THE NEW YORK STATE MOTOR TRUCK ASSOCIATION

COMPENSATION TRUST

Financial Statements as of December 31, 2013 and 2012

Together with Independent Auditor's Report

RECEIVED WORKERS' COMPENSATION

:~PR ~\ o 1\l' Lt ~· SELF iNSURANCE OFFJCE

Bonadio & Co., ILP Certified Public Accountants

Bonadio & Co., llP Cett ified Public Accountants

6 Wembley Court Albany, New York 12205

p (518) 464-4080 f (5 18) 464-4087

www.bonadio.com

INDEPENDENT AUDITOR'S REPORT

April24, 2014

The Board of Trustees of The New York State Motor Truck Association Compensation Trust

Report on Financial Statements We have audited the accompanying financial statements of The New York State Motor Truck Association Compensation Trust (the Trust) which comprise the balance sheet as of December 31, 2013, and the related statements of operations and comprehensive loss, changes in members' equity, and cash flows for the year then ended, and the related notes to the financial statements.

Management's responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error.

Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with accounting 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 from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Trust's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

fContinued\ ALBANY • BATAVIA • BU FFALO • EAST AURORA • GE NEVA • NYC • 'PERRY • ROCHESTER • RUTLA ND, VT • SYRACUSE • UTI CA

INDEPENDENT AUDITOR'S REPORT (Continued)

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The New York State Motor Truck Association Compensation Trust as of December 31 , 2013 and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

Prior Period Financial Statements The financial statements as of December 31 , 2012, were audited by Stulmaker, Kohn & Richardson, LLP, who merged with Bonadio & Co. , LLP as of December 1, 2013, and whose report dated April 17, 2013, expressed an unmodified opinion on those statements.

THE NEW YORK STATE MOTOR TRUCK ASSOCIATION COMPENSATION TRUST

BALANCE SHEETS DECEMBER 31, 2013 AND 2012

ASSETS

ASSETS: Investments Cash and cash equivalents Cash - Escrow Interest receivable Member contributions receivable, net New York State assessment receivable Other receivables and prepaid expenses Income taxes receivable Reinsurance recoverable Deferred income tax benefits, net

LIABILITIES AND MEMBERS' EQUITY (DEFICIT)

LIABILITIES: Reserves for losses and loss adjustment expenses Accrued New York State assessments Accounts payable and accrued expenses Deferred tax liability Escrow payable

Total liabilities

MEMBERS' DEFICIT: Accumulated deficit Accumulated other comprehensive income, net of taxes

Total members' deficit

2013

$ 1,482,803 1,297,588

340,402 5,324

182,118 101,128 731,960

2,522 309,310

2,015,068

$ 6,468,223

$ 9,123,119

27,000 1,047

340,402

9,491 ,568

(3,024,915) 1,570

(3 ,023,345)

$ 6,468,223

The accompanying notes are an integral part of these statements. 1

2012

$ 3,424,599 1,504,691

340,402 8,593

422,599

382,504 3,030

278,352 1,493,042

$ 7,857,812

$ 9,604,563 104,567 20,250 11,037

340,402

10,080,819

(2,239,560) 16,553

(2,223,007)

$ 7,857,812

THE NEW YORK STATE MOTOR TRUCK ASSOCIATION COMPENSATION TRUST

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

REVENUES: Member contributions earned Member assessment- prior years, net Reinsurance assessments ceded

Net member contributions earned Investment income, net Other income

TOTAL REVENUES

OPERATING EXPENSES: Losses and loss adjustment expenses Management fees General and administrative expenses Bad debts

TOTAL OPERATING EXPENSES

NET LOSS BEFORE INCOME TAX PROVISION (BENEFITS)

INCOME TAX PROVISION (BENEFITS) Current Deferred

Total income taxes (benefits)

NET LOSS

OTHER COMPREHENSIVE INCOME (LOSS) Unrealized net holding gains arising during the period, net of

income tax benefits of $1 ,047 and $11 ,037, respectively

TOTAL COMPREHENSIVE LOSS

2013

$

40,110

40 110

1,046,949 212,500

57,534 30,000

1,346,983

(1 ,306,873)

508 (522,026) (521 ,518)

(785,355)

(14,983)

$ (800,338)

