SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
June 30, 1999 0-671
MOTOR CLUB OF AMERICA
(Exact name of registrant as specified in its charter)
New Jersey 22-0747730
(State of Incorporation) (I.R.S. Employer
Identification No.)
95 Route 17 South, Paramus, New Jersey 07653
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (201) 291-2000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x . No .
2,116,429 shares of Common Stock were outstanding as of August 12, 1999.
<PAGE>
MOTOR CLUB OF AMERICA
FORM 10-Q
JUNE 30, 1999
PART I PAGE
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 9
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
<S> <C> <C>
1999 1998
ASSETS
Investments $71,610,098 $75,951,241
Cash and cash equivalents 5,104,647 2,773,427
Premiums receivable 20,037,025 20,401,069
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 20,121,039 19,234,277
Notes and accounts receivable
- net 192,234 125,444
Deferred policy acquisition costs 8,188,085 8,708,329
Fixed assets - at cost, less
accumulated depreciation 1,783,608 1,671,902
Prepaid reinsurance premiums 1,024,954 1,015,581
Federal income tax recoverable - 26,724
Other assets 1,576,397 1,104,782
Total Assets $129,638,087 $131,012,776
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Losses and loss expenses $61,366,498 $58,335,143
Unearned premiums 28,923,225 30,733,144
Other liabilities 8,191,117 10,163,520
Note payable 3,000,000 3,000,000
Deferred tax liability 319,610 957,440
Federal income taxes payable 29,333 -
Total Liabilities 101,829,783 103,189,247
Shareholders' Equity:
Common Stock, par value $.50 per share:
(Authorized - 10,000,000 shares;
issued and outstanding - 2,116,429
(1999 and 1998) 1,058,215 1,058,215
Paid in additional capital 1,996,954 1,996,954
Accumulated other comprehensive loss (5,434,666) (3,422,387)
Retained earnings 30,187,801 28,190,747
Total Shareholders' Equity 27,808,304 27,823,529
Total Liabilities and
Shareholders' Equity $129,638,087 $131,012,776
<FN>
(Financial statements should be read in
conjunction with the accompanying notes)
</TABLE>
<PAGE>
<TABLE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Six Months Ended For the Three Months Ended
June 30, 1999 June 30,1998 June 30,1999 June 30,1998
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums (net of
premiums ceded totaling
$3,667,516, $3,373,178
$1,848,619 and
$1,794,878) $26,266,691 $26,122,699 $13,182,492 $13,113,746
Net investment income 2,384,857 2,077,842 1,192,325 1,036,556
Realized gains on sales
of investments 5,378 28,341 5,378 2,441
Other revenues 74,900 90,261 36,858 44,162
Total revenues 28,731,826 28,319,143 14,417,053 14,196,905
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance
recoveries totaling
$1,842,816, $1,156,632
$959,195 and $267,296) 17,540,281 17,040,737 8,657,338 8,706,413
Amortization of deferred
policy acquisition costs 7,889,322 7,250,570 4,057,199 3,460,351
Other operating expenses 850,514 1,027,834 458,906 462,842
Total losses and
expenses 26,280,117 25,319,141 13,173,443 12,629,606
Income before Federal
income taxes 2,451,709 3,000,002 1,243,610 1,567,299
Provision for Federal
income taxes: current 55,858 61,337 27,788 32,123
deferred 398,797 779,195 204,389 400,237
Total provision for Federal
income taxes 454,655 840,532 232,177 432,360
Net income $ 1,997,054 $ 2,159,470 $ 1,011,433 $ 1,134,939
Net income per common share:
Basic $.95 $1.03 $.48 $.54
Diluted $.94 $1.02 $.48 $.54
Weighted average common and potential common shares outstanding:
Basic 2,116,429 2,100,888 2,116,429 2,106,393
Diluted 2,123,899 2,122,604 2,120,053 2,118,913
<FN>
(Financial statements should be read in
conjunction with the accompanying notes)
</TABLE>
<PAGE>
<TABLE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Six Months Ended
