, delivered to the Property Trustee (in its individual capacity and on
behalf of the Trust). An Administrative Trustee may be removed by the Common
Securityholder at any time.
If the Relevant Trustee shall resign, be removed or become incapable of
continuing to act as Relevant Trustee, or if a vacancy shall occur in the office
of any Trustee for any cause, at a time when no Debenture Event of Default shall
have occurred and be continuing, the Common Securityholder, by Act of the Common
Securityholder delivered to the retiring Relevant Trustee, shall promptly
appoint a successor Relevant Trustee or Trustees with respect to the Trust
Securities and the Trust, and the retiring Relevant Trustee shall comply with
the applicable requirements of Sec tion 8.11. If the Property Trustee shall
resign, be removed or become incapable of continuing to act as the Property
Trustee at a time when a Debenture Event of Default shall have occurred and be
continuing, the Capital Securityholders, by Act of the Securityholders of a
majority in Liquidation Amount of the Capital Securities then Out standing
delivered to the retiring Relevant Trustee, shall promptly appoint a successor
Relevant Trustee or Trustees with respect to the Trust Securities and the Trust,
and such successor Trustee shall comply with the applicable requirements of
Section 8.11. If an Administrative Trustee shall resign, be removed or become
incapable of continuing to act as Administrative Trustee at a time when a
Debenture Event of Default shall have occurred and be continuing, the Common
Securityholder may appoint a successor Administrative Trustee, which successor
Trustee shall comply with the applicable requirements of Section 8.11 or the
Common Securityholder may reduce the number of Administrative Trustees pursuant
to Section 8.17(a). If no successor Relevant Trustee with respect to the Trust
Securities shall have been so appointed by the Common Securityholder or the
Capital Securityholders and accepted appointment in the manner
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required by Section 8.11, any Securityholder who has been a Securityholder of
Trust Securities for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Relevant Trustee with respect to the Trust
Securities.
The Property Trustee shall give notice of each resignation and each removal
of the Property Trustee with respect to the Trust Securities and the Trust and
each appointment of a successor Property Trustee with respect to the Trust
Securities and the Trust to all Securityholders in the manner provided in
Section 10.09 and shall give notice to the Depositor. Each notice shall include
the name of the successor Property Trustee with respect to the Trust Securities
and the Trust and the address of its Corporate Trust Office.
Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee, a Trustee or a Property
Trustee who is a natural person dies or becomes incompetent or incapacitated,
the vacancy created by such death, incompetence or incapacity may be filled by
(a) the unanimous act of the remaining Administrative Trustees if there are at
least two of them prior to such vacancy or (b) otherwise by the Depositor (with
the successor in each case being an individual who satisfies the eligibility
requirement for Administrative Trustees set forth in Section 8.07).
Additionally, notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event the Depositor believes that any Administrative Trustee
or a Property Trustee who is a natural person, as the case may be, has become
incompetent or incapacitated, the Depositor, by notice to the remaining
Trustees, may terminate the status of such Person as an Administrative Trustee
or a Property Trustee, as the case may be (in which case the vacancy so created
will be filled in accordance with the preceding sentence).
Section 8.11. Acceptance of Appointment by Successor. In case of the
--------------------------------------
appointment hereunder of a successor Relevant Trustee with respect to the Trust
Securities and the Trust, every such successor Relevant Trustee so appointed
shall execute, acknowledge and deliver to the Trust and to the retiring Relevant
Trustee an instrument accepting such appointment, and thereupon the resignation
or removal of the retiring Relevant Trustee shall become effective and such
successor Relevant Trustee, without any further act, deed or conveyance, shall
become vested with all the rights, powers, trusts and duties of the retiring
Relevant Trustee; but, on the request of the Depositor or the successor Relevant
Trustee, such retiring Relevant Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Relevant
Trustee all the rights, powers and trusts of the retiring Relevant Trustee and
shall duly assign, transfer and deliver to such successor Relevant Trustee all
property and money held by such retiring Relevant Trustee hereunder.
In case of the appointment hereunder of a successor Relevant Trustee with
respect to the Trust Securities and the Trust, the retiring Relevant Trustee and
each successor Relevant Trustee with respect to the Trust Securities shall
execute and deliver an amendment hereto wherein each successor Relevant Trustee
shall accept such appointment and which (a) shall contain such provisions as
shall be necessary or desirable to transfer and confirm to, and to vest in, each
successor Relevant Trustee all the rights, powers, trusts and duties of the
retiring Relevant Trustee with respect to the
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Trust Securities and the Trust and (b) shall add to or change any of the
provisions of this Trust Agreement as shall be necessary to provide for or
facilitate the administration of the trusts hereunder by more than one Relevant
Trustee, it being understood that nothing herein or in such amendment shall
constitute such Relevant Trustees co-trustees of the same trust and that each
such Relevant Trustee shall be trustee of a trust or trusts hereunder separate
and apart from any trust or trusts hereunder administered by any other such
Relevant Trustee and upon the execution and delivery of such amendment the
resignation or removal of the retiring Relevant Trustee shall become effective
to the extent provided therein and each such successor Relevant Trustee, without
any further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Relevant Trustee with respect to the
Trust Securities and the Trust; but, on request of the Trust or any successor
Relevant Trustee, such retiring Relevant Trustee shall duly assign, transfer and
deliver to such successor Relevant Trustee all Trust Property, all proceeds
thereof and money held by such retiring Relevant Trustee hereunder with respect
to the Trust Securities and the Trust.
Upon request of any such successor Relevant Trustee, the Trust shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Relevant Trustee all such rights, powers and trusts referred
to in the first or second preceding paragraph, as the case may be.
No successor Relevant Trustee shall accept its appointment unless at the
time of such acceptance such successor Relevant Trustee shall be qualified and
eligible under this Article.
Section 8.12. Merger, Conversion, Consolidation or Succession to Business
-----------------------------------------------------------
of a Trustee. Any Person into which the Property Trustee, Trustee or any
- ------------
Administrative Trustee which is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Relevant Trustee shall be a party, or
any Person succeeding to all or substantially all the corporate trust business
of any such Relevant Trustee, shall be the successor of such Relevant Trustee
hereunder, provided such Person shall be otherwise qualified and eligible under
this Article, without the execution or filing of any paper or any further act on
the part of any of the parties hereto.
Section 8.13. Preferential Collection of Claims Against Depositor or the
----------------------------------------------------------
Trust. If and when the Property Trustee shall be or become a creditor of the
- -----
Depositor of the Trust (or any other obligor upon the Capital Securities), the
Property Trustee shall be subject to the provisions of the Trust Indenture Act
regarding the collection of claims against the Depositor or the Trust ( or any
such other obligor).
Section 8.14. Reports by Property Trustee.
---------------------------
(a) Within 90 days after December 31 of each year commencing with December
31, 1998, the Property Trustee shall transmit by mail to all Securityholders, as
their names and addresses appear in the Securities Register, and to the
Depositor, a brief report dated as of such December 31 with respect to:
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(i) its eligibility under Section 8.07 or, in lieu thereof, if to the
best of its knowledge it has continued to be eligible under said Section, a
written statement to such effect;
(ii) a statement that the Property Trustee has complied with all of its
obligations under this Trust Agreement during the twelve-month period (or, in
the case of the initial report, the period since the Closing Date) ending with
such December 31 or, if the Property Trustee has not complied in any material
respect with such obliga tions, a description of such non-compliance; and
(iii) any change in the property and funds in its possession as Property
Trustee since the date of its last report and any action taken by the Property
Trustee in the performance of its duties hereunder which it has not previously
reported and which in its opinion materially affects the Trust Securities.
(b) In addition, the Property Trustee shall transmit to Securityholders
such reports concerning the Property Trustee and its actions under this Trust
Agreement as may be required pursuant to the Trust Indenture Act at the times
and in the manner provided pursuant thereto.
(c) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with each stock exchange, the Nasdaq
National Market or such other interdealer quotation system or self-regulatory
organization upon which the Trust Securities are listed or traded, if any, with
the Commission and with the Depositor.
Section 8.15. Reports to the Property Trustee. Each of the Depositor and
-------------------------------
the Administrative Trustees on behalf of the Trust shall provide to the Property
Trustee such documents, reports and information as required by Section 314 of
the Trust Indenture Act (if any) and the compliance certificate required by
Section 314 of the Trust Indenture Act in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act. The Depositor and the
Administrators shall annually file with the Property Trustee a certificate
specifying whether such Person is in compliance with all the terms and covenants
applicable to such Person thereunder.
Section 8.16. Evidence of Compliance with Conditions Precedent. Each of
------------------------------------------------
the Depositor and the Administrative Trustees on behalf of the Trust shall
provide to the Property Trustee such evidence of compliance with any conditions
precedent, if any, provided for in this Trust Agreement that relate to any of
the matters set forth in Section 314(c) of the Trust Indenture Act. Any
certificate or opinion required to be given by an officer pursuant to Section
314(c)(1) of the Trust Indenture Act may be given in the form of an Officers'
Certificate.
Section 8.17. Number of Trustees.
------------------
(a) The number of Trustees shall be four, provided that the Depositor, by
written instrument, may increase or decrease the number of Administrative
Trustees.
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(b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 8.17(a), or if the
number of Trustees is increased pursuant to Section 8.17(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 8.10.
(c) The death, resignation, retirement, removal, bankruptcy, incompetence
or incapacity to perform the duties of a Trustee shall not operate to annul,
dissolve or terminate the Trust. Whenever a vacancy in the number of
Administrative Trustees shall occur, until such vacancy is filled by the
appointment of an Administrative Trustee in accordance with Section 8.10, the
Administrative Trustees in office, regardless of their number (and
notwithstanding any other provision of this Agreement), shall have all the
powers granted to the Administrative Trustees and shall discharge all the duties
imposed upon the Administrative Trustees by this Trust Agreement.
Section 8.18. Delegation of Power.
-------------------
(a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any other natural person over the age of 21 his or
her power for the purpose of executing any documents contemplated in Section
2.07(a), including any registration statement or amendment thereto filed with
the Commission or making any other governmental filing; and
(b) The Administrative Trustees shall have power to delegate from time to
time to such of their number or to the Depositor the doing of such things and
the execution of such instruments either in the name of the Trust or the names
of the Administrative Trustees or otherwise as the Administrative Trustees may
deem expedient, to the extent such delegation is not prohibited by applicable
law or contrary to the provisions of the Trust, as set forth herein.
ARTICLE IX
Termination and Liquidation
Section 9.01. Termination Upon Expiration Date. The Trust shall
--------------------------------
automatically terminate on (_______________________, 2053), (the "Expiration
Date") following the distribution of the Trust Property in accordance with
Section 9.04.
Section 9.02. Early Termination. Upon the first to occur of any of the
-----------------
following events (such first occurrence, an "Early Termination Event"):
(a) the occurrence of a Bankruptcy Event in respect of, or the dissolution
or liquidation of, the Depositor;
(b) the written direction to the Property Trustee from the Depositor at any
time (which direction is optional and wholly within the discretion of the
Depositor) to terminate the Trust and distribute the Debentures to the
Securityholders in exchange for the Trust Securities;
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(c) the redemption of all of the Capital Securities in connection with the
redemption of all of the Debentures; and
(d) the entry of an order for dissolution of the Trust shall have been
entered by a court of competent jurisdiction,
then the Trustees shall take such action as is required by Section 4.02 or
Section 9.04, as applicable, and as soon as practicable after the occurrence of
any event referred to in this Section 9.02, the Trustees shall cause to be filed
a certificate of cancellation relating to the Trust with the Secretary of State
of the State of Delaware.
Section 9.03. Termination. The respective obligations and
-----------
responsibilities of the Trustees and the Trust created and continued hereby
shall terminate upon the latest to occur of the following: (a) the distribution
by the Property Trustee to Securityholders upon the liquidation of the Trust
pursuant to Section 9.04, or upon the redemption of all of the Trust Securities
pursuant to Section 4.02, of all amounts required to be distributed hereunder
upon the final payment of the Trust Securities; (b) the payment of any expenses
owed by the Trust and (c) the discharge of all administrative duties of the
Administrative Trustees, including the performance of any tax reporting
obligations with respect to the Trust or the Securityholders.
Section 9.04. Liquidation.
-----------
(a) If an Early Termination Event specified in clauses (a), (b) or (d) of
Section 9.02 occurs or immediately prior to the Expiration Date specified in
Section 9.01, the Trust shall be liquidated by the Trustees as expeditiously as
the Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to each
Securityholder a Like Amount of the Debentures, subject to Section 9.04(d).
Notice of liquidation shall be given by the Administrative Trustees by first-
class mail, postage prepaid, mailed not later than 30 nor more than 60 days
prior to the Liquidation Date to each Holder of Trust Securities at such
Holder's address appearing in the Securities Register. All notices of
liquidation shall:
(i) state the Liquidation Date;
(ii) state that from and after the Liquidation Date, the Trust Securities
will no longer be deemed to be Outstanding and any Trust Securities Certificates
not surrendered for exchange will be deemed to represent a Like Amount of the
Debentures; and
(iii) provide such information with respect to the mechanics by which
Holders may exchange Trust Securities Certificates for the Debentures, or if
Section 9.04(d) applies, receive a Liquidation Distribution, as the
Administrative Trustees or the Property Trustee shall deem appropriate.
(b) Except where Sections 9.02(c) or 9.04(d) apply, in order to effect the
liquidation of the Trust and distribution of the Debentures to Securityholders,
the Property Trustee shall establish a record date for such distribution (which
shall be not more than 45 days prior to the Liquidation Date) and, either itself
acting as exchange
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agent or through the appointment of a separate exchange agent, shall establish
such procedures as it shall deem appropriate to effect the distribution of the
Debentures in exchange for the Outstanding Trust Securities Certificates.
(c) Except where Sections 9.02 (c) or 9.04(d) apply, after the Liquidation
Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii)
The Depository Trust Company ("DTC") or its nominee, as the record Holder of the
Capital Securities, will receive a registered global certificate or certificates
representing the Debentures to be delivered upon such distribution, (iii) any
Capital Securities Certificates not held by DTC or its nominee will be deemed to
represent a Like Amount of the Debentures, bearing accrued and unpaid interest
in an amount equal to the accumulated and unpaid Distributions on such Trust
Certificates until such certificates are so surrendered (and until such
certificates are so surrendered, no payments or interest or principal will be
made to Holders of Trust Securities Certificates with respect to such
Debentures), (iv) certificates representing a Like Amount of the Debentures will
be issued to the Holder of the Common Securities Certificates, upon surrender of
such certificates to the Administrative Trustees or their agent for exchange,
(v) all rights of Securityholders holding Trust Securities will cease, except
the right of such Securityholders to receive the Debentures upon surrender of
Trust Securities Certificates and (vi) the Depositor shall use its reasonable
efforts to have the Debentures listed on the New York Stock Exchange or on such
other exchange, interdealer quotation system or self-regulatory organization as
the Capital Securities are then listed, if any.
(d) In the event that, notwithstanding the other provisions of this Section
9.04, whether because of an order for dissolution entered by a court of
competent jurisdiction or payment at the stated maturity thereof of all
principal of and interest on the Debentures or otherwise, distribution of the
Debentures in the manner provided herein is determined by the Property Trustee
not to be practical, the Trust Property shall be liquidated, and the Trust shall
be dissolved, wound-up or terminated, by the Property Trustee in such manner as
the Property Trustee determines. In such event, on the date of the dissolution,
winding-up or other termination of the Trust, Securityholders will be entitled
to receive out of the assets of the Trust available for distribution to
Securityholders, after satisfaction of liabilities to creditors, an amount equal
to the Liquidation Amount per Trust Security plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If, upon any such dissolution, winding up or termination, the
Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then, subject to the next succeeding sentence, the amounts payable
by the Trust on the Trust Securities shall be paid on a pro rata basis (based
upon Liquidation Amounts). The Holder of the Common Securities will be entitled
to receive Liquidation Distributions upon any such dissolution, winding-up or
termination pro rata (determined as aforesaid) with Holders of Capital
Securities, except that, if an Event of Default specified in Sections 501(a) or
501(b) of the Indenture has occurred and is continuing, the Capital Securities
shall have a priority over the Common Securities. In the event the Capital
Securities are issued in certificated form, the Liquidation Distribution will be
payable at (i) the Corporate Trust Office of the Property Trustee, (ii) the
principal office of any Paying Agent or (iii) the principal office of the
Securities Registrar and Transfer Agent; provided that payment of any
Liquidation Distribution may be made, at the option of the Administrative
Trustees, by
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check mailed to the address of the Person entitled thereto as such address shall
appear on the Securities Register or by wire transfer in immediately available
funds at such place and to such place and to such account as may be designated
by the Person entitled thereto as specified in the Securities Register.
Section 9.05. Merger, Consolidation, Amalgamation or Replacement of the
---------------------------------------------------------
Trust.
- -----
The Trust may not merge, consolidate or amalgamate with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except pursuant
to this Section 9.05. At the request of the Depositor, with the consent of the
Administrative Trustees and with the consent of the Holders of at least a
Majority in Liquidation Amount of the Capital Securities or the Property
Trustee, the Trust may merge, consolidate or amalgamate with or into, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any State;
provided, that (a) such successor entity either (i) expressly assumes all of the
obligations of the Trust with respect to the Capital Securities or (ii)
substitutes for the Capital Securities other securities having substantially the
same terms as the Capital Securities (the "Successor Securities") so long as the
Successor Securities rank the same as the Capital Securities rank in priority
with respect to distributions and payments upon liquidation, redemption and
otherwise, (b) the Depositor expressly appoints a trustee of such successor
entity possessing the same powers and duties as the Property Trustee as the
holder of the Debentures, (c) the Successor Securities are listed or quoted, or
any Successor Securities will be listed or quoted upon notification of issuance,
on any national securities exchange, Nasdaq or other organization on which the
Capital Securities are then quoted or listed, if any, (d) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
cause the Capital Securities (including any Successor Securities) to be
downgraded by any nationally recognized statistical rating organization, (e)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
Holders of the Capital Securities (including any Successor Securities) in any
material respect, (f) such successor entity has a purpose substantially
identical to that of the Trust, (g) prior to such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease, the Depositor has
received an opinion from independent counsel to the Trust experienced in such
matters to the effect that (i) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the Holders of the Capital Securities (including
any Successor Securities) in any material respect and (ii) following such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease,
neither the Trust nor such successor entity will be required to register as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"), and (h) the Depositor or any permitted successor or assignee owns
all of the common securities of such successor entity and guarantees the
obligations of such successor entity under the Successor Securities at least to
the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust
shall not, except with the consent of Holders of 100% in Liquidation Amount of
the Capital Securities, consolidate, amalgamate or merge with or into, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
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amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Trust or the successor entity to be taxable as a corporation or classified as
other than a grantor trust for United States federal income tax purposes or
cause the Junior Subordinated Debentures to be treated as other than
indebtedness of the Parent for United States federal income tax purposes.
ARTICLE X
Miscellaneous Provisions
Section 10.01. Expense Agreement. It is the contemplation of the parties
-----------------
that the Expense Agreement shall be entered into no later than
_________________________,1998.
Section 10.02. Limitation of Rights of Securityholders. The death or
---------------------------------------
incapacity of any person having an interest, beneficial or otherwise, in the
Trust Securities shall not operate to terminate this Trust Agreement, nor
entitle the legal representatives or heirs of such person or any Securityholder
for such person, to claim an accounting, take any action or bring any proceeding
in any court for a partition or winding up of the arrangements contemplated
hereby nor otherwise affect the rights, obligations and liabilities of the
parties hereto or any of them.
Section 10.03. Amendment.
---------
(a) This Trust Agreement may be amended from time to time by the Trustees
and the Depositor, without the consent of any Securityholders, (i) to cure any
ambiguity, correct or supplement any provision herein which may be inconsistent
with any other provision herein or to make any other provisions with respect to
matters or questions arising under this Trust Agreement, which shall not be
inconsistent with the other provisions of this Trust Agreement or (ii) to
modify, eliminate or add to any provisions of this Trust Agreement to such
extent as shall be necessary to ensure that the Trust will not be taxable as a
corporation or will be classified as a grantor trust for United States federal
income tax purposes at all times that any Trust Securities are outstanding or to
ensure that the Trust will not be required to register as an "investment
company" under the 1940 Act; provided, however, that in the case of either
clause (i) or clause (ii), such action shall not adversely affect in any
material respect the interests of any Securityholder and any amendments of this
Trust Agreement shall become effective when notice thereof is given to the
Securityholders.
(b) Except as provided in Section 10.03(c) hereof, any provision of this
Trust Agreement may be amended by the Trustees and the Depositor with (i) the
consent of Trust Securityholders representing not less than a majority in
Liquidation Amount of the Trust Securities then Outstanding and (ii) the receipt
by the Trustees of an Opinion of Counsel to the effect that such amendment or
the exercise of any power granted to the Trustees in accordance with such
amendment will not affect the Trust's status as a grantor trust or cause the
Trust to be taxable as a corporation for United States federal income tax
purposes or the Trust's exemption from status as an "investment company" under
the Investment Company Act of 1940, as amended.
-48-
<PAGE>
(c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance with Section 6.03 or 6.06 hereof), this Trust
Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount of
any Distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a Securityholder to institute suit
for the enforcement of any such payment on or after such date; notwithstanding
any other provision herein without the unanimous consent of the Securityholders
(such consent being obtained in accordance with Section 6.03 or 6.06 hereof),
paragraph (b) of this Section 10.03 may not be amended.
(d) Notwithstanding any other provisions of this Trust Agreement, no
Trustee shall enter into or consent to any amendment to this Trust Agreement
which would cause the Trust to (i) fail or cease to qualify, as evidenced by an
Opinion of Counsel, for an exemption from status of an "investment company"
under the Investment Company Act of 1940, as amended, or (ii) be taxable as a
corporation or fail or cease to be classified, as evidenced by an Opinion of
Counsel, as a grantor trust for United States federal income tax purposes.
(e) Notwithstanding anything in this Trust Agreement to the contrary,
without the consent of the Depositor and the Administrative Trustees, this Trust
Agreement may not be amended in a manner which imposes any additional obligation
on the Depositor or the Administrative Trustees.
(f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustees shall promptly provide to the Depositor a copy of such
amendment.
(g) The Property Trustee shall not be required to enter into any amendment
to this Trust Agreement which affects its own rights, duties or immunities under
this Trust Agreement. The Property Trustee shall be entitled to receive an
Opinion of Counsel and an Officer's Certificate stating that any amendment to
this Trust Agreement is in compliance with this Trust Agreement.
Section 10.04. Separability. In case any provision in this Trust
------------
Agreement or in the Trust Securities Certificates shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions hereof and thereof shall not in any way be affected or impaired
thereby.
SECTION 10.05. GOVERNING LAW. THIS TRUST AGREEMENT AND THE RIGHTS AND
-------------
OBLIGATIONS OF EACH OF THE SECURITYHOLDERS, THE DEPOSITOR, THE TRUST AND THE
TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE
WITHOUT REFERENCE TO ITS CONFLICTS OF LAWS PROVISIONS.
Section 10.06. Payments Due on Non-Business Day. If the date fixed for
--------------------------------
any payment on any Trust Security shall be a day which is not a Business Day,
then such payment need not be made on such date but may be made on the next
succeeding day
-49-
<PAGE>
which is a Business Day (except as otherwise provided in Section 4.01(a) and
4.02(d)), with the same force and effect as though made on the date fixed for
such payment, and no Distribution shall accumulate on such unpaid amount thereon
for the period after such date.
Section 10.07. Successors. This Trust Agreement shall be binding upon and
----------
shall inure to the benefit of any successor to the Depositor, the Trust or any
Relevant Trustee, including any successor by operation of law. Except in
connection with a consolidation, merger or sale involving the Depositor that is
permitted under Article Eight of the Indenture and pursuant to which the
assignee agrees in writing to perform the Depositor's obligations hereunder, the
Depositor shall not assign its obligations hereunder.
Section 10.08. Headings. The Article and Section headings are for
--------
convenience only and shall not affect the construction of this Trust Agreement.
Section 10.09. Reports, Notices and Demands. Any report, notice, demand
----------------------------
or other communication which by any provision of this Trust Agreement is
required or permitted to be given or served to or upon any Securityholder or the
Depositor shall be given or served in writing by deposit thereof, postage
prepaid, in the United States mail, hand delivery or facsimile transmission, in
each case, addressed, (a) in the case of a Capital Securityholder, to such
Capital Securityholder as such Securityholder's name and address may appear on
the Securities Register; and (b) in the case of the Common Securityholder or the
Depositor, to Pennsylvania Manufacturers Corporation, 1735 Market Street,
Philadelphia, Pennsylvania 19103-7590, Attention: President, facsimile no.:
(215) 665-5061. Such notice, demand or other communication to or upon a
Securityholder shall be deemed to have been sufficiently given or made, for all
purposes, upon hand delivery, mailing or transmission.
Any notice, demand or other communication which by any provision of this
Trust Agreement is required or permitted to be given or served to or upon the
Trust, the Property Trustee or the Administrative Trustees shall be given in
writing addressed (until another address is published by the Trust) as follows:
(a) with respect to the Trustee, to The Bank of New York (Delaware),
__________________________________________ Attention: Corporate Trust
Administration; (b) with respect to the Property Trustee, The Bank of New York,
_______________________________; Attention: Corporate Trust Administration and
(c) with respect to the Administrative Trustees, to them at the address above
for notices to the Depositor, marked "Attention: Administrative Trustees of PMC
Capital I c/o President." Such notice, demand or other communication to or upon
the Trust or the Property Trustee shall be deemed to have been sufficiently
given or made only upon actual receipt of the writing by the Trust or the
Property Trustee.
Section 10.10. Agreement Not to Petition. Each of the Trustees and the
-------------------------
Depositor agree for the benefit of the Securityholders that, until at least one
year and one day after the Trust has been terminated in accordance with Article
IX, they shall not file, or join in the filing of, a petition against the Trust
under any bankruptcy, reorganization, arrangement, insolvency, liquidation or
other similar law (including, without limitation, the United States Bankruptcy
Code) (collectively, "Bankruptcy Laws") or otherwise join in the commencement of
any proceeding against the Trust under any Bankruptcy Law.
-50-
<PAGE>
In the event the Depositor takes action in violation of this Section 10.10, the
Property Trustee agrees, for the benefit of Securityholders, that at the expense
of the Depositor, it shall file an answer with the bankruptcy court or otherwise
properly contest the filing of such petition by the Depositor against the Trust
or the commencement of such action and raise the defense that the Depositor has
agreed in writing not to take such action and should be stopped and precluded
therefrom and such other defenses, if any, as counsel for the Property Trustee
or the Trust may assert. The provisions of this Section 10.10 shall survive the
termination of this Trust Agreement.
Section 10.11. Trust Indenture Act; Conflict with Trust Indenture Act.
------------------------------------------------------
(a) This Trust Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Trust Agreement and shall, to
the extent applicable, be governed by such provisions.
(b) The Property Trustee shall be the only Trustee which is a Trustee for
the purposes of the Trust Indenture Act.
(c) If any provision hereof limits, qualifies or conflicts with the duties
imposed by Section 310 to 317, inclusive, of the Trust Indenture Act through
operation of Section 318(c) thereof, such imposed duty provision shall control.