The accompanying notes are an integral part of these statements. 2

2012

$ 123,538 584,457

(466) 707,529

51,030 2 204

760 763

1,927,017 314,147

73,216 280,000

2,594,380

(1 ,833,617)

1,208 (733,410) (732,202)

(1 , 101,415)

16,553

$ {1 ,084,862)

THE NEW YORK STATE MOTOR TRUCK ASSOCIATION COMPENSATION TRUST

STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

Accumulated Deficit

BALANCE AT JANUARY 1, 2012 $ {1,138,145)

NET LOSS (1,101,415)

Unrealized net holding gains arising during the year, net of taxes

BALANCE AT DECEMBER 31, 2012 (2,239,560)

NET LOSS (785,355)

Unrealized net holding losses arising during the year, net of taxes

BALANCE AT DECEMBER 31, 2013 $ {3,024,915)

Accumulated Other

Comprehensive Income

$

16,553

16,553

(14,983)

$ 1,570

The accompanying notes are an integral part of these statements. 3

Total Members'

Deficit

$ (1 '138, 145)

(1,101,415)

16,553

(2,223,007)

(785,355)

(14,983)

$ (3,023,345)

THE NEW YORK STATE MOTOR TRUCK ASSOCIATION COMPENSA liON TRUST

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

CASH FLOWS FROM OPERATIONS: Net loss Adjustments to reconcile net loss to net cash

flows from operating activities: Net gain on sale of securities Deferred income tax benefits Change in allowance for doubtful member contributions Changes in operating assets and liabilities:

Interest receivable Member contributions receivable Other receivables and prepaid expenses Income taxes receivable Reinsurance recoverable Reserves for losses and loss adjustment expenses Accrued New York State assessments Accounts payable and accrued expenses Income taxes payable

NET CASH FLOWS FROM OPERATING ACTIVITIES

CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investments redeemed\sold Investments purchased Purchase of certificates of deposits

NET CASH FLOWS FROM INVESTING ACTIVITIES

CHANGE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS- beginning of year

CASH AND CASH EQUIVALENTS- end of year

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for income taxes

2013

$ (785,355)

(4 ,212) (522,026)

30,000

3,269 210,481

(349,456) 508

(30,958) (481 ,444) (205,695)

6,750

(2, 128, 138)

1,921,035

1,921 ,035

(207, 1 03)

1,504,691

$ 1,297,588

$

The accompanying notes are an integral part of these statements. 4

2012

$ (1,101,41 5)

(7,245) (733,41 0) 280,000

(8,593) (186, 196)

(19,525) (3,030)

(27,309) (2, 165,199)

32,066 8,727

(1,323)

(3,932,452)

1,494,090 (4, 120,486)

(763,369)

(3,389,765)

(7,322,217)

8,826,908

$ 1,504,691

$ 561

THE NEW YORK STATE MOTOR TRUCK ASSOCIATION COMPENSATION TRUST

NOTES TO FINANCIAL STATEMENTS DECEMBER 31,2013 AND 2012

1. THE ORGANIZATION

The New York State Motor Truck Association Compensation Trust (the 'Trust") was organized to create an unincorporated association of motor truck operators within the State of New York to constitute a workers' compensation self-insurance group, with its initial fiscal year beginning on July 1, 1994. The Trust operates pursuant to and in accordance with Subdivision 3-a of Section 50 of the New York Workers' Compensation Law. The Trust was created to make available a self-insured workers' compensation program for motor truck operators in the State of New York, to establish, maintain, promote and enforce sound safety programs, and to provide a cost-effective market in which truck operators may obtain workers' compensation coverage. The Trust is currently managed by an elected board of trustees and administered by qualified group third party administrators.

During 2011 the Trust received a letter from the NYS Workers' Compensation Board (the "Board") advising that the application to continue operation in 2012 had been denied. Based on that letter the Trust voted to voluntarily terminate its status as an active group self-insurer for the Trust effective January 1, 2012. The plan to terminate was ratified by a vote of the membership on November 1, 2011. The Trust notified the Board of its decision to terminate their status on January 1, 2012. Accordingly, the Trust no longer provides Workers' Compensation insurance coverage. The Trust continues to operate until all of its claim obligations for events that occurred on or prior to December 31 , 2011 have been fulfilled.