June 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 1,997,054 $ 2,159,470
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and net amortization 311,303 307,300
Gain on sale of investments (5,378) (28,341)
Changes in:
Deferred policy
acquisition costs 520,244 61,896
Premiums receivable 364,044 (540,226)
Notes and accounts
receivable (66,790) (15,000)
Other assets (471,615) 171,052
Losses and loss expenses 3,031,355 1,959,188
Unearned premiums (1,809,919) (76,674)
Federal income tax - current 56,057 (2,263)
Federal income tax - deferred 398,798 779,195
Other liabilities (1,972,403) (1,317,577)
Reinsurance recoverable on
paid and unpaid losses (886,762) 786,290
Prepaid reinsurance premiums (9,373) 123,399
Net cash provided by
operating activities $1,456,615 $4,367,709
Investing activities:
Investments purchased (48,833,930) (95,420,568)
Fixed assets purchased (413,662) (215,908)
Proceeds from sales of investments 50,122,197 92,748,968
Net cash provided by (used in)
investing activities 874,605 (2,887,508)
Financing activities:
Common stock issued - 57,750
Net cash provided by financing activities - 57,750
Net increase in cash and
cash equivalents 2,331,220 1,537,951
Cash and cash equivalents at
beginning of period 2,773,427 222,761
Cash and cash equivalents at
end of period $5,104,647 $1,760,712
Supplemental Disclosures of Cash Flow Information
Interest paid $ 107,049 $ 2,640
Federal income taxes paid $ - $ 63,600
Non Cash Investing Activities:
Invested assets and shareholders' equity decreased by $2,012,279 and increased
by $199,634 in 1999 and 1998, respectively, as a result of changes in market
value pertaining to the Registrant's application of SFAS No. 115 - Accounting
for Certain Investments in Debt and Equity Securities.
<FN>
(Financial statements should be read in
conjunction with the accompanying notes)
</TABLE>
<PAGE>
<TABLE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<CAPTION>
For the Six Months Ended For the Three Months Ended
June 30, 1999 June 30,1998 June 30,1999 June 30,1998
<S> <C> <C> <C> <C>
Net income $1,997,054 $2,159,470 $1,011,433 $1,134,939
Other comprehensive
income (loss):
Unrealized gains(losses)
on securities, net of tax:
Unrealized holding gains
(losses) arising during
the period (2,008,730) 218,339 (1,255,572) 165,486
Less: reclassification
adjustment for gains
included in earnings (3,549) (18,705) (3,549) 7,195
Other comprehensive income
(loss) (2,012,279) 199,634 (1,259,121) 172,681
Comprehensive income ($ 15,225) $2,359,104 ($ 247,688) $1,307,620
<FN>
(Financial statements should be read in
conjunction with the accompanying notes)
</TABLE>
<PAGE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Preparation and Presentation
The accompanying condensed consolidated financial statements of
Motor Club of America (the "Registrant") include its accounts and those of its
subsidiary companies, Motor Club of America Insurance Company ("Motor Club") and
Preserver Insurance Company ("Preserver") (collectively referred to as the
"Insurance Companies"), and, in the opinion of management, contain
all adjustments necessary to present fairly the Registrant's consolidated
financial position, results of operations and cash flows, in accordance with
generally accepted accounting principles.
These statements should be read in conjunction with the Summary of
Significant Accounting Policies and other notes included in the Notes to
Financial Statements in the Registrant's 1998 Annual Report on Form 10-K.
2. Per Share Data
Basic earnings per share are computed based upon the weighted average
number of common shares outstanding during each year. Diluted earnings per
share are computed based upon the weighted average number of common shares
outstanding including outstanding stock options.
3. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated Federal income
tax return. In the three and six month periods ended June 30, 1999 and 1998,
the provision for Federal income taxes resulted in effective tax rates different
from the expected statutory Federal income tax rates, principally as a result of
(i) certain adjustments, principally those enacted under the Tax Reform Act
of 1986; (ii) utilization of Net Operating Loss ("NOL") carryforwards; and
(iii) in 1999, the recognition as a deferred tax asset of certain tax credit
carryforwards for alternative minimum tax purposes. The Registrant has now
utilized all of its NOL carryforwards at June 30, 1999.
4. North East Merger
As of March 16, 1999, the Registrant signed a definitive Agreement
and Plan of Merger to acquire North East Insurance Company ("North East")
through a merger of a wholly-owned subsidiary of the Registrant with and into
North East ("Merger"), which was amended and restated as of May 28, 1999,
(the "Merger Agreement"). North East is a NASDAQ listed property and
casualty insurance company, headquartered in Scarborough, Maine, and trading
under the symbol NEIC. Under the terms of the Merger Agreement, North East
shareholders will receive, at their individual election, (a) $3.30 per share of
North East common stock, (b) 0.19048 of a share of the Registrant's common stock
for each share of North East common stock, or (c) a combination thereof. If the
North East shareholders in the aggregate elect to exchange their North East
stock for more than 290,389 shares of the Registrant's stock, the
aggregate number of shares of the Registrant's common stock to be issued in the
Merger will be ratably reduced to 290,389 shares.
Consummation of the Merger is subject to the satisfaction of certain
conditions set forth in the Merger Agreement. The Registrant has received the
approvals of the Maine Bureau of Insurance and its shareholders and North East
has received the approval of its shareholders to complete the Merger. The only
principal condition remaining to complete the Merger is the approval of the New
York Department of Insurance. Both the Registrant and North East expect that
this condition will be satisfied in due course. The Registrant intends to close
the transaction immediately after the New York approval is received.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview of Business Operations
The Registrant and a group of affiliated corporations provide property
and casualty insurance related services. The Registrant has two subsidiaries
which are domiciled in the State of New Jersey and write property and casualty
insurance, Motor Club and Preserver. At this time one hundred percent of the
Registrant's insurance operations are in the State of New Jersey.
The Registrant seeks to increase its identification as a provider of
small commercial lines insurance. The Registrant also seeks to expand and
diversify its insurance operations outside the State of New Jersey. The
Registrant believes that both of these objectives can be attained through
the acquisition of other insurance companies which present opportunities to
write these product lines in different geographic areas. The Registrant expects
to continue to pursue these objectives during 1999 and beyond.
The Registrant anticipates continuing revenue growth in the State of
New Jersey through small commercial and ancillary coverages written by Preserver
as well as through new private passenger automobile ("PPA") writings by
Motor Club.
The Registrant also anticipates continued reductions in its operating
expenses, namely through the implementation of operating efficiencies which
should reduce other overhead expenditures.
New Jersey Private Passenger Automobile Insurance
The New Jersey PPA market has historically been subject to regulatory
and legislative volatility which has, at times, adversely affected the
profitability of this line of business, despite New Jersey having among the
highest average premium rate in the United States. New Jersey insurance
law presently requires insurers to write all eligible personal automobile
coverage presented to them from drivers with eight points or less on their
driving record. This is commonly referred to as "take-all-comers".
The New Jersey Department of Banking and Insurance ("NJ DOBI")
may grant an insurer relief, by written notification, from writing new PPA
pursuant to the take-all-comers provisions of New Jersey law if a showing finds
that the insurer's premium to surplus ("leverage") ratio exceeds 3 to 1.
Motor Club's present applicable leverage ratio for the twelve months ended
June 30, 1999 is 3.50 to 1. However, this ratio is temporarily elevated due to
the conversion from six month policies to twelve month policies that began
July 1, 1998. It appears that Motor Club's leverage ratio, adjusted for this
conversion, was below 3 to 1 at June 30, 1999.
The Registrant's tier rating system implemented as part of the 1997
New Jersey PPA legislation was approved by the NJ DOBI and has been implemented
on all PPA policies with effective dates on and after November 1, 1998.
