Registration No. 33-60105
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 3
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
(Exact name of registrant as specified in charter)
Barbados Not Applicable
(State or other jurisdiction (I.R.S. employer identification
of incorporation or organization) number)
Financial Services Centre
Bishops Court Hill
St. Michael, Barbados, W.I.
(246) 436-4895
(Address and telephone number of
principal executive office)
RONALD W. JONES, Vice-President, Finance
Motors Mechanical Reinsurance Company, Limited
Financial Services Centre
Bishops Court Hill
St. Michael, Barbados, W.I.
(246) 436-4895
(Name, address and telephone number of agent for service)
Copy to:
David R. Woodward, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Avenue, N.W.
Washington, D.C. 20009
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. (X)
If the registrant elects to deliver its latest annual report to security-
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(i)
of this form, check the following box.( )
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
Cross reference sheet between
Items of Form S-2 and Prospectus
Pursuant to Item 501(b)
of Regulation S-K
FORM S-2 ITEM NO. CAPTION OR
AND CAPTION LOCATION IN PROSPECTUS
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus ....................... Front Cover
2. Inside Front Page and Outside Back
Cover Pages of Prospectus ........ Inside Front Cover; Outside
Back Cover
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges .......................... Summary; Risk Factors
4. Use of Proceeds .................. Use of Proceeds
5. Determination of Offering Price .. Determination of Offering Price
6. Dilution ......................... Not Applicable
7. Selling Security Holdings ........ Not Applicable
8. Plan of Distribution ............. Plan of Distribution
9. Description of Securities to be
Registered ....................... Description of Capital Stock
10. Interests of Named Experts and
Counsel .......................... Not Applicable
11. Information With Respect to the
Registrant ....................... Summary; Use of
Proceeds; Business of the Company;
Capitalization; Management
12. Incorporation of Certain Information Incorporation of Certain
by Reference Information by Reference
13. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities .................. Not Applicable
P R O S P E C T U S
Motors Mechanical Reinsurance Company, Limited
12,000 Shares of Participating Stock
THE SECURITIES OFFERED HEREBY INVOLVE SIGNIFICANT RISK, ARE SUBJECT TO
SUBSTANTIAL RESTRICTIONS ON TRANSFER, AND WILL NOT BE READILY MARKETABLE.
OFFEREES SHOULD REFER TO THE SECTION CAPTIONED "RISK FACTORS".
Motors Mechanical Reinsurance Company, Limited, a Barbados company, is
engaged in the business of assuming risks in respect of certain insurance
policies covering motor vehicle mechanical repairs. (See "Business of the
Company.")
The shares of Participating Stock of the Company offered by this Prospectus (the
"Shares") are divided into 120 series, and the authorized number of Shares of
each series is 100 Shares. The offering price is $75.00 per Share. (See
"Description of Capital Stock.") ALL AMOUNTS OF MONEY SHOWN IN THIS PROSPECTUS
ARE STATED IN U.S. DOLLARS.
The Company is offering Shares of a series only to persons certified by the
owners of motor vehicle franchises to be identified with that series and only if
it receives Stock Purchase Agreements executed by such persons which are
acceptable to the Company in its sole discretion.
The Shares are being sold, on a continuous basis, by certain employees of Motors
Insurance Corporation ("MIC"), who are not compensated specifically for their
services in this regard.
(See "Plan of Distribution.")
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 THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Underwriting
Price to discounts and Proceeds
public commissions to issuer
Per Share $75.00 None $75.00
Total 12,000 shares $900,000 None $900,000
The date of this Prospectus is , 1997.
The Company, certain of its directors, and certain experts named herein are
residents of Barbados, and all or a substantial portion of the assets of the
Company and of such persons are or may be located outside the United States. As
a result, it may not be possible for investors to effect service of process
within the United States upon the Company or such persons, or to enforce against
them judgments obtained in United States courts predicated upon the civil
liability provisions of the Securities Act of 1933, as amended (the "1933 Act").
The Company has been advised by its Barbados counsel, Evelyn, Gittens & Farmer,
that there is doubt as to whether Barbados courts would (1) enforce judgments of
United States courts obtained against the Company or such persons predicated
upon the civil liability provisions of the 1933 Act, or (2) impose, in original
actions in Barbados, liabilities against the Company or such persons predicated
upon the 1933 Act.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected and copied at
the offices of the Commission, at Room 1024, 450 Fifth Street, N.W., Washington,
D.C.; Room 1204, Kluczynski Federal Building, 230 South Dearborn Street,
Chicago, Illinois; and Room 1102, Jacob K. Javits Building, 26 Federal Plaza,
New York, New York. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates.
The Company furnishes to its stockholders annual reports containing financial
statements that reflect the Company's overall results and condition and that
have been audited and reported upon by independent public accountants, and
quarterly reports for each of the first three quarters of each fiscal year
containing unaudited financial information. In addition, the Company furnishes
to each holder of Shares of a series a quarterly statement containing unaudited
financial information relating to such series. The reports furnished by the
Company contain information prepared in accordance with accounting principles
generally accepted in the United States.
FOR ARIZONA AND MASSACHUSETTS INVESTORS
NO SHARES MAY BE OFFERED TO OR PURCHASED BY RESIDENTS OF ARIZONA OR
MASSACHUSETTS UNLESS THE PURCHASER IS (I) A FRANCHISE OWNER, (II) A MEMBER OF
THE FRANCHISE OWNER'S FAMILY, (III) A TRUST FOR THE BENEFIT OF PERSONS OTHERWISE
ELIGIBLE TO PURCHASE SHARES, (IV) A CORPORATION OR PARTNERSHIP CONTROLLED BY THE
FRANCHISE OWNER, OR (V) A KEY EMPLOYEE WITH RESPECT TO THE FRANCHISE.
FOR FLORIDA INVESTORS
THE SECURITIES BEING OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE
FLORIDA DIVISION OF SECURITIES. ANY SALE MADE PURSUANT TO THIS PROSPECTUS MAY BE
VOIDED BY THE PURCHASER WITHIN THREE DAYS OF THE FIRST TENDERING OF
CONSIDERATION.
FOR MISSISSIPPI INVESTORS
THE COMMISSIONER OF INSURANCE OF THE STATE OF MISSISSIPPI (THE "MISSISSIPPI
INSURANCE COMMISSIONER") HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS
THE MISSISSIPPI INSURANCE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS.
FOR NEBRASKA INVESTORS
ALL NEBRASKA INVESTORS DESIRING TO PURCHASE PARTICIPATING STOCK SHALL
FORWARD THEIR EXECUTED STOCK PURCHASE AGREEMENTS, CERTIFIED OR CASHIER'S CHECK
PAYABLE TO THE COMPANY, AND CERTIFICATION OF ELIGIBILITY TO:
MOTORS INSURANCE CORPORATION
3044 W. GRAND BOULEVARD
RM GM 2-202
DETROIT, MI 48202
ATTENTION: ROBERT E. CAPSTACK
FOR NORTH CAROLINA INVESTORS
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF
INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF INSURANCE
RULED UPON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT. THE BUYER IN NORTH
CAROLINA UNDERSTANDS THAT THE OFFERER IS NOT LICENSED AS AN INSURANCE COMPANY IN
NORTH CAROLINA, NOR DOES IT MEET THE BASIC ADMISSIONS REQUIREMENTS FOR LICENSING
AS AN INSURANCE COMPANY IN NORTH CAROLINA.
TABLE OF CONTENTS
Page
DEFINITIONS .......................................................
SUMMARY ...........................................................
RISK FACTORS ......................................................
Relationship with MIC ............................................
Restrictions Applicable to Certain Retrocessions .................
Extension of New Vehicle Warranties ..............................
Risk of Underwriting Losses ......................................
Investment Related Risks .........................................
United States Tax Considerations .................................
Risks Related to Foreign Business Operations .....................
Competition and Loss of Business .................................
Barbados Regulatory Limitations ..................................
Reliance on Outside Consultants ..................................
Dividends ........................................................
No Public Market; Restrictions on Transfers ......................
Share Redemption..................................................
ELIGIBILITY TO PURCHASE THE SHARES ................................
USE OF PROCEEDS ...................................................
DETERMINATION OF OFFERING PRICE ...................................
DIVIDENDS .........................................................
BUSINESS OF THE COMPANY ...........................................
SELECTED FINANCIAL DATA............................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................
MANAGEMENT ........................................................
Certain Transactions ..............................................
DESCRIPTION OF CAPITAL STOCK ......................................
Allocations to Subsidiary Capital Accounts .......................
Voting Rights ....................................................
Election of Directors ...........................................
Proxies .........................................................
Liquidation .....................................................
Changes in Articles and By-Laws .................................
Other Matters ...................................................
Redemption .......................................................
Liquidation ......................................................
Restrictions on Transfer .........................................
Transfers of Less Than All Shares of a Series ...................
Right of First Refusal ..........................................
Exceptions for Certain Transfers ................................
Provisions Applicable to All Transfers ..........................
Common Stock .....................................................
Barbados Corporate Law Provisions ................................
Dividends and Distributions .....................................
Repurchase ......................................................
Shareholders' Remedies ..........................................
Enforcement of United States Judgments ..........................
Indemnification .................................................
Inspection of Corporate Records .................................
PLAN OF DISTRIBUTION ..............................................
Purchase Procedures ..............................................
Terms of Sale ....................................................
Conditions of Sale ...............................................
Approval of Purchase ............................................
Termination of Offering ..........................................
UNITED STATES FEDERAL TAX CONSIDERATIONS ..........................
United States - Barbados Income Tax Treaty .......................
United States Premium Excise Tax .................................
United States Federal Income Tax Risks and
Consequences -- The Company .....................................
United States Federal Income Tax Consequences -- The Shareholders.
LEGAL MATTERS .....................................................
EXPERTS ...........................................................
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE .................
ADDITIONAL INFORMATION ............................................
INDEPENDENT AUDITORS' REPORT ......................................
FINANCIAL STATEMENTS...............................................
APPENDIX A (Restated Articles of Incorporation of the Company)...
APPENDIX B (Stock Purchase Agreement)............................
APPENDIX C (Certification Form)..................................
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
DEFINITIONS
As used in this Prospectus, the following terms have the particular meanings set
forth below.
Common Stock -- The class of shares held by MIC.
Company -- Motors Mechanical Reinsurance Company, Limited.
Eligible Purchaser -- An individual or entity certified, by the owner(s) of the
Franchise(s) for which an MIC Mechanical Account is maintained, as a purchaser
of all or part of a series of Shares in respect of such MIC Mechanical Account.
Franchise -- A right conferred by a motor vehicle manufacturer pursuant to a
written agreement which permits the grantee to sell the manufacturer's new motor
vehicles.
MIC -- Motors Insurance Corporation.
MIC Mechanical Account -- The separate business record maintained by MIC or any
of its subsidiaries to track volume, experience, and commissions with respect to
mechanical service agreements sold by one or more particular Franchises.
Policies -- Insurance policies issued by any MIC subsidiary and reinsured by MIC
that cover motor vehicle mechanical service agreements, to the extent that risks
under such policies are attributable to an MIC Mechanical Account in respect of
which a series of Shares is issued and outstanding, provided, that fleet
coverages, medium duty truck business and maintenance plans are not reinsured.
Retrocession Agreement -- The agreement or agreements entered into between the
Company and MIC pursuant to which risks arising under the Policies are
transferred to the Company.
Shares -- The shares of the Participating Stock of the Company.
Stock Purchase Agreement -- The agreement entered into between the Company and a
purchaser of Shares, in the form approved by the Company's Board of Directors.
Subsidiary Capital Account -- The bookkeeping record established by the Company
for a particular series of shares or class of stock and maintained for the
purpose of accounting for items of income and expense, gains and losses, capital
contributions, and shareholder distributions which are allocated to the
particular series of shares or class of stock.
SUMMARY
The following summary is qualified in its entirety by the detailed information
and financial statements, including the notes thereto, appearing elsewhere in
this Prospectus.
THE COMPANY
The Company was incorporated under the laws of Barbados on June 12, 1986
and is registered as a licensee under the Barbados Exempt Insurance Act, 1983 to
carry on the business of an Exempt Insurance Company from within Barbados. Its
registered and principal offices are located in St. Michael, Barbados. The
Company is engaged in the business of assuming insurance risks with respect to
motor vehicle mechanical breakdowns insured under policies that are reinsured by
MIC. The Company conducts its operations within or from Barbados. (See "Business
of the Company.")
THE OFFERING
Securities Being
Offered ........... Participating Stock, not to exceed 12,000 shares, in
series of 100 shares each, without nominal or par
value. (See "Description of Capital Stock.")
Offering Price .... $75.00 per Share, or $7,500 per series.
Terms of Offering . Shares of a series of Participating Stock will be
issued with respect to a specific MIC Mechanical
Account. Only one series of Shares will be issued
with respect to each MIC Mechanical Account.
An entire series must be purchased by one or
more Eligible Purchasers. See "Eligibility to
Purchase the Shares.")
Offering Period ... This offering commenced as of July 12, 1995 and,
subject to termination by the Board of Directors of the
Company (the "Board"), will be continuous in accordance
with Rule 415 under the 1933 Act. All funds paid by an
Eligible Purchaser will be held for the benefit of the
Company in an escrow account at Barclays Bank PLC in
Bridgetown, Barbados until such time as the related
Stock Purchase Agreement has been accepted by the
Company. Upon acceptance by the Company of a Stock
Purchase Agreement, funds will be paid to the Company
and Shares will be issued.
Purchase Procedure.. Eligible Purchasers who wish to purchase Shares will be
required to submit to the Company in Barbados the
following: (1) two executed Stock Purchase Agreements;
(2) a certified or cashier's check in the amount of the
purchase price of the Shares payable to "Motors
Mechanical Reinsurance Company, Limited -- Escrow
Account"; and (3) certification of eligibility. (See
"Eligibility to Purchase the Shares.")
Restrictions on
Transfer .......... Subject to certain exceptions, the transfer of Shares
is subject to the Company's right of first refusal. In
addition, the transfer of less than all of the Shares
of a series requires prior written consent of the
Company. (See "Description of Capital Stock --
Restrictions on Transfer.")
Voting Rights ..... Holders of shares of Participating Stock as a class are
entitled to elect one out of six members of the Board.
Their right to vote on other matters is limited.
(See "Description of Capital Stock -- Voting Rights.")
Risk Factors ...... This investment is subject to significant risks.
(See "Risk Factors.")
Capital Structure.. As of April 1, 1997, 26,200 shares of
Participating Stock representing 262 series were
issued and outstanding and were held by 454
shareholders. In addition to the Shares, the Company
has authorized 2,000 shares of Common Stock without
nominal or par value, all of which have been issued
to MIC and are outstanding.
Use of Proceeds ... The proceeds of this offering are added to general
funds of the Company and utilized in its insurance
business. (See "Use of Proceeds.")
Plan of
Distribution ...... The Shares are being sold by employees of MIC, on a
continuous basis. Neither MIC nor its employees are
compensated specifically for their services in that
regard, and no commissions are charged or paid in
connection with sales of the Shares. (See "Plan of
Distribution.")
RISK FACTORS
Investment in the Company is subject to significant risk. Prospective investors
should carefully consider, together with the information contained elsewhere in
this Prospectus, the following:
Relationship with MIC. MIC owns all of the Common Stock of the Company, which
permits it to control the Board and determine, among other things, the selection
of the Company's officers, outside insurance management company and outside
investment adviser. (See "Description of Capital Stock.") The Company has
entered into a Retrocession Agreement with MIC pursuant to which risks that MIC
reinsures under Policies are "retroceded" to the Company. (See "Business of the
Company.") The Company relies exclusively on the Retrocession Agreement and,
thus, on MIC for its business. Therefore, any matters adversely affecting MIC
may have an adverse impact on the insurance business of the Company. In
addition, it should be noted that, under the Retrocession Agreement, only
business identified with certain MIC Mechanical Accounts is retroceded. MIC and
its subsidiaries have the power to limit the Company's insurance business with
respect to MIC Mechanical Accounts.
Pursuant to the Retrocession Agreement, the Company must pay to MIC the amounts
of any and all claims paid by MIC in respect of the Policies. Although the
Company may, at its own expense, be associated with MIC in the defense of any
claim, MIC or its subsidiaries generally have full authority to investigate and
settle, or defend, all claims.
The Retrocession Agreement extends for an indefinite term. It generally may be
terminated at any time by MIC or the Company upon 30 days written notice. In the
event that the Retrocession Agreement is terminated, there is no assurance that
the Company could make arrangements which would allow it to continue to operate
in the manner described in this Prospectus.
Restrictions Applicable to Certain Retrocessions. At the present time, MIC
believes that there is no federal or state law or regulation that impairs its
ability to retrocede its risks to the Company. However, certain state insurance
laws and regulations are imprecise and subject to varied interpretations, and it
is possible that some state administrators could seek to limit retrocession
arrangements with a non-United States insurance company or with an insurance
company that is affiliated with the ceding company or its producers. Moreover,
from time to time, there are legislative and regulatory proposals that could, if
adopted, affect the MIC retrocession.
Extension of New Vehicle Warranties. Sales of mechanical service agreements, and
thus the business of the Company, may be adversely affected by changes in
warranties provided by manufacturers for new motor vehicles. If such warranties
are expanded, there could be an adverse affect on the sales of mechanical
service agreements, and thus on the retrocession business of the Company.