The Trust has a contract with a third party administrator through December 31, 2014.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting The financial statements of the Trust have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).

Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Significant estimates used in preparing these financial statements include those assumed in determining the reserve for loss and loss adjustment expense. Actual results could differ from those estimates.

Cash and Cash Equivalents Cash and cash equivalents includes deposits in a financial institution located in Western New York. Bank deposits, at times, may exceed federally insured limits. The Trust has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash.

The Trust considers cash and cash equivalents to be cash in bank, savings accounts and money market funds.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

Investments The Trust classifies all marketable securities as "available for sale". Securities classified as "available for sale" are carried in the financial statements at fair value. Interest income is recognized as earned. Realized gains and losses, determined using the first-in , first-out method, are included in earnings; unrealized holding gains and losses are reported in other comprehensive income.

Securities classified as "available for sale" are stated at fair value, within a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. This hierarchy consists of three broad levels: Level 1 inputs consist of unadjusted quoted prices in active markets for identical assets and have the highest priority, Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly and Level 3 inputs, which are unobservable input where there is little, if any, market activity for the asset or liability at the measurement date and have the lowest priority.

The Trust invests in various types of investment securities. Investment securities are exposed to various risks, such as interest rate, market, and credit risk. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the accompanying financial statements.

Member Contributions The Trust provides for assessment adjustments to its members based upon actual payroll information and accrues such assessments in the year billed. The Trust also assesses members for deficits based on deficits in prior policy years. Those assessments are recognized as revenue once an assessment has been determined and approved by the Trust's board for billing.

An allowance for doubtful member contributions receivable as of December 31, 2013 and 2012 was $570,000 and $540,000, respectively. This allowance was based on member history in the Trust, collection activity, and recent correspondence between members and the Trust.

Reserves for Losses and Loss Adjustment Expenses The actuarially determined reserves for losses and loss adjustment expenses includes an amount determined from loss reports and individual cases, an amount for losses incurred but not reported (IBNR)and an amount for certain New York State assessments. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may vary significantly from the estimated amounts and could have a material effect on Members' equity in future periods. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. The reserves for losses and loss adjustment expense is reported net of receivables for salvage, subrogation and New York State Special Disability Fund recoveries of approximately $583,222 and $632,134 as of December 31 , 2013 and 2012, respectively. Loss reserves were discounted to present value using a 1% and 3% discount rate for the years ended December 31 , 2013 and 2012, respectively.

The reserve for loss and loss adjustment expenses includes an estimate for certain New York State assessments and charges.

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)

3.

New York State Assessments

Effective January 1, 2011 , inactive self-insured group trusts are only responsible to pay New York State assessments under Section 50-5, which is based on indemnity payments paid by the Trust times a rate established by the WCB.

The assessment procedure has undergone several changes in recent years and further changes to the process can be anticipated. Moreover, rates used for the assessments are highly uncertain. Elimination of the Special Disability Fund and the recent failure of several individual and group self-insurers will impact future assessment rates. The Workers' Compensation Board has been indefinite with respect to both its estimation expectation and impending rates of assessment for future periods.

Income Taxes The Trust is a taxable entity, and is required to file federal Form 1120 PC and its New York State return on a calendar year basis. Income taxes are based on financial statement income.

The Trust follows the provisions of Accounting for Uncertainty in Income Taxes as it related to uncertain tax positions. In evaluating the Trust's tax provisions the Trust considers future taxable income, reversal of temporary differences, interpretations and tax planning strategies. The Trust believes their estimates for tax provisions are appropriate based on current facts and circumstances. The Trust is no longer subject to income tax examination by tax authorities for years prior to the year ended December 31, 2010.

