SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year end Commission File Number
December 31, 1998 0-671
MOTOR CLUB OF AMERICA
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(201)291-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value) $.50 per share
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(Title of Class)
Indicate by check mark whether the registrant (l) 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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the voting Common Stock (par value
$.50 per share) held by non-affiliates on March 26, 1999 was
$15,895,456 based on the closing selling price.
2,116,429 shares of Common Stock were outstanding as of March 26,
1999.
Documents Incorporated by Reference: Portions of the registrant's
definitive proxy statement issued in conjunction with the June 9,
1999 Annual Meeting of Shareholders (Part III).
MOTOR CLUB OF AMERICA
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1998
PART I PAGE
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ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 40
ITEM 3. LEGAL PROCEEDINGS 41
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 41
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 42
ITEM 6. SELECTED FINANCIAL DATA 43
ITEM 7. MANAGEMENT'S DISCUSSION AND 44
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND 60
SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH 60
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF 60
THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION 60
ITEM 12. SECURITY OWNERSHIP OF CERTAIN 60
BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 60
TRANSACTIONS
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 61
SCHEDULES AND REPORTS ON FORM 8-K
CAUTINARY STATEMENT
- - -------------------
This Report on Form 10-K 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
Company. 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; Motor Club of America's
pending merger with North East Insurance Company; 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 I
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Item 1. Business
- - ----------------
(a) GENERAL DEVELOPMENT OF BUSINESS
Motor Club of America (the "Registrant") and a group of
wholly-owned subsidiaries of which the Registrant is parent, are
known as the "Motor Club of America Companies" (the "Motor Club of
America Group") and provide property and casualty insurance
services. The Registrant, incorporated in New Jersey in 1933 as
"Automobile Association of New Jersey", is the successor to a New
Jersey corporation organized in 1926. The present name was adopted
in 1958.
The Registrant has two subsidiaries which write property
and casualty insurance, Motor Club of America Insurance Company
("Motor Club") and Preserver Insurance Company ("Preserver").
Motor Club writes private passenger automobile ("PPA") business.
Preserver writes small commercial, homeowners and ancillary
coverages. Motor Club and Preserver are collectively referred to
as the "Insurance Companies". The Insurance Companies are
domiciled in the State of New Jersey.
The Registrant is pursuing a strategy to: (1) increase
its identification as a provider of small commercial lines
insurance and has continued to expand its product line in support
of this objective; and (2) 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.
On March 16, 1999, the Registrant signed a definitive
Agreement and Plan of Merger ("Merger Agreement") 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").
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) one share of the Registrant's common stock for each 5.25 shares
of North East common stock, or (c) a combination thereof. If the North East
shareholders in the aggregate elect to exchange more than 50% of
their shares for the Registrant's stock, the aggregate percentage
will be ratably reduced to 50%.
Consummation of the Merger is subject to the satisfaction
of certain conditions set forth in the merger agreement, including
approval from the shareholders of the Registrant and North East and
authorization by state insurance regulators. Both the Registrant
and North East expect that these conditions will be satisfied in
due course.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Registrant does not have any reportable industry
segments for the three fiscal years reported in this Form 10-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS
See Items 1 (a) and 7.
FIRE AND CASUALTY INSURANCE OPERTIONS
- - -------------------------------------
GENERAL
The Insurance Companies distribute insurance policies and
generate premium revenue through approximately 160 independent
producers in New Jersey.
The Registrant anticipates continuing its emphasis of the
small commercial and ancillary coverages written by Preserver in
the State of New Jersey. Commencing in 1998, Preserver began to
offer workers' compensation insurance as part of its commercial
lines product offerings, along with product offerings in boiler and
machinery and umbrella coverages which were enhanced in 1997. New
PPA writings by Motor Club are expected to continue as well.
Preserver has sought to increase its identity as a
commercial lines market through these product improvements as well
as a new corporate identification program, specifically, its
"Preserver - The Business Advantage" logo. The Registrant believes
these improvements, combined with Preserver's existing product
line, enable Preserver to offer a broad, competitive product line
which will grow steadily in the future.
As of December 31, 1998, the Insurance Companies had a
pooled rating of B+ (Very Good) by A.M. Best Company, Inc.
("Best"). See Item 1(c) "Narrative Description of Business - Fire
and Casualty Insurance Operations - Pooling Arrangement".
In January 1999, Preserver and Motor Club received
separate ratings of B+ (Very Good) from Best. Best ratings are
based upon factors relevant to policyholders and are not directed
toward the protection of investors. Management believes that the
Best rating is an important factor in marketing the Insurance
Companies' products, and in particular Preserver's, to their agents
and customers.
From January 1, 1996 to December 31, 1997, Preserver and
Motor Club participated in an intercompany pooling agreement
("Pooling") under which their property and casualty business was
combined. See Item 1(c) "Narrative Description of Business - Fire
and Casualty Insurance Operations - Pooling Arrangement" for
further details. In each of Accident Years 1996 and 1997,
Preserver's participation in the Pooling was 30% and Motor Club's
was 70%.
Effective July 1, 1998, Motor Club began converting its
existing policies with six month terms to twelve month policy terms
(the "Policy Term Conversion"). Management believes this measure
will further improve the Registrant's operating efficiency and
service levels, and reduce expenses. While the Policy Term
Conversion will, for a one year period commencing July 1, 1998,
temporarily increase the amount of premiums written by Motor Club,
it will not effect the amount of premiums earned.
The table which follows reflects the increase in premium
written as a result of the Policy Term Conversion and sets forth
the direct premiums written, by line of insurance, for the
Insurance Companies for the last five years:
<TABLE>
<CAPTION>
Direct Written Premiums
(Amounts in Thousands - Exclusive of Service Charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
Direct Percent Direct Percent Direct Percent Direct Percent Direct
Percent
Program Premium of Total Premium of Total Premium of Total Premium of Total
Premium of Total
- - -------- ------------------ ------------------ ------------------ --------------------
Private Passenger
Automobile $54,254 76.7% $43,238 74.7% $41,055 76.0% $32,100 73.1%
$27,636 74.4%
Commercial Lines 9,672 13.7% 8,019 13.9% 6,744 12.5% 5,828 13.3%
4,431 12.0%
Personal Property 6,833 9.6% 6,596 11.4% 6,216 11.5% 5,972 13.6%
5,056 13.6%
------- ----- ------- ----- ------- ----- ------- -----
Total $70,759 100.0% $57,853 100.0% $54,015 100.0% $43,900 100.0%
$37,123 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
The following table sets forth ratios for the Insurance
Companies prepared in accordance with generally accepted accounting
principles ("GAAP") and with statutory accounting practices ("SAP")
prescribed or permitted by state insurance authorities. The SAP
combined ratio, a standard measure of underwriting profitability,
is the sum of: (i) the ratio of incurred losses and loss expenses
to net earned premium ("loss ratio"); and (ii) the ratio of
expenses incurred for commissions, premium taxes, administrative
and other underwriting expenses to net written premium ("expense
ratio"). The GAAP combined ratio is calculated in the same manner
except that it is based on GAAP amounts and the denominator for
each component is net earned premium.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31,
---------------------------
1998 1997 1996
---- ---- ----
GAAP operating ratios:
Loss ratio 68.6% 65.1% 64.5%
Expense ratio 29.1% 33.3% 37.9%
---- ---- -----
Combined ratio 97.7% 98.4% 102.4%
==== ==== =====
Statutory operating ratios:
Loss ratio 69.9% 66.3% 66.6%
Expense ratio 28.8% 32.4% 37.5%
---- ---- -----
Combined ratio 98.7% 98.7% 104.1%
==== ==== =====
</TABLE>
In general, when the combined ratio is under 100%,
underwriting results are considered profitable. Conversely, when
the combined ratio is over 100%, underwriting results are generally
considered unprofitable. The combined ratio reflects underwriting
results and not investment income, federal income taxes or other
non-operating income or expense. The Registrant's operating income
is a function of both underwriting results and investment income.
POOLING ARRANGEMENT
From January 1, 1996 to December 31, 1997, the Insurance
Companies participated in an intercompany pooling arrangement
("Pooling") with each other. Since the inception of the Pooling,
it was the Registrant's intention to maintain the Pooling only
until Preserver could secure a separate Best rating equal to or
greater than the pooled Best rating of B+ (Very Good).
On December 17, 1998, the New Jersey Department of Banking and
Insurance ("NJ DOBI") approved the termination of the pooling agreement
on a run-off basis effective January 1, 1998, which means that losses
on the years covered by the Pooling will still be pooled until they are
completely settled. Pursuant to the approved Pooling termination,
the Insurance Companies have no further liability to each other
under the pooling agreement as to losses occurring after December
31, 1997. As noted previously, Preserver received a separate
rating of B+ (Very Good) from Best in January 1999.
The Pooling enabled Preserver, which commenced operations
in 1993, to attain a Best rating it would not otherwise have been
able to achieve due to its relatively insufficient operating
experience. The Pooling was intended to permit a more uniform and
stable underwriting result from year to year for the Insurance
Companies in the Pooling than they would experience individually
and to reduce the risk of either of the Pooling participants by
spreading the risk of loss of either of the pool participants. The
Insurance Companies therefore had at their disposal the
underwriting capacity of the entire pool, rather than being limited
to policy exposures of a size commensurate with its own capital and
surplus. The additional capacity existed because such policy
exposures are spread between both pool participants which each have
its own capital and surplus. Regulation by state insurance
departments is applied to the individual companies rather than to
the Pooling.
Pursuant to the terms of the Pooling, Preserver ceded to
Motor Club 100% of its net premiums on all of its business as of
January 1, 1996 and between that date and December 31, 1997, and
100% of its net losses and expenses on all of its business
occurring between January 1, 1996 and December 31, 1997. All of
Motor Club's net premiums, losses and expenses during these same
periods, as applicable, were included in the pooled business.
Motor Club then retroceded to Preserver 30% of the premiums, losses
and expenses subject to the Pooling, and retained the remaining
70%. The Pooling does not legally discharge the Insurance
Companies from their primary liability for the full amount of the
policies ceded.
LOSS RESERVES
Reserves for unpaid losses and loss expenses at any
report date reflect the estimate of the liabilities for the
ultimate net loss of reported claims and estimated incurred but not
reported claims.
The liability for unpaid losses and loss expenses is
determined using case-basis evaluations and statistical projections
and represents estimates of the ultimate net cost of all unpaid
losses and loss expenses through December 31 of each year. These
estimates are continually reviewed and refined as historical
experience develops, new information becomes known and the effects
of trends in future claim severity and frequency are considered.
The liabilities are adjusted accordingly with such
adjustments being reflected in the current year operations. No
trends that are considered abnormal have been identified as of the
most recent evaluation date, December 31, 1998.
The Insurance Companies generally reinsure all risks in
excess of $100,000 for property lines (increased from $75,000 for
losses incurred before July 1, 1997) and $150,000 for casualty
lines.
The following table presents a reconciliation of
beginning and ending liability balances for 1998, 1997 and 1996,
reported under GAAP:
<TABLE>
<CAPTION>
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS EXPENSES
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Liability for losses and loss expenses, net of
reinsurance recoverables, at January 1 $32,884 $28,114 $23,409
Incurred losses and loss expenses
Provision for current year claims 32,598 29,369 28,244
Increase in provision for prior years'
claims 3,881 3,773 904
------- ------- -------
Total incurred losses and loss expenses 36,479 33,142 29,148
------- ------- -------
Payments for losses and loss expenses
Payments on current year claims 12,038 12,169 13,029
Payments on prior years' claims 17,511 16,203 11,414
------- ------- -------
Total payments for losses and loss expenses 29,549 28,372 24,443
------- ------- -------
Liability for losses and loss expenses, net
of reinsurance recoverables, at December 31 39,814 32,884 28,114
Reinsurance recoverables on unpaid losses
and loss expenses, at December 31 18,521 17,363 19,553
------- ------- -------
Liability for losses and loss expenses,
gross of reinsurance recoverables,
at December 31 $58,335 $50,247 $47,667
======= ======= =======
</TABLE>
The reconciliation shows a 1998 deficiency of $3,881,000
in the liability recorded at December 31, 1997. The deficiency is
primarily the result of; (1) initial net adverse development of
reserves at December 31, 1997 which is consistent with the
Registrant's loss development history; and (2) continuing adverse
development of losses incurred in 1996.
The Registrant believes that its book of business,
particularly Motor Club's PPA book of business, has loss
development characteristics which result in initial adverse
development ("Initial Development") but ultimately develop closer
to the reserves initially established. This Initial Development
typically occurs during the first 24 to 36 months of a given year's
reserves. Historically, the Initial Development has been offset by
redundancies from older years approximating or greater than the
Initial Development. However, as Motor Club's PPA book of business
has grown, the Initial Development has been greater than the
redundancies in older years.
The Registrant believes that as the new PPA book of business written
by Motor Club continues to stabilize and mature, the Net Cumulative Deficiency
in the more recent years will decline and thus the deficiencies indicated
will diminish. The Registrant believes this pattern is supported by the
generally sequential decline in the Net Cumulative Deficiency from
the most recent year presented to the oldest year presented. The
Registrant also believes that the Initial Development referred to
is generally consistent and identifiable in the table on page 16.
The Registrant also believes that the 1996 adverse
development is attributable principally to losses which occurred in
1996, primarily in Motor Club's PPA book of business. During 1996,
Motor Club's new PPA book of business was in its first twelve
months of development. As is consistent with applicable New Jersey
statutes, no business had yet been non-renewed, resulting in a book
of PPA business that lacked historical experience. Thereafter,
certain business was non-renewed and the performance of the book
has improved. Given the adverse development of this particular
year, it is possible that the Net Cumulative Deficiency for 1996
may not develop consistently with the other years described above,
but the Registrant does not believe that this is indicative of
prospective loss development for years after 1996.
The differences between the liability for unpaid losses
and loss expenses reported in the Registrant's consolidated
financial statements prepared in accordance with GAAP and those
reported in the annual statements filed by the Insurance Companies
with State insurance departments in accordance with SAP are
reconciled as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
December 31,
----------------------------
1998 1997 1996
---- ---- ----
(thousands of dollars)
Liability for unpaid losses and
loss expenses on a SAP basis
(net of reinsurance recoverables
on unpaid losses and loss expenses) $43,111 $35,900 $30,686
Reinsurance recoverables on unpaid
losses and loss expenses 18,521 17,363 19,553
Anticipated salvage and subrogation
recoveries (3,297) (3,016) (2,572)
------- ------- -------
Liability for unpaid losses and loss
expenses, as reported in the
Registrant's GAAP basis financial
statements $58,335 $50,247 $47,667
======= ======= =======
</TABLE>
The anticipated effect of inflation is implicitly
considered when estimating liabilities for losses and loss
expenses. While anticipated price increases due to inflation are
considered in estimating the ultimate claim costs, the increase in
the average severity of claims is caused by a number of factors
that vary with the individual type of policy written. These
anticipated trends are monitored based on actual development and
are modified if necessary.
The table on Page 16 presents the development of the GAAP
balance sheet liabilities for 1992 through 1998; data is presented
for those years in which the Insurance Companies had operations.
The top line on the table shows the estimated liability
for unpaid losses and loss expenses recorded at the balance sheet
date for each of the indicated years. This liability represents
the estimated amount of losses and loss expenses for claims arising
in that and all prior years that are unpaid at the balance sheet
date, including losses that had been incurred but not yet reported.
The upper portion of the table shows the re-estimated amount of the
previously recorded liability, based on experience as of the end of
each succeeding year. The estimate is increased or decreased as
more information becomes known about the frequency and severity of
claims for development years. The Net Cumulative Deficiency
represents the aggregate change in the estimates over all prior
years. The lower section of the table shows the cumulative amounts
paid with respect to previously recorded liabilities as of the end
of each succeeding year.
In evaluating this information, it should be noted that
each amount includes the effects of all changes in amounts for
prior periods. For example, the amount of deficiency relating to
losses settled in 1997, but incurred in 1993, will be included in
the cumulative deficiency for the 1997 year.
This table does not present accident or policy year
development data, which readers may be more accustomed to
analyzing. Conditions and trends that have affected development of
liabilities in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
<TABLE>
<CAPTION>
LOSS AND LOSS EXPENSE DEVELOPMENT (In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31 1992 1993 1994 1995 1996 1997 1998
Liability for unpaid
losses and loss expenses, net
of reinsurance recoverables $28,469 $25,334 $22,356 $23,409 $28,114 $32,884
$39,814
Net Liability Re-estimated as of:
One year later 27,145 26,253 23,468 24,313 31,887 36,765 -
Two years later 28,563 26,766 23,813 25,759 33,848 - -
Three years later 28,454 26,819 24,181 25,680 - - -
Four years later 28,702 26,572 23,759 - - - -
Five years later 28,662 26,066 - - - - -
Six years later 28,516 - - - - - -
Net Cumulative Deficiency ($ 47) ($ 732) ($ 1,403) ($ 2,271) ($ 5,734)($ 3,881) $ -
======== ======== ======== ======== ========
======== ======
Cumulative Amount of Liability Paid Through:
One year later 12,314 12,311 11,106 11,414 16,203 17,511 -
Two years later 20,270 18,992 17,231 18,357 24,830 - -
Three years later 24,546 23,032 20,821 22,164 - - -
Four years later 26,878 24,882 22,488 - - - -
Five years later 27,642 25,373 - - - - -
Six years later 27,810 - - -
Net liability - December 31 $28,469 $25,334 $22,356 $23,409 $28,114 $32,884
39,814
Reinsurance recoverables 21,698 20,484 19,309 16,415 19,553 17,363
18,521
------- ------- ------- ------- ------- ------- -------
Gross liability - December 31 $50,167 $45,818 $41,665 $39,824 $47,667 $50,247
$58,335
======= ======= ======= ======= ======= =======
=======
</TABLE>
REINSURANCE
The Insurance Companies follow the customary industry
practice of reinsuring a portion of their risks and paying to
reinsurers a portion of the premiums received on the policies. The
Insurance Companies' reinsurance program permits greater
diversification of business and the ability to write larger
policies while limiting maximum net losses; in addition, the
reinsurance program is designed to protect against catastrophic
losses. Reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the policies, although it
does make the reinsurer liable to the insurer to the extent of the
reinsurance ceded. Therefore, the Insurance Companies are subject
to credit risk with respect to their reinsurers. Reinsurance
premiums and recoveries have been, and during the run-off period,
are being allocated to the participants in the Pooling according to
their respective participation percentages.
Reinsurance for property losses of Preserver is
maintained under a per risk excess of loss treaty affording
recovery to $2 million, in excess of a retention of $100,000. This
retention had been $75,000 until July 1, 1997. In addition, the
Insurance Companies' catastrophe reinsurance program presently
covers substantially all of the losses in excess of $500,000 up to
$42.5 million. The Company also maintains a 100% quota share
treaty for boiler and machinery coverage.
Casualty reinsurance is currently maintained under an
excess of loss treaty affording recovery up to $3 million, in
excess of a retention of $150,000. The Insurance Companies also
maintain reinsurance coverage for personal and commercial umbrella
policies up to $2 million for personal lines policies and up to $5
million for commercial lines policies. Effective March 1, 1998,
Preserver entered into reinsurance contracts for the workers'
compensation policies it commenced writing on that date. An 80%
quota share reinsurance contract on the first $500,000 of workers'
compensation coverage has been implemented; an excess of loss
treaty affording coverage up to $10 million in excess of the
retention of $500,000 has also been implemented.