Risk of Underwriting Losses. Mechanical service agreement risks are
unpredictable and highly volatile. If losses and expenses incurred by the
Company were to exceed its earned premium and investment income, the Company
would incur net losses.
Each series of Shares bears 100% of the losses incurred (to the extent of its
respective Subsidiary Capital Account balance) with respect to business
attributable to the MIC Mechanical Account related to such series. To the extent
such losses are substantial, a holder of Shares might sustain a loss of all or a
portion of his or her investment even if other holders of Shares are not
similarly affected. In addition, underwriting losses allocable to a particular
series may, under certain circumstances, be allocated to the other series. (See
"Description of Capital Stock -- Allocations to Subsidiary Capital Accounts.")
Investment Related Risks. The profitability of the Company depends in part on
the amount of income that the Company earns on its investments. There can be no
assurance that the Company will earn a net investment return which, when added
to its earned premium, will be sufficient to offset its liability for claims and
expenses. In addition, the Company could suffer investment losses due to
declines in the market values of securities in which it invests which may be
caused by, among other things, volatile interest rates. The Company invests
primarily in U.S. dollar-denominated securities issued outside of the United
States by non-U.S. private or governmental issuers and U.S. dollar-denominated
bank certificates of deposit issued by foreign banks and foreign branches of
U.S. banks. Investing in such securities subjects the Company to certain risks
not generally associated with securities issued in the United States. Subject to
satisfaction of certain conditions, the Company may make limited investments in
non- U.S. dollar denominated bonds on a fully currency-hedged basis. Such
forward foreign currency transactions minimize the risk of loss resulting from a
decline in the value of the foreign currency relative to the dollar, but may
also limit the potential for gain in the event the foreign currency's value
increases in relation to the value of the dollar. The instruments that may be
used to hedge non-U.S. dollar denominated investments could involve, to varying
degrees, elements of credit risk in the event a counterparty should default on
its obligation under the hedge instrument. Such credit risk is managed through
the selection of financially sound counterparties and periodic monitoring of
counterparty financial condition.
United States Tax Considerations. The Company conducts a reinsurance business in
Barbados and executes and administers its reinsurance agreements and manages its
business affairs from Barbados. On this basis, the Company believes that it
should not be deemed to be engaged in business within the United States through
a permanent establishment, and, therefore, the Company believes it should not be
subject to United States income tax. However, given the factual nature of the
questions involved and certain aspects of the Company's treaty reinsurance
program related to the United States, there can be no assurance that for tax
purposes the Company ultimately will not be deemed to be engaged in business
within the United States through a permanent establishment. In such event, the
Company would be subject to United States income tax on business profits
attributable to such permanent establishment, as well as an additional 5% branch
profits tax.
Under captive insurance company provisions contained in the Internal Revenue
Code, each holder of Shares generally will be subject to United States income
tax currently on his or her pro rata share of the earnings of the Company,
whether or not such earnings are distributed. To the extent that the Company
were subject to United States income tax on its business profits, the holders of
Shares would not be subject to current tax on such profits, but the holders of
Shares would be subject to tax on actual distributions of the Company with
respect to such profits. (See "United States Federal Tax Considerations --
United States Federal Income Tax Consequences -- The Shareholders.")
No representation is made as to the effect that any change in United States tax
laws or the interpretation thereof may have on the Company or holders of Shares.
Risks Related to Foreign Business Operations. The Company's business is
conducted outside of the United States and may, consequently, be affected by
changes in foreign governments and by other political and economic conditions.
As a Barbados corporation, the Company is subject to the provisions of the
Barbados Companies Act, 1982. (See "Description of Capital Stock -- Barbados
Corporate Law Provisions.") In addition, the Company has received a guarantee
from the Barbados Minister of Finance effectively exempting it from Barbados
taxes for a period ending December 31, 2016.
Competition and Loss of Business. The business of insuring risks under motor
vehicle mechanical service agreements is highly competitive, with many companies
seeking the business produced by motor vehicle dealers. Since all of the
Company's business is currently derived from the Retrocession Agreement, the
volume of the Company's business is dependent, to some extent, upon the
marketability of agreements and plans developed by GM and its subsidiaries,
including MIC, and offered through motor vehicle dealers. In addition, GM may
choose not to insure its liability under mechanical repair plans with MIC or its
subsidiaries.
Barbados Regulatory Limitations. Barbados insurance law requires that the
Company maintain certain levels of capital and surplus in relation to its earned
premium. To the extent that the net asset value of the Company does not meet
these minimum requirements and to the extent that a Subsidiary Capital Account
does not support the business attributable to such account, the Company may
reduce the amount of its business attributable to such deficient Subsidiary
Capital Account.
Reliance on Outside Consultants. The Company does not have any full-time
officers or employees. The Company relies on outside consultants for insurance
management, day-to-day administrative services, and investment advice. (See
"Business of the Company.")
Dividends. Although the Company's Restated Articles of Incorporation (the
"Articles") (see Appendix A) provide for a minimum annual dividend to holders of
Shares under certain circumstances, the ability of the Company to pay any
dividend is subject to compliance with Barbados insurance regulatory
requirements, the Barbados Companies Act and other limitations provided in the
Company's Articles. (See "Dividends.")
No Public Market; Restrictions on Transfers. There is no public market for the
Participating Stock or the other capital stock of the Company, and none is
expected to develop. In addition, the Participating Stock is subject to
substantial restrictions on transfer. Except for transfers to certain members of
a transferor's family, certain trusts, certain business affiliates, or estates,
a transfer of any series of shares is subject to the Company's right of first
refusal, and a transfer of less than all of the shares of a series cannot be
made without the express written consent of the Company. All transferees must
agree to be bound by the provisions of a Stock Purchase Agreement, including,
among other things, restrictions on the transfer of their shares. (See
"Description of Capital Stock -- Restrictions on Transfer," "Eligibility to
Purchase the Shares," and "Plan of Distribution.")
Share Redemption. The Board of Directors of the Company has the right to
cause a redemption of the shares of Participating Stock of any series at any
time and for any reason. This permits, among other things, the Board of
Directors to redeem, at its discretion, shareholders who produce unsatisfactory
business on a continuing basis. The Board also may reject a request for
redemption by a shareholder. (See "Description of Capital Stock -- Redemption.")
ELIGIBILITY TO PURCHASE THE SHARES
Shares of a series may be purchased only by an individual or entity certified by
all the owner(s) of the Franchise(s) for which an MIC Mechanical Account is
maintained, as a purchaser of all or part of a series of Shares in respect of
such MIC Mechanical Account ("Eligible Purchaser"). There are no formal
eligibility requirements for certification. Franchise owner(s) have complete
discretion with respect to whom they choose to certify as Eligible Purchasers
(including themselves), provided that all beneficial owners of the dealership
operating under the Franchise consent to such designation. In addition, the
Company has complete discretion to accept or reject any offer to purchase
Shares. No more than one series of Shares is issued with respect to each MIC
Mechanical Account. No Shares of a series are issued unless executed Stock
Purchase Agreements (see Appendix B) for all Shares of that series have been
received and accepted by the Company.
A prospective purchaser is considered to be properly certified if the Company
has received a certificate in the form furnished by the Company (see Appendix C)
from each owner of the particular Franchise(s) stating that the prospective
purchaser has been designated by such owner(s) to be eligible to purchase the
particular Shares and representing that all beneficial owners of the dealership
operating under the Franchise have consented to such designation. In addition,
the prospective purchaser must execute a Stock Purchase Agreement and forward
that agreement, together with payment for the Shares purchased, to the Company.
Stock Purchase Agreements are subject to acceptance by the Company. (See "Plan
of Distribution.")
Transfer of Shares is subject to certain restrictions. If less than all the
Shares of a series are transferred, the Company must give its consent. In
addition, the Company has a right of first refusal to purchase any Shares which
the holder attempts to transfer. However, a transfer is not subject to either of
the foregoing restrictions if the transferee falls into one of the categories of
designated transferees set forth in the Articles. (See "Description of Capital
Stock -- Restrictions on Transfer.")
USE OF PROCEEDS
The offering of the Shares pursuant to this Prospectus is being made on a
continuous basis. This means that it is not possible to predict how many series
of Shares will ultimately be purchased or the maximum net proceeds to be derived
by the Company from this offering.
The proceeds derived from this offering are added to the general funds of the
Company to provide a pool of funds for the payment of future claims in the event
premiums prove insufficient to cover such claims. Under Barbados law, the
Company is required to have minimum net assets, determined by reference to the
annual earned premium. All of the Company's available capital, including the
proceeds of this offering, is invested by its investment advisor in accordance
with guidelines established by the Board. The Company believes that the proceeds
derived from this offering will be sufficient, together with its other capital,
to support the Company's insurance operations for the foreseeable future.
The consideration received by the Company upon issuance of a series of
Shares is allocated to the Subsidiary Capital Account established with respect
to that series of Shares. (See "Description of Capital Stock - Allocations to
Subsidiary Capital Accounts.")
DETERMINATION OF OFFERING PRICE
There is no public trading market for the Shares nor is one expected to develop.
The price per Share reflects the projected capital needs of the Company and
bears no relationship to any valuation criteria.
DIVIDENDS
Dividends may be declared and paid at the discretion of the Board, provided that
each holder of Shares of a series will be entitled to receive a minimum
dividend, payable annually, equal to 20% of the annual net income attributable
to the Subsidiary Capital Account associated with that series of Shares. In all
events, however, dividends are subject to the restrictions described in the
following paragraphs.
Pursuant to the general corporate laws of Barbados, dividends on the Shares are
payable only if after the payment: (a) the Company would be able to pay its
liabilities as they come due; and (b) the realizable value of the Company's
assets exceeds its liabilities and stated capital of all classes. Dividends may
not be paid out of unrealized investment gains. Further, under Barbados
insurance law, the Company is required to maintain a minimum capitalization of
$125,000 and, in addition, the recorded value of its assets must exceed its
liabilities by: (a) $125,000 where the earned premium in the preceding financial
year did not exceed $750,000; (b) an amount equal to 20% of the earned premium
for the preceding financial year, where such income exceeded $750,000 but did
not exceed $5,000,000; and (c) an amount equal to the aggregate of $1,000,000
and 10% of the amount by which the earned premium for the preceding financial
year exceeded $5,000,000. (See "Description of Capital Stock -- Barbados
Corporate Law Provisions.")
In addition to the provisions of Barbados law, the Articles place limitations on
the payment of dividends. Dividends may be declared and paid only out of the
earned surplus of the Company and only if the Company, after giving effect to
the distribution, meets the Barbados margin of solvency requirements without
regard to any letters of credit. Further, dividends with respect to any series
of Shares may be paid only out of earned surplus attributable to the Subsidiary
Capital Account identified with those Shares, and only to the extent that, after
giving effect to the dividend, the capital and surplus identified with that
Subsidiary Capital Account (without regard to any guarantee or letter of credit)
would meet its pro rata share, based on allocable earned premium, of the minimum
margin of solvency required of the Company under Barbados law, as described in
the preceding paragraph. To the extent a dividend, other than a minimum
dividend, is declared on the Shares, it will be declared and paid subject to the
foregoing limitations on all series of Shares as a percentage of the net income
and/or earned surplus attributable to each series, provided that such percentage
may vary with the level of net income and/or earned surplus.
In March of 1997 and April of 1996 and 1995, the Company declared dividends on
the Shares aggregating $4,196,730, $4,007,483 and $1,188,614, respectively.
These dividends, in each case, were declared as a varying percentage of earned
surplus attributable to each series of Shares with the percentage applicable to
each series depending on the amount of earned surplus attributable to such
series. The applicable percentages were 20% to 45% for dividends declared in
1997, 20% to 60% for the dividend declared in 1996, and 15% to 40% for the
dividend declared in 1995.
Dividends on the Common Stock are also subject to the restrictions under
Barbados law and the Articles described above. In addition, the Articles provide
that dividends may not be declared or paid on the Common Stock unless and until
each holder of Shares of a series has received any minimum dividend to which he
is entitled for the current period and may be declared and paid only to the
extent that the earned surplus attributable to the Common Stock exceeds
Restricted Earned Surplus. (See "Description of Capital Stock -- Allocations to
Subsidiary Capital Accounts.")
BUSINESS OF THE COMPANY
The Company was incorporated in Barbados on June 12, 1986. It became registered
in Barbados as an insurer on June 30, 1986 and commenced operations in December,
1987. The Company was organized by MIC. All of MIC's outstanding stock is owned
by General Motors Acceptance Corporation which, in turn, is a wholly owned
subsidiary of General Motors Corporation ("GM").
The business of the Company is the assumption of risks arising under mechanical
breakdown protection plans sold to purchasers of automobiles. These plans
provide coverage against specific automobile mechanical breakdowns during the
manufacturer's new vehicle warranty period that are not attributed to
manufacturing defects and coverage for certain specified mechanical breakdowns
(whether or not caused by manufacturing defects) beyond the period covered by
the manufacturer's warranty. The risk of loss under these plans is covered by
insurance policies that are issued either to GM or to automobile dealers,
reinsured by MIC, and retroceded to the Company to the extent that such policies
are attributable to an MIC Mechanical Account in respect of which a series of
Shares is issued and outstanding.
Reinsurance is a means of transferring the risk of loss arising under a contract
of insurance from the company that initially insured the risk to the reinsurer.
Retrocession is the transfer of the risk borne by the reinsurer (the
"retroceding company") to another company which, in turn, assumes such risk (the
"retrocessionaire"). Retrocession agreements are of numerous different types and
may be individually negotiated by the parties to meet particular needs. Under a
"quota share" indemnity retrocession agreement, such as the Retrocession
Agreement between MIC and the Company, the retrocessionaire (the Company) is
paid ("ceded") a certain percentage of the premiums collected by the retroceding
company (MIC) and, in return, agrees to indemnify the retroceding company for a
certain percentage of the losses in respect of those risks. Further, a "treaty"
arrangement, such as is involved here, covers all risks of a defined class.
Under the terms of the Retrocession Agreement, the Company assumes 100% of each
risk retroceded to it by MIC in return for which it receives 75% of the gross
premium with respect to the risk, reduced by related agents' or brokers'
commission if any. The remaining 25% of the gross premium is retained by MIC as
a ceding commission.
A major source of income to the Company is income earned on the investment of
amounts not currently required to meet claims or expenses. The principal funds
available for investment by the Company come from accumulated capital, and the
cumulative excess of premiums collected over losses and operating expenses paid.
Rothschild Asset Management Limited ("Rothschild") manages the investment and
reinvestment of the Company's funds in accordance with the investment policies
and guidelines established by the Board. Rothschild charges a management fee of
0.3% per annum on the first $20,000,000 of assets under management based on the
market value of the Company's investment portfolio at the end of each calendar
quarter, and 0.15% per annum on the excess thereof.
The Company has entered into an Insurance Management Agreement (the "Management
Agreement") with Alexander Insurance Managers (Barbados) Ltd. (the "Manager"),
pursuant to which the Manager collects and disburses funds on behalf of the
Company, provides accounting, clerical, telephone, telex, facsimile, information
management and other services for the Company, and advises and consults with the
Company in regard to all aspects of the Company's retrocession activities. Under
the terms of the Management Agreement, the Company pays the Manager a fixed
annual fee plus a monthly variable fee based on the number of outstanding Shares
at each calendar month end. For the year ended December 31, 1996, the Company
paid fees to the Manager in the amount of $204,674.
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1996,
1995, 1994, 1993 and 1992 have been derived from financial statements audited by
Deloitte & Touche, independent chartered accountants, whose report with respect
to their audits of the financial statements as of December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 is included
elsewhere in this Prospectus. This information should be read in conjunction
with the information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes included elsewhere in this Prospectus.
<TABLE>
December 31
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Premiums Assumed $ 47,410,037 $44,084,952 $38,371,896 $27,779,063 $19,386,455
============ =========== =========== =========== ===========
Premiums Earned $ 36,077,699 $28,800,689 $21,316,685 $15,429,611 $13,005,184
Net Investment
Income 5,341,924 5,563,573 1,227,816 2,700,242 2,522,712
------------ ----------- ----------- ----------- -----------
Total Income 41,419,623 34,364,262 22,544,501 18,129,853 15,527,896
Less Losses and
Expenses 33,965,100 27,462,338 20,825,943 15,425,146 12,020,682
------------ ----------- ----------- ----------- -----------
Net Income* $ 7,454,523 $ 6,901,924 $ 1,718,558 $ 2,704,707 $ 3,507,214
============ =========== =========== =========== ===========
Dividends Per
Common Share 0 0 0 0 0
Total Assets $106,041,164 $91,526,976 $66,012,284 $50,359,633 $36,847,490
Total Policy
Reserves and
Other Liabilities 88,479,590 76,350,313 60,246,641 42,430,269 29,777,783
Stockholders' Equity 17,561,574 15,176,663 5,765,643 7,929,364 7,069,707
Dividends Paid on
Participating Shares 4,007,483 1,188,614 2,156,304 2,021,504 1,021,705
</TABLE>
*/ Information as to earnings per share is not provided inasmuch as the results
for each series of stock will vary with the underwriting experience attributable
to each Subsidiary Capital Account established with respect to that series. See
Note 2 to the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Liquidity. The Company expects to generate sufficient funds from operations to
cover current liquidity needs. The Company's liquidity requirements are related
to payment of insurance losses, administrative expenses, and dividends. Premiums
generated by the Company's reinsurance business, combined with investment
earnings plus proceeds from the sale of Shares, will continue to be the
principal sources of funds for the Company. Although losses are expected to
increase due to the increased level of premiums assumed in each preceding year
and the anticipated incidence of claims following the expiration of
manufacturers' warranties, available funds from the sources identified above
have also grown. Net cash provided by operating activities has increased to
$17,588,199 in 1996 and $16,418,640 in 1995 from $14,960,494 in 1994. The
Company believes that such funds will be sufficient to meet its liquidity
requirements in 1997 and in future years to which its reinsurance liabilities
extend. No capital expenditures are expected during the next few years.