INVESTMENTS

Investments consisted of the following at:

Gross Cost Unrealized or Holding Carrying

Amortized cost Gains {Losses} Fair Value Value December 31, 2013 Avai lable-for-sale: Certificates of deposit $ 724,244 $ 4,476 $ 728,720 $ 728,720 Corporate bonds 451 ,816 4,245 456,061 456,061 Mutual funds- fixed

income 304,126 (6,104) 298,022 298,022 Total available for sale

sale $ 1,480,186 $ 2,617 $ 1,482,803 $ 1,482,803

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3. INVESTMENTS (Continued)

Gross Cost Unrealized

or Holding Carrying Amortized cost Gains Fair Value Value

December 31, 2012 Available-for-sale: Certificates of deposit $ 763,369 $ 4,647 $ 768,016 $ 768,016 Obligations of U.S. 828,097 2,179 830,276 830,276 Corporate bonds 906,153 19,652 925,805 925,805 Mutual funds- fixed

income 899,390 1' 112 900,502 900,502 Total available for sale

sale $ 3,397,009 $ 27,590 $ 3,424,599 $ 3,424,599

Proceeds from the sale and maturity of investments for the years ended December 31, 2013 and 2012 were $1,921,035 and $1 ,494,090, respectively, resulting in gross realized gains of $4,212 and $7,245, respectively.

The scheduled maturities of fixed maturity investments at December 31, 2013, were as follows:

Amortized Fair Cost Value

Due in less than one year $ 200,939 $ 201 '140 Due after one year through five years 250,877 254,921

Total $ 451,816 $ 456,061

Members' equity at December 31, 2013 includes unrealized holding gains on available for sale securities of $2,617 less related deferred taxes of $1,047. Members' equity at December 31, 2012 includes unrealized holding gains on available for sale securities of $27,590 less related deferred taxes of $11,037.

Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2013 and 2012.

Mutual funds:

Corporate bonds:

Obligations of U.S. Government corporations:

Valued at the net asset value (NAV) of shares held by the Trust at year end (level 1 measurements).

Certain corporate bonds are valued at the closing price of similar assets reported in the active market in which the bond is traded (level 2 measurements).

Valued at the closing price of similar assets reported in the active market in which the obligation is traded (level 2 measurements).

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4. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table presents an analysis of the reserve for loss and loss adjustment expenses, including an estimate of future losses and a reconciliation of beginning and ending reserve balances for 2013 and 2012. The reserve is stated on a net basis after deductions for losses recoverable from reinsurers and subrogation.

Balance, January 1 Less: Reinsurance receivable at beginning of year Net balance, January 1 Incurred related to for prior years Paid related to for prior years Plus: Reinsurance receivable at year end Balance, December 31

Year Ended December 31, 2013 2012

$ 9,604,563 278,352

9,326,211 1,046,949

(1 ,559,351) 309,310

$ 9,123,119

$ 11,769,762 251 ,043

11,518,719 1,927,018 (4,119,526)

278,352 $ 9,604,563

During 2013, the Trust experienced significant adverse development in fund years 05/06, 06/07, 07108, 08/09, 2010 and 2011. Approximately twenty claims accounted for over $1.2 million (net) of the adverse development in these years. During 2012, the Trust experienced significant adverse development in fund years 06/07, 08/09, 2010 and 2011. Approximately ten claims accounted for over $1.9 million of the adverse development in these years. In 2013, a portion of the adverse development was directly a result of the 2013-14 NYS budget which contained a provision closing the Fund for Reopened Cases (25-a Fund) to new cases.

5. EXCESSINSURANCE

In the normal course of business, the Trust seeks to reduce the loss that may arise from catastrophe or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with a reinsurer. Since the Trust did not provide self-insurance during the years December 31, 2013 and 2012, excess insurance premium expense was $0 for both years. Amounts recoverable from reinsurers are estimated in a manner consistent with the excess policy.

The amount of recoveries pertaining to the Trust's reinsurance contract from losses incurred for the years ended December 31, 2013 and 2012 was $309,310 and $278,352, respectively.

In the event the Trust's reinsurer is unable to meet its obligations under the reinsurance agreements, the Trust would continue to have primary liability to members for losses incurred.

The Trust and its advisors evaluate the financial condition of its reinsurers on an ongoing basis. Although the Trust only utilizes a single reinsurer for each loss year, it has not experienced any losses with a reinsurer and does not believe that it is exposed to any significant credit risk with reinsurers.

6. MANAGEMENTFEES

The Trust has entered into agreements with third-party administrators under which they will provide various services including claims administration, marketing, accounting and general administration. For the years ended December 31, 2013 and 2012, the Trust incurred management fees of $212,500 and $314,147, respectively.