Effective January 1, 1999, Preserver purchased aggregate
stop loss reinsurance for all of its lines of business which will
provide $3 million coverage in excess of a loss ratio of 67.5% (in
1999) after the application of all other reinsurance. The treaty
is subject to experience adjustments over a three-year period and
pays Preserver for the time use of premiums paid to the reinsurer,
net of losses paid. This treaty affords Preserver protection
against elevated levels of frequency or severity of losses which
are not consistent with its historical experience, and includes but
is not limited to weather-related events which may not rise to the
level of a catastrophe.
The Insurance Companies also maintained an 80% quota
share reinsurance agreement for their non-automobile policies
issued prior to February 19, 1994, until their expiration dates.
The Insurance Companies considers numerous factors in selecting
reinsurers, the most important of which is the financial stability
of the reinsurer. The Insurance Companies have not experienced any
collectibility problems for its reinsurance recoverables.
COMPETITION
The property and casualty insurance industry is generally
highly competitive on the basis of both price and service.
There are numerous companies competing for the coverages
which Preserver offers in New Jersey, many of which are
substantially larger and have considerably greater resources than
Preserver. In addition, because Preserver's insurance products are
marketed exclusively through independent insurance agencies, most
of which represent more than one insurance company, Preserver faces
competition within each agency.
While Motor Club distributes its personal auto policies
similarly and thus faces the same issues as Preserver in concept,
the personal auto regulatory environment in New Jersey,
particularly its "take-all-comers" requirements (see Regulation),
has suppressed competition and effectively eliminated risk
selection. In addition, the New Jersey market has historically
been subject to regulatory and legislative volatility which has, at
times, adversely affected the profitability of the PPA line of
business, further suppressing competition. Finally, approximately
24% of Motor Club's appointed independent insurance agencies
represent only Motor Club for PPA coverage and thus, Motor Club has
no competition for this business in those agencies. New Jersey law
also substantially restricts the ability of an insurer to terminate
its agencies, limiting Motor Club's ability to manage its agency
force for PPA. Management believes this lack of competition in PPA
presents a significant business risk which must be monitored very
closely on an ongoing basis.
INVESTMENTS AND INFORMATION ABOUT MARKET RISK
Management has maintained, in its opinion, a conservative
investing philosophy. The Registrant manages its investment
portfolio with the assistance of investment professionals based on
guidelines established by management and approved by the Board of
Directors.
The overall goal of the portfolio is to enhance
investment returns within the structure of limited credit risk
assumption which management has utilized, with evaluations of
portfolio duration made in relation to the current interest rate
environment.
During 1998, the Registrant's investment guidelines were
expanded to allow for a higher percentage of investments in
investment grade corporate bonds and mortgage-backed securities and
to include certain investment grade asset-backed securities, which
provide more structured cash flows. The objectives of these
changes to the Registrant's investment policy were: (1) to reduce
the amount of interest risk in the portfolio; and (2) enhance
portfolio yield without unreasonably increasing credit risk. The
Registrant believes these objectives have been accomplished.
The Registrant does not invest in or hold any derivative
financial instruments.
Tax exempt securities have not been acquired. Management
believes that the current tax position of the Registrant, which
includes net operating loss carryforwards, dictates the exclusion
of tax exempt securities from the portfolio, which historically
provide substantially lower yields on a before tax basis than
taxable securities.
Market risk represents the potential for loss due to
adverse changes in the fair value of financial instruments. The
market risks related to the financial instruments of the Registrant
relate to the investment portfolio, which exposes the Registrant to
risks related to interest rates, and to a lesser extent, credit
quality and prepayment. The Registrant does not have exposure to
foreign currency exchange rates or equity prices.
Interest rate risk is the price sensitivity of a fixed
income security to changes in interest rates. The Registrant views
these potential changes in price within the overall context of
asset and liability management. The payout pattern of insurance
liabilities are actuarially determined, to determine their
duration, which is the present value of the weighted average
payments expressed in years. Duration targets are then set for the
Registrant's fixed income investment portfolio after consideration
of these liabilities and other factors, which the Registrant
believes mitigates the overall effect of its exposure to interest
rate risk.
At December 31, 1998 and 1997, the Registrant's
investment portfolio was comprised of the following types of
securities:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1998 December 31, 1997
----------------- -----------------
Market Market
Value Percent Value Percent
----------- ------- ----------- -----
Taxable Fixed Maturities $69,594,904 91.6% $56,831,444 88.1%
Short Term Investments 5,995,299 7.9% 7,150,000 11.1%
Mortgage Loans 361,038 0.5% 522,555 0.8%
----------- ----- ----------- -----
Total Investment Portfolio $75,951,241 100.0% $64,503,999 100.0%
=========== ===== =========== =====
</TABLE>
At December 31, 1998 and 1997, the taxable fixed maturity
portfolio consisted of the following types of securities:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1998 December 31, 1997
----------------- -----------------
Market Market
Value Percent Value Percent
----------- ------- ----------- -------
United States Treasuries $18,669,055 26.8% $29,205,469 51.3%
United States Government
Agencies 4,476,576 6.5% 5,495,828 9.7%
Mortgage-Backed Securities 11,213,589 16.1% 10,096,820 17.8%
Asset-Backed Securities 10,805,970 15.5% - -
Corporate Bonds 24,429,714 35.1% 12,033,327 21.2%
----------- ----- ----------- -----
Total $69,594,904 100.0% $56,831,444 100.0%
=========== ===== =========== =====
</TABLE>
Mortgage-backed securities ("MBS") consist primarily of
Government National Mortgage Association issues, along with other
MBS issues of the United States Government. Asset-backed
securities ("ABS") issues are all rated "Aaa" by Moody's and "AAA"
by Standard & Poor's. The underlying collateral of ABS issues at
December 31, 1998 consist primarily of home equity loans.
The taxable fixed maturity portfolio duration at December
31, 1998 and 1997 was 3.69 and 3.74 years, respectively.
United States Treasuries are weighted towards maturities
of five years or less, to reduce interest rate risk and match the
Insurance Companies' claims payout ratio; corporate obligations are
generally weighted towards five to ten year maturities, to take
advantage of the yield curve; the average life of the GNMA
portfolio has been maintained at approximately 10 years to reduce
interest rate risk.
Please refer to Note C in the Notes to Consolidated
Financial Statements ("Notes") for statistics regarding portfolio
maturity composition.
The Registrant has not acquired, nor are there plans to
acquire, below investment grade or "junk" bonds. Ninety-seven
percent of the fixed maturity portfolio as of December 31, 1998 was
graded Class 1 according to the National Association of Insurance
Commissioners' valuation system. This classification is reserved
for only the highest quality securities, generally rated A or
better by two major rating services.
At December 31, 1998 and 1997, the Registrant's taxable
fixed maturity investment portfolio at market value by Moody's
rating was:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1998 December 31, 1997
----------------- -----------------
Market Market
Value Percent Value Percent
------------ ------- ----------- -------
United States Government
Securities $34,359,229 49.4% $44,798,117 78.9%
Aaa 11,311,103 16.2% 500,000 0.9%
Aa 7,504,082 10.8% 2,797,273 4.9%
A 13,388,045 19.2% 7,078,067 12.4%
Baa 3,032,445 4.4% 1,657,987 2.9%
----------- ----- ----------- -----
Total $69,594,904 100.0% $56,831,444 100.0%
=========== ===== =========== =====
</TABLE>
The following table provides information about the
Registrant's taxable fixed maturity portfolio at December 31, 1998
that are sensitive to changes in interest rates. The table
presents cash flows of principal amounts and related weighted
average interest rates by expected maturity dates. The cash flows
are based on the earlier of the call date or the maturity date or,
for mortgage and asset-backed securities, expected payments
patterns. Actual cash flows could differ from the expected
amounts.
<TABLE>
<CAPTION>
EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL
----------------------------------
1999 2000 2001 2002 2003 Thereafter COST
VALUE
---- ---- ---- ---- ---- ---------- ---- ------
Taxable-- Other than
mortgage- backed
securities $5,587,108 $2,906,843 $4,648,076 $3,798,001 $1,912,271 $27,072,074
$45,924,373 $47,575,345
Average interest
rate 6.9% 6.7% 7.1% 6.6% 6.4% 6.4% 6.6%
Mortgage- backed
securities 1,613,735 1,198,588 1,035,728 847,843 1,111,715 5,246,077
11,053,686 11,213,589
Average interest
rate 7.1% 7.0% 7.0% 6.9% 6.6% 6.6% 6.8%
Asset-backed
securities 203,704 1,802,700 1,311,088 2,547,807 1,194,550 3,638,503
10,698,352 10,805,970
Average interest
rate 6.1% 6.3% 6.3% 6.4% 6.4% 6.5% 6.4%
---------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total $7,404,547 $5,908,131 $6,994,892 $7,193,651 $4,218,536 $35,956,654
$67,676,411 $69,594,904
========== ========== ========== ========== ==========
=========== =========== ===========
</TABLE>
Management anticipates continuing this minimum risk
approach to investing for the foreseeable future. Management
believes that the mix of investments in both type and maturity
length is appropriate in order to preserve capital, take advantage
of investment opportunities as they are presented, and provide the
Registrant and its subsidiaries with sufficient liquidity to react
to economic and business circumstances as they evolve.
The Registrant's investment portfolio yielded 6.30%,
6.41% and 6.25% in 1998, 1997 and 1996, respectively. Including
realized gains and losses, the investment portfolio yielded 6.34%,
6.41% and 6.26% in 1998, 1997 and 1996, respectively.
REGULATION
General
- - -------
Insurance companies are subject to supervision and
regulation in the states in which they transact business. Such
supervision and regulation relate to numerous aspects of an
insurance company's business and financial condition. The primary
purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally
derives from state statutes which delegate regulatory, supervisory
and administrative authority to state insurance departments.
Accordingly, the authority of the state insurance departments
includes the establishment of standards of solvency which must be
met and maintained by insurers; the licensing to do business of
insurers and agents; the nature of and limitations on investments;
premium rates for property and casualty insurance; the provisions
which insurers must make for current losses and future liabilities;
the deposit of securities for the benefit of policyholders; and the
approval of policy forms. Insurance departments also conduct
periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the
financial condition of insurance companies.
New Jersey law requires the Insurance Companies to
participate in involuntary insurance programs for automobile
insurance, as well as other property and casualty lines. These
programs include joint underwriting associations, assigned risk
plans, fair access to insurance requirements plans and reinsurance
facilities. These laws generally require all companies that write
lines covered by these programs to provide coverage (either
directly or through reinsurance) for insureds who cannot obtain
insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable
to such insureds to each company on the basis of direct written
premiums or the number of automobiles insured. Generally, state
law requires participation in such programs as a condition to doing
business. The loss ratio on insurance written under involuntary
programs generally has been greater than the loss ratio on
insurance in the voluntary market.
During 1997, Motor Club began to participate in the New
Jersey Personal Automobile Insurance Plan; fees totaling $254,000
and $191,000 were paid in 1998 and 1997, respectively, to a
servicing carrier rather than process these policies and take a
risk of further loss.
State insurance holding company acts regulate insurance
holding company systems. Each insurance company in the holding
company system is required to register with the insurance
supervisory agency of its state of domicile and furnish certain
information concerning the operations of companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurers within the
system. Such laws further require disclosure of material
transactions including the payment of "extraordinary dividends"
from the insurance subsidiaries to the Registrant.
Insurance holding company acts require that all
transactions within the holding company system affecting the
insurance subsidiaries must be fair and equitable. Further,
approval of the insurance commissioner is required prior to the
consummation of transactions affecting the control of an insurer.
The Insurance Companies are restricted by the insurance
laws of New Jersey as to the amount of dividends they may pay to
the Registrant without prior approval of the Commissioner of
Banking and Insurance. To the extent that statutorily defined
surplus is available, the maximum dividend that may be paid by
either Motor Club or Preserver during any year without prior
regulatory approval is limited to the greater of 10% of that
Company's statutory surplus as of the prior December 31, or
adjusted net income of that Company, for the preceding year.
Applying current regulatory restrictions as of December 31, 1998,
approximately $1.4 and $1.1 million in dividends would be available
for distribution by Motor Club and Preserver, respectively, to the
Registrant without prior regulatory approval during 1999. During
1998, Motor Club paid $1 million in dividends to the Registrant.
No dividends were paid in 1997 or 1996 by the Insurance Companies.
National Association of Insurance Commissioners ("NAIC")
- - --------------------------------------------------------
The Insurance Companies are subject to the general
statutory accounting practices and reporting formats established by
the NAIC as well as accounting practices prescribed or permitted by
the State of New Jersey. The NAIC has codified SAP to afford
preparers and users of statutory basis financial statements a more
uniform application of SAP by insurers in differing states of
domicile. It is not known whether regulatory authorities in the
State of New Jersey will recognize SAP as codified by the NAIC as
the approved basis of financial statement preparation for insurers
domiciled in the State.
The NAIC also promulgates model insurance laws and
regulations relating to the financial and operational regulation of
insurance companies, which includes the Insurance Regulating
Information System ("IRIS"). IRIS identifies eleven industry ratios
and specifies "usual values" for each ratio. Departure from the
usual values on four or more of the ratios can lead to inquiries
from individual state insurance commissioners as to certain aspects
of an insurer's business. The Insurance Companies have, in recent
years, met substantially all of the IRIS test ratios. During 1998,
Motor Club did return two unusual values as a result of the Policy
Term Conversion which are not expected to recur.
NAIC model rules and regulations generally are not
directly applicable to an insurance company until they are adopted
by applicable state legislatures and departments of insurance.
However, NAIC model laws and regulations have become increasingly
important in recent years, due primarily to the NAIC's Financial
Regulations Standards and Accreditation Program. Under this
program, states which have adopted certain required model laws and
regulations and meet various staffing and other requirements are
"accredited" by the NAIC. Such accreditation reflects an eventual
nationwide regulatory network of accredited states. The State of
New Jersey is accredited by the NAIC.
The NAIC has adopted Risk-Based Capital ("RBC")
requirements for property/casualty insurance companies, to evaluate
the adequacy of statutory capital and surplus in relation to
investment and insurance risks such as asset quality, credit risk,
loss reserve adequacy and other business factors. The RBC formula
is used by State insurance regulators as an early warning tool to
identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized.
Regulatory compliance is determined by a ratio of the insurer's
regulatory total adjusted capital to its authorized control level
RBC, as defined by the NAIC. Insurers below specific trigger
points or ratios are classified within certain levels, each of
which requires specific corrective action. The ratios of each
Insurance Company are in excess of that required, therefore
requiring no action.
New Jersey Private Passenger Automobile
- - ---------------------------------------
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 PPA 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 NJ DOBI may grant an insurer relief, by written
notification, from writing new PPA business 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 year ended
December 31, 1998 is 3.46 to 1. However, this ratio is temporarily
elevated due to the aforementioned Policy Term Conversion. It
appears that Motor Club's leverage ratio adjusted for the Policy
Term Conversion was below 3 to 1 at December 31, 1998.
In June 1997, the State of New Jersey enacted PPA
legislation, which principally: (1) repealed the annual "flex" rate
increase available to insurers, which was required by law to be no
less than 3%, and replaced it with an expedited prior approval rate
filing process for rate increase requests up to 3% on an overall
basis. Subsequent to the enactment of this legislation, the
Commissioner of the NJ DOBI froze all PPA insurance rates until
March 1998, but has not yet promulgated the regulations required
for insurers to file for an expedited rate increase; (2) restricted
the ability of insurers to non-renew at their discretion up to 2%
of their policies; (3) repealed the ability of insurers to non-renew one policy
for every two new policies written in each rating
territory; and (4) replaced the rating system which assessed
surcharges to insureds' policies for specific driving violations
and accidents with a broader-based tiered rating system. Motor
Club's tier rating system was approved by the NJ DOBI and has been
implemented on all PPA policies with effective dates on and after
November 1, 1998.
Additional PPA legislation was enacted in 1998 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.
Implementation of most of the provisions of the 1998
legislation (with one exception) will start with new policies
issued on March 22, 1999. The only exception is the redefinition
of the territories and removal of the territorial rating caps,
which will 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, because the mandated rate
reductions do not appear to be completely cost justified (based on
information presently available) by the cost savings in the
legislation.
Consistent with New Jersey's regulatory and legislative
history, the enacted and proposed legislation, current rate freeze
and ongoing volatility could adversely affect the Registrant's
long-term profitability in the PPA line of business.
The State of New Jersey also maintains an excess profits
law which provides that PPA insurers whose profits exceed a
statutorily computed maximum over a three year period will be
required to pay such excess to its policyholders. It would appear
that presently Motor Club does not have such excess profits.
The Insurance Companies were subject to certain
assessments in the State of New Jersey, the most substantial of
which had been the FAIR Act surtaxes and assessments commencing in
1990; the surtaxes expired after 1992 and the assessments expired
after 1997. FAIR Act assessments totaled $971,000 and $962,000 in
1997 and 1996, respectively.
MOTOR CLUB OPERATIONS
- - ---------------------
On December 2, 1996, the Registrant sold Motor Club of
America Enterprises, Inc. ("Enterprises") to JVL Holding
Properties, Inc. ("JVL"), a non-affiliated Oklahoma corporation,
for $1,125,000, resulting in a gain of $702,000.
Pursuant to an additional agreement entered into
concurrent with the sale of Enterprises, the Registrant provides
certain services to Enterprises' members whose memberships are
written with PPA policies written by Motor Club. In exchange, the
Registrant receives a servicing fee from JVL. The Registrant also
receives certain fees for other memberships written by Enterprises,
as defined by this additional agreement. The Registrant earned
$134,000 and $143,000 in fees from this agreement in 1998 and 1997,
respectively.
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.
The Internal Technology section pertains to the
Registrant's internal technology systems, including hardware,
operating and applications software, telecommunications systems and
other technology controlled or developed by the Registrant
("Business Critical Internal Technology"). These systems include
the Insurance Companies' rating and policy processing, billing,
claims, management reporting and supporting applications. Internal
Technology also includes the Registrant's financial, administrative
and telecommunications technology systems ("Other Internal
Technology").
The Registrant utilizes an AS/400 computer platform along
with various Local Area Networks ("LAN's") and personal computers
("PC's") to operate its Internal Technology. The operating
software for the AS/400 is currently Y2K compliant. LAN's and PC's
will be certified as Y2K compliant no later than July 1, 1999.
Implementation of operating software has and will include testing
systems operating together using aged data and critical future
dates.
As of December 31, 1998, the Registrant had completed
conversion of and had placed in production versions of the Policy
Management Systems Corporation Point ("PMSC Point") system which
was Y2K compliant for its billing, claims and certain management
reporting systems which the Registrant utilizes. Implementation of
the PMSC Point software applications included testing production
systems operating together using aged data and critical future
dates.
As of December 31, 1998, the Registrant had completed
conversion of and had placed in production versions of its rating
and policy processing systems which were Y2K compliant for all of
the Insurance Companies' business. Implementation of these
software applications included testing production systems operating
together using aged data and critical future dates.
The Registrant is currently converting the remainder of
its management reporting not emanating from the PMSC Point system
to Y2K compliant versions and expects to be completed by July 1,
1999; this process is presently 95% complete. The Registrant is
also presently converting its Other Internal Technology to Y2K
compliant versions and expects to be completed by July 1, 1999.
Implementation of these software applications will include testing
production systems operating together using aged data and critical
future dates as applicable.
The Registrant has been able to continue to design, test
and implement other projects related to its Internal Technology
while addressing the Y2K Issue.
The Registrant has been assessing its External Technology
exposure to the Y2K Issue during 1998 and continues to do so in
1999. This ongoing assessment includes: (1) inventorying all
operating systems and processes which are not related to its
Internal Technology and rely on embedded technology not controlled
by or developed by the Registrant and provided by a third-party
vendor, supplier or business partner ("Business Partners"); and (2)
communicating in detail with the Business Partners as to their
individual Y2K readiness. The Registrant has received responses
from all such Business Partners. The Registrant will continue to
identify and communicate with Business Partners as it conducts
business up to, through and beyond the Year 2000 as to the Business
Partners' Y2K readiness.