If any provision of this Trust Agreement modifies or excludes any provision of
the Trust Indenture Act which may be so modified or excluded, the latter
provision shall be deemed to apply to this Trust Agreement as so modified or
excluded, as the case may be.
(d) The application of the Trust Indenture Act to this Trust Agreement
shall not affect the nature of the Securities as equity securities representing
undivided beneficial interests in the assets of the Trust.
Section 10.12. Rights Under Indenture. The Trust may not assign any of
----------------------
its rights under the Indenture without the prior written consent of the
Depositor.
Section 10.13. Effectiveness. This Trust Agreement shall become effective
-------------
when signed by the Depositor, the Trustee and the Bank. Each Administrative
Trustee shall assume the duties of an Administrative Trustee hereunder when he
signs the signature page hereof.
Section 10.14. Intention of the Parties. It is the intention of the parties
------------------------
hereto that the Trust not be characterized for United States federal income tax
purposes as a corporation or a partnership, but rather that the Trust be
characterized as a grantor trust or otherwise in a manner that each Owner be
treated as owning an undivided beneficial interest in the assets of the Trust.
The provisions of this Trust Agreement shall be interpreted to further this
intention of the parties.
-51-
<PAGE>
THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR ON
BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR
FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE
BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST
SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT
TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE
INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER
AND SUCH OTHERS THAT THOSE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE
BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER
AND SUCH OTHERS.
PENNSYLVANIA MANUFACTURERS
CORPORATION, as Depositor
By:
-----------------------------------
John W. Smithson,
President and Chief Executive Officer
THE BANK OF NEW YORK (DELAWARE),
as Trustee
By:
-----------------------------------
Name:
Title:
THE BANK OF NEW YORK,
as Property Trustee
By:
-----------------------------------
Name:
Title:
--------------------------------------
John W. Smithson,
as Administrative Trustee
--------------------------------------
Francis W. McDonnell,
as Administrative Trustee
--------------------------------------
Edward S. Hochberg,
as Administrative Trustee
-52-
<PAGE>
Exhibti 4.1
PENNSYLVANIA MANUFACTURERS CORPORATION
TO
THE BANK OF NEW YORK
Trustee
________________
Junior Subordinated Indenture
Dated as of ___________________________, 1998
Up to $103,093,000
_________% Junior Subordinated Debentures, Series A
<PAGE>
Sections 310 through 318 of the
Trust Indenture Act of 1939:
Trust Indenture Indenture
Act Section Section
- ----------------- -----------------
(S) 310(a)(1).................................... 609
(a)(2).................................... 609
(a)(3).................................... Not Applicable
(a)(4).................................... Not Applicable
(b)....................................... 608, 610
(S) 311(a)....................................... 613
(b)....................................... 613
(S) 312(a)....................................... 701
702(a)
(b)....................................... 702(b)
(c)....................................... 702(c)
(S) 313(a)....................................... 703(a)
(a)(4).................................... 101, 1004
(b)....................................... 703(a)
(c)....................................... 703(a)
(d)....................................... 703(b)
(S) 314(a)....................................... 704
(b)....................................... Not Applicable
(c)(1).................................... 102
(c)(2).................................... 102
(c)(3).................................... Not Applicable
(d)....................................... Not Applicable
(e)....................................... 102
(S) 315(a)....................................... 601
(b)....................................... 602
(c)....................................... 601
(d)....................................... 601
(e)....................................... 514
(S) 316(a)....................................... 101
(a)(1)(A)................................. 502
512
(a)(1)(B)................................. 513
(a)(2).................................... Not Applicable
(b)....................................... 508
(c)....................................... 104(c)
(S) 317(a)(1).................................... 503
(a)(2).................................... 504
(b)....................................... 1003
(S) 318(a)....................................... 107
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
ARTICLE ONE
Definitions and Other Provisions of General Application
<S> <C>
SECTION 101. Definitions..................................................... 2
Act.......................................................................... 2
Additional Interest.......................................................... 2
Additional Sums.............................................................. 3
Additional Taxes............................................................. 3
Administrative Trustees...................................................... 3
Affiliate.................................................................... 3
Authenticating Agent......................................................... 3
Board of Directors........................................................... 3
Board Resolution............................................................. 3
Business Day................................................................. 3
Capital Securities........................................................... 3
Commission................................................................... 3
Common Securities............................................................ 4
Common Stock................................................................. 4
Company...................................................................... 4
Company Request.............................................................. 4
Company Order................................................................ 4
Corporate Trust Office....................................................... 4
Corporation.................................................................. 4
Debt......................................................................... 4
Defaulted Interest........................................................... 4
Depositary................................................................... 4
Event of Default............................................................. 4
Expense Agreement............................................................ 4
Extension Period............................................................. 4
Global Security.............................................................. 5
Government Obligations....................................................... 5
Holder....................................................................... 5
Indenture.................................................................... 5
Interest Payment Date........................................................ 5
Investment Company Event..................................................... 5
Junior Subordinated Payment.................................................. 5
Maturity..................................................................... 5
Officers' Certificate........................................................ 6
Opinion of Counsel........................................................... 6
Outstanding.................................................................. 6
Parent Guarantee............................................................. 6
Paying Agent................................................................. 7
Person....................................................................... 7
PMC Capital I................................................................ 7
Predecessor Security......................................................... 7
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
Proceeding................................................................... 7
Property Trustee............................................................. 7
Redemption Date.............................................................. 7
Redemption Price............................................................. 7
Regular Record Date.......................................................... 7
Responsible Officer.......................................................... 7
Securities................................................................... 7
Security Register............................................................ 7
Security Registrar........................................................... 7
Senior Debt.................................................................. 7
Special Event................................................................ 8
Special Record Date.......................................................... 8
Stated Maturity.............................................................. 8
Subsidiary................................................................... 8
Tax Event.................................................................... 8
Trust Agreement.............................................................. 8
Trustee...................................................................... 8
Trust Indenture Act.......................................................... 9
Trust Securities............................................................. 9
SECTION 102. Compliance Certificates and Opinions............................ 9
SECTION 103. Form of Documents Delivered to Trustee.......................... 9
SECTION 104. Acts of Holders; Record Dates................................... 10
SECTION 105. Notices, Etc., to Trustee and the Company....................... 12
SECTION 106. Notices to Holders; Waiver...................................... 12
SECTION 107. Conflict with Trust Indenture Act............................... 13
SECTION 108. Effect of Headings and Table of Contents........................ 13
SECTION 109. Successors and Assigns.......................................... 13
SECTION 110. Separability Clause............................................. 13
SECTION 111. Benefits of Indenture........................................... 13
SECTION 112. Governing Law................................................... 14
SECTION 113. Non-Business Days............................................... 14
ARTICLE TWO
Security Forms
SECTION 201. Forms Generally................................................. 14
SECTION 202. Form of Face of Security........................................ 15
SECTION 203. Form of Reverse of Security..................................... 19
SECTION 204. Additional Provisions Required in Global Security............... 23
SECTION 205. Form of Trustee's Certificate of Authentication................. 24
ARTICLE THREE
The Securities
SECTION 301. Title and Terms; Paying Agent................................... 24
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 302. Denominations.....................................................26
SECTION 303. Execution, Authentication, Delivery and Dating....................26
SECTION 304. Temporary Securities..............................................27
SECTION 305. Registration, Registration of Transfer and Exchange...............27
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities..................28
SECTION 307. Payment of Interest; Interest Rights Preserved....................29
SECTION 308. Persons Deemed Owners.............................................30
SECTION 309. Cancellation......................................................31
SECTION 310. Computation of Interest...........................................31
SECTION 311. Right of Set-Off..................................................31
SECTION 312. Agreed Tax Treatment..............................................31
SECTION 313. CUSIP Numbers.....................................................32
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture...........................32
SECTION 402. Application of Trust Money........................................33
SECTION 403. Satisfaction, Discharge and Defeasance of Securities..............33
ARTICLE FIVE
Remedies
SECTION 501. Events of Default.................................................34
SECTION 502. Acceleration of Maturity; Rescission and Annulment................35
SECTION 503. Collection of Indebtedness and Suits for Enforcement
by Trustee........................................................37
SECTION 504. Trustee May File Proofs of Claim..................................37
SECTION 505. Trustee May Enforce Claims Without Possession of Securities.......38
SECTION 506. Application of Money Collected....................................38
SECTION 507. Limitation on Suits...............................................39
SECTION 508. Unconditional Right of Holders to Receive Principal
and Interest......................................................39
SECTION 509. Restoration of Rights and Remedies................................40
SECTION 510. Rights and Remedies Cumulative....................................40
SECTION 511. Delay or Omission Not Waiver......................................40
SECTION 512. Control by Holders................................................40
SECTION 513. Waiver of Past Defaults...........................................41
SECTION 514. Undertaking for Costs.............................................42
SECTION 515. Waiver of Usury, Stay or Extension Laws...........................42
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities...............................42
SECTION 602. Notice of Defaults................................................44
SECTION 603. Certain Rights of Trustee.........................................44
SECTION 604. Not Responsible for Recitals or Issuance of Securities............45
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 605. May Hold Securities.............................................. 45
SECTION 606. Money Held in Trust.............................................. 45
SECTION 607. Compensation; Reimbursement and Indemnity........................ 45
SECTION 608. Disqualification; Conflicting Interests.......................... 46
SECTION 609. Corporate Trustee Required; Eligibility.......................... 46
SECTION 610. Resignation and Removal; Appointment of Successor................ 47
SECTION 611. Acceptance of Appointment by Successor........................... 48
SECTION 612. Merger, Conversion, Consolidation or Succession to Business...... 49
SECTION 613. Preferential Collection of Claims Against Company................ 49
SECTION 614. Appointment of Authenticating Agent.............................. 49
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders........ 51
SECTION 702. Preservation of Information; Communications to Holders........... 51
SECTION 703. Reports by Trustee............................................... 51
SECTION 704. Reports by Company............................................... 52
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms............. 52
SECTION 802. Successor Substituted............................................ 53
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders............... 54
SECTION 902. Supplemental Indentures with Consent of Holders.................. 54
SECTION 903. Execution of Supplemental Indentures............................. 55
SECTION 904. Effect of Supplemental Indentures................................ 56
SECTION 905. Conformity with Trust Indenture Act.............................. 56
SECTION 906. Reference in Securities to Supplemental Indentures............... 56
ARTICLE TEN
Covenants; Representations and Warranties
SECTION 1001. Payment of Principal and Interest............................... 56
SECTION 1002. Maintenance of Office or Agency................................. 56
SECTION 1003. Money for Security Payments to Be Held in Trust................. 57
SECTION 1004. Statement by Officers as to Compliance.......................... 58
SECTION 1005. Additional Sums................................................. 58
SECTION 1006. Additional Covenants............................................ 59
SECTION 1007. Waiver of Certain Covenants..................................... 59
</TABLE>
-iv-
<PAGE>
ARTICLE ELEVEN
Subordination of Securities
<TABLE>
<S> <C> <C>
SECTION 1101. Securities Subordinate to Senior Debt........................... 60
SECTION 1102. Payment Over of Proceeds Upon Dissolution, Etc.................. 60
SECTION 1103. Prior Payment to Senior Debt Upon Acceleration of Securities.... 62
SECTION 1104. No Payment When Senior Debt in Default.......................... 62
SECTION 1105. Payment Permitted If No Default................................. 63
SECTION 1106. Subrogation to Rights of Holders of Senior Debt................. 63
SECTION 1107. Provisions Solely to Define Relative Rights..................... 63
SECTION 1108. Trustee to Effectuate Subordination............................. 64
SECTION 1109. No Waiver of Subordination Provisions........................... 64
SECTION 1110. Notice to Trustee............................................... 64
SECTION 1111. Reliance on Judicial Order or Certificate of Liquidating Agent.. 65
SECTION 1112. Trustee Not Fiduciary for Holders of Senior Debt................ 65
SECTION 1113. Rights of Trustee as Holder of Senior Debt; Preservation
of Trustee's Rights............................................. 66
SECTION 1114. Article Applicable to Paying Agents............................. 66
SECTION 1115. Certain Conversions or Exchanges Deemed Payment................. 66
ARTICLE TWELVE
Redemption of Securities
SECTION 1201. Applicability of this Article................................... 66
SECTION 1202. Election to Redeem; Notice to Trustee........................... 67
SECTION 1203. Selection by Trustee of Securities to Be Redeemed............... 67
SECTION 1204. Notice of Redemption............................................ 67
SECTION 1205. Deposit of Redemption Price..................................... 68
SECTION 1206. Securities Payable on Redemption Date........................... 68
SECTION 1207. Optional Redemption; Conditions to Optional Redemption.......... 69
ANNEX A: Form of Amended and Restated Trust Agreement among Pennsylvania
Manufacturers Corporation, as Depositor, The Bank of New York (Delaware), as
Trustee, The Bank of New York, as Property Trustee, and the Administrative
Trustees named therein dated as of _____________________, 1998.
EXHIBIT A: Agreement as to Expenses and Liabilities between Pennsylvania
Manufacturers Corporation and PMC Capital I dated as of _____________, 1998.
</TABLE>
-v-
<PAGE>
INDENTURE, dated as of _________________, 1998, between Pennsylvania
Manufacturers Corporation, a corporation duly organized and existing under the
laws of the Commonwealth of Pennsylvania (herein called the "Company"), having
its principal office at The PMA Building, 380 Sentry Parkway, Blue Bell,
Pennsylvania 19422-2328, and The Bank of New York, a banking corporation duly
organized and existing under the laws of New York, as Trustee (herein called the
"Trustee"). Unless otherwise defined herein, all capitalized items used herein
shall have the meanings ascribed to them in the Amended and Restated Trust
Agreement between the Company, as Depositor and The Bank of New York (Delaware),
as Trustee ("Delaware Trustee"), The Bank of New York, as Property Trustee, and
the Administrative Trustees named therein dated as of _____________________,
1998 (the "Trust Agreement"), as in effect on the date hereof, the form of which
is attached as Annex A hereto.
RECITALS OF THE COMPANY
WHEREAS, PMC Capital I (as defined herein) may pursuant to the Underwriting
Agreement dated ______________________, 1998 among the Company, PMC Capital I,
PMA Reinsurance Corporation and the several underwriters named therein, issue
$100,000,000 aggregate liquidation amount of its ______% Capital Securities,
Series A (the "Capital Securities" and, together with the Common Securities, the
"Trust Securities") with a liquidation amount of $1,000 per Capital Security;
WHEREAS, this Indenture is subject to the provisions of the Trust Indenture
Act of 1939, as amended, that are required to be part of this Indenture and
shall, to the extent applicable, be governed by such provisions;
WHEREAS, the Company is guaranteeing the payment of distributions on the
Capital Securities of PMC Capital I and payment of the Redemption Price and
payments on liquidation with respect to the Capital Securities, to the extent
provided in the Guarantee Agreement dated as of ______________________, 1998,
between the Company and The Bank of New York, as guarantee trustee (the "Parent
Guarantee") for the benefit of the holders of the Capital Securities;
WHEREAS, the Company wishes to sell to PMC Capital I, and PMC Capital I
wishes to purchase from the Company, Securities (as defined below) in an
aggregate principal amount of $103,093,000 and in satisfaction of the purchase
price for such Securities, the trustees of PMC Capital I, on behalf of PMC
Capital I, wish to (i) execute and deliver to the Company Common Securities
certificates evidencing an ownership interest in PMC Capital I, registered in
the name of the Company, in an aggregate amount of 3,093 Common Securities
having an aggregate liquidation amount of up to $3,093,000 and (ii) deliver to
the Company the sum of $100,000,000;
WHEREAS, the Company has duly authorized the creation and issuance of an
issue of its unsecured _______% junior subordinated debentures, Series A (the
"Securities"), of substantially the tenor and amount hereinafter set forth
issued to evidence loans made to the Company of the proceeds from the issuance
by PMC Capital I of the Capital Securities and Common Securities, to provide the
terms and conditions upon which the Securities are
<PAGE>
to be authenticated, issued and delivered and to provide therefor the Company
has duly authorized the execution and delivery of this Indenture; and
WHEREAS, all things necessary to make the Securities, when executed by
the Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holder thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101 Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them in
this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
(3) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles,
and the term "generally accepted accounting principles" with respect to any
computation required or permitted hereunder shall mean such accounting
principles which are generally accepted at the date or time of such computation;
provided, that when two or more principles are so generally accepted, it shall
mean that set of principles consistent with those in use by the Company; and
(4) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Indenture as a whole and not to any particular Article,
Section or other sub division.
"Act", when used with respect to any Holder, has the meaning specified in
----
Section 104.
"Additional Interest" means interest, if any, that shall accrue on any
--------------------
interest on the Securities the payment of which has not been made on the
applicable Interest Payment
-2-
<PAGE>
Date and which shall accrue at the rate of ________% per annum compounded semi-
annually (to the extent permitted by law).
"Additional Sums" has the meaning specified in Section 1005.
----------------
"Additional Taxes" means the sum of any additional taxes, duties and other
-----------------
governmental charges to which PMC Capital I has become subject from time to time
as a result of a Tax Event.
"Administrative Trustees" means each Person identified as an
-----------------------
"Administrative Trustee" in the Trust Agreement, solely in such Person's
capacity as Administrative Trustee of PMC Capital I under such Trust Agreement
and not in such Person's individual capacity, or any successor administrative
trustee appointed as therein provided.
"Affiliate" of any specified Person means any other Person directly or
----------
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee pursuant
---------------------
to Section 614 to act on behalf of the Trustee to authenticate Securities.
"Board of Directors" means either the board of directors of the Company or
-------------------
any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary
-----------------
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors or such committee of the Board of Directors or officers of the
Company to which authority to act on behalf of the Board of Directors has been
delegated, and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day" means any day other than a Saturday or Sunday or a day on
-------------
which banking institutions in the City of New York are authorized or required by
law or executive order to remain closed or a day on which the Corporate Trust
Office of the Trustee, or the principal office of the Property Trustee or the
Delaware Trustee, under the Trust Agreement, is closed for business.
"Capital Securities" has the meaning specified in the Recitals to this
-------------------
Indenture.
"Commission" means the Securities and Exchange Commission, as from time to
-----------
time constituted, created under the Securities Exchange Act of 1934, as amended,
or, if at any time after the execution of this instrument such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
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<PAGE>
"Common Securities" means undivided beneficial interests in the assets of
-----------------
PMC Capital I, having a Liquidation Amount of $1,000 per Common Security and
having the rights provided therefor in the Trust Agreement.
"Common Stock" means the common stock, without par value, of the Company.
------------
"Company" means the Person named as the "Company" in the first paragraph of
--------
this instrument until a successor Person shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Request" or "Company Order" means a written request or order
---------------- --------------
signed in the name of the Company by its Chairman of the Board, its Chief
Executive Officer, its President or a Senior Vice President, and by its
Treasurer and Chief Financial Officer, its Vice President of Finance or its
Secretary, and delivered to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee in
-----------------------
_________________________________________ at which at any particular time its
corporate trust business shall be administered and which at the date of this
Indenture is
________________________________________________________________________________
____.
"Corporation" includes a corporation, association, company, limited
-----------
liability company, joint-stock company or business trust.
"Debt" means, with respect to any Person, whether recourse is to all or a
----
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person and (vi) every
obligation of the type referred to in clauses (i) through (v) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable for, directly or indirectly,
as obligor or otherwise.
"Defaulted Interest" has the meaning specified in Section 307.
-------------------
"Depositary" means, with respect to the Securities issuable or issued in
----------
whole or in part in the form of one or more Global Securities, the Person
designated as Depositary by the Company pursuant to this Indenture or any
successor thereto.
"Event of Default" has the meaning specified in Section 501.
-----------------
"Expense Agreement" means the Expense Agreement contemplated by Section
------------------
607.
"Extension Period" has the meaning specified in Section 301.
-----------------
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<PAGE>
"Global Security" means a Security in the form prescribed in Section 204
----------------
evidencing all or part of the Securities, issued to the Depository or its
nominee, and registered in the name of such Depository or its nominee.
"Government Obligations" means, with respect to the Securities, securities
-----------------------
which are (i) direct obligations of the United States of America or (ii)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed by the United States of America and which, in either
case, are full faith and credit obligations of the United States of America and
are not callable or redeemable at the option of the issuer thereof and shall
also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to
any such Government Obligation or a specific payment of interest on or principal
of any such Government Obligation held by such custodian for the account of the
holder of such depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Obligation or the specific payment of
interest on or principal of the Government Obligation evidenced by such
depository receipt.
"Holder" means a Person in whose name a Security is registered in the
-------
Security Register.
"Indenture" means this instrument as originally executed or as it may from
----------
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the Trust Inden ture Act that are deemed to be a part of and
govern this instrument and any such supplemental indenture, respectively.
"Interest Payment Date", when used with respect to any installment of
----------------------
interest on a Security, means the date specified in such Security as the fixed
date on which an installment of interest with respect to the Securities is due
and payable.
"Investment Company Event" means the receipt by PMC Capital I of an Opinion
-------------------------
of Counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority (a "Change in 1940 Act Law"), PMC Capital I is or
will be considered an "investment company" that is required to be registered
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), which Change in 1940 Act Law becomes effective on or after the date of
original issuance of the Capital Securities.
"Junior Subordinated Payment" has the meaning specified in Section 1102.
---------------------------
"Maturity", when used with respect to any Security, means the date on which
---------
the principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
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<PAGE>
"Officers' Certificate" means a certificate signed by the Chairman of the
----------------------
Board, the Chief Executive Officer, the President or a Senior Vice President,
and by the Treasurer, the Chief Financial Officer, the Vice President of Finance
of the Company or the Secretary, and delivered to the Trustee. One of the
officers signing an Officers' Certificate given pursuant to Section 1004 shall
be the principal executive, financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
-------------------
for the Company (and who may be an employee of the Company), and who shall be
acceptable to the Trustee.
"Outstanding," when used with respect to Securities, means, as of the date
------------
of determination, all Securities theretofore authenticated and delivered under
this Indenture, except: (a) Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation; (b) Securities for whose payment or
redemption money in the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its own Paying
Agent) for the Holders of such Securities, provided that, if such Securities are
to be redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee has been made and
(c) Securities which have been paid pursuant to Section 306, or in exchange for
or in lieu of which other Securities have been authenticated and delivered
pursuant to this Indenture, other than any such Securities in respect of which
there shall have been presented to the Trustee proof satisfactory to it that
such Securities are held by Holders in whose hands such Securities are valid,
binding and legal obligations of the Company; provided, however, that in
determining whether the Holders of the requisite principal amount of Outstanding
Securities have given any request, demand, authorization, direction, notice,
consent or waiver hereunder, Securities owned by the Company or any other
obligor upon the Securities or any Affiliate of the Company or such other
obligor shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trustee knows to be so owned shall be so disregarded.
Securities so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Securities and that the pledgee
is not the Company or any other obligor upon the Securities or any Affiliate of
the Company or such other obligor. Upon the written request of the Trustee, the
Company shall furnish to the Trustee promptly an Officers' Certificate listing
and identifying all Securities, if any, known by the Company to be owned or held
by or for the account of the Company, or any other obligor on the Securities or
any Affiliate of the Company or such obligor, and, subject to the provisions of
Section 601, the Trustee shall be entitled to accept such Officers' Certificate
as conclusive evidence of the facts therein set forth and of the fact that all
Securities not listed therein are Outstanding for the purpose of any such
determination.
"Parent Guarantee" has the meaning specified in the Recitals to this
-----------------
Indenture.
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<PAGE>
"Paying Agent" means any Person authorized by the Company to pay the
-------------
principal (or premium, if any) and interest or other amounts in respect of, any
Securities on behalf of the Company.
"Person" means any individual, corporation, partnership, joint venture,
-------
association, limited liability company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PMC Capital I" means the business trust declared and established pursuant
--------------
to the Delaware Business Trust Act (12 Del. Code Section 3801 et seq.) by the
Trust Agreement.
"Predecessor Security" of any particular Security means every previous
---------------------
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
"Proceeding" has the meaning specified in Section 1102.
-----------
"Property Trustee" means the commercial bank or trust company identified as
-----------------
the "Property Trustee" in the Trust Agreement, solely in its capacity as
Property Trustee under such Trust Agreement and not in its individual capacity,
or its successor in interest in such capacity, or any successor property trustee
appointed as therein provided.
"Redemption Date", when used with respect to any Security to be redeemed,
----------------
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price", when used with respect to any Security to be redeemed,
-----------------
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment Date
--------------------
means the Business Day next preceding such Interest Payment Date.
"Responsible Officer", when used with respect to the Trustee, means any
--------------------
officer of the Trustee assigned by the Trustee from time to time to administer
its corporate trust matters.
"Securities" has the meaning specified in the Recitals to this Indenture.
-----------
"Security Register" and "Security Registrar" have the respective meanings
------------------ -------------------
specified in Section 305.
"Senior Debt" means the principal of (and premium, if any) and interest, if
------------
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of this Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
-7-
<PAGE>
superior in right of payment to the Securities or to other Debt which is pari
passu with, or subordinated to, the Securities; provided, however, that Senior
Debt shall not be deemed to include (a) any Debt of the Company which, when
incurred and without respect to any election under Section 1111(b) of the
Bankruptcy Reform Act of 1978, was without recourse to the Company, (b) any Debt
of the Company to any of its Subsidiaries, (c) Debt to any employee of the
Company, (d) trade accounts payable of the Company, (e) accrued liabilities
arising in the ordinary course of business of the Company, (f) the Securities
and (g) the Parent Guarantee.
"Special Event" means either an Investment Company Event or a Tax Event.
--------------
"Special Record Date" for the payment of any Defaulted Interest means a
--------------------
date fixed by the Trustee pursuant to Section 307.
"Stated Maturity", when used with respect to any Security or any
----------------
installment of principal thereof (or premium, if any) or interest (including any
Additional Interest) thereon, means, ______________________________, 2028 the
date on which the principal, together with any accrued and unpaid interest
(including any Additional Interest), of such Security or such installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding voting
-----------
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidi aries, or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock which ordinarily
has voting power for the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.
"Tax Event" means the receipt by PMC Capital I of an Opinion of Counsel
----------
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein or any official administrative pronouncement
or judicial decision interpreting or applying such laws or regulations, which
amendment or change is effective or which pronouncement or decision is announced
on or after the date of issuance of the Securities, there is more than an
insubstantial risk that (a) PMC Capital I is, or will be within 90 days of the
date of such Opinion of Counsel, subject to United States federal income tax
with respect to interest income received or accrued on the Securities, (b)
interest payable by the Company on the Securities is not, or within 90 days of
the date of such Opinion of Counsel will not be, deductible by the Company, in
whole or in part, for United States federal income tax purposes or (c) PMC
Capital I is, or will be within 90 days of the date of such Opinion of Counsel,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
"Trust Agreement" has the meaning specified in the first paragraph of this
----------------
Indenture.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
--------
this Indenture until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean
such successor Trustee.
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<PAGE>
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended and
--------------------
as in force at the date as of which this instrument was executed; provided,
however, that in the event the Trust Indenture Act of 1939 is amended after such
date, "Trust Indenture Act" means, to the extent required by any such amendment,
the Trust Indenture Act of 1939 as so amended.
