P R O S P E C T U S
Motors Mechanical Reinsurance Company, Limited
12,000 Shares of Participating Stock
We are a Barbados company engaged in the business of reinsuring risks covering
motor vehicle mechanical repairs.
The participating shares being offered by this prospectus are divided into 120
series, and the authorized number of participating shares of each series is 100.
The offering price is $75.00 per participating share. All Amounts Of Money Shown
In This Prospectus Are Stated In U.S. Dollars.
We will issue participating shares only to persons certified by the owners of
entities selling motor vehicles to be identified with that series and only if we
receive stock purchase agreements executed by such persons that are acceptable
to us in our sole discretion.
No underwriting discounts or commissions will be paid in connection with the
offering of participating shares. The participating shares are not listed on any
national securities exchange or the Nasdaq Stock Market.
Investing in our participating shares involves risks. See "Risk Factors"
(page __).
Neither The Securities And Exchange Commission Nor Any State Securities
Commission Has Approved Or Disapproved These Securities Or Passed Upon The
Accuracy Or Adequacy Of This Prospectus. Any Representation To The Contrary Is A
Criminal Offense.
The date of this Prospectus is May 12, 2000.
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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.
FOR ARIZONA, ARKANSAS, IOWA, MASSACHUSETTS AND MISSOURI INVESTORS
NO SHARES MAY BE OFFERED TO OR PURCHASED BY RESIDENTS OF ARIZONA, ARKANSAS,
IOWA, MASSACHUSETTS OR MISSOURI UNLESS THE PURCHASER IS (I) AN OWNER OF THE
ENTITY WITH RESPECT TO WHICH THE PARTICIPATING SHARES ARE ISSUED, (II) A MEMBER
OF THE FAMILY OF ONE OF THE OWNERS OF THE ENTITY WITH RESPECT TO WHICH THE
PARTICIPATING SHARES ARE ISSUED, (III) A TRUST FOR THE BENEFIT OF PERSONS
OTHERWISE ELIGIBLE TO PURCHASE SHARES, (IV) A CORPORATION OR PARTNERSHIP
CONTROLLED BY AN OWNER OF THE ENTITY WITH RESPECT TO WHICH THE PARTICIPATING
SHARES ARE ISSUED, OR (V) A KEY EMPLOYEE WITH RESPECT TO SUCH ENTITY.
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 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED, AND CERTIFICATION OF
ELIGIBILITY TO:
GMAC SECURITIES CORPORATION
3044 W. GRAND BOULEVARD
MC 482-102-201
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.
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TABLE OF CONTENTS
SUMMARY ......................................................................1
RISK FACTORS...................................................................3
We Are Controlled By and Dependent Upon Motors Insurance Corporation.....3
Restrictions Applicable to Motors Insurance Corporation's Ability to
Retrocede Risks to Us...........................................3
Extension of New Vehicle Warranties Could Adversely Affect Our Business..4
Losses Paid With Respect to Mechanical Service Agreements May Exceed Our
Income..........................................................4
Investment Related Risks.................................................4
United States Tax Risks..................................................5
Risks Related to Foreign Business Operations.............................5
Competition and Loss of Business.........................................5
Barbados Regulatory Limitations May Restrict The Amount of Our Business..6
We Rely on Outside Consultants...........................................6
Our Ability to Pay Dividends is Subject to Certain Restrictions..........6
There Is No Public Market For Our Stock and There are Restrictions on
Transfers.......................................................6
We Have the Right to Redeem Shares.......................................6
Year 2000................................................................7
ELIGIBILITY TO PURCHASE THE SHARES.............................................7
USE OF PROCEEDS.......................................................8
DETERMINATION OF OFFERING PRICE................................................8
DIVIDENDS......................................................................9
OUR BUSINESS..................................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ..........................................................13
MANAGEMENT....................................................................19
CERTAIN TRANSACTIONS..........................................................20
DESCRIPTION OF CAPITAL STOCK..................................................20
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS...........................21
VOTING RIGHTS........................................................25
Election of Directors.......................................25
Proxies ...................................................26
Liquidation.................................................26
Changes in Articles and By-Laws.............................26
Other Matters...............................................26
REDEMPTION...........................................................26
LIQUIDATION..........................................................26
RESTRICTIONS ON TRANSFER.............................................27
Transfers of Less Than All Shares of a Series...............27
Right of First Refusal......................................27
Exceptions for Certain Transfers............................27
Provisions Applicable to All Transfers......................28
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COMMON STOCK.........................................................28
BARBADOS CORPORATE LAW PROVISIONS....................................28
Dividends and Distributions.................................28
Repurchase..................................................29
Shareholders' Remedies......................................29
Enforcement of United States Judgments......................29
Indemnification.............................................29
Inspection of Corporate Records.............................29
PLAN OF DISTRIBUTION..........................................................30
PURCHASE PROCEDURES..................................................30
TERMS OF SALE........................................................30
CONDITIONS OF SALE...................................................31
Approval of Purchase........................................31
TERMINATION OF OFFERING..............................................31
UNITED STATES FEDERAL TAX CONSIDERATIONS......................................31
UNITED STATES -- BARBADOS INCOME TAX TREATY..........................32
UNITED STATES PREMIUM EXCISE TAX.....................................32
UNITED STATES FEDERAL INCOME TAX RISKS AND CONSEQUENCES TO US........32
Risks and Consequences of Carrying on a United States
Reinsurance Business Through a Permanent
Establishment......................................32
United States Withholding Tax Applicable to Certain
Investment Income Not Attributable to a United
States Permanent Establishment.....................33
Reallocations By Internal Revenue Service...................33
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES -- THE SHAREHOLDERS....34
Taxation of Our Income to Shareholders Under Subpart
F of the Code......................................34
Risk of Recharacterization of Reinsurance Profits on
Business Retroceded to Us..........................35
Deductibility of Premiums Paid By Entities Selling
Motor Vehicles for Certain Coverages
Reinsured by Us....................................35
LEGAL MATTERS.................................................................36
EXPERTS .....................................................................36
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................36
ADDITIONAL INFORMATION........................................................37
INDEPENDENT AUDITORS' REPORT..................................................38
APPENDIX A (Restated Articles of Incorporation of the Company)
APPENDIX B (Stock Purchase Agreement)
APPENDIX C (Certification Form)
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SUMMARY
The following summary highlights important information about our business and
about this offering. Because it is a summary, it does not contain all the
information you should consider before investing in our participating shares.
You should read the entire prospectus, including the financial statements and
notes to the financial statements, before you decide to buy participating
shares.
OUR BUSINESS
We are a Barbados reinsurance company located at One Financial Place, Collymore
Rock, St. Michael, Barbados, and our telephone number is (246) 436- 4895. We
assume risks with respect to motor vehicle repairs that are covered under motor
vehicle mechanical service agreements sold to purchasers of new and used motor
vehicles. These risks are initially insured under policies that are issued
either to General Motors Corporation or its affiliates, or to automobile
dealers, and reinsured by Motors Insurance Corporation. We then assume the risks
under these policies from Motors Insurance Corporation. (See "Our Business.")
THE OFFERING
Securities Being
Offered ........... Shares of 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 . We issue series of participating shares with respect to
specific MIC Mechanical Accounts. An "MIC Mechanical
Account" refers to the record maintained by Motors Insurance
Corporation with respect to mechanical service agreements
sold by one or more entities that sell motor vehicles. Only
one series of participating shares will be issued with
respect to each MIC Mechanical Account. To be eligible to
purchase participating shares, you must be certified to
purchase shares by the owners of the entity for which the
MIC Mechanical Account is maintained. We will not issue any
participating shares of a series unless all shares of that
series are purchased by you or other eligible persons. (See
"Eligibility to Purchase the Shares.")
Offering Period ... This offering commenced as of the date of this prospectus.
Participating shares will be offered and sold on a
continuous basis unless we terminate the offering. All funds
paid by purchasers of participating shares will be held in
an escrow account at Barclays Bank PLC in Bridgetown,
Barbados until we accept the
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purchaser's stock purchase agreement. Once we accept the
stock purchase agreement, the funds will be paid to us and
shares will be issued.
Purchase Procedure..To purchase participating shares, you must send the
following to us: (1) two executed stock purchase agreements;
(2) a certified or cashier's check in the amount of the
purchase price of the participating shares payable to
"Motors Mechanical Reinsurance Company, Limited -- Escrow
Account"; and (3) a certification of eligibility. (See
"Eligibility to Purchase the Shares.")
Restrictions on
Transfer .......... Generally, you will not be able to transfer participating
shares unless you have first offered us the opportunity to
purchase the shares. In addition, generally you will need to
obtain our prior written consent to transfer less than all
of the shares of a series. (See "Description of Capital
Stock -- Restrictions on Transfer.")
Voting Rights ..... As a holder of participating shares, you and the other
holders of participating shares will be entitled to elect
one out of six members of our board of directors. Your right
to vote on other matters will be limited. (See "Description
of Capital Stock -- Voting Rights.")
Risk Factors ...... This investment is subject to significant risks. (See "Risk
Factors.")
Capital Structure.. As of May 1, 2000, there were 26,500 participating shares
representing 265 series issued and outstanding and held by
471 shareholders. In addition, we have issued 2,000 shares
of our common stock to Motors Insurance Corporation that
remain outstanding.
Use of Proceeds ... We will add the proceeds of this offering to our general
funds and utilize these funds in our reinsurance business.
(See "Use of Proceeds.")
Plan of
Distribution ...... The participating shares are being offered, on a continuous
basis, by registered representatives of GMAC Securities
Corporation, a broker-dealer affiliate of Motors Insurance
Corporation. No commissions are charged or paid in
connection with the sale of the participating shares.