The Registrant has also been assessing what action, if
any, is required to limit and or eliminate the Registrant's
exposure to Y2K Issues emanating from Insurance Issues. These
issues primarily relate to coverage questions which may emerge from
insurance policies issued by the Insurance Companies. It is the
position of the Registrant that most of the claims for losses
related to the Y2K Issue are not covered by insurance policies
issued by the Insurance Companies. This position is consistent with
that taken by insurance companies regarding coverage and Y2K
Issues. Exposure to the Y2K Issue primarily relates to commercial
insurance policies issued by Preserver.
Preserver is also taking the following steps related to
Insurance Issues: 1) it has notified its commercial insureds that
they may have Y2K Issues which they need to address which are not
covered by their commercial insurance policies; 2) it has notified
its agents of these exposures their insureds may have and provided
them with the notice being sent to insureds; and 3) commercial
insurance policies (not including automobile) effective on and
after December 31, 1998, will include policy language which
specifically excludes coverages related to Y2K Issues.
The Registrant has expended less than $250,000 to address
Y2K Issues, almost all of it in 1998, consisting primarily of costs
of internal resources. Estimated costs to complete work related to
the Y2K Issue are currently less than $250,000. The Registrant has
combined Y2K conversion efforts to its Internal Technology with
required enhancements not related to Y2K to the Insurance
Companies' rating and policy processing, billing, claims and
management reporting applications, thereby minimizing the cost of
Y2K conversion.
The Registrant believes that it has provided adequate
time and resources to correct problems related to Internal
Technology, and is continually assessing the most reasonably likely
worst case Y2K scenario, which is currently believed to be if
Business Critical Internal Technology reveals problems which were
not identified in testing and implementation of Y2K compliant
versions of Business Critical Internal Technology. Under such a
scenario, the contingency plan is to devote more internal resources
to solving such problems in a timely manner so that delays in
processing transactions are avoided or minimized.
The Registrant does have risk that External Technology
will suffer Y2K problems. Responses to the Registrant's Y2K
communications to date with its Business Partners have not revealed
any Y2K readiness issues; however, the Registrant will continue to
communicate with its Business Partners during 1999 and will develop
contingency plans as appropriate.
The Registrant does have risk that its coverage positions
regarding Insurance Issues will be challenged in court, or that
court decisions regarding coverage involving other insurers will be
applied to the Insurance Companies' policies.
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.
EMPLOYEES
- - ---------
At December 31, 1998, the Motor Club of America Group had
approximately 95 employees.
Item 2. Properties
- - ------------------
Effective January 1, 1996, the Registrant entered into a
lease at 95 Route 17 South, Paramus, New Jersey. The Registrant's
home office is located at this facility. The lease expires on
December 31, 2005. The Registrant has an option to terminate the
lease after six years, and an option to extend the lease for an
additional five years after the initial lease term expires.
Item 3. Legal Proceedings
- - --------------------------
The Insurance Companies are a party to numerous lawsuits
arising in the ordinary course of their insurance business. The
Registrant believes that the resolution of these lawsuits will not
have a material adverse effect on its results of operations,
financial condition, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
No matter was submitted to a vote of security holders in
the fourth quarter of 1998.
Item Pursuant to Instruction 3 to Paragraph (b) of Item 401 of
- - -------------------------------------------------------------
Regulation S-K. Executive Officers of the Registrant.
- - -----------------------------------------------------
At December 31, 1998, the executive officers of the
Registrant and their offices with the Registrant and principal
occupations were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Years in
Which Officer
Has Served
Office and Principal as
Name Age Occupation Such(3)
----- --- -------------------- -------------
Archer McWhorter (1) 77 Chairman of the Board of
Directors and Director of
the Registrant and Companies
in the Motor Club of America
Group 1986-1998
Stephen A. Gilbert (2) 59 President, Chief Executive
Officer, General Counsel and
Director of the Registrant and
Companies in the Motor Club of
America Group 1975-1998
Patrick J. Haveron (2) 37 Executive Vice President, Chief
Financial Officer and
Director of the Registrant and
Companies in the Motor Club of
America Group; Treasurer of
Motor Club of America Insurance
Company and Preserver Insurance
Company 1988-1998
Peter K. Barbano 48 Vice President, Secretary
and Associate General Counsel 1993-1998
Myron Rogow 55 Vice President 1987-1998
G. Bruce Patterson 54 Vice President 1989-1998
Charles J. Pelosi 53 Vice President 1983-1998
Norma Rodriguez 49 Treasurer 1984-1998
</TABLE>
(l) Chairman of the Board of Directors of Companies in the
Motor Club of America Group; from 1995 to March 1997,
Director of National Car Rental Systems, Inc. and
affiliated corporations, a car rental enterprise ("NCR");
from 1995 to February 1997, one-third owner of Santa Ana
Holdings, Inc., which exchanged its 90% stock interest in
NCR for stock in Republic Industries, Inc.; from February
1997 to February 1998, consultant to NCR; President (to
January 1996) of Acceptance Inc., a finance company.
(2) Member of Finance Committee.
(3) Includes years during any portion of which the officer
served as such. All terms of office are until the date
of the 1999 Annual Meetings of Stockholders and
Directors.
Except for Archer McWhorter, each of the officers devoted
substantially all of their business time to the affairs of the
Registrant or one or more other companies in the Motor Club of
America Group.
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related
- - --------------------------------------------------------------
Stockholder Matters
- - -------------------
The Registrant's Common Stock trades on the NASDAQ Stock
Market under the symbol MOTR. The following are the high and the
low selling prices for each quarter of 1997 and 1998, as reported
by the NASDAQ:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997
Quarter High Low
I .............................. 11 5/8 9 1/2
II .............................. 14 1/2 9 7/8
III .............................. 14 1/2 11 7/8
IV .............................. 14 1/2 12 1/4
1998
Quarter High Low
I .............................. 17 1/2 13 5/8
II .............................. 17 5/8 15
III .............................. 15 3/4 10
IV .............................. 15 1/4 11 1/2
</TABLE>
There were approximately 483 holders of record of the
Common Stock of the Registrant as of December 31, 1998. The
Registrant paid no dividends in 1997 and 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Item 6. Selected Financial Data
- - --------------------------------
Years ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
(in thousands, except as to per share data)
Operating Results:
Revenues from operations $ 53,347 $ 51,102 $46,525 $36,703 $29,471
Realized gains (losses) on sale
of investments 28 - 5 57 (43)
Realized gain on sale of
subsidiary - - 702 - -
Net investment income 4,305 3,595 3,087 2,764 2,730
-------- -------- ------- ------- -------
Total revenues $ 57,680 $ 54,697 $50,319 $39,524 $32,158
-------- -------- ------- ------- -------
Income before
federal income taxes $ 5,719 $ 4,630 $ 3,297 $ 2,455 $ 5,039
-------- -------- ------- ------- -------
Net income $ 4,256 $ 3,403 $ 5,330 $ 2,417 $ 5,035
======== ======== ======= ======= =======
Financial Condition:
Total assets $131,013 $101,347 $95,533 $81,959 $79,172
Shareholders' equity $ 27,824 $ 23,001 $18,786 $14,081 $10,546
Per Common Share:
Net income - Basic $ 2.02 $ 1.68 $ 2.61 $ 1.18 $ 2.46
Net income - Diluted $ 2.01 $ 1.66 $ 2.56 $ 1.17 $ 2.46
Book Value $ 13.15 $ 10.98 $ 9.17 $ 6.89 $ 5.16
Weighted average number of
shares outstanding:
Basic 2,108,722 2,074,473 2,045,590 2,043,197 2,043,004
Diluted 2,121,366 2,102,395 2,081,080 2,061,791 2,043,004
Significant Insurance Indicators:
Net premiums written $64,303 $ 51,680 $47,337 $38,073 $31,797
Loss and loss expense ratio 68.6% 65.1% 64.5% 58.7% 54.8%
Expense ratio 29.1% 33.3% 37.9% 43.9% 39.3%
---- ---- ----- -----
Combined ratio 97.7% 98.4% 102.4% 102.6% 94.1%
==== ==== ===== =====
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
- - ----------------------------------------------------------
Condition and Results of Operations
- - -----------------------------------
OVERVIEW OF BUSINESS OPERTIONS
- - ------------------------------
The Registrant and a group of affiliated corporations
provide property and casualty insurance related services. The
Registrant also operated until December 1, 1996 a motor club
through Enterprises. One hundred percent of the Registrant's
insurance operations are presently in the State of New Jersey.
The Registrant has two subsidiaries which write property
and casualty insurance, Motor Club and Preserver. Motor Club
writes PPA business; Preserver writes small commercial, homeowners
and ancillary coverages. The Insurance Companies are domiciled in
the State of New Jersey.
The Registrant seeks to: (1) increase its identification
as a provider of small commercial lines insurance; and (2) 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.
On March 16, 1999, the Registrant signed a definitive
Agreement and Plan of Merger ("Merger Agreement") to acquire North
East through a merger of a wholly-owned subsidiary of the
Registrant with and into North East ("Merger"). 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) one share of the
Registrant's common stock for each 5.25 shares of North East common
stock, or (c) a combination thereof. If the North East
shareholders in the aggregate elect to exchange more than 50% of
their shares for the Registrant's stock, the aggregate percentage
will be ratably reduced to 50%.
Consummation of the Merger is subject to the satisfaction
of certain conditions set forth in the merger agreement, including
approval from the shareholders of the Registrant and North East and
authorization by state insurance regulators. Both the Registrant
and North East expect that these conditions will be satisfied in
due course.
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 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.
Historically, the Insurance Companies' results of
operations have been influenced by factors affecting the property
and casualty insurance industry in general and the New Jersey PPA
market in particular. The operating results of the U.S. property
and casualty insurance industry have been subject to significant
variations due to competition, weather, catastrophic events,
regulation, general economic conditions, judicial trends,
fluctuations in interest rates and other changes in the investment
environment.
Results of Operations
- - ---------------------
The table below reconciles operating net income to
reported net income for 1996 with adjustments for certain
unusual and non-recurring items (all per share amounts shown
are basic):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
----- ----- ----
Amount Per Share Amount Per Share Amount Per Share
------ --------- ------ --------- ------ ---------
Operating net income $4,255,791 $2.02 $3,482,702 $1.68 $3,436,343 $1.69
Lease termination charge (1) - - - - (359,077) (0.18)
Non-recurring tenancy and
relocation charges (2) - - - - (327,916) (0.16)
Reinsurance settlement (3) - - - - (197,196) (0.10)
Sale of Enterprises (4) - - - - 702,419 0.34
Deferred tax asset recognition (5) - - - - 2,075,535 1.02
---------- ----- ---------- ----- ---------- -----
Net income $4,255,791 $2.02 $3,482,702 $1.68 $5,330,108 $2.61
========== ===== ========== ===== ==========
=====
</TABLE>
(1) This non-recurring charge was incurred in connection with the
termination of the lease of the office building in which the
Registrant and its subsidiaries formerly operated.
(2) These non-recurring charges were incurred in connection with
the Registrant's tenancy at its former office building and its
subsequent relocation.
(3) This non-recurring charge was incurred in connection with the
settlement of a previously reported dispute with a reinsurer
of Motor Club.
(4) This is a non-recurring gain.
(5) The Registrant believed that it was more likely than not that
it will generate future taxable income to realize the benefits
of the net deferred tax asset, which consists primarily of net
operating loss carryforwards. The Registrant accordingly
eliminated the valuation allowance on its net deferred tax
asset in 1996, resulting in a benefit to net income. The
ultimate amounts realized, however, could be reduced if actual
amounts of future taxable income differ from projected future
taxable income.
1998 COMPARED to 1997
The 22% increase in net income was largely due to the
elimination of FAIR Act assessments paid through 1997, when
$971,000 in expenses were incurred for this assessment. Absent the
FAIR Act assessments in 1997, pre-tax income increased $118,000 or
2% in 1998 as compared to 1997, due to continuing improvements in
the combined ratio and higher revenues for Preserver, higher
investment income, offset by higher combined ratios for Motor Club
due to the increasing effects of the new PPA business which it has
written.
Insurance premiums increased by $2,298,000 or 5% during
the year, due primarily to commercial lines premiums written by
Preserver and savings on reinsurance programs. The following table
details the increases in Insurance Premiums:
<TABLE>
<CAPTION>
<S> <C> <C>
Increase in
Net
Class of Business Premium Percent
---------------- -------- -------
Private Passenger
Automobile $ 659,000 2%
Commercial Lines 951,000 14%
Personal Property 688,000 14%
---------- --
Total $2,298,000 5%
========== ==
</TABLE>
The Registrant continues to write new amounts of personal
lines business, both PPA by Motor Club and Homeowners by Preserver.
However, the growth in these respective lines of business is at a
slower rate than the Commercial Lines business written by
Preserver, which is expected to continue in 1999 and beyond.
Net investment income increased $710,000 or 20% resulting
from an increase in invested assets. Average invested assets (at
amortized cost) were $68,374,000 during 1998 as compared to
$56,239,000 during 1997. The increase in insurance premiums noted
above, combined with the Note Payable discussed in Liquidity and
Capital Resources, provided the increase in invested assets. Other
revenues decreased $53,000 or 24%, due to declines in mortgage loan
revenue, servicing fee income and other miscellaneous income items.
Losses and loss expenses incurred increased by $3,338,000
or 10%, which produced the following loss and loss expense ratios:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Motor Club 71.6% 66.8%
Preserver 59.6% 59.7%
Total 68.6% 65.1%
</TABLE>
Despite the higher loss and loss expense ratio on a
comparative basis, no significant adverse trends were experienced
or identified during 1998.
The increase in Motor Club's PPA loss and loss expense
ratio is largely due to the new business written by Motor Club
since January 1995 which constituted 53% of Motor Club's total PPA
business as of December 31, 1998. The Registrant has reserved the
ultimate development of this new business at a loss and loss
expense ratio of approximately 78%; the underlying loss development
to date for each accident year on this new business has supported
the ultimate development selected, with the exception of Accident
Year 1996, which has developed approximately 25% worse than
anticipated. This has been the primary cause of some initial
deficient development in the Registrant's loss reserves in 1997 and
1998. However, the Registrant believes that the 1996 Accident Year
experience is not indicative of the overall book of business and
subsequent accident year development continues to support the
ultimate loss ratios utilized.
As the Registrant continues to write additional new PPA
business, PPA loss and loss expense ratios should generally
continue to trend higher, although within levels that should remain
profitable. However, the effects of the 1997 and 1998 PPA reforms
continue to be uncertain as to their ultimate outcome. As noted
previously, the Registrant believes that the collective effect of
these reforms to be a modest net negative. During 1999 however,
PPA revenue may decline on a per policy basis and its combined
ratio may increase as a result of the reforms.
Preserver continues to experience stable loss and loss
expenses and loss ratios. During September 1998, severe storms
struck New Jersey, resulting in $217,000 in losses to Preserver
which increased its loss ratio by 2 points during 1998. Frequency
of losses remains at acceptable levels for all lines of Preserver's
business.
More than half of the $1,787,000 or 12% decrease in
acquisition costs is attributable to the 1998 elimination of the
FAIR Act assessments previously paid, which totaled $971,000 in
1997. The remainder of the decrease is attributable to the
temporary effects of the Policy Term Conversion, which has resulted
in additional expenses being deferred to reflect the increase in
unearned premiums through December 31, 1998. This circumstance is
temporary as noted, and the amount of expense amortized in 1999
related to acquisition expenses may rise in conjunction with the
completion of the Policy Term Conversion.
The $343,000 or 20% increase in other operating expenses
is due to increased expenditures related to the Registrant's merger
and acquisition efforts along with expenditures to comply with the
PPA reforms being implemented in New Jersey.
This decrease in net expenses is the realization of the
Registrant's previously stated strategy to increase its revenue while
decreasing its overhead expenditures and has resulted in a decrease in the
expense ratio to 29.1% in 1998 as compared to 31.4% in 1997 (as
adjusted for the FAIR Act assessments described above).
The Registrant expects to reduce its expenses and expense
ratio further in the long-term by pursuing further automation of
its policy processing functions, particularly as relates to data
provided by and to its independent agents. During 1997, the
Registrant converted its information systems to a smaller, more
contemporary computing platform which will allow for more efficient
operations and lower maintenance costs. The Registrant expects to
continue the efforts made previously to reduce all unnecessary
overhead expenditures.
However, during 1999, the aforementioned completion of
the Policy Term Conversion, in conjunction with the rate rollback
required under the 1998 PPA reforms, may increase the Registrant's
expense ratio. Although the Registrant anticipates that the net
impact of these reforms will be a modest net negative, the impact
of these reforms on premiums, losses, expenses or related financial
ratios cannot be completely quantified.
The Registrant's book value increased to $13.15 per share
at December 31, 1998 from $10.98 per share at December 31, 1997.
The principal sources of the net increase were: (1) net income of
$4,256,000 or $2.02 per share described previously; (2) $159,400 or
$.08 decrease per share due to the increase of the minimum required
pension liability for the defined benefit pension plan sponsored by
the Registrant; and (3) $668,400 or $.32 per share increase due to
the increase (net of applicable deferred taxes) in the fair value
of the fixed maturity investments accounted for as available-for-sale
securities under SFAS No. 115 ("Accounting for Certain Investments in
Debt and Equity Securities").
These increases in book value were offset by the dilutive
effects ($.09 per share) of the issuance of 22,000 shares of common
stock upon exercise of employee stock options granted under the
1987 and 1992 Stock Option plans. See Note O of the Notes for
additional information regarding the Registrant's stock option
plans.
The increase in the minimum pension liability was the
result of a decrease in the discount rate used to compute Plan
liabilities to 6.75% at December 31, 1998, from 7.25% at December
31, 1997, offset by the performance of the Plan assets in excess of
the expected return on these assets. See Note K of the Notes for
additional information regarding the Registrant's minimum pension
liability.
1997 COMPARED TO 1996
In 1997, increased Federal tax expense reduced operating
net income by $1,105,000 as a result of utilization of the deferred
tax asset recognized in 1996 as noted in the table. Operating net
income was also reduced in 1996 by the effects of winter storms,
which increased losses by $635,000. Excluding these items, the
increase in operating net income of $517,000 or 13% was due to
continuing revenue growth and a stable combined ratio. The combined
ratio was 98.4% in 1997 as compared to 99.1% in 1996 (adjusted for
the non-recurring items noted). Insurance premiums increased by
$5,684,000 or 13% during the year, due primarily to increased
earnings of personal auto premiums written by Motor Club. The
following table details the increases in Insurance Premiums:
<TABLE>
<CAPTION>
<S> <C> <C>
Increase in
Net
Class of Business Premium Percent
Private Passenger
Automobile $4,040,000 12%
Commercial Lines 1,175,000 21%
Personal Property 469,000 11%
Total $5,684,000 13%
The increases in Commercial Lines and Personal Property
premium were enhanced by $331,000 in savings on reinsurance
programs which principally affected Preserver and were implemented
effective July 1, 1997. Preserver also increased its retention for
property excess of loss reinsurance at that date from $75,000 to
$100,000, which contributed to the reduction in rate.
Net investment income increased $507,000 or 16% resulting
from an increase in invested assets. The increase in insurance
premiums noted above provided the increase in invested assets.
Other revenues increased $110,000 or 95%, primarily as a result of
servicing fees earned by the Registrant in 1997 on the Motor Club
membership program after the sale of Enterprises in December 1996.