The Company had unearned premium reserves of $84,084,870 as of December 31,
1996, and $72,752,532 as of December 31, 1995. These amounts are attributable to
the long-term nature of the contracts sold. Such contracts may extend for up to
72 months from date of issue. In addition, the risk of loss to the Company under
the contract arises primarily after the underlying manufacturer's warranty
expires. For new vehicles, the warranty generally covers 36 months or 36,000
miles. For used vehicles, the applicable warranty period depends on the
unexpired portion of the original manufacturer's warranty at the time of
purchase of the vehicle. Because the Company has little risk of loss prior to
expiration of the underlying manufacturer's warranty, most premium is not
recognized as earned until such expiration. Since very little premium is
recognized as earned until the expiration of the underlying warranty, most of
the premium written in any year is recorded as unearned.
On March 27, 1997, the Board of Directors authorized the payment of dividends to
eligible holders of Participating Shares aggregating $4,196,730. See "Dividends"
for a discussion of dividends paid and legal restrictions on the payment of
dividends.
Capital Resources. Capitalization of the Company, as of December 31, 1996, was
comprised of paid-in capital with respect to the Common Stock of $200,000,
paid-in capital with respect to the Shares of $1,905,000 (compared with
$1,807,500 and $1,665,000 as of December 31, 1995 and 1994, respectively), and
earnings retained for use in the business of $14,913,053. Barbados law requires
that the Company's net assets equal at least the aggregate of $1,000,000 and 10%
of the amount by which the earned premium exceeded $5,000,000 in the previous
year. If the Company's net assets are less than mandated by Barbados law, the
Company has the right to reduce the business related to a Subsidiary Capital
Account by retrocession or any other means to the extent necessary to permit the
Subsidiary Capital Account to meet its pro rata share of the Company's required
capital and surplus. At January 1, 1997, the Company's required minimum net
assets computed in accordance with Barbados law was approximately $4,107,770,
compared to total capital and retained earnings computed for purpose of Barbados
law of $ 17,018,053.
Results of Operations. During the year ended December 31, 1996, the Company had
net income of $7,454,523 compared to $6,901,924 and $1,718,558 for the years
ended December 31, 1995 and 1994, respectively. As described below, the increase
in net income during 1996 compared to the previous year was primarily due to the
improved underwriting results which were partially offset by a small decrease in
investment income. The increase in net income during 1995 compared to the
previous year was the result of realized gains on the sale of investments,
increases in interest earned and improved underwriting results.
The Company had net underwriting income of $2,112,599 in 1996 compared to
$1,338,351 and $490,742 for the years ended December 31, 1995 and 1994,
respectively. The increase in underwriting income during 1996 was the result of
an increase in the amount of premiums earned coupled with a modest improvement
in the loss ratio (the ratio of losses incurred to premiums earned). During
1996, the Company had earned premiums of $36,077,699 compared to $28,800,689 and
$21,316,685 during 1995 and 1994, respectively. Increased premium income has
been generated by the issuance of additional series of Shares during the year
ended December 31, 1996, and the continuing flow of reinsurance premiums from
series issued in prior years. During 1996, the Company issued 16 new series of
Shares and redeemed 3 series of Shares for a net increase of 13 series. There
were a total of 254 series outstanding at December 31, 1996 compared to 241 and
222 series of Shares outstanding at December 31, 1995 and 1994, respectively.
The Company incurred losses and administrative expenses during the year
ended December 31, 1996 of $33,965,100 compared with $27,462,338 and $20,825,943
for the years ended December 31, 1995 and 1994, respectively. Expenses in 1996
were comprised of losses paid and provisions for losses incurred of $24,037,827,
ceding commissions and excise taxes of $9,378,748 and operating expenses of
$548,525. Losses incurred in 1995 and 1994 were $19,431,032 and $14,830,166
respectively. The loss ratio for the year ended December 31, 1996 was 66.6%
compared to 67.5% and 69.6% for the years ended December 31, 1995 and 1994,
respectively.
The Company incurred operating expenses during the year ended December 31, 1996
of $548,525 compared to $544,837 and $455,238 for the years ended December 31,
1995 and 1994, respectively. MIC has agreed to pay directly certain costs of
registering and issuing shares if such costs cannot be allocated to the
subsidiary Capital Account for the Common Stock. In 1996 $64,848 of such costs
were paid directly by MIC compared to $171,079 and $162,989 for the years ended
December 31, 1995 and 1994, respectively.
Investment income in 1996 was $5,341,924 compared to $5,563,573 and $1,227,816
for the years ended December 31, 1995 and 1994, respectively. The decrease in
investment income during 1996 compared to 1995 was attributable to an overall
decline in yields in U.S. and non-U.S. dollar positions. The increase in
investment income during 1995 compared to 1994 was attributable to realized
gains on the sale of investment securities and an increase in interest earned.
The sale of investment securities for the year ended December 31, 1996 resulted
in realized gains of $64,244 compared to realized gains of $1,404,232 for the
year ended December 31, 1995, and realized losses of $1,543,358 for the year
ended December 31, 1994. The realized gains during 1995 were due to increased
sales of investment securities to take advantage of market opportunities
presented by fluctuations in interest rates. Interest earned for the year ended
December 31, 1996 was $5,277,680 compared to $4,159,341 and $2,771,174 for the
years ended December 31, 1995 and 1994, respectively. The increase in interest
earnings during 1996 was largely a result of an increase in the amount of assets
under management.
Unrealized appreciation on investment securities held at December 31, 1996 was
$543,521 compared to unrealized appreciation at December 31, 1995 of $1,651,621.
The change in unrealized appreciation as of December 31, 1996 compared to
December 31, 1995 is in large part attributable to the fact that the Company's
portfolio at December 31, 1996 comprised primarily U.S. dollar securities and
U.S. yields were approximating fair market value at that time.
At December 31, 1996, 100% of the Company's investments were in U.S.
dollar-denominated fixed-income securities compared to 78.5% at December 1995
when approximately 21.5% of the Company's investments were in non-U.S.
dollar-denominated bonds, on a fully currency-hedged basis. The Company's
investment manager seeks to identify non-U.S. dollar-denominated investments
that offer a higher rate of return (net of hedging costs) than would be
available in the market for similarly rated U.S. dollar-denominated bonds. The
instruments used to hedge non-U.S. dollar-denominated investments involve, to
varying degrees, elements of credit risk in the event a counterparty should
default on its obligation under the hedge instrument. Such credit risk is
managed through the selection of financially sound counterparties and periodic
monitoring of counterparty financial condition. The Company's investment
guidelines do not permit the use of financial instrument derivatives in managing
interest rate risk.
Pursuant to the retrocession Agreement, the Company must furnish to MIC
collateral in the form of an irrevocable letter of credit of at least 12 months
duration equal in amount to the unearned premium in respect of risks retroceded
and unpaid loss reserves (including reserves for losses incurred but not
reported) otherwise required to be maintained by MIC in respect of the Policies.
As of December 31, 1996, the Company had furnished such a letter of credit in
the amount of $67,350,000.
MANAGEMENT
DIRECTORS AND OFFICERS
Five of the current directors of the Company were elected by MIC through its
ownership of the Common Stock the Annual Shareholders Meeting held on March 27,
1997 and one director was elected by the holders of the Shares at such meeting.
The directors and officers of the Company are as follows:
POSITION WITH THE COMPANY
(AND OTHER EMPLOYMENT DURING PAST FIVE YEARS)
NAME AGE
William B. Noll ............ 54 Chairman and Chief Executive Officer,
President and Director (Executive Vice
President & Chief Financial Officer, Motors
Insurance Corporation ("MIC") March 1993;
Group Vice-President, MIC, 1991-1993;
Vice President, MIC, 1989-1990).
Mr. Noll became President and Director in
April of 1995.
Louis S. Carrio, Jr. ...... 53 Vice-President and Director
(Vice-President, MIC).
Mr. Carrio became Vice President and
Director in June of 1991.
Bernard J. Buselmeier ...... 41 Vice-President and Director (Vice-President
and Treasurer, MIC, March 1993; Treasurer,
MIC, 1989- 1993).
Mr. Buselmeier became Vice-President and
Director in April of 1995.
John J. Dunn, Jr........... 38 Vice-President and Director (Assistant
Treasurer, MIC, 1995; previously manager,
Coopers & Lybrand, L.L.P.)
Mr. Dunn became a Director in April of
1996.
Peter R. P. Evelyn ........ 55 Director (Attorney, Evelyn, Gittens &
Farmer, a Barbados law firm).
Mr. Evelyn has been a Director since 1986.
Gregory Greenwood ......... 37 Director (Greenwood Chevrolet, Youngstown,
Ohio)
Mr. Greenwood became a director in March
of 1997
Ronald W. Jones ........... 44 Vice-President, Finance (Managing Director,
Alexander Insurance Managers (Barbados)
Ltd.).
Mr. Jones has served as Vice-President,
Finance since 1987.
Michael R. Boyce ........... 58 Secretary (Principal, Colybrand Company
Services, Limited, Barbados, since 1993;
previously principal, Price Waterhouse,
Eastern Caribbean).
Mr. Boyce was elected Secretary in 1994.
Mr. Boyce served previously as Assistant
Secretary to the Company.
The directors and officers named above serve in those capacities until the
annual meeting of shareholders next following their election.
CERTAIN TRANSACTIONS
It is the Company's policy not to make loans to any of its officers, directors,
control persons or other affiliates.
All transactions between the Company and its officers, directors, employees and
affiliates, will be on terms no less favorable to the Company than can be
obtained from unaffiliated parties. Any such transactions will be subject to the
approval of a majority of the disinterested members of the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
The Company is currently authorized to issue 2,000 shares of Common Stock,
without nominal or par value per share, all of which have been issued to MIC and
are outstanding. In addition, the Company is currently authorized to issue
100,000 shares of Participating Stock (the "Shares"), also without nominal or
par value per share (collectively, the Shares and the Common Stock are referred
to as the "Capital Stock"). The Shares are issued in series of 100 shares. As of
March 1, 1997, 26,000 Shares representing 260 series had been issued and were
outstanding and were held of record by 453 shareholders. All of the Capital
Stock is, when issued and outstanding, fully paid and nonassessable. No shares
of Capital Stock have conversion, preemptive or sinking-fund rights.
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
The Company has established a Subsidiary Capital Account with respect to the
Common Stock as a class, and establishes such an account with respect to each
series of Shares at the time a series is issued. Subsidiary Capital Accounts are
maintained solely for the purpose of the allocations described below, and do not
serve any other legal or accounting function. None of the Company's assets are
segregated or earmarked with respect to those accounts.
The consideration received by the Company upon the issuance of a particular
series of Shares and the Common Stock as a class are allocated to the Subsidiary
Capital Account for that series or class. Items of income and expense, and
losses, attributable to insurance underwriting activities are determined and
allocated to the Subsidiary Capital Accounts as of the end of each quarter.
Investment experience, and other items of income and expense, gains and losses
and distributions with respect to the Capital Stock, are determined and
allocated to the Subsidiary Capital Accounts as of the end of each quarter. All
such accounting determinations are made using United States generally accepted
accounting principles, unless otherwise required by the Articles.
For purposes of the following discussion, items shall be "related" to the
Subsidiary Capital Account for the series identified with the MIC Mechanical
Account to which such items can be attributed.
(1) Allocations with respect to underwriting activities are made as follows:
(a) With respect to premiums ceded by MIC to the Company, 100% to
the related Subsidiary Capital Account; provided, however,
that an amount equal to 1-1/3% of those premiums, net of
related ceding commissions, are subtracted from such
Subsidiary Capital Account and allocated to the Subsidiary
Capital Account for the Common Stock.
(b) With respect to any agents' or brokers' commissions,
commissions recaptured, unearned premiums, reinsurance
premiums ceded, and any United States excise tax, 100% to the
related Subsidiary Capital Account.
(c) With respect to losses incurred, and any amount of losses
recovered through salvage, subrogation, reimbursement or
otherwise, 100% to the related Subsidiary Capital Account.
(d) With respect to return premiums, 98-2/3% to the related
Subsidiary Capital Account and 1-1/3% to the Subsidiary
Capital Account for the Common Stock.
(2) Any expenses or liabilities attributable to day-to-day Company
operations, excluding any United States Federal income taxes, are
allocated among all Subsidiary Capital Accounts for the Shares pro rata
in accordance with the number of series issued and outstanding at the
end of the fiscal quarter in which the expense or liability is
incurred, provided that for purposes of such allocation, series of
Shares issued during the current calendar year and series with respect
to which unearned premium is zero as of the date of such allocation,
shall be excluded.
(3) Any United States Federal income tax liability (and any interest
thereon or any penalties related thereto) is allocated among the
Subsidiary Capital Accounts based upon the relative contribution of
each of those accounts to the taxable income of the Company upon which
the tax (or any interest or penalties) is imposed.
(4) Any expenses or liabilities attributable to the sale and issuance of
Shares, including but not limited to the costs of compliance with
regulations and requirements of the Securities and Exchange Commission
and state securities laws (but not including ongoing periodic reporting
costs), are allocated to the Subsidiary Capital Account for the Common
Stock; however, MIC may undertake to pay such expenses.
(5) Any expenses or liabilities of the Company not allocable in the manner
described in paragraphs 2 through 4 above are allocated among the
Subsidiary Capital Accounts on the basis of the relative balances of
those accounts as of the end of the quarter preceding the date on which
the expense or liability is incurred.
(6) (a) Investment income, net of any direct investment expense, is
allocated among the Subsidiary Capital Accounts pro rata based
upon the relative Investment Asset Balance (as defined in
subparagraph (b) below) of each of those accounts as of the last
day of the quarter preceding the quarter for which the investment
income is being allocated. For these purposes, net investment
income includes realized (but not unrealized) gains and losses.
(b) The Investment Asset Balance of each Subsidiary Capital Account
is equal to the capital and surplus of each account, increased
by:
(i) the unearned portions of the written premiums that
have been collected by the Company attributable to
those accounts as of the last day of the quarter
preceding the quarter for which the income is being
allocated, net of any applicable commissions and
taxes;
(ii) the outstanding loss reserves attributable to each of
those accounts as of the last day of the quarter
preceding the quarter for which the income is being
allocated; and
(iii) any other outstanding liability that has been charged
to the account as of the last day of the quarter
preceding the quarter or which the income is being
allocated.
(7) (a) If, after the credits and charges described in paragraphs
1-6 above are made to the Subsidiary Capital Accounts there
exists a deficit in one or more of the accounts, then each
such deficit is allocated to and charged against:
(i) first, the Subsidiary Capital Account for the Common
Stock to the extent of Restricted Earned Surplus (the phrase
"Restricted Earned Surplus" refers to the portion of the
earned surplus, if any, in the Subsidiary Capital Account
for the Common Stock equal to that 1-1/3% of the premiums
ceded to the Company during the immediately preceding
five-year period which was subtracted from the Subsidiary
Capital Accounts for the Shares pursuant to paragraph 1(a)
above, net of losses allocated to that account during such
period pursuant to the allocation procedure described in
this paragraph 7 and net of return premiums allocated to
that Account during such period pursuant to the allocation
procedure described in paragraph (1)(d) above);
(ii) then, the Subsidiary Capital Accounts for the Shares,
pro rata, based upon the relative earned premiums allocated
to each such account for the quarter for which the
allocation is being made, provided, however, that only
accounts which have positive balances are taken into account
for purposes of this allocation;
(iii) then, the remaining Subsidiary Capital Accounts for the
Shares with positive balances as of the last day of the
quarter for which the allocation is being made, pro rata,
based upon such balances; and
(iv) then, to the extent necessary, the Subsidiary Capital
Account for the Common Stock.
(b) If, as a result of an allocation of a deficit as described in
subparagraph (ii) or (iii) of paragraph (a) above, a deficit
is created in one or more of the Subsidiary Capital Accounts,
then the resulting deficit(s) are further allocated in the
manner provided in that subparagraph before applying a
subsequent subparagraph.
(c) Notwithstanding the foregoing, if any Subsidiary Capital
Account for a series of Shares had a deficit that was allocated
to and charged against the Restricted Earned Surplus or, after
January 1, 1995, to the Subsidiary Capital Account for any series
of shares, then at the end of any succeeding quarter for which
that account otherwise would show an account balance greater than
zero, the balance is reallocated to the Restricted Earned Surplus
until all reductions of that surplus attributable to that
Subsidiary Capital Account have been restored and thereafter, to
the Subsidiary Capital Accounts for the Shares, pro rata based on
the relative amount of deficits allocated to such accounts, until
all reductions of such Subsidiary Capital Accounts after January
1, 1995 have been restored.