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7. INCOME TAXES

Deferred income taxes are based on the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The tax effects of temporary differenced and carryforwards that give rise to significant portions of deferred tax assets consist of the following :

Deferred tax assets: Tax reserve adjustment Allowance for doubtful member contributions Net operating loss carryforwards Valuation allowance

2013 2012

$ 658,534 $ 437,460 197,840

1,465,590 (607,848)

219,509 1,843,388 (706,363)

$ 2,015,068 $ 1,493,042

At December 31, 2013, the Trust has federal net operating loss carryforwards of $4,786,000 expiring in various years through 2033.

8. COMMITMENTS AND CONTINGENCIES

Indemnity Agreements The Trust has entered into an indemnification agreement with each member to provide workers' compensation and employer's liability coverage. The agreement stipulates, among other things, that each member is jointly and severally liable for the workers' compensation and employers' liability obligations of the Trust and its members' which were incurred during the member's period of membership in the Trust, irrespective of the subsequent termination of the member's membership in the Trust, the insolvency or bankruptcy of another member of the Trust, or other facts and circumstances. Accordingly, the financial viability of the Trust is contingent upon the financial viability of the individual members. However, recourse for any and all payments of workers' compensation and employer's liability benefits covered by the Trust's certificate of coverage to a member shall first be made from Trust's assets. To ensure the financial viability of each member, as a requirement for entering the Trust, each member had to pass a financial security test developed by the Trust to determine its financial strength. As an option, a member of the Trust could have put up other collateral in lieu of taking the financial security test.

New York State Assessments Under New York State regulatory laws, the Trust is required to pay for its share of various assessments to the WCB for certain obligations, including but not limited to the costs of the WCB's operations, and defaulted self-insurers. Through an assessment under Section 50-5 of the New York State Workers' Compensation Law, the WCB has taken the position that the Trust is obligated to contribute a share of anticipated losses of self-insurance groups that are in default, have closed or have otherwise failed to meet their obligations. The WCB has not declared that there is any limit to the Trust's potential assessments for such failed self-insurance groups. An estimated reserve for the Trust's exposure to the anticipated losses of the defaulted trusts has been included in the reserve for loss and loss adjustment expenses.

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8. COMMITMENTS AND CONTINGENCIES (Continued)

Letter-of-Credit The Trust has a letter-of-credit in favor of New York State in the amount of $1,155,000. The letter-of-credit is secured by cash total ing $1,155,000. Should New York State have to draw upon this letter-of-credit, the Trust could be potentially liable to the Bank up to $1 ,155,000.

Continuing Operations The Trust's ability to continue as a going concern is dependent upon it's: a) ability to assess members for the current deficit and b) to collect those assessments once billed. Management is planning on future assessments and is vigorously attempting to collect accounts receivables billed to members.

9. REGULATORY REVIEW

The Trust is not in compliance with the assets to liabilities ratio as required by New York State Workers' Compensation Law, Section 50, Subdivision 3-a, Part 317.9 of the regulations currently in effect at December 31, 2013 and 2012. Group Self-Insurers (trusts) who do not meet the ratio requirement are deemed under-funded and may be subject to regulatory action by the Board.

The Trust is' required to submit monthly cash flow documentation to the Board, the purpose of which is to allow the NYS Workers' Compensation Board to analyze if the Trust has adequate funds, according to the Board's methodology, that are readily available to pay claims as they become due. The Board uses a twelve month rolling average using net claims expense paid to determine a preliminary calculation for the number of months of cash the Trust has remaining. Circular 2011-5, issued on August 1, 2011 , provides guidance to Trusts in run off. The Circular states that if a Trust falls below eighteen months of unrestricted cash, the Trust must immediately issue a member deficit assessment billing, and if the Trust falls below nine months of unrestricted cash, the Board will immediately assume the administration of the Trust assets and liabilities and the Board then designate all appropriate key agents. The Trust was notified by the Board on March 20, 2014 that it was below the eighteen months of unrestricted cash based upon the Boards calculation and that the Trust is required to submit a plan to the Board for future assessments to members. The Trust is preparing a response to the Board, which will include plans to assess its members during 2014.

10. SUBSEQUENT EVENTS

Subsequent events have been evaluated through April 24, 2014, which is the date the financial statements were available to be issued.

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