Losses and loss expenses incurred increased by $3,993,000
or 14%, which produced the following loss and loss expense ratios:
1997 1996
Motor Club 66.8% 61.4%
Preserver 59.7% 75.5%
Total 65.1% 64.5%
</TABLE>
Despite the higher loss and loss expense ratio on a
comparative basis, no significant adverse trends were experienced
or identified during 1997.
The increase in Motor Club's PPA loss and loss expense
ratio is largely due to the new business written by Motor Club
since January 1995. The Registrant reserved the ultimate
development of this new business at a loss and loss expense ratio
of 78%.
During 1996, winter storm losses of $635,000 increased
Preserver's loss ratio from 69.2% to 75.5%. The remaining
improvement in Preserver's loss ratio during 1997 was attributable
to reduced amounts of losses, particularly large losses greater
than $35,000. Frequency of losses remains at acceptable levels for
all lines of Preserver's business.
The increase in acquisition costs of $1,483,000 or 11%
generally corresponds with the increase in insurance premiums noted
above, although the rate of increase was slightly lower due to
savings on net commissions realized in 1997. During 1998, the FAIR
Act assessments previously paid were eliminated. These assessments
totaled $971,000 and $962,000 in 1997 and 1996, respectively.
Excluding the non-recurring items in 1996 noted in the
table, which includes the lease termination charge, other operating
expenses declined $1,282,000 or 42%, due to lower overhead
expenditures.
The decrease in expenses allowed for a decrease in the
expense ratio (as adjusted for the non-recurring charges described
above) to 33.3% as compared to 36.0%.
The Registrant's book value increased to $10.98 per share
at December 31, 1997 from $9.17 per share at December 31, 1996.
The principal sources of the net increase were: (1) net income of
$3,483,000 or $1.68 per share described previously; (2) $161,800 or
$.08 increase per share due to the reduction of the minimum
required pension liability for the defined benefit pension plan
sponsored by the Registrant; and (3) $327,700 or $.16 per share
increase due to the increase (net of applicable deferred taxes) in
the fair value of the fixed maturity investments accounted for as
available-for-sale securities under SFAS No. 115 ("Accounting for
Certain Investments in Debt and Equity Securities").
These increases in book value were offset by the dilutive
effects ($.11 per share) of the issuance of 46,925 shares of common
stock upon exercise of employee stock options granted under the
1987 and 1992 Stock Option plans. See Note O of the Notes for
additional information regarding the Registrant's stock option
plans.
The reduction in the minimum pension liability was the
result of the performance of the Plan assets in excess of the
expected return on these assets, offset by a decrease in the
discount rate used to compute Plan liabilities to 7.25% at December
31, 1997, from 7.50% at December 31, 1996. See Note K of the Notes
for additional information regarding the Registrant's minimum
pension liability.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
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 (except as noted in Loss Reserves)
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 was
$10,547,000, $10,389,000 and $6,851,000 in 1998, 1997 and 1996,
respectively. The higher amounts in these years are attributable
to the growth in premium revenue combined with the reduction in
overhead expenses described previously.
Net cash utilized in investing activities was
$11,054,000, $13,886,000 and $6,015,000 in 1998, 1997 and 1996,
respectively. The amounts used reflect the investment of cash
provided by operating activities; the amounts used in 1996 were
offset by the $1,125,000 proceeds from the sale of Enterprises
described previously.
Aside from the changes in operating expenditures noted
previously, particularly the State mandated assessments related to
the FAIR Act, no unusual or nonrecurring operating expenditures
have been incurred over this period.
The Registrant's cash and cash equivalents at year end
1996 were enhanced by the proceeds of the sale of Enterprises. As
part of its strategy to expand and diversify its insurance
operations, the Registrant seeks to increase the level of cash and
cash equivalents available to enable the execution of this
strategy.
The payout ratio of losses has not fluctuated
substantially over this period. Cash flow from operations is
expected to continue to increase as the Registrant increases its
revenue through additional premium writings, specifically
commercial lines and PPA, and continues to reduce its expenses and
expense ratio. This will be offset somewhat by the development and
payment of losses on the new PPA which Motor Club is writing.
FINANCING ACTIVITIES
The Registrant paid no dividend on its common stock in
1998, 1997 and 1996.
On September 30, 1998, the Registrant borrowed $3 million
from Dresdner Bank, AG (the "Loan"). The Loan assisted the
Registrant with certain internal restructuring of its organization,
in order to improve the prospects of Preserver to attain its own
separate rating from Best, which was achieved in January 1999.
Please refer to Note G in the Notes to Consolidated Financial
Statements for further information on the Loan.
In connection with its announced acquisition of North
East, the Registrant may borrow up to $10 million additional funds
in either the public or private securities markets. While such a
borrowing is not expected to have a material effect on the
Registrant's financial condition or results of operations, credit
terms have not been agreed upon. The cost of the any such
borrowing is subject to rising interest rates and economic
downturns. The Registrant has no other material outstanding capital
commitments which would require additional financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued and established standards for accounting
and reporting of derivative instruments and hedging activities.
The Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Registrant is in the process of
determining the effect, if any, of this Statement on its financial
statements.
In December 1997, the Accounting Standards Executive
Committee of the American Institute of the American Institute of
Certified Public Accountants ("AcSEC") issued Statement of Position
("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance Related Assessments." This Statement provides guidance
for the recording of a liability for insurance related assessments.
The Statement requires that a liability be recognized in certain
defined circumstances. The Registrant believes that the impact of
this Statement on its results of operations, financial condition or
liquidity will not be significant. This Statement is effective for
the year commencing January 1, 1999.
In October 1998, AcSEC issued SOP 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That
Do Not Transfer Insurance Risk." This Statement identifies several
methods of deposit accounting and provides guidance on the
application of each method. This Statement classifies insurance
and reinsurance contracts for which the deposit method is
appropriate as contracts that (i) transfer only significant timing
risk, (ii) transfer only significant underwriting risk, (iii)
transfer neither significant timing nor underwriting risk, and (iv)
have an indeterminate risk. This Statement is effective for
financial statements for the year commencing January 1, 2000.
Restatement of previously issued financial statements is not
permitted. The Registrant does not believe the Insurance
Companies' reinsurance contracts would require the deposit method
of accounting.
Item 8. Financial Statements and Supplementary Data
- - ----------------------------------------------------
See Item 14 (a).
Item 9. Disagreements with Accountants on Accounting and Financial
- - -------------------------------------------------------------------
Disclosures
- - -----------
None
PART III
--------
Items 10, 11, 12 and 13 are omitted from this Report on
Form 10-K; the Registrant shall file a definitive proxy statement
pursuant to Regulation 14A not later than April 30, 1998, which is
120 days after the close of the fiscal year of the Registrant.
PART IV
-------
Item 14. Exhibits, Financial Statements Schedules and Reports on
- - -----------------------------------------------------------------
Form 8-K
- - --------
(a) (1) The following financial statements are included in
Part II, Item 8:
Page (s)
--------
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31,
1998 and 1997 F-2
Consolidated Statements of Operations for
the years ended December 31, 1998, 1997
and 1996 F-3
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1998,
1997 and 1996 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-36
(2) The following financial statement schedules for the years
1998, 1997 and 1996 (pursuant Rule 5-04 of Regulation S-X) are
presented herewith:
Schedule I - Summary of Investments- Other than
Investments in Related Parties* F-37
Schedule II - Condensed Financial Information
of Registrant F-38 to F-40
Schedule IV - Reinsurance* F-41
Schedule V - Valuation and Qualifying
Accounts and Reserves F-42
Schedule VI - Supplemental Information
Concerning Property/
Casualty Insurance
Operations* F-43
*Presented pursuant to Rule 7-05 of Regulation S-X.
Schedules other than those mentioned above are omitted because
the conditions requiring their filing do not exist, or because
the information is given in the financial statements filed
herewith, including the notes thereto.
<TABLE>
<CAPTION>
<S> <C> <C>
(b) Exhibits:
Exhibit No. Description Reference
2-a Agreement and Plan of Merger Exhibit 2 to Motor Club
between Motor Club of America and of America's Form 8-K
North East Insurance Company, dated March 17, 1999
dated as of March 16, 1999
3-a Restated and Amended Certificate Exhibit 1(i) to Motor
of Incorporation of Motor Club of Club of America's
America, dated June 12, 1972 Annual Report on Form
10-K for fiscal year
ended December 31, 1972
3-b By-Laws of Motor Club of America, Exhibit 3-l to Motor
effective March 15, 1989 Club of America's
Annual Report on Form
10-K for fiscal year
ended December 31, 1988
3-c By-law Amendment of Motor Club Exhibit 3-m to Motor
of America, effective Club of America's
August 3, 1994 Form 8-K dated
July 21, 1994
4-a Specimen Certificate Exhibit 4 to File
representing Common Stock, No. 2-39996 on
$.50 par value Form S-1
10-a Motor Club of America 1987 Stock Exhibit 10-o to Motor
Option Plan Club of America's
Annual Report on Form
10-K for fiscal year
ended December 31,
1987
10-b Specimen copy of Motor Club of Exhibit 10-p to Motor
America 1987 Stock Option Club of America's
Agreement Annual Report on Form
10-K for fiscal year
ended December 31, 1987
10-c Motor Club of America 1992 Exhibit A to Motor
Stock Option Plan Club of America's
Proxy Statement for
fiscal year ended
December 31, 1991
10-d Specimen copy Motor Club of Exhibit 10-r to
America 1992 Stock Option Motor Club of
Plan Agreement America's Annual
Report on Form 10-K
for fiscal year
ended December 31, 1992
10-e Settlement Agreement between Exhibit 99 to Motor
Motor Club of America et als. Club of America's
and Receiver of MCA Insurance Form 8-K dated
Company in Liquidation et als. December 20, 1994
and related documents
10-f Order dated December 30, 1994 Exhibit 99-C to Motor
Approving Settlement between Club of America's
Motor Club of America et als and Form 8-K dated
Receiver of MCA Insurance December 30, 1994
Company in Liquidation et als
and related conformed documents
10-g Stock Purchase Agreement Exhibit 99-F to Motor
between Motor Club of America Club of America's
and JVL Holding Properties, Inc. Form 8-K dated
December 2, 1996
10-h Agreement dated December 2, 1996 Exhibit 99-G to Motor
between Motor Club of America Club of America's
and Motor Club of America Form 8-K dated
Enterprises, Inc. December 2, 1996
10-i $3 Million Senior Unsecured Page 65 to Page 124
Revolving Credit Facility between
Motor Club of America and Dresdner
Bank, AG and related documents
22 Subsidiaries of Motor Club of
America Page 125
</TABLE>
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
Dated: March 30, 1999 By s/Stephen A. Gilbert
Stephen A. Gilbert
President, Chief Executive
Officer, General Counsel
and Director
Dated: March 30, 1999 By s/Patrick J. Haveron
Patrick J. Haveron
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Dated: March 30, 1999 By s/Archer McWhorter
Archer McWhorter
Chairman of the Board
and Director
Dated: March 30, 1999 By s/Alvin E. Swanner
Alvin E. Swanner
Director
Dated: March 30, 1999 By s/William E. Lobeck,Jr.
William E. Lobeck, Jr.
Director
MOTOR CLUB OF AMERICA
Exhibit (22) Subsidiaries of the Registrant.
The following are the subsidiaries of the Registrant as of
March 26, 1999:
State of
Name Organization
Motor Club of America Insurance Company New Jersey
Preserver Insurance Company New Jersey
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of
Motor Club of America:
In our opinion, the consolidated financial statements listed
in the index appearing under Item 14(a)(1) on page 61 present
fairly, in all material respects, the financial position of
Motor Club of America and Subsidiaries at December 31, 1998
and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial
statement schedules listed in the index appearing under Item
14(a)(2) on page 61 present fairly, in all material respects,
the information set forth therein when read in conjunction
with the related consolidated financial statements. These
financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and
financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used
and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 1, 1999.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
__________
<S> <C> <C>
December 31,
----------------------------
1998 1997
---- ----
ASSETS
Investments:
Fixed maturity securities, available-
for-sale, at fair value (amortized
cost $67,676,411 -1998 and
$55,925,617 -1997) $ 69,594,904 $ 56,831,444
Mortgage loans on real estate - at the
unpaid principal amount 361,038 522,555
Short-term investments, at fair value
which approximates cost 5,995,299 7,150,000
----------- -----------
Total investments 75,951,241 64,503,999
Cash and cash equivalents 2,773,427 222,761
Premiums receivable 20,401,069 7,809,567
Reinsurance recoverable on paid
and unpaid losses and loss expenses 19,234,277 18,666,066
Notes and accounts receivable 125,444 124,669
Deferred policy acquisition costs 8,708,329 5,858,650
Fixed assets - at cost, less accumulated
depreciation 1,671,902 1,586,649
Federal income tax recoverable 26,724 -
Prepaid reinsurance premiums 1,015,581 695,245
Deferred tax asset - 657,362
Other assets 1,104,782 1,221,723
------------ ------------
Total assets $131,012,776 $101,346,691
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $58,335,143 $50,246,778
Unearned premiums 30,733,144 19,285,757
Commissions payable 2,835,408 1,322,669
Accounts payable 875,327 562,453
Accrued expenses 4,763,950 5,518,935
Drafts outstanding 1,688,835 1,396,215
Note payable 3,000,000 -
Deferred tax liability 957,440 -
Federal income taxes payable - current - 12,851
------------ -----------
Total liabilities 103,189,247 78,345,658
------------ -----------
Shareholders' Equity:
Common Stock, par value $.50 per share:
Authorized - 10,000,000 shares;
issued and outstanding shares 2,116,429
- 1998 and 2,094,429 - 1997 1,058,215 1,047,215
Paid in additional capital 1,996,954 1,950,204
Accumulated other comprehensive loss (3,422,387) (3,931,342)
Retained earnings 28,190,747 23,934,956
----------- -----------
Total Shareholders' Equity 27,823,529 23,001,033
----------- -----------
Total Liabilities and
Shareholders' Equity $131,012,776 $101,346,691
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
__________
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the years ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
REVENUES
Insurance premiums (net of premiums
ceded totaling $6,776,174, $7,151,204
and $7,273,083) $53,175,663 $50,877,890 $45,194,073
Net investment income 4,304,507 3,594,509 3,087,112
Realized gains on
sales of investments (net) 28,545 - 5,485
Realized gain on sale of subsidiary - - 702,419
Motor club membership fees - - 1,215,039
Other revenues 171,171 224,271 114,512
----------- ----------- -----------
Total revenues 57,679,886 54,696,670 50,318,640
=========== =========== ===========
LOSSES AND EXPENSES
Losses and loss expenses
incurred (net of reinsurance
recoveries totaling $4,736,671,
$3,650,474 and $6,840,459) 36,479,591 33,141,691 29,148,280
Amortization of deferred
policy acquisition costs 13,375,221 15,162,320 13,678,710
Other operating expenses 2,105,668 1,762,192 3,569,564
Lease termination charge - - 359,077
Motor Club benefits - - 266,112
----------- ----------- -----------
Total losses and expenses 51,960,480 50,066,203 47,021,743
=========== =========== ===========
Income before Federal income
taxes 5,719,406 4,630,467 3,296,897
Benefit (provision) for Federal
income taxes: current (193,121) (37,573) (42,324)
deferred (1,270,494) (1,110,192) 2,075,535
----------- ----------- ----------
Total Federal income tax (1,463,615) (1,147,765) 2,033,211
----------- ----------- ----------
Net income $ 4,255,791 $ 3,482,702 $ 5,330,108
=========== ============ ===========
Net Income per common share:
Basic $2.02 $1.68 $2.61
===== ===== =====
Diluted $2.01 $1.66 $2.56
===== ===== =====
Weighted average common and potential common shares outstanding:
Basic 2,108,722 2,074,473 2,045,590
========= ========= =========
Diluted 2,121,366 2,102,395 2,081,080
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
________
<S> <C> <C> <C> <C> <C> <C>
Common Stock (a) Paid-In Accumulated Other
------------------
Shares Additional Comprehensive Retained
Issued Amount Capital Income (Loss)(b) Earnings Total
------- ------ ---------- ---------------- --------- ------
Balance at December 31, 1995 2,043,754 $1,021,876 $1,722,539 ($3,785,485)
$15,122,146 $14,081,076
Net income 5,330,108 5,330,108
Other comprehensive income, net
of tax:
Unrealized investment losses net
of reclassification adjustment (1,122,378) (1,122,378)
Minimum pension liability
adjustment 487,000 487,000
Comprehensive income 4,694,730
Common stock issued 3,750 1,876 7,969 9,845
Balance at December 31, 1996 2,047,504 1,023,752 1,730,508 (4,420,863)
20,452,254 18,785,651
Net income 3,482,702 3,482,702
Other comprehensive income, net
of tax:
Unrealized investment gains, net
of reclassification adjustment 327,721 327,721
Minimum pension liability
adjustment 161,800 161,800
Comprehensive income 3,972,223
Common stock issued 46,925 23,463 219,696
243,159
Balance at December 31, 1997 2,094,429 1,047,215 1,950,204 (3,931,342)
23,934,956 23,001,033
Net income 4,255,791 4,255,791
Other comprehensive income, net
of tax:
Unrealized investment gains, net
of reclassification adjustment 668,355 668,355
Minimum pension liability
adjustment (159,400) (159,400)
Comprehensive income 4,764,746
Common stock issued 22,000 11,000 46,750
57,750
Balance at December 31, 1998 2,116,429 $1,058,215 $1,996,954 ($3,422,387)
$28,190,747 $27,823,529
</TABLE>
(a) Par value $.50 per share; authorized - 10,000,000 shares.
(b) Net of deferred taxes.
The accompanying notes are an integral part of these
consolidated financial statements.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
__________
<S> <C> <C> <C>
For the years ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
Net income $ 4,255,791 $ 3,482,702 $ 5,330,108
Adjustments to reconcile net income
to cash provided by
operating activities:
Depreciation expense 527,644 461,845 379,453
Amortization of bond
premium - net 35,375 103,308 98,738
Gain on sale of subsidiary - - (702,419)
Gain on sale of investments (28,545) - (5,485)
Write-off of leasehold improvements
(net) due to lease termination - - 227,077
Deferred tax provision (benefit) 1,270,494 1,110,192 (2,075,535)
Changes in:
Net assets of Motor Club of America
Enterprises, Inc. - - (422,581)
Premiums receivable (12,591,502) (7,984) (666,352)
Notes and accounts receivable (775) 124,206 (38,922)
Deferred policy acquisition costs (2,849,679) (97,154) (692,274)
Federal income tax - current (39,575) (13,118) 39,649
Reinsurance recoverable on paid and
unpaid losses and loss expenses (568,211) 3,101,263 (4,128,475)
Prepaid reinsurance premiums (320,336) 450,699 47,154
Other assets 116,941 (100,563) 129,820
Losses and loss expenses 8,088,365 2,579,922 7,843,304
Unearned premiums 11,447,387 351,557 1,571,169
Commissions payable 1,512,739 (121,991) 86,908
Accounts payable 312,874 (33,332) 292,994
Accrued expenses (914,385) (1,089,809) (415,706)
Drafts outstanding 292,620 86,778 (47,878)
----------- ----------- ----------
Total cash provided by
operating activities 10,547,222 10,388,521 6,850,747
----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
__________
<S> <C> <C> <C>
For the years ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
Investing activities:
Proceeds from:
Maturities of fixed maturities 17,444,834 4,852,707 4,442,716
Sales of fixed maturities 2,000,000 2,700,000 1,396,522
Sale of subsidiary - - 1,125,000
Payments received on mortgage
loan principal 161,517 111,937 131,609
Sale or maturities of short-
term investments 245,390,264 86,804,893 200,000
Sale of fixed assets - - 13,400
Purchase of:
Fixed maturities (31,304,235) (15,927,470) (10,350,787)
Short-term investments (244,133,789) (92,206,193) (1,745,455)
Fixed assets (612,897) (221,741) (1,227,558)
------------ ----------- -----------
Total cash utilized in
investing activities (11,054,306) (13,885,867) (6,014,553)
------------ ----------- -----------
Financing activities:
Note payable 3,000,000 - -
Common stock issued 57,750 243,159 9,845
------------ ----------- -----------
Total cash provided by financing
activities 3,057,750 243,159 9,845
------------ ----------- -----------
Net increase (decrease) in cash 2,550,666 (3,254,187) 846,039
Cash and cash equivalents
at beginning of year 222,761 3,476,948 2,630,909
----------- ------------ ------------
Cash and cash equivalents
at end of year $ 2,773,427 $ 222,761 $ 3,476,948
=========== ============ ============
</TABLE>
Supplemental Disclosures of Cash Flow Information
(1) Total interest paid was $60,389 (1998), $8,890 (1997) and $8,166
(1996).