Additional New Jersey PPA legislation was enacted in 1998 and
implemented with new policies issued on and after March 22, 1999, which:
1) allows insureds to reduce levels of compulsory coverages, including the
option to reduce their coverage for Personal Injury Protection ("PIP") to as
low as $15,000, from the presently required $250,000; 2) revises the PIP
policy form to set forth the medical treatments and services, valid diagnostic
tests and appropriate health care protocols which are eligible to be paid;
3) seeks to limit lawsuits by claimants by redefining of the type of injury
which would be grounds for litigation; 4) replaces the present PIP arbitration
system which utilizes part-time arbitrators who render only oral decisions
without consulting medical professionals with one using full-time dispute
resolution professionals who may refer questions of medical necessity or
diagnosis to medical review organizations and who must render written decisions;
5) appoints a special fraud prosecutor to increase enforcement of fraudulent
acts committed against insurance companies; 6) removes the system of territorial
rating caps which have been in place since 1983, enabling insurers to modify
(as appropriate) rates charged in various rating territories, which will be
redefined; and 7) requires up to a 15% reduction in rates on all PPA policies.
The only element of the 1998 legislation not implemented in 1999 is
the redefinition of the territories and removal of the territorial rating caps,
which is scheduled to be implemented in 2000. The Registrant believes that the
legislation will have a modest net negative effect on Motor Club's PPA
operations and profitability, as the mandated rate reductions do not appear to
be completely cost justified (based on information presently available) by the
cost savings contained in the legislation.
Results of Operations
Net income decreased $124,000 or $.06 basic and diluted net income per
share and $162,000 or $.08 basic and diluted net income per share in the three
and six months ended June 30, 1999 as compared to the same periods in 1998,
respectively.
The decline in three and six month earnings was primarily due to
reduced premium rates in Motor Club, due to the rate rollback provisions of the
1998 PPA reform legislation implemented in 1999 and previously described.
Motor Club's income before federal income taxes declined by $591,000 and
$525,000 in the three and six month periods ended June 30, 1999 as compared to
the same periods in 1998, respectively. These reductions were in line with
expectations and were offset by improvements in Preserver's income before
federal income taxes of $349,000 and $155,000 in the three and six month
periods ended June 30, 1999 as compared to the same periods in 1998,
respectively, due to stable loss ratios and positive revenue growth.
The decline in net income was also offset by lower provisions for
Federal income taxes in the three and six months results ended June 30, 1999 as
compared to 1998, due principally to the recognition in 1999 of certain tax
credit carryforwards for alternative minimum tax purposes as a deferred tax
asset. The Registrant has now begun to utilize these tax credits, having
fully utilized its net operating losses.
Revenues
Insurance Premiums
Insurance premiums increased $69,000 and $144,000 in the three and
six months ended June 30, 1999, compared to the same period in 1998,
respectively, both less than one percent increases. Motor Club's insurance
premiums declined due to the rate rollback provisions of the 1998 PPA
reform legislation implemented in 1999 and previously described. This
decrease was offset in the first six months of 1999 by higher insurance premiums
in Preserver, principally in its commercial lines programs. The Registrant
expects a continued decline in Motor Club's insurance premiums during
the remainder of 1999, as policies renew and the imposed rate rollback
provisions are applied.
The following table details the net increases in insurance premiums
for the three and six months period ended June 30, 1999 as compared to the same
periods in 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
Class of Business Net Net
Premium Percent Premium Percent
<S> <C> <C> <C> <C>
Private Passenger Automobile ($133,000) (1%) ($288,000) (1%)
Commercial Lines 264,000 15% 439,000 12%
Personal Property (62,000) (4%) (7,000) (0%)
Total $ 69,000 1% $144,000 1%
</TABLE>
Effective July 1, 1998, Motor Club began converting its existing six
month policies, which constitute 98% of its personal automobile book of
business, to twelve month policies. This measure will further improve the
Registrant's operating efficiency and service levels, and reduce expenses. The
Registrant believes this is particularly important since the NJ DOBI has not
proposed or adopted regulations which would provide for expedited prior approval
rate increases, as required by legislation passed by the New Jersey Legislature
in 1997. While conversion to twelve month policies did, for a one year period
commencing July 1, 1998, temporarily increase the amount of premiums written
by the Registrant, it did not effect the amount of premium earned.