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RISK FACTORS
An investment in our participating shares is subject to significant risk. Before
you decide to purchase participating shares, please carefully consider the
following risk factors:
We Are Controlled By and Dependent Upon Motors Insurance Corporation.
Motors Insurance Corporation owns all of our common stock. This permits Motors
Insurance Corporation to control our board of directors and determine, among
other things, the selection of our officers, management company and investment
adviser. We have entered into a retrocession agreement with Motors Insurance
Corporation. Under this agreement, we assume (reinsure) risks of Motors
Insurance Corporation under insurance policies covering motor vehicle mechanical
service agreements. We rely exclusively on this retrocession agreement and,
thus, on Motors Insurance Corporation for our business. Therefore, any matters
adversely affecting Motors Insurance Corporation may have an adverse impact on
our business. In addition, under the retrocession agreement, Motors Insurance
Corporation has the ability to limit our reinsurance with respect to particular
MIC Mechanical Accounts. This could adversely affect the value of your
participating shares. (See "Our Business;" and "Description of Capital Stock.")
Under the retrocession agreement, we are required to reimburse Motors Insurance
Corporation for all claims paid by Motors Insurance Corporation with respect to
the motor vehicle mechanical service agreements that are covered by the
retrocession agreement. We may, at our own expense, participate with Motors
Insurance Corporation in the defense of any claim. However, Motors Insurance
Corporation generally has full authority to investigate and settle, or defend,
all claims.
The retrocession agreement does not specify a date upon which it will terminate.
The agreement may generally be terminated at any time by either Motors Insurance
Corporation or by us upon 30 days written notice. If the retrocession agreement
is terminated, we may not be able to continue to operate in the manner described
in this prospectus.
Restrictions Applicable to Motors Insurance Corporation's Ability to Retrocede
Risks to Us.
Motors Insurance Corporation believes that there is no federal or state law or
regulation that limits its ability to retrocede (assign) to us its risks with
respect to the mechanical service agreements. However, certain state insurance
laws and regulations are imprecise and subject to varied interpretations.
Accordingly, it is possible that a state administrator could attempt to limit
the retrocession arrangement between Motors Insurance Corporation and us on the
grounds that we are a non-United States company or a company that is affiliated
with the ceding company (i.e. Motors Insurance Corporation) or its producers
(i.e. the entities selling the mechanical service agreements). In addition, from
time to time, there are legislative and regulatory proposals that could, if
adopted, affect the ability of Motors Insurance Corporation to retrocede its
liability under the mechanical service agreements to us.
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Extension of New Vehicle Warranties Could Adversely Affect Our Business.
Our business is largely dependent upon sales of mechanical service agreements.
Therefore, our business could be adversely affected by changes in warranties
provided by manufacturers for new motor vehicles that limit the need for, and
sales of, mechanical service agreements. For example, if warranties provided by
manufacturers are expanded, there could be an adverse affect on the sales of
mechanical service agreements, and thus on our business.
Losses Paid With Respect to Mechanical Service Agreements and Other Expenses May
Exceed Our Income.
The amount of losses that are incurred under mechanical service agreements are
unpredictable and highly volatile. If the amount of losses and expenses we incur
under the mechanical service agreements combined with our other expenses exceeds
the amount of premium we earn and our investment income, we would incur net
losses. For the year ending December 31, 1999, we incurred net losses of
$3,534,968.
Each series of participating shares generally bears 100% of the losses incurred
with respect to mechanical service agreements sold by the entity with respect to
which the shares are issued. To the extent losses incurred with respect to
mechanical service agreements sold by the entity with respect to which your
participating shares are issued are substantial, you might lose all or a portion
of your investment even if other holders of participating shares do not
experience a similar loss. In addition, under certain circumstances, losses
incurred with respect to mechanical service agreements other than those sold by
the entity with respect to which your shares are issued, may be allocated to the
account maintained for your shares. (See "Description of Capital Stock --
Allocations to Subsidiary Capital Accounts.")
Investment Related Risks.
Our profitability depends in part on the amount of income we earn on our
investments. There is a risk that we will not earn a net investment return
which, when added to our earned premium, will be sufficient to offset our
liability for claims and expenses. In addition, we could suffer investment
losses due to declines in the market values of securities in which we invest
which may be caused by, among other things, volatile interest rates.
We invest primarily in debt instruments that are not subject to U.S. withholding
tax. In addition, we are permitted to invest a portion, not to exceed 30%, of
our portfolio in equity securities, including securities issued by non-U.S.
issuers. Investing in securities issued outside the United States subjects us to
certain risks not generally associated with securities issued in the United
States. These risks include:
o fluctuations in currency exchange rates;
o lack of standard financial and accounting information; and
o lack of liquidity in such securities.
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United States Tax Risks.
We conduct a reinsurance business in Barbados. We execute and administer our
retrocession agreements and manage our business affairs from Barbados. On this
basis, we believe that we should not be deemed to be engaged in business within
the United States through a permanent establishment, and, therefore, we believe
we should not be subject to United States income tax. However, given the factual
nature of the questions involved and certain aspects of our treaty reinsurance
program related to the United States, there can be no assurance that for tax
purposes we ultimately will not be deemed to be engaged in business within the
United States through a permanent establishment. In such event, we 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 participating shares generally will be subject to United
States income tax currently on his or her pro rata share of our earnings,
whether or not such earnings are distributed. To the extent that we were subject
to United States income tax on our business profits, the holders of
participating shares would not be subject to current tax on such profits, but
the holders of participating shares would be subject to tax on our actual
distributions 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 us or holders of participating
shares.
Risks Related to Foreign Business Operations.
Our 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, we are subject to the provisions of the
Barbados Companies Act, 1982. (See "Description of Capital Stock -- Barbados
Corporate Law Provisions.")
Competition and Loss of Business.
The business of insuring risks under motor vehicle mechanical service agreements
is highly competitive, with many companies seeking to insure mechanical service
agreements sold by entities selling motor vehicles. Since all of our business is
currently derived from the retrocession agreement with Motors Insurance
Corporation, the volume of our business is dependent, to some extent, upon the
marketability of agreements and plans developed by General Motors Corporation
and its subsidiaries, including Motors Insurance Corporation, and offered
through motor vehicle dealers. In addition, General Motors may choose not to
insure its liability under mechanical repair plans with Motors Insurance
Corporation or its subsidiaries which would limit our business.
Barbados Regulatory Limitations May Restrict The Amount of Our Business.
Barbados insurance law requires that we maintain certain levels of capital and
surplus in relation to the amount of premium we earn. To the extent that our net
asset value does not meet these minimum requirements and to the extent
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that the capital and surplus attributable to a particular series of
participating shares does not support the business attributable to such series,
we may reduce the amount of our business attributable to such deficient series.
We Are Dependent on Outside Consultants.
We do not have any full-time officers or employees. We rely on outside
consultants for insurance management, day-to-day administrative services, and
investment advice. In the event that our relationship with any of these
consultants were to terminate, we may have difficulty finding replacements.
(See "Our Business.")
Our Ability to Pay Dividends is Subject to Certain Restrictions.
Although our articles of incorporation require that we pay a minimum annual
dividend to holders of participating shares under certain circumstances, we will
not be able to pay any dividend unless such payment is in compliance with
Barbados insurance regulatory requirements, the Barbados Companies Act and other
limitations provided in our articles. (See Appendix A; and "Dividends.")
There Is No Public Market For Our Stock and There are Restrictions on
Transfers.
There is no public market for the participating shares, and we don't expect one
to develop. In addition, the participating shares are subject to substantial
restrictions on transfer. Except for transfers to some members of a transferor's
family, some trusts, some business affiliates, or estates, a transfer of any
series of shares is subject to our right of first refusal, and a transfer of
less than all of the shares of a series cannot be made without our express
written consent. 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.")
We Have the Right to Redeem Shares.
We have the right to redeem participating shares of any series at any time and
for any reason. This would permit us, among other things, to redeem your shares,
at our discretion, if loss experience with respect to the mechanical service
agreements sold by the entity or entities with respect to which your
participating shares are issued, is unsatisfactory. We also may reject any
request for redemption by a shareholder. (See "Description of Capital Stock - -
Redemption.")
We Could be Adversely Affected as a Result of The OECD Including Barbados in a
List of Countries Engaged in Harmful Tax Practices.
For some time, the Organization for Economic Cooperation and Development
("OECD"), an international organization consisting of member countries devoted
to promoting international trade and development, has been engaged in an effort
to eliminate so-called "harmful tax practices" engaged in by some countries. As
part of that effort, the OECD released in June 2000 a list of tax haven
countries allegedly engaged in harmful tax practices that have not cooperated in
the OECD's efforts. Barbados is on that list. Continued inclusion of Barbados on
the OECD list after July 2001 could result in the imposition of sanctions by
member countries, such as the U.S., to deter harmful tax practices in Barbados.
The form such sanctions would take currently is unknown, although they could
include, among other things, denial of deductions for payments made to Barbados
companies, reductions in benefits under the tax treaty currently in place
between Barbados and the U.S. or other actions that could directly or indirectly
affect us and our shareholders. Barbados government officials have indicated
that they are currently working closely with the OECD to resolve all issues
necessary for the OECD to remove Barbados from the list. However, such efforts
may not be successful, or, if successful, they could include actions that may be
harmful to us such as the imposition of additional taxes.
We Could Be Adversely Affected By The Transition to Year 2000
To date, we have not experienced any material adverse effects on our business,
results of operations or financial condition as a result of the transition to
Year 2000. We will continue to monitor our own operations, and the operations of
third parties that are critical to our operations, for potential Year 2000-
related problems. Although we do not anticipate that we will discover any future
Year 2000 issues that will have a material effect on our business,
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results of operations, or financial condition, there can be no assurance that
any such issues will not arise.