"Trust Securities" has the meaning specified in the Recitals to this
-----------------
Indenture.
SECTION 102 Compliance Certificates and Opinions.
------------------------------------
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent
(including covenants, compliance with which constitutes a condition precedent),
if any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all conditions precedent (including covenants, compliance with which
constitutes a condition precedent), if any, have been complied with, except that
in the case of any such application or request as to which the furnishing of
such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished. Every certificate or opinion delivered with respect
to compliance with a condition or covenant provided for in this Indenture (other
than the certificate provided pursuant to Section 1004) shall include:
(a) a statement that each officer signing the Officers' Certificate has
read the covenant or condition and the definitions herein relating thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;
(c) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(d) a statement as to whether, in the opinion of each such officer, such
condition or covenant has been complied with.
SECTION 103 Form of Documents Delivered to Trustee.
--------------------------------------
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
-9-
<PAGE>
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104 Acts of Holders; Record Dates.
-----------------------------
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given to or taken by Holders
may be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such Holders in person or by an agent duly appointed in
writing; and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee at the address specified in Section 105 and, where it is hereby
expressly required, to the Company. Such instrument or instruments (and the
action embodied therein and evidenced thereby) are herein sometimes referred to
as the "Act" of the Holders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and (subject to Section 601)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is
by a signer acting in a capacity other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority. The fact and date of the execution by any Person of any such
instrument or writing, or the authority of the Person executing the same, may
also be proved in any other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by the Trust Indenture
Act, but shall not be obligated, to fix any day as the record date for the
purpose of determining the Holders entitled to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action, or to vote on
any action, authorized or permitted to be given or taken by Holders. Except as
otherwise provided herein, if not set by the Company prior to the first
solicitation of a Holder made by any Person in respect of any such action, or,
in the case of any such vote, prior to such vote, the record date for any such
action or vote shall be the 30th day (or, if later, the date of the most recent
list of
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<PAGE>
Holders required to be provided pursuant to Section 701) prior to such first
solicitation or vote, as the case may be. With regard to any record date, only
the Holders on such date (or their duly designated proxies) shall be entitled to
give or take, or vote on, the relevant action, whether or not such Persons
continue to be Holders after such record date, provided, however, that unless
such vote or consent is obtained from the Holders (or their duly designated
proxies) of the requisite principal amount of Outstanding Securities prior to
the Expiration Date (as defined below), any such vote or consent previously
given shall automatically and without further action by any Holder be canceled
and of no further effect and nothing in this paragraph shall be construed to
render ineffective any action taken by Holders of the requisite principal amount
of Outstanding Securities on the date such action is taken. Promptly after any
record date is set pursuant to this paragraph, the Company, at is own expense,
shall cause notice of such record date, the proposed action by Holders and the
applicable Expiration Date to be given to the Trustee in writing and to each
Holder of Securities in the manner set forth in Section 106.
The Trustee may set any day as a record date for the purpose of determining
the Holders of Outstanding Securities entitled to join in the giving or making
of (i) any Notice of Default, (ii) any declaration of acceleration referred to
in Section 502, (iii) any request to institute proceedings referred to in
Section 507(b) or (iv) any direction referred to in Section 512. If any record
date is set pursuant to this paragraph, the Holders of Outstanding Securities on
such record date, and no other Holders, shall be entitled to join in such
notice, declaration, request or direction, whether or not such Holders remain
Holders after such record date, provided that no such action shall be effective
hereunder unless taken on or prior to the applicable Expiration Date by Holders
of the requisite principal amount of Outstanding Securities on such record date.
Nothing in this paragraph shall be construed to prevent the Trustee from setting
a new record date for any action for which a record date has previously been set
pursuant to this paragraph (whereupon the record date previously set shall
automatically and with no action by any Person be canceled and of no effect),
and nothing in this paragraph shall be construed to render ineffective any
action taken by Holders of the requisite principal amount of Outstanding
Securities on the date such action is taken. Promptly after any record date is
set pursuant to this paragraph, the Trustee, at the Company's expense, shall
cause notice of such record date, the proposed action by Holders and the
applicable Expiration Date to be given to the Company in writing and to each
Holder of Securities in the manner set forth in Section 106.
With respect to any record date set pursuant to this Section, the party
hereto that sets such record date may designate any day as the "Expiration Date"
and from time to time may change the Expiration Date to any earlier or later
day, provided that no such change shall be effective unless notice of the
proposed new Expiration Date is given to the other party hereto in writing, and
to each Holder of Securities of the relevant series in the manner set forth in
Section 106, on or prior to the existing Expiration Date. If an Expiration Date
is not designated with respect to any record date set pursuant to this Section,
the party hereto that set such record date shall be deemed to have initially
designated the 180th day after such record date as the Expiration Date with
respect thereto, subject to its right to change the Expiration Date as provided
in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be
later than the 180th day after the applicable record date.
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<PAGE>
(d) The ownership of Securities shall be proved by the Security Register.
(e) Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future Holder of the
same Security and the Holder of every Security issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
(f) Without limiting the foregoing, a Holder entitled hereunder to take any
action hereunder with regard to any particular Security may do so with regard to
all or any part of the principal amount of such Security or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.
SECTION 105 Notices, Etc., to Trustee and the Company.
-----------------------------------------
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
(a) the Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing to or with
the Trustee at its Corporate Trust Office, Attention: Corporate Trust
Administration; or
(b) the Company by the Trustee or by any Holder shall be sufficient for
every pur pose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to the Company addressed to it
at the address of its principal office specified in the first paragraph of this
instrument or at any other address previously furnished in writing to the
Trustee by the Company.
SECTION 106 Notices to Holders; Waiver.
--------------------------
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. In any case where notice to Holders
is given by mail, neither the failure to mail such notice, nor any defect in any
notice so mailed, to any particular Holder shall affect the sufficiency of such
notice with respect to other Holders. Where this Indenture provides for notice
in any manner, such notice may be waived in writing by the Person entitled to
receive such notice, either before or after the event, and such waiver shall be
the equivalent of such notice. Waivers of notice by Holders shall be filed with
the Trustee, but such filing shall not be a condition precedent to the validity
of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then such
notification as shall
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<PAGE>
be made with the approval of the Trustee shall constitute a sufficient
notification for every purpose hereunder.
SECTION 107 Conflict with Trust Indenture Act.
---------------------------------
If any provision hereof limits, qualifies or conflicts with a provision of
the Trust Indenture Act that is required under such Act to be a part of and
govern this Indenture, the latter provision shall control. If any provision of
this Indenture modifies or excludes any provision of the Trust Indenture Act
that may be so modified or excluded, the latter provision shall be deemed to
apply to this Indenture as so modified or to be excluded, as the case may be.
SECTION 108 Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 109 Successors and Assigns.
----------------------
The Company will have the right at all times to assign any of its rights or
obligations under this Indenture to a direct or indirect wholly owned subsidiary
of the Company, provided, that, in the event of any such assignment, the Company
will remain liable for all such obligations. PMC Capital I may not assign any
of its rights under this Indenture without the prior written consent of the
Company. This Indenture is not otherwise assignable by the parties hereto.
Subject to the foregoing, this Indenture shall bind and inure to the benefit of
the parties hereto and their respective successors and assigns, whether so
expressed or not.
SECTION 110 Separability Clause.
-------------------
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111 Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Securities, express or implied, shall
give to any Person, other than the parties hereto, any Paying Agent and their
successors and assigns hereunder, the holders of Senior Debt, the holders of
Capital Securities (to the extent provided herein) and the Holders of
Securities, any benefit or any legal or equitable right, remedy or claim under
this Indenture.
SECTION 112 GOVERNING LAW.
-------------
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS
CONFLICTS OF LAWS PROVISIONS. THIS
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<PAGE>
INDENTURE IS SUBJECT TO THE PROVISIONS OF THE TRUST INDENTURE ACT OF 1939, AS
AMENDED, THAT ARE REQUIRED TO BE PART OF THIS INDENTURE AND SHALL, TO THE EXTENT
APPLICABLE, BE GOVERNED BY SUCH PROVISIONS.
SECTION 113 Non-Business Days.
-----------------
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or of the Securities) payment of interest or
principal (and premium, if any) or other amounts in respect of the Securities
need not be made on such date, but may be made on the next succeeding Business
Day in each case (except that, if such Business Day is in the next succeeding
calendar year, payment shall be made on the immediately preceding Business Day)
in each case with the same force and effect as if made on the Interest Payment
Date or Redemption Date, or at the Stated Maturity, provided that no interest
shall accrue in respect of the amounts whose payment is so delayed for the
period from and after such Interest Payment Date, Redemption Date or Stated
Maturity, as the case may be.
ARTICLE TWO
Security Forms
SECTION 201 Forms Generally.
---------------
The Securities and the Trustee's certificates of authentication shall be in
substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with applicable tax laws or the rules of any securities
exchange, the Nasdaq National Market or any other applicable self-regulatory
organization as may, consistently herewith, be determined by the officers
executing such Securities, as evidenced by their execution of the Securities.
The definitive Securities shall be printed, lithographed or engraved or
produced by any combination of these or other methods, if required by any
securities exchange on which the Securities may be listed, on a steel engraved
border or steel engraved borders or may be produced in any other manner
permitted by the rules of any securities exchange on which the Securities may be
listed, all as determined by the officers executing such Securities, as
evidenced by their execution of such Securities.
SECTION 202 Form of Face of Security.
------------------------
If the Security is a Global Security, insert:
"This Security is a Global Security within the meaning of the Indenture
hereinafter referred to and is registered in the name of The Depository Trust
Company, a New York
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<PAGE>
corporation ("DTC") or a nominee of DTC. This Security is exchangeable for
Securities registered in the name of a person other than DTC or its nominee only
in the limited circumstances described in the Indenture and no transfer of this
Security (other than a transfer of this Security as a whole by DTC to a nominee
of DTC or by a nominee of DTC to DTC or another nominee of DTC) may be
registered except in limited circumstances.
"Unless this Security is presented by an authorized representative of DTC to
Pennsylvania Manufacturers Corporation or its agent for registration of
transfer, exchange or payment, and any Security issued is registered in the name
of Cede & Co. or in such other name as is requested by an authorized
representative of DTC (and any payment hereon is made to Cede & Co. or to such
other entity as is requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co. has an interest
herein."
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<PAGE>
PENNSYLVANIA MANUFACTURERS CORPORATION
________% Junior Subordinated Debenture, Series A
No._________ $__________________________
[CUSIP No. _______________]
PENNSYLVANIA MANUFACTURERS CORPORATION, a corporation duly organized and
existing under the laws of the Commonwealth of Pennsylvania (herein called
"PMC," which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to
______________________________________, or registered assigns, the principal sum
of $_____________________ on __________________________, 2028. PMC further
promises to pay interest on said principal sum from__________________________,
2028 or from the most recent interest payment date (each such date, an "Interest
Payment Date") to which interest has been paid or duly provided for, semi-
annually (subject to deferral as set forth herein) in arrears on
____________________ 1 and ____________________ 1 of each year, com mencing
____________________, 1999, at the rate of _________% per annum together with
Additional Sums, if any, until the principal hereof is paid or duly provided for
or made available for payment; provided that any overdue principal, premium or
Additional Sums and any overdue installment of interest shall bear Additional
Interest at the rate of ________% per annum (to the extent that the payment of
such interest shall be legally enforceable), compounded semi-annually, from the
dates such amounts are due until they are paid or made available for payment.
The amount of interest payable for any period less than a full interest period
will be computed on the basis of twelve 30-day months and a 360-day year and the
actual days elapsed in a partial month in such period. In the event that any
date on which interest is payable on this Security is not a Business Day, then a
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date the
payment was originally payable. A "Business Day" shall mean any day other than
a Saturday or Sunday or a day on which banking institutions in the City of New
York are authorized or required by law or executive order to remain closed or a
day on which the Corporate Trust Office of the Trustee, or the principal office
of the Property Trustee under the Trust Agreement, is closed for business. The
interest installment so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in the Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities, as
defined in the Indenture) is registered at the close of business on the Regular
Record Date for such interest installment, which shall be the close of business
on the Business Day next preceding such Interest Payment Date. Any such
interest installment not so punctually paid or duly provided for shall forthwith
cease to be payable to the Holder on such Regular Record Date and may either be
paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice
whereof shall be given to Holders of Securities not less than 10 days prior to
such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any
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<PAGE>
securities exchange on which the Securities may be listed or the Nasdaq National
Market if the Securities are quoted thereon, or of any other applicable self-
regulatory organization, and upon such notice as may be required by such
exchange, the Nasdaq National Market or such other organization all as more
fully provided in said Indenture.
So long as no Event of Default under the Indenture has occurred and is
continuing, PMC shall have the right at any time during the term of this
Security, from time to time, to extend the interest payment period of such
Security for up to ten consecutive semi-annual periods with respect to each
deferral period (each an "Extension Period"), during which period interest will
compound semi-annually and PMC shall have the right to make partial payments of
interest on any Interest Payment Date, and at the end of which Extension Period
PMC shall pay all interest then accrued and unpaid including any Additional
Interest; provided, however, that no Extension Period shall extend beyond the
Stated Maturity of the principal of this Security as then in effect, and no such
Extension Period may end on a date other than an Interest Payment Date;
provided, further, that during any such Extension Period, PMC shall not, and
shall cause any Subsidiary of PMC not to, (a) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of PMC's outstanding capital stock or (b) make any payment
of principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of PMC that rank pari passu with or junior in interest to this
Security or make any guarantee payments with respect to any guarantee by PMC of
the debt securities of any Subsidiary of PMC that by their terms rank pari passu
or junior in interest to the Securities (other than (i) dividends or
distributions in Common Stock or Class A Common Stock of PMC, (ii) payments
under any Parent Guarantee and (iii) purchases of Common Stock or Class A Common
Stock related to the issuance of Common Stock or Class A Common Stock under any
of PMC's benefit plans for its directors, officers or employees). Prior to the
termination of any such Extension Period, PMC may further defer the interest
payments, provided that no Extension Period, together with all such previous and
further extensions thereof, shall exceed ten consecutive semi-annual periods or
extend beyond the Stated Maturity of this Security or end on a date other than
an Interest Payment Date. Upon the termination of any such Extension Period and
upon the payment of all accrued and unpaid interest and any Additional Interest
then due, PMC may elect to begin a new Extension Period, subject to the above
requirements. No interest shall be due and payable during an Extension Period,
except at the end thereof but each installment of interest that would otherwise
have been due and payable during such Extension Period shall bear Additional
Interest (to the extent that the payment of such interest shall be legally
enforceable) at the rate of ________% per annum, compounded semi-annually and
calculated as set forth in the first paragraph of this Security, from the dates
on which amounts would otherwise have been due and payable until paid or made
available for payment. PMC shall give the Trustee and the Administrative
Trustees notice of its election to begin an Extension Period at least one
Business Day prior to the earliest of (a) the date interest on this Security
would have been payable except for the election to begin such Extension Period,
(b) the date such distributions on the Trust Securities are payable or (c) the
date PMC Capital I is required to give notice to any securities exchange or the
Nasdaq National Market or other applicable self-regulatory organization or to
holders of the Capital Securities of the record date, but in any event not less
than one Business Day prior to such record date.
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<PAGE>
Payment of the principal of and premium, if any, and interest (including any
Additional Interest) on this Security will be made at the office or agency of
PMC maintained for that purpose in the United States, in such coin or currency
of the United States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that at the option of
PMC payment of interest may be made (a) by check mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register or
(b) by wire transfer in immediately available funds at such place and to such
account as may be designated by the Person entitled thereto as specified in the
Security Register.
The indebtedness evidenced by this Security is, to the extent provided in
the Indenture, subordinate and junior in right of payment to the prior payment
in full of all Senior Debt, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
authorizes and directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination so provided and (c)
appoints the Trustee his attorney-in-fact for any and all such purposes. Each
Holder hereof, by his acceptance hereof, waives all notice of the acceptance of
the subordination provisions contained herein and in the Indenture by each
holder of Senior Debt, whether now outstanding or hereafter incurred, and waives
reliance by each such holder upon said provisions.
Reference is hereby made to the further provisions of the Indenture
summarized on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, Pennsylvania Manufacturers Corporation has caused this
instrument to be duly executed under its corporate seal.
Dated:
PENNSYLVANIA MANUFACTURERS
CORPORATION
By:
___________________________
Name:
Title:
Attest:
___________________________
Name:
Title:
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<PAGE>
SECTION 203 Form of Reverse of Security.
---------------------------
This Security is one of a duly authorized issue of Securities of PMC,
designated as its ________% Junior Subordinated Debentures, Series A (herein
called the "Securities"), limited in aggregate principal amount to $103,093,000
issued under an Indenture, dated as of ____________________, 1998 (herein called
the "Indenture"), between PMC and The Bank of New York, as Trustee (herein
called the "Trustee", which term includes any successor trustee under the
Indenture), to which Indenture and all indentures supplemental thereto reference
is hereby made for a statement of the respective rights, limitations of rights,
duties and immunities thereunder of the Trustee, PMC and the Holders of the
Securities, and of the terms upon which the Securities are, and are to be,
authenticated and delivered.
All terms used in this Security which are defined in the Indenture or in the
Trust Agreement attached as Annex A thereto shall have the meanings assigned to
them in the Indenture or the Trust Agreement, as the case may be.
At any time on or after ____________________, 2008, PMC shall have the
right, subject to the terms and conditions of Article Twelve of the Indenture,
to redeem this Security at the option of PMC, without premium or penalty, in
whole at any time or in part from time to time, at a Redemption Price equal to
the following prices expressed in percentages of the principal amount to be
redeemed, plus accrued but unpaid interest, including any Additional Interest,
if any, to the Redemption Date, if redeemed during the 12-month period beginning
____________________ 1:
Year Redemption Price
---- ----------------
2008 10x.xxxx%
2009 10x.xxxx%
2010 10x.xxxx%
2011 10x.xxxx%
2012 10x.xxxx%
2013 10x.xxxx%
2014 10x.xxxx%
2015 10x.xxxx%
2016 10x.xxxx%
2017 10x.xxxx%
and at 100% on or after _________________________ 1, 2018.
If a Special Event as defined in the Indenture shall occur and be continuing
prior to ___________________, 2008, PMC shall have the right, subject to the
terms and conditions of Article Twelve of the Indenture, to redeem this Security
at the option of PMC, without premium or penalty, in whole but not in part,
within 90 days following the occurrence of such Special Event, subject to the
provisions of Section 1207 and other provisions of Article Twelve of the
Indenture, at a Redemption Price equal to the Make-Whole Amount, plus accrued
but unpaid interest, including any Additional Interest, if any, to the
Redemption Date. The "Make-Whole Amount" shall be equal to the greater of (a)
100% of the principal
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<PAGE>
amount hereof or (b) as determined by a Quotation Agent (as defined below), the
sum of the present values of the principal amount and premium payable as part of
the Redemption Price with respect to an optional redemption hereof on
_______________________, 2008, together with scheduled payments of interest from
the Redemption Date to _____________________, 2008 (the "Remaining Life"), in
each case discounted to the Redemption Date on a semi-annual basis (assuming a
360-day year consisting of 30-day months) at the Adjusted Treasury Rate (as
defined below). Any redemption pursuant to this paragraph will be made upon not
less than 30 nor more than 60 days' notice, provided that, for so long as this
Security is held by PMC Capital I, such notice shall be given not less than 45
nor more than 75 days prior to such Redemption Date (unless a shorter notice
shall be satisfactory to the Property Trustee). If the Securities are only
partially redeemed by PMC, the Securities will be redeemed pro rata.
--- ----
"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
Treasury Rate (as defined below) plus (a) ________% if such Redemption Date
occurs on or before ________________ 1,________ or (b) __________% if such
Redemption Date occurs after _______________ 1, ________.
"Treasury Rate" means (a) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the maturity corresponding to the
Remaining Life (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Remaining Life shall be determined and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month) or (b) if such release (or any successor release)
is not published during the week preceding the calculation date or does not
contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue (as defined below),
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.
"Comparable Treasury Issue" means, with respect to any Redemption Date, the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States Treasury security has a maturity which is within a
period from three months before to three months after _________________ 1, 2008,
the two most closely corresponding United States Treasury securities shall be
used as the Comparable Treasury Issue, and the Treasury Rate shall be
interpolated or extrapolated on a straight-line basis, rounding to the nearest
month using such securities.
"Quotation Agent" means Goldman, Sachs & Co. and their successors; provided,
however, that if the foregoing shall cease to be a primary U.S. Government
securities
-20-
<PAGE>
dealer in New York City (a "Primary Treasury Dealer"), PMC shall substitute
therefor another Primary Treasury Dealer.
"Reference Treasury Dealer" means (a) the Quotation Agent and (b) any other
Primary Treasury Dealer selected by the Trustee after consultation with PMC.
"Comparable Treasury Price" means (a) the average of five Reference Treasury
Dealer Quotations (as defined below) for such Redemption Date, after excluding
the highest and lowest such Reference Treasury Dealer Quotations or (b) if the
Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the
average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any Redemption Date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third Business Day preceding such Redemption Date.
In the event of redemption of this Security in part only, a new Security or
Securities for the unredeemed portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.
If an Event of Default with respect to the Securities shall occur and be
continuing, the principal of the Securities may be declared due and payable in
the manner, with the effect and subject to the conditions provided in the
Indenture.
The Indenture contains provisions for satisfaction and discharge and
defeasance at any time of the entire indebtedness of this Security upon
compliance by PMC with certain conditions set forth in the Indenture.
The Indenture contains provisions permitting PMC and the Trustee, with the
consent of Holders of not less than a majority in aggregate principal amount of
the Outstanding Securities, to modify the Indenture in a manner affecting the
rights of the Holders of the Securities; provided that no such modification may,
without the consent of the Holder of each Outstanding Security affected thereby,
(a) change the fixed maturity of the Securities or reduce the principal amount
thereof, or reduce the rate of interest thereon, or (b) reduce the percentage in
aggregate principal amount of the Outstanding Securities, the Holders of which
are required to consent to any such modification of the Indenture; provided,
that, so long as any of the Capital Securities remains outstanding, no such
modification may be made that adversely affects the Holders of the Capital
Securities in any material respect, and no termination of the Indenture may
occur, and no waiver of any Event of Default or compliance with any covenant
under the Indenture may be effective, without the prior consent of the Holders
of at least a majority of the aggregate Liquidation Amount (as defined in the
Trust Agreement) of the outstanding Capital Securities unless and until the
principal of and any premium on the Securities and all accrued and unpaid
interest (including any Additional Interest) thereon have been paid in full.
The Indenture also contains provisions permitting Holders of specified
percentages in principal amount of the
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<PAGE>
Securities at the time Outstanding, on behalf of the Holders of all Securities,
to waive compliance by PMC with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any Security issued
upon the registration of transfer hereof or in exchange therefor or in lieu
hereof, whether or not notation of such consent or waiver is made upon this
Security.
As provided in and subject to the provisions of the Indenture, if an Event
of Default (other than an Event of Default relating to certain bankruptcy
events) with respect to the Securities at the time Outstanding occurs and is
continuing, then and in every such case the Trustee or the Holders of not less
than 25% in aggregate principal amount of the Outstanding Securities may declare
the principal (or a specific portion of) of and the accrued interest on all the
Securities, and any other amount payable under the Indenture to be due and
payable immediately, by a notice in writing to PMC (and to the Trustee if given
by Holders), provided that, if upon an Event of Default the Trustee or such
Holders fail to declare the principal of all the Outstanding Securities to be
immediately due and payable, the holders of at least 25% in aggregate
Liquidation Amount of the Capital Securities then Outstanding shall have the
right to make such declaration by a notice in writing to PMC and the Trustee;
and upon any such declaration the principal (or a specific portion of) of and
the accrued interest (including any Additional Interest) on all the Securities
shall become immediately due and payable, provided that the payment of principal
and interest (including any Additional Interest) on such Securities shall remain
subordinated to the extent provided in Article Eleven of the Indenture.
No reference herein to the Indenture and no provision of this Security or of
the Indenture shall alter or impair the obligation of PMC, which is absolute and
unconditional, to pay the principal of and premium, if any, and interest on this
Security at the times, place and rate, and in the coin or currency, herein
prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of The Bank of New York in
______________________________________________, duly endorsed by, or accompanied
by a written instrument of transfer in form satisfactory to The Bank of New
York, as the Security Registrar, duly executed by the Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Securities of
like tenor, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees. No service
charge shall be made for any such registration of transfer or exchange, but PMC
or The Bank of New York may require payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, PMC,
the Trustee and any agent of PMC or the Trustee may treat the Person in whose
name this Security is registered as the owner hereof for all purposes, whether
or not this Security be overdue, and neither PMC, the Trustee nor any such agent
shall be affected by notice to the contrary.
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<PAGE>
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Securities are
exchangeable for a like aggregate principal amount of Securities of a different
authorized denomination, as requested by the Holder surrendering the same.
PMC and, by its acceptance of this Security or a beneficial interest
therein, the Holder of, and any Person that acquires a beneficial interest in,
this Security agree that for United States federal, state and local tax purposes
it is intended that this Security constitute indebtedness.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES THEREOF.
SECTION 204 Additional Provisions Required in Global Security.
-------------------------------------------------
Any Global Security issued hereunder shall, in addition to the provisions
contained in Sections 202 and 203, bear a legend in substantially the following
form:
If the Security is a Global Security, insert:
"This Security is a Global Security within the meaning of the Indenture
hereinafter referred to and is registered in the name of The Depository
Trust Company, a New York corporation ("DTC") or a nominee of DTC. This
Security is exchangeable for Securities registered in the name of a
person other than DTC or its nominee only in the limited circumstances
described in the Indenture and no transfer of this Security (other than a
transfer of this Security as a whole by DTC to a nominee of DTC or by a
nominee of DTC to DTC or another nominee of DTC) may be registered except
in limited circumstances.
"Unless this Security is presented by an authorized representative of DTC
to Pennsylvania Manufacturers Corporation or its agent for registration
of transfer, exchange or payment, and any Security issued is registered
in the name of Cede & Co. or in such other name as is requested by an
authorized representative of DTC (and any payment hereon is made to Cede
& Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co. has an interest herein."
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<PAGE>
SECTION 205 Form of Trustee's Certificate of Authentication.
-----------------------------------------------
This is one of the Securities referred to in the within-mentioned Indenture.
The Bank of New York,
as Trustee
By:
---------------------------------
Authorized Officer
ARTICLE THREE
The Securities
SECTION 301 Title and Terms; Paying Agent.
-----------------------------
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is limited to $103,093,000 except for Securities
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Securities pursuant to Sections 304, 305, 306, 906 or
1208.
The Securities shall be known and designated as the "________% Junior
Subordinated Debentures, Series A" of the Company. Their Stated Maturity shall
be __________________ 1, 2028.
The Securities shall bear interest at the rate of ________% per annum, from
_____________ 1, __________ or from the most recent Interest Payment Date to
which interest has been paid or duly provided for, as the case may be, payable
semi-annually (subject to deferral as set forth herein), in arrears, on
__________________ 1 and__________________ 1 of each year, commencing
______________ 1, 1999 until the principal thereof is paid or made available for
payment. Accrued interest that is not paid on the applicable Interest Payment
Date (even if unpaid due to an extension of an interest payment period as set
forth below in this Section 301) will bear Additional Interest on the amount
thereof. In the event that any date on which interest is payable on the
Securities is not a Business Day, then a payment of the interest payable on such
date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day is in the next succeeding calendar year, such payment
shall be made on the immediately preceding Business Day, in each case with the
same force and effect as if made on the date the payment was originally payable.