During the first quarter of 1998, Preserver introduced its new
workers' compensation product. The Registrant believes the introduction of this
product, along with other product improvements, enable Preserver to offer a
broad, competitive product line which will grow steadily in the future.
Insurance premiums in Preserver's workers' compensation program increased
$250,000 and $320,000 in the three and six months ended June 30, 1999
as compared to the same periods in 1998, respectively.
Net Investment Income
Net investment income increased $156,000 and $307,000, both 15%
increases for the three and six months ended June 30, 1999 as compared to the
same period in 1998, respectively, due to an increase in invested assets.
Average invested assets for the six months period ended June 30, 1999 were
$73,107,000 as compared to $64,466,000 for the same period in 1998. The
investment portfolio (including short-term investments and excluding realized
capital gains) yielded 6.52% for the six months ended June 30, 1999 as compared
to 6.45% for the same period in 1998.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred decreased $49,000 or less than one
percent in the three months ended June 30, 1999 as compared to the same period
in 1998, and increased $500,000 or 3% in the six months ended June 30, 1999 as
compared to 1998.
The Registrant had slightly lower loss ratios during the 1999 second
quarter, although year to date loss ratios have increased marginally compared
to 1998:
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
Motor Club 68.8% 66.9% 70.4% 68.3%
Preserver 56.8% 64.8% 56.5% 55.8%
Total 65.7% 66.4% 66.8% 65.2%
The personal automobile loss ratio for Motor Club remains in line with
expectations which consider the increased amounts of new personal automobile
written since 1995, now representing 56% of the total Motor Club book of
business. Preserver continued the excellent loss ratios which it has
experienced in recent years.
No significant adverse trends were experienced or identified during
the three and six months period ended June 30, 1999.
Amortization of Deferred Policy Acquisition Costs and Other Operating Expenses
During 1999, the completion of the Policy Term Conversion, in
conjunction with the rate rollback required under the 1998 PPA reforms, has
increased the Registrant's expense ratio and resulted in increased
amortization of deferred acquisition expenses. Consequently, these expenses
increased $593,000 or 15% and $462,000 or 6% in the three and six month
periods ended June 30, 1999 as compared to the same period in 1998,
respectively. This resulted in an increase in the expense ratio to 34.3% and
33.3% for the three and six month ended June 30, 1999 as compared to 29.9%
and 31.7% for the same period in 1998, respectively.
Underlying operating expenses were essentially unchanged in the second
quarter 1999 as compared to 1998 and were $177,000 or 17% lower in the six
months ended June 30, 1999 as compared to the same period in 1998. The
Registrant remains committed to reducing its expense ratio by increasing
revenues while either limiting increases or reducing where possible its
overhead expenditures.
Financial Condition, Liquidity and Capital Resources
The Registrant's book value decreased to $13.14 per share at
June 30, 1999 from $13.15 per share at December 31, 1998. The sources of the
net decrease were net income of $1,997,000 described previously, offset by a
decrease of $2,012,000 (net of deferred taxes) in the market
value of fixed maturity investments accounted for as available-for-sale
securities under SFAS No. 115. Interest rates have risen sharply in the first
half of 1999, causing substantial unrealized losses during this period in the
Registrant's investment portfolio.
The Insurance Companies' need for liquidity arises primarily from the
obligation to pay claims. The primary sources of liquidity are premiums
received, collections from reinsurers and proceeds from investments.
Reserving assumptions and payment patterns of the Insurance Companies
did not materially change from the prior year and there were no unusually large
retained losses resulting from claim activity. Unpaid losses are not
discounted.