Thus, a loss in a Subsidiary Capital Account which exceeds
the balance in that account is absorbed by other Subsidiary
Capital Accounts, in general, as follows: The amount of such
excess losses is charged first to the Restricted Earned Surplus
portion of the Subsidiary Capital Account of the Common Stock.
Any remaining losses, should the Restricted Earned Surplus be
exhausted, are allocated among the Subsidiary Capital Accounts of
other participating series. Any then unabsorbed losses are
charged to the Subsidiary Capital Account of the Common Stock.
Funds drawn from the Restricted Earned Surplus or the Subsidiary
Capital Accounts for the shares in the manner described above
must be restored from the Subsidiary Capital Account that drew
the funds if at any time it returns to a positive balance.
(8) (a) Dividends, payments upon redemption or liquidation
(described below), and any other distributions with respect to
the Capital Stock are allocated to the Subsidiary Capital Account
for the class or series with respect to which the dividend,
payment or distribution was made.
(b) Where all Shares of a series are repurchased by the Company
pursuant to its right of first refusal or redeemed in accordance
with the Company's procedures for redemption, the Subsidiary
Capital Account for that series is terminated. Thereafter, all
income, expenses, gains and losses that would have been allocated
to the terminated account, will be allocated among the Subsidiary
Capital Accounts of the existing series of Shares pro rata based
upon relative earned premiums attributable to such accounts for
the calendar quarter in which the item was earned or incurred;
provided, however, that a net deficit for any such period is
allocated to the Subsidiary Capital Account for the Common Stock
(to the extent of Restricted Earned Surplus) before allocating
any remaining deficits to the Subsidiary Capital Accounts for the
participating series.
Using the procedures described above, the Company has allocated items of gain
and loss to the Subsidiary Capital Account for each series. Initially each
Account had a balance of $7,500 representing the amount paid for the Shares of
that series. During the year ended December 31, 1996, $2,661,124 of net
underwriting gains and $548,525 of administrative expenses were allocated among
the 254 series of Shares outstanding as of December 31, 1996, and $5,341,924 of
net investment income was allocated among such series of Shares and the Common
Stock.
As of December 31, 1996, 214 series of Shares outstanding had balances greater
than $7,500 (ranging from $7,788 to $534,098) and 40 of such series had balances
less than $7,500 (ranging from $7,339 to zero). (The amounts in the Subsidiary
Capital Accounts can fluctuate substantially and therefore may not be indicative
of future results.) At December 31, 1996, an aggregate of $2,207,958 had been
advanced from the Restricted Earned Surplus (which forms a portion of the
Account established for the Common Stock owned by MIC) to 32 Subsidiary Capital
Accounts and remained outstanding at that date. In addition, at December 31,
1996, net deficits of $537,992 associated with 4 series of Shares that have been
redeemed had been charged against Restricted Earned Surplus and remained
outstanding at that date. As of December 31, 1996, $981,497 of aggregate
deficits has been reallocated among the Subsidiary Capital Accounts of the
Shares and remained outstanding. Of this amount $284,048 is available to be
recovered from deficit accounts should they return to profitability and to the
extent that the risk fund is repaid in full.
The Subsidiary Capital Account for the Common Stock had, at the time it was
established, a balance of approximately $200,000, representing the capital paid
in by MIC for the 2,000 shares of the Common Stock issued to it. That Subsidiary
Capital Account is not affected directly by underwriting gains and losses
attributable to the various Subsidiary Capital Accounts related to series of
Shares, but is affected by those gains and losses indirectly to the extent that
one of the Subsidiary Capital Accounts for a series of Shares incurs a deficit,
in which case resort to the Subsidiary Capital Account for the Common Stock will
result, in the manner described above.
The allocations of income and expense, gains and losses, and distributions
described above are subject to approval by the Board, and when finally so
approved are considered final and conclusive and will be binding on all holders
of Shares for all purposes including without limitation any redemption of Shares
pursuant to the Company's procedures for redemption. (See "Description of
Capital Stock -- Redemption.")
Barbados insurance law requires that the Company maintain certain levels of net
assets, which for this purpose are calculated without taking into account
unrealized gains or losses. The Company is currently in compliance with these
requirements. However, in the event that the Company is unable to comply with
such requirements in the future, it has the right to reduce the business related
to a Subsidiary Capital Account by retrocession or any other means to the extent
necessary to permit the Subsidiary Capital Account to meet its pro rata share of
the Company's required capital and surplus.
VOTING RIGHTS
Subject to the following, holders of Capital Stock are entitled to one vote for
each share held on any question on which the holder is entitled to vote. The
matters on which holders of Capital Stock are entitled to vote, and the relative
voting rights of each class of stock, are set forth below.
Election of Directors. The holders of Shares as a class are entitled to elect
one director of the Company and one alternate director, and the holders of
Common Stock as a class are entitled to elect five directors and up to five
alternate directors. At least one of the directors must be resident in Barbados.
Cumulative voting is not permitted.
Proxies. Any shareholder of the Company may appoint another person as his
or her proxy to act on behalf of the appointing shareholder at any annual
meeting of the Company. The appointment of a person as proxy for a shareholder
must be in writing.
Liquidation. The Company may be liquidated upon the vote of at least 75% of
the outstanding Shares. (See "Description of Capital Stock -- Liquidation.")
Changes in Articles and By-Laws. No change may be made in the Articles or
By-Laws unless a majority of the Shares, and a majority of the Common Stock,
present in person or by proxy and voting at a meeting at which a vote on that
issue is put forth for a vote, approve the change. In addition, no amendment may
vary the rights associated with any one series unless either the rights
associated with all other series are similarly changed or a majority of the
holders of the Shares of each series present in person or by proxy at a meeting
vote in favor of the amendment.
Other Matters. Any matters other than those described above which call for a
shareholder vote require only approval by a majority of the outstanding shares
of Common Stock.
REDEMPTION
Pursuant to the Articles, the Capital Stock may be redeemed as follows: The
Company may redeem outstanding Shares of a series at any time for any reason if
the redemption of such Shares is approved by a majority of the Board of
Directors, provided that the Director representing the Shares must vote in favor
of the action being taken. The Common Stock is nonredeemable in all
circumstances.
A redemption of Shares is effective as of the date specified by the Board of
Directors but no later than the end of the calendar year in which the redemption
was approved by the Board. This date is referred to hereinafter as the
"Redemption Date." The consideration payable to the holders of redeemed Shares
will be the Subsidiary Capital Account balance ("Account Balance") of those
Shares as of the Redemption Date, as adjusted by the Board to reflect unrealized
gains and losses on investments held by the Company and any contingent
liabilities allocable to such account. Each holder of redeemed Shares will
receive the pro rata portion of the Account Balance that corresponds to the
proportionate number of Shares of the series owned. The Account Balance will be
paid within five months of the Redemption Date and bear interest from the
Redemption Date until the date of payment at a rate equal to the yield on
26-week U.S. Treasury Bills for the issue immediately following the Redemption
Date.
Upon the redemption of Shares on the Redemption Date, the redeemed Shares will
be cancelled and the holders thereof will no longer have any interest in the
Shares redeemed or in the Subsidiary Capital Account with respect to the
redeemed Shares.
LIQUIDATION
Subject to Barbados regulatory and judicial approvals, the Company may be
liquidated upon the vote of 75% of the outstanding Shares. In the event of the
liquidation of the Company, after payment of all liabilities of the Company,
each holder of Shares of a series is entitled to receive his pro rata share of
his respective Account Balance before any distribution of the assets of the
Company is made to the holder(s) of Common Stock. Thereafter, the holders of
Shares are not entitled to participate further in the distribution of the assets
of the Company. Each holder of Common Stock will be entitled to receive his pro
rata share of the remaining assets of the Company, if any.
RESTRICTIONS ON TRANSFER
There is no existing public market for the Shares, and it is not anticipated
that one will develop in the future. In addition, the Articles set forth a
number of restrictions on the manner in which the Shares may be transferred.
These restrictions and certain exceptions thereto are described below.
Transfers of Less Than All Shares of a Series. Subject to the exceptions
described below, transfers of less than all Shares of a series may not be made
unless the transfer is to the Company, or the holder(s) of the Shares sought to
be transferred has received the written consent of the Company. A request for
consent must be made in writing and set forth the name(s) and address(es) of the
intended transferee(s), the desired date of the transfer and the consideration
to be paid. No transfer may otherwise be made by a shareholder of less than all
of the Shares of a particular series that he owns. If the Company fails to give
its written consent, any subsequent transfer is void and of no effect.
Right of First Refusal. Subject to the exceptions described below,
transfers of Shares of a series may not in any event be made unless the
holder(s) has received a bona fide written offer to purchase such Shares, a copy
of that offer has been furnished to the Company, and the Company is thereafter
offered the opportunity to purchase the Shares. The Company will have 60 days
during which to exercise its right to purchase the Shares sought to be
transferred. If the Company accepts the offer to purchase, the price will be the
lesser of the Account Balance for the series of Shares sought to be transferred
as of the last day of the quarter immediately preceding the date on which the
offer to purchase was accepted by the Company, or the bona fide offering price.
A purchase made by the Company pursuant to this "right of first refusal" will be
deemed effective upon acceptance by the Company of the offer to purchase,
although payment by the Company may be deferred until the end of the quarter in
which the offer to purchase is accepted by the Company. Shares purchased by the
Company pursuant to its right of first refusal will be cancelled.
Exceptions for Certain Transfers. A transfer of either all or a portion of the
Shares of a series is not subject to either the consent or right of first
refusal of the Company where the Board determines that the transferee of the
shares is: (1) a member of the transferring shareholder's immediate family; (2)
a trust for the benefit of the transferring shareholder or for the benefit of
other exempted transferees described in this paragraph; (3) if the transferor is
a corporation, any of its shareholders; (4) if the transferor is a partnership,
any of its partners; (5) a corporation which is controlled by or under common
control with the transferor; (6) the estate of a deceased shareholder and
legatees or heirs of a deceased shareholder; (7) a charitable or other
qualifying organization described in section 170(c)(2) of the United States
Internal Revenue Code of 1986, or any successor provision thereto; (8) in the
case of a transfer of less than all the Shares of a series, a person who
immediately prior to such transfer is a holder of Shares of that series; or (9)
a key employee of an owner of a Franchise previously designated in the Stock
Purchase Agreement entered into by the transferor.
Provisions Applicable to All Transfers. No Shares may be transferred unless and
until the Board has received, from the holder of the Shares sought to be
transferred, assurances of compliance with all applicable laws and regulations.
Further, transferees of Shares must agree to abide by the requirements set forth
in the Stock Purchase Agreement entered into by the transferor.
Certificates representing the Shares will bear a legend noting the applicable
limitations on transfers.
COMMON STOCK
The Company is currently authorized to issue 2,000 shares of Common Stock,
without nominal or par value, all of which have been issued to MIC and are
outstanding.
A Subsidiary Capital Account has been established for this class of stock,
and allocations of various items to such account are described above. (See
"Description of Capital Stock -- Allocations to Subsidiary Capital Accounts.")
Holders of Common Stock as a class are entitled to elect five directors, at
least one of whom must be resident in Barbados, and up to five alternate
directors. As a class, these holders generally have the sole right to vote on
matters not specifically reserved to the Shares. (See "Description of Capital
Stock -- Voting Rights.")
BARBADOS CORPORATE LAW PROVISIONS
The corporate law of Barbados was derived historically from that of England
prior to the coming into force in 1985 of the Companies Act Cap. 308 of the Laws
of Barbados, which is similar to the Canada Corporations Act. Barbados law may
differ in certain respects from comparable law in the United States. The
following is a summary of certain provisions of Barbados corporate law as
prepared by Evelyn, Gittens & Farmer, the Company's Barbados counsel. The
summary does not purport to contain all applicable provisions and does not
purport to be complete or cover all respects in which Barbados corporate law may
differ from laws generally applicable to United States corporations and their
shareholders.
Dividends and Distributions. Under Barbados law, a company may pay dividends
only if there are reasonable grounds for believing that (a) the company would be
able, after the payment of the dividends, to pay its liabilities as they become
due, and (b) the realizable value of the company's assets would be greater than
the aggregate of its liabilities and stated capital of all classes. Dividends
may not be paid out of unrealized gains.
Repurchase. The Company is authorized by the Articles, subject to certain
approvals, to repurchase its own shares. Such purchases may only be effected if
the Company can satisfy a similar solvency test as that described above under
"Dividends and Distributions."
Shareholders' Remedies. Barbados corporate law contains wide protection for
minority shareholders and investors generally. A statutory right of action is
conferred on subscribers to shares of a Barbados company against the directors
and officers responsible for the issue of a prospectus, in respect of damages
suffered by reason of untrue statements therein. In addition, the Company may
take action against directors and officers for breach of their statutory duty to
act honestly and in good faith with a view to the best interests of the Company.
Enforcement of United States Judgments. Except as mentioned below, a judgment of
a court in the United States, under which a sum of money is payable, will under
most circumstances be enforced as a debt by the courts of Barbados without
reexamination of the merits of the case. This will not apply where the judgment
is for payment of taxes, fines or penalties. There is also doubt as to whether a
Barbados court would enforce judgments of United States courts obtained against
the Company, or its directors and officers resident in Barbados, predicated on
the civil liability provisions of the 1933 Act or, in original actions, impose
liabilities against the Company or such persons predicated upon that Act.
(However, liability for violations of the 1933 Act by the Company may be imposed
directly on MIC in a United States court as a result of MIC being a "control
person" with respect to the Company under the 1933 Act.)
Indemnification. The By-Laws of the Company provide for the indemnification of
its directors and officers against liabilities incurred in their capacities as
such, but the indemnity does not extend to any liability incurred in respect of
wilful negligence, wilful default, fraud or dishonesty in relation to the
Company.
Inspection of Corporate Records. Shareholders have the right to inspect and copy
the Articles and By-Laws, corporate register, security register, minutes of
shareholders meetings, any unanimous shareholder agreement, as well as audited
financial statements of the Company, which must be presented to the annual
meeting of shareholders.
PLAN OF DISTRIBUTION
The Shares are being offered by full-time employees of MIC, or its affiliates
("Salespersons"), who have other duties in connection with the business of MIC
or its affiliates. Salespersons receive no commissions or other compensation
related directly to their sale of the Shares. In addition, MIC receives no
compensation in connection with its distribution of the Shares. Salespersons are
licensed as agents of MIC in certain states in which they offer the Shares for
sale and their activities in selling the Shares are subject to the regulation of
state securities regulators. All sales of the Shares are subject to approval by
the Company. (See "Eligibility to Purchase the Shares.")
PURCHASE PROCEDURES
In order to purchase the Shares, the following documents must be sent to the
Company in Barbados:
(1) two duly executed Stock Purchase Agreements (see Appendix B);
(2) all necessary certifications of the eligibility of prospective
purchasers by all the owner(s) of the Franchise(s) related to the MIC
Mechanical Account with respect to which the Shares will be issued (see
"Description of Capital Stock -- Allocations to Subsidiary Capital
Accounts," and Appendix C); and
(3) a certified or cashier's check payable to "Motors Mechanical
Reinsurance Company, Limited -- Escrow Account" in the amount of the
aggregate cost of the Shares to be purchased, based on the offering
price of $75.00 per Share ("Purchase Payment").
NONE OF THE FOREGOING DOCUMENTS IS TO BE EXECUTED OR DELIVERED UNTIL AFTER A
FINAL PROSPECTUS HAS BEEN DELIVERED TO THE OFFEREE.
Once it is executed by a prospective purchaser, a Stock Purchase Agreement
is, in effect, an offer to purchase the Shares described therein. That offer
will be deemed accepted only if the Company approves the offer and executes the
agreement. (See "Plan of Distribution--Conditions of Sale.")
Following execution of the Stock Purchase Agreement by the Company, the
prospective purchaser has no right to withdraw the amount of the Purchase
Payment or any interest earned thereon. Amounts remain in the Escrow Account
pending satisfaction of the conditions set forth below under "Conditions of
Sale."
TERMS OF SALE
Shares are sold only to eligible purchasers who have executed a Stock Purchase
Agreement and returned it to the Company. Shares must be purchased by series,
although more than one person may buy the Shares of one series. Pursuant to the
Stock Purchase Agreement, the purchaser must accept and agree to be bound by the
Articles and By-Laws of the Company, including the restrictions on transfer.
(See "Description of Capital Stock -- Restrictions on Transfer.") The Stock
Purchase Agreement further provides that the Company may place on a certificate
issued with respect to Shares a legend stating that the transfer or other
disposition of the Shares evidenced thereby is restricted pursuant to the
Articles and By-Laws.
Once it is accepted by the Company, a Stock Purchase Agreement remains in effect
as long as the Shares purchased pursuant thereto remain outstanding. A Stock
Purchase Agreement terminates only upon the redemption of the Shares or the
liquidation of the Company. Upon a transfer of Shares, the transferor is
relieved of all restrictions and obligations under the Stock Purchase Agreement
which the transferor had entered into upon the purchase of those Shares and the
transferee, as a condition of the transfer, is required to agree to abide by all
of the provisions of the Stock Purchase Agreement.
CONDITIONS OF SALE
The Company maintains an Escrow Account at Barclays Bank PLC in Bridgetown,
Barbados (the "Escrow Account"), into which checks from prospective purchasers
are deposited pending satisfaction of the conditions described below. This
account bears interest at prevailing rates but is not subject to investment
guidelines discussed above. If the conditions are not satisfied, the Purchase
Payment is returned together with any interest earned.