(2) Total Federal income taxes paid was $212,738(1998), $50,691
(1997) and $38,462 (1996).
The accompanying notes are an integral part of
these consolidated financial statements.
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note A - Summary of Significant Accounting Policies:
(a) Basis of Presentation and Principles of Consolidation:
The consolidated financial statements of Motor Club of
America (the "Company") include its accounts and those of
its wholly-owned subsidiary companies. The financial
statements have been prepared on the basis of generally
accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with these
practices 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
period. Actual results could differ from those
estimates.
The Company's insurance subsidiaries, Motor Club of
America Insurance Company ("Motor Club") and Preserver
Insurance Company ("Preserver") are collectively referred
to as the "Insurance Companies". All material
intercompany items and transactions have been eliminated
in consolidation.
(b) Nature of Operations:
The Company is a New Jersey corporation which owns the
Insurance Companies. The Company's finance subsidiary,
Motor Club of America Finance Company, was merged into
the Company on December 9, 1997. The Company's
subsidiary, Motor Club of America Enterprises, Inc.
("Enterprises"), was sold on December 2, 1996 (see Note
B, Sale of Subsidiary for further details). Enterprises
operated a motor club. The Insurance Companies engage in
property and casualty insurance, principally private
passenger automobile, small commercial and homeowners
insurance, produced by independent agents; at the present
time, one hundred percent of the Insurance Companies'
operations are conducted in the State of New Jersey. The
Company generates substantially all of its revenues from
its insurance operations.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note A - Summary of Significant Accounting Policies (Continued):
(c) Insurance Premiums:
Insurance premiums are credited to income by the monthly
pro rata method over the terms of the contracts.
Beginning July 1, 1998, Motor Club began converting its
contracts for private passenger automobile insurance from
six month to twelve month policies ("Policy Term
Conversion"). While the Policy Term Conversion will, for
a one year period commencing July 1, 1998, temporarily
increase the amount of premiums written by Motor Club, it
will not effect the amount of premiums earned. Insurance
contracts for policies other than private passenger
automobile are for terms of twelve months.
(d) Motor Club Operations:
Through December 2, 1996 (See Note B) Motor club
membership fees were credited to income by the
straight-line method over the terms of the contracts.
Commission expense was deferred and amortized in the same
manner as the related unearned membership fees. Other
related costs were charged to expense as incurred.
(e) Investments:
All of the Company's fixed maturity securities are
classified as available-for-sale securities, and are
therefore reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of
applicable deferred taxes.
The Company does not invest in, hold or issue any
derivative financial instruments.
Premium and discount amounts are amortized into income
based on the stated contractual life of the securities.
The Company recognizes income for the mortgage-backed and
asset-backed bond portion of its fixed maturity
securities portfolio using the constant effective yield
method.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note A - Summary of Significant Accounting Policies (Continued):
When actual prepayments differ from this assumption, the
effective yield is recalculated to reflect actual
payments to date. The net investment in the security is
adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of
the security. That adjustment is included in net
investment income.
Gains and losses on investments are recognized when
investments are sold or redeemed on a specific
certificate basis.
(f) Other Revenues:
Other revenues consist principally of interest on
mortgage loans and in 1997 and 1998, servicing fees from
motor club membership fees written by Enterprises.
(g) Losses and Loss Expenses:
The estimated liability for losses is based on (1) the
accumulation of cost estimates for unpaid losses reported
prior to the close of the accounting period; and (2)
estimates of incurred but not reported losses based upon
past experience; less (3) estimates of anticipated
salvage and subrogation recoveries. In the normal course
of business, the Company seeks to reduce the loss that
may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain
levels of risk in various areas of exposure with other
insurance enterprises or reinsurers.
Changes to the estimated liabilities are reflected in the
results of operations currently.
Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated
with the reinsured policy. The liability for loss
expenses is based on estimates of expenses to be
incurred in the settlement of claims.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note A - Summary of Significant Accounting Policies (Continued):
(h) Deferred Policy Acquisition Costs:
Deferred policy acquisition costs are costs that vary
with and are primarily related to the production of new
and renewal business. Such costs include commissions,
premium taxes, certain State mandated assessments and
certain underwriting and policy issuance costs which are
deferred when incurred (subject to a maximum) and
amortized to income as the related written premiums are
earned. Investment income is anticipated in determining
whether a premium deficiency relating to these costs
exists.
(i) Fixed Assets:
Depreciation on leasehold improvements is computed by the
straight-line method over the remaining lease term.
Depreciation on furniture and fixtures, data processing
and other equipment, is computed by the straight-line
method over the estimated useful lives, ranging from
three to twenty years.
Expenditures for major renewals and betterments are
capitalized, and expenditures for maintenance and repairs
are charged to income as incurred. When property units
are retired, or otherwise disposed of, the cost thereof
and related accumulated depreciation are eliminated from
the accounts. Any gain or loss on disposal is credited
or charged to operations.
(j) Federal Income Taxes:
Deferred Federal income taxes are provided for temporary
differences between the financial statement and tax basis
of assets and liabilities using enacted tax rates
expected to apply in the years in which the differences
are expected to reverse.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note A - Summary of Significant Accounting Policies (Continued):
(k) Statement of Cash Flows:
For purposes of the statement of cash flows, the Company
considers demand deposits held with financial
institutions and money market mutual fund holdings to be
cash equivalents.
(l) 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.
See Note O for more information on outstanding stock
options and Note R for more information on the
computation of Earnings per Share.
(m) Comprehensive Income:
In 1998, the Company adopted SFAS No. 130 ("Comprehensive
Income"), which established standards for the reporting
and disclosure of comprehensive income and its
components. Comprehensive income consists of net income,
the unfunded accumulated benefit obligation in excess of
plan assets and net unrealized investment gains or losses
and is presented separately. The adoption of SFAS No.
130 had no impact on shareholders' equity. Prior year
financial statements have been reclassified to conform to
these requirements.
Note B - Sale of Subsidiary:
On December 2, 1996, the Company sold Enterprises to JVL
Holding Properties, Inc., ("JVL") a non-affiliated
Oklahoma corporation, for $1,125,000. As a result of
this transaction, the Company recorded a gain of
$702,419.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note B - Sale of Subsidiary (Continued):
Pursuant to an additional agreement entered into
concurrent with the sale, the Company provides certain
services to members whose memberships are written with
private passenger automobile ("PPA") policies written by
Motor Club. In exchange the Company receives a servicing
fee from JVL. The Company also receives certain fees for
other memberships written by Enterprises, as defined by
this additional agreement. During 1998, 1997 and 1996,
these fees collectively totaled $134,000, $143,000 and
$11,000, respectively.
Note C - Investments:
(a) The amortized cost and estimated fair value of
investments in fixed maturity securities at December 31,
1998 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ---------- -----------
U.S. Government
securities $22,027,700 $1,128,251 ($ 10,320) $23,145,631
Mortgage-backed
securities 11,053,686 165,978 (6,075) 11,213,589
Asset-backed
securities 10,698,352 107,618 - 10,805,970
Corporate
securities 23,896,673 558,555 (25,514) 24,429,714
----------- ---------- --------- -----------
Total $67,676,411 $1,960,402 ($ 41,909) $69,594,904
=========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and estimated fair value of
investments in fixed maturity securities at December 31,
1997 were as follows:
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Government
securities $33,950,152 $ 768,123 ($ 16,978) $34,701,297
GNMA Mortgage-
backed
securities 10,015,258 131,866 (50,304) 10,096,820
Corporate
securities 11,960,207 108,689 (35,569) 12,033,327
----------- ---------- --------- -----------
Total $55,925,617 $1,008,678 ($102,851) $56,831,444
=========== ========== ========= ===========
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note C - Investments (Continued):
The amortized cost and fair value of investments in fixed
maturity securities at December 31, 1998, by contractual
maturity, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 5,293,385 $ 5,359,253
Due after one year through
five years 12,090,697 12,625,197
Due after five years through
ten years 25,327,919 26,183,629
Due after ten years 24,964,410 25,426,825
$67,676,411 $69,594,904
</TABLE>
The above maturity tables include $22,019,559 (at fair
value) of mortgage-backed and asset-backed securities,
which were classified as due after ten years based on the
contractual life of the securities.
Expected maturities may differ from contractual
maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment
penalties. Gross gains of $50,099 and $5,485 were
realized on proceeds of $10,434,411 and $264,795 in 1998
and 1996, respectively, on those sales and calls. Gross
losses of $21,554 were realized on proceeds of $5,391,130
in 1998 on those sales and calls. There were no gross
gains or gross losses in 1997 and no gross losses in
1996.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note C - Investments (Continued):
(b) Net investment income by category of investments
consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Category 1998 1997 1996
-------- --------- ---------- ----------
Fixed maturities $3,950,500 $3,387,140 $3,093,534
Other, principally
short-term
investments 498,253 431,932 196,457
---------- ---------- ----------
Total investment
income 4,448,753 3,819,072 3,289,991
Investment
expenses 144,246 224,563 197,394
---------- ---------- ----------
Net investment
income $4,304,507 $3,594,509 $3,092,597
========== ========== ==========
</TABLE>
(c) At December 31, 1998 and 1997, fixed maturity investments
(at fair value) deposited with the New Jersey Department
of Banking and Insurance ("NJ DOBI") amounted to $222,784
and $220,859, respectively.
(d) There were no investments in any persons and its
affiliates in excess of ten percent of shareholders'
equity.
(e) The change in net unrealized gains (losses) on
investments are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31,
----------------------------------
1998 1997 1996
Fixed
maturities $1,012,666 $635,790 ($1,122,378)
========== ======== ============
</TABLE>
(f) In the opinion of management there has been no
permanent impairment in the carrying amount of
investments.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note D - Unpaid Losses and Loss Expenses:
(a) The following table provides a reconciliation of
the beginning and ending balances for unpaid losses
and loss expenses for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Balance at January 1 $50,246,778 $47,666,856 $39,823,552
Less: Reinsurance
recoverables 17,363,319 19,553,223 16,414,610
----------- ----------- -----------
Net balance at
January 1 32,883,459 28,113,633 23,408,942
Incurred losses and
loss expenses:
Provision for current
year claims 32,598,287 29,368,738 28,244,599
Increase in provision
for prior years'
claims 3,881,304 3,772,953 903,681
----------- ----------- -----------
Total incurred losses
and loss expenses 36,479,591 33,141,691 29,148,280
----------- ----------- -----------
Payment for losses and
loss expenses:
Payment on current
year claims 12,038,000 12,169,000 13,029,214
Payment on prior
years' claims 17,510,773 16,202,865 11,414,375
----------- ----------- -----------
Total payments for losses
and loss expenses 29,548,773 28,371,865 24,443,589
----------- ----------- -----------
Net balance at
December 31 39,814,277 32,883,459 28,113,633
Plus: Reinsurance recover-
ables 18,520,866 17,363,319 19,553,223
----------- ----------- -----------
Balance at December 31 $58,335,143 $50,246,778 $47,666,856
=========== =========== ===========
</TABLE>
The reconciliation shows a 1998 deficiency of $3,881,304
in the liability recorded at December 31, 1997. The
deficiency is primarily the result of: (1) initial
adverse development of reserves at December 31, 1997
which is consistent with the Company's loss development
history; and (2) continuing adverse development of losses
incurred in 1996.
(b) Losses incurred are reduced by salvage and subrogation
approximating $2,661,000, $2,801,000 and $2,188,000 for
the years ended December 31, 1998, 1997 and 1996,
respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note E - Fixed Assets:
Fixed assets consist of the following:
1998 1997
---- ----
Leasehold improvements $ 191,937 $ 191,937
Office furniture, fixtures and
data processing equipment 3,287,546 3,155,739
---------- ----------
3,479,483 3,347,676
Less accumulated depre-
ciation 1,807,581 1,761,027
---------- ----------
$1,671,902 $1,586,649
========== ==========
Note F - Reinsurance:
(a) Unearned premiums and unpaid loss and loss expenses are
stated gross of the effects of reinsurance.
(b) Reinsurance contracts do not relieve the Insurance
Companies from their obligations to policyholders.
Failure of reinsurers to honor their obligations could
result in losses to the Insurance Companies. Generally,
all risks in excess of $150,000 for liability lines and
$100,000 for property lines are reinsured. Prior to July
1, 1997 the property retention was $75,000.
The Insurance Companies evaluate the financial condition
of their reinsurers and monitor concentrations of credit
risk arising from activities or economic characteristics
of the reinsurers to minimize their exposure to
significant losses from reinsurer insolvencies.
As referred to in Note A, one hundred percent of the
Company's insurance operations are presently located in
the State of New Jersey, the laws of which require
participation in certain reinsurance funds.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note F - Reinsurance (Continued):
Reinsurance recoverable on paid and unpaid loss and loss
expenses are principally attributable to the amounts of
reinsurance recoverable from the Unsatisfied Claim and
Judgment Fund ("UCJF") of the State of New Jersey, which
pertains to New Jersey Personal Injury Protection claims
in excess of Motor Club's statutory retention limit of
$75,000. Reinsurance recoverable from the UCJF was
$9,139,160 and $10,552,385 as of December 31, 1998 and
1997, respectively.
Motor Club is required to participate in the New Jersey
Automobile Insurance Risk Exchange ("NJ AIRE"). NJ AIRE
is designed to balance differences between Motor Club's
bodily injury exposures and loss payments as compared to
industry exposures and loss payments under New Jersey's
dual tort threshold system.
Assessments paid to NJ AIRE based on subject bodily
injury exposures are accounted for as ceded premiums
written and totaled $1,113,756, $1,728,341 and $1,613,095
in 1998, 1997 and 1996, respectively. Reimbursements
from NJ AIRE based on subject claim payment experience
are accounted for as ceded losses incurred and totaled
$548,415, $500,657 and $482,105 in 1998, 1997 and 1996,
respectively.
Prepaid reinsurance premiums of $1,015,581 and $695,245
as of December 31, 1998 and 1997, respectively, are
mainly attributable to, in 1998, Preserver's workers'
compensation program and in both years, the Insurance
Companies' excess of loss reinsurance treaties which are
with one reinsurer.
The effect of reinsurance on premiums written and earned
is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
---- ---- ----
Written Earned Written Earned Written Earned
-------------------------- ------------------------- --------------------------
Direct $71,399,224 $59,951,837 $58,380,651 $58,029,094 $54,563,224
$52,467,156
Ceded (7,096,511) (6,776,174) (6,700,505) (7,151,204) (7,225,929) (7,273,083)
----------- ----------- ----------- ----------- ----------- -----------
Net $64,302,713 $53,175,663 $51,680,146 $50,877,890 $47,337,295 $45,194,073
=========== =========== =========== =========== ===========
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note F- Reinsurance (Continued):
(c) During 1993, Motor Club was notified by one of its
reinsurers of a dispute. The reinsurer did not deny the
validity of coverage; rather, the reinsurer indicated
that it believed that a right of set-off existed for the
reinsurance which Motor Club had ceded to the reinsurer
for accident years 1973 to 1975 against reinsurance which
MCA Insurance Company ("MCAIC") had assumed from the
reinsurer between 1968 and 1976. Motor Club assumed the
ceded reinsurance from MCAIC in 1991. The reinsurer had
indicated that payments to Motor Club would be held in
abeyance pending resolution of the dispute. Motor Club
had recorded a liability of $1,695,774 at December 31,
1995.
On November 6, 1996, Motor Club and the reinsurer settled
the dispute. Motor Club paid the reinsurer $1,950,000,
in three installments prior to December 31, 1996. In
return, the reinsurer agreed to: (1) pay Motor Club all
past amounts due under the reinsurance agreement
applicable to accident years 1973 to 1975, totaling
$640,698 as of June 30, 1996; and (2) to pay Motor Club
future amounts which may be recoverable from the
reinsurer under the terms of the same reinsurance
agreement.
The Consolidated Statement of Operations includes in
other operating expenses $254,226 for this matter in
1996.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note G - Note Payable:
On September 14, 1998, the Company entered into a $3
million revolving credit facility (the "Loan") and drew
on the entire amount of the Loan on September 30, 1998.
The Loan has a three-year term and bears interest payable
in varying periods depending on the interest period, not
to exceed three months, at rates selected by the Company
under the terms of Loan, including a Base Rate (which is
the lender's prime rate) or the Eurodollar Rate plus
applicable margin of 2%. At December 31, 1998, the
interest rate under the Loan was 7.0625%. Interest paid
on the loan in 1998 was $54,146.
The Loan requires compliance with certain financial and
operating covenants which require certain financial
ratios and limit, among other things, the incurrence of
additional indebtedness by the Company and the Insurance
Companies, investments by the Company, sales of assets
and changes in control, along with maintenance by the
Insurance Companies of their ratings by A.M. Best. At
December 31, 1998, the Company was in compliance with
these covenants. The commitment fee for any unborrowed
portion of the Loan is 0.35%.
Note H - Taxes:
(a) The Company and its subsidiaries (including MCA Insurance
Company ("MCAIC") and its subsidiaries, former
affiliates) file a consolidated Federal income tax
return.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note H - Taxes (Continued):
(b) The tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1998 1997
---------- ---------
Deferred tax assets:
Net operating loss ("NOL")
carryforward $ 606,807 $3,965,602
Unpaid losses and loss expenses 1,637,930 1,385,862
Unearned premium 2,020,795 1,264,155
Alternative minimum tax and
general business credit carry-
forwards 107,677 91,094
---------- ----------
Total deferred tax assets 4,373,209 6,706,713
---------- ----------
Deferred tax liabilities:
Deferred acquisition costs (2,960,832) (1,991,942)
Unrealized gain on debt securities (652,288) (307,981)
Prepaid pension cost (1,370,837) (937,880)
Excess loss account - (722,888)
Other deferred tax liabilities (251,462) (172,458)
---------- ----------
Total deferred tax liabilities (5,235,419) (4,133,149)
---------- ----------
Less: valuation allowance for
deferred tax assets (95,230) (1,916,202)
---------- ----------
Net deferred tax (liability) asset ($ 957,440) $ 657,362
========== ==========
</TABLE>
The Company believes it is more likely than not that it
will generate future taxable income to realize the
benefits of the net deferred tax asset. The Company has
provided a valuation allowance at December 31, 1998 for
those deferred tax assets related to NOL carryforwards of
MCAIC and its subsidiaries as a percentage of the total
NOL carryforward in the Consolidated return. The
ultimate amounts realized, however, could be reduced if
actual amounts of future taxable income differ from
projected future taxable income.