ELIGIBILITY TO PURCHASE THE SHARES
Participating shares ("Shares") of a series may be purchased only by an
individual or entity certified by all the owner(s) of the entity or entities 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"). An "MIC Mechanical Account" is the separate business record
maintained by Motors Insurance Corporation ("MIC") or any of its subsidiaries to
track volume, experience, and commissions with respect to mechanical service
agreements sold by one or more particular entities selling new and/or used motor
vehicles. There are no formal eligibility requirements for certification. The
owners of the entity or entities for which an MIC Mechanical Account is
maintained have complete discretion with respect to whom they choose to certify
as Eligible Purchasers (including themselves), provided that all beneficial
owners of the entity or entities for which an MIC Mechanical Account is
maintained consent to such designation. In addition, we have 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 us.
A prospective purchaser is considered to be properly certified when we have
received a certificate in the form furnished by us (see Appendix C) from each
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owner of the entity or entities for which an MIC Mechanical Account is
maintained 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 entity or entities for which an MIC Mechanical
Account is maintained have consented to such designation. In addition, the
prospective purchaser must execute a stock purchase agreement, in the form
approved by us (see Appendix B) and forward that agreement, together with
payment for the Shares purchased, to us. Stock purchase agreements are subject
to acceptance by us. (See "Plan of Distribution.")
The transfer of Shares is subject to restrictions. If less than all the Shares
of a series are transferred, we must give our consent. In addition, we have 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 our articles of incorporation. (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 us from this offering.
The proceeds derived from this offering are added to our general funds 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, we are required to
have minimum net assets, determined by reference to our annual earned premium.
All of our available capital, including the proceeds of this offering, is
invested in accordance with guidelines established by our board of directors. We
believe that the proceeds derived from this offering will be sufficient,
together with our other capital, to support our insurance operations for the
foreseeable future.
We establish a bookkeeping record for each particular series of Shares or class
of stock which we maintain 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
("Subsidiary Capital Account"). The consideration we receive 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 our projected capital needs and bears no
relationship to any valuation criteria.
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DIVIDENDS
Dividends may be declared and paid at the discretion of our board of directors,
provided that, subject to the restrictions described in the following
paragraphs, each holder of Shares of a series will be entitled to receive a
minimum dividend, payable in the following year, equal to 20% of the annual net
income attributable to the Subsidiary Capital Account associated with that
series of Shares.
Pursuant to the general corporate laws of Barbados, dividends on the Shares are
payable only if after the payment: (a) we would be able to pay our liabilities
as they come due; and (b) the realizable value of our assets exceeds our
liabilities and stated capital. Dividends may not be paid out of unrealized
profits. Further, under Barbados insurance law, we are required to maintain a
minimum capitalization of $125,000 and, in addition, the recorded value of our
assets must exceed our liabilities by: (a) $125,000 where our 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, our articles of incorporation
place limitations on the payment of dividends. Dividends may be declared and
paid only out of our earned surplus and only if, after giving effect to the
distribution, we meet 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 us under Barbados law, as described in the
preceding paragraph. To the extent that we declare a dividend, other than a
minimum dividend, 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 May of 2000, February of 1999 and February of 1998, we declared dividends on
the Shares aggregating $673,134, $4,066,464 and $5,171,956, 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 3% to 25% for dividends declared in 2000, 15% to
45% for dividends declared in 1999, and 20% to 50% for dividends declared in
1998.
The payment of dividends on our common stock (the "Common Stock"), all of which
is held by MIC, is also subject to the restrictions under Barbados law and our
articles of incorporation. In addition, our 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
9
<PAGE>
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 (as defined in "Description of Capital Stock --
Allocations to Subsidiary Capital Accounts").
OUR BUSINESS
We were incorporated under the laws of Barbados on June 12, 1986. We became
registered as a licensee under the Barbados Exempt Insurance Act, 1983 to carry
on the business of an Exempt Insurance Company from within Barbados on June 30,
1986 and commenced operations in December, 1987. Our registered and principal
offices are located in St. Michael, Barbados. We were organized by MIC. All of
MIC's outstanding stock is owned by GMAC Insurance Holdings, Inc., a subsidiary
of General Motors Acceptance Corporation which, in turn, is a wholly owned
subsidiary of General Motors Corporation.
Our business is the assumption of risks arising under mechanical breakdown
protection plans sold to purchasers of motor vehicles. These plans provide
coverage against specific motor vehicle 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 General Motors or its affiliates,
or to automobile dealers, reinsured by MIC, and retroceded to us 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, provided, that fleet
coverages, medium duty truck business and maintenance plans are not reinsured.
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 us, the retrocessionaire (us) 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 with MIC, we assume 100% of each
risk retroceded to us by MIC in return for which we receive 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 us is income earned on the investment of amounts not
currently required to meet claims or expenses. The funds available for
investment by us come primarily from accumulated capital and from unearned
premiums and are invested in accordance with investment policies and guidelines
adopted by our board of directors. In February of 2000, we implemented new
investment guidelines and entered into an agreement with BlackRock
International, Ltd. ("BlackRock") pursuant to which BlackRock manages the
investment and reinvestment of our non-equity investments.
10
<PAGE>
Permitted investments under these new guidelines, which we anticipate will be
fully implemented by the end of year 2000, include U.S. Treasury and agency
securities, mortgage-backed securities backed by loans secured by residential
multifamily and commercial properties, obligations of U.S. and non-U.S.
corporations, asset backed securities, taxable municipal securities, and money
market instruments. In addition to our fixed income investments, we may invest a
portion of our portfolio, not to exceed 30%, in equity securities, including
securities issued by non-U.S. issuers. We have purchased shares of a fund
organized in Luxembourg that invests in such securities. At December 31, 1999,
approximately 10% of our investment portfolio was in equity securities and the
remaining 90% was invested in U.S. dollar denominated fixed-income securities.
For managing the investment and reinvestment of our non-equity investments,
BlackRock charges a management fee calculated as a percentage of the net asset
value of our portfolio managed by BlackRock. The applicable percentage is based
on the aggregate amount of assets managed by BlackRock on behalf of us and
certain other related entities. The applicable percentage is tiered on the first
$50 million of assets under management on behalf of the foregoing entities and
lower on all assets in excess of $50 million.
We have entered into an Insurance Management Agreement (the "Management
Agreement") with Aon Insurance Managers (Barbados) Ltd. (the "Manager"),
pursuant to which the Manager collects and disburses funds on our behalf,
provides accounting, clerical, telephone, facsimile, information management and
other services for us, and advises and consults with us in regard to all aspects
of our retrocession activities. Under the terms of the Management Agreement, we
pay the Manager a fixed annual fee plus a monthly variable fee based on the
number of outstanding series of Shares at each calendar month end. For the year
ended December 31, 1999, we paid fees to the Manager in the amount of $237,360.
We are a resident of Barbados, as are some of our directors, and some experts
named herein, and all or a substantial portion of our assets and the assets 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 us 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"). We have been advised by our
Barbados counsel, Evelyn, Gittens & Farmer, that there is doubt as to whether
Barbados courts would (1) enforce judgments of United States courts obtained
against us or such persons predicated upon the civil liability provisions of the
1933 Act, or (2) impose, in original actions in Barbados, liabilities against us
or such persons predicated upon the 1933 Act.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 (the "Exchange Act"), and in accordance therewith file reports and other
information with the Securities and Exchange Commission (the "SEC"). Such
reports and other information can be inspected and copied at the offices of the
SEC, 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
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
11
<PAGE>
The information we file with the SEC is also available through the SEC's
Internet site at "http://www.sec.gov."
We furnish to our stockholders annual reports containing financial statements
that reflect our 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, we furnish to each holder of Shares of a series a
quarterly statement containing unaudited financial information relating to such
series. The reports furnished by us contain information prepared in accordance
with accounting principles generally accepted in the United States.
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1999,
1998, 1997, 1996 and 1995 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, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 is included
elsewhere herein. 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>
<CAPTION>
December 31
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Premiums Assumed $ 67,104,475 $ 72,634,160 $ 57,071,313 $ 47,410,037 $ 44,084,952
Premiums Returned $ 24,934,234 $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============ ============
Premiums Earned $ 58,471,950 $ 57,845,674 $ 45,701,595 $ 36,077,699 $ 28,800,689
Net Investment
Income 655,755 10,375,464 5,704,678 5,341,924 5,563,573
------------ ----------- ----------- ----------- ------------
Total Income 59,127,705 68,221,138 51,406,273 41,419,623 34,364,262
Less Losses and
Expenses 62,662,673 61,027,782 43,503,363 33,965,100 27,462,338
------------ ----------- ------------ ------------ ------------
Net (Loss) Income* $ (3,534,968) $ 7,193,356 $ 7,902,910 $ 7,454,523 $ 6,901,924
Dividends Per
Common Share 0 0 0 0 0
Total Assets $132,504,762 $139,428,183 $123,065,286 $106,041,164 $ 91,526,976
Total Policy
Reserves and
Other Liabilities 117,281,645 115,902,615 100,999,317 88,479,590 76,350,313
Stockholders'
Equity 15,223,117 23,525,568 22,065,969 17,561,574 15,176,663
Dividends Paid on
Participating
Shares 4,066,464 5,171,956 4,196,730 4,007,483 1,188,614
</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
12
<PAGE>
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. We expect to generate sufficient funds from operations to cover
current liquidity needs. Our liquidity requirements are related to payment of
insurance losses, administrative expenses, and dividends. Premiums generated by
our reinsurance business, combined with investment earnings plus proceeds from
the sale of Shares, will continue to be the principal sources of our funds.
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. We believe that such funds will be sufficient
to meet our liquidity requirements in 2000 and in future years to which our
reinsurance liabilities extend. No capital expenditures are expected during the
next few years.