Approval of Purchase. Each purchase of Shares must be accepted by the Company
within 120 days from the date of execution of the Stock Purchase Agreement by
the Purchaser. If the Company determines to accept an offer to purchase Shares
from an Eligible Purchaser, it executes both copies of the Stock Purchase
Agreement remitted by such person and returns one copy to such person. If it
determines not to approve an offer to purchase, it returns the Stock Purchase
Agreement without having executed it.
Pending approval of offers, each check for the purchase of Shares (which
ordinarily is received together with a Stock Purchase Agreement) is deposited in
the Escrow Account. If a request to purchase is approved, Shares are issued and
the Eligible Purchaser receives a certificate evidencing ownership of the
Shares. Where the Company determines not to approve a sale of Shares to a
prospective purchaser, the Purchase Payment is returned, together with any
interest earned thereon. The Company has the right to reject any prospective
purchaser for any reason whatsoever.
TERMINATION OF OFFERING
Unless terminated sooner by the Board, this offering will terminate on the date
on which all of the Shares offered hereby have been sold.
UNITED STATES FEDERAL TAX CONSIDERATIONS
It is impractical to comment here on all aspects of the Federal, state, and
local tax laws that may affect the United States taxation of the Company and its
shareholders. The following is a discussion, based on the facts set forth herein
and existing law, of the material Federal tax consequences which, in the opinion
of the Company's U.S. tax counsel, LeBoeuf, Lamb, Greene & MacRae, L.L.P., are
associated with an investment in the Company.
United States taxation of the Company and its shareholders involves a number of
complex questions of fact and law with respect to some of which there is no
statutory, administrative, or judicial authority directly on point. Advance
rulings on these questions have not been requested by the Company from the
Internal Revenue Service (the "Service") and, at least as to certain matters,
there is no assurance that favorable rulings could be obtained. There is also no
assurance that the laws in existence as of the date of this Prospectus will not
be modified so as to alter the tax consequences described below. In this
connection, for example, it is to be noted that President Clinton's 1997 Budget
Plan contains a proposal concerning the Taxation of Certain Captive Insurance
Companies and their shareholders which might, if enacted, have a significant
effect on the tax consequences described below and possibly on the business of
the Company. In general, that proposal would eliminate the tax benefit for an
insured's insurance premium deductions when the insured's risks ultimately are
assumed by a "related-party" reinsurer and would materially alter the way in
which the reinsurer accounts for tax purposes for the reinsurance of such
"related-party" risks. It appears that for this purpose a substantial portion of
the Company's business would be composed of the reinsurance of "related-party"
risks. (See "Business of the Company.") Accordingly, although it is not entirely
clear at this time, the enactment of the President's captive proposal could
materially alter the tax treatment with respect to "related-party" risks assumed
by the Company. Such a change could in turn result in a change in the
reinsurance and/or stock ownership relationships between MIC and the Company.
This discussion does not address all aspects of federal income taxation that may
be relevant to a particular shareholder in light of his or her personal tax
circumstances. Nor does it address state, local, or foreign tax laws that may
affect taxation of shareholders. EACH PROSPECTIVE INVESTOR IN THE COMPANY SHOULD
CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE TAX IMPLICATIONS OF HIS OR HER
INVESTMENT IN THE COMPANY.
UNITED STATES -- BARBADOS INCOME TAX TREATY
The United States and Barbados have entered into an income tax treaty (the
"Treaty") that offers certain tax benefits (some of which are discussed below)
to those persons who qualify for its protection. As a Barbados corporation that
ultimately is owned more than 50% by U.S. persons, the Company is entitled to
the benefits of the Treaty provided that it is "resident" (that is, "managed and
controlled") in Barbados. The Company attempts to conduct its business in such a
manner that it will be considered to be "managed and controlled" in Barbados in
order to qualify for the benefits of the Treaty.
UNITED STATES PREMIUM EXCISE TAX
The United States imposes an excise tax at the rate of 1% of the gross premiums
paid to foreign insurance companies for reinsurance covering risks located
within the United States. Reinsurance premiums paid to the Company are subject
to this excise tax.
UNITED STATES FEDERAL INCOME TAX RISKS AND CONSEQUENCES -- THE COMPANY
Risks and Consequences of Carrying on a United States Reinsurance Business
Through a Permanent Establishment. As a "resident" of Barbados, if the Company
engages in business within the United States through a permanent establishment,
it will be subject to United States Federal income tax at normal corporate tax
rates on its business profits that are attributable to such permanent
establishment. Insofar as is relevant hereto, all of the Company's underwriting
income and investment income (such as dividends and interest) generally would be
treated as business profits attributable to such a permanent establishment. In
addition, a Barbadian resident corporation engaged in business in the United
States through a permanent establishment would be subject to a branch-level tax
at the rate of 5% (reduced by the Treaty from a 30% statutory rate that would
apply generally to foreign corporations engaged in business in the United
States) on its after-tax earnings attributable to its United States permanent
establishment that are considered remitted to the head office of the
corporation.
All relevant facts and circumstances must be taken into account in any
particular case in determining whether a person is engaged in business within
the United States and, if so, whether the business is carried on through a
permanent establishment within the meaning of the Treaty. Under the Treaty, the
activities of both dependent and independent agents in some circumstances may be
deemed to create a permanent establishment of the principal that they represent.
As discussed elsewhere herein, the Company conducts reinsurance business in
Barbados and in that regard executes and administers its reinsurance agreements
and manages its business affairs from Barbados. On this basis, the Company
believes that it should not be deemed to be engaged in business within the
United States through a permanent establishment, and therefore the Company
believes it should not be subject to United States income tax. However, given
the factual nature of the questions involved and certain aspects of the
Company's treaty reinsurance program related to the United States, and given the
absence of any clear legal interpretation of the application of the provisions
of the permanent establishment standard under the circumstances, there can be no
assurance that for tax purposes the Company ultimately will not be deemed to be
engaged in business within the United States through a permanent establishment.
United States Withholding Tax Applicable to Certain Investment Income Not
Attributable to a United States Permanent Establishment. If the Company does not
engage in business within the United States through a permanent establishment,
it generally will be subject to a United States withholding tax on interest,
dividends, and certain other investment income derived from sources within the
United States. (The 30% rate of United States withholding tax provided by
statute is reduced by the Treaty to 5% in the case of interest and 15% in the
case of dividends derived from portfolio investments.) An exemption from the
United States withholding tax is provided for interest earned on amounts on
deposit in a bank, savings and loan association, or insurance company, and
interest income, termed "portfolio interest," on certain debt obligations of
United States issuers.
Although the Company could, in the circumstances described above, invest
its funds in the United States without incurring a withholding tax, the Company
currently invests its funds outside of the United States. (See "Business of the
Company.")
Reallocations By Internal Revenue Service. Under section 482 of the
Internal Revenue Code (the "Code"), the Service may allocate gross income,
deductions, and credits between or among two or more businesses, owned or
controlled directly or indirectly by the same interests, in order to prevent
evasion of taxes or to reflect clearly the true taxable income of such
businesses. As described elsewhere herein, MIC elects five of the Company's six
directors through its ownership of all of the Company's issued and outstanding
Common Stock. Thus, if transactions between MIC and the Company were determined
not to reflect the true taxable income of the parties, a reallocation of income
or deductions between such entities could result. However, as long as the
transactions between MIC and the Company are conducted on an "arm's-length"
basis in a manner consistent with industry standards and practices, section 482
should not provide a basis for reallocations by the Service between MIC and the
Company.
In addition, section 845 of the Code grants broad authority to the Service to
adjust items arising under certain reinsurance agreements (including
retrocession agreements), whether or not they involve related parties. If two or
more "related" parties enter into a reinsurance contract, the Service in general
may make any adjustment necessary to reflect the "proper source and character"
of the taxable income of each such party. The Service also has broad authority
to make proper adjustments where any reinsurance contract between unrelated
parties has a "significant tax avoidance effect" on any party to the contract.
Because MIC is entitled to elect five of the Company's six directors, MIC and
the Company may be considered "related" parties within the meaning of section
845 of the Code. To date, there are no regulations under section 845 of the Code
to aid in its interpretation. However, the legislative history of section 845
suggests that certain types of reinsurance transactions -- such as a coinsurance
reinsurance transaction that covers new business of the ceding company and that
allocates expenses and income items between the ceding company and the reinsurer
in the same proportion as the allocation of the risk reinsured -- generally
should not be subject to reallocations or adjustments. The ongoing quota share
Retrocession Agreement between MIC and the Company, in general, would seem to be
similar to such transactions for which adjustments generally should not be made,
but there is substantial uncertainty at the present time concerning the scope of
section 845.
If the Service were successful in an effort to reallocate to MIC business
retroceded to the Company by MIC, MIC would likely be subject to tax on such
business. Since the Company has no obligation to indemnify MIC against such
adverse tax consequences, a reallocation of business to MIC should not directly
affect the Company. However, any such reallocation might contribute to the early
termination of the Retrocession Agreement between MIC and the Company.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES --- THE SHAREHOLDERS
Taxation of Income of the Company to Shareholders Under Subpart F of the Code.
Under the so-called "Subpart F" provisions (sections 951-964) of the Code,
current United States income tax is imposed on each United States person who
owns stock in any 25% or more U.S.-owned foreign insurance company with respect
to "related person insurance income," whatever the degree of ownership of the
United States shareholder. For this purpose, the term "related person insurance
income" means underwriting and investment income of a foreign insurer
attributable to a policy of insurance or reinsurance with respect to which the
insured is a United States shareholder of the foreign insurer or a person
related to such a shareholder. Under this provision, all of the Company's income
(as determined for tax purposes) will be treated as "related person insurance
income," and, as such, will be passed through and taxed currently to all of the
shareholders of the Company ("Shareholders") under Subpart F of the Code.
The basis of the stock of a Shareholder will be increased by the amount
required to be included in the Shareholder's income with respect to such stock
under Subpart F. Further, a distribution from earnings and profits of the
Company attributable to amounts that have been included in gross income of the
Shareholders under Subpart F would not be included again in gross income of the
Shareholders but would reduce the adjusted tax basis of the stock with respect
to which the distribution is made. It should be noted that Subpart F income will
be computed for the Company as a single entity. The amount of Subpart F income
attributable to one series of Shares in these circumstances may be affected by
results with respect to other series. It also should be noted that the Subpart F
income of the Company generally will be computed under the same rules that
govern the computation of taxable income of domestic property and casualty
insurance companies.
As a result of differences between financial and tax accounting rules applicable
to the computation of income of the Company, the amount of income subject to
pass-through to Shareholders of the Company for United States tax purposes may
in any year differ from the amount of book income allocable to a Shareholder's
subsidiary capital account. Since the consideration payable to the holders of a
series of Shares upon redemption is based substantially on book income
previously allocated to the Shares being redeemed, such consideration may not
reflect the amount of income previously passed through and taxed to the holders
of those Shares.
To the extent that the Company were subject to United States income tax on its
business profits, the Shareholders generally would not be subject to current tax
on such profits under Subpart F, but would be taxed when profits were
distributed by the Company. (See "United States Federal Tax Considerations --
United States Federal Income Tax Consequences -- The Company.")
Risk of Recharacterization of Reinsurance Profits on Business Retroceded to the
Company. As described elsewhere herein, a portion of the underwriting experience
in respect of insurance business retroceded to the Company is allocated to the
series of Shares issued in respect of the Franchise that is the source of such
business. In this connection, the Service could question whether profits on such
business should be treated as being related to equity ownership for tax
purposes, or whether the Shares should be treated, in whole or in part, as a
means by which the direct insurer pays additional income to certain of its
business producers or pays return premiums to certain policyholders, such that
the producers or policyholders (rather than the Shareholders) should be subject
to ordinary income tax on all or some of such profits. Although the issue is not
free from doubt, given, among other things, the significance of the
Shareholders' "at-risk" investment in the Company relative to the volume of
business projected for the Company, the degree of pooling of risks among all
series of Shares, the fact that distributions with respect to Shares are,
subject to certain "minimum dividends," within the discretion of the Board, and
the vote accompanying each Share, there should be substantial arguments against
the recharacterization of profits with respect to the Shares.
Deductibility of Premiums Paid By Franchises for Certain Coverages Reinsured by
the Company. As discussed elsewhere herein, risks arising under mechanical
service agreements entered into with respect to a particular Franchise
ultimately may be retroceded to the Company and allocated in part to a series of
Shares owned by the owner(s) of such Franchise or by persons closely related to
such owner(s). The Service conceivably could seek to deny any deductions taken
by the obligor under the mechanical service agreements for premiums paid by it
with respect to its obligations ultimately retroceded to the Company, relying on
the theory, developed in cases dealing with transactions involving wholly owned
insurance companies, that no insurance risk has been shifted in respect of such
premiums. However, although the matter is not free from doubt, given the degree
of risk pooling within the Company, there should be substantial arguments in
support of the treatment of such premiums as deductible insurance premiums for
tax purposes.
LEGAL MATTERS
The legality of the securities offered hereby is passed upon for the
Company by its Barbados counsel, Evelyn, Gittens & Farmer, Heritage House,
Pinfold Street, Bridgetown, Barbados, West Indies. LeBoeuf, Lamb, Greene &
MacRae, L.L.P., 1875 Connecticut Avenue, N.W., Washington, D.C. 20009, will
advise the Company as to certain matters pertaining to the laws of the United
States.
EXPERTS
The financial statements as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996, included elsewhere in this
Prospectus, have been audited by Deloitte & Touche, independent chartered
accountants, Bridgetown, Barbados as set forth in their report included in this
Prospectus. Such financial statements have been so included in this Prospectus
in reliance upon such report given upon the authority of that firm as experts in
accounting and auditing.
The matters of Barbados law referred to in this Prospectus are set forth in
reliance upon the opinion of Evelyn, Gittens & Farmer and upon their authority
as experts in Barbados law. LeBoeuf, Lamb, Greene & MacRae, L.L.P. has passed
upon the statements concerning United States tax laws contained in the
discussion under "United States Federal Tax Considerations," which is included
herein in reliance upon their authority as experts with respect to such matters.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31, 1996,
File No. 33- 6534, as filed by the Company with the Securities and Exchange
Commission, Washington, D.C. (the "Commission"), is incorporated in this
Prospectus by reference. Any statement contained in such Annual Report shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
ADDITIONAL INFORMATION
A registration statement under the 1933 Act has been filed with the Commission
with respect to the Shares offered hereby. This Prospectus does not contain all
of the information set forth in such registration statement, certain parts
having been omitted pursuant to the rules and regulations of the Commission. The
omitted information may be examined at the Commission's principal office at 450
5th Street, N.W., Washington, D.C., or at the following regional offices: New
York City, 26 Federal Plaza, Room 1102; Chicago, 219 South Dearborn Street, Room
1204; and Los Angeles, 5757 Wilshire Boulevard, Suite 500 East. Copies may be
obtained upon payment of the fees prescribed from the public reference section
of the Commission, Washington, D.C. 20549.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference is
hereby made to the copy of the contract or other document filed as an exhibit to
the registration statement, of which this Prospectus is a part, for a full
statement of the provisions, and each such statement in this Prospectus is
qualified in all respects by such reference.
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Motors Mechanical Reinsurance Company, Limited
Financial Services Centre
Bishops Court Hill
St. Michael, Barbados
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance
Company, Limited as of December 31, 1996 and 1995 and the related statements of
income and retained earnings and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such financial statements present fairly, in all material
respects, the financial position of Motors Mechanical Reinsurance Company,
Limited as of December 31, 1996 and 1995 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with accounting principles generally accepted in the United States
of America.
s/DELOITTE & TOUCHE
CHARTERED ACCOUNTANTS
Bridgetown, Barbados
February 14, 1997
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(Expressed in U.S. Dollars)
1996 1995
----------- -----------
ASSETS
Investments $66,647,930 $59,898,265
Cash and cash equivalents 12,926,272 7,093,106
Accrued investment income 1,453,691 2,532,813
Due from Motors Insurance Corporation 3,158,064 3,095,587
Deferred acquisition costs 21,855,207 18,907,205
----------- -----------
Total Assets $106,041,164 $91,526,976
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums $84,084,870 $72,752,532
Loss reserves 4,284,304 3,480,334
Accrued liabilities 110,416 117,447
----------- -----------
Total Liabilities 88,479,590 76,350,313
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Share capital
Common stock - no par value;
Authorized - 2,000 shares;
issued and outstanding -
2,000 shares 200,000 200,000
Participating stock - no par value;
Authorized - 100,000 shares;
issued and outstanding -
25,400 shares at December 31,
1996 and 24,100 shares at
December 31, 1995 1,905,000 1,807,500
---------- ----------
2,105,000 2,007,050
Retained earnings 14,913,053 11,517,542
Unrealized appreciation
on investments 543,521 1,651,621
---------- ----------
Total Stockholders' Equity 17,561,574 15,176,663
---------- ----------
Total Liabilities and
Stockholders' Equity $106,041,164 $91,526,976
============ ===========
The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Expressed in U.S. Dollars)
1996 1995 1994
----------- ----------- ----------
INCOME
Reinsurance
premiums assumed $47,410,037 $44,084,952 $38,371,896
Increase in
unearned premiums (11,332,338) (15,284,263) (17,055,211)
------------ ------------ ------------
Premiums earned 36,077,699 28,800,689 21,316,685
------------ ------------ ------------
Investment income:
Interest earned 5,277,680 4,159,341 2,771,174
Realized gains (losses)
on investments 64,244 1,404,232 (1,543,358)
------------ ------------ ------------
Investment income - net 5,341,924 5,563,573 1,227,816
------------ ------------ ------------
TOTAL INCOME 41,419,623 34,364,262 22,544,501
------------ ------------ ------------
EXPENSES
Acquisition costs 9,378,748 7,486,469 5,540,539
Losses paid 23,233,857 18,610,968 14,079,926
Increase in loss
reserves 803,970 820,064 750,240
Administrative expenses:
Related Parties 211,001 174,443 171,135
Other 337,524 370,394 284,103
------------ ------------ ------------
TOTAL EXPENSES 33,965,100 27,462,338 20,825,943
------------ ------------ ------------
NET INCOME 7,454,523 6,901,924 1,718,558
RETAINED EARNINGS,
beginning of year 11,517,542 5,796,732 6,211,978
LESS: DIVIDENDS (4,007,483) (1,188,614) (2,156,304)
(DEDUCT)/ADD: REDEMPTION OF
PARTICIPATING STOCK (51,529) 7,500 22,500
------------ ------------ ------------
RETAINED EARNINGS, end of year $14,913,053 $11,517,542 $ 5,796,732
============ ============ ============
The accompanying notes form an integral part of these financial statements.