The net operating loss carryforward of $1,784,727 expires
beginning in 2009.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note H - Taxes (Continued):
(c) The provision for Federal income taxes resulted in
effective tax rates lower than the statutory Federal
income tax rates, as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Tax provision
computed at statutory
federal income tax rates ($1,944,598) ($1,574,359) ($1,120,945)
Change in valuation
allowance (1,820,972) (1,110,192) 2,075,535
Effect of net operating
loss carryforward 1,830,513 1,548,594 1,095,320
Other-net 471,442 (11,808) (16,699)
----------- ----------- ----------
Benefit (provision) ($1,463,615) ($1,147,765) $2,033,211
=========== =========== ==========
</TABLE>
(d) The Consolidated Statements of operations for the years
ended December 31, 1998, 1997 and 1996 include state
taxes based on insurance premiums of $189,346, $153,333
and $143,262.
Note I - Shareholders' Equity:
(a) The Insurance Companies are domiciled in the State of New
Jersey and therefore prepare their statutory financial
statements in accordance with accounting practices
prescribed or permitted by the NJ DOBI ("SAP").
Prescribed statutory accounting practices include a
variety of publications of the National Association of
Insurance Commissioners, as well as state laws,
regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting
practices not so prescribed.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note I - Shareholders' Equity (Continued):
The maximum amount of dividends which the Insurance
Companies can pay to shareholders without approval of the
Insurance Commissioner is subject to restrictions. To the
extent that surplus as defined is available, the maximum
amount distributable is limited to the greater of: (1)
ten percent of statutory surplus as regards
policyholders; or (2) net income, excluding realized
capital gains. Accordingly, the maximum dividend which
may be paid without prior approval in 1999 is $1.4
million and $1.1 million for Motor Club and Preserver,
respectively. Motor Club paid $1 million in dividends to
the Company in 1998. The Insurance Companies paid no
dividends in 1997 or 1996.
(b) The consolidated financial statements of the Company's
insurance subsidiaries have been prepared in accordance
with GAAP, which differ in certain respects from SAP.
The principal differences relate to (1) acquisition costs
incurred in connection with acquiring new business which
are charged to expense under SAP but under GAAP are
deferred and amortized as the related premiums are
earned; (2) anticipated salvage and subrogation
recoveries which have not been credited to losses
incurred for SAP; (3) net deferred tax assets created by
the tax effects of temporary differences; (4) unpaid
losses, unpaid loss adjustment expenses and unearned
premium reserves are presented gross of reinsurance with
a corresponding asset recorded; and (5) fixed maturity
portfolios that qualify as available for sale are carried
at fair value and changes in fair value are reflected
directly in unassigned surplus, net of related deferred
taxes.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note I - Shareholders' Equity (Continued):
The consolidated capital and surplus, shareholders'
equity and income of Motor Club and Preserver on a
statutory and GAAP basis were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
------------------------
1998 1997
---- ----
Capital and surplus -
Statutory basis $24,886,388 $18,129,018
Shareholders' equity -
GAAP basis $42,143,091 $29,308,852
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31,
-----------------------------------
1998 1997 1996
---- ---- -----
Net income (loss):
Statutory basis ($ 762,471) $3,719,782 $ 212,807
GAAP basis $5,157,732 $4,316,713 $2,737,318
</TABLE>
Distribution by the Insurance Companies of the excess of
GAAP shareholders' equity over statutory capital and
surplus to the Company is prohibited by law.
Note J - Contingencies:
The Company and its subsidiaries are parties to various
legal actions and administrative proceedings and subject
to various claims arising in the ordinary course of
business. The Company believes that the disposition of
these matters will not have a material adverse effect on
the financial position, the results of operations or cash
flows of the Company.
Note K - Pensions:
(a) The Company has a non-contributory defined benefit plan
(the "Plan"). Eligible salaried and hourly employees of
the Company participate in the Plan after twelve months
of continuous employment with the Company when age 21 has
been attained. Retirement benefits are based on each
participant's average compensation and years of service.
Vesting of benefits begins after five years of service
commencing from the minimum age of 21 or date of hire, if
later.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note K - Pensions (Continued):
The Company's contributions are designed to fund the
Plan's normal costs on a current basis and to fund the
unfunded prior service costs, including accrued benefits
arising from qualifying employee service occurring prior
to the establishment of the Plan, over 40 years.
On January 15, 1992, the Company suspended the accrual of
benefits arising from participant service. The Company
continues to fund the Plan for benefits earned through
January 31, 1992.
The Plan maintains a significant amount of assets in
group annuity contracts with Mutual Benefit Life
Insurance Company ("Mutual"), which was placed in
rehabilitation by the NJ DOBI on July 16, 1991.
On November 10, 1993, a Plan of Rehabilitation for Mutual
was confirmed by the Superior Court of New Jersey. As a
result, certain amendments were made to the Plan's
contracts ("the restructured contract"), which is now
transferred to the MBL Life Assurance Corporation
("MBLLAC"), the successor corporation of Mutual, where
the restructured contract continues.
The restructured contract is supported by a group of life
insurance companies who are participating in the Plan of
Rehabilitation. This arrangement has the effect of
guaranteeing the contract balances should MBLLAC not be
able to fulfill its obligations under the contract.
In October 1994, MBLLAC approved and subsequently paid a
"hardship withdrawal" of $2,666,204 (net of an
administrative charge of $470,507) to the Plan.
The Plan also received $183,876, $183,876 and $177,517 in
distributions from MBLLAC and Mutual in 1998, 1997 and
1996, respectively, under provisions of the Plan of
Rehabilitation.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note K - Pensions (Continued):
On January 9, 1997, the Plan of Rehabilitation was
amended. Prior to the amendment, the payment of
principal and interest under the restructured contract
was to be in five installments beginning December 31,
1999. Under the amended Plan of Rehabilitation, such
payments have been accelerated and will be paid in full
on or before December 31, 1999.
On December 9, 1998 MBLLAC announced that this date had
been accelerated further and that the revised maturity
date will likely occur between April 1, 1999 and June 30,
1999.
(b) Pension expense for 1998, 1997 and 1996 included the
following components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Interest cost $813,900 $837,900 $831,800
Expected return on plan assets (946,800) (862,000) (805,000)
Recognized loss 312,500 277,900 320,100
-------- -------- --------
Net periodic benefit cost
benefit obligation $179,600 $253,800 $346,900
======== ======== ========
</TABLE>
Measurement of the Company's benefit obligation and
pension expense as of December 31 of each year used the
following assumptions:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Discount rate 6.75% 7.25% 7.50%
Expected return on plan assets 10.00% 10.00% 10.00%
Rate of compensation increase N/A N/A N/A
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note K - Pensions (Continued):
(c) A reconciliation of the changes in the Plan's benefit
obligations and fair value of assets during 1998 and 1997
and a statement of the funded status of the Plan as of
December 31 of each year is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Change in benefit obligation:
Benefit obligation at
January 1 $11,605,700 $11,591,100
Service cost - -
Interest Cost 813,900 837,900
Actuarial loss 568,000 403,600
Benefits paid (1,018,700) (1,226,900)
----------- -----------
Benefit obligation at
December 31 $11,968,900 $11,605,700
=========== ===========
Change in plan assets:
Fair value of plan assets at
January $ 9,340,000 $ 8,791,900
Actual return on plan assets 1,165,300 1,241,500
Employer contribution 1,254,500 625,500
Benefits paid (1,018,700) (1,226,900)
Other (122,400) (92,000)
----------- -----------
Fair value of plan assets at
December 31 $10,618,700 $ 9,340,000
=========== ===========
Funded Status at December 31 ($ 1,350,200) ($ 2,265,700)
Unrecognized loss 4,688,500 4,529,100
------------ ------------
Net amount recognized at
December 31 $ 3,338,300 $ 2,263,400
============ ============
</TABLE>
Following are the amounts recognized in the statement of
financial position as of December 31 of each year:
<TABLE>
<CAPTION>
<S> <C> <C>
Accrued benefit liability ($1,350,200) ($2,265,700)
Accumulated other comprehensive
income 4,688,500 4,529,100
----------- -----------
Net amount recognized $3,338,300 $2,263,400
=========== ===========
</TABLE>
The adjustment required to recognize the minimum
liability is reflected as a component of accumulated
comprehensive income (loss) as of December 31, 1998 and
1997, respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note K - Pensions (Continued):
(d) The Company maintains a defined contribution plan for
substantially all employees (including those of MCAIC).
Employer contributions of a discretionary amount are made
by the Company and its subsidiaries. MCAIC and its
subsidiaries provide similar employer contributions.
Employer contributions in the amount of $116,329,
$115,995 and $116,938 were made by the Company in 1998,
1997 and 1996, respectively, for its employees and
charged to expense.
(e) In 1997, the Company established a non-qualified deferred
compensation plan for certain employees. Employer
contributions of a discretionary amount are made by the
Company.
Note L - Post-retirement Benefits:
(a) The Company currently provides certain life and health
benefits to retired employees who had twenty-five or more
years of service, subject to certain eligibility
restrictions. These benefits consist of the payment of
medical, life and dental premiums for the retired
employees. The Company's funding policy is to pay for
the premiums currently; any future increases in the cost
of these benefits will be borne by the retirees and not
the Company.
(b) Net periodic post-retirement benefit cost for 1998, 1997
and 1996 included the following components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Service cost $ 2,500 $ 2,300 $ 2,000
Interest cost 36,000 40,200 40,000
Amortization of transition obligation 28,000 28,000 28,000
Amortization of net loss 21,800 22,400 17,000
------- ------- -------
Net postretirement expense $88,300 $92,900 $87,000
======= ======= =======
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note L - Post-retirement Benefits (Continued):
Measurement of the Company's benefit obligation and post-retirement
benefit expense as of December 31 of each year used the following
assumptions:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Discount Rate 6.75% 7.25% 7.50%
Expected return on assets N/A N/A N/A
Average rate of increase in
compensation N/A N/A N/A
</TABLE>
(c) A reconciliation of the changes in the benefit
obligations and fair value of assets during 1998 and 1997
and a statement of the funded status as of December 31 of
each year is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Change in Accumulated Postretirement
Benefit Obligation
Benefit Obligation at January 1 $552,900 $536,000
Service Cost 2,500 2,300
Interest Cost 36,000 40,200
Employee Contributions 12,400 11,400
Benefit Paid (125,100) (126,900)
Actuarial loss 23,900 89,900
-------- --------
Benefit Obligation at December 31 $502,600 $552,900
======== ========
Change in Plan Assets
Fair Value of Plan Assets at January 1 $ - $ -
Company Contributions 112,700 115,500
Employee Contributions 12,400 11,400
Benefits Paid (125,100) (126,900)
-------- --------
Fair Value of Plan Assets at
December 31 $ - $ -
========= =========
Funded Status of the Plan
Benefit obligation less than plan assets ($502,600) ($552,900)
Unamortized transition obligation 389,000 417,000
Unamortized net loss 257,600 255,500
-------- --------
Net prepaid assets $144,000 $119,600
======== ========
</TABLE>
The following are the amounts recognized in the statement
of financial position as of December 31 of each year:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Prepaid benefit cost $144,000 $119,600
Accumulated other comprehensive income - -
-------- --------
Net amount recognized $144,000 $119,600
======== ========
(Continued)
</TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note L - Post-retirement Benefits (Continued):
(d) It is the policy of the Company that any future increase
in life and health care benefits will be borne by the
retirees and not the Company; as a result, there will be
no increase in either the accumulated post-retirement
benefit obligation or the service and interest cost
components of net periodic post-retirement benefit cost
related to a 1% increase in the health care
(a) Year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Revenues $14,122,238 $14,196,905 $14,481,138 $14,879,605
=========== =========== =========== ===========
Losses and
expenses $12,689,535 $12,629,606 $13,140,836 $13,500,503
=========== =========== =========== ===========
Net income $ 1,024,531 $ 1,134,939 $ 1,015,460 $ 1,080,861
=========== =========== =========== ===========
Net income per common share:
Basic $ .49 $ .54 $ .48 $ .51
=========== =========== =========== ===========
Diluted $ .48 $ .54 $ .48 $ .51
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
(b) Year ended December 31, 1997:
<S> <C> <C> <C> <C>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Revenues $13,780,326 $13,624,634 $13,630,808 $13,660,902
=========== =========== =========== ===========
Losses and
expenses $12,570,194 $12,457,776 $12,532,142 $12,506,091
=========== =========== =========== ===========
Net income $ 921,993 $ 868,540 $ 844,910 $ 847,259
=========== =========== =========== ===========
Net income per common share:
Basic $ .45 $ .42 $ .40 $ .41
=========== =========== =========== ===========
Diluted $ .44 $ .42 $ .40 $ .40
=========== =========== =========== ===========
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note N - Comprehensive Income:
Comprehensive income consisted of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Net income $4,255,791 $ 3,482,702 $ 5,330,108
Other comprehensive income
Unrealized gains (losses) on securities:
Unrealized gains (losses) during period
(net of taxes of $358,732, $307,981
and $0) 687,195 327,721 (1,118,758)
Less: Reclassification adjustment
for gains included in net income
(net of taxes of $9,705, $0 and
$1,865) (18,840) - (3,620)
----------- ----------- -----------
Net unrealized gains (losses) 668,355 327,721 (1,122,378)
----------- ----------- -----------
Minimum pension liability adjustment
(net of $0 taxes in all years) (159,400) 161,800 487,000
---------- ---------- ----------
Other comprehensive income 508,955 489,521 (635,378)
---------- ---------- ----------
Comprehensive income $4,764,746 $3,972,223 $4,694,730
========== ========== ==========
</TABLE>
Note O - Stock Option Plans:
The Motor Club of America 1987 and 1992 Stock Option
Plans ("1987 Option Plan" and "1992 Option Plan",
respectively) provide for the issuance of options to
purchase 100,000 common shares, respectively, by key
executives at the market price at date of grant.
Options under both Option Plans are exercisable for a
five year period in twenty-five percent increments each
year, commencing one year from the date of grant. As of
December 31, 1998: (1) 5,125 shares under the 1987 Option
Plan are available for grant; 57,000 shares were
exercisable and 37,875 shares had been exercised as of
that date; and (2) 32,950 shares under the 1992 Option
Plan are available for grant; 31,500 shares were
exercisable and 35,550 shares had been exercised as of
that date.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note O - Stock Option Plans (Continued):
Transactions during 1996, 1997 and 1998 relating to the
1987 Option Plan are as follows:
<TABLE>
<CAPTION>
<C> <C> <C> <C>
Weighted
Average
Exercise
Number of Price per Aggregate
Shares Share Amount
---------- --------- ----------
Options outstanding at
December 31, 1995 38,250 $ 2.625 $100,406
Options exercised in 1996 (3,750) $ 2.625 (9,844)
------- --------
Options outstanding at
December 31, 1996 34,500 $ 2.625 90,562
Options exercised in 1997 (11,375) $ 2.625 (29,859)
Options lapsed in 1997 (1,125) $ 2.625 (2,953)
Options granted in 1997 62,000 $12.75 790,500
------- --------
Options outstanding at
December 31, 1997 84,000 $10.098 848,250
Options exercised in 1998 (22,000) $ 2.625 (57,750)
Options lapsed in 1998 (5,000) $12.75 (63,750)
------- --------
Options outstanding at
December 31, 1998 57,000 $12.75 $726,750
====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Transactions during 1996, 1997 and 1998 relating to
the 1992 Option Plan are as follows:
<C> <C> <C> <C>
Weighted
Average
Exercise
Number of Price per Aggregate
Shares Share Amount
-------- --------- ---------
Options outstanding at
December 31, 1996 and 1995 51,000 $ 6.00 $306,000
Options exercised in 1997 (35,550) $ 6.00 (213,300)
Options lapsed in 1997 (15,450) $ 6.00 (92,700)
Options granted in 1997 3,000 $12.75 38,250
------- --------
Options outstanding at
December 31, 1997 3,000 $12.75 38,250
Options granted in 1998 28,500 $11.75 334,875
------- --------
Options outstanding at
December 31, 1998 31,500 $11.845 $373,125
======= ======= ========
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note O - Stock Option Plans (Continued):
The Company has adopted the provision of SFAS No. 123
("Accounting for Stock-Based Compensation"), which calls
for companies to measure employee stock compensation
expense based on the fair value method of accounting.
However, as allowed by SFAS No. 123, the Company has
elected the continued use of APB Opinion No. 25
("Accounting for Stock Issued to Employees"), with pro
forma disclosures of net income and earnings per share
determined as if the fair value method had been applied
in measuring compensation cost.
These calculations only take into consideration options
issued since January 1, 1995. No options were granted by
the Company in 1996 and therefore the adoption of this
Statement does not have any effect on that year's
financial position or results of operations. In 1998 and
1997, had the fair value method been applied, net income
would have been reduced by $21,100 and $10,200, $.01 and
less than $.01 basic net earnings per share,
respectively.
The average fair value of options granted during 1998 and
1997 was $5.79 and $6.52, respectively. The fair value
was estimated using the Black-Scholes option pricing
model based on the following assumptions for 1998 and
1997: risk-free interest rate of 4.66% and 5.65%;
volatility of 52.3% and 54.5%; and expected life of 4.75
and 4.5 years. The Company does not pay a dividend on its
common stock. The following table summarizes options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
<C> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
------------------- -------------------
Average
Exercise Average Exercise Exercise
Price Options Life(a) Price Options Price
-------- ------- -------- -------- ------- --------
$11.75 28,500 4.75 $11.75 0 $ -
$12.75 60,000 3.25 $12.75 15,000 12.75
------ ---- ------ ------ ------
Total 88,500 3.73 $12.42 15,000 $12.75
====== ==== ====== ====== ======
</TABLE>
(a) Average contractual life remaining years.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note P - Related Party Transactions:
Three of the Company's directors ("Ownership Group") own
42.2% of the outstanding common stock of the Company at
December 31, 1998. The Company paid directors fees' of
$180,000 during 1998, 1997 and 1996 to the Ownership
Group.
Note Q - Lease Obligations:
Effective January 1, 1996, the Company entered into a
lease ("Paramus Lease") at 95 Route 17 South, Paramus,
New Jersey. The Paramus Lease expires on December 31,
2005. The Company has an option to terminate the Paramus
Lease after six years, and an option to extend the
Paramus Lease for an additional five years after the
initial lease term expires. The Company will pay a base
annual rental of $371,745 through December 31, 2000 and
$416,805 thereafter until the Paramus Lease expires.
Additional charges for electricity and escalation of
certain operating costs apply. In 1998, 1997 and 1996,
rent expense paid by the Company on the Paramus Lease was
$410,000, $410,000 and $310,000, respectively.
Through March 31, 1996, the Company was party to a lease
("Newark Lease") with Fairmount Central Urban Renewal
Corporation ("Fairmount"), a subsidiary of MCAIC, for the
lease of the office building in which the Company and its
subsidiaries formerly operated. Rent of $324,000 per
year, subject to adjustment for property taxes in excess
of $200,000, was paid by the Company, along with other
costs as defined in the Newark Lease.
Effective March 31, 1996, the Company entered into a
Mutual Release Agreement (the "Release") with Fairmount,
Property-Casualty Company of MCA and MCAIC. Pursuant to
the terms of the Release, the Newark Lease was terminated
in exchange for $132,000.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
Note Q - Lease Obligations (Continued):
The Newark Lease was to run to December 31, 2011. The
Release also enabled the Company to terminate the Joint
Service Agreement ("JSA"). Concurrent with the execution
of the Release in 1996, the Company charged off $227,000
in leasehold improvements at that facility.
In 1996, rent expense paid by the Company (net of amounts
paid by MCAIC) on the Newark Lease was $75,000.
Note R - Earnings per Share ("EPS"):
In 1997, the Company adopted SFAS No. 128 ("Earnings Per
Share") specifying the computation, presentation and
disclosure requirements for EPS. The new standard defines
"basic" and "diluted" earnings per share. Basic earnings
per share are based on weighted average basic shares
outstanding. Diluted earnings per share are based on
weighted average diluted shares outstanding, which is
calculated by adding shares contingently issuable under
stock options to the average basic shares outstanding.