We had unearned premium reserves of $93,941,365 as of December 31, 1999, and
$110,243,074 as of December 31, 1998. 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, our risk of loss under these contracts
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
we have limited exposure to 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. The decrease in the amount of the unearned premium
reserves in 1999 compared to 1998 is primarily attributable to the Recapture
which is discussed in more detail below under "Results of Operations."
Capital Resources. Our capitalization, as of December 31, 1999, was comprised of
paid-in capital with respect to the Common Stock of $200,000, paid-in capital
with respect to the Shares of $1,995,000 (compared with $2,362,500 and
$2,115,000 as of December 31, 1998 and 1997, respectively), and earnings
retained for use in the business of $13,190,576. The reduction in the amount of
paid-in capital with respect to the Shares as of December 31, 1999 compared with
December 31, 1998 and 1997 is primarily attributable to the Redemption and
Recapture discussed below under "Results of Operations."
Barbados law requires that our 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 our net assets are less than mandated by Barbados law,
we have 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 our required capital
and surplus. At January 1, 2000, our
13
<PAGE>
required minimum net assets computed in accordance with Barbados law was
approximately $6,347,195, compared to total capital and retained earnings
computed for purposes of Barbados law of $15,385,576.
Results of Operations. During the year ended December 31, 1999, we had net
losses of $3,534,968 compared to net income of $7,193,356 and $7,902,910 for the
years ended December 31, 1998 and 1997, respectively. As described below, the
decrease in net income during 1999 compared to the previous year was primarily
as a result of increases in underwriting losses incurred and decreases in
investment income. The decrease in net income in 1998 compared to 1997 arose
from increases in underwriting losses incurred which were partially offset by
increases in investment income.
We had a net underwriting loss of $4,190,723 in 1999 compared to net
underwriting loss of $3,182,108 in 1998 and net underwriting income of
$2,198,232 in 1997. During 1999, we earned premiums of $58,471,950 compared to
$57,845,674 and $45,701,595 during 1998 and 1997, respectively. Premium income
increased as a result of the issuance of additional series of Shares during the
year ended December 31, 1999, and the continuing flow of reinsurance premiums
from series issued in prior years, although this increase was offset, in part,
by the Recapture as discussed below. During 1999, we issued 2 new series of
Shares and redeemed 51 series of Shares (of which 37 were attributable to the
Recapture) for a net decrease of 49 series. There were a total of 266 series
outstanding at December 31, 1999 compared to 315 and 282 series of Shares
outstanding at December 31, 1998 and 1997, respectively.
We incurred losses and administrative expenses during the year ended December
31, 1999 of $62,662,673 compared with $61,027,782 and $43,503,363 for the years
ended December 31, 1998 and 1997, respectively. Expenses in 1999 were comprised
of losses paid and provisions for losses incurred of $46,784,152, ceding
commissions and excise taxes of $15,206,934 and operating expenses of $671,587.
Losses incurred in 1998 and 1997 were $45,552,545 and $31,118,622, respectively.
The loss ratio for the year ended December 31, 1999 was 80% compared to 78.8%
and 68.1% for the years ended December 31, 1998 and 1997, respectively.
As a result of our adverse underwriting results, working with MIC, we took steps
during 1999 to improve our underwriting performance. During 1999, our board of
directors voted to redeem 37 series of Shares that had consistently experienced
adverse underwriting results and that the board determined were unlikely to
experience favourable underwriting results in the future (the "Redemption").
Because the subsidiary capital account for these series had a balance of zero,
the redemption price for the Shares was zero.
In addition to the Redemption, MIC agreed to commute the unearned premium and
recapture all unpaid losses as of the end of the second quarter of 1999 that
were attributable to 37 series of Shares that, as discussed above, the board
voted to redeem (the "Recapture"). In exchange for assuming these unearned
premium and unpaid loss reserves, we agreed to pay $19,660,649 to MIC, which
amount represented the unearned premium and unpaid losses as of June 30, 1999
that were attributable to the commuted business (after offset
14
<PAGE>
by the 25% ceding commission and 1% federal excise taxes previously paid by us
with respect to the recaptured business). If MIC had not recaptured this
business from us, we would have experienced materially larger underwriting
losses and a higher loss ratio for the year ended December 31, 1999.
Notwithstanding the Redemption and the Recapture, there can be no assurances
that we will not continue to experience significant adverse underwriting
results. In addition, there can be no assurances that MIC would recapture
additional business from us if we do experience significant adverse underwriting
results in the future.
In addition to the Redemption and Recapture, we continue to work with MIC to
evaluate ways for improving our underwriting performance. MIC continues to
contact unprofitable accounts and implement procedures to discontinue ceding new
business to us with respect to such accounts. Additionally, MIC continues to
place claims adjusters at some unprofitable accounts. Furthermore, claim
approval empowerment levels have been significantly reduced or eliminated.
We incurred operating expenses during the year ended December 31, 1999 of
$671,587 compared to $555,321 and $503,020 for the years ended December 31, 1998
and 1997, respectively, which amounts do not include expenses paid directly by
MIC. MIC has agreed to pay directly those costs relating to registering and
issuing shares if such costs can not be allocated to the Subsidiary Capital
Account for the Common Stock. In 1999 $141,697 of those costs were paid directly
by MIC compared to $69,280 and $77,329 for the years ended December 31, 1998 and
1997, respectively.
Investment income in 1999 was $655,755 compared to $10,375,464 and $5,704,678
for the years ended December 31, 1998 and 1997, respectively. The decrease in
investment income during 1999 arose primarily as a result of realized losses on
sales of investment securities as our investment manager prior to BlackRock
attempted to minimize the impact of increasing interest rates.
The increase in investment income during 1998 compared to 1997 arose primarily
as a result of increased sales of investment securities to take advantage of
market opportunities presented by uncertainty in the U.S. dollar denominated
international equity markets.
The sale of investment securities for the year ended December 31, 1999 resulted
in realized losses of $5,255,474 compared to realized gains of $4,404,651 and
$750,923 for the years ended December 31, 1998 and 1997, respectively. Interest
earned for the year ended December 31, 1999 was $5,911,229 compared to
$5,970,813 and $4,953,755 for the years ended December 31, 1998 and 1997,
respectively. Interest earned during 1999 compared to 1998 was largely unchanged
as a result of very little change in the amount of assets under management or
their coupon rates. The increase in interest earned during 1998 compared to 1997
was largely a result of an increase in the amount of assets under management
combined with a slight increase in the overall rate of return.
Unrealized losses on investment securities held at December 31, 1999 was
$162,459 compared to unrealized gains at December 31, 1998 of $334,059.
15
<PAGE>
The decrease in unrealized gains as of December 31, 1999 compared to December
31, 1998 resulted primarily from the continued poor performance of the fixed
income markets and the related decline in market value of the fixed income
portfolio which was offset, in part, by the increase in market value of our
investment in the equity fund.
At December 31, 1999 approximately 10% of our investment portfolio was in a U.S.
dollar denominated international equity fund and the remaining 90% was invested
in U.S. dollar denominated fixed-income securities. At December 31, 1998, 100%
of our investment portfolio was in U.S. dollar denominated fixed income
securities.
As a result of the investment return experienced by us, during 1999, our board
of directors appointed BlackRock to replace the prior investment manager of our
fixed income portfolio and the board adopted new investment guidelines for the
portfolio. (See "Our Business" above)
Pursuant to the Retrocession Agreement, we 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,
1999, we had furnished such a letter of credit in the amount of $90,000,000.
Year 2000
We do not separately own or license any computers or computer software
applications. Accordingly, we had minimal exposure with respect to the
transition to Year 2000 on our computerized systems and microprocessors. During
1999 we completed communications and assessments with the Manager and other
service and technology providers, including those on which we are dependent, to
ensure adequacy with the transition to Year 2000. Also during 1999, MIC
successfully completed its assessment and remediation project to address the
Year 2000.
To date, we have not experienced any material adverse effect on our business,
results of operations or financial condition as a result of the Year 2000 Issue.
Furthermore, because we do not own or licence any computers or computer software
applications, we did not incur any expenses with respect to remediation of Year
2000.
We will continue to monitor our operations, and the operations of third parties
that are critical to our operations, for potential Year 2000- related problems.
However, we do not anticipate that we will discover any future Year 2000 issues
that will have a material effect on our business, results of operations, or
financial condition.
Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards ("FASB") No. 130, Reporting
Comprehensive Income, effective for fiscal years beginning after December
16
<PAGE>
15, 1997. Under this statement all items required to be recognized under
accounting standards as components of comprehensive income must be reported in a
financial statement that is displayed with the same prominence as other
financial statements. We adopted this accounting standard in 1998. Adopting the
accounting standard has no impact on our reported net income.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, effective for fiscal years beginning after
June 15, 1999. In the second quarter of 1999, the FASB delayed implementation of
SFAS No. 133 until fiscal years beginning on or after June 15, 2000. The new
standard requires that all companies record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting.
Management is currently assessing the impact of SFAS No. 133 on our consolidated
financial statements. We will adopt this accounting standard on January 1, 2001,
as required.
Forward Looking Statements
The foregoing Management Discussion and Analysis contains various forward
looking statements within the meaning of applicable federal securities laws and
are based upon our current expectations and assumptions concerning future
events, which are subject to a number of risks and uncertainties that could
cause actual results to differ materially from those anticipated.
Market Risk
We are exposed to market risk from changes in interest rates, foreign currency
exchange rates, and certain equity security prices. Market risk is inherent to
all financial instruments. Active management of market risk is integral to our
operations, and we seek to manage our exposure to market risk generally by
monitoring the character of investments that are purchased or sold.
A discussion of our accounting policies for derivative instruments is included
in Note 3 to the consolidated financial statements included herein.