Operating and Investing Activities
Net cash provided by operating activities were $1,457,000 and
$4,368,000 in the six months ended June 30, 1999 and 1998, respectively.
The lower cash flow provided by operating activities in the six months ended
June 30, 1999 as compared to 1998 reflects the lower growth in
the Insurance Companies' premium revenue during those periods.
Net cash provided by investing activities was $875,000 in 1999, reflecting the
decline in Motor Club insurance premium as a result of the rate rollback
associated with the 1998 PPA reform. Net cash utilized in investing
activities was $2,888,000 in 1998, reflecting the investment of cash provided
by operating activities.
No unusual or nonrecurring operating expenditures have been incurred
over these periods. Additionally, the payout ratio of losses has not fluctuated
substantially over these periods.
Financing Activities
The Registrant paid no dividend on its common stock in 1999 or 1998.
In connection with its announced acquisition of North East, the
Registrant's shareholders have approved an alternative plan of financing the
Merger. Under this plan, the Registrant would issue unsecured convertible
debentures, in one or more series, for a total principal amount of up
to $10 million. Each series would be due on the tenth anniversary of the date
of issuance and will bear interest at a rate equal to 2.5% over the London
Interbank Offered Rate, fixed as of the date on which the series is issued.
Interest will be paid quarterly, in arrears.
At the holder's option, each debenture will be convertible at any
time, in whole or in part, into a number of the Registrant's shares equal to the
total principal amount of indebtedness to be converted, divided by 130% of the
average trading price of the Registrant's common stock over the 20 day period
immediately prior to the debenture's issue date.
The debentures were offered only to high net worth individuals,
institutional investors, and other accredited investors (as defined in section
501 of the Securities Act of 1933) who were shareholders of the Registrant as of
April 29, 1999. Consequently, the offering of these debentures has been
structured to be exempt from the registration requirements of the Securities
Act of 1933. Members of the Registrant's Executive Committee have subscribed
for 92.5% of the debentures offered.
If the members of the Executive Committee convert a substantial
portion of the debentures, their percentage ownership in the Registrant's common
stock will substantially increase. It is possible that the Executive Committee
could increase its collective percentage stock ownership from the current 42.2%
to over 50%.
The Registrant presently anticipates drawing on all $10 million of the
debentures at the closing of the Merger.
The Registrant has no other material outstanding capital commitments
which would require additional financing.
Year 2000
The Registrant has been addressing the issues resulting from computer
programs which use two digits, rather than four digits to define a year and
which may be affected by the use of dates after January 1, 2000 ("Y2K Issue").
The Registrant has divided the Y2K Issue into the following three areas:
(1) Internal Technology; (2) External Technology; and (3) Insurance Issues.
This disclosure updates the disclosure made in the Registrant's 1998
Annual Report on Form 10-K. All terms used herein are as defined in that
Report.
The Registrant has not experienced any significant Y2K related
problems from its Business Critical Internal Technology to date in 1999,
including processing of policy information and changes which have date
information after January 1, 2000. A rating mechanism for certain
Business Critical Internal Technology, which represents less than 5% of the
Registrant's direct premium revenue, was discovered in the 1999 second quarter
to require additional Y2K remedation, which is expected to be completed by
October 15, 1999. The Registrant is approximately 90% complete with the
certification of the LAN and PC environments utilized in its Internal Technology
as Y2K complaint. The Registrant expects to be compliant with this
element of its Y2K compliance effort no later than September 1, 1999, two months
later than the original date estimated. All conversions of Other Internal
Technology to Y2K compliant versions have been completed.
The Registrant has expended less that $200,000 to address Y2K issues
in 1999, consisting primarily of the purchase of new PC's and file servers for
its LAN's which are Y2K compliant and are replacing obsolete equipment.
Estimated costs to complete work related to the Y2K issue are currently less
than $100,000.