The calculations of average basic and diluted common
shares outstanding and net income per common share are as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Net income (numerator) $4,255,791 $3,482,702 $5,330,108
========== ========== ==========
Weighted average basic common
shares outstanding (denominator) 2,108,722 2,074,473 2,045,590
Shares contingently issuable
under Stock Option plans 12,644 27,922 35,490
---------- ---------- ----------
Average diluted common shares
outstanding (denominator) 2,121,366 2,102,395 2,081,080
========== ========== ==========
Net income per common share:
Basic $2.02 $1.68 $2.61
===== ===== =====
Diluted $2.01 $1.66 $2.56
===== ===== =====
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
Note S - Reportable Segments:
In 1998, the Company adopted SFAS No. 131 ("Disclosures
about Segments of an Enterprise and Related
Information"). Under this Statement, the Company does
not have any reportable segments but is required to
disclose certain enterprise-wide information.
The Company writes property and casualty insurance in the
State of New Jersey only through independent producers,
none of which generate more than 10% of the Company's
insurance premiums. Products include private passenger
automobile, homeowners and ancillary coverages ("Personal
Property"), and small commercial lines insurance,
including commercial auto. Insurance premiums generated
by these products during 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Product
Private Passenger
Automobile $39,872,261 $39,213,154 $35,172,633
Commercial Lines 7,703,054 4,912,797 5,577,301
Personal Property 5,600,348 6,751,939 4,444,139
----------- ----------- -----------
Total $53,175,663 $50,877,890 $45,194,073
=========== =========== ===========
</TABLE>
Note T - Subsequent Event (Unaudited):
On March 16, 1999, the Company signed a definitive
Agreement and Plan of Merger ("Merger Agreement") to
acquire North East Insurance Company ("North East")
through a merger of a wholly-owned subsidiary of the
Company with and into North East ("Merger"). 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) one share of the Company's common stock
for each 5.25 shares of North East common stock, or (c)
a combination thereof. If the North East shareholders in
the aggregate elect to exchange more than 50% of their
shares for the Company's stock, the aggregate percentage
will be ratably reduced to 50%.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
Note T - Subsequent Event (Unaudited)(Continued):
Consummation of the Merger is subject to the satisfaction
of certain conditions set forth in the merger agreement,
including approval from the shareholders of the Company
and North East and authorization by state insurance
regulators. Both the Company and North East expect that
these conditions will be satisfied in due course.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE I. SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
at December 31, 1998
__________
<S> <C> <C> <C>
Column A Column B Column C Column D
-------- -------- -------- Amount at
which shown
in the
Cost(a) Market balance sheet
-------- -------- -------------
Type of investment
Fixed maturity securities
available-for-sale:
United States Government
and government agencies
and authorities $33,081,386 $34,359,220 $34,359,220
Industrial and
miscellaneous 31,741,156 32,325,042 32,325,042
Public utilities 2,853,869 2,910,642 2,910,642
----------- -----------
Total fixed maturities 67,676,411 69,594,904
Mortgage loans on real
estate 361,038 361,038
Short-term investments,
available-for-sale 5,995,299 5,995,299 5,995,299
----------- ----------- -----------
Total investments $74,032,748 $75,951,241
=========== ===========
</TABLE>
Note: (a) Represents original cost of investments reduced by
repayment and as to fixed maturities, adjusted for
amortization of premiums or accrual of discounts.
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE II. CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
__________
BALANCE SHEETS
<S> <C> <C>
December 31,
---------------------
1998 1997
---- ----
Assets:
Cash and cash equivalents $ 1,238,530 $ -
Investments in subsidiaries 40,707,745 28,889,766
Insurance premiums receivable 19,587,908 7,366,692
Deferred tax asset - 657,362
Other assets 1,991,162 5,364,125
----------- -----------
Total assets $63,525,345 $42,277,945
=========== ===========
Liabilities and shareholders' equity:
Indebtedness to subsidiaries $26,498,457 $14,641,404
Deferred tax liability 957,440 -
Note payable 3,000,000 -
Other liabilities 5,245,919 4,635,508
----------- -----------
Total liabilities 35,701,816 19,276,912
Shareholders' equity 27,823,529 23,001,033
----------- -----------
Total liabilities and
shareholders' equity $63,525,345 $42,277,945
=========== ===========
</TABLE>
Notes to Schedule
The Notes to Consolidated Financial Statements of Motor Club
of America and Subsidiaries are incorporated by reference to
this schedule.
The Statements of Shareholders' Equity are the same as those
presented for Motor Club of America and Subsidiaries.
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE II. CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
__________
STATEMENTS OF OPERATIONS
<S> <C> <C> <C> <C>
For the years ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
Revenues:
Membership servicing fees $ 133,531 $ 152,791 $ 21,481
Commission income - 1,595 9,960
Realized gain on sale of
subsidiary - - 702,419
Interest on mortgage loans 35,251 4,973 -
Other income (1) 204,640 216,161 135,704
---------- ---------- ----------
Total revenues 373,422 375,520 869,564
---------- ---------- ----------
Expenses:
Interest expense 60,389 8,890 8,166
General and administrative
expenses (2) (248,636) (512,054) (41,111)
---------- ---------- ---------
Total expenses (188,247) (503,164) (32,945)
---------- ---------- ---------
Income before
Federal income taxes 561,669 878,684 902,509
Benefit (provision) for
Federal income taxes: current 1,371,151 (37,573) (42,324)
---------- ---------- ---------
deferred (1,270,494) (1,110,192) 2,075,535
---------- ---------- ---------
Total Federal income tax 100,657 (1,147,765) 2,033,211
---------- ---------- ---------
Income before item
shown below 662,326 (269,081) 2,935,720
Equity in net income
of subsidiaries 3,593,465 3,751,783 2,394,388
---------- ---------- ----------
Net income $4,255,791 $3,482,702 $5,330,108
========== ========== ==========
</TABLE>
(1) Amount includes $31,559 (1996) of interest due from
Motor Club.
(2) Amount is net of $296,810 (1998), $535,816 (1997)
and $520,579 (1996) of management fees charged to
subsidiaries.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE II. CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
__________
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the years ended December 31,
----------------------------------------------
1998 1997 1996
---------- ---------- ----------
Net income $4,255,791 $3,482,702 $5,330,108
Adjustments to reconcile net
income to net cash provided by
operating activities:
Write-off of leasehold improvement
(net) due to lease termination - - 227,077
Depreciation expense 426,703 371,756 309,875
Gain on sale of subsidiary - - (702,419)
Accretion of bond discount - - 10
Deferred tax benefit 1,614,802 1,418,173 (2,075,535)
Changes in:
Net assets of Motor Club of America
Enterprises, Inc. - - (422,581)
Premiums receivable (12,221,216) 172,024 (520,054)
Investments in subsidiaries (11,149,624) (2,947,331) (1,663,715)
Other assets 125,831 229,053 (146,637)
Other liabilities 451,011 (305,577) 103,409
Indebtedness to related parties 11,857,053 (922,446) 1,594,981
----------- --------- ---------
Net cash provided by (utilized in)
operating activities (4,639,649) 1,498,354 2,034,519
----------- --------- ---------
Investing activities:
Proceeds from:
Sale of subsidiary - - 1,125,000
Disposal of short-term
investments 28,900,000 47,287,674 -
Disposal of fixed
maturities - - 15,039
Sale of fixed assets - - 13,400
Payments received on mortgage
loan principal 161,517 4,490 -
Purchase of:
Fixed maturities - - -
Short-term investments (25,750,000) (48,692,219) (1,745,455)
Fixed assets (491,088) (168,878) (1,097,883)
----------- ----------- ----------
Mortgage loans from Finance Company - (527,045) -
Net cash provide by (utilized in)
investing activities 2,820,429 (2,095,978) (1,689,899)
---------- ----------- ----------
Financing activities:
Note payable 3,000,000 - -
Common stock issued 57,750 243,159 9,845
--------- ---------- ----------
Net cash provided by
financing activities 3,057,750 243,159 9,845
--------- --------- ----------
Increase (decrease) in cash and
cash equivalents 1,238,530 (354,465) 354,465
Cash and cash equivalents at
beginning of year - 354,465 -
----------- ---------- ----------
Cash and cash equivalent at end of year $ 1,238,530 $ - $ 354,465
=========== ========== ==========
</TABLE>
Supplemental Disclosures of Cash Flow Information
(1) Total interest paid was $60,389(1998), $8,890 (1997) and $8,166 (1996).
(2) Total federal income taxes paid was $212,738(1998), $50,691 (1997) and
$38,462 (1996).
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE IV. REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
__________
<S> <C> <C> <C> <S> <C> <C>
Column A Column B Column C Column D Column E Column F
-------- % of
Ceded to Assumed from Amount
other other Assumed
Gross Amount Companies Companies Net Amount to Net
------------ --------- ------------ ----------
December 31, 1998:
Total property and casualty
insurance premiums earned $59,951,837 $6,776,174 $ - $53,175,663 0.0%
=========== ========== ========= =========== ===
December 31, 1997:
Total property and casualty
insurance premiums earned $58,029,094 $7,151,204 $ - $50,877,890 0.0%
=========== ========== ========= ===========
December 31, 1996:
Total property and casualty
insurance premiums earned $52,467,156 $7,273,083 $ - $45,194,073 0.0%
=========== ========== ========== ===========
</TABLE>
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE V. VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 and 1996
__________
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Charged to Balance
Beginning Cost and Other at end
Description of Period Expenses Accounts Deductions of Period
- - ------------ ---------- ---------- --------- ---------- ---------
Allowance for
doubtful
receivables:
December 31, 1998 $ 68,091 $ - $ - $ - $ 68,091
========== ========== ======== ========== ==========
December 31, 1997 $ 41,340 $ 26,751 $ - $ - $ 68,091
========== ========== ======== ========== ==========
December 31, 1996 $ 656,083 $ - $ - $ 614,743 $ 41,340
Valuation allowance
for deferred taxes:
December 31, 1998 $1,916,202 $ - $ - $1,820,972 $ 95,230
========== ========== ========= ========== ==========
December 31, 1997 $ - $1,916,202 $ - $ - $1,916,202
=========== ========== ========= ========== ==========
December 31, 1996 $2,974,408 $ - $ 722,894 $3,697,302 $ -
========== ========== ========== ========== ==========
</TABLE>
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
<C> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E Column F
-------- -------- -------- -------- -------- ---------
Reserves for
Deferred Unpaid Claims Discount,
Policy and Claim if any,
Acquisition Adjustment Deducted in Unearned Earned
Costs Expenses Column C Premiums Premiums
----------- ------------- ----------- --------- --------
Year ended
December 31, 1998 $ 8,708,329 $58,335,143 - $30,733,144 $53,175,663
Year ended
December 31, 1997 $ 5,858,650 $50,246,778 - $19,285,757 $50,877,890
Year ended
December 31, 1996 $ 5,761,496 $47,666,856 - $18,934,200 $45,194,073
</TABLE>
Note: (a) Excludes non-insurance subsidiaries' investment income and realized
investment gains.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1998, 1997 and 1996
<C> <C> <C> <C> <C> <C> <C>
Column A Column G Column H Column I Column J Column K
-------- --------- -------- -------- --------- ---------
Claims and Claim
Adjustment Expenses Amortization Paid
Incurred Related to of deferred Claims
Net (1) (2) policy and Claim
Investment Current Prior acquisition Adjustment Premium
Income (a) Year Years Costs Expenses Written
---------- --------------------- ----------- ------------ --------
Year ended
December 31, 1998 $4,102,255 $32,598,287 $3,881,304 $13,375,221 $29,548,773
$64,302,713
Year ended
December 31,1997 $3,384,004 $29,368,738 $3,772,953 $15,162,320 $28,371,865
$51,680,146
Year ended
December 31, 1996 $2,998,897 $28,244,599 $ 903,681 $13,678,710 $24,443,589
$47,337,295
Note: (a) Excludes non-insurance subsidiaries' investment income and
realized investment gains.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
These schedules contain summary financial information extracted from Motor Club
of America's Consolidated Balance Sheets for the period ending December 31, 1998
and the Consolidated Statements of Operations for the twelve months then ended
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 69,594,904
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 361,038
<REAL-ESTATE> 0
<TOTAL-INVEST> 75,951,241
<CASH> 2,773,427
<RECOVER-REINSURE> 19,234,277
<DEFERRED-ACQUISITION> 8,708,329
<TOTAL-ASSETS> 131,012,776
<POLICY-LOSSES> 58,335,143
<UNEARNED-PREMIUMS> 30,733,144
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 3,000,000
0
0
<COMMON> 1,058,215
<OTHER-SE> 26,765,314
<TOTAL-LIABILITY-AND-EQUITY> 131,012,776
53,175,663
<INVESTMENT-INCOME> 4,304,507
<INVESTMENT-GAINS> 28,545
<OTHER-INCOME> 171,171
<BENEFITS> 36,479,591
<UNDERWRITING-AMORTIZATION> 13,375,221
<UNDERWRITING-OTHER> 2,105,668
<INCOME-PRETAX> 5,719,406
<INCOME-TAX> 1,463,615
<INCOME-CONTINUING> 4,255,791
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,255,791
<EPS-PRIMARY> 2.02
<EPS-DILUTED> 2.01
<RESERVE-OPEN> 50,246,778
<PROVISION-CURRENT> 38,093,225
<PROVISION-PRIOR> 3,123,037
<PAYMENTS-CURRENT> 12,506,521
<PAYMENTS-PRIOR> 20,621,376
<RESERVE-CLOSE> 58,335,143
<CUMULATIVE-DEFICIENCY> 3,123,037
</TABLE>
LOAN AGREEMENT
LOAN AGREEMENT dated as of September 14, 1998 between
MOTOR CLUB OF AMERICA, a New Jersey corporation (the "Borrower"),
and DRESDNER BANK AG, acting through its New York and Grand
Cayman Branches (the "Bank").
ARTICLE I
DEFINITIONS; RULES OF CONSTRUCTION
SECTION 1.1 Definitions. The capitalized terms used
in this Agreement shall have the following meanings, unless
otherwise defined herein.
"Additional Costs" shall have the meaning assigned to
such term in Section 4.1 of this Agreement.
"Affiliate" of a referenced Person shall mean
(a) another Person controlling, controlled by or under common
control with such referenced Person, (b) any other Person
beneficially owning or controlling ten percent (10%) or more of
the outstanding voting securities or rights of or the interest in
the capital, distributions or profits of the referenced Person,
or (c) any officer (exclusive of a "ministerial officer" with no
authority to bind a Person) or, director of, or partner in, the
referenced Person. The terms "control", "controlling",
"controlled" and the like shall mean the direct or indirect
possession of the power to direct or cause the direction of the
management or policies of a Person or the disposition of its
assets or properties, whether through ownership, by contract,
arrangement or understanding, or otherwise.
"Agreement" shall mean this Loan Agreement, as the same
from time to time may be extended, amended, supplemented, waived
or modified.
"Applicable Law" shall mean (i) all applicable laws and
treaties, judgments, decrees, injunctions, writs and orders of
any court, arbitrator or governmental agency or authority and
rules, regulations, orders, licenses and permits of any
governmental body, instrumentality, agency or authority, and
(ii) any of the foregoing.
"Applicable Margin Rate" shall mean, in respect of the
calculation of interest on any Eurodollar Loans, 2.00%.
"Authorized Control Level Risk-Based Capital" shall
mean, with respect to any Subsidiary of the Borrower which is an
insurance company, the number which appears on page 21 (Five-Year
Historical Data, first of two pages), line 26, column 1 of such
Person's most recently filed Convention Statement.
"Base Rate" shall mean a fluctuating rate of interest
per annum equal to the higher of:
(a) the rate of interest most recently announced by
the Bank at its Booking Office as its base rate; and
(b) the Federal Funds Rate, plus 1/2 of 1% per annum.
The Base Rate is not necessarily intended to be the lowest rate
of interest determined by the Bank in connection with extensions
of credit. Changes in the rate of interest on any Loan
maintained as a Base Rate Loan shall take effect simultaneously
with each change in the Base Rate. The Bank shall give notice
promptly to the Borrower of changes in the Base Rate.
"Base Rate Loan" shall mean a Loan bearing interest
based on the Base Rate.
"Booking Office" shall mean, with respect to any
Eurodollar Loans or Base Rate Loans, the office of the Bank or an
Affiliate designated as its "Eurodollar Lending Office" or "Base
Rate Lending Office", respectively, in Schedule 1 to this
Agreement; provided, the Bank may designate a different Booking
Office with respect to its Eurodollar Loans or Base Rate Loans
from time to time upon notice to the Borrower.
"Borrower" shall have the meaning assigned to such term
in the introduction to this Agreement.
"Business Day" shall mean any day other than a
Saturday, Sunday or a day when banks are authorized or required
by law to close in New York, New York and, if such day relates to
a borrowing of, a payment or prepayment of principal of, or
interest on, or a conversion of or into, or an Interest Period
for, a Eurodollar Loan or a notice by the Borrower with respect
to any such borrowing, payment, prepayment, conversion or
Interest Period, any day which is also a London Banking Day.
"Capital Lease" shall mean as applied to any Person,
any lease of any property (whether real, personal or mixed) by
such Person as lessee which, in conformity with GAAP, is
accounted for as a capital lease on the balance sheet of such
Person.
"Capital Stock" shall mean with respect to any Person,
any capital stock of such Person, regardless of class or
designation, and all warrants, options, purchase rights,
conversion or exchange rights, voting rights, calls or claims of
any character with respect thereto.
"Change of Control" shall mean a state of facts where
Mr. Archer McWhorter, Mr. William E. Lobeck and Mr. Alvin E.
Swanner, directly or indirectly, shall cease to own in the
aggregate at least 25% of the issued and outstanding shares of
Capital Stock of the Borrower having ordinary voting power (other
than stock having such power only by reason of contingency) to
elect directors of the Borrower.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Commitment" means the commitment of the Bank to make
Loans hereunder in an aggregate amount outstanding equal to
$3,000,000, as the same may be lowered in accordance with the
terms hereof.
"Commitment Expiration Date" shall mean September 14,
2001, or such later date as shall be agreed to in writing by the
Borrower and the Bank.
"Commitment Fee" shall have the meaning assigned to
such term in Section 10.1 hereof.
"Commitment Fee Percentage" shall mean 0.35% per annum.
"Consolidated Leverage Ratio" shall mean the quotient
of (i) the aggregate outstanding Indebtedness of the Borrower and
its Subsidiaries divided by (ii) the sum of (x) the aggregate of
all Indebtedness of the Company and its Subsidiaries plus (y) the
aggregate stockholder equity of the Borrower and its Subsidiaries
computed in accordance with GAAP (in all cases, after elimination
of all duplicative and intercompany items).
"Convention Statement" shall mean the financial
statements and accompanying schedules and exhibits filed by any
insurance company Subsidiary of the Borrower with its applicable
state insurance regulators, substantially in the form heretofore
filed by such Person (or such other form as may in the future be
required by applicable state insurance regulatory authorities),
and prepared in accordance with statutory accounting principles.
References to line items on a Convention Statement shall be
deemed changed to the appropriate line items in the event of a
change on the format of such Convention Statement from that in
existence on the date hereof.
"Contingent Obligation" shall mean any contractual
obligation, contingent or otherwise, of one Person with respect
to any Indebtedness, obligation or liability of another,
including, without limitation, direct or indirect guaranties,
endorsements (except for collection or deposit in the ordinary
course of business), notes co-made or discounted, recourse
agreements, keep-well agreements, agreements to purchase or
repurchase such Indebtedness, obligation or liability or any
security therefor or to provide funds for the payment or
discharge thereof, agreements to maintain solvency, assets, level
of income, or other financial condition, and agreements to make
payment other than for value received.