The following analyses are based on sensitivity analysis tests that assume
instantaneous, parallel shifts in exchange rates, interest rates, and interest
rate yield curves. There are shortcomings inherent to the sensitivity analyses
presented. The model assumes interest rate changes are instantaneous, parallel
shifts in the yield curve. In reality, changes are rarely instantaneous or
parallel. Although certain assets may have similar maturities or periods to
repricing, they may not react correspondingly to changes in market interest
rates. Also, the interest rates on certain types of assets may fluctuate with
changes in market interest rates, while interest rates on other types of assets
may lag behind changes in market rates. We do not hold any financial instruments
for trading purposes.
17
<PAGE>
Interest Rate Risk. We have exposure to economic losses due to interest rate
risk arising from changes in the level or volatility of interest rates and we
attempt to mitigate that exposure through active portfolio management. Our
investment guidelines do not permit the use of derivatives in managing interest
rate risk. As of December 31, 1999 and 1998, the net fair value asset exposure
to interest rate risk was approximately $93.9 million and $89.5 million,
respectively. As of December 31, 1999 and 1998, the potential loss in fair value
resulting from a hypothetical 10% increase in interest rates would be
approximately $2.1 million and $2.1 million, respectively.
Foreign Exchange Risk. Foreign exchange rate risk arises from the possibility
that changes in foreign currency exchange rates will impact the value of
financial instruments. At December 31, 1999 and 1998, 100% of investments were
denominated in U.S. dollars.
Equity Price Risk. Equity price risk results from changes in the level or
volatility of equity prices which affect the value of equity securities. At
December 31, 1999, we had approximately 10% of our portfolio invested in an
international equity fund. Prior to 1999, we had no investments in equity
securities. As of December 31, 1999, the net fair value asset exposure to equity
price risk was approximately $11.8 million, and the potential gain in fair value
resulting from a hypothetical 10% increase in the underlying equity prices would
be approximately $1.2 million.
Overall Limitations and Forward-Looking Statements
We have developed fair value estimates by utilization of available market
information or other appropriate valuation methodologies. However, considerable
judgement is required in interpreting market data to develop estimates of fair
value; therefore, the estimates are not necessarily indicative of the amounts
that could be realized or would be paid in a current market exchange. The effect
of using different market assumptions and/or estimation methodologies may be
material to the estimated fair market value amounts. In addition, the above
discussion and the estimated amounts generated from the sensitivity analyses
referred to above include forward-looking statements of market risk which
assume, for analytical purposes, that certain adverse market conditions may
occur. Actual future market conditions may differ materially from such
assumptions because the amounts noted previously are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should be considered projections of
future events or losses.
18
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
Five of the current members of our board of directors were elected by MIC
through its ownership of the Common Stock at the annual shareholders meeting
held on May 10, 2000 and one director (Haywood B. Hyman, Jr.) was elected by the
holders of the Shares at such meeting. Our directors and officers are as
follows:
<TABLE>
<CAPTION>
POSITION WITH US
(AND OTHER EMPLOYMENT DURING PAST
NAME AGE FIVE YEARS)
<S> <C> <C>
William B. Noll.......................... 57 Chairman and Chief Executive
Officer, President and Director
(President, Motors Insurance
Corporation ("MIC"), 1999;
Executive Vice President & Chief
Financial Officer, MIC, 1993-1999).
Mr. Noll became President and
Director in 1995 and became
Chairman and Chief Executive
Officer in 1996.
Thomas D. Callahan....................... 47 Executive Vice-President and
Director (Senior Vice-President,
MIC, 1998; Vice-President, MIC,
1994-1998).
Mr. Callahan became Executive Vice-
President and Director in 1999.
John J. Dunn, Jr. ....................... 41 Vice-President and Director
(Vice-President and Treasurer, MIC,
1998; Assistant Treasurer, MIC,
1995-1998; manager, Coopers &
Lybrand, L.L.P.)
Mr. Dunn became Vice-President and
Director in 1996.
Robert E. Capstack....................... 59 Vice-President and Director
(Section Manager, MIC, 1994; Vice-
President, GMAC Securities
Corporation, 1999).
Mr. Capstack became Vice-President
and Director in 1999.
19
<PAGE>
Peter R. P. Evelyn....................... 58 Director (Attorney, Evelyn, Gittens
& Farmer, a Barbados law firm).
Mr. Evelyn has been a Director
since 1986.
Haywood B. Hyman, Jr. ................... 48 Director (Haywood-Clarke Automotive
Group, Midlothian, Virginia).
Mr. Hyman became a Director in
2000.
Ronald W. Jones.......................... 47 Vice-President, Finance (Managing
Director, Aon Insurance Managers
(Barbados) Ltd.).
Mr. Jones has served as Vice-
President, Finance since 1987.
Michael R. Boyce......................... 60 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 our Assistant Secretary.
</TABLE>
The directors and officers named above serve in those capacities until the
annual meeting of shareholders next following their election.
CERTAIN TRANSACTIONS
It is our policy not to make loans to any of our officers, directors, control
persons or other affiliates.
All transactions between us and our officers, directors, employees and
affiliates, will be on terms no less favorable to us than can be obtained from
unaffiliated third parties. Any such transactions will be subject to the
approval of a majority of the members of our board of directors who do not have
an interest in the transaction and who have had access, at our expense, to our
counsel or to independent counsel.
20
<PAGE>
DESCRIPTION OF CAPITAL STOCK
We are 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, we are currently authorized to issue 100,000 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 May 1, 2000, 26,500 Shares representing 265 series
had been issued and were outstanding and were held of record by 471
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
We have established a Subsidiary Capital Account with respect to the Common
Stock as a class, and we establish 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 our assets are segregated
or earmarked with respect to those accounts.
The consideration we receive upon the issuance of a particular series of Shares
and the Common Stock as a class is 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 of
incorporation.
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 us, 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.
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(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 our day-to-day operations,
excluding any United States Federal income taxes, are allocated among all
Subsidiary Capital Accounts for the Shares pro rata on the basis of 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 at any time during the twelve
calendar months proceeding the end of the fiscal quarter in which the
expense of liability is incurred 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
our taxable income 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 SEC 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 of our expenses or liabilities 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 us attributable to those accounts as of the last day
of the quarter preceding the quarter for
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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 us 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 (to the extent such losses relate to premiums ceded
to such account) and 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.
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(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 us pursuant to our
right of first refusal or redeemed in accordance with our 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, we have 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
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of that series. During the year ended December 31, 1999, $3,519,136 of net
underwriting losses and $671,587 administrative expenses were allocated among
the 266 series of Shares outstanding as of December 31, 1999, and $65,755 of net
investment income was allocated among such series of Shares and the Common
Stock.
As of December 31, 1999, 165 series of Shares outstanding had balances greater
than or equal to $7,500 (ranging from $7,641 to $389,764) and 101 of such series
had balances less than $7,500 (ranging from $7,399 to zero). (The amounts in the
Subsidiary Capital Accounts can fluctuate substantially and therefore may not be
indicative of future accumulated amounts.) At December 31, 1999, an aggregate of
$4,201,365 had been advanced from the Restricted Earned Surplus (which forms a
portion of the Account established for the Common Stock owned by MIC) to 123
Subsidiary Capital Accounts and remained outstanding at that date including net
deficits of $2,901,638 associated with 51 series of Shares that have been
redeemed. As of December 31, 1999, $6,226,105 of aggregate deficits has been
reallocated among the Subsidiary Capital Accounts of the Shares and remained
outstanding. Of this amount $5,528,657 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 our board of directors, 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 our procedures for redemption. (See
"Description of Capital Stock -- Redemption.")
Barbados insurance law requires that we maintain certain levels of net assets,
which for this purpose are calculated without taking into account unrealized
gains or losses. We are currently in compliance with these requirements.
However, in the event that we are unable to comply with such requirements in the
future, we have 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 our 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.
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Election of Directors. The holders of Shares as a class are entitled to elect
one member of our board of directors 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 may appoint another person as his or her proxy to act
on behalf of the appointing shareholder at any of our annual meetings. The
appointment of a person as proxy for a shareholder must be in writing.
Liquidation. We 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 to our articles of
incorporation 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 our articles of incorporation, the Capital Stock may be redeemed as
follows: We 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 our 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 our 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 of directors to
reflect 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.
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LIQUIDATION
Subject to Barbados regulatory and judicial approvals, we may be liquidated upon
the vote of 75% of the outstanding Shares. In the event of liquidation, after
payment of all of our liabilities, each holder of Shares of a series is entitled
to receive his pro rata share of his respective Account Balance before any
distribution of our assets is made to the holder(s) of Common Stock. Thereafter,
the holders of Shares are not entitled to participate further in the
distribution of our assets. Each holder of Common Stock will be entitled to
receive his pro rata share of our remaining assets, 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, our articles of incorporation
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 us, or the holder(s) of the Shares sought to be
transferred has received our written consent. 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 we fail to give our 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
furnished to us a written notice of the intended transfer which notice shall
identify the intended transferee. We may elect, at any time within 60 days of
the receipt of the notice of the proposed transfer, to purchase the Shares
sought to be transferred. If we elect to purchase the Shares, the price will be
the Account Balance for the series of Shares sought to be transferred. A
purchase made by us pursuant to this "right of first refusal" will be deemed
effective upon acceptance by us of the offer to purchase, although payment by us
may be deferred until the end of the quarter in which the offer to purchase is
accepted by us. Shares purchased by us pursuant to this 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 our consent or right of first
refusal where our board of directors 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
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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 the entity with
respect to which the Shares held by the transferor were issued.
Provisions Applicable to All Transfers. No Shares may be transferred unless and
until our board of directors 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. In addition, all transfers of Shares require the approval of the
Barbados Supervisor of Insurance.
Certificates representing the Shares will bear a legend noting the applicable
limitations on transfers.
COMMON STOCK
We are 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, our 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.