So long as no Event of Default hereunder has occurred and is continuing, the
Company shall have the right at any time during the term of the Securities to
defer the payment of interest on such Securities from time to time, for up to
ten consecutive semi-annual periods (each, an "Extension Period") during which
Extension Periods interest will compound semi-annually and the Company shall
have the right to make partial payments of interest on any Interest Payment
Date. No Extension Period shall end on a date other
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<PAGE>
than an Interest Payment Date. At the end of any such Extension Period, the
Company shall pay all interest then accrued and unpaid on the Securities
(together with Additional Interest thereon, if any, at the rate specified for
the Securities to the extent permitted by applicable law), provided, however,
that during any such Extension Period, the Company shall not, and shall cause
any Subsidiary not to, (i) declare or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
the Company's capital stock or (ii) make any payment of principal, interest or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior in interest to the Securities or
make any guarantee payments with respect to any guarantee by the Company of the
debt securities of any Subsidiary of the Company that by their terms rank pari
passu or junior in interest to the Securities (other than (a) dividends or
distributions in Common Stock or Class A Common Stock of the Company, (b)
payments under the Parent Guarantee and (c) purchases of Common Stock or Class A
Common Stock related to the issuance of Common Stock or Class A Common Stock
under any of the Company's benefit plans for its directors, officers or
employees). Prior to the termination of any such Extension Period, the Company
may further extend the interest payment period, provided that no Extension
Period shall exceed ten consecutive semi-annual periods or extend beyond the
Stated Maturity of the Securities. Upon the termination of any Extension Period
and upon the payment of all accrued and unpaid interest and any Additional
Interest then due, the Company may elect to begin a new Extension Period,
subject to the above requirements. No interest shall be due and payable during
an Extension Period, except at the end thereof. The Company shall give the
Trustee and the Administrative Trustees notice of its election to begin any such
Extension Period at least one Business Day prior to the earliest of (i) the date
interest on the Securities would have been payable except for the election to
begin such Extension Period, (ii) the date such distributions on the Trust
Securities are payable or (iii) the date PMC Capital I is required to give
notice to any securities exchange or the Nasdaq National Market or other
applicable self-regulatory organization or to holders of the Capital Securities
of the record date, but in any event not less than one Business Day prior to
such record date.
The Trustee shall promptly give notice of the Company's election to begin
any such Extension Period to the Holders of the Outstanding Securities.
The principal of and premium, if any, and interest (including any Additional
Interest) on the Securities shall be payable at the office of such Paying Agent
or Paying Agents as the Company may designate for such purpose from time to
time, in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts; provided,
however, that at the option of the Company payment of interest may be made (i)
by check mailed to the address of the Person entitled thereto as such address
shall appear in the Security Register or (ii) by wire transfer in immediately
available funds at such place and to such account as may be designated by the
Person entitled thereto as specified in the Security Register.
The Company designates The Bank of New York as the initial Paying Agent with
respect to the Securities. The Company may at any time designate additional
Paying Agents or rescind the designation of any Paying Agent or approve a change
in the office through which any Paying Agent acts pursuant to Section 1002.
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<PAGE>
The Securities shall be subordinated in right of payment to Senior Debt as
provided in Article Eleven.
The Securities shall be redeemable as provided in Article Twelve.
SECTION 302 Denominations.
-------------
The Securities shall be issuable only in registered form, without coupons,
and only in denominations of $1,000 and any integral multiple thereof.
SECTION 303 Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Securities shall be executed on behalf of the Company by its Chairman of
the Board, its President or one of its Senior Vice Presidents, under its
corporate seal reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities executed by the Company to the
Trustee for authentication. Securities may be authenticated on original
issuance from time to time and delivered pursuant to such procedures acceptable
to the Trustee ("Procedures") as may be specified from time to time by Company
Order. Procedures may authorize authentication and delivery pursuant to oral
instructions of the Company or a duly authorized agent, which instructions shall
be promptly confirmed in writing.
Prior to the delivery of a Security in any such form to the Trustee for
authentication, the Company shall deliver to the Trustee a Company Order
requesting the Trustee's authentication and delivery of all or a portion of the
Securities, and if less than all, setting forth procedures for such
authentication. The Trustee in accordance with such Company Order shall
authenticate and deliver such Securities as provided in this Indenture and not
otherwise.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder.
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SECTION 304 Temporary Securities.
--------------------
Pending the preparation of definitive Securities, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Securities which are printed, lithographed, typewritten, mimeographed or
otherwise produced, in any authorized denomination, substantially of the tenor
of the definitive Securities in lieu of which they are issued and with such
appropriate insertions, omissions, substitutions and other variations as the
officers executing such Securities may determine, as evidenced by their
execution of such Securities.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at any office
or agency of the Company designated pursuant to Section 1002, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary
Securities, the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a like principal amount of definitive Securities
having the same date of issuance and Stated Maturity and having the same terms
as such temporary Securities. Until so exchanged, the temporary Securities
shall in all respects be entitled to the same benefits under this Indenture as
definitive Securities.
SECTION 305 Registration, Registration of Transfer and Exchange.
---------------------------------------------------
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
collectively referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers of Securities. The Trustee is hereby
appointed "Security Registrar" for the purpose of registering Securities and
transfers of Securities as herein provided.
Upon surrender for registration of transfer of any Security (duly endorsed
or with the form of transfer endorsed thereon duly executed) at the office of
the Security Registrar or at an office or agency of the Company designated
pursuant to Section 1002 for such purpose, the Company shall execute, and the
Trustee shall authenticate and deliver, in the name of the designated transferee
or transferees, one or more new Securities of any authorized denominations, of a
like tenor and aggregate principal amount, having the same date of issuance,
Stated Maturity and terms.
At the option of the Holder, Securities may be exchanged for other
Securities of any authorized denominations, of a like tenor and aggregate
principal amount having the same date of issuance, Stated Maturity and terms,
upon surrender of the Securities to be exchanged at such office or agency.
Whenever any Securities are so surrendered for exchange, the Company shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the
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same benefits under this Indenture, as the Securities surrendered upon such
registration of transfer or exchange.
Every Security presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company or the Trustee) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and the Security Registrar duly executed by the Holder thereof or
his attorney duly authorized in writing. Such transfer or exchange will be
effected upon the Security Registrar or the Company, as the case may be, being
satisfied with the documents of title and identity of the Person making the
request.
No service charge shall be made to a Holder for any registration of transfer
or exchange of Securities, but the Company or the Securities Registrar may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer or
exchange of Securities, other than exchanges pursuant to Sections 304, 906 or
1206 not involving any transfer.
Notwithstanding any of the foregoing, any Global Security shall be
exchangeable pursuant to this Section for Securities registered in the name of
Persons other than the Depositary for such Security or its nominee only if (a)
such Depositary notifies the Company that it is unwilling or unable to continue
as Depositary for such Global Security or if at any time such Depositary ceases
to be a clearing agency registered under the Securities Exchange Act of 1934, as
amended, (b) the Company executes and delivers to the Trustee a Company Order
that such Global Security shall be so exchangeable or (c) there shall have
occurred and be continuing an Event of Default with respect to the Securities.
Any Global Security that is exchangeable pursuant to the preceding sentence
shall be exchangeable for Securities registered in such names as such Depositary
shall direct.
Notwithstanding any other provision in this Indenture, a Global Security may
not be transferred except as a whole by the Depositary with respect to such
Global Security to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
Neither the Company nor the Security Registrar shall be required, pursuant
to the provisions of this Section, (a) to issue, register the transfer of or
exchange any Security during a period beginning at the opening of business 15
days before the day of selection for redemption of Securities pursuant to
Article Twelve and ending at the close of business on the day of mailing of
notice of redemption or (b) to register the transfer of or exchange any Security
so selected for redemption, in whole or in part, except, in the case of any
Security to be redeemed in part, any portion thereof not to be redeemed.
SECTION 306 Mutilated, Destroyed, Lost and Stolen Securities.
------------------------------------------------
If any mutilated Security is surrendered to the Trustee together with such
security or indemnity as may be required by the Company or the Trustee to save
each of them harmless, the Company shall execute, and the Trustee shall
authenticate and deliver, in
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exchange therefor a new Security of like tenor and aggregate principal amount
and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (a) evidence to
their satisfaction of the destruction, loss or theft of any Security and (b)
such security or indemnity as may be required by them to save each of them and
any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and upon its request the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security, a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become or
is about to become due and payable, the Company in its discretion may, instead
of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, 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 (including
the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any destroyed,
lost or stolen Security shall constitute an original additional contractual
obligation of the Company, whether or not the destroyed, lost or stolen Security
shall be at any time enforceable by anyone, and shall be entitled to all the
benefits of this Indenture equally and proportionately with any and all other
Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307 Payment of Interest; Interest Rights Preserved.
----------------------------------------------
Interest and Additional Interest on any Security which is payable, and is
punctually paid or duly provided for, on any Interest Payment Date shall be paid
to the Person in whose name that Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest payment except that, unless otherwise provided in the
Securities, interest and any Additional Interest payable on the Stated Maturity
of the principal of a Security shall be paid to the Person to whom principal is
paid.
Any interest on any Security which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the Holder on the relevant
Regular Record Date by virtue of having been such Holder, and such Defaulted
Interest may be paid by the Company, at its election in each case, as provided
in clause (a) or (b) below:
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(a) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Securities (or their respective Predecessor
Securities) are regis tered at the close of business on a Special Record Date
for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the amount
of Defaulted Interest proposed to be paid on each Security and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as in this clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest which
shall be not more than 15 days and not less than 10 days prior to the date of
the proposed payment and not less than 10 days after the receipt by the Trustee
of the notice of the proposed payment. The Trustee shall promptly notify the
Company of such Special Record Date and, in the name and at the expense of the
Company, shall cause notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor to be mailed, first-class postage prepaid,
to each Holder at his address as it appears in the Security Register, not less
than 10 days prior to such Special Record Date. Notice of the proposed payment
of such Defaulted Interest and the Special Record Date therefor having been so
mailed, such Defaulted Interest shall be paid to the Persons in whose names the
Securities (or their respective Predecessor Securities) are registered at the
close of business on such Special Record Date and shall no longer be payable
pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities may be listed, and, if so listed, upon such notice as
may be required by such exchange, (or by the Trustee if the Securities are not
listed) if, after notice given by the Company to the Trustee of the proposed
payment pursuant to this clause, such manner of payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security delivered
under this Indenture upon registration of transfer of or in exchange for or in
lieu of any other Security shall carry the rights to interest accrued and
unpaid, and to accrue (including in each such case Additional Interest), which
were carried by such other Security.
SECTION 308 Persons Deemed Owners.
---------------------
The Company, the Trustee and any agent of the Company or the Trustee may
treat the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal of and (subject to
Section 307) interest (including Additional Interest) on such Security and for
all other purposes whatsoever, whether or not such Security be overdue, and
neither the Company, the Trustee nor any agent of the Company or the Trustee
shall be affected by notice to the contrary.
No holder of any beneficial interest in any Global Security held on its
behalf by a Depositary shall have any rights under this Indenture with respect
to such Global Security, and such Depositary may be treated by the Company, the
Trustee and any agent of the
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Company or the Trustee as the owner of such Global Security for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the
Company, the Trustee or any agent of the Company or the Trustee from giving
effect to any written certification, proxy or other authorization furnished by a
Depositary or impair, as between a Depositary and such holder of beneficial
interests, the operation of customary practices governing the exercise of the
rights of the Depositary (or its nominee) as Holder of any Security.
SECTION 309 Cancellation.
------------
All Securities surrendered for payment, redemption, registration of transfer
or exchange shall, if surrendered to any Person other than the Trustee, be
delivered to the Trustee and any such Securities and Securities surrendered
directly to the Trustee for any such purpose shall be promptly canceled by it.
The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Securities so delivered
shall be promptly canceled by the Trustee. No Securities shall be authenticated
in lieu of or in exchange for any Securities canceled as provided in this
Section, except as expressly permitted by this Indenture. All canceled
Securities held by the Trustee shall be disposed of as directed by a Company
Order.
SECTION 310 Computation of Interest.
-----------------------
Interest on the Securities payable for any full semi-annual period shall be
computed on the basis of a 360-day year of twelve 30-day months and, for any
period shorter than a full monthly period, shall be computed on the basis of the
actual number of days elapsed in such period.
SECTION 311 Right of Set-Off.
----------------
Notwithstanding anything to the contrary in the Indenture, the Company shall
have the right to set-off any payment it is otherwise required to make hereunder
with respect to any Security and to the extent the Company has theretofore made,
or is concurrently on the date of such payment making, a payment under the
Parent Guarantee or under Section 508 hereof.
SECTION 312 Agreed Tax Treatment.
--------------------
Each Security issued hereunder shall provide that the Company and, by its
acceptance of a Security or a beneficial interest therein, the Holder of, and
any Person that acquires a beneficial interest in, such Security agree that for
United States federal, state and local tax purposes it is intended that such
Security constitute indebtedness.
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SECTION 313 CUSIP Numbers.
-------------
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers.
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401 Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall, upon Company Request, cease to be of further effect
and the Company will be deemed to have satisfied and discharged this Indenture
(except as to any surviving rights of registration of transfer or exchange of
Securities herein expressly provided for and as otherwise provided in this
Section 401) and the Trustee, on written demand of and at the expense of the
Company, shall execute instruments supplied by the Company acknowledging
satisfaction and discharge of this Indenture, when
(a) either
(i) all Securities theretofore authenticated and delivered (other than
(A) Securities which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 306 and (B) Securities for whose payment
money has theretofore been deposited in trust or segregated and held in trust by
the Company and thereafter repaid to the Company or discharged from such trust,
as provided in Section 1003) have been delivered to the Trustee for
cancellation; or
(ii) all such Securities not theretofore delivered to the Trustee for
cancellation (A) have become due and payable or (B) will become due and payable
at their Stated Maturity within one year of the date of deposit, and the
Company, in the case of (A) or (B) above, has deposited or caused to be
deposited with the Trustee cash or cash equivalents, as trust funds in trust for
the purpose, an amount sufficient to pay and discharge the entire indebtedness
on such Securities not theretofore delivered to the Trustee for cancellation,
for principal, premium, if any, and interest (including Additional Interest) to
the date of such deposit (in the case of Securities which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
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Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607, the obligations of
the Trustee to any Authenticating Agent under Section 614 and, if money shall
have been deposited with the Trustee pursuant to subclause (ii) of clause (a) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402 Application of Trust Money.
--------------------------
Subject to the provisions of the last paragraph of Section 1003, all money
deposited with the Trustee pursuant to Section 401 or money or Government
Obligations deposited with the Trustee pursuant to Section 403, or received by
the Trustee in respect of Government Obligations deposited with the Trustee
pursuant to Section 403, shall be held in trust and applied by the Trustee, in
accordance with the provisions of the Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Persons
entitled thereto, of the principal (and premium, if any) and interest (including
any Additional Interest) for the payment of which such money or obligations have
been deposited with or received by the Trustee.
SECTION 403 Satisfaction, Discharge and Defeasance of Securities.
----------------------------------------------------
The Company shall be deemed to have paid and discharged the entire
indebtedness on all the Outstanding Securities and the Trustee, at the expense
of the Company, shall execute proper instruments acknowledging satisfaction and
discharge of such indebtedness, when
(a) with respect to all Outstanding Securities,
(i) the Company has irrevocably deposited or caused to be irrevocably
deposited with the Trustee as trust funds in trust for such purpose an amount
sufficient to pay and discharge the entire indebtedness on all Outstanding
Securities for principal (and premium, if any) and interest (including any
Additional Interest) to the Stated Maturity or any Redemption Date as
contemplated by the penultimate paragraph of this Section, as the case may be;
or
(ii) the Company has irrevocably deposited or caused to be irrevocably
deposited with the Trustee as obligations in trust for such purpose an amount of
Government Obligations as will, in the written opinion of independent public
accountants delivered to the Trustee, together with predetermined and certain
income to accrue thereon, without consideration of any reinvestment thereof, be
sufficient to pay and discharge when due the entire indebtedness on all
Outstanding Securities for principal (and premium, if any) and interest
(including any Additional Interest) to the Stated Maturity or any Redemption
Date as contemplated by the penultimate paragraph of this Section, as the case
may be; and
(b) the Company has paid or caused to be paid all other sums payable with
respect to the Outstanding Securities; and
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(c) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of the entire
indebtedness on all Outstanding Securities have been complied with.
Any deposits with the Trustee referred to in Section 403(a) above shall be
irrevocable and shall be made under the terms of an escrow trust agreement in
form and substance reasonably satisfactory to the Trustee. If any Outstanding
Securities are to be redeemed prior to their Stated Maturity pursuant to any
optional redemption provisions, the applicable escrow trust agreement shall
provide therefor and the Company shall make such arrangements as are
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company. If the Securities are
not to become due and payable at their Stated Maturity or upon call for
redemption within one year of the date of deposit, then the Company shall give,
not later than the date of such deposit, notice of such deposit to the Holders
of Securities.
Upon the satisfaction of the conditions set forth in this Section with
respect to all the Outstanding Securities, the terms and conditions of the
Securities, including the terms and conditions with respect thereto set forth in
this Indenture, shall no longer be binding upon, or applicable to, the Company;
provided, that the Company shall not be discharged from any payment obligations
in respect of Securities which are deemed not to be Outstanding under clause (c)
of the definition thereof if such obligations continue to be valid obligations
of the Company under applicable law.
ARTICLE FIVE
Remedies
SECTION 501 Events of Default.
-----------------
"Event of Default", wherever used herein, means any one of the following
----------------
events that has occurred and is continuing (whatever the reason for such Event
of Default and whether it shall be occasioned by the provisions of Article
Eleven or be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(a) failure for 30 days to pay any interest on the Securities (including
Additional Interest, if any) when due (subject to the deferral of any due date
in the case of an Extension Period); or
(b) failure to pay any principal (or premium, if any) on the Securities
when due whether at Stated Maturity, upon redemption, by declaration or
otherwise; or
(c) failure to observe or perform in any material respect any other
covenant herein for 90 days after written notice requiring the Company to remedy
the same to the
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Company from the Trustee or to the Company and the Trustee from the holders of
at least 25% in aggregate principal amount of the Outstanding Securities; or
(d) entry by a court having jurisdiction in the premises of (i) a decree or
order for relief in respect of the Company in an involuntary case or proceeding
under any applicable federal or state bankruptcy, insolvency, reorganization or
other similar law or (ii) a decree or order adjudging the Company a bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company under any
applicable federal or state law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of the
Company or of all or substantially all of the property of the Company, or
ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order for relief or any such other decree or order unstayed
and in effect for a period of 60 consecutive days; or
(e) (i) the commencement by the Company of a voluntary case or proceeding
under any applicable federal or state bankruptcy, insolvency, reorganization or
other similar law or of any other case or proceeding to be adjudicated a
bankrupt or insolvent or (ii) the consent by the Company to or the entry of a
decree or order for relief in respect of itself in an involuntary case or
proceeding under any applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any bankruptcy or
insolvency case or proceeding against the Company, or (iii) the filing by the
Company of a petition or answer or consent seeking reorganization or relief
under any applicable federal or state law, or (iv) the consent by the Company to
the filing of such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or of all or substantially all of the property
of the Company, or (v) the making by the Company of an assignment for the
benefit of creditors or (vi) the taking of corporate action by the Company in
furtherance of any such action.
SECTION 502 Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
If an Event of Default (other than an Event of Default specified in Sections
501(d) or 501(e)) occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have the right to declare the principal (or a
specific portion thereof) of and the interest on all the Securities, and any
other amount payable under the Indenture, to be due and payable immediately, by
a notice in writing to the Company (and to the Trustee if given by Holders)
provided, that if upon an Event of Default, the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Outstanding Securities fail
to declare such amounts to be immediately due and payable, the holders of at
least 25% in aggregate Liquidation Amount of Capital Securities then outstanding
shall have such right, by a notice in writing to the Company and the Trustee;
and upon any such declaration such principal amount (or specified portion
thereof) of and the accrued interest (including any Additional Interest) on all
the Securities shall become immediately due and payable. If an Event of Default
specified in Sections 501(d) or 501(e) occurs, the principal amount of all the
Securities shall automatically, and without any declaration or other action on
the part of the Trustee or any Holder, become immediately due and payable.
Payment of principal and interest
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(including any Additional Interest) on such Securities shall remain subordinated
to the extent provided in Article Eleven.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter provided in this Article, the Holders of a majority
in aggregate principal amount of the Outstanding Securities, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(a) the Company has paid or deposited with the Trustee a sum sufficient to
pay:
(i) all overdue installments of interest (including any Additional
Interest) on all Securities,
(ii) the principal of (and premium, if any, on) any Securities which
have become due otherwise than by such declaration of acceleration and interest
and Additional Interest, if any, thereon at the rate borne by the Securities and
(iii) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel; and
(b) all Events of Default, other than the non-payment of the principal of
Securities which has become due solely by such declaration of acceleration, have
been cured or waived as provided in Section 513.
If the Holders of a majority in principal amount of the Outstanding Securities
fail to annul such declaration and waive such default, the holders of a majority
in aggregate Liquidation Amount of the Capital Securities may rescind and annul
such declaration and its consequences, subject to the foregoing conditions.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Upon receipt by the Trustee of written notice declaring such an
acceleration, or rescission and annulment thereof, with respect to Securities
all or part of which are represented by a Global Security, a record date shall
be established for determining Holders of Outstanding Securities entitled to
join in such notice, which record date shall be at the close of business on the
day the Trustee receives such notice. The Holders on such record date, or their
duly designated proxies, and only such Persons, shall be entitled to join in
such notice, whether or not such Holders remain Holders after such record date;
provided, that, unless such declaration of acceleration, or rescission and
annulment, as the case may be, shall have become effective by virtue of the
requisite percentage having joined in such notice prior to the day which is 90
days after such record date, such notice of declaration of
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acceleration, or rescission and annulment, as the case may be, shall
automatically and without further action by any Holder be canceled and of no
further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of
a Holder, from giving, after expiration of such 90-day period, a new written
notice of declaration of acceleration, or rescission and annulment thereof, as
the case may be, that is identical to a written notice which has been canceled
pursuant to the proviso to the preceding sentence, in which event a new record
date shall be established pursuant to the provisions of this Section 502.
SECTION 503 Collection of Indebtedness and Suits for Enforcement by Trustee.
---------------------------------------------------------------
The Company covenants that if:
(a) default is made in the payment of any installment of interest
(including any Additional Interest) on any Security when such interest becomes
due and payable and such default continues for a period of 30 days or
(b) default is made in the payment of the principal of (and premium, if
any, on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities, the whole amount then due and payable
on such Securities for principal (and premium, if any) and interest (including
any Additional Interest), and, in addition thereto, all amounts owing the
Trustee under Section 607. Payment of principal (and premium, if any) and
interest (including any Additional Interest) on such Securities shall remain
subordinated to the extent provided in Article Eleven notwithstanding that such
amount shall become immediately due and payable as herein provided.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Securities and collect the
monies adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein or to enforce any other proper remedy.
SECTION 504 Trustee May File Proofs of Claim.
--------------------------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
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the Company for the payment of overdue principal (and premium, if any) or
interest (including Additional Interest)) shall be entitled and empowered, by
intervention in such proceeding or otherwise, (a) to file and prove a claim for
the whole amount of principal (and premium, if any) and interest (including any
Additional Interest) owing and unpaid in respect to the Securities and to file
such other papers or documents as may be necessary or advisable and to take any
and all actions as are authorized under the Trust Indenture Act in order to have
the claims of the Holders and any predecessor to the Trustee under Section 607
allowed in any such judicial proceedings and (b) in particular, the Trustee
shall be authorized to collect and receive any monies or other property payable
or deliverable on any such claims and to distribute the same in accordance with
Section 506; and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee for distribution
in accordance with Section 506 and, in the event that the Trustee shall consent
to the making of such payments directly to the Holders, to pay to the Trustee
any amount due to it and any predecessor Trustee under Section 607.
No provision of this Indenture shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding; provided, however,
that the Trustee may, on behalf of the Holders, vote for the election of a
trustee in bankruptcy or similar official and be a member of a creditors' or
other similar committee.
SECTION 505 Trustee May Enforce Claims Without Possession of Securities.
-----------------------------------------------------------
All rights of action and claims under this Indenture or the Securities may
be prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, subject to
Article Eleven and after provision for payment of all the amounts owing the
Trustee and any predecessor Trustee under Section 607, its agents and counsel,
be for the ratable benefit of the Holders of the Securities in respect of which
such judgment has been recovered.
SECTION 506 Application of Money Collected.
------------------------------
Subject to Article Eleven, any money or property collected or to be applied
by the Trustee pursuant to this Article shall be applied in the following order,
at the date or dates fixed by the Trustee and, in case of the distribution of
such money or property on account of principal (or premium, if any) or interest
(including any Additional Interest), upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee and any predecessor
Trustee under Section 607; and
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SECOND: To the payment of the amounts then due and unpaid for principal of
(and premium, if any) and interest (including any Additional Interest) on the
Securities in respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind, according to the
amounts due and payable on such Securities for principal (and premium, if any)
and interest (including any Additional Interest), respectively; and
THIRD: The balance, if any, to the Person or Persons entitled thereto.
SECTION 507 Limitation on Suits.
-------------------
No Holder of any Security shall have any right to institute any proceeding,
judicial or otherwise, with respect to this Indenture, or for the appointment of
a receiver, assignee, trustee, liquidator, sequestrator or other similar
official or for any other remedy hereunder, unless:
(a) such Holder has previously given written notice to the Trustee of a
continuing Event of Default;
(b) the Holders of not less than 25% in aggregate principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance with
such request;
(d) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding; and
(e) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in aggregate
principal amount of the Outstanding Securities; it being understood and intended
that no one or more Holders shall have any right in any manner whatever by
virtue of, or by availing itself of, any provision of this Indenture to affect,
disturb or prejudice the rights of any other Holders, or to obtain or to seek to
obtain priority or preference over any other Holders or to enforce any right
under this Indenture, except in the manner herein provided and for the equal and
ratable benefit of all the Holders.
SECTION 508 Unconditional Right of Holders to Receive Principal and Interest.
----------------------------------------------------------------
Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right, which is absolute and unconditional, to receive
payment of the principal of (and premium, if any) and (subject to Section 307)
interest (including any Additional Interest) on such Security on the respective
Stated Maturities expressed in such Security (or, in the case of redemption, on
the Redemption Date) and to institute suit for the enforcement of any such
payment, and such right shall not be impaired without the consent of such
Holder. Any holder of the Capital Securities shall have the right, upon the
occurrence of an Event of Default described in Sections 501(a) or 501(b) hereof,
to institute
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a suit directly against the Company for enforcement of payment to such holder of
principal of (and premium, if any) and (subject to Section 307) interest
(including any Additional Interest) on the Securities having a principal amount
equal to the aggregate Liquidation Amount of the Capital Securities held by such
holder.