The risks associated with the Registrant's Internal Technology,
External Technology and Insurance Issues with regard to the Y2K Issue could
result in an interruption in, or a failure of, certain normal business
activities or operations, in addition to increased amounts of losses and
loss expenses incurred. This could materially and adversely affect the
Registrant's results of operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Y2K Issue, the Registrant is unable to
determine at this time whether the consequences of Y2K failures will have a
material impact on the Registrant's results of operations, liquidity and
financial condition. The Registrant's efforts to address the Y2K Issue are
expected to significantly reduce its level of uncertainty about the Y2K Issue.
The Registrant believes that, with the steps described herein, the possibility
of significant interruptions of normal operations should be reduced. This
disclosure regarding the Y2K Issue contains statements which are forward looking
and that involve risks and uncertainties and qualify for the statutory safe
harbor under the Private Securities Litigation Reform Act of 1995.
Future activities related to the Y2K Issue may not adhere to the anticipated
schedule and cost estimates because the Registrant may encounter : (1)
more problems than anticipated in bringing its Internal Technology in
compliance with the Y2K Issue and not be able to provide adequate resources to
address those problems; (2) unexpected problems with External Technology due to
Business Partners who are not able to be in compliance with the Y2K Issues
despite their communications with the Registrant to the contrary; and (3) public
policy decisions related to Insurance Issues which adversely affect the
Registrant's operations.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
This Report on Form 10-Q contains statements that are not historical
facts and are considered "forward-looking statements" (as defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by terms such
as "believes", "expects", "may", "will", "should", "anticipates", the negatives
thereof, or by discussions of strategy. Certain statements contained herein are
forward-looking statements that involve risks, uncertainties, opinions and
predictions, and no assurance can be given that the future results will be
achieved since events or results may differ materially as a result of risks
facing the Registrant. These include, but are not limited to, economic, market
or regulatory conditions as well as risks associated with Motor Club
of America's entry into new markets; diversification; catastrophic events;
and state regulatory and legislative actions which can affect the profitability
of certain lines of business and impede Motor Club of America's ability to
charge adequate rates. Accordingly, Motor Club of America's premium growth and
underwriting results have been and will continue to be potentially materially
affected by these factors.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTOR CLUB OF AMERICA
s/Stephen A. Gilbert
By: Stephen A. Gilbert
President
s/Patrick J. Haveron
By: Patrick J. Haveron
Executive Vice President -
Chief Financial Officer
and Chief Accounting Officer
Dated: August 16, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
These schedules contain summary financial information extracted from Motor Club
of America's Consoldiated Balance Sheets for the period ended June 30, 1999 and
the Consolidated Statements of Operations for the six months ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 71,490,983
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 119,115
<REAL-ESTATE> 0
<TOTAL-INVEST> 71,610,098
<CASH> 5,104,647
<RECOVER-REINSURE> 20,121,039
<DEFERRED-ACQUISITION> 8,188,085
<TOTAL-ASSETS> 129,638,087
<POLICY-LOSSES> 61,366,498
<UNEARNED-PREMIUMS> 28,923,225
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 3,000,000
0
0
<COMMON> 1,058,215
<OTHER-SE> 26,750,089
<TOTAL-LIABILITY-AND-EQUITY> 129,638,087
26,266,691
<INVESTMENT-INCOME> 2,384,857
<INVESTMENT-GAINS> 5,378
<OTHER-INCOME> 74,900
<BENEFITS> 17,540,281
<UNDERWRITING-AMORTIZATION> 7,889,322
<UNDERWRITING-OTHER> 850,514
<INCOME-PRETAX> 2,451,709
<INCOME-TAX> 454,655
<INCOME-CONTINUING> 1,997,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,997,054
<EPS-BASIC> .95
<EPS-DILUTED> .94
<RESERVE-OPEN> 58,335,143
<PROVISION-CURRENT> 20,933,604
<PROVISION-PRIOR> (1,550,507)
<PAYMENTS-CURRENT> 4,818,020
<PAYMENTS-PRIOR> 11,533,722
<RESERVE-CLOSE> 61,366,498
<CUMULATIVE-DEFICIENCY> (1,550,507)
</TABLE>