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Repurchase. We are authorized by our articles, subject to certain approvals, to
repurchase our own shares. Such purchases may only be effected if we 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, we may take action
against directors and officers for breach of their statutory duty to act
honestly and in good faith with a view to our best interests.
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
us, or our directors and officers resident in Barbados, predicated on the civil
liability provisions of the 1933 Act or, in original actions, impose liabilities
against us or such persons predicated upon that Act. (However, liability for
violations of the 1933 Act by us may be imposed directly on MIC in a United
States court as a result of MIC being a "control person" with respect to us
under the 1933 Act.)
Indemnification. Our by-laws provide for the indemnification of our 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 us.
Inspection of Corporate Records. Shareholders have the right to inspect and copy
our articles and by-laws, corporate register, security register, minutes of
shareholders meetings, any unanimous shareholder agreement, as well as our
audited financial statements, which must be presented to the annual meeting of
shareholders.
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PLAN OF DISTRIBUTION
The Shares are being offered, on a continuous basis, by registered
representatives of GMAC Securities Corporation. GMAC Securities Corporation is
an affiliate of MIC and is registered as a broker-dealer under the Securities
Exchange Act of 1934 and in each of the states in which Shares are being
offered. It is also a member of the National Association of Securities Dealers,
Inc. No commissions are charged or paid in connection with the sale of Shares.
All sales of Shares are subject to our approval. (See "Eligibility to Purchase
the Shares")
PURCHASE PROCEDURES
In order to purchase the Shares, the following documents must be sent to us 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 entity or entities 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 we approve the offer and execute the agreement. (See
"Plan of Distribution--Conditions of Sale.")
Following execution of the stock purchase agreement by us, 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 us. 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 our
articles and by-laws, including the restrictions on transfer. (See "Description
of Capital Stock -- Restrictions on Transfer.") The stock purchase agreement
further provides that we 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 our articles and by-laws.
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Once it is accepted by us, 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 our liquidation.
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
We maintain 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 us within 120
days from the date of execution of the stock purchase agreement by the
Purchaser. If we determine to accept an offer to purchase Shares from an
Eligible Purchaser, we execute both copies of the stock purchase agreement
remitted by such person and return one copy to such person. If we determine not
to approve an offer to purchase, we return 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 we determine not to approve a sale of Shares to a prospective
purchaser, the purchase payment is returned, together with any interest earned
thereon. We have the right to reject any prospective purchaser for any reason
whatsoever.
TERMINATION OF OFFERING
Unless terminated sooner by our board of directors, 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 us and our
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 our U.S. tax counsel, LeBoeuf, Lamb, Greene & MacRae, L.L.P., are associated
with an investment in Shares.
United States taxation of us and our 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. We
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have not requested advance rulings on these questions 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.
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. You Should Consult Your Own Tax Advisor
Concerning The Tax Implications Of Your Investment In Shares.
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, we are entitled to the
benefits of the Treaty provided that we are "resident" (that is, "managed and
controlled") in Barbados. We attempt to conduct our business in such a manner
that we will be considered to be "managed and controlled" in Barbados in order
to qualify for the benefits of the Treaty.
For some time, the Organization for Economic Cooperation and Development
("OECD"), an international organization consisting of member countries devoted
to promoting international trade and development, has been engaged in an effort
to eliminate so-called "harmful tax practices" engaged in by some countries. As
part of that effort, the OECD released in June 2000 a list of tax haven
countries allegedly engaged in harmful tax practices that have not cooperated in
the OECD's efforts. Barbados is on that list. Continued inclusion of Barbados on
the OECD list after July 2001 could result in the imposition of sanctions by
member countries, such as the U.S., to deter harmful tax practices in Barbados.
The form such sanctions would take currently is unknown, although they could
include, among other things, denial of deductions for payments made to Barbados
companies, reductions in benefits under the Treaty or other actions that could
directly or indirectly affect us and our shareholders. Barbados government
officials have indicated that they are currently working closely with the OECD
to resolve all issues necessary for the OECD to remove Barbados from the list.
However, such efforts may not be successful, or, if successful, they could
include actions that may be harmful to us such as the imposition of additional
taxes.
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 us are subject to this
excise tax.
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UNITED STATES FEDERAL INCOME TAX RISKS AND CONSEQUENCES TO US
Risks and Consequences of Carrying on a United States Reinsurance Business
Through a Permanent Establishment. As a "resident" of Barbados, if we engage in
business within the United States through a permanent establishment, we will be
subject to United States Federal income tax at normal corporate tax rates on our
business profits that are attributable to such permanent establishment. Insofar
as is relevant hereto, all of our 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, we conduct reinsurance business in Barbados and
in that regard execute and administer our reinsurance agreements and manage our
business affairs from Barbados. On this basis, we believe that we should not be
deemed to be engaged in business within the United States through a permanent
establishment, and therefore we believe we should not be subject to United
States income tax. However, given the factual nature of the questions involved
and certain aspects of our 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 we 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 we do not engage in
business within the United States through a permanent establishment, we
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.
Under investment guidelines implemented in 2000, we expect to invest our funds
in the United States in circumstances whereby we do not incur a withholding tax.
(See "Our Business.")
33
<PAGE>
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 our six directors through its
ownership of all of our issued and outstanding Common Stock. Thus, if
transactions between MIC and us 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 us
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 us.
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 our six directors, we and MIC 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 us, 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 us by MIC, MIC would likely be subject to tax on such business.
Since we have no obligation to indemnify MIC against such adverse tax
consequences, a reallocation of business to MIC should not directly affect us.
However, any such reallocation might contribute to the early termination of the
retrocession agreement between MIC and us.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES -- THE SHAREHOLDERS
Taxation of Our Income 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
34
<PAGE>
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
our 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 our shareholders ("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 our earnings and profits 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 us 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 our Subpart F income generally
will be computed under the same rules that govern the computation of taxable
income of domestic property and casualty insurance companies.
Although Subpart F income generally is allocated based on book income,
differences between the financial and tax accounting rules applicable to the
computation of our income may result in differences in any year between the
amount of income subject to pass-through to a Shareholder for United States tax
purposes and 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 we were subject to United States income tax on our 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 us.
(See "United States Federal Tax Considerations -- United States Federal Income
Tax Consequences To Us.")
Risk of Recharacterization of Reinsurance Profits on Business Retroceded to Us.
As described elsewhere herein, a portion of the underwriting experience in
respect of insurance business retroceded to us is allocated to the series of
Shares issued in respect of the entity 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 us relative to the volume of our business, 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
35
<PAGE>
the discretion of our board of directors, 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 Entities Selling Motor Vehicles for Certain
Coverages Reinsured by Us. As discussed elsewhere herein, risks arising under
mechanical service agreements entered into with respect to a particular entity
selling motor vehicles ultimately may be retroceded to us and allocated in part
to a series of Shares owned by the owner(s) of such entity 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 us,
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 among the series of Shares, 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 us by our
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 us as to certain
matters pertaining to the laws of the United States.
EXPERTS
The financial statements as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999, included and incorporated by
reference in this prospectus, have been audited by Deloitte & Touche,
independent chartered accountants, Bridgetown, Barbados, as stated in their
report, which is included and incorporated by reference herein, and has been so
included and incorporated in reliance upon the report of such firm given upon
their authority 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
Our Annual Report on Form 10-K for the year ended December 31, 1999 filed by us
(File No. 33-6534) (the "Annual Report") with the SEC is incorporated herein.
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.
36
<PAGE>
We undertake to provide without charge to each person to whom a copy of this
prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the documents incorporated here by reference, other than exhibits
to such documents unless such documents are specifically incorporated by
reference in to such documents. Requests for such documents should be directed
to us at One Financial Place, Collymore Rock, St. Michael, Barbados, W.I.,
Attention Ronald W. Jones, Vice President, Finance, telephone number (246)
436-4895.
ADDITIONAL INFORMATION
A registration statement under the 1933 Act has been filed with the SEC 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 SEC. The omitted
information may be examined at the SEC'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 SEC,
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.
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Motors Mechanical Reinsurance Company, Limited
One Financial Place
Collymore Rock
St. Michael, Barbados
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance
Company, Limited as of December 31, 1999 and 1998 and the related statements of
(loss)\income and retained earnings, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998 and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United States
of America.
s/DELOITTE & TOUCHE
CHARTERED ACCOUNTANTS
Bridgetown, Barbados
February 22, 2000
38
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Notes 1999 1998
----- ------------ --------------
<S> <C> <C> <C>
ASSETS
Investments 3,7 79,184,187 89,474,377
Cash & cash equivalents 7 26,602,226 19,504,563
Accrued investment income 2,253,779 1,788,490
Deferred acquisition costs 24,418,570 28,660,753
Prepaid expenses 46,000 0
------------ ------------
Total Assets 132,504,762 139,428,183
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums 93,941,365 110,243,074
Reserves for unpaid losses 4 4,725,239 5,393,818
Accrued liabilities 276,116 150,056
Due to Motors Insurance Corporation 18,338,925 115,667
------------ ------------
Total Liabilities 117,281,645 115,902,615
------------- ------------
COMMITMENTS AND CONTINGENCIES 7
STOCKHOLDERS' EQUITY 5
Share Capital
Common stock - no par value;
Authorised - 2,000 shares;
Issued and outstanding -
2000 shares 200,000 200,000
Participating stock - no par value;
Authorised - 100,000 shares;
Issued and outstanding -
26,600 shares at December 31, 1999
And 31,500 shares at December 31,
1998 1,995,000 2,362,500
------------- ------------
2,195,000 2,562,500
Retained earnings 13,190,576 20,629,009
Accumulated other comprehensive (162,459) 334,059
------------ ------------
(loss)/income
15,223,117 23,525,568
------------- ------------
Total Stockholders' Equity
Total Liabilities and
Stockholders' Equity $132,504,762 $139, 428,183
============ =============
</TABLE>
The accompanying notes form an integral part of these financial statements.