SECTION 509 Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder or any holder of Capital Securities has
instituted any proceeding to enforce any right or remedy under this Indenture
and such proceeding has been discontinued or abandoned for any reason, or has
been determined adversely to the Trustee, such Holder or such holder of Capital
Securities, then and in every such case, subject to any determination in such
proceeding, the Company, the Trustee, the Holders and the holders of Capital
Securities shall be restored severally and respectively to their former
positions hereunder, and thereafter all rights and remedies of the Trustee, such
Holder and such holders of Capital Securities shall continue as though no such
proceeding had been instituted.
SECTION 510 Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Securities in the last paragraph of Section
306, no right or remedy herein conferred upon or reserved to the Trustee or to
the Holders is intended to be exclusive of any other right or remedy, and every
right and remedy shall, to the extent permitted by law, be cumulative and in
addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 511 Delay or Omission Not Waiver.
----------------------------
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Securities in the last paragraph of Section
306, no delay or omission of the Trustee or of any Holder of any Security or any
holder of any Capital Security to exercise any right or remedy accruing upon any
Event of Default shall impair any such right or remedy or constitute a waiver of
any such Event of Default or an acquiescence therein. Every right and remedy
given by this Article or by law to the Trustee or to the Holders and the right
and remedy given to the holders of Capital Securities by Section 508 may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders or the holders of Capital Securities, as the case may
be.
SECTION 512 Control by Holders.
------------------
The Holders of a majority in aggregate principal amount of the Outstanding
Securities shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee, provided that
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(a) such direction shall not be in conflict with any rule of law or with
this Indenture,
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction; and
(c) subject to the provisions of Section 601, the Trustee shall have the
right to decline to follow such direction if the Trustee in good faith shall, by
a Responsible Officer or Officers of the Trustee, determine that the proceeding
so directed would be unjustly prejudicial to the Holders not joining in any such
direction or would involve the Trustee in personal liability.
Upon receipt by the Trustee of any written notice directing the time, method or
place of conducting any such proceeding or exercising any such trust or power,
with respect to Securities all or part of which are represented by a Global
Security, a record date shall be established for determining Holders of
Outstanding Securities entitled to join in such notice, which record date shall
be at the close of business on the day the Trustee receives such notice. The
Holders on such record date, or their duly designated proxies, and only such
Persons, shall be entitled to join in such notice, whether or not such Holders
remain Holders after such record date; provided, that, unless the Holders of a
majority in principal amount of the Outstanding Securities shall have joined in
such notice prior to the day which is 90 days after such record date, such
notice shall automatically and without further action by any Holder be canceled
and of no further effect. Nothing in this paragraph shall prevent a Holder, or
a proxy of a Holder, from giving, after expiration of such 90-day period, a new
notice identical to a notice which has been canceled pursuant to the proviso to
the preceding sentence, in which event a new record date shall be established
pursuant to the provisions of this Section.
SECTION 513 Waiver of Past Defaults.
-----------------------
Subject to Sections 902 and 1007 hereof, the Holders of not less than a
majority in aggregate principal amount of the Outstanding Securities affected
thereby may waive any past default hereunder and its consequences, except a
default: (a) in the payment of the principal of (or premium, if any) or
interest (including any Additional Interest) on any Security (unless such
default has been cured and a sum sufficient to pay all matured installments of
interest (including any Additional Interest) and principal due (and premium, if
any) otherwise than by acceleration has been deposited with the Trustee) or (b)
in respect of a covenant or provision hereof which under Article Nine cannot be
modified or amended without the consent of the Holder of each Outstanding
Security affected. If the Holders of such Securities fail to waive such
default, the holders of not less than a majority in aggregate Liquidation Amount
of the Capital Securities shall have such right.
Any such waiver shall be deemed to be on behalf of the Holders of all the
Securities or, in the case of a waiver by holders of Capital Securities, by all
holders of Capital Securities.
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Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SECTION 514 Undertaking for Costs.
---------------------
All parties to this Indenture agree, and each Holder of any Security by his
acceptance thereof shall be deemed to have agreed that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs against any such party litigant including
reasonable attorneys' fees, in the manner and to the extent provided in the
Trust Indenture Act having due regard to the merits and good faith of the claims
or defenses made by such party litigants; but the provisions of this Section
shall not apply to any suit instituted by the Trustee, to any suit instituted by
any Holder, or group of Holders, holding in the aggregate more than 10% in
aggregate principal amount of the Outstanding Securities, or to any suit
instituted by any Holder for the enforcement of the payment of the principal of
(or premium, if any) or interest (including any Additional Interest) on any
Security on or after the respective Stated Maturities expressed in such
Security.
SECTION 515 Waiver of Usury, Stay or Extension Laws.
---------------------------------------
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
The Trustee
SECTION 601 Certain Duties and Responsibilities.
-----------------------------------
The duties and responsibilities of the Trustee shall be as provided by this
Indenture and the Trust Indenture Act. Notwithstanding the foregoing, no
provision of this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it. Whether or not therein expressly so provided, every provision of
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this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
(a) Except during the continuance of an Event of Default,
(i) the Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee, and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; but in the case of
any such certificates or opinions which by any provisions hereof are
specifically required to be furnished to the Trustee, the Trustee shall be under
a duty to examine the same to determine whether or not they conform to the
requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent person
would exercise or use under the circumstances in the conduct of his own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct except that
(i) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(ii) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction of
Holders pursuant to Section 512 relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee under this Indenture with respect
to the Securities.
(d) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder, or in the exercise of any of its rights or
powers, if there shall be reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
(e) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
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SECTION 602 Notice of Defaults.
------------------
Within 90 days after actual knowledge by a Responsible Officer of the
Trustee of the occurrence of any default hereunder, the Trustee shall transmit
by mail to all Holders of Securities, as their names and addresses appear in the
Securities Register, notice of such default hereunder known to the Trustee,
unless such default shall have been cured or waived; provided, however, that
except in the case of a default in the payment of the principal of (or premium,
if any) or interest (including any Additional Interest) on any Security, the
Trustee shall be protected in withholding such notice if and so long as the
board of directors, the executive committee or a trust committee of directors
and/or Responsible Officers of the Trustee in good faith determine that the
withholding of such notice is in the interests of the Holders of Securities;
provided, further, that in the case of any default of the character specified in
Section 501(c), no such notice to Holders shall be given until at least 30 days
after the occurrence thereof. For the purpose of this Section, the term
"default" means any event which is, or after notice or lapse of time or both
would become, an Event of Default. For purposes of this Section, the Trustee
shall be deemed to have actual knowledge of a default if it has received written
notice of such default in the manner contemplated by Section 105.
SECTION 603 Certain Rights of Trustee.
-------------------------
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, security,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper party or
parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall deem
it desirable that a matter be proved or established prior to taking, suffering
or omitting any action hereunder, the Trustee (unless other evidence be herein
specifically prescribed) may, in the absence of bad faith on its part, rely upon
an Officers' Certificate;
(d) the Trustee may consult with counsel of its choice and the written
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders pursuant to this Indenture, unless such Holders shall have offered
to the Trustee reasonable security or
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indemnity against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the facts
or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, indenture,
Security, note, other evidence of indebtedness or other paper or document, but
the Trustee, in its discretion, may make such further inquiry or investigation
into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to
examine the books, records and premises of the Company, personally or by agent
or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
SECTION 604 Not Responsible for Recitals or Issuance of Securities.
------------------------------------------------------
The recitals contained herein and in the Securities, except the Trustee's
certificates of authentication, shall be taken as the statements of the Company,
and neither the Trustee nor any Authenticating Agent assumes responsibility for
their correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Securities. Neither the Trustee nor any
Authenticating Agent shall be accountable for the use or application by the
Company of the Securities or the proceeds thereof.
SECTION 605 May Hold Securities.
-------------------
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and, subject to Sections
608 and 613, may otherwise deal with the Company with the same rights it would
have if it were not Trustee, Authenticating Agent, Paying Agent, Security
Registrar or such other agent.
SECTION 606 Money Held in Trust.
-------------------
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed in writing with the Company.
SECTION 607 Compensation; Reimbursement and Indemnity.
-----------------------------------------
The Company agrees
(a) to pay to the Trustee from time to time such reasonable compensation as
the Company and the Trustee shall from time to time agree in writing for all
services rendered by it hereunder (which compensation shall not be limited by
any provision of law in regard to the compensation of a trustee of an express
trust);
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(b) except as otherwise expressly provided herein, to reimburse the Trustee
upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith, and
(c) to indemnify the Trustee for, and to hold it harmless against, any and
all loss, damage, claim, liability, action, suit, cost or expense (including the
reasonable compensation and the expenses and disbursements of its agents and
counsel) of any kind and nature whatsoever incurred without negligence or bad
faith, arising out of or in connection with the acceptance or administration of
this trust or the performance of its duties hereunder, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties hereunder.
In addition, the Company hereby agrees to pay all amounts owing under
Section 8.06 of the Trust Agreement and to enter into and perform an Expense
Agreement substantially in the form of Exhibit A to this Indenture. To secure
the Company's payment obligations under this Section 607, the Trustee shall have
a lien against all money or property held or collected by the Trustee, which
lien shall be subordinate to the rights of the Securityholders but prior to the
rights of the Company to any such money or property.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 501(d) or (e) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under the Bankruptcy Reform Act of 1978 or any successor statute.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 608 Disqualification; Conflicting Interests.
---------------------------------------
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, Section 310(b) of the Trust Indenture Act and this Indenture.
SECTION 609 Corporate Trustee Required; Eligibility.
---------------------------------------
There shall at all times be a Trustee hereunder which shall be a Person that
is eligible pursuant to the Trust Indenture Act to act as such and has a
combined capital and surplus of at least $50,000,000, subject to supervision or
examination by federal or state authority. If such Person publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section and to
the extent permitted by the Trust Indenture Act, the combined capital and
surplus of such Person shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
the Trustee shall cease to be eligible in accordance with the provisions of this
Section, it shall resign
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immediately in the manner and with the effect hereinafter specified in this
Article. Neither the Company nor any Person directly or indirectly controlling,
controlled by or under common control with the Company shall serve as Trustee
for the Securities issued hereunder.
SECTION 610 Resignation and Removal; Appointment of Successor.
-------------------------------------------------
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611.
(b) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in aggregate principal amount of the Outstanding Securities, delivered
to the Trustee and to the Company.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 608 after written
request therefor by the Company or by any Holder who has been a bona fide Holder
of a Security for at least six months, or
(ii) the Trustee shall cease to be eligible under Section 609 and shall
fail to resign after written request therefor by the Company or by any such
Holder, or
(iii) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property shall be
appointed or any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation,
then, in any such case, (A) the Company by a Board Resolution may remove the
Trustee or (B) subject to Section 514, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by a Board Resolution, shall promptly appoint a successor Trustee. If the
Company fails to appoint a successor Trustee within 30 days of such resignation,
removal or incapability, or the occurrence of such vacancy, the retiring Trustee
may, subject to Section 514, petition any court of competent jurisdiction for
the appointment of a successor Trustee. If, within one year after such
resignation, removal or incapability, or the occurrence of such vacancy, a
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successor Trustee shall be appointed by Act of the Holders of a majority in
aggregate principal amount of the Outstanding Securities delivered to the
Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company or any court. If
no successor Trustee shall have been so appointed by the Company or the Holders
and accepted appointment in the manner hereinafter provided, any Holder who has
been a bona fide Holder of a Security for at least six months may, subject to
Section 514, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee to all Holders in the
manner provided in Section 106. Each notice shall include the name of the
successor Trustee and the address of its Corporate Trust Office.
SECTION 611 Acceptance of Appointment by Successor.
--------------------------------------
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; provided that, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee,
the Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts referred to in this Section.
In case of the appointment hereunder of a successor Trustee, the Company,
the retiring Trustee and each successor Trustee shall execute and deliver an
indenture supplemental hereto wherein each successor Trustee shall accept such
appointment and which shall contain such provisions as shall be necessary or
desirable to transfer and confirm to, and to vest in, each successor Trustee all
the rights, powers, trusts and duties of the retiring Trustee; and upon the
execution and delivery of such supplemental indenture the resignation or removal
of the retiring Trustee shall become effective to the extent provided therein
and each such successor Trustee, without any further act, deed or conveyance,
shall become vested with all the rights, powers, trusts and duties of the
retiring Trustee; but, on request of the Company or any successor Trustee, such
retiring Trustee shall duly assign, transfer and deliver to such successor
Trustee all property and money hold by such retiring Trustee hereunder.
No successor Trustee shall accept its appointment unless at the time of such
acceptance such successor Trustee shall be qualified and eligible under this
Article.
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SECTION 612 Merger, Conversion, Consolidation or Succession to Business.
-----------------------------------------------------------
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated, and in case any
Securities shall not have been authenticated, any successor to the Trustee may
authenticate such Securities either in the name of any predecessor Trustee or in
the name of such successor Trustee, and in all cases the certificate of
authentication shall have the full force which it is provided anywhere in the
Securities or in this Indenture that the certificate of the Trustee will have.
SECTION 613 Preferential Collection of Claims Against Company.
-------------------------------------------------
If and when the Trustee shall be or become a creditor of the Company (or any
other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
SECTION 614. Appointment of Authenticating Agent.
-----------------------------------
The Trustee may appoint an Authenticating Agent or Agents which shall be
authorized to act on behalf of the Trustee to authenticate Securities issued
upon original issue and upon exchange, registration or transfer or partial
redemption thereof, and Securities so authenticated shall be entitled to the
benefits of this Indenture and shall be valid and obligatory for all purposes as
if authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent. Each Authenticating Agent shall be acceptable to the
Company and shall at all times be a corporation organized and doing business
under the laws of the United States of America, or of any State, Territory or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $50,000,000 and
subject to supervision or examination by federal or state authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of said supervising or examining authority, then
for the purposes of this Section the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
an Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign immediately
in the manner and with the effect specified in this Section.
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Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which an Authenticating Agent
shall be a party, or any corporation succeeding to all or substantially all of
the corporate trust business of an Authenticating Agent shall be the successor
Authenticating Agent hereunder, provided such corporation shall be otherwise
eligible under this Section, without the execution or filing of any paper or any
further act on the part of the Trustee or such Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice
of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall give notice of such
appointment in the manner provided in Section 106 to all Holders of Securities.
Any successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the provisions
of Section 607.
If an appointment is made pursuant to this Section, the Securities may have
endorsed thereon, in addition to the Trustee's certificate of authentication, an
alternative certificate of authentication in the following form:
This is one of the Securities referred to in the within mentioned Indenture.
Dated:
The Bank of New York,
As Trustee
By:________________________________
As Authenticating Agent
By:________________________________
Authorized Officer
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ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701 Company to Furnish Trustee Names and Addresses of Holders.
---------------------------------------------------------
The Company will furnish or cause to be furnished to the Trustee:
(a) semiannually, not later than January 15 and July 15 in each year, a
list, in such form as the Trustee may reasonably require, of the names and
addresses of the Holders as of a date not more than 15 days prior to the time
such list is furnished; and
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished;
in each case to the extent such information is in the possession or control of
the Company and has not otherwise been received by the Trustee in its capacity
as Security Registrar.
SECTION 702 Preservation of Information; Communications to Holders.
------------------------------------------------------
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 701 and the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with respect to
their rights under this Indenture or under the Securities, and the corresponding
rights and duties of the Trustee, shall be as provided by the Trust Indenture
Act.
(c) Every Holder of Securities, by receiving and holding the same, agrees
with the Company and the Trustee that neither the Company nor the Trustee nor
any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act.
SECTION 703 Reports by Trustee.
------------------
(a) The Trustee shall transmit to Holders such reports concerning the
Trustee and its actions under this Indenture as may be required pursuant to the
Trust Indenture Act at the times and in the manner provided pursuant thereto.
(b) Reports so required to be transmitted at stated intervals of not more
than 12 months shall be transmitted no later than July 15 in each calendar year,
commencing with the first July 15 after the first issuance of Securities under
this Indenture.
(c) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Trustee with each stock exchange upon which the
Securities are listed and the
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Nasdaq National Market if the Securities are quoted thereon, with the Commission
and with the Company. The Company will notify the Trustee whenever the
Securities are listed on any stock exchange.
SECTION 704 Reports by Company.
------------------
The Company shall file with the Trustee and the Commission, and transmit to
Holders, such information, documents and other reports, and such summaries
thereof, as may be required pursuant to the Trust Indenture Act at the times and
in the manner provided pursuant to such Act; provided that any such information,
documents or reports required to be filed with the Commission pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, shall be
filed with the Trustee within 15 days after the same is so required to be filed
with the Commission. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Company shall continue to file
with the Commission and provide the Trustee with the annual reports and the
information, documents and other reports which are specified in Sections 13 and
15(d) of the Securities Exchange Act of 1934. The Company also shall comply
with the other provisions of Trust Indenture Act Section 314(a).
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 801 Company May Consolidate, Etc., Only on Certain Terms.
----------------------------------------------------
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and the Company shall not permit any Person to consolidate with
or merge into the Company or convey, transfer or lease its properties and assets
substantially as an entirety to the Company, unless:
(a) in case the Company shall consolidate with or merge into another Person
or convey, transfer or lease its properties and assets substantially as an
entirety to any Person, the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by conveyance or transfer, or
which leases, the properties and assets of the Company substantially as an
entirety shall be a corporation, partnership, trust or other entity, shall be
organized and validly existing under the laws of the United States of America,
any State thereof or the District of Columbia and shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee, in form
satis factory to the Trustee, the due and punctual payment of the principal of
(and premium, if any) and interest (including any Additional Interest) on all
the Securities and the performance or observance of every covenant of this
Indenture and the Securities on the part of the Company to be performed or
observed;
(b) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would become
an Event of Default, shall have happened and be continuing;
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(c) such consolidation or merger or conveyance, transfer or lease of
properties or assets of the Company is permitted under the Trust Agreement and
the Parent Guarantee and does not give rise to any breach or violation of the
Trust Agreement or the Parent Guarantee; and
(d) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease complies with this Article and that all conditions precedent
herein provided for relating to such transaction have been complied with; and
the Trustee, subject to Section 601, may rely upon such Officers' Certificate
and Opinion of Counsel as conclusive evidence that such transaction complies
with this Section.
SECTION 802 Successor Substituted.
---------------------
Upon any consolidation of the Company with, or merger of the Company with or
into, any other Person or any conveyance, transfer or lease of the properties
and assets of the Company substantially as an entirety in accordance with
Section 801, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, transfer or lease is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein; and in the event of any such
conveyance, transfer or lease, the Company shall be discharged from all
obligations and covenants under this Indenture and the Securities and may be
dissolved and liquidated.
Such successor Person may cause to be signed, and may issue either in its
own name or in the name of the Company, any or all of the Securities issuable
hereunder which theretofore shall not have been signed by the Company and
delivered to the Trustee; and, upon the order of such successor Person instead
of the Company and subject to all the terms, conditions and limitations in this
Indenture prescribed, the Trustee shall authenticate and shall deliver any
Securities which previously shall have been signed and delivered by the officers
of the Company to the Trustee for authentication pursuant to such provisions and
any Securities which such successor Person thereafter shall cause to be signed
and delivered to the Trustee on its behalf for the purpose pursuant to such
provisions. All the Securities so issued shall in all respects have the same
legal rank and benefit under this Indenture as the Securities theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Securities has been issued at the date of the execution hereof.
In case of any such consolidation, merger, sale, conveyance or lease, such
changes in phraseology and form may be made in the Securities thereafter to be
issued as may be appropriate.
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ARTICLE NINE
Supplemental Indentures
SECTION 901 Supplemental Indentures Without Consent of Holders.
--------------------------------------------------
Without the consent of any Holders, the Company, when authorized by a Board
Resolution, and the Trustee, at any time and from time to time, may enter into
one or more indentures supplemental hereto, in form satisfactory to the Trustee,
for any of the following purposes:
(a) to evidence the succession of another Person to the Company and the
assump tion by any such successor of the covenants of the Company herein and in
the Securities; or
(b) to convey, transfer, assign, mortgage or pledge any property to or with
the Trustee or to surrender any right or power herein conferred upon the
Company; or
(c) to add to the covenants of the Company for the benefit of the Holders,
or to surrender any right or power herein conferred upon the Company; or
(d) to add any additional Events of Default; or
(e) to cure any ambiguity, to correct or supplement any provision herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising under
this Indenture, provided that such action pursuant to this clause (e) shall not
materially adversely affect the interests of the Holders of the Securities or,
so long as any of the Capital Securities shall remain outstanding, the holders
of the Capital Securities; or
(f) to evidence and provide for the acceptance of appointment hereunder by
a successor Trustee; or
(g) to comply with the requirements of the Commission in order to effect or
maintain the qualification of this Indenture under the Trust Indenture Act.
SECTION 902 Supplemental Indentures with Consent of Holders.
-----------------------------------------------
With the consent of the Holders of not less than a majority in aggregate
principal amount of the Outstanding Securities, by Act of said Holders delivered
to the Company and the Trustee, the Company, when authorized by a Board
Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders under this Indenture;
provided, however, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security affected thereby,
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(a) except to the extent permitted and subject to the conditions set forth
in Section 301 with respect to the extension of interest payment periods of the
Securities, change the Stated Maturity of, the principal of, or any installment
of interest (including any Additional Interest) on, any Security, or reduce the
principal amount thereof or the rate of interest thereon or reduce any premium
payable upon the redemption thereof, or change the place of payment where, or
the coin or currency in which, any Security or interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof (or, in the case of redemption, on or after
the Redemption Date), or modify the provisions of this Indenture with respect to
the subordination of the Securities in a manner adverse to the Holders, or
(b) reduce the percentage in aggregate principal amount of the Outstanding
Securities, the consent of the Holders of which is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture, or
(c) modify any of the provisions of this Section, Section 513 or Section
1007, except to increase any such percentage or to provide that certain other
provisions of this Indenture cannot be modified or waived without the consent of
the Holder of each Outstanding Security affected thereby;
provided, that, so long as any of the Capital Securities remains outstanding, no
such amendment shall be made that adversely affects the holders of the Capital
Securities in any material respect, and no termination of this Indenture shall
occur, and no waiver of any Event of Default or compliance with any covenant
under this Indenture shall be effective, without the prior consent of the
holders of at least a majority of the aggregate Liquidation Amount of the
outstanding Capital Securities unless and until the principal of and any premium
on the Securities and all accrued and, subject to Section 307, unpaid interest
(including any Additional Interest) thereon have been paid in full and where a
consent hereunder would require the consent of each holder of the Outstanding
Securities, no such consent will be given by the Trustee without the prior
consent of each holder of the Capital Securities, provided further, that so long
as any of the Capital Securities remains outstanding, no amendment shall be made
to Section 508 of this Indenture without the prior consent of the holders of
each Capital Security then outstanding unless and until the principal (and
premium, if any) of the Securities and all accrued and (subject to Section 301)
unpaid interest (including any Additional Interest) thereon have been paid in
full.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903 Execution of Supplemental Indentures.
------------------------------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be
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fully protected in relying upon, an Officers' Certificate and an Opinion of
Counsel stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture, and that all conditions precedent have been
complied with. The Trustee may, but shall not be obligated to, enter into any
such supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
SECTION 904 Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
SECTION 905 Conformity with Trust Indenture Act.
-----------------------------------
Every supplemental indenture executed pursuant to this Article shall conform
to the requirements of the Trust Indenture Act as then in effect.
SECTION 906 Reference in Securities to Supplemental Indentures.
--------------------------------------------------
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Company, bear a notation in form approved by the Company as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Company, to any
such supplemental indenture may be prepared and executed by the Company and
authenticated and delivered by the Trustee in exchange for Outstanding
Securities.
ARTICLE TEN
Covenants; Representations and Warranties
SECTION 1001 Payment of Principal and Interest.
---------------------------------
The Company covenants and agrees for the benefit of the Securities that it
will duly and punctually pay the principal of (and premium, if any) and interest
(including any Additional Interest) on the Securities in accordance with the
terms of the Securities and this Indenture.
SECTION 1002 Maintenance of Office or Agency.
-------------------------------
The Company will maintain in Wilmington, Delaware, an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer or exchange and where notices
and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Company initially appoints the Trustee, acting
through its Corporate Trust Office, as its
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agent for said purposes. The Company will give prompt written notice to the
Trustee of any change in the location of any such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee as its agent
to receive all such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices
or agencies (in the United States) where the Securities may be presented or
surrendered for any or all of such purposes, and may from time to time rescind
such designations; provided, however, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in the United States for such purposes. The Company will give prompt
written notice to the Trustee of any such designation and any change in the
location of any such office or agency.
SECTION 1003 Money for Security Payments To Be Held in Trust.
-----------------------------------------------
If the Company shall at any time act as its own Paying Agent, it will, on
or before each due date of the principal (and premium, if any) of or interest
(including any Additional Interest) on any of the Securities, segregate and hold
in trust for the benefit of the Persons entitled thereto a sum sufficient to pay
the principal (and premium, if any) or interest (including any Additional
Interest) so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided, and will promptly notify the Trustee
of its failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, prior
to 10:00 a.m. New York City time on each due date of the principal (or premium,
if any) of or interest (including any Additional Interest) on any Securities,
deposit with a Paying Agent a sum sufficient to pay the principal (and premium,
if any) or interest (including any Additional Interest) so becoming due, such
sum to be held in trust for the benefit of the Persons entitled to such
principal (and premium, if any) or interest (including any Additional Interest),
and (unless such Paying Agent is the Trustee) the Company will promptly notify
the Trustee of its failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent will (a) comply with the provisions of the Trust Indenture Act applicable
to it as a Paying Agent, (b) hold all sums held by it for the payment of the
principal of (and premium, if any) or interest (including any Additional
Interest) on Securities in trust for the benefit of the Persons entitled thereto
until such sums shall be paid to such Persons or otherwise disposed of as herein
provided, (c) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any payment of principal
(and premium, if any) or interest (including any Additional Interest) and (d) at
any time during the continuance of any such default by the Company (or any other
obligor upon the Securities) in the making of any payment of principal (and
premium, if any) or interest (including any Additional Interest), upon written
request of the Trustee, forthwith pay to the Trustee all sums held in trust by
such Paying Agent.
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The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by the Company or any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of (and premium, if any)
or interest (including any Additional Interest) on any Security and remaining
unclaimed for two years after such principal (and premium, if any) or interest
(including any Additional Interest) has become due and payable shall (unless
otherwise required by mandatory provision of applicable escheat or abandoned or
unclaimed property law) be paid to the Company on Company Request, or (if then
held by the Company) shall (unless otherwise required by mandatory provision of
applicable escheat or abandoned or unclaimed property law) be discharged from
such trust; and the Holder of such Security shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease.
SECTION 1004 Statement by Officers as to Compliance.
--------------------------------------
The Company will deliver to the Trustee, within 120 days after the end of
each calendar year of the Company ending after the date hereof, an Officers'
Certificate covering the preceding calendar year, stating whether or not to the
best knowledge of the signers thereof the Company is in default in the
performance, observance or fulfillment of or compliance with any of the terms,
provisions, covenants and conditions of this Indenture (without regard to any
period of grace or requirement of notice provided hereunder) and, if the Company
shall be in default, specifying all such defaults and the nature and status
thereof of which they may have knowledge.