<TABLE>
MOTORS MECHANICAL REINSURANCE COMPANY LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(Expressed in U.S. dollars)
<S> <C> <C> <C>
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Reinsurance premiums collected $46,031,997 $42,818,628 $35,580,944
Losses and acquisition
expenses paid (34,302,453) (28,599,428) (22,168,851)
Administrative expenses paid (501,147) (540,841) (527,767)
Investment income received 6,359,802 3,193,568 2,076,168
Net cash provided by operating
activities 17,588,199 16,871,927 14,960,494
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (232,194,343) (182,526,749) (70,748,944)
Sales and maturities of investments 224,400,822 170,483,482 54,189,043
Net cash invested ( 7,793,521) (12,043,267) (16,559,901)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
Participating Stock 120,000 150,000 270,000
Redemption of Participating Stock (74,029) 0 0
Dividends paid ( 4,007,483) (1,188,614) (2,156,304)
---------- ---------- ----------
Net cash used in financing
activities ( 3,961,512) (1,038,614) (1,886,304)
---------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 5,833,166 3,790,046 (3,485,711)
CASH AND CASH EQUIVALENTS, beginning
of year 7,093,106 3,303,060 6,788,771
----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of
year $12,926,272 $ 7,093,106 $ 3,303,060
=========== =========== ===========
RECONCILIATION OF NET INCOME TO
NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 7,454,523 $ 6,901,924 $ 1,718,558
Realized (gains) losses on
investments (64,244) (1,404,232) 1,543,358
Change in:
Accrued investment income 1,079,122 (973,618) (698,005)
Due from Motors Insurance
Corporation (62,477) 219,919 (983,528)
Deferred acquisition costs (2,948,002) (3,975,738) (4,436,261)
Unearned premiums 11,332,338 15,284,263 17,055,211
Loss reserves 803,970 820,064 750,240
Accrued liabilities (7,031) (655) 10,921
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $17,588,199 $16,871,927 $14,960,494
=========== =========== ===========
</TABLE>
The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in U.S. Dollars)
Note 1. OPERATIONS
The Company is incorporated under the laws of Barbados and is
a licensed insurer under the Exempt Insurance Act, 1983, and
amendments thereto.
All of the common stock of the Company is owned by Motors
Insurance Corporation ("MIC"). MIC is an indirect wholly-owned
subsidiary of General Motors Corporation. The principal
activity of the Company is the assumption of motor vehicle
mechanical service agreements arising under insurance policies
reinsured by MIC and attributable to an MIC Mechanical Account
in respect of which shares of Participating Stock are issued
and outstanding. All premiums received were assumed from MIC.
Note 2. PRINCIPAL ACCOUNTING POLICIES
Basis of Presentation
The financial statements are stated in United States dollars
and are prepared in conformity with accounting principles
generally accepted in the United States of America.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts in the 1995 financial statements have been
reclassified to conform with the 1996 presentation.
Premium Income and Acquisition Costs
Reinsurance premiums are based on the Company assuming (after
ceding commission) 75% of the original policy premium written
by the direct insurer. Of these reinsurance premiums, 75% is
retroceded to the Company when written and 25% when earned.
Premiums are written on the basis of quarterly cessions and
earned relative to anticipated loss exposures. Acquisition
costs, consisting of ceding commissions and excise taxes, are
expensed on the same basis as premiums are earned.
Investments
Investments are comprised of interest-bearing marketable
securities which are carried at fair value based on quoted
market prices and dealer quotes obtained from an external
pricing service. Investments with original maturities of less
than 90 days are classified as cash equivalents. Unrealized
appreciation (depreciation) is included in stockholders'
equity.
Realized gains and losses on the sale of investments are
included as investment income and are calculated based on
average costs.
Loss Reserves
The Company provides for unsettled, reported losses based on
estimates of the final settlement, with an experience factor
added to provide for losses incurred but not reported. The
final settlement may be greater or less than the amounts
provided. Any such differences, when they become known, are
recognized in current operations.
Taxation
The Company has received a guarantee from the Barbados Goverment
which limits its liability for all local income, capital gains
or other direct taxes for a period ending December 31, 2016 to
a maximum tax of 2% of taxable income provided that the amount
of such tax will not exceed $2,500 per annum.
Stockholders who are United States residents are taxed in the
United States on their share of the Company's income on a
deemed distribution basis.
Earnings Per Share
No amount has been reported as earnings per share as the
earnings applicable to the Participating Stockholders vary
with the underwriting results of each series. Retained
earnings applicable to the Common Stockholder include
allocated investment income and operating expenses and amounts
restricted for advances to Participating Stockholders (see
Note 8).
Note 3. INVESTMENTS
The cost and fair value of investments in debt securities are
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Gross Gross
Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
-------------- -------------- ------------ -----------
December 31, 1996:
Debt securities
issued by foreign
governments and
their agencies $31,595,722 $ 351,461 $ (206,151) $31,741,032
Debt securities
issued by
corporations 27,967,937 298,190 (37,604) 28,228,523
Debt securities
issued by
supra-nationals 6,540,750 137,625 - 6,678,375
------------ ---------- ----------- -----------
Total $66,104,409 $ 787,276 $ (243,755) $66,647,930
============ ========== =========== ============
December 31, 1995:
Debt securities
issued by
foreign
governments
and their
agencies $56,243,544 $1,711,611 $ (135,765) $57,819,390
Debt securities
issued by
supra-nationals 2,003,100 75,775 - 2,078,875
------------ ----------- ----------- ------------
Total $58,246,644 $1,787,386 $ (135,765) $59,898,265
============ =========== =========== ============
</TABLE>
Note 3. INVESTMENTS (Cont'd)
The cost and fair value of debt securities at
December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from
contractual maturities because borrowers may have the
right to call or prepay obligations with or without
call or prepayment penalties.
Fair
Cost Value
Due after one year
through five years $51,424,773 $51,784,023
Due after five years
through ten years 14,679,636 14,863,907
----------- -----------
$66,104,409 $66,647,930
=========== ===========
In 1996, gross gains of $1,997,197 and gross losses
of $1,932,953 were realized. In 1995, gross gains of
$2,694,685 and gross losses of $1,290,453 were
realized. In 1994, gross gains of $150,704 and gross
losses of $1,694,062 were realized.
The following summarizes net unrealized appreciation
(depreciation) on investments:
Balance, December 31, 1993 $ 99,886
Net depreciation (1,995,975)
-----------
Balance, December 31, 1994 $(1,896,089)
Net appreciation 3,547,710
-----------
Balance, December 31, 1995 $ 1,651,621
Net depreciation (1,108,100)
-----------
Balance, December 31, 1996 $ 543,521
===========
The investment portfolio is comprised of diverse debt
securities which do not result in any concentration
of credit risk. At December 31, 1996, 100% of the
Company's investments are denominated in U.S.
dollars.
The Company uses forward currency contracts to hedge
its exposure to changes in currency exchange rates
relating to its investments denominated in currencies
other than the U.S. dollar. The contracts provide for
settlement in U.S. dollars in the future. Credit risk
is managed by dealing with financially-sound
counterparties. Market risk is mitigated because the
forward contracts hedge corresponding non-U.S. dollar
investments. The notional amount of forward contracts
outstanding at December 31, 1996 was nil.
Note 4. RESERVES FOR UNPAID LOSSES
The following table sets forth an analysis of changes in the loss
reserves for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Beginning balance in
reserves for losses $ 3,480,334 $ 2,660,270 $1,910,030
------------ ----------- -----------
Add-provision for losses incurred related to:
Current claim year 24,080,078 19,540,192 14,893,890
Prior claim years (42,251) (109,160) (63,724)
----------- ------------ ------------
Total 24,037,827 19,431,032 14,830,166
----------- ------------ ------------
Deduct-paid losses
attributable to:
Current claim year 20,330,269 16,461,768 12,527,026
Prior claim yea 2,903,588 2,149,200 1,552,900
----------- ------------ ------------
Total 23,233,857 18,610,968 14,079,926
----------- ------------ ------------
Ending balance in
reserves for losses $ 4,284,304 $ 3,480,334 $ 2,660,270
------------ ------------ ------------
As a result of change in estimates of losses incurred in prior years, the
provisions for losses incurred in 1996, 1995 and 1994 decreased by $42,251,
$109,160 and $63,724, respectively, because of lower actual claims.
Note 5. STOCKHOLDERS' EQUITY
All of the Company's Common Stock is held by MIC. The Company
is offering, on a continuous basis, 12,000 shares of
Participating Stock to persons certified by owners of certain
motor vehicle franchises. The offering consists of 120 series
of 100 shares each at a price of $75 per share.
During 1996, 16 additional series of 100 shares of
Participating Stock were issued as compared with 20 for the
year ended December 31, 1995. In addition, in 1996 the Board
of Directors redeemed 3 series of 100 shares at the request of
the shareholders. The redeemed series had been previously
placed in run off and had reached a fully earned position
during 1996.
In the years ended December 31, 1996, 1995 and 1994, costs in
the amount of $64,848, $171,079 and $162,989, respectively,
were incurred in the sale of Participating Stock. The Common
Stockholder reimbursed the Company directly for these
expenses.
The holder of Common Stock is entitled to elect five
directors, at least one of whom must be a resident of
Barbados. The holder of Common Stock has no right to vote with
respect to liquidation of the Company. The holder generally
has the sole right to vote on matters not specifically
reserved to Participating Stock.
The holders of Participating Stock as a class are entitled to
elect one director. Generally, liquidation of the Company
requires approval by at least 75% of the outstanding shares of
this class. Any redemption of a series of shares requires a
vote of the Board provided that the director representing
holders of the Participating Stock votes in favor of the
redemption. Any changes in the Company's Articles of
Incorporation or By-Laws require the approval of a majority of
the shares of Participating Stock present and voting together
with a majority of the shares of Common Stock.
From time to time, funds are held in escrow on account of Partici
pating Stock applications. Such amounts are not included in cash
and cash equivalents in the accompanying financial statements.
At December 31, 1996, there were no funds held in escrow.
Note 6. REINSURANCE PREMIUMS
Under the provisions of the retrocession agreement, the
Company will assume additional cessions of $28,028,290
($24,250,844 at December 31, 1995) relating to premiums
written by Motors Insurance Corporation but unearned at the
respective period ends. The amounts will be received as the
premiums are earned, net of related acquisition costs.
Note 7. LETTERS OF CREDIT
The Company has provided an irrevocable letter of credit to
MIC, in the amount of $67,350,000 to collateralize the amounts
recoverable from the Company related to the business ceded to
it. Cash equivalents and investments are assigned to
collateralize the letter of credit.
Note 8. RETAINED EARNINGS
Items of income or loss and premiums and expenses attributable
to insurance underwriting activities are determined as of the
end of each calendar quarter and are allocated to the
Participating Stockholders' capital accounts.
An amount equal to 1-1/3 percent of assumed premiums (net of
related ceding commissions) is allocated to the capital
account of the Common Stockholder. Such allocations accumulate
as restricted retained earnings and may be used to advance
capital to any Participating Stockholders who incur a deficit
in their capital accounts; any such advances are repayable out
of future profitable operations of the respective
Participating Stockholder. Amounts allocated to the Common
Stockholder, net of advances to Participating Stockholders,
are presented in the table below as "net transfers."
Dividends may be declared and paid at the discretion of the
Company's Board of Directors subject to the right of holders of
Participating Stock to receive minimum dividends. The minimum
annual dividend payable on each share shall be such shares pro
pro rata portion of an amount equal to twenty percent of the
net income, if any, for the preceding year attributable to the
subsidiary capital account associated with the series of which
that share is part.
Barbados law requires that the Company maintain a minimum
capitalization based generally on the amount of premiums
earned in the preceding year. At January 1, 1997, the
Company's required minimum capital computed in accordance with
Barbados law was approximately $4,107,770.
Retained earnings applicable to the Common and Participating
Stockholders are comprised of the following:
Common Participating Total
Balance (Deficit),
December 31, 1993 (8,274) 6,220,252 6,211,978
Net income (loss) for the year (7,536) 1,726,094 1,718,558
Net transfers (37,410) 7,410 -
Dividends paid - (2,156,304) (2,156,304)
Redemption of Participating
Stock - 22,500 22,500
--------- ---------- ----------
Balance (Deficit)
December 31, 1994 (53,220) 5,849,952 5,796,732
Net income for the year 18,627 6,883,297 6,901,924
Net transfers 23,732 (23,732) -
Dividend paid - (1,188,614) (1,188,614)
Redemption of Participating
Stock - 7,500 7,500
--------- ----------- ----------
Balance (Deficit)
December 31, 1995 $ (10,861) $11,528,403 $11,517,542
Net income for the year 14,131 7,440,392 7,454,523
Net transfers 6,147 (6,147) -
Dividend paid - (4,007,483) (4,007,483)
Redemption of participating
stock - (51,529) (51,529)
--------- ----------- ----------
Balance
December 31, 1996 $ 9,417 $14,903,636 $14,913,053
========= =========== ===========
COMPANIES ACT OF BARBADOS APPENDIX A
(Section 205)
RESTATED ARTICLES OF INCORPORATION FORM 13
1. Name of Company
Motors Mechanical Reinsurance Company, Limited
2. Company No.
1485
3. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE COMPANY IS
AUTHORIZED TO ISSUE
The annexed Schedule is incorporated in this form.
4. RESTRICTION IF ANY ON SHARE TRANSFERS
The annexed Schedule is incorporated in this form.
5. NUMBER (OR MINIMUM AND MAXIMUM NUMBER) OF DIRECTORS
There shall be a minimum of 5 and a maximum of 6 directors.
6. RESTRICTIONS IF ANY ON BUSINESS THE COMPANY MAY CARRY ON
The principal object and activity of the Company is to engage in Exempt
Insurance business within the meaning of the Exempt Insurance Act, 1983 of
Barbados and the business of the Company shall be restricted accordingly.
7. OTHER PROVISIONS IF ANY
The annexed Schedule is incorporated in this form.
8. Date Signatures Title
June 27, 1996 Peter Evelyn Director
FOR MINISTRY USE ONLY
COMPANY NO. FILED
COMPANIES ACT OF BARBADOS SCHEDULE TO ARTICLES OF INCORPORATION
3. The classes and any maximum number of shares that the Company is
authorized to issue:
The Company is authorized to issue:
(a) 2,000 shares of one class without nominal or par value to be designated
Common shares; and
(b) 100,000 shares of one class without nominal or par value to be designated
Participating shares which shall be divided into 1,000 series and issued in
series of 100 shares.
The rights, preferences and limitations of the said classes of shares are as
follows:
DEFINITIONS
In these Articles and any amendment thereto and in the Company's By-Laws the
following terms shall mean:
Board -- The Company's Board of Directors.
Company -- Motors Mechanical Reinsurance Company, Limited.
Franchise -- A right conferred by a motor vehicle manufacturer pursuant to a
written agreement which permits the grantee to sell the manufacturer's new motor
vehicles.
MIC -- Motors Insurance Corporation, a New York corporation with its
administrative offices in Detroit, Michigan.
MIC Agency Account -- The separate business record maintained by MIC or any of
its subsidiaries to track volume, experience, and commissions with respect to
insurance business related to any one or more particular Franchises.
Restricted Earned Surplus -- At any point in time, that portion of the earned
surplus, if any, in the Subsidiary Capital Account for the Common shares equal
to one and one-third percent (1-1/3%) of the premiums paid to the Company during
the immediately preceding five-year period, net of deficits allocated to such
account pursuant to paragraph 3(1)(7)(a)(i) hereof during such five-year period
to the extent not restored to such account pursuant to paragraph 3(1)(7)(c)
hereof and net of return premiums allocated to such account during such period
pursuant to paragraph 3(1)(1)(d) hereof.
Shares -- Shares of the Participating Stock of the Company.
Stock Purchase Agreement -- The agreement entered into between the Company and
the purchaser of Shares, in the form approved by the Board.
Subsidiary Capital Account -- The subsidiary bookkeeping record established by
the Company for a particular series or class of shares and maintained for the
purpose of accounting for items of income and expense, gains and losses, capital
contributions, and shareholder distributions which are allocated to the
particular series or class of shares.