39
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF (LOSS)/INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------
Notes 1999 1998 1997
----- ----------------------- ------------------------ ------------------
<S> <C> <C> <C> <C>
INCOME
Reinsurance premiums
assumed 6 $ 67,104,475 $ 72,634,160 $ 57,071,313
Recapture of unearned reinsurance
premiums 9 (24,934,234) 0 0
Decrease/(Increase) in unearned
premiums 16,301,709 (14,788,486) (11,369,718)
----------- ------------ ------------
Premiums earned 58,471,950 57,845,674 45,701,595
----------- ------------ ------------
Investment income
Interest earned 5,911,229 5,970,813 4,953,755
Realized (losses)/gains
on investments - net (5,255,474) 4,404,651 750,923
----------- ------------ ------------
Investment income 655,755 10,375,464 5,704,678
----------- ------------ ------------
TOTAL INCOME 59,127,705 68,221,138 51,406,273
----------- ------------ ------------
EXPENSES
Acquisition costs 15,206,934 14,919,916 11,881,721
Losses paid 47,452,731 45,579,887 29,981,766
(Decrease)/Increase in loss
reserves (668,579) (27,342) 1,136,856
Administrative expenses
Related parties 252,299 225,922 219,760
Other 419,288 329,399 283,260
------------ ------------ ------------
TOTAL EXPENSES 62,662,673 61,027,782 43,503,363
------------ ------------ ------------
NET (LOSS)/INCOME FOR THE YEAR (3,534,968) 7,193,356 7,902,910
RETAINED EARNINGS,
beginning of year 20,629,009 18,615,768 14,913,053
LESS: DIVIDENDS (4,066,464) (5,171,956) (4,196,730)
ADD/(DEDUCT) REDEMPTION OF
PARTICIPATING STOCK 162,999 (8,159) (3,465)
------------ ----------- -----------
RETAINED EARNINGS, end of year $ 13,190,576 $ 20,629,009 $ 18,615,768
============ ============ ============
</TABLE>
The accompanying notes form an integral part of these financial statements.
40
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. dollars)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
<S> C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Reinsurance premiums collected $ 54,936,354 $ 67,293,382 $ 57,014,145
Losses and acquisition expenses paid (52,963,826) (58,004,044) (42,436,530)
Administrative expenses paid (672,060) (581,648) (502,230)
Investment income received 5,529,962 7,369,361 3,229,000
------------ ------------ ------------
Net cash provided by operating
activities 6,830,430 16,077,051 17,304,385
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (396,939,849) (324,678,378) (318,139,315)
Sales and maturities of investments 401,478,047 327,393,023 297,544,335
------------ ------------ ------------
Net cash from/(used in) investing
activities 4,538,198 2,714,645 (20,594,980)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
Participating Stock 15,000 277,500 217,500
Redemption of Participating Stock (219,501) (38,159) (10,965)
Dividends paid (4,066,464) (5,171,956) (4,196,730)
------------ ------------ ------------
Net cash used in financing activities (4,270,965) (4,932,615) (3,990,195)
------------ ------------ ------------
INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 7,097,663 13,859,081 (7,280,790)
CASH AND CASH EQUIVALENTS, beginning
of year 19,504,563 5,645,482 12,926,272
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year $ 26,602,226 $ 19,504,563 $ 5,645,482
============ ============ ============
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
Net (loss)/income $ (3,534,968) $ 7,193,356 $ 7,902,910
Realised losses/(gains) on
investments 5,255,474 (4,404,651) (750,923)
Change in:
Accrued investment income (465,289) 1,389,956 (1,724,755)
Deferred acquisition costs 4,242,183 (3,846,835) (2,958,711)
Prepaid expenses (46,000) 0 0
Unearned premiums (16,301,709) 14,788,486 11,369,718
Loss reserves (668,579) (27,342) 1,136,856
Accrued liabilities 126,060 26,487 13,153
Due to Motors Insurance
Corporation 18,223,258 957,594 2,316,137
------------ ------------ -------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 6,830,430 $ 16,077,051 $ 17,304,385
============ ============= =============
</TABLE>
The accompanying notes form an integral part of these financial statements.
41
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------------------------------------
Total Accumulated
Shareholders' Retained Other
Participating Comprehensive Earnings Comprehensive Common Participating
Equity Loss (Loss) Income Stock Stock
------ ---- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $23,525,568 $ - $20,629,009 $334,059 $ 200,000 $2,362,500
Comprehensive Income:
Net loss (3,534,968) (3,534,968) (3,534,968) - - -
Other comprehensive income,
net of tax:
Unrealized loss on securities
(net of reclassification
adjustments) (496,518) (496,518) - (496,518) - -
----------
Comprehensive income - $(4,031,486) - - - -
===========
Dividends declared on participating
stock (4,066,464) (4,066,464) - - -
Participating Stock
Issued 15,000 - - - 15,000
Redeemed (219,501) 162,999 - - (382,500)
--------- ---------- ---------- --------- ----------
Balance at December 31, 1999 $15,223,117 $13,190,576 $ (162,459) $ 200,000 $1,995,000
=========== =========== ========== ========= ==========
Disclosure of reclassification
amount
Unrealised holding losses arising (5,751,992)
during period
Add: reclassification adjustment 5,255,474
----------
for losses included in net
income (496,518)
==========
</TABLE>
Net unrealised loss on securities
42
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholders Comprehensive Retained Comprehensive Common Participating
Equity Income Earnings Income Stock Stock
------ ------ -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $22,065,969 $ - $18,615,768 $1,135,201 $ 200,000 $2,115,000
Comprehensive Income:
Net income 7,193,356 7,193,356 7,193,356 - - -
Other comprehensive income,
net of tax:
Unrealized loss on securities
(net of reclassification
adjustments) (801,142) (801,142) - (801,142) - -
----------
Comprehensive income - $6,392,214 - - - -
==========
Dividends declared on participating - -
stock (5,171,956) (5,171,956) -
Participating Stock
Issued 285,000 - - - 285,000
Redeemed (45,659) (8,159) - - (37,500)
---------- ---------- ---------- --------- ----------
Balance at December 31, 1998 $23,525,568 $20,629,009 $ 334,059 $ 200,000 $2,362,500
=========== =========== ========== ========= ==========
Disclosure of reclassification
amount
Unrealised holding losses arising 3,603,509
during period
Add: reclassification adjustment (4,404,651)
----------
for losses included in net
income (801,142)
===========
</TABLE>
Net unrealised loss on securities
The accompanying notes form an integral part of these financial statements.
43
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------------
Accumulated
Total Retained Other
Shareholders Comprehensive Earnings Comprehensive Common Participating
Equity Loss (Loss) Income Stock Stock
------ ---- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $17,561,574 $ - $14,913,053 $ 543,521 $ 200,000 $1,905,000
Comprehensive Income:
Net income 7,902,910 7,902,910 7,902,910 - - -
Other comprehensive income,
net of tax:
Unrealised loss on securities
(net of reclassification
adjustments) 591,680 591,680 - 591,680 - -
----------
Comprehensive income - $8,494,590 - - - -
==========
Dividends declared on participating
stock (4,196,730) (4,196,730) - -
Participating Stock
Issued 225,000 - - -
Redeemed (18,465) (3,465) - - -
----------- ----------- ---------- ---------
Balance at December 31, 1997 $22,065,969 $18,615,768 $1,135,201 $ 200,000
=========== =========== ========== =========
225,000
Disclosure of reclassification (15,000)
----------
amount $2,115,000
==========
Unrealised holding gains arising 1,342,603
during period
Less: reclassification (750,923)
-----------
adjustment
for gains included in net 591,680
===========
income
Net unrealised gain on securities
</TABLE>
The accompanying notes form an integral part of these financial statements.
44
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(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"), a member of the GMAC Insurance Group. 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. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements are stated in United States dollars and are
prepared in conformity with accounting principles generally accepted
within the United States of America.
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities 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.
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 taken into income on the
basis of premiums earned.
45
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Investments
Investments, all of which are available for sale, are comprised of
interest- bearing marketable securities and an investment in an
international equity fund, 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. Unrealised appreciation
(depreciation) is included in accumulated other comprehensive income.
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 and can potentially
be significant to the financial statements.
Derivatives
In June 1998, the Financial Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts. It requires that all derivatives be recognized as either
assets or liabilities in the balance sheet and measured at fair value.
If certain conditions are satisfied, a derivative may be designated as
a hedge of an exposure to changes in the value of an asset or
liability, variable cash flows for forecasted transactions, or certain
foreign currency exposures. For derivatives designated as hedging
instruments, net income will be affected by the extent to which the
derivative is not effective as a hedge of the underlying instrument.
For derivatives not designated as hedges, the gain or loss would be
recognized in income in the period of change. Pursuant to Statement No.
137, the effective date of Statement No. 133 was delayed for one year
to fiscal years beginning after June 15, 2000. The Company has not
completed its evaluation of the impact of this statement on its
financial statements upon adoption.