SECTION 1005 Additional Sums.
---------------
In the event that (a) PMC Capital I is the Holder of all of the Outstanding
Securities, (b) a Tax Event shall have occurred and be continuing and (c) the
Company shall not have redeemed the Securities pursuant to Section 1201 or
terminated PMC Capital I pursuant to Section 9.02(b) of the Trust Agreement, so
long as no Event of Default has occurred and is continuing, the Company shall
pay to PMC Capital I (and its permitted successors or assigns under the Trust
Agreement) for so long as PMC Capital I (or its permitted successor or assignee)
is the registered holder of any Securities, such additional amounts as may be
necessary in order that the amount of distributions (including any Additional
Amounts (as defined in the Trust Agreement)) then due and payable by PMC Capital
I on the Capital Securities and Common Securities that at any time remain
outstanding in accordance with the terms thereof shall not be reduced as a
result of any Additional Taxes arising from such Tax Event (the "Additional
Sums"). Whenever in this Indenture or the Securities there is a reference in
any context to the payment of principal of or interest on
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the Securities, such mention shall be deemed to include mention of the payments
of the Additional Sums provided for in this paragraph to the extent that, in
such context, Additional Sums are, were or would be payable in respect thereof
pursuant to the provisions of this paragraph and express mention of the payment
of Additional Sums (if applicable) in any provisions hereof shall not be
construed as excluding Additional Sums in those provisions hereof where such
express mention is not made, provided, however, that the deferral of interest
payments pursuant to Section 301 or the Securities shall not defer the payment
of any Additional Sums that may be due and payable.
SECTION 1006 Additional Covenants.
--------------------
The Company covenants and agrees with each Holder of Securities that it
shall not, and it will not permit any Subsidiary of the Company to, (a) declare
or pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's outstanding capital
stock or (b) make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities that rank pari passu with or
junior to the Securities or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any Subsidiary of the Company
that by their terms rank pari passu or junior in interest to the Securities
(other than (i) dividends or distributions in Common Stock or Class A Common
Stock of the Company, (ii) payments under the Parent Guarantee and (iii)
purchases of Common Stock or Class A Common Stock related to the issuance of
Common Stock or Class A Common Stock under any of the Company's benefit plans
for its directors, officers or employees), if at such time (A) there shall have
occurred and be continuing any event that (1) with the giving of notice or the
lapse of time or both, would constitute an Event of Default hereunder and (2) in
respect of which the Company shall not have taken reasonable steps to cure, (B)
the Company shall be in default with respect to its payment of any obligations
under the Parent Guarantee or (C) the Company shall have given notice of its
selection of an Extension Period as provided herein and shall not have rescinded
such notice and such Extension Period, or any extension thereof, shall be
continuing.
The Company also covenants (a) to maintain directly or indirectly 100%
ownership of the Common Securities of PMC Capital I; provided, however, that any
permitted successor of the Company hereunder may succeed to the Company's
ownership of such Common Securities, (b) not to voluntarily dissolve, wind-up or
liquidate PMC Capital I, except (i) in connection with a distribution of the
Securities to the holders of Capital Securities in liquidation of PMC Capital I
or (ii) in connection with certain mergers, consolidations or amalgamations
permitted by the Trust Agreement and (c) to use its reasonable efforts,
consistent with the terms and provisions of the Trust Agreement, to cause PMC
Capital I to remain a business trust and to be classified as a grantor trust for
United States federal income tax purposes, except in connection with a
distribution of the Securities to the holders of Capital Securities in
liquidation of PMC Capital I.
SECTION 1007 Waiver of Certain Covenants.
---------------------------
Except as otherwise specified as contemplated by Section 301 for
Securities, the Company may, with respect to the Securities, omit in any
particular instance to comply with any term, provision or condition set forth in
any covenant provided pursuant to
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Section 901(b) for the benefit of the Holders if before or after the time for
such compliance the Holders of at least a majority in aggregate principal amount
of the Outstanding Securities shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such term,
provision or condition, but no such waiver shall extend to or affect such term,
provision or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Company and the duties of
the Trustee in respect of any such term, provision or condition shall remain in
full force and effect.
ARTICLE ELEVEN
Subordination of Securities
SECTION 1101 Securities Subordinate to Senior Debt.
-------------------------------------
The Company covenants and agrees, and each Holder of a Security, by its
acceptance thereof, likewise covenants and agrees, that, to the extent and in
the manner hereinafter set forth in this Article (subject to Article Four), the
payment of the principal of (and premium, if any) and interest (including any
Additional Interest) on each and all of the Securities are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
amounts then due and payable in respect of all Senior Debt.
The Trustee and the Holders shall take such action (including, without
limitation, the delivery of this Indenture to an agent for the holders of Senior
Debt or consent to the filing of a financing statement with respect hereto) as
may, in the opinion of counsel designated by the holders of a majority in
principal amount of the Senior Debt at the time outstanding, be necessary or
appropriate to assure the effectiveness of the subordination effected by these
provisions.
The provisions of Sections 1102, 1103 and 1104 hereof shall not impair any
rights, interests, remedies or powers of any secured creditor of the Company in
respect of any security interest the creation of which is not prohibited by the
provisions of this Indenture.
The securing of any obligations of the Company, otherwise ranking on a
parity with the Securities or ranking junior to the Securities, shall not be
deemed to prevent such obligations from constituting, respectively, obligations
ranking on a parity with the Securities or ranking junior to the Securities.
SECTION 1102 Payment Over of Proceeds Upon Dissolution, Etc.
-----------------------------------------------
In the case of the pendency of (a) any liquidation, reorganization,
bankruptcy, insolvency, receivership, arrangement, adjustment, composition or
other judicial proceeding relative to the Company, its creditors or its
property, (b) any proceeding for the liquidation, dissolution or other winding
up of the Company, voluntary or involuntary, whether or not involving insolvency
or bankruptcy proceedings, (c) any assignment by the Company for the benefit of
creditors or (d) any other marshalling of the assets of the Company (each such
event, if any, herein sometimes referred to as a "Proceeding"), then
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the holders of Senior Debt shall be entitled to receive payment in full of
principal of (and premium, if any) and interest, if any, on such Senior Debt
(including any interest thereon accruing after the commencement of any such
Proceeding), or provision shall be made for such payment in cash or cash
equivalents or otherwise in a manner satisfactory to the holders of Senior Debt,
before the Holders of the Securities are entitled to receive or retain any
payment or distribution of any kind or character, whether in cash, property or
securities (including any payment or distribution which may be payable or
deliverable by reason of the payment of any other Debt of the Company (including
the Securities) subordinated to the payment of the Securities, such payment or
distribution being hereinafter referred to as a "Junior Subordinated Payment"),
on account of principal of (or premium, if any) or interest (including any
Additional Interest) on the Securities or on account of the purchase or other
acquisition of Securities by the Company or any Subsidiary and to that end the
holders of Senior Debt shall be entitled to receive, for application to the
payment thereof, any payment or distribution of any kind or character, whether
in cash, property or securities, including any Junior Subordinated Payment,
which may be payable or deliverable in respect of the Securities in any such
Proceeding.
In the event of any Proceeding, after payment in full of all sums owing
with respect to Senior Debt, the Holders of the Securities, together with the
holders of any obligations of the Company ranking on a parity with the
Securities, shall be entitled to be paid from the remaining assets of the
Company the amounts at the time due and owing on account of unpaid principal of
(and premium, if any) and interest (including any Additional Interest) on the
Securities and such other obligations before any payment or other distribution,
whether in cash, property or otherwise, shall be made on account of any capital
stock or any obligations of the Company ranking junior to the Securities and
such other obligations.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, including any Junior Subordinated
Payment, before all Senior Debt is paid in full or payment thereof is provided
for in cash or cash equivalents or otherwise in a manner satisfactory to the
holders of Senior Debt, then and in such event such payment or distribution
shall be paid over or delivered forthwith to the trustee in bankruptcy,
receiver, liquidating trustee, custodian, assignee, agent or other Person making
payment or distribution of assets of the Company for application to the payment
of all Senior Debt remaining unpaid, to the extent necessary to pay all Senior
Debt in full, after giving effect to any concurrent payment or distribution to
or for the holders of Senior Debt.
For purposes of this Article only, the words "any payment or distribution
of any kind or character, whether in cash, property or securities" shall not be
deemed to include shares of stock of the Company as reorganized or readjusted,
or securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment which securities are subordinated in right of
payment to all then outstanding Senior Debt at least to the same extent as the
Securities are so subordinated as provided in this Article. The consolidation
of the Company with, or the merger of the Company into, another Person or the
liquidation or dissolution of the Company following the sale of all or
substantially all of its properties and assets as an entirety to another Person
upon the terms and conditions
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set forth in Article Eight shall not be deemed a Proceeding for the purposes of
this Section if the Person formed by such consolidation or into which the
Company is merged or the Person which acquires by sale such properties and
assets as an entirety, as the case may be, shall, as a part of such
consolidation, merger, or sale comply with the conditions set forth in Article
Eight.
SECTION 1103 Prior Payment to Senior Debt Upon Acceleration of Securities.
------------------------------------------------------------
In the event that any Securities are declared due and payable before their
Stated Maturity, then and in such event the holders of the Senior Debt
outstanding at the time such Securities so become due and payable shall be
entitled to receive payment in full of all amounts due on or in respect of such
Senior Debt (including any amounts due upon acceleration), or provision shall be
made for such payment in cash or cash equivalents or otherwise in a manner
satisfactory to the holders of Senior Debt, before the Holders of the Securities
are entitled to receive any payment or distribution of any kind or character,
whether in cash, properties or securities (including any Junior Subordinated
Payment) by the Company on account of the principal of (or premium, if any) or
interest (including any Additional Interest) on the Securities or on account of
the purchase or other acquisition of Securities by the Company or any
Subsidiary.
In the event that, notwithstanding the foregoing, the Company shall make
any payment to the Trustee or the Holder of any Security prohibited by the
foregoing provisions of this Section, then and in such event such payment shall
be paid over and delivered forthwith to the Company.
The provisions of this Section shall not apply to any payment with respect
to which Section 1102 would be applicable.
SECTION 1104 No Payment When Senior Debt in Default.
--------------------------------------
(a) In the event and during the continuation of any default in the payment
of principal of (or premium, if any) or interest on any Senior Debt, when the
same becomes due and payable, whether at maturity or at a date fixed for
prepayment or by declaration of acceleration or otherwise, then, upon written
notice of such default to the Company by the holders of Senior Debt or any
trustee therefor, unless and until such event of default shall have been cured
or waived or shall have ceased to exist, then no payment or distribution of any
kind or character, whether in cash, properties or securities (including any
Junior Subordinated Payment) shall be made by the Company on account of
principal of (or premium, if any) or interest (including any Additional
Interest), if any, on the Securities or on account of the purchase or other
acquisition of Securities by the Company or any Subsidiary.
In the event that, notwithstanding the foregoing, any payment or
distribution of cash, property or securities shall be received or collected by
the Trustee or the Holder of any Security in contravention of the foregoing
provisions, such payment or distribution shall be held for the benefit of and
shall be paid over to the holders of Senior Debt or their representative or
representatives or to the trustee or trustees under any indenture under which
any instrument evidencing Senior Debt may have been issued, as their respective
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interests may appear, to the extent necessary to pay in full all Senior Debt
then due, after giving effect to any concurrent payment to the holders of Senior
Debt, but only to the extent that the holders of the Senior Debt (or their
representative or representatives) notify the Trustees in writing, within 90
days of such payment, of the amounts then due and owing on such Senior Debt and
only the amounts specified in such notice to the Trustees shall be paid to the
holders of such Senior Debt.
The provisions of this Section shall not apply to any payment with respect
to which Section 1102 would be applicable.
SECTION 1105 Payment Permitted If No Default.
-------------------------------
Nothing contained in this Article or elsewhere in this Indenture or in any
of the Securities shall prevent (a) the Company, at any time except during the
pendency of any Proceeding referred to in Section 1102 or under the conditions
described in Sections 1103 and 1104, from making payments at any time of
principal of (and premium, if any) or interest (including any Additional
Interest) on the Securities or (b) the application by the Trustee of any money
or Government Obligations deposited with it hereunder to the payment of or on
account of the principal of (and premium, if any) or interest (including any
Additional Interest) on the Securities or the retention of such payment by the
Holders, if, at the time of such application by the Trustee, it did not have
knowledge that such payment would have been prohibited by the provisions of this
Article.
SECTION 1106 Subrogation to Rights of Holders of Senior Debt.
-----------------------------------------------
Subject to the payment in full of all amounts due or to become due on all
Senior Debt, or the provision for such payment in cash or cash equivalents or
otherwise in a manner satisfactory to the holders of the Senior Debt, the
Holders of the Securities shall be subrogated to the extent of the payments or
distributions made to the holders of such Senior Debt pursuant to the provisions
of this Article (equally and ratably with the holders of all indebtedness of the
Company which by its express terms is subordinated to Senior Debt of the Company
to substantially the same extent as the Securities are subordinated to the
Senior Debt and is entitled to like rights of subrogation by reason of any
payments or distributions made to holders of such Senior Debt) to the rights of
the holders of such Senior Debt to receive payments and distributions of cash,
property and securities applicable to the Senior Debt until the principal of
(and premium, if any) and interest (including any Additional Interest) on the
Securities shall be paid in full. For purposes of such subrogation or
assignment, no payments or distributions to the holders of the Senior Debt of
any cash, property or securities to which the Holders of the Securities or the
Trustee would be entitled except for the provisions of this Article, and no
payments over pursuant to the provisions of this Article to the holders of
Senior Debt by Holders of the Securities or the Trustee, shall, as among the
Company, its creditors other than holders of Senior Debt, and the Holders of the
Securities, be deemed to be a payment or distribution by the Company to or on
account of the Senior Debt.
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SECTION 1107 Provisions Solely to Define Relative Rights.
-------------------------------------------
The provisions of this Article are and are intended solely for the purpose
of defining the relative rights of the Holders of the Securities on the one hand
and the holders of Senior Debt on the other hand. Nothing contained in this
Article or elsewhere in this Indenture or in the Securities is intended to or
shall (a) impair, as between the Company and the Holders of the Securities, the
obligations of the Company, which are absolute and unconditional, to pay to the
Holders of the Securities the principal of (and premium, if any) and interest
(including any Additional Interest) on the Securities as and when the same shall
become due and payable in accordance with their terms; (b) affect the relative
rights against the Company of the Holders of the Securities and creditors of the
Company other than their rights in relation to the holders of Senior Debt or (c)
prevent the Trustee or the Holder of any Security (or to the extent expressly
provided herein, the holder of any Capital Security) from exercising all
remedies otherwise permitted by applicable law upon default under this Indenture
including, without limitation, filing and voting claims in any Proceeding,
subject to the rights, if any, under this Article of the holders of Senior Debt
to receive cash, property and securities otherwise payable or deliverable to the
Trustee or such Holder.
SECTION 1108 Trustee to Effectuate Subordination.
-----------------------------------
Each Holder of a Security by his or her acceptance thereof authorizes and
directs the Trustee on his or her behalf to take such action as may be necessary
or appropriate to acknowledge or effectuate the subordination provided in this
Article and appoints the Trustee his or her attorney-in-fact for any and all
such purposes.
SECTION 1109 No Waiver of Subordination Provisions.
-------------------------------------
No right of any present or future holder of any Senior Debt to enforce
subordination as herein provided shall at any time in any way be prejudiced or
impaired by any act or failure to act on the part of the Company or by any act
or failure to act, in good faith, by any such holder, or by any noncompliance by
the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof that any such holder may have or otherwise
be charged with.
Without in any way limiting the generality of the immediately preceding
paragraph, the holders of Senior Debt may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to such Holders of the Securities
and without impairing or releasing the subordination provided in this Article or
the obligations hereunder of such Holders of the Securities to the holders of
Senior Debt, do any one or more of the following: (a) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, Senior
Debt, or otherwise amend or supplement in any manner Senor Debt or any
instrument evidencing the same or any agreement under which Senior Debt is
outstanding; (b) sell, exchange, release or otherwise deal with any property
pledged, mortgaged or otherwise securing Senior Debt; (c) release any Person
liable in any manner for the collection of Senior Debt and (d) exercise or
refrain from exercising any rights against the Company and any other Person.
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SECTION 1110 Notice to Trustee.
-----------------
The Company shall give prompt written notice to the Trustee of any fact
known to the Company that would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts that would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Debt or from any trustee, agent or representative
therefor (whether or not the facts contained in such notice are true); provided,
however, that if the Trustee shall not have received the notice provided for in
this Section at least two Business Days prior to the date upon which by the
terms hereof any monies may become payable for any purpose (including, without
limitation, the payment of the principal of (and premium, if any) or interest
(including any Additional Interest) on any Security), then, anything herein
contained to the contrary notwithstanding, the Trustee shall have full power and
authority to receive such monies and to apply the same to the purposes for which
they were received, and shall not be affected by any notice to the contrary
which may be received by it within two Business Days prior to such date.
Subject to the provisions of Section 601, the Trustee shall be entitled to
rely on the delivery to it of a written notice by a Person representing such
Person to be a holder of Senior Debt (or a trustee or attorney-in-fact therefor)
to establish that such notice has been given by a holder of Senior Debt (or a
trustee or attorney-in-fact therefor). In the event that the Trustee determines
in good faith that further evidence is required with respect to the right of any
Person as a holder of Senior Debt to participate in any payment or distribution
pursuant to this Article, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Debt held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such Person under this Article, and if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial determination
as to the right of such Person to receive such payment.
SECTION 1111 Reliance on Judicial Order or Certificate of Liquidating Agent.
---------------------------------------------------------------
Upon any payment or distribution of assets of the Company referred to in
this Article, the Trustee, subject to the provisions of Article Six, and the
Holders of the Securities shall be entitled to rely upon any order or decree
entered by any court of competent jurisdiction in which such Proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior Debt and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article.
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SECTION 1112 Trustee Not Fiduciary for Holders of Senior Debt.
-------------------------------------------------
The Trustee, in its capacity as trustee under this Indenture, shall not be
deemed to owe any fiduciary duty to the holders of Senior Debt and shall not be
liable to any such holders if it shall in good faith mistakenly pay over or
distribute to Holders of Securities or to the Company or to any other Person
cash, property or securities to which any holders of Senior Debt shall be
entitled by virtue of this Article or otherwise.
SECTION 1113 Rights of Trustee as Holder of Senior Debt; Preservation of
-----------------------------------------------------------
Trustee's Rights.
----------------
The Trustee in its individual capacity shall be entitled to all the rights
set forth in this Article in respect of any Senior Debt which may at any time be
held by it, to the same extent as any other holder of Senior Debt, and nothing
in this Indenture shall deprive the Trustee of any of its rights as such holder.
SECTION 1114 Article Applicable to Paying Agents.
------------------------------------
In case at any time any Paying Agent other than the Trustee shall have been
appointed by the Company and be then acting hereunder, the term "Trustee" as
used in this Article shall in such case (unless the context otherwise requires)
be construed as extending to and including such Paying Agent within its meaning
as fully for all intents and purposes as if such Paying Agent were named in this
Article in addition to or in place of the Trustee.
SECTION 1115 Certain Conversions or Exchanges Deemed Payment.
------------------------------------------------
(a) For the purposes of this Article only, (i) the issuance and delivery of
junior securities upon exchange of Securities shall not be deemed to constitute
a payment or distribution on account of the principal of (or premium, if any) or
interest (including any Additional Interest) on Securities or on account of the
purchase or other acquisition of Securities and (ii) the payment, issuance or
delivery of cash, property or securities (other than junior securities) upon
exchange of a Security shall be deemed to constitute payment on account of the
principal of such Security.
(b) For the purposes of this Section, the term "junior securities" means
(i) shares of any stock of any class of the Company and (ii) securities of the
Company which are subordinated in right of payment to all Senior Debt which may
be outstanding at the time of issuance or delivery of such securities to
substantially the same extent as, or to a greater extent than, the Securities
are so subordinated as provided in this Article.
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ARTICLE TWELVE
Redemption of Securities
SECTION 1201 Applicability of this Article.
-----------------------------
Redemption of Securities as permitted or required by any form of Security
issued pursuant to this Indenture shall be made in accordance with such form of
Security and this Article; provided, however, that if any provision of any such
form of Security shall conflict with any provision of this Article, the
provision of such form of Security shall govern. Except as otherwise set forth
in the form of Security, each Security shall be subject to partial redemption
only in the amount of $1,000 or integral multiples thereof.
SECTION 1202 Election to Redeem; Notice to Trustee.
-------------------------------------
The election of the Company to redeem any Securities shall be evidenced by
or pursuant to a Board Resolution. In case of any redemption at the election of
the Company, the Company shall at least 45 days prior to the Redemption Date
fixed by the Company (unless a shorter notice shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date and of the principal amount
of Securities to be redeemed, provided that, for so long as the Securities are
held by PMC Capital I, such notice shall be given not less than 45 nor more than
75 days prior to such Redemption Date (unless a shorter notice shall be
satisfactory to the Property Trustee). In the case of any redemption of
Securities prior to the expiration of any restriction on such redemption
provided in the terms of such Securities, the Company shall furnish the Trustee
with an Officers' Certificate and an Opinion of Counsel evidencing compliance
with such restriction.
SECTION 1203 Selection by Trustee of Securities to Be Redeemed.
-------------------------------------------------
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not more than 75 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities not previously
called for redemption, by such method as the Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of a portion
of the principal amount of any Security, provided that the unredeemed portion of
the principal amount of any Security shall be in an authorized denomination
(which shall not be less than the minimum authorized denomination) for such
security.
The Trustee shall promptly notify the Company in writing of the Securities
selected for partial redemption and the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to the redemption of Securities shall relate, in the
case of any Security redeemed or to be redeemed only in part, to the portion of
the principal amount of such Security which has been or is to be redeemed.
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SECTION 1204 Notice of Redemption.
--------------------
Notice of redemption shall be given by first-class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the Redemption Date, to
each Holder of Securities to be redeemed, at the address of such Holder as it
appears in the Security Register, provided that, for so long as the Securities
are held by PMC Capital I, such notice shall be given not less than 45 nor more
than 75 days prior to such Redemption Date (unless a shorter notice shall be
satisfactory to the Property Trustee).
All notices of redemption shall identify the Securities to be redeemed
(including CUSIP number, if any) and shall state:
(a) the Redemption Date,
(b) the Redemption Price or, if the Redemption Price cannot be calculated
prior to the time the notice is required to be sent, the estimate of the
Redemption Price together with a statement that it is an estimate and that the
actual Redemption Price will be calculated on the third Business Day prior to
the Redemption Date (and if an estimate is provided, a further notice shall be
sent of the actual Redemption Price on the date that such Redemption Price is
calculated);
(c) if less than all Outstanding Securities are to be redeemed, the
identification (and, in the case of partial redemption, the respective principal
amounts) of the particular Securities to be redeemed;
(d) that on the Redemption Date the Redemption Price will become due and
payable upon each such Security or portion thereof, and that interest thereon,
if any, shall cease to accrue on and after said date; and
(e) the place or places where such Securities are to be surrendered for
payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company and shall not be
irrevocable. The notice if mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the Holder
receives such notice. In any case, a failure to give such notice by mail or any
defect in the notice to the Holder of any Security designated for redemption as
a whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
SECTION 1205 Deposit of Redemption Price.
---------------------------
Prior to 10:00 a.m. New York City time on the Redemption Date specified in
the notice of redemption, the Company shall deposit with the Trustee or with a
Paying Agent (or, if the Company is acting as its own Paying Agent, segregate
and hold in trust as provided in Section 1003) an amount of money sufficient to
pay the Redemption Price with any interest, of all the Securities (or portions
thereof) so called for redemption.
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SECTION 1206 Securities Payable on Redemption Date.
-------------------------------------
If any notice of redemption has been given as provided in Section 1204, the
Securities or portion of Securities with respect to which such notice has been
given shall become due and payable on the Redemption Date at the place or places
stated in such notice and at the Redemption Price therein specified, together
with accrued interest to the Redemption Date, and from and after such date
(unless the Company shall default in the payment of the Redemption Price and
accrued interest) such Securities shall cease to bear interest. On presentation
and surrender of such Securities at a place of payment in said notice specified,
the said Securities or the specified portions thereof shall be paid and redeemed
by the Company at the applicable Redemption Price, together with accrued
interest to the Redemption Date; provided, however, that installments of
interest (including any Additional Interest) whose corresponding Interest
Payment Date is on or prior to the Redemption Date will be payable to the
Holders of such Securities, or one or more Predecessor Securities, registered as
such at the close of business on the relevant record dates according to their
terms and the provisions of Section 307.
Upon presentation of any Security redeemed in part only, the Company shall
execute and the Trustee shall authenticate and deliver to the Holder thereof, at
the expense of the Company, a new Security or Securities, of authorized
denominations, in aggregate principal amount equal to the unredeemed portion of
the Security so presented and having the same date of issuance, Stated Maturity
and terms. If a Global Security is so surrendered, such new Security will also
be a Global Security.
If any Security called for redemption shall not be so paid upon surrender
thereof for redemption, the principal of and premium, if any, on such Security
shall, until paid, bear interest from the Redemption Date at the rate prescribed
therefor in the Security.
SECTION 1207 Optional Redemption; Conditions to Optional Redemption.
------------------------------------------------------
At any time on or after _________________ 1, 2008, the Company shall have
the right, subject to the last paragraph of this Section, to redeem the
Securities, in whole at any time or in part from time to time, at a Redemption
Price equal to the following prices expressed in percentages of the principal
amount of Securities to be redeemed, plus any accrued but unpaid interest,
including Additional Interest, if any, to the Redemption Date, if redeemed
during the 12-month period beginning ____________________ 1:
Year Redemption Price
---- ----------------
2008 10x.xxxx%
2009 10x.xxxx%
2010 10x.xxxx%
2011 10x.xxxx%
2012 10x.xxxx%
2013 10x.xxxx%
2014 10x.xxxx%
2015 10x.xxxx%
2016 10x.xxxx%
2017 10x.xxxx%
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and at 100% on or after __________________ 1, 2018. The Company shall not
redeem the Securities in part unless all accrued and unpaid interest (including
any Additional Interest) has been paid in full on all Securities Outstanding for
all semi-annual interest periods terminating on or prior to the Redemption Date.
If a Special Event shall occur and be continuing prior to
__________________ 1, 2008, the Company may, at its option, within 90 days of
the occurrence of such Special Event, subject to the last paragraph of this
Section and the other provisions of this Article Twelve, redeem the Securities
in whole but not in part, at a Redemption Price for each Capital Security equal
to the Make-Whole Amount, plus accrued but unpaid interest, including Additional
Interest, if any, to but excluding the Redemption Date.
The "Make-Whole Amount" shall be equal to the greater of (a) 100% of the
principal amount of such Securities or (b) as determined by a Quotation Agent
(as defined below), the sum of the present values of the principal amount and
premium payable as part of the Redemption Price with respect to an optional
redemption of such Securities on _____________________ 1, 2008, together with
scheduled payments of interest from the Redemption Date to ____________________
1, 2008 (the "Remaining Life"), in each case discounted to the Redemption Date
on a semi-annual basis (assuming a 360-day year consisting of 30-day months) at
the Adjusted Treasury Rate (as defined below).