(1) ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
The Company will establish a Subsidiary Capital Account with respect to the
Common shares as a class, and to each series of Shares of the Company at the
time a series is issued.
The consideration received by the Company upon the issuance of a particular
series of Shares and the Common shares as a class will be allocated to the
Subsidiary Capital Account for that series or class. Items of income and
expense, and losses, attributable to insurance underwriting activities shall be
determined as of the end of each calendar quarter and shall be allocated to the
Subsidiary Capital Accounts as of the end of the fiscal quarter of the Company
in which the respective calendar quarter ends. Investment experience, and other
items of income and expense, gains and losses and distributions with respect to
shares of the Company will be determined and allocated to the Subsidiary Capital
Accounts as of the end of each fiscal quarter of the Company. All such
accounting determinations shall be made using United States generally accepted
accounting principles, unless otherwise required by these Articles. For purposes
of such allocations, items shall be "related" to a Subsidiary Capital Account
which is identified with the same MIC Agency Account to which such items can be
attributed.
(1) Items of income and expense, and losses, attributable to insurance
underwriting activities shall be allocated to the Subsidiary Capital Accounts in
accordance with the following paragraphs:
(a) With respect to premiums ceded to the Company, one hundred percent
(100%) shall be allocated to the related Subsidiary Capital Account;
provided, however, that an amount equal to one and one-third percent
(1-1/3%) of such premiums shall be subtracted from such Subsidiary
Capital Account and allocated to the Subsidiary Capital Account of the
Common shares.
(b) With respect to any agents' or brokers' commissions, any
commissions recaptured, unearned premiums, reinsurance premiums ceded
by the Company, and any United States excise tax, one hundred percent
(100%) shall be allocated to the related Subsidiary Capital Account.
(c) With respect to losses incurred, and any amount of losses recovered
through salvage, subrogation, reimbursement or otherwise, one hundred
percent (100%) shall be allocated to the related Subsidiary Capital
Account. For this purpose, losses incurred includes both paid and
unpaid (reported and unreported) losses.
(d) With respect to return premiums, ninety-eight and two-thirds
percent (98-2/3%) shall be allocated to the related Subsidiary Capital
Account and one and one-third percent (1-1/3%) shall be allocated to
the Subsidiary Capital Account for the Common shares.
(2) Any expenses or liabilities attributable to ordinary day-to-day Company
operations, excluding any United States Federal income taxes, shall be allocated
among all Subsidiary Capital Accounts for the Shares pro rata in accordance with
the number of series issued and outstanding at the end of the fiscal quarter in
which the expense or liability is incurred, provided, that for purposes of such
allocation, series of Shares issued during the current calendar year and series
with respect to which unearned premium is zero as of the date of such
allocation, shall be excluded.
(3) Any United States Federal income tax liability (and any interest thereon or
any penalties related thereto) incurred by the Company shall be allocated among
the Subsidiary Capital Accounts based upon the relative contribution of each of
those accounts to the taxable income of the Company upon which the tax (and any
interest or penalties) is imposed.
(4) Any expenses or liabilities attributable to the organization of the Company
or to the offer, sale or issuance of Shares, including but not limited to the
costs of compliance with regulations and requirements of the United States
Securities and Exchange Commission and the various states and other
jurisdictions of the United States as they pertain thereto, shall be allocated
to the Subsidiary Capital Account for the Common shares.
(5) Any expenses or liabilities of the Company not allocable in the manner
described in paragraphs (2) through (4) above shall be allocated among the
Subsidiary Capital Accounts on the basis of the relative balances of such
accounts as of the end of the fiscal quarter preceding the date on which the
expense or liability is incurred.
(6) (a) Investment income, net of any direct investment expense, shall be
allocated among the Subsidiary Capital Accounts pro rata based upon the
relative Investment Asset Balance (as defined in subparagraph (b)
below) of each such account as of the last day of the fiscal quarter
preceding the quarter for which the investment income is being
allocated. For these purposes, net investment income will include
realized (but not unrealized) gains and losses.
(b) The Investment Asset Balance of each Subsidiary Capital Account
shall be equal to the capital and surplus allocated to such account,
increased by:
(i) the unearned portions of the written premiums that have
been collected by the Company and allocated to such account as
of the last day of the fiscal quarter preceding the quarter
for which the income is being allocated, net of any applicable
commissions and taxes;
(ii) the outstanding loss reserves attributable to such
account as of the last day of the fiscal quarter preceding the
quarter for which the income is being allocated; and
(iii) any other outstanding liability that has been charged to
such account as of the last day of the fiscal quarter
preceding the quarter for which the income is being allocated.
(7) (a) If, after the credits and charges described in paragraphs (1)
through (6) above are made to the Subsidiary Capital Accounts there
exists a deficit in one or more of such accounts, then each such
deficit will be allocated to and charged against:
(i) first, the Subsidiary Capital Account for the Common
shares to the extent of Restricted Earned Surplus;
(ii) then, any remaining unallocated deficit to the Subsidiary
Capital Accounts for the Shares, pro rata, based upon the
relative earned premiums allocated to each such account for
the fiscal quarter for which the allocation is being made;
provided, however, that only accounts which have positive
balances will be taken into account for the purposes of this
allocation;
(iii) then, any remaining unallocated deficit to the remaining
Subsidiary Capital Accounts for the Shares with positive
balances as of the last day of the fiscal quarter for which
the allocation is being made, pro rata, based upon such
balances; and
(iv) finally, to the extent necessary, the Subsidiary Capital
Account for the Common shares.
(b) If, as a result of an allocation of a deficit as described in
subparagraph (ii) or (iii) of paragraph (a) above, a deficit is created
in one or more of the Subsidiary Capital Accounts, then the resulting
deficit(s) will be further allocated in the manner provided in that
subparagraph.
(c) Although this paragraph (7) shall be applied in a manner that does
not result in a balance in any Subsidiary Capital Account for a series
of Shares that is less than zero, if any such account had a deficit
that was allocated to and charged against the Subsidiary Capital
Account of the Common shares pursuant to Section 3(1)(7)(a)(i) hereof,
or to the Subsidiary Capital Account for any series of Shares pursuant
to Section 3(1)(7)(a)(ii) or (iii) hereof (after taking into account
the provisions of Section 3(1)(7)(b)) after January 1, 1995, then at
the end of any succeeding fiscal quarter for which that account
otherwise would show an account balance greater than zero, such balance
will be reallocated and credited:
(i) first to the Subsidiary Capital Account of the
Common shares until all reductions of such Subsidiary Capital
Account for the Common shares under Section 3(1)(7)(a)(i)
hereof with respect to said series of Shares have been
restored, and
(ii) then, with respect to any deficits charged
against the Subsidiary Capital Account for any series of
Shares pursuant to Section 3(1)(7)(a)(ii) or (iii) for periods
after January 1, 1995, to the Subsidiary Capital Accounts for
the Shares, pro rata, based upon the relative amounts, through
the end of the fiscal quarter for which the reallocation
hereunder is being made, of deficits that were allocated to
those accounts (whether under Section 3(1)(7)(a)(ii) or (iii))
from the Subsidiary Capital Account for the series of Shares
for which the reallocation hereunder is being made and that
have not previously been restored, until all reductions of
such Subsidiary Capital Accounts after January 1, 1995 under
Section 3(1)(7)(a) with respect to said series of Shares have
been restored.
(8) (a) Dividends, payments upon redemption or liquidation (described
below), and any other distributions with respect to shares of the
Company will be allocated to the Subsidiary Capital Account for the
class or series with respect to which the dividend, payment or
distribution was made.
(b) Where all shares of a series of Shares are repurchased by the
Company pursuant to Section 4 below, or redeemed in accordance with the
Company's procedures for redemption set forth in Section 3(6) below,
the Subsidiary Capital Account for such series shall be terminated as
of the Repurchase Date or Redemption Date (as those terms are defined
in Sections 4 and 3(6), respectively). Thereafter, all income,
expenses, gains and losses that would have been allocated to the
terminated account will be allocated among the Subsidiary Capital
Accounts of the existing series of Shares pro rata based upon relative
earned premiums attributable to such accounts for the calendar quarter
in which the item was earned or incurred; provided, however, that a net
deficit for any such period shall be allocated in accordance with the
provisions of Section 3(1)(7).
The allocations to the Subsidiary Capital Accounts described above shall be
approved by the Board, and when finally so approved all calculations,
allocations and determinations shall be final and conclusive and shall be
binding on all holders of shares of the Company for all purposes, including
without limitation any redemption of shares of the Company pursuant to the
Company's procedures for redemption. The Board is authorized to interpret and
apply the provisions of these Articles and to promulgate such additional rules
and guidelines as the Board deems appropriate to carry out the intent of these
Articles and such interpretations, rules and guidelines shall be binding on all
shareholders.
(2) PARTICIPATING SHARES
(a) If any Share shall be redeemed, repurchased or otherwise retired, it shall
return to the status of an authorized but unissued share of such class.
(b) A series of Shares shall be issued with respect to a specific MIC Agency
Account. Only one series of Shares shall be issued with respect to an MIC Agency
Account. A series of Shares shall be issued only to persons or entities
acceptable to the Board and certified by the owner(s) of the Franchise(s) to
which the MIC Agency Account relates. Certification will be effected in
accordance with procedures adopted by the Board from time to time. No share of
any particular series of Shares shall be issued unless all shares of such series
are issued.
(c) Each outstanding Share shall entitle the registered holder of record of such
Share to dividends in accordance with the rules set forth in Section 3(5) of
these Articles.
(d) The holders of Shares shall among them have the right to elect one director
of the Company and shall otherwise have only such voting rights as are
specifically provided herein. On all such matters each share shall entitle the
registered holder thereof to one vote.
(e) The rights associated with any Shares of a series shall be identical to the
rights associated with all other Shares of the same series.
(3) COMMON SHARES
(a) Each outstanding Common share shall entitle the registered holder of such
shares to dividends in accordance with the rules set forth in Section 3(5) of
these Articles.
(b) Each outstanding Common share shall entitle the registered holder thereof to
one vote per share on all resolutions of the Company other than as specifically
provided herein.
(c) The holders of the Common shares shall be entitled to elect five directors
of the Company, one of whom must be a resident citizen of Barbados.
(4) LIQUIDATION
The Company may be liquidated upon the vote of the holders of at least
seventy-five percent (75%) of the Shares. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, after payment of all liabilities of the Company, each holder of Shares
of a series shall be entitled to receive an amount equal to his share (based on
his proportionate ownership of such series) of the Subsidiary Capital Account
balance related to his series of Shares before any distribution of the assets of
the Company shall be made to holders of the Common shares. After such payment
shall have been made in full to the holders of the outstanding Shares, or funds
necessary for such payment shall have been set aside in trust for the account of
the holders of the outstanding Shares so as to be available therefor, the
holders of the outstanding Shares shall be entitled to no further participation
in the distribution of the assets of the Company, and the remaining assets of
the Company, if any, shall be divided and distributed among the holders of the
Common shares then outstanding pro rata based on their respective shares. A
consolidation or merger of the Company, or sale or transfer of all or
substantially all its assets, or any purchase or redemption of shares of the
Company of any class or series, shall not be regarded as a "liquidation,
dissolution, or winding up" within the meaning of this paragraph.
(5) DIVIDENDS
(a) Subject to the following paragraphs, dividends may be paid at the
discretion of the Board.
(b) Dividends, payable in cash or such other property as the Board may
determine, on a series of Shares or on Common shares, shall be declared and
payable only if the Company shall have, after giving effect to the dividend,
sufficient net assets, without regard to any Letter of Credit or Guarantee, to
meet the general business solvency margin prescribed by the Exempt Insurance Act
and Section 51 of the Act; provided that dividends with respect to any series of
Shares may be paid only out of earned surplus attributable to the Subsidiary
Capital Account identified with those Shares, and only to the extent that, after
giving effect to the dividend, the capital and surplus identified with that
Subsidiary Capital Account (without regard to any Guarantee or Letter of Credit)
would meet its pro rata share, based on allocable premium income, of the minimum
net assets required of the Company under the Exempt Insurance Act. Subject to
the right of the holders of Shares to receive minimum dividends pursuant to the
following paragraph, to the extent a dividend is declared on the Shares, it
shall be declared and paid subject to the foregoing limitations for each series
of Shares as a percentage of the net income for the preceding calendar year
and/or earned surplus as of the end of the preceding calendar year, attributable
to each series, provided that such percentage may vary among series of Shares
with the level of net income and/or earned surplus. Dividends shall only be
declared and paid on Common shares to the extent that the earned surplus
attributable to Common shares exceeds Restricted Earned Surplus.
(c) Subject to the preceding paragraph, the holders of the Shares of each
series shall be entitled to receive minimum annual dividends, payable annually
within the first 120 days of each fiscal year, in cash or such other property as
the Board may determine. The minimum annual dividend payable on each Share shall
be such Share's pro rata portion of an amount equal to twenty percent (20%) of
the net income, if any, for the preceding fiscal year attributable to the
Subsidiary Capital Account associated with the series of which that Share is a
part. If a holder of Shares receives no dividend or a limited dividend in any
annual period as a result of the limitations set forth in the preceding
paragraph, any unpaid portion of the minimum dividend otherwise payable pursuant
to this paragraph shall not become payable pursuant to this paragraph in any
subsequent year.
(d) In no event shall any dividend whatever be paid upon or declared or set
apart for the Common shares, unless and until all minimum annual dividends
required to be paid on the then outstanding Shares for the then current period
shall have been paid or declared and set apart for payment.
(6) REDEMPTION
The Common shares are non-redeemable. Subject to compliance with any applicable
statute or act the company may redeem any of its issued and outstanding Shares
if all Shares of the series involved are redeemed and the redemption of such
Shares is approved by a majority of the Board, provided that the Director
representing holders of the Shares votes in favor of the redemption.
The redemption of Shares shall be effective on such future date as determined by
the Board, which shall be no later than the last business day of the calendar
year in which the redemption was approved by the Board. Such date is herein
called the "Redemption Date."
The consideration payable to the holders of redeemed Shares shall be the
Subsidiary Capital Account balance for the series of such Shares as of the
Redemption Date, as adjusted by the Board to reflect unrealized gains and losses
on investments held by the Company and any contingent liabilities allocable to
such account. Such consideration shall be paid within five (5) months of the
Redemption Date, provided that the holder(s) of the redeemed Shares shall have
delivered to the Company, certificates representing the Shares being redeemed
duly endorsed and accompanied by such other documents as the Company may
require. Such consideration shall bear interest from the Redemption Date until
the earlier of the date of payment or the date that is five (5) months from the
Redemption Date, at a rate equal to the rate of interest paid on 26-week United
States Treasury Bills for the issue following the Redemption Date.
Upon redemption of the Shares as aforesaid, the holder(s) thereof shall cease to
have any further interest in the shares being redeemed. Shares redeemed pursuant
to this Section 3(6) shall return to the status of authorized but unissued
Shares.
4. Restrictions, if any, on share transfers:
(a) Subject to the exceptions listed below, Shares (whether owned by
the original or any subsequent holder thereof) shall not be
transferred in any manner unless the holder(s) has received a bona
fide written offer to purchase such Shares, a copy of which has been
furnished to the Company, and the Company is thereafter offered the
opportunity to purchase such Shares. The Company shall have sixty
(60) days during which to exercise the rights conferred upon it by
this paragraph. If the Company accepts such offer, the price will
be the lesser of the balance of the Subsidiary Capital Account
related to such series of Shares as of the last day of the fiscal
quarter immediately preceding the date on which the offer to purchase
was accepted by the Company (the "Repurchase Date") (or if less than
all such Shares are offered, then the pro rata portion of such account
attributable to the Shares offered), or the bona fide offering price.
Payment by the Company may be deferred until the end of the fiscal
quarter in which the offer to purchase was accepted by the Company.
Shares purchased by the Company pursuant to this paragraph shall return
to the status of authorized but unissued shares of such class. If the
Company does not elect to purchase the Shares pursuant to this
paragraph, they may be sold in accordance with the bona fide written
offer referred to above within the following sixty (60) days,
subject to the requirements of the following paragraphs. After
such further sixty (60) days, any attempted sale or transfer of
the Shares shall be subject to all the requirements of this paragraph.
(b) In addition to the requirements of the preceding paragraph and
except as provided in paragraph (d) below, transfers of less than all
Shares of a series shall not be made unless the holder(s) has received
the written consent of the Company thereto. A request for such consent
must be made in writing and set forth the name(s) and address(es) of
the intended transferee(s), the desired date of the transfer, and the
consideration to be paid. The Company shall have sixty (60) days from
receipt of such request to grant or withhold its consent to the
intended transfer. If the Company fails to give its written consent,
any subsequent transfer shall be void and of no effect.
(c) Shares may not be transferred unless and until the Board has
received such assurances of compliance with all applicable laws and
regulations as it may deem necessary and the transferee has agreed to
abide by the requirements set forth in the Stock Purchase Agreement
entered into by the transferor. Certificates representing shares of any
class of the Company's shares shall bear a legend substantially to the
effect of this Section 4 of these Articles.