46
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Expressed in U.S. Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (Cont'd)
Taxation
The Company has received an undertaking from the Barbados Government
exempting it from all local income, profits and capital gains taxes for
a period ending December 31, 2016. Thereafter and until December 31,
2031, the Company will be subject to tax at a rate of 2% on its 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 and equity
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealised Unrealised Fair
Cost Appreciation Depreciation Value
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
December 31, 1999
Foreign governments and
their agencies $18,175,335 $ - $ (799,400) $17,375,935
Corporations 22,951,967 - (637,687) 22,314,280
Supranationals 28,205,097 - (559,927) 27,645,170
----------- ---------- ----------- -----------
Sub Total Debt Securities 69,332,399 - (1,997,014) 67,335,385
Capital International 10,014,247 1,834,555 - 11,848,802
----------- ----------- ------------ -----------
Fund
$79,346,646 $ 1,834,555 $(1,997,014) $79,184,187
Total =========== =========== =========== ===========
</TABLE>
47
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 3. INVESTMENTS (Cont'd)
<TABLE>
<CAPTION>
Gross Gross
Unrealised Unrealised Fair
Cost Appreciation Depreciation Value
----------- ------------ ------------ -------
<S> <C> <C> <C> <C>
December 31, 1998
Foreign governments and
their agencies $27,522,957 $ 43,649 $(290,075) $27,276,531
Corporations 25,150,984 538,236 (2,142) 25,687,078
Supranationals 36,466,377 154,367 (109,976) 36,510,768
----------- ---------- --------- -----------
Total $89,140,318 $ 736,252 $(402,193) $89,474,377
=========== ========== ========= ===========
</TABLE>
The cost and fair value of debt securities at December 31, 1999, 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.
Cost Fair Value
Due after one year through five years $49,386,022 $47,665,100
Due after five years through ten years 19,946,377 19,670,285
---------- ----------
$69,332,399 $67,335,385
=========== ===========
In 1999, gross gains of $1,571,947 and gross losses of $6,827,421 were realized.
In 1998, gross gains of $6,253,358 and gross losses of $1,848,707 were realized.
In 1997, gross gains of $1,494,878 and gross losses of $743,955 were realized.
The following summarizes net unrealized appreciation (depreciation) on
investments:
Balance, December 31, 1996 $ 543,521
Net appreciation 591,680
-----------
Balance, December 31, 1997 $ 1,135,201
Net depreciation (801,142)
-----------
Balance, December 31, 1998 $ 334,059
Net depreciation (496,518)
-----------
Balance, December 31, 1999 $ (162,459)
===========
48
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 3. INVESTMENTS (Cont'd)
The investment portfolio is comprised of approximately 90% in diverse
debt securities which do not result in any concentration of credit risk
and 10% in an international equity fund. At December 31, 1999, 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 counter parties. Market risk
is mitigated because the forward contracts hedge corresponding non-U.S.
dollar investments. There were no forward contracts outstanding at
December 31, 1999 and 1998.
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance in
reserves for losses $ 5,393,818 $ 5,421,160 $ 4,284,304
----------- ----------- -----------
Add/(deduct)-provision for
losses incurred related to:
Current claim year 47,211,542 45,843,093 31,904,950
Prior claim years (427,390) (290,547) (746,024)
----------- ----------- -----------
Total 46,784,152 45,552,546 31,158,926
----------- ----------- -----------
Deduct paid losses attributable to:
Current claim year 43,514,155 40,767,738 27,024,981
Prior claim years 3,938,576 4,812,150 2,997,089
----------- ----------- -----------
Total 47,452,731 45,579,888 30,022,070
----------- ----------- -----------
Ending balance in
reserves for losses $ 4,725,239 $ 5,393,818 $ 5,421,160
=========== =========== ===========
</TABLE>
49
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 4. RESERVES FOR UNPAID LOSSES (Cont'd)
As a result of change in estimates of losses incurred in prior years,
the provisions for losses incurred in 1999, 1998 and 1997 decreased by
$427,390, $290,547 and $746,024, respectively.
Note 5. STOCKHOLDERS' EQUITY
All of the Company's Common Stock is held by MIC. The Company is
preparing to file a prospectus offering a further 90 series of 100
shares at a price of $75 per share.
During 1999, 2 additional series of 100 shares of Participating Stock
were issued as compared with 37 for the year ended December 31, 1998.
In addition, in 1999 the Board of Directors redeemed 14 series of 100
shares of which 7 series had been previously placed in run off and had
reached a fully earned position during 1999 and 7 were redeemed for nil
value. The Board of Directors also redeemed 37 series of 100 shares for
nil value and thereafter, MIC recaptured the unearned premium and loss
reserves for those series. (See Note 9).
In the years ended December 31, 1999, 1998 and 1997, costs in the
amount of $141,696, $69,280 and $77,239 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.
50
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 5. STOCKHOLDERS' EQUITY (Cont'd)
From time to time, funds are held in escrow on account of Participating
Stock applications. Such amounts are not included in cash and cash
equivalents in the accompanying financial statements. At December 31,
1999, there were $7,500 in funds held in escrow.
Note 6. REINSURANCE PREMIUMS
Under the provisions of the retrocession agreement, the Company will
assume additional cessions of $31,313,788 ($36,747,691 at December 31,
1998) 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. LETTER OF CREDIT
The Company has provided an irrevocable letter of credit to MIC, in the
amount of $90,000,000 to collateralize the amounts recoverable from the
Company related to the business ceded to it. Cash equivalents and
certain 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 share's 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.
51
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 8. RETAINED EARNINGS (Cont'd)
Barbados law requires that the Company maintain a minimum margin of
solvency based generally on the amount of premiums earned in the
preceding year. At January 1, 2000, the Company's required minimum
stockholders' equity computed in accordance with Barbados law was
approximately $6,347,195.
Retained earnings applicable to the Common and Participating
Stockholders are comprised of the following:
<TABLE>
<CAPTION>
Common Participating Total
------ ------------- -----
<S> <C> <C> <C>
Balance,
December 31, 1996 $ 9,417 $14,903,636 $14,913,053
Net income for the year 12,304 7,890,606 7,902,910
Net transfers (29,879) 29,879 0
Dividends paid 0 (4,196,730) (4,196,730)
Redemption of participating
stock 0 (3,465) (3,465)
----------- ----------- -----------
Balance (Deficit),
December 31, 1997 $ (8,158) $18,623,926 $18,615,768
Net income for the year 20,970 7,172,386 7,193,356
Dividends paid 0 (5,171,956) (5,171,956)
Redemption of participating
stock 0 (8,159) (8,159)
---------- ----------- -----------
Balance,
December 31, 1998 $ 12,812 $20,616,197 $20,629,009
Net income\(loss) for the year 1,422 (3,536,390) (3,534,968)
Dividends paid 0 (4,066,464) (4,066,464)
Redemption of participating
stock 0 162,999 162,999
---------- ----------- -----------
Balance,
December 31, 1999 $ 14,234 $13,176,342 $13,190,576
========== =========== ===========
</TABLE>
52
<PAGE>
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Expressed in U.S. Dollars)
Note 9. RECAPTURE OF UNEARNED REINSURANCE PREMIUMS
During 1999, The Company entered into a recapture agreement with MIC
for 37 series of Participating Shares, and to pay MIC a recapture
premium of $24,934,234, which represents unearned premiums and an
amount equal to $1,209,316 for losses incurred but unpaid in respect to
the recapture business as of June 30, 1999. Additionally, MIC has
agreed to pay the Company a recapture commission of $6,482,901 which
represents the deferred portion of the ceding commission previously
paid by the Company.
53
<PAGE>
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
[Date] Peter Evelyn Director
FOR MINISTRY USE ONLY
COMPANY NO. FILED
A-1
<PAGE>
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.
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 affiliates to track volume, experience, and commissions with respect to
mechanical service agreements sold by one or more particular entities selling
new and/or used motor vehicles.
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: (1) premiums allocated to the Subsidiary Capital Account of the Common
shares during the immediately preceding five-year period pursuant to Section
3(1)(1)(a), plus (ii) deficits restored to such Account during such period
pursuant to Section 3(1)(7)(c), less (iii) return premiums allocated to such
account during such period pursuant to Section 3(1)(1)(d), and less (iv)
deficits allocated to such account during such period pursuant to Section
3(1)(7)(a)(i) to the extent that they relate to amounts described in clauses (i)
and (ii) of this definition.
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.
A-2
<PAGE>
(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 on the basis of
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 at any time during
A-3
<PAGE>
the twelve calendar months preceding the end of the fiscal quarter in which the
expense or liability is incurred, and series with respect to which the unearned
premium is zero as of such date, 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:
A-4
<PAGE>
(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.
A-5
<PAGE>
(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 entity or entities
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.
A-6
<PAGE>
(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
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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
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 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
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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 furnished written notice to the Company
which notice shall identify the proposed transferee of such Shares. The
Company may elect, at any time within sixty (60) days of receipt of the
notice of the proposed transfer, to purchase the shares identified in the
notice required by this Section 4(a). If the Company elects to purchase
such Shares, the price will be 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). 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 transferred to the party identified in the notice
referred to above within sixty (60) days, subject to the requirements of
the following paragraphs. After such further sixty (60) days, any attempted
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
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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 of the entity with respect to
which the Shares held by the transferor were issued.
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.
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APPENDIX B
STOCK PURCHASE AGREEMENT
BETWEEN
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
AND
(Certified Purchaser)
-----------------
(Month/Date/Year)
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 ,
2000 with respect to the stock described herein.
1. DEFINITIONS
1.1 MIC. The term "MIC" means Motors Insurance Corporation, a Michigan
corporation.
1.2 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:
(insert names and addresses of particular entity or entities selling new and/or
used motor vehicles with respect to which the applicable MIC Mechanical Account
is maintained).
1.3 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.
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1.4 Shareholder. The term "Shareholder" means , taxpayer
identification number , who is a citizen of ,
and who resides at .
1.5 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.
1.6 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
owner(s) of the entity or entities with respect to which the MIC Mechanical
Account is maintained 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 more
than one person owns the entity or entities referred to in the foregoing
sentence, 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
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subsidiaries or affiliates and identified with the MIC Mechanical Account and
similar MIC accounts maintained with respect to entity or entities 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],
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.
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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 Motors
Mechanical Reinsurance Company, 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.
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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.
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APPENDIX C
The undersigned represent(s) that he (she)(they) is (are) the owner(s) of the
entity or entities selling new and/or used motor vehicles 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 Dealership Owner
--------------------------------
Print Name of Dealership 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
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