"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
Treasury Rate (as defined below) plus (a) __________% if such Redemption Date
occurs on or before ___________________________ or (b) _________% if such
Redemption Date occurs after __________________________.
"Treasury Rate" means (a) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the maturity corresponding to the
Remaining Life (if no maturity is within three months before or after the
Remaining Life, yields for the two published maturities most closely
corresponding to the Remaining Life shall be determined and the Treasury Rate
shall be interpolated or extrapolated from such yields on a straight-line basis,
rounding to the nearest month) or (b) if such release (or any successor release)
is not published during the week preceding the calculation date or does not
contain such yields, the rate per annum equal to the semi-annual equivalent
yield to maturity of the Comparable Treasury Issue (as defined below),
calculated using a price for the Comparable Treasury Issue (expressed as a
percentage of its principal amount) equal to the Comparable Treasury Price for
such Redemption Date. The Treasury Rate shall be calculated on the third
Business Day preceding the Redemption Date.
"Comparable Treasury Issue" means, with respect to any Redemption Date, the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States Treasury security has a maturity which is within a
period from three months before to three months
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after __________________ 1, 2008, the two most closely corresponding United
States Treasury securities shall be used as the Comparable Treasury Issue, and
the Treasury Rate shall be interpolated or extrapolated on a straight-line
basis, rounding to the nearest month using such securities.
"Quotation Agent" means Goldman, Sachs & Co. and their successors;
provided, however, that if the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"), the
Company shall substitute therefor another Primary Treasury Dealer.
"Reference Treasury Dealer" means (a) the Quotation Agent and (b) any other
Primary Treasury Dealer selected by the Trustee after consultation with the
Company.
"Comparable Treasury Price" means (a) the average of five Reference
Treasury Dealer Quotations (as defined below) for such Redemption Date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations or
(b) if the Trustee obtains fewer than three such Reference Treasury Dealer
Quotations, the average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any Redemption Date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York
City time, on the third Business Day preceding such Redemption Date.
For so long as PMC Capital I is the Holder of all Securities Outstanding,
the proceeds of any redemption described in this Section shall be used by PMC
Capital I to redeem Trust Securities in accordance with their terms.
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
PENNSYLVANIA MANUFACTURERS
CORPORATION
(SEAL) By:____________________________
Name:
Attest: Title:
___________________________
Name:
Title:
-71-
<PAGE>
THE BANK OF NEW YORK
(SEAL) By:____________________________
Name:
Title:
Attest:
____________________________
Name:
Title:
-72-
<PAGE>
COMMONWEALTH OF PENNSYLVANIA ) ss.:
COUNTY OF PHILADELPHIA )
On the _____ day of _________________ 1998, before me personally came
[________________], to me known, who, being by me duly sworn, did depose and say
that he/she is the [____________________] of Pennsylvania Manufacturers
Corporation one of the corporations described in and which executed the
foregoing instrument; and that he/she signed his/her name thereto by authority
of the Board of Directors of such corporation.
______________________________
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<PAGE>
STATE OF NEW YORK ) ss.:
COUNTY OF NEW YORK )
On the _____ day of ________________, 1998, before me personally came
____________________, to me known, who, being by me duly sworn, did depose and
say that he/she is a ________________ of The Bank of New York, a New York
banking corporation described in and which executed the foregoing instrument;
and that he/she signed his/her name thereto by authority of the Board of
Directors of such corporation.
______________________________
-74-
<PAGE>
Exhibit 4.4
GUARANTEE AGREEMENT
Between
Pennsylvania Manufacturers Corporation
(as Guarantor)
and
The Bank of New York
(as Guarantee Trustee)
dated as of
_______________, 1998
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture Act Section Guarantee Agreement Section
- --------------------------- ---------------------------
<TABLE>
<CAPTION>
<S> <C>
310(a) .............................. 4.01(a)
310(b) .............................. 4.01(c), 2.08
310(c) .............................. Inapplicable
311(a) .............................. 2.02(b)
311(b) .............................. 2.02(b)
311(c) .............................. Inapplicable
312(a) .............................. 2.02(a)
312(b) .............................. 2.02(b)
313 .............................. 2.03
314(a) .............................. 2.04
314(b) .............................. Inapplicable
314(c) .............................. 2.05
314(d) .............................. Inapplicable
314(e) .............................. 1.01, 2.05, 3.02
314(f) .............................. 2.01, 3.02
315(a) .............................. 3.01(d)
315(b) .............................. 2.07
315(c) .............................. 3.01
315(d) .............................. 3.01(d)
316(a) .............................. 5.04(a), 2.06
316(b) .............................. 5.03
316(c) .............................. 2.02
317(a) .............................. Inapplicable
317(b) .............................. Inapplicable
318(a) .............................. 2.01(b)
318(b) .............................. 2.01
318(c) .............................. 2.01(a)
</TABLE>
_______________
* This Cross-Reference Table does not constitute part of the Guarentee
Agreement and shall not affect the interpretation of any of its terms or
provisions.
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions ..................................... 1
ARTICLE II
TRUST INDENTURE ACT
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 2.01. Trust Indenture Act; Application ................ 4
SECTION 2.02. Lists of Holders ................................ 4
SECTION 2.03. Reports by the Guarantee Trustee ................ 5
SECTION 2.04. Periodic Reports to Guarantee Trustee ........... 5
SECTION 2.05. Evidence of Compliance with Conditions Precedent 5
SECTION 2.06. Events of Default; Waiver ....................... 5
SECTION 2.07. Event of Default; Notice ........................ 5
SECTION 2.08. Conflicting Interests ........................... 6
</TABLE>
ARTICLE III
POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 3.01. Powers and Duties of the Guarantee Trustee ...... 6
SECTION 3.02. Certain Rights of Guarantee Trustee ............. 7
SECTION 3.03. Indemnity ....................................... 9
</TABLE>
ARTICLE IV
GUARANTEE TRUSTEE
SECTION 4.01. Guarantee Trustee; Eligibility .................... 9
SECTION 4.02. Appointment, Removal and Resignation of
Guarantee Trustee ................................. 10
ARTICLE V
GUARANTEE
<TABLE>
<S> <C> <C>
SECTION 5.01. Guarantee ...................................... 10
SECTION 5.02. Waiver of Notice and Demand .................... 10
SECTION 5.03. Obligations Not Affected ....................... 11
SECTION 5.04. Rights of Holders .............................. 11
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 5.05. Guarantee of Payment ........................... 12
SECTION 5.06. Subrogation .................................... 12
SECTION 5.07. Independent Obligations ........................ 12
</TABLE>
ARTICLE VI
COVENANTS AND SUBORDINATION
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 6.01. Covenants ...................................... 12
SECTION 6.02. Subordination .................................. 13
SECTION 6.03. Pari Passu Guarantees .......................... 13
</TABLE>
ARTICLE VII
TERMINATION
SECTION 7.01. Termination .................................... 13
ARTICLE VIII
MISCELLANEOUS
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 8.01. Successors and Assigns ......................... 13
SECTION 8.02. Amendments ..................................... 14
SECTION 8.03. Notices ........................................ 14
SECTION 8.04. Benefit ........................................ 15
SECTION 8.05. Interpretation ................................. 15
SECTION 8.06. Governing Law .................................. 16
</TABLE>
-ii-
<PAGE>
GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT, dated as of _______________, 1998, is executed
and delivered by Pennsylvania Manufacturers Corporation, a Pennsylvania
corporation (the "Guarantor"), and The Bank of New York, a New York banking
corporation, as trustee (the "Guarantee Trustee"), for the benefit of the
Holders (as defined herein) from time to time of the Capital Securities (as
defined herein) of PMC Capital I, a Delaware statutory business trust (the
"Issuer").
WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "Trust
Agreement"), dated as of _________________, 1998 among the Guarantor, as
Depositor, The Bank of New York (Delaware), as Trustee, The Bank of New York, as
Property Trustee, and the Administrative Trustees named therein, the Issuer is
issuing up to $100,000,000 aggregate liquidation amount of its ______% Capital
Securities, Series A (liquidation amount $1,000 per Capital Security) (the
"Capital Securities" and, together with the Common Securities, the "Trust
Securities") and up to $3,093,000 aggregate liquidation amount of its Common
Securities, each representing ownership interests in the assets of the Issuer
and having the terms set forth in the Trust Agreement;
WHEREAS, the Trust Securities will be issued by the Issuer and the proceeds
thereof will be used to purchase the Debentures (as defined in the Trust
Agreement) of the Guarantor which will be deposited with The Bank of New York,
as Property Trustee under the Trust Agreement, as trust assets; and
WHEREAS, as incentive for the Holders to purchase the Capital Securities
the Guarantor desires irrevocably and unconditionally to agree, to the extent
set forth herein, to pay to the Holders the Guarantee Payments (as defined
herein) and to make certain other payments on the terms and conditions set forth
herein;
NOW, THEREFORE, in consideration of the purchase by each Holder of the
Capital Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee Agreement for the
benefit of the Holders from time to time of the Capital Securities.
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. As used in this Guarantee Agreement, the terms
-----------
set forth below shall, unless the context otherwise requires, have the following
meanings. Capitalized or otherwise defined terms used but not otherwise defined
herein shall have the meanings assigned to such terms in the Trust Agreement as
in effect on the date hereof unless otherwise indicated.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however that an Affiliate of the
Guarantor shall not be deemed to include the Issuer. For the purposes of this
definition, "control" when used with respect to
<PAGE>
any specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Capital Securities" has the meaning specified in the recitals to this
Guarantee Agreement.
"Common Securities" means the securities representing common undivided
beneficial interests in the assets of the Issuer (liquidation amount $1,000 per
Common Security).
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (a) every
obligation of such Person for money borrowed; (b) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (c) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (d) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (e) every capital lease obligation of such Person and (f) every
obligation of the type referred to in clauses (a) through (e) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable for, directly or indirectly,
as obligor or otherwise.
"Event of Default" shall mean (a) a default by the Guarantor on any of its
payment obligations under this Guarantee Agreement or (b) a default by the
Guarantor in any other obligation hereunder that remains unremedied for 30 days.
"Guarantee" means this Guarantee Agreement, dated as of ____________, 1998,
between the Guarantor and the Guarantee Trustee.
"Guarantee Payments" shall mean the following payments or distributions,
without duplication, with respect to the Capital Securities, to the extent not
paid or made by or on behalf of the Issuer: (a) any accumulated and unpaid
Distributions (as defined in the Trust Agreement) required to be paid on the
Capital Securities, to the extent the Issuer shall have funds available therefor
at such time, (b) the Redemption Price (as defined in the Trust Agreement) with
respect to the Capital Securities called for redemption by the Issuer, to the
extent the Issuer shall have funds available therefor at such time and (c) upon
a voluntary or involuntary dissolution, winding-up or termination of the Issuer,
unless the Debentures are distributed to the Holders, the lesser of (i) the
Liquidation Distribution (as defined in the Trust Agreement) to the extent the
Issuer shall have funds available therefor at such time and (ii) the amount of
assets of the Issuer remaining available for distribution to Holders, after
satisfaction of liabilities to creditors of the Issuer as required by applicable
law, in liquidation of the Issuer.
-2-
<PAGE>
"Guarantee Trustee" means The Bank of New York, until a Successor Guarantee
Trustee has been appointed and has accepted such appointment pursuant to the
terms of this Guarantee Agreement and thereafter means each such Successor
Guarantee Trustee.
"Holder" shall mean any holder, as registered on the books and records of
the Issuer, of any Capital Securities; provided, however, that in determining
whether the holders of the requisite percentage of Capital Securities have given
any request, notice, consent or waiver hereunder, "Holder" shall not include the
Guarantor, the Guarantee Trustee or any Affiliate of the Guarantor or the
Guarantee Trustee.
"Indenture" means the Junior Subordinated Indenture dated as of
___________________, 1998, among the Guarantor and The Bank of New York, as
trustee.
"Majority in liquidation amount of the Capital Securities" means, except as
provided by the Trust Indenture Act, Capital Securities representing more than
50% of the liquidation amount of all then outstanding Capital Securities.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chairman of the Board, Chief Executive Officer, the President or a
Senior Vice President, and by the Chief Financial Officer, the Treasurer or the
Vice President of Finance of such Person, and delivered to the Guarantee
Trustee. Any Officers' Certificate delivered with respect to compliance with a
condition or covenant provided for in this Guarantee Agreement shall include:
(a) a statement that each officer signing the Officers' Certificate has
read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;
(c) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(d) a statement as to whether, in the opinion of each such officer, such
condition or covenant has been complied with.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association or government or any agency
or political subdivision thereof, or any other entity of whatever nature.
"Responsible Officer" means, with respect to the Guarantee Trustee, any
Vice President, any Assistant Vice President, the Secretary, any Assistant
Secretary, the Treasurer, any Assistant Treasurer, any financial services
officer or any other officer of the Corporate Trust Administration Department of
the Guarantee Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer to
-3-
<PAGE>
whom such matter is referred because of that officer's knowledge of and
familiarity with the particular subject.
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Guarantor whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of this Guarantee or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Guarantee or to other Debt which is pari
passu with, or subordinated to, the Guarantee; provided, however, that Senior
Debt shall not be deemed to include (a) any Debt of the Guarantor which, when
incurred and without respect to any election under Section 1111(b) of the
Bankruptcy Code, was without recourse to the Guarantor, (b) any Debt of the
Guarantor to any of its Subsidiaries (as defined in the Indenture), (c) Debt to
any employee of the Guarantor, (d) any trade accounts payable of the Guarantor,
(e) accrued liabilities arising in the ordinary course of business of the
Guarantor, (f) the Debentures and (g) the Guarantee.
"Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.01.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
ARTICLE II
TRUST INDENTURE ACT
SECTION 2.01. Trust Indenture Act; Application.
--------------------------------
(a) This Guarantee Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Guarantee Agreement and
shall, to the extent applicable, be governed by such provisions.
(b) If and to the extent that any provision of this Guarantee Agreement
limits, qualifies or conflicts with the duties imposed by Sections 310 to 317,
inclusive, of the Trust Indenture Act, through operation of Section 318(c)
thereof, such imposed duties shall control. If any provision of this Guarantee
Agreement modifies or excludes any provision of the Trust Indenture Act which
may be so modified or excluded, the latter provision shall be deemed to apply to
this Guarantee Agreement as so modified or excluded, as the case may be.
SECTION 2.02. Lists of Holders.
----------------
(a) The Guarantor shall furnish or cause to be furnished to the Guarantee
Trustee (i) semi-annually, not later than _________________ 15 and
________________ 15 in each year, a list, in such form as the Guarantee Trustee
may reasonably require, of the names and addresses of the Holders of the Capital
Securities ("List of Holders") as of a date not more than 15 days prior to the
delivery thereof and (ii) at such other times as the Guarantee Trustee
-4-
<PAGE>
may request in writing, within 30 days after the receipt by the Guarantor of any
such request, a List of Holders as of a date not more than 15 days prior to the
time such list is furnished, in each case to the extent such information is in
the possession or control of the Guarantor and has not otherwise been received
by the Guarantee Trustee in its capacity as such. The Guarantee Trustee may
destroy any List of Holders previously given to it on receipt of a new List of
Holders.
(b) The Guarantee Trustee shall comply with its obligations under Sections
311(a), 311(b) and Section 312(b) of the Trust Indenture Act.
SECTION 2.03. Reports by the Guarantee Trustee. Not later than July 15 of
--------------------------------
each year, commencing July 15, 1999, the Guarantee Trustee shall provide to the
Holders such reports as are required by Section 313 of the Trust Indenture Act,
if any, in the form and in the manner provided by Section 313 of the Trust
Indenture Act. The Guarantee Trustee shall also comply with the requirements of
Section 313(d) of the Trust Indenture Act.
SECTION 2.04. Periodic Reports to Guarantee Trustee. The Guarantor shall
-------------------------------------
provide to the Guarantee Trustee, the Securities and Exchange Commission and the
Holders such documents, reports and information as are required by Section 314
(if any) and the compliance certificate required by Section 314 of the Trust
Indenture Act in the form, in the manner and at the times required by Section
314 of the Trust Indenture Act.
SECTION 2.05. Evidence of Compliance with Conditions Precedent. The
------------------------------------------------
Guarantor shall provide to the Guarantee Trustee such evidence of compliance
with any conditions precedent, if any, provided for in this Guarantee Agreement
that relate to any of the matters set forth in Section 314(c) of the Trust
Indenture Act. Any certificate or opinion required to be given by an officer
pursuant to Section 314(c)(1) may be given in the form of an Officers'
Certificate.
SECTION 2.06. Events of Default; Waiver. The Holders of a Majority in
-------------------------
liquidation amount of the Capital Securities may, by vote, on behalf of the
Holders of all of the Capital Securities, waive any past default or Event of
Default and its consequences. Upon such waiver, any such default or Event of
Default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been cured, for every purpose of this Guarantee Agreement, but
no such waiver shall extend to any subsequent or other default or Event of
Default or impair any right consequent thereon.
SECTION 2.07. Event of Default; Notice.
------------------------
(a) The Guarantee Trustee shall, within 90 days after the occurrence of an
Event of Default, transmit by mail, first-class postage prepaid, to the Holders
of the Capital Securities, notices of all Events of Default known to the
Guarantee Trustee, unless such Event of Default has been cured before the giving
of such notice; provided that, except in the case of a default in the payment of
a Guarantee Payment, the Guarantee Trustee shall be protected in withholding
such notice if and so long as the board of directors, the executive committee or
a trust committee of directors and/or Responsible Officers of the
-5-
<PAGE>
Guarantee Trustee in good faith determines that the withholding of such notice
is in the interests of the Holders of the Capital Securities.
(b) The Guarantee Trustee shall not be deemed to have knowledge of any
Event of Default unless the Guarantee Trustee shall have received written notice
or a Responsible Officer charged with the administration of this Guarantee
Agreement shall have obtained actual knowledge of such Event of Default.
SECTION 2.08. Conflicting Interests. The Trust Agreement and the
---------------------
Indenture shall be deemed to be specifically described in this Guarantee
Agreement for the purposes of clause (i) of the first proviso contained in
Section 310(b) of the Trust Indenture Act.
ARTICLE III
POWERS, DUTIES AND RIGHTS OF
GUARANTEE TRUSTEE
SECTION 3.01. Powers and Duties of the Guarantee Trustee.
------------------------------------------
(a) This Guarantee Agreement shall be held by the Guarantee Trustee for
the benefit of the Holders of the Capital Securities, and the Guarantee Trustee
shall not transfer this Guarantee Agreement to any Person except a Holder of
Capital Securities exercising his or her rights pursuant to Section 5.04(d) or
to a Successor Guarantee Trustee on acceptance by such Successor Guarantee
Trustee of its appointment to act as Successor Guarantee Trustee. The right,
title and interest of the Guarantee Trustee shall auto matically vest in any
Successor Guarantee Trustee, upon acceptance by such Successor Guarantee Trustee
of its appointment hereunder, and such vesting and cessation of title shall be
effective whether or not conveyancing documents have been executed and delivered
pursuant to the appointment of such Successor Guarantee Trustee.
(b) If an Event of Default has occurred and is continuing, the Guarantee
Trustee shall enforce this Guarantee Agreement for the benefit of the Holders of
the Capital Securities.
(c) The Guarantee Trustee, before the occurrence of any Event of Default
and after the curing of all Events of Default that may have occurred, shall
undertake to perform only such duties as are specifically set forth in this
Guarantee Agreement, and no implied covenants shall be read into this Guarantee
Agreement against the Guarantee Trustee. In case an Event of Default has
occurred (that has not been cured or waived pursuant to Section 2.06), the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee Agreement, and use the same degree of care and skill in its
exercise thereof as a prudent individual would exercise or use under the
circumstances in the conduct of his or her own affairs.
(d) No provision of this Guarantee Agreement shall be construed to relieve
the Guarantee Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that:
-6-
<PAGE>
(i) prior to the occurrence of any Event of Default and after the
curing or waiving of all such Events of Default that may have occurred:
(A) the duties and obligations of the Guarantee Trustee shall be
determined solely by the express provisions of this Guarantee Agreement,
(including pursuant to Section 2.01) and the Guarantee Trustee shall not be
liable except for the performance of such duties and obligations as are
specifically set forth in this Guarantee Agreement; and
(B) in the absence of bad faith on the part of the Guarantee Trustee,
the Guarantee Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon any certificates or
opinions furnished to the Guarantee Trustee and conforming to the requirements
of this Guarantee Agreement; but in the case of any such certificates or
opinions that by any provision hereof or of the Trust Indenture Act are
specifically required to be furnished to the Guarantee Trustee, the Guarantee
Trustee shall be under a duty to examine the same to determine whether or not
they conform to the requirements of this Guarantee Agreement;
(ii) the Guarantee Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer of the Guarantee Trustee,
unless it shall be proved that the Guarantee Trustee was negligent in
ascertaining the pertinent facts upon which such judgment was made;
(iii) the Guarantee Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of not less than a Majority in liquidation amount of
the Capital Securities relating to the time, method and place of conducting any
proceeding for any remedy available to the Guarantee Trustee or exercising any
trust or power conferred upon the Guarantee Trustee under this Guarantee
Agreement; and
(iv) no provision of this Guarantee Agreement shall require the
Guarantee Trustee to expend or risk its own funds or otherwise incur personal
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers, if the Guarantee Trustee shall have reasonable
grounds for believing that the repayment of such funds or liability is not
reasonably assured to it under the terms of this Guarantee Agreement or adequate
indemnity against such risk or liability is not reasonably assured to it.
SECTION 3.02. Certain Rights of Guarantee Trustee.
-----------------------------------
(a) Subject to the provisions of Section 3.01:
(i) The Guarantee Trustee may rely and shall be fully protected in
acting or refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, other evidence of indebtedness or other paper or document
reasonably believed by it to be genuine and to have been signed, sent or
presented by the proper party or parties.
-7-
<PAGE>
(ii) Any direction or act of the Guarantor contemplated by this
Guarantee Agreement shall be sufficiently evidenced by an Officers' Certificate
unless otherwise prescribed herein.
(iii) Whenever, in the administration of this Guarantee Agreement,
the Guarantee Trustee shall deem it desirable that a matter be proved or
established before taking, suffering or omitting any action hereunder, the
Guarantee Trustee (unless other evidence is herein specifically prescribed) may,
in the absence of bad faith on its part, request and rely upon an Officers'
Certificate which, upon receipt of such request from the Guarantee Trustee,
shall be promptly delivered by the Guarantor.
(iv) The Guarantee Trustee may (at the expense of the Guarantor)
consult with legal counsel, and the written advice or opinion of such legal
counsel with respect to legal matters shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in accordance with such advice or opinion. Such
legal counsel may be legal counsel to the Guarantor or any of its Affiliates and
may be one of its employees. The Guarantee Trustee shall have the right at any
time to seek instructions concerning the administration of this Guarantee
Agreement from any court of competent jurisdiction.
(v) The Guarantee Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Guarantee Agreement at the request
or direction of any Holder, unless such Holder shall have provided to the
Guarantee Trustee such adequate security and indemnity as would satisfy a
reasonable person in the position of the Guarantee Trustee, against the costs,
expenses (including attorneys' fees and expenses) and liabilities that might be
incurred by it in complying with such request or direction, including such
reasonable advances as may be requested by the Guarantee Trustee; provided that
nothing contained in this Section 3.02(a)(v) shall be taken to relieve the
Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation
to exercise the rights and powers vested in it by this Guarantee Agreement.
(vi) The Guarantee Trustee shall not be bound to make any
investigation into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Guarantee Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit.
(vii) The Guarantee Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys, and the Guarantee Trustee shall not be responsible for any
misconduct or negligence on the part of any such agent or attorney appointed
with due care by it hereunder.
(viii) Whenever in the administration of this Guarantee Agreement
the Guarantee Trustee shall deem it desirable to receive instructions with
respect to enforcing any remedy or right or taking any other action hereunder,
the Guarantee Trustee (A) may request instructions from the Holders of the
Capital Securities, (B) may refrain from
-8-
<PAGE>
enforcing such remedy or right or taking such other action until such
instructions are received and (C) shall be protected in acting in accordance
with such instructions.
(b) No provision of this Guarantee Agreement shall be deemed to impose any
duty or obligation on the Guarantee Trustee to perform any act or acts or
exercise any right, power, duty or obligation conferred or imposed on it in any
jurisdiction in which it shall be illegal, or in which the Guarantee Trustee
shall be unqualified or incompetent in accordance with applicable law, to
perform any such act or acts or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Guarantee Trustee
shall be construed to be a duty to act in accordance with such power and
authority.
SECTION 3.03. Indemnity. The Guarantor agrees to indemnify the Guarantee
---------
Trustee for, and to hold it harmless against, any loss, damage, claims,
liability, penalty or expense incurred without negligence or bad faith on the
part of the Guarantee Trustee, arising out of or in connection with the
acceptance or administration of this Guarantee Agreement, including the costs
and expenses of defending itself against any claim or liability in connection
with the exercise or performance of any of its powers or duties hereunder. The
Guarantee Trustee will not claim or exact any lien or charge on any Guarantee
Payments as a result of any amount due to it under this Guarantee Agreement.
ARTICLE IV
GUARANTEE TRUSTEE
SECTION 4.01. Guarantee Trustee; Eligibility.
------------------------------
(a) There shall at all times be a Guarantee Trustee which shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a Person that is eligible pursuant to the Trust Indenture Act
to act as such and has a combined capital and surplus of at least 50 million
U.S. dollars ($50,000,000), and shall be a corporation meeting the requirements
of Section 310(a) of the Trust Indenture Act. If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of a supervising or examining authority, then, for the purposes of this Section
4.01(a)(ii) and to the extent permitted by the Trust Indenture Act, the combined
capital and surplus of such corporation shall be deemed to be its com bined
capital and surplus as set forth in its most recent report of condition so
published.
(b) If at any time the Guarantee Trustee shall cease to be eligible to so
act under Section 4.01(a), the Guarantee Trustee shall immediately resign in the
manner and with the effect set out in Section 4.02(c).
(c) If the Guarantee Trustee has or shall acquire any "conflicting
interest" within the meaning of Section 310(b) of the Trust Indenture Act, the
Guarantee Trustee and the
-9-
<PAGE>
Guarantor shall in all respects comply with the provisions of Section 310(b) of
the Trust Indenture Act.
SECTION 4.02. Appointment, Removal and Resignation of Guarantee Trustee.
---------------------------------------------------------
(a) Subject to Section 4.02(b), the Guarantee Trustee may be appointed or
removed without cause at any time by the Guarantor.
(b) The Guarantee Trustee shall not be removed until a Successor Guarantee
Trustee has been appointed and has accepted such appointment by written
instrument exe cuted by such Successor Guarantee Trustee and delivered to the
Guarantor.
(c) The Guarantee Trustee appointed hereunder shall hold office until a
Successor Guarantee Trustee shall have been appointed or until its removal or
resignation. The Guarantee Trustee may resign from office (without need for
prior or subsequent accounting) by an instrument in writing executed by the
Guarantee Trustee and delivered to the Guarantor, which resignation shall not
take effect until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by instrument in writing executed by such Successor
Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee
Trustee.