(d) A sale, gift, assignment, pledge or other transfer of Shares shall
be exempt from the requirements of paragraphs (a) and (b) of this
Section 4 if the Board determines that the transferee or assignee of
the shares is: (i) a member of the transferring shareholder's immediate
family; (ii) a trust for the benefit of the transferring shareholder,
or for the benefit of other exempted transferees described in this
paragraph; (iii) if the transferor is a corporation, any shareholder of
the transferor; (iv) if the transferor is a partnership, any of its
partners; (v) a corporation which is controlled by or under common
control with the transferor; (vi) the estate of a deceased shareholder
or legatees and heirs of such deceased shareholder; (vii) a charitable
or other qualifying organization described in Section 170(c)(2) of the
United States Internal Revenue Code of 1986; (viii) in the case of a
transfer of less than all of the Shares of a series, a person who
immediately prior to such transfer is a holder of Shares of that
series; or (ix) a key employee with respect to a Franchise previously
designated in the Stock Purchase Agreement entered into by the
transferor.
7. Other provisions if any:
No holder of shares of the Company of any class, now or hereafter authorized,
shall have any preferential or preemptive right to subscribe for, purchase or
receive any shares of the Company of any class, now or hereafter authorized, or
any options or warrants for such shares, or any rights to subscribe for or
purchase such shares, or any securities convertible into or exchangeable for
such shares, which may at any time be issued, sold or offered for sale by the
Company.
Amendment of Articles and By-Laws:
The Company's Articles and By-Laws shall not be altered, amended or repealed and
no provision inconsistent therewith shall be adopted, without the affirmative
vote of the holders of a majority of the Common shares and of the Shares
present; provided that the rights associated with any series of Shares shall not
be varied, unless the rights associated with all other series are similarly
changed, without the affirmative vote of the holders of a majority of the Shares
of each series present.
APPENDIX B
STOCK PURCHASE AGREEMENT
BETWEEN
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
AND
(Certified Purchaser)
_________ , 19
Motors Mechanical Reinsurance
Company, Limited
Financial Services Centre
Bishops Court Hill
St Michael, Barbados
Gentlemen:
The undersigned Shareholder (as more fully described below) hereby offers to
purchase certain shares of stock of Motors Mechanical Reinsurance Company,
Limited, a Barbados Corporation (the "Company"), upon the terms and conditions
set forth herein. The Shareholder hereby tenders a check in the amount of the
Purchase Payment (as defined herein), to be held in an escrow account with
Barclays Bank PLC (the "Escrow Account"). This offer shall expire on the 120th
day after the date hereof if the Company has not accepted it prior to such
expiration date. The Shareholder acknowledges receipt of a prospectus dated with
respect to the stock described herein.
1. DEFINITIONS
1.1 Franchisee. The term "Franchisee" means (insert name(s) and address(es)
of Franchisee(s) of the automobile sales franchise(s) related to the applicable
MIC Mechanical Account).
1.2 MIC. The term "MIC" means Motors Insurance Corporation, a New York
corporation.
1.3 MIC Mechanical Account. The term "MIC Mechanical Account" means the
separate business record maintained by MIC or any of its subsidiaries or
affiliates to track volume, experience and commissions with respect to
mechanical service agreements sold by one or more particular franchise(s).
1.4 Purchase Payment. The term "Purchase Payment" means the $ ($75 (U.S.) x
number of shares) paid hereunder as consideration for the purchase of the
Shares.
1.5 Shareholder. The term "Shareholder" means , taxpayer identification
number , who is a citizen of ,
and who resides at .
1.6 Shares. The term "Shares" means shares (number of shares) of the
authorized shares of a series of the participating stock of the Company,
which series consists of 100 shares, and which is issued in respect of the
MIC Mechanical Account.
1.7 The masculine gender is to be construed to include a female or an entity
where the context of this Agreement so requires.
2. REPRESENTATIONS
2.1 Representation of Shareholder. The Shareholder represents that he has been
duly certified (on the form furnished by the Company and attached hereto) by the
Franchisee and meets the requirements for this purchase and sale as set forth in
the Articles of Incorporation of the Company (the "Articles"), copies of which
are attached to the prospectus. (It is understood that, if the Franchisee
consists of more than one person, all such persons must join in the
certification of the Shareholder.)
2.2 Representation of Company. The Company represents that the issuance and
sale of the Shares pursuant to this Agreement has been duly authorized by the
Board in accordance with the Articles, and is consistent with the applicable
provisions of Barbados law.
3. PURCHASE AND SALE OF SHARES
Upon acceptance of this Agreement by the Company, the Company agrees to sell and
issue to the Shareholder, and the Shareholder agrees to purchase, the Shares in
consideration of the Purchase Payment.
4. ESCROW OF PURCHASE PAYMENT
Subject to the following sentence, the Purchase Payment will remain on deposit
in the Escrow Account until the Shares are issued by the Company. If this
Agreement is not executed by the Company within 120 days of the date hereof, the
Purchase Payment shall be refunded promptly together with any interest earned
thereon. Following execution by the Company, the Shareholder shall have no right
to withdraw the amount of the Purchase Payment or any interest earned thereon.
5. COVENANTS OF THE COMPANY
5.1 Series of Participating Stock. No more than 100 shares of the same series
of participating stock as the Shares shall be issued by the Company, and no
other series of such stock shall be issued with respect to the MIC Mechanical
Account.
5.2 Reinsurance Business. The business of the Company shall be limited to the
reinsurance of mechanical breakdown risks underwritten by MIC or its
subsidiaries or affiliates and identified with the MIC Mechanical Account and
similar MIC accounts maintained with respect to automobile franchises for which
series of participating stock of the Company are issued and outstanding.
6. LIMITATIONS BASED ON INADEQUATE CAPITAL
The Shareholder and the Company agree that if the Company cannot meet the
minimum margin of solvency requirements under Barbados insurance law, then, to
the extent the net asset value attributable to the Subsidiary Capital Account
(the "Account") for the shares issued pursuant to this Agreement is less than
its pro rata share (based on proportionate earned premium) of the Company's
required net asset value, the Company shall reduce the business attributable to
the Account, on a pro rata basis with such other accounts that are similarly
deficient, by retrocession or some other means acceptable to the Company, to the
extent necessary to permit the Company to meet the Company's required minimum
margin of solvency.
7. RESTRICTIONS ON TRANSFER
The Shareholder agrees to be bound by and shall be subject to all provisions in
the Articles (including without limitation those with respect to the ownership
and transfer of the Shares) that are in effect as of the date of this Agreement
or that may be added in the future, and any amendments to such provisions. It is
understood that the Company may place on the certificate for the Shares a legend
stating in substance:
The sale, transfer, or other disposition of the shares evidenced by
this certificate is restricted pursuant to provisions of the Articles
of Motors Mechanical Reinsurance Company, Limited ("Company"), and the
Stock Purchase Agreement ("Agreement") between the Company and the
Shareholder, dated , 19 , pursuant to which the shares were issued.
Copies of the Articles and the Agreement may be examined at the
registered office of the Company.
8. MISCELLANEOUS
8.1 Severability. If for any reason any provision of this Agreement shall be
invalid or unenforceable, the validity of any or all of the remaining provisions
shall not be affected thereby; provided, however, that the absence of such
illegal or invalid provisions does not so materially alter the purpose of this
Agreement such that the continuation of the arrangement contemplated by this
Agreement would no longer be mutually beneficial to the Shareholder and the
Company.
8.2 No Waiver. The failure of any party to insist upon strict performance of
any obligation hereunder shall not be a waiver of the party's right to demand
strict compliance therewith in the future.
8.3 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of Barbados.
8.4 Counterparts. This Agreement has been executed in multiple copies, each of
which shall for all purposes constitute one Agreement, binding on the parties.
8.5 Assignment. This Agreement is personal to the parties and, except as
contemplated herein and in the Articles, no party shall have any right to assign
any right or to delegate any duty hereunder, either voluntarily or
involuntarily, or by operation of law.
8.6 Term of Agreement. Except as herein expressly provided, this Agreement
shall remain in force as long as the Shares remain outstanding. If not
terminated sooner, this Agreement shall terminate upon the earlier of the
redemption of the Shares or the liquidation of the Company.
8.7 Effect of Transfer. The Shareholder shall be relieved of all restrictions
and obligations and shall not be entitled to any further benefits under this
Agreement upon transfer of all the Shares and upon the agreement of the
transferee to be bound by the terms and conditions of this Agreement.
8.8 Amendment. No change, modification, or amendment to this Agreement shall be
valid or binding upon the parties hereto unless such change, modification, or
amendment shall be in writing signed by all of the parties.
8.9 Integration. This Agreement constitutes the full and complete agreement
between the Shareholder and the Company.
8.10 Captions. Titles or captions of sections, paragraphs or exhibits contained
in or made a part of this Agreement are inserted only as a matter of convenience
and for reference, and in no way define, limit, extend or describe the scope of
this Agreement or the intent of any provision hereof.
8.11 Notices. Any and all notifications permitted or required to be made under
this Agreement shall be in writing, signed by the party giving such
notification, and shall be sent by registered or certified mail, postage prepaid
(1) if to the Shareholder, at the address set forth in Section 1.5 of this
Agreement or at such other address as may have been furnished by the Shareholder
to the Company in writing; or (2) if to the Company, in care of Alexander
Insurance Managers (Barbados) Limited, Financial Services Centre, Bishops Court
Hill, St. Michael, Barbados, W.I. For purposes of computing a time period, the
date of mailing shall be the date of notification.
8.12 Survival of Representations and Warranties. All agreements,
representations, and warranties contained herein or made in writing by the
Shareholder or the Company in connection with the transactions contemplated
hereby shall survive the execution and delivery of this Agreement, and the sale
and purchase of the Shares under this Agreement.
8.13 Relationship to Articles. The provisions of the Articles are
incorporated herein to the extent relevant to this Agreement. If the authorized
representative of the Company executes this Agreement on its behalf, then this
Agreement shall become a binding contract, subject to the terms and conditions
set forth herein, between the Company and the Shareholder as of the date of the
execution on behalf of the Company.
Very truly yours,
- ------------------------------ ----------------------------------
Date Signature of Shareholder
----------------------------------
Print Name of Shareholder
The foregoing Agreement is hereby accepted and agreed to as of the date set
forth below. Series P- is hereby designated for the Shares described in this
Agreement.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
By ___________________________ Dated: __________________________
Title ________________________
Note: Upon acceptance by the Company, a duly signed copy of this Agreement
shall be sent to the Shareholder.
APPENDIX C
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
CERTIFICATION FORM
The undersigned represent(s) that he (she)(they) is (are) the owner(s) of an
automobile sales franchise doing business as ______________________ (name of
dealership), with respect to which MIC Mechanical Account___ is maintained. The
undersigned hereby designate(s) ___________________________________ (name of
purchaser), who resides at ____________________________ (address of purchaser),
to be deemed eligible to purchase shares of a series of the participating stock
of Motors Mechanical Reinsurance Company, Limited (the "Company") pursuant to
the Articles of Incorporation of the Company. The undersigned further
represent(s) that all beneficial owners of the dealership have consented to this
designation.
- ------------------------------ ----------------------------------
Date Signature of Franchise Owner
----------------------------------
Print Name of Franchise Owner
(Names of Co-Owners, if any)
- ------------------------------ ----------------------------------
Date Signature of Co-Owner
----------------------------------
Print Name of Co-Owner
- ------------------------------ ----------------------------------
Date Signature of Co-Owner
----------------------------------
Print Name of Co-Owner
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, all of which were paid by
Motors Insurance Corporation, in connection with the initial offering described
in the Registration Statement:
Registration Fee -- Securities
and Exchange Commission ................ $ 310
State "Blue Sky" fees ................... $ 16,476
Accountants Fees and Expenses ........... $ 10,000
Legal Fees and Expenses ................. $ 30,000
Printing and Engraving .................. $ 8,000
Miscellaneous ........................... $ -
--------
Total Expenses ..................... $ 64,786
--------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Paragraph 10 of Registrant's By-Laws provides for the indemnification of
Registrant's officers and directors (and such persons' heirs, executors and
administrators) against any and all judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees, incurred by such person in
connection with any claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that such person is or was
a director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee, fiduciary or member of any other
corporation, partnership, joint venture, trust, enterprise or organization,
except with respect to any matter for which indemnification would be void
pursuant to the Companies Act, 1982 of Barbados (the "Companies Act").
Under the Companies Act, indemnification of Registrant's officers and directors
against any liability which would attach by reason of any contract entered into
or act or thing done or omitted to be done by them in performance of their
office or in any way in the discharge of their duties, if the same happens
through their not acting in good faith and in the best interest of the
Registrant is void.
The position of the Securities and Exchange Commission regarding indemnification
for liabilities arising under the Securities Act of 1933 is set forth under Item
17, paragraph 4 of this Part II.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
A. Exhibits:
4 Restated Articles of Incorporation (filed as Appendix A to
the Prospectus).
5 Opinion of Evelyn, Gittens & Farmer filed by reference to
Exhibit 5 to Registration Statement on Form S-2, File
No. 33-60105, filed June 9, 1995.
10 (a) Form of Principal Retrocession Agreement between Motors
Insurance Corporation and Registrant filed by reference to
Exhibit 10(a) of the Registration Statement on Form S-1, File
No. 33-6534, dated June 18, 1986.
(b) Form of Supplemental Retrocession Agreement between
Motors Insurance Corporation and Registrant filed by
reference to Exhibit 10(b) of the Registration Statement on
From S-1, File No. 33-6534 dated June 18, 1986.
(c) Specimen Stock Purchase Agreement (filed as Appendix B
to the Prospectus).
(d) Amended and Restated Stock Purchase Agreement between
Registrant and Motors Insurance Corporation filed by
reference to Exhibit 10(d) to Amendment No. 1 to
Registration Statement on Form S-1, File No. 33-6534, dated
February 12, 1987.
(e) Insurance Management Agreement between Registrant and
Alexander Insurance Managers (Barbados) Ltd. effective
January 1, 1996, filed by reference to Exhibit 10(e) to
Annual Report on From 10-K, File No. 33-6534, for the year
ended December 31, 1996.
23 (a) Consent of Evelyn, Gittens & Farmer.
(b) Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
(c) Consent of Deloitte & Touche, Independent Chartered
Accountants.
99 (a) Certification Form (filed as Appendix C to the Prospectus).
(b) Guarantee issued by the Ministry of Finance of Barbados
filed by reference to Exhibit 99(b) to Amendment No. 2 to
Registration Statement on Form S-2, File No. 33-60105.
(c) Certificate of Barbados Residency filed by reference to
Exhibit 28(c) of Amendment No. 1 to Registration Statement
on Form S-1, File No. 33-6534, dated February 12, 1987.
B. Financial Statement Schedules:
No financial statement schedules are submitted herewith because the information
is included elsewhere in the financial statements or the notes thereto or such
schedules are not applicable.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which offers or sales of the securities being
registered are being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement, and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the 1933 Act, each
such post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Michael, Barbados, on
April 8, 1997.
MOTORS MECHANICAL
REINSURANCE COMPANY, LIMITED
By s/Ronald W. Jones
Ronald W. Jones, Vice-President,
Finance
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
s/William B. Noll Chairman and Chief Executive April 8, 1997
- --------------------------
William B. Noll Officer and Director
(Principal Executive Officer)
s/Ronald W. Jones Vice-President (Principal April 8, 1997
- --------------------------
Ronald W. Jones Financial and Accounting
Officer)
s/Louis S. Carrio, Jr. Vice-President and Director April 14, 1997
- --------------------------
Louis S. Carrio, Jr.
s/Bernard J. Buselmeier Vice-President and Director April 8, 1997
- --------------------------
Bernard J. Buselmeier
s/John J. Dunn, Jr. Vice-President and Director April 8, 1997
- --------------------------
John J. Dunn, Jr.
s/Peter R. P. Evelyn Director April 8, 1997
- --------------------------
Peter R. P. Evelyn
- -------------------------- Director
Gregory Greenwood
EXHIBIT 23.1
CONSENT OF COUNSEL
Motors Mechanical Reinsurance Company, Limited:
We hereby consent to (i) the filing of our opinion as Exhibit 5 to this
Registration Statement, and (ii) the reference to our name under the captions
"Barbados Corporate Laws Provisions," "Legal Matters" and "Experts" in the
Prospectus which is part of this Registration Statement.
s/EVELYN, GITTENS & FARMER
Bridgetown, Barbados
April 8, 1997
EXHIBIT 23.2
CONSENT OF COUNSEL
Motors Mechanical Reinsurance Company, Limited:
We hereby consent to the reference to our name under the captions "United States
Federal Tax Considerations," "Legal Matters" and "Experts" in the Prospectus
which is part of this Registration Statement.
s/LeBoeuf, Lamb, Greene & MacRae, L.L.P.
Washington, D.C.
April 15, 1997
EXHIBIT 23.3
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
Motors Mechanical Reinsurance Company, Limited:
We hereby consent to the use in Post Effective Amendment No. 2 to Registration
Statement No. 33-60105 of Motors Mechanical Reinsurance Company, Ltd. on Form
S-2 of our report dated March 1, 1996, included in the Annual Report on Form
10-K for Motors Mechanical Reinsurance Company, Ltd. for the year ended December
31, 1996, and to the use of our report dated March 1, 1996, appearing in the
Prospectus, which is part of such Registration Statement. We also consent to the
reference to us under the headings "Selected Financial Data" and "Experts" in
such Prospectus.
s/DELOITTE & TOUCHE
Bridgetown, Barbados
April 8, 1997