(d) If no Successor Guarantee Trustee shall have been appointed and
accepted appointment as provided in this Section 4.02 within 30 days after
delivery to the Guarantor of an instrument of resignation, the resigning
Guarantee Trustee may petition, at the expense of the Guarantor, any court of
competent jurisdiction for appointment of a Successor Guarantee Trustee. Such
court may thereupon, after prescribing such notice, if any, as it may deem
proper, appoint a Successor Guarantee Trustee.
ARTICLE V
GUARANTEE
SECTION 5.01. Guarantee. The Guarantor irrevocably and unconditionally
---------
agrees to pay in full to the Holders the Guarantee Payments (without duplication
of amounts theretofore paid by or on behalf of the Issuer), as and when due,
regardless of any defense (other than the defense of payment), right of set-off
or counterclaim which the Issuer may have or assert. The Guarantor's obligation
to make a Guarantee Payment may be satisfied by direct payment of the required
amounts by the Guarantor to the Holders or by causing the Issuer to pay such
amounts to the Holders.
SECTION 5.02. Waiver of Notice and Demand. The Guarantor hereby waives
---------------------------
notice of acceptance of the Guarantee Agreement and of any liability to which it
applies or may apply, presentment, demand for payment, any right to require a
proceeding first against the Guarantee Trustee, the Issuer or any other Person
before proceeding against the Guarantor, protest, notice of nonpayment, notice
of dishonor, notice of redemption and all other notices and demands.
-10-
<PAGE>
SECTION 5.03. Obligations Not Affected. The obligations, covenants,
------------------------
agreements and duties of the Guarantor under this Guarantee Agreement shall in
no way be affected or impaired by reason of the happening from time to time of
any of the following:
(a) the release or waiver, by operation of law or otherwise, of the
performance or observance by the Issuer of any express or implied agreement,
covenant, term or condition relating to the Capital Securities to be performed
or observed by the Issuer;
(b) the extension of time for the payment by the Issuer of all or any
portion of the Distributions (other than an extension of time for payment of
Distributions that results from the extension of any interest payment period on
the Debentures as so provided in the Indenture), Redemption Price, Liquidation
Distribution or any other sums payable under the terms of the Capital Securities
or the extension of time for the performance of any other obligation under,
arising out of or in connection with the Capital Securities;
(c) any failure, omission, delay or lack of diligence on the part of the
Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Capital Securities or any
action on the part of the Issuer granting indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorgani zation, arrangement, composition or readjustment of debt
of, or other similar proceedings affecting, the Issuer or any of the assets of
the Issuer;
(e) any invalidity of, or defect or deficiency in, the Capital Securities;
(f) the settlement or compromise of any obligation guaranteed hereby or
hereby incurred; or
(g) any other circumstance whatsoever that might otherwise constitute a
legal or equitable discharge or defense of a guarantor (other than payment of
the underlying obligation), it being the intent of this Section 5.03 that the
obligations of the Guarantor hereunder shall be absolute and unconditional under
any and all circumstances.
There shall be no obligation of the Holders to give notice to, or obtain consent
of, the Guarantor with respect to the happening of any of the foregoing.
SECTION 5.04. Rights of Holders. The Guarantor expressly acknowledges
-----------------
that: (a) this Guarantee Agreement will be deposited with the Guarantee Trustee
to be held for the benefit of the Holders; (b) the Guarantee Trustee has the
right to enforce this Guarantee Agreement on behalf of the Holders; (c) the
Holders of a Majority in liquidation amount of the Capital Securities have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Guarantee Trustee in respect of this Guarantee Agreement
or exercising any trust or power conferred upon the Guarantee Trustee under this
Guarantee Agreement and (d) any Holder of Capital Securities may institute, to
the extent permissible under applicable law, a legal proceeding directly against
-11-
<PAGE>
the Guarantor to enforce its rights under this Guarantee Agreement without first
instituting a legal proceeding against the Guarantee Trustee, the Issuer or any
other Person.
SECTION 5.05. Guarantee of Payment. This Guarantee Agreement creates a
--------------------
guarantee of payment and not a guarantee of collection. This Guarantee
Agreement will not be discharged except by payment of the Guarantee Payments in
full (without duplication of amounts theretofore paid by the Issuer) or upon
distribution of the Debentures to the Holders as provided in the Trust
Agreement.
SECTION 5.06. Subrogation. The Guarantor shall be subrogated to all (if
-----------
any) rights of the Holders against the Issuer in respect of any amounts paid to
the Holders by the Guarantor under this Guarantee Agreement and shall have the
right to waive payment by the Issuer pursuant to Section 5.01; provided,
however, that the Guarantor shall not (except to the extent required by
mandatory provisions of law) be entitled to enforce or exercise any rights which
it may acquire by way of subrogation or any indemnity, reimbursement or other
agreement, in all cases as a result of payment under this Guarantee Agreement,
if, at the time of any such payment, any amounts are due and unpaid under this
Guarantee Agreement. If any amount shall be paid to the Guarantor in violation
of the preceding sentence, the Guarantor agrees to hold such amount in trust for
the Holders and to pay over such amount to the Holders.
SECTION 5.07. Independent Obligations. The Guarantor acknowledges that
-----------------------
its obligations hereunder are independent of the obligations of the Issuer with
respect to the Capital Securities and that the Guarantor shall be liable as
principal and as debtor hereunder to make Guarantee Payments pursuant to the
terms of this Guarantee Agreement notwithstanding the occurrence of any event
referred to in subsections (a) through (g), inclusive, of Section 5.03 hereof.
ARTICLE VI
COVENANTS AND SUBORDINATION
SECTION 6.01. Covenants. So long as any Capital Securities remain
---------
outstanding, the Guarantor shall not, and shall cause its Subsidiaries (as
defined in the Indenture) not to, (a) declare or pay any dividends or
distributions on (other than dividends or distributions in Common Stock or Class
A Common Stock of the Guarantor), or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Guarantor's outstanding capital
stock or (b) make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities that rank pari passu with or
junior to the Debentures or make any guarantee payments with respect to the
foregoing, if at such time (i) the Guarantor shall be in default with respect to
its Guarantee Payments hereunder, (ii) there shall have occurred and be
continuing any Event of Default under the Indenture or (iii) the Guarantor shall
have given notice of its selection of an Extension Period (as defined in the
Indenture) and such period, or any extension thereof, is continuing.
-12-
<PAGE>
SECTION 6.02. Subordination. The obligations of the Guarantor under this
-------------
Guarantee Agreement will constitute unsecured obligations of the Guarantor and
will rank subordinate and junior in right of payment to all Senior Debt of the
Guarantor to the extent and in the manner set forth in the Indenture with
respect to the Debentures, and the provisions of Article Eleven of the Indenture
will apply, mutatis mutandis, to the obligations of the Guarantor hereunder.
The obligations of the Guarantor hereunder do not constitute Senior Debt (as
defined in the Indenture) of the Guarantor.
SECTION 6.03. Pari Passu Guarantees. The obligations of the Guarantor
---------------------
under this Guarantee Agreement shall rank pari passu with the obligations of the
Guarantor under (a) any similar guarantee agreements issued by the Guarantor on
behalf of the holders of preferred or capital securities issued by a business
trust or similar entity whose common securities are owned, directly or
indirectly, by the Guarantor, (b) the Indenture and the Debentures issued
thereunder, (c) the Expense Agreement (as defined in the Trust Agreement) and
any similar expense agreements entered into by the Guarantor in connection with
the offering of the Capital Securities by the Trust and (d) any other security,
guarantee or other agreement or obligation that is expressly stated to rank pari
passu with the obligations of the Guarantor under this Guarantee Agreement or
with any obligation that ranks pari passu with the obligations of the Guarantor
under this Guarantee Agreement.
ARTICLE VII
TERMINATION
SECTION 7.01. Termination. This Guarantee Agreement shall terminate and
-----------
be of no further force and effect upon (a) full payment of the Redemption Price
of all Capital Securities, (b) the distribution of the Debentures to the Holders
of the Capital Securities in exchange for all of the Capital Securities or (c)
payment in full of the amounts payable in accordance with the Trust Agreement
upon liquidation of the Issuer. Notwithstanding the foregoing, this Guarantee
Agreement will continue to be effective or will be reinstated, as the case may
be, if at any time any Holder must restore payment of any sums paid with respect
to the Capital Securities or this Guarantee Agreement. The Guarantor will
indemnify each Holder and hold it harmless from and against any loss it may
suffer in such circumstance.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Successors and Assigns. All guarantees and agreements
----------------------
contained in this Guarantee Agreement shall bind the successors, assigns,
receivers, trustees and representatives of the Guarantor and shall inure to the
benefit of the Holders of the Capital Securities then outstanding. Except in
connection with a consolidation, merger or sale involving the Guarantor or a
conveyance, transfer or lease of the Guarantor's properties that is permitted
under Article Eight of the Indenture and pursuant
-13-
<PAGE>
to which the successor or assignee agrees in writing to perform the Guarantor's
obligations hereunder, the Guarantor shall not assign its obligations hereunder,
and any purported assignment other than in accordance with this provision shall
be void.
SECTION 8.02. Amendments. Except with respect to any changes that do not
----------
adversely affect the rights of the Holders in any material respect (in which
case no consent of the Holders will be required), this Guarantee Agreement may
be amended only with the prior approval of the Holders of not less than a
Majority in liquidation amount of the outstanding Capital Securities. The
provisions of Article VI of the Trust Agreement concerning meetings of the
Holders shall apply to the giving of such approval.
SECTION 8.03. Notices. Any notice, request or other communication
-------
required or permitted to be given hereunder shall be in writing, duly signed by
the party giving such notice, and delivered, telecopied or mailed by first class
mail as follows:
(a) if given to the Guarantor, to the address or telecopy number set forth
below or such other address as the Guarantor may give notice of to the Guarantee
Trustee:
Pennsylvania Manufacturers Corporation
1735 Market Street
Philadelphia, Pennsylvania 19103-7590
Facsimile No.: (215) 665-5061
Attention: President
(b) if given to the Issuer, at the address or telecopy number set forth
below or such other address as the Issuer may give notice of to the Guarantee
Trustee:
PMC Capital I
c/o Pennsylvania Manufacturers Corporation
1735 Market Street
Philadelphia, Pennsylvania 19103-7590
Facsimile No.: (215) 665-5061
Attention: Administrative Trustee
with copy to:
The Bank of New York
....................
....................
....................
Facsimile No:............
Attention:...............
-14-
<PAGE>
(c) if given to the Guarantee Trustee, at the Guarantee Trustee's address
or telecopy number set forth below:
The Bank of New York
....................
....................
....................
Facsimile No:.............
Attention:................
(d) if given to any Holder of the Capital Securities, at the address set
forth on the books and records of the Issuer.
All notices hereunder shall be deemed to have been given when received in
person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid except that if a notice or other document is refused delivery or
cannot be delivered because of a changed address of which no notice was given,
such notice or other document shall be deemed to have been delivered on the date
of such refusal or inability to deliver.
SECTION 8.04. Benefit. This Guarantee Agreement is solely for the
-------
benefit of the Holders, and is not separately transferable from the Capital
Securities.
SECTION 8.05. Interpretation. In this Guarantee Agreement, unless the
--------------
context otherwise requires:
(a) Capitalized terms used in this Guarantee Agreement but not defined in
the preamble hereto have the respective meanings assigned to them in Section
1.01 unless otherwise indicated;
(b) a term defined anywhere in this Guarantee Agreement has the same
meaning throughout;
(c) all references to "the Guarantee Agreement" or "this Guarantee
Agreement" are to this Guarantee Agreement as modified, supplemented or amended
from time to time;
(d) all references in this Guarantee Agreement to Articles and Sections
are to Articles and Sections of this Guarantee Agreement unless otherwise
specified;
(e) a term defined in the Trust Indenture Act has the same meaning when
used in this Guarantee Agreement unless otherwise defined in this Guarantee
Agreement or unless the context otherwise requires;
(f) a reference to the singular includes the plural and vice versa; and
-15-
<PAGE>
(g) the masculine, feminine or neuter genders used herein shall include
the masculine, feminine and neuter genders.
SECTION 8.06. GOVERNING LAW. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED
-------------
BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK WITHOUT REFERENCE TO ITS CONFLICTS OF LAWS PROVISIONS.
This instrument may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
THIS GUARANTEE AGREEMENT is executed as of the day and year first above
written.
PENNSYLVANIA MANUFACTURERS
CORPORATION
By:..............................
Name: John W. Smithson
Title:President and
Chief Executive Officer
THE BANK OF NEW YORK,
as Guarantee Trustee
By:..............................
Name:
Title:
-16-
<PAGE>
[AN OPINION SUBSTANTIALLY IN THE FORM BELOW WILL BE DELIVERED AT CLOSING OF THE
TRANSACTION DESCRIBED HEREIN, ASSUMING NO MATERIAL CHANGE IN THE FACTS OR LAW
UPON WHICH SUCH OPINION IS BASED]
[Letterhead of Duane, Morris & Heckscher LLP]
[Date]
Pennsylvania Manufacturers Corporation
The PMA Building
380 Sentry Parkway
Blue Bell, Pennsylvania 19422-2328
Dear Ladies and Gentlemen:
We have acted as counsel to Pennsylvania Manufacturers Corporation, a
Pennsylvania corporation ("PMC"), and PMC Capital I, a Delaware statutory
business trust (the "Trust"), in connection with the proposed offering by the
Trust of its Capital Securities, Series A (the "Capital Securities") as
described in the Registration Statement on Form S-1 (the "Registration
Statement"), filed by PMC and the Trust with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended. The Registration
Statement includes the Preliminary Prospectus (the "Prospectus") of PMC and the
Trust. Capitalized terms not defined herein have the meanings specified in the
Prospectus.
In rendering the opinions expressed below, we have examined the Prospectus
and such other documents as we have deemed relevant and necessary, including,
without limitation, the Form of Amended and Restated Trust Agreement, the Form
of Indenture and the Form of Guarantee Agreement, attached as Exhibits to the
Registration Statement. Such opinions are conditioned, among other things, upon
the accuracy and completeness of the facts, information and representations
contained in the Prospectus as of the date hereof and the continuing accuracy
and completeness thereof as of the date of the issuance of the Capital
Securities. We have assumed that the transactions contemplated by the Prospectus
and such other documents will occur as provided therein and that there will be
no material change to the Prospectus or any of such other documents between the
date hereof and the date of the issuance of the Capital Securities.
<PAGE>
Pennsylvania Manufacturers Corporation
[Date]
Page 2
We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of all natural
persons and the conformity with original documents of all copies submitted to us
for our examination. We have also assumed that all obligations imposed by such
documents on the parties thereto are or will be enforceable, and have been or
will be performed or satisfied in accordance with their terms.
In rendering the opinions expressed below, we have considered the
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), Regulations promulgated thereunder by the United States Treasury
Department (the "Regulations"), pertinent judicial authorities, rulings of the
Internal Revenue Service and such other authorities as we have considered
relevant. It should be noted that the Code, the Regulations and such judicial
decisions, administrative interpretations and other authorities are subject to
change at any time and, in some circumstances, with retroactive effect; and any
such change could affect the opinions stated herein.
Based upon and subject to the foregoing, we are of the opinion that:
(1) Under current law, the Junior Subordinated Debentures held by the Trust
will be classified for United States federal income tax purposes as indebtedness
of PMC;
(2) Under current law, the Trust will be classified for United States
federal income tax purposes as a grantor trust and not as an association taxable
as a corporation; and
(3) The discussion set forth in the Prospectus under the caption "UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES" is a fair and accurate summary of the
matters addressed therein, based upon current law and the assumptions stated or
referred to therein.
We assume no obligation to update or supplement this letter to reflect any
facts or circumstance which may hereafter come to our attention with respect to
the opinions expressed above, including any changes in applicable law which may
hereafter occur.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to all references to our Firm included in or made a
part of the Registration Statement and to all references to our Firm included in
or made a part of the Registration Statement.
Very truly yours,
DUANE, MORRIS & HECKSCHER LLP
<PAGE>
Exhibit 12.1
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (1)
(dollar amounts in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS
Pre-tax income $25,516 $ 2,620 $25,153 $(191,394) $34,913 $65,380 $ 89,621
Fixed charges 8,411 9,199 17,664 19,070 20,231 14,550 13,356
---------------------------------------------------------------------------
Earnings (a) $33,927 $11,819 $42,817 $(172,324) $55,144 $79,930 $102,977
===========================================================================
FIXED CHARGES
Interest expense and amortization of
debt discount and premium on all
indebtedness $ 7,463 $ 8,222 $15,768 $ 17,052 $18,734 $13,051 $ 11,650
Interest portion of rental expense 948 977 1,896 2,018 1,497 1,499 1,706
---------------------------------------------------------------------------
Fixed charges (c) $ 8,411 $ 9,199 $17,664 $ 19,070 $20,231 $14,550 $ 13,356
===========================================================================
Ratio of earnings to fixed charges
including net realized investment
gains (a)/(c) 4.0x 1.3x 2.4x (2) 2.7x 5.5x 7.7x
</TABLE>
(1) For purposes of determining this ratio, earnings (loss) consist of income
(loss) before income taxes and extraordinary loss (1997), plus fixed
charges. Fixed charges consist of interest expense and the portion of
operating leases that management believes is representative of the interest
factor.
(2) Earnings were insufficient to cover fixed charges by $191.4 million in
1996.
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF PRICEWATERHOUSECOOPERS]
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
November 2, 1998
We consent to the inclusion in this Registration Statement on Form S-3 of our
reports dated February 6, 1998, on our audits of the consolidated financial
statements and financial statement schedules of Pennsylvania Manufacturers
Corporation and subsidiaries as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997. We also consent to the
reference to our firm under the captions "Experts."
/s/ PricewaterhouseCoopers LLP
<PAGE>
Exhibit 25.1
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
Pennsylvania Manufacturers Corporation
(Exact name of obligor as specified in its charter)
Pennsylvania 23-2217932
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
The PMA Building
380 Sentry Parkway
Blue Bell, Pennsylvania 19422
(Address of principal executive offices) (Zip code)
______________________
Junior Subordinated Debentures
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT
IS SUBJECT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Name Address
- ---------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7A-29
UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York (formerly
Irving Trust Company) as now in effect, which contains the authority to
commence business and a grant of powers to exercise corporate trust
powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration
Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with
Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published pursuant
to law or to the requirements of its supervising or examining authority.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a
corporation organized and existing under the laws of the State of New York, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 27th day of October, 1998.
THE BANK OF NEW YORK
By: /s/ Marie E. Trimboli
--------------------------
Name: Marie E. Trimboli
Title: Assistant Treasurer
3
<PAGE>
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin.................... $ 7,301,241
Interest-bearing balances............. 1,385,944
Securities:
Held-to-maturity securities........... 1,000,737
Available-for-sale securities......... 4,240,655
Federal funds sold and Securities pur-
chased under agreements to resell..... 971,453
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................38,788,269
LESS: Allowance for loan and
lease losses ..............632,875
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 38,155,394
Assets held in trading accounts......... 1,307,562
Premises and fixed assets (including
capitalized leases)................... 670,445
Other real estate owned................. 13,598
Investments in unconsolidated
subsidiaries and associated
companies............................. 215,024
Customers' liability to this bank on
acceptances outstanding............... 974,237
Intangible assets....................... 1,102,625
Other assets............................ 1,944,777
-----------
Total assets............................ $59,283,692
===========
LIABILITIES
Deposits:
In domestic offices................... $26,930,258
Noninterest-bearing ......11,579,390
Interest-bearing .........15,350,868
In foreign offices, Edge and
Agreement subsidiaries, and IBFs...... 16,117,854
Noninterest-bearing .........187,464
Interest-bearing .........15,930,390
Federal funds purchased and Securities
sold under agreements to repurchase... 2,170,238
Demand notes issued to the U.S.
Treasury.............................. 300,000
Trading liabilities..................... 1,310,867
Other borrowed money:
With remaining maturity of one year
or less............................. 2,549,479
With remaining maturity of more than
one year through three years........ 0
With remaining maturity of more than
three years......................... 46,654
Bank's liability on acceptances exe-
cuted and outstanding................. 983,398
Subordinated notes and debentures....... 1,314,000
Other liabilities....................... 2,295,520
-----------
Total liabilities....................... 54,018,268
-----------
EQUITY CAPITAL
Common stock............................ 1,135,284
Surplus................................. 731,319
Undivided profits and capital
reserves.............................. 3,385,227
Net unrealized holding gains
(losses) on available-for-sale
securities............................ 51,233
Cumulative foreign currency transla-
tion adjustments...................... ( 37,639)
-----------
Total equity capital.................... 5,265,424
-----------
Total liabilities and equity capital ... $59,283,692
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the above-
named bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot |
Thomas A. Renyi | Directors
Alan R. Griffith |
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 25.2
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
PMC Capital I
(Exact name of obligor as specified in its charter)
Delaware Applied For
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
The PMA Building
380 Sentry Parkway
Blue Bell, Pennsylvania 19422
(Address of principal executive offices) (Zip code)
______________________
Capital Securities
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT
IS SUBJECT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Name Address
- ---------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7A-29
UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York (formerly
Irving Trust Company) as now in effect, which contains the authority to
commence business and a grant of powers to exercise corporate trust
powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration
Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with
Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published pursuant
to law or to the requirements of its supervising or examining authority.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a
corporation organized and existing under the laws of the State of New York, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 27th day of October, 1998.
THE BANK OF NEW YORK
By: /s/ Marie E. Trimboli
--------------------------
Name: Marie E. Trimboli
Title: Assistant Treasurer
3
<PAGE>
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin.................... $ 7,301,241
Interest-bearing balances............. 1,385,944
Securities:
Held-to-maturity securities........... 1,000,737
Available-for-sale securities......... 4,240,655
Federal funds sold and Securities pur-
chased under agreements to resell..... 971,453
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................38,788,269
LESS: Allowance for loan and
lease losses ..............632,875
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 38,155,394
Assets held in trading accounts......... 1,307,562
Premises and fixed assets (including
capitalized leases)................... 670,445
Other real estate owned................. 13,598
Investments in unconsolidated
subsidiaries and associated
companies............................. 215,024
Customers' liability to this bank on
acceptances outstanding............... 974,237
Intangible assets....................... 1,102,625
Other assets............................ 1,944,777
-----------
Total assets............................ $59,283,692
===========
LIABILITIES
Deposits:
In domestic offices................... $26,930,258
Noninterest-bearing ......11,579,390
Interest-bearing .........15,350,868
In foreign offices, Edge and
Agreement subsidiaries, and IBFs...... 16,117,854
Noninterest-bearing .........187,464
Interest-bearing .........15,930,390
Federal funds purchased and Securities
sold under agreements to repurchase... 2,170,238
Demand notes issued to the U.S.
Treasury.............................. 300,000
Trading liabilities..................... 1,310,867
Other borrowed money:
With remaining maturity of one year
or less............................. 2,549,479
With remaining maturity of more than
one year through three years........ 0
With remaining maturity of more than
three years......................... 46,654
Bank's liability on acceptances exe-
cuted and outstanding................. 983,398
Subordinated notes and debentures....... 1,314,000
Other liabilities....................... 2,295,520
-----------
Total liabilities....................... 54,018,268
-----------
EQUITY CAPITAL
Common stock............................ 1,135,284
Surplus................................. 731,319
Undivided profits and capital
reserves.............................. 3,385,227
Net unrealized holding gains
(losses) on available-for-sale
securities............................ 51,233
Cumulative foreign currency transla-
tion adjustments...................... ( 37,639)
-----------
Total equity capital.................... 5,265,424
-----------
Total liabilities and equity capital ... $59,283,692
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the above-
named bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot |
Thomas A. Renyi | Directors
Alan R. Griffith |
- --------------------------------------------------------------------------------
<PAGE>
Exhibit 25.3
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
Pennsylvania Manufacturers Corporation
(Exact name of obligor as specified in its charter)
Pennsylvania 23-2217932
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
The PMA Building
380 Sentry Parkway
Blue Bell, Pennsylvania 19422
(Address of principal executive offices) (Zip code)
______________________
Guarantee of Capital Securities of PMC Capital I
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT
IS SUBJECT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Name Address
- ---------------------------------------------------------------------------------
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION, ARE
INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO RULE 7A-29
UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17 C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York (formerly
Irving Trust Company) as now in effect, which contains the authority to
commence business and a grant of powers to exercise corporate trust
powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration
Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with
Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1
filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the Act.
(Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee published pursuant
to law or to the requirements of its supervising or examining authority.
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a
corporation organized and existing under the laws of the State of New York, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in The City of New York, and State
of New York, on the 27th day of October, 1998.
THE BANK OF NEW YORK
By: /s/ Marie E. Trimboli
------------------------------
Name: Marie E. Trimboli
Title: Assistant Treasurer
3
<PAGE>
Exhibit 7
- --------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business June 30, 1998,
published in accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin.................... $ 7,301,241
Interest-bearing balances............. 1,385,944
Securities:
Held-to-maturity securities........... 1,000,737
Available-for-sale securities......... 4,240,655
Federal funds sold and Securities pur-
chased under agreements to resell..... 971,453
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................38,788,269
LESS: Allowance for loan and
lease losses ..............632,875
LESS: Allocated transfer risk
reserve..........................0
Loans and leases, net of unearned
income, allowance, and reserve 38,155,394
Assets held in trading accounts......... 1,307,562
Premises and fixed assets (including
capitalized leases)................... 670,445
Other real estate owned................. 13,598
Investments in unconsolidated
subsidiaries and associated
companies............................. 215,024
Customers' liability to this bank on
acceptances outstanding............... 974,237
Intangible assets....................... 1,102,625
Other assets............................ 1,944,777
-----------
Total assets............................ $59,283,692
===========
LIABILITIES
Deposits:
In domestic offices................... $26,930,258
Noninterest-bearing ......11,579,390
Interest-bearing .........15,350,868
In foreign offices, Edge and
Agreement subsidiaries, and IBFs...... 16,117,854
Noninterest-bearing .........187,464
Interest-bearing .........15,930,390
Federal funds purchased and Securities
sold under agreements to repurchase... 2,170,238
Demand notes issued to the U.S.
Treasury.............................. 300,000
Trading liabilities..................... 1,310,867
Other borrowed money:
With remaining maturity of one year
or less............................. 2,549,479
With remaining maturity of more than
one year through three years........ 0
With remaining maturity of more than
three years......................... 46,654
Bank's liability on acceptances exe-
cuted and outstanding................. 983,398
Subordinated notes and debentures....... 1,314,000
Other liabilities....................... 2,295,520
-----------
Total liabilities....................... 54,018,268
-----------
EQUITY CAPITAL
Common stock............................ 1,135,284
Surplus................................. 731,319
Undivided profits and capital
reserves.............................. 3,385,227
Net unrealized holding gains
(losses) on available-for-sale
securities............................ 51,233
Cumulative foreign currency transla-
tion adjustments...................... ( 37,639)
-----------
Total equity capital.................... 5,265,424
-----------
Total liabilities and equity capital ... $59,283,692
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the above-
named bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot |
Thomas A. Renyi | Directors
Alan R. Griffith |
- --------------------------------------------------------------------------------