"Credit Expiration Date" shall mean the Commitment
Expiration Date or such earlier date as provided in Section 9.
"Default" shall mean an event which with notice or
lapse of time, or both, would constitute an Event of Default.
"Dollars" and "$" shall mean lawful money of the United
States of America.
"Effective Date" shall mean the first date on which the
conditions precedent set forth in Section 5 have been satisfied.
"Environmental Laws" means any and all applicable
Federal, state, and local statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees relating to
pollution and the protection of the environment or the release of
any materials into the environment, including but not limited to
those related to hazardous substances or wastes, air emissions
and discharges to public water or sewer systems.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended.
"ERISA Affiliate" shall mean (i) any corporation which
is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the Code) as the Borrower;
(ii) a trade or business (whether or not incorporated) which is
under common control (within the meaning of Section 414(c) of the
Code) with the Borrower; and (iii) a member of the same
affiliated service group (within the meaning of Section 414(m) of
the Code) as the Borrower, as any corporation described in clause
(i) above or as any trade or business described in clause (ii)
above.
"Eurodollar Loan" shall mean a Loan bearing interest
based on the Eurodollar Rate.
"Eurodollar Rate" shall mean, with respect to any
Interest Period for any Eurodollar Loan, the rate per annum
determined by the Bank to be equal to the quotient (rounded
upwards, if necessary, to the next higher 1/16 of 1%) of (y) the
rate per annum at which deposits in Dollars are offered by the
Bank in immediately available funds at its Eurodollar Lending
Office specified in Schedule 1 to this Agreement in an amount
comparable to the principal amount of such Eurodollar Loan for a
period equal to such Interest Period at approximately 10:00 A.M.,
New York City time, on the date two Business Days before the
first day of such Interest Period, divided by (z) a number equal
to 1.00 minus the Eurodollar Reserve Percentage.
"Eurodollar Reserve Percentage" shall mean, for any
day, the maximum percentage (expressed as a decimal) specified
from time to time by the Board of Governors of the Federal
Reserve System (or any successor) for determining the maximum
reserve requirements (including, but not limited to,
supplemental, marginal and emergency reserves) with respect to
eurocurrency funding (currently referred to as "Eurocurrency
Liabilities") of a member bank in such System. The Eurodollar
Rate shall be adjusted automatically with respect to any
Eurodollar Loan outstanding on the effective date of any change
in the Eurodollar Reserve Percentage, as of such effective date.
"Event of Default" shall mean any of the Events of
Default described in Section 9 of this Agreement.
"Facility Documents" shall mean this Agreement, the
Note and each other agreement, document or instrument delivered
in connection herewith or therewith.
"Federal Bankruptcy Code" shall mean Title 11 of the
United States Code, Sections 101, et seq., and the rules and
regulations promulgated thereunder, as amended from time to time.
"Federal Funds Rate" shall mean, for any period, a
fluctuating interest rate per annum equal for each day during
such period to the weighted average of the rates on overnight
Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a
Business Day, the average of the quotations for such day on such
transactions received by the Bank from three Federal funds
brokers of recognized standing selected by it.
"GAAP" shall mean generally accepted accounting
principles in the United States of America in effect from time to
time.
"Governmental Authority" shall mean any nation or
government, any state or other political subdivision thereof and
any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to
government.
"Hazardous Material" means any and all toxic or
hazardous substances, materials, wastes, pollutants or
contaminants regulated, restricted or controlled under any
Environmental Law.
"Highest Lawful Rate" shall mean, the maximum
nonusurious interest rate, if any, that at any time or from time
to time may be contracted for, taken, reserved, charged or
received on the Loans or on any of the Borrower's obligations
under this Agreement under laws applicable to the Bank which are
presently in effect or, to the extent allowed by law, under such
applicable laws which may hereafter be in effect and which allow
a higher maximum nonusurious interest rate than applicable laws
now allow.
"Indebtedness" shall mean with respect to any Person,
at any time, (a) all indebtedness, obligations or other
liabilities of such Person (i) for borrowed money or evidenced by
debt securities, debentures, acceptances, notes or other similar
instruments, (ii) under profit payment agreements (other than
profit-sharing or bonus plans or agreements for employees) or in
respect of obligations to redeem, repurchase or exchange any
securities of such Person or to pay dividends in respect of any
stock, (iii) with respect to letters of credit issued for such
Person's account, (iv) to pay the deferred purchase price of
property or services, (v) in respect of Capital Leases or
(vi) which are Contingent Obligations, (b) all indebtedness,
obligations or other liabilities of such Person or others secured
by a Lien on any property of such Person, whether or not such
indebtedness, obligations or liabilities is or are assumed by
such Person, all as of such time, (c) all indebtedness,
obligations or other liabilities of such Person in respect of
currency hedging agreements, repurchase agreements, swap
agreements and similar arrangements, in each case net of
liabilities owed to such Person by the counterparties thereon,
and (d) all preferred stock and hybrid securities subject (upon
the occurrence of any contingency or otherwise) to mandatory
redemption, puts or calls.
"Interest Period" shall mean with respect to any
Eurodollar Loan, each period commencing on the date such
Eurodollar Loan is made or converted from a Base Rate Loan or the
last day of the next preceding Interest Period with respect to
such Eurodollar Loan and ending on the same day in the first,
second, third, sixth, ninth (if available) or twelfth (if
available) (as selected by the Borrower) calendar month
thereafter, except that each such Interest Period which commences
on the last Business Day of a calendar month (or on any day for
which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last
Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing, (i) no Interest Period
may extend beyond the Credit Expiration Date; (ii) each Interest
Period which would otherwise end on a day which is not a Business
Day shall end on the next succeeding Business Day (or, if such
next succeeding Business Day falls in the next succeeding
calendar month, on the next preceding Business Day); (iii) each
Interest Period which would otherwise commence before and end
after the Credit Expiration Date shall end on the Credit
Expiration Date; and (iv) notwithstanding clauses (i) and (iii)
above, if any Interest Period would have a duration of less than
one month, such Eurodollar Loans shall be Base Rate Loans during
such period.
"Lien" shall mean any mortgage, deed of trust, pledge,
security interest, encumbrance, lien or charge of any kind
(including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in
the nature thereof, and the filing of or agreement to give any
financing statement under the UCC of any jurisdiction in
connection with any of the foregoing).
"Loan" shall mean each loan made pursuant to Section
2.1 hereof.
"Loan Request" shall have the meaning assigned to such
term in Section 2.2 of this Agreement.
"London Banking Day" shall mean any day on which
dealings in Dollar deposits are carried out in the London
interbank markets.
"Material Adverse Effect" means, (a) a material adverse
effect on the assets, business, operations, properties or
condition (financial or otherwise) of the Borrower and its
Subsidiaries, taken as a whole, (b) a material adverse effect on
the ability of the Borrower to perform any of its obligations
under this Agreement or any Facility Document, or (c) an adverse
effect on the validity or enforceability of this Agreement or any
Facility Document (including the rights and remedies of the Bank
hereunder and thereunder).
"Multiemployer Plan" shall mean a "multiemployer plan"
as defined in Section 4001(a)(3) of ERISA which is, or was at any
time during the five preceding years, contributed to by the
Borrower, any Subsidiary of the Borrower or any ERISA Affiliate
for the benefit of its employees.
"Note" shall mean the promissory note issued by the
Borrower and payable to the order of the Bank evidencing the
Loans, made by the Bank as provided herein, in substantially the
form attached as Exhibit A to this Agreement.
"Notice of Conversion or Continuation" shall mean a
written notice, in substantially the form of Exhibit D to this
Agreement, delivered by the Borrower to the Bank pursuant to
Section 3.1(c) of this Agreement.
"PBGC" shall mean Pension Benefits Guaranty Corporation
or any successor thereto.
"Person" shall mean an individual, a corporation, a
partnership, a joint venture, a limited liability company, a
trust or unincorporated organization, a joint stock company or
other similar organization, a government or any political
subdivision thereof, a court, or any other legal entity whether
acting in an individual, fiduciary or other capacity.
"Plan" shall mean any "employee benefit pension plan"
as defined in Section 3(2) of ERISA (including a Multiemployer
Plan) established or maintained, as to which contributions have
been made, by the Borrower, any Subsidiary or any ERISA Affiliate
for its respective employees .
"Post-Default Rate" shall mean the Base Rate as in
effect from time to time plus two percent (2.0%).
"Property" shall mean all types of real, personal
tangible, intangible or mixed property, including fixtures.
"Regulatory Change" shall mean any change in United
States federal, state or foreign laws or the making of any
interpretations, directives or requests applying to a class of
banks, including the Bank, under any United States federal,
state, or foreign laws or regulations (whether or not having the
force of law) by any court or governmental or monetary authority
charged with the interpretation or administration thereof.
"Reportable Event" shall mean any event described in
Section 4043(c) of ERISA.
"Subsidiary" shall mean as to any Person, (i) a
corporation of which shares of stock or other ownership interests
having ordinary voting power (other than stock having such power
only by reason of the happening of a contingency) to elect a
majority of the board of directors or other managers of such
corporation are at the time owned, or the management of which is
otherwise controlled, directly or indirectly, through one or more
intermediaries, or both, by such Person, (ii) a limited or
general partnership of which such Person or any of its
subsidiaries is a general partner, or (iii) a business trust or
limited liability company in which such Person holds a majority
interest comparable to that for a corporation as described above.
"Taxes" shall mean all taxes, levies, imposts, duties,
or other charges of whatsoever nature imposed by any government
or any political subdivision or taxing authority thereof, and any
liability (including penalties and interest) arising therefrom or
with respect thereto, except for any taxes (other than United
States withholding taxes) on the overall net income of the Bank
or any similar tax in lieu of an overall net income tax on the
Bank imposed by any jurisdiction with respect to which such
Lender is subject to such tax without regard to the transactions
contemplated by the Facility Documents.
"Termination Event" shall mean (i) any Reportable Event
with respect to a Plan, as to which the requirements of Section
4043(a) of ERISA have not been waived by the PBGC (provided that
a failure to meet the minimum funding standard of Section 302 of
ERISA shall be a reportable event regardless of the issuance of
any waivers by the PBGC); (ii) the filing of a notice of intent
to terminate any Plan under Section 4041 of ERISA or any other
event or condition which might constitute grounds under Section
4042 of ERISA for the termination of, or for the appointment of a
trustee to administer, any Plan; (iii) the complete or partial
withdrawal of the Borrower or any Subsidiary or any ERISA
Affiliate from a Multiemployer Plan or the receipt by the
Borrower or any Subsidiary or any ERISA Affiliate of notice from
a Multiemployer Plan that it is in reorganization or insolvency
pursuant to Section 4241 or 4245 of ERISA or that it intends to
terminate or has terminated under Section 4041A of ERISA; (iv)
the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Borrower or any Subsidiary or any
ERISA Affiliate to enforce Section 515 of ERISA; or (v) any event
or circumstance under which the Borrower or any Subsidiary or any
ERISA Affiliate may reasonably be expected to incur any liability
under Title IV of ERISA with respect to any Plan other than
liabilities to make contributions and pay premiums in the
ordinary course.
"Total Adjusted Capital" shall mean, with respect to
each Subsidiary of the Borrower which is an insurance company, at
the time of any determination thereof, the number which appears
on page 21 (Five-year Historical Data, first of two pages), line
25, column 1 of such Person's most recently filed Convention
Statement.
"Year 2000 Problem" shall mean any significant risk
that computer hardware, software or equipment containing embedded
microchips essential to the business or operations of the
Borrower or any of its Subsidiaries will not, in the case of
dates or time periods occurring after December 31, 1999, function
at least as effectively and reliably as in the case of times or
time periods occurring before January 1, 2000, including the
making of accurate leap year calculations.
SECTION 1.2. Rules of Construction. For all purposes
of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires (a) each use in this
Agreement of a singular version of a pronoun shall be deemed to
include references to the plural, and vice versa, (b) Article and
Section headings are for convenience of reference only and shall
not affect the construction of this Agreement, and (c) references
to "this section" or words of similar import shall be deemed to
refer to the entire section and not to a particular subsection,
and references to "hereunder", "herein" or words of similar
import shall be deemed to refer to this entire Agreement and not
to the particular section or subsection.
ARTICLE II
THE LOANS
SECTION 2.1 Loans. (a) Subject to the terms and
conditions set forth in this Agreement, the Bank hereby agrees
that it will, from time to time prior to the Credit Expiration
Date, make Loans to the Borrower. Anything contained herein to
the contrary notwithstanding, the Bank shall not be obligated in
any manner to make any Loan in a principal amount which together
with any other Loans to be made by the Bank on such day, would
exceed the positive result of (i) the Commitment, less (ii) the
aggregate principal amount of all Loans outstanding on the
proposed date of the making of such Loan, after giving effect to
all other proposed Loans on such day. The Bank shall, subject to
the terms and conditions of this Agreement, make the proceeds of
such borrowing available to the Borrower not later than
4:00 P.M., New York City time, by disbursing such funds in
Dollars to the Borrower in accordance with the disbursement
instructions set forth in the Loan Request delivered to the Bank.
(b) Each Loan Request, to be effective, shall include
a computation demonstrating compliance with the limits set forth
in the second sentence of paragraph (a) hereof.
SECTION 2.2 Loan Requests. The Borrower shall in
respect of all Loans deliver to the Bank a written request, in
substantially the form of Exhibit C to this Agreement (a "Loan
Request") (i) for a Eurodollar Loan, not later than 11:00 A.M.,
New York City time, at least three Business Days prior to the
date of the proposed borrowing and (ii) for a Base Rate Loan, not
later than 10:00 A.M., New York City time, on the day of the
proposed borrowing. The Loan Request shall specify (i) the date
of the proposed borrowing (which shall be a Business Day),
(ii) the principal amount of the Loan to be made on that date,
(iii) whether such Loan is a Base Rate Loan or a Eurodollar Loan,
(iv) if a Eurodollar Loan, the Interest Period requested by the
Borrower therefor (which shall be one, two, three, six, nine or
twelve months), and (v) the disbursement instructions for the
proceeds of such Loan. Each Loan Request submitted by the
Borrower shall be an affirmation by the Borrower that (x) the
representations and warranties of the Borrower set forth in
Article VI of this Agreement are on the date of such Loan
Request, and will be on the date of the proposed borrowing, true
and correct as if made on and as of such dates (other than with
respect to financial statement information which shall be true
and correct as of the date indicated), and (y) no Default or
Event of Default shall have occurred and be continuing on such
dates. Any Loan Request given pursuant hereto shall be
irrevocable.
SECTION 2.3 Notes. Each Loan made by the Bank shall
be evidenced by, and recorded on, the Note. The Borrower hereby
authorizes the Bank to make the appropriate notations on the
schedule annexed to the Note for purposes of recording any Loan
made thereon and any payments or prepayments made with respect
thereto (provided that any failure by the Bank to make any such
notation shall not affect the obligations of the Borrower
hereunder or under the Note in respect of any Loan). The
Borrower agrees that each notation made by the Bank on the
schedule annexed to a Note shall constitute prima facie evidence
of the accuracy of such information. The aggregate principal
amount of the Loans made by the Bank outstanding at any time
shall constitute the principal amount owing on the Note payable
to the Bank at such time.
SECTION 2.4 Reductions of the Commitment. (a) The
Borrower may from time to time reduce the Commitment by
$1,000,000 or a multiple thereof upon two Business Days' written
notice to the Bank. Any such reduction shall be permanent and
irrevocable, provided that the amount of the Commitment after
giving effect to such reduction of the Commitment shall at no
time be less than the aggregate principal amount of all
outstanding Loans.
(b) Upon the occurrence of the Credit Expiration Date,
the Commitment shall be reduced to zero.
(c) After the effective date of any reduction pursuant
to Section 2.4(a) hereof, the term "Commitment" shall mean the
Commitment in effect immediately prior to such reduction less the
amount of such reduction of the Commitment.
SECTION 2.5 Mandatory Prepayments. If at any time the
principal amount of outstanding Loans shall exceed the aggregate
Commitment, then the Borrower shall immediately prepay the Loans
in an amount equal to such excess.
ARTICLE III
TERMS APPLICABLE TO LOANS
SECTION 3.1 Payments and Prepayments. (a) Payments
Generally. Except to the extent otherwise provided herein, all
payments of principal, interest and other amounts to be made by
the Borrower hereunder and under each Note shall be made in
Dollars, in immediately available funds, to such account as the
Bank may advise the Borrower in writing from time to time. Such
payments shall be made no later than 1:00 P.M., New York City
time, on the date on which such payment shall become due (each
such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day). If the
due date of any payment hereunder or under the Note would
otherwise fall on a day which is not a Business Day, such due
date shall be extended to the next succeeding Business Day and
interest shall be payable for any principal so extended for the
period of such extension; provided, that, with respect to
Eurodollar Loans, if such next succeeding Business Day falls in
the next succeeding calendar month, such due date shall be the
next preceding Business Day.
(b) Borrower's Obligations Absolute. The Borrower's
obligations to pay the Bank hereunder and under the Note shall be
absolute, unconditional and irrevocable, and shall be paid
strictly in accordance with the terms hereof and thereof, under
any and all circumstances and irrespective of any setoff,
counterclaim or defense to payment which the Borrower may have or
have had against the Bank.
(c) Optional Conversions. The Borrower may, at its
option, (i) on the last day of any Interest Period, convert a
Eurodollar Loan into a Base Rate Loan, (ii) on the last day of
any Interest Period, continue a Eurodollar Loan as a Eurodollar
Loan, and (iii) on any Business Day, convert a Base Rate Loan
into a Eurodollar Loan; provided, that, except as otherwise
provided in this Agreement to the contrary, the Borrower shall
deliver to the Bank a Notice of Conversion or Continuation by
11:00 A.M., New York City time, (A) in the case of clauses (ii)
and (iii) above, not less than three Business Days prior to the
date of each such conversion or continuation, and (B) in the case
of clause (i) above, on or prior to the date of such conversion.
Each Notice of Conversion or Continuation shall specify (x) the
amount of each Loan to be continued or converted, (y) the date of
such continuation or conversion, and (z) the type of Loan to be
continued or converted (and in the case of a conversion, the type
of Loan to result from such conversion and, if such Loan is to be
converted into a Eurodollar Loan, the Interest Period). If the
Borrower shall fail to timely send a Notice of Conversion or
Continuation in respect of any Eurodollar Loan, such Loan shall
automatically be converted into a Base Rate Loan as of the end of
the applicable Interest Period for such Eurodollar Loan.
(d) Optional Prepayments. The Borrower may, at its
option, without penalty or premium, (i) on the last day of any
Interest Period with respect to a Eurodollar Loan, prepay all or
any portion of the principal of such Eurodollar Loan, and (ii) on
any Business Day, prepay all or any portion of the principal of
the Base Rate Loans; provided, in each case, that any such
prepayment, if a partial prepayment, shall be an integral
multiple of $500,000 with a minimum amount of $500,000. The
Borrower shall deliver to the Bank notice of such prepayment by
11:00 A.M., New York City time on the Business Day immediately
preceding such prepayment date, specifying the amount and type of
each Loan to be prepaid on such date.
(e) Mandatory Prepayments. The Borrower shall prepay,
without premium or penalty,
(i) Loans in an aggregate principal amount equal
to 100% of the net cash proceeds (on an after-tax
basis) of any sale of assets by the Company or any
Subsidiary of the Company outside of the ordinary
course of business on the date which is five Business
Days following the occurrence of such sale; and
(ii) Loans in an aggregate principal amount equal
to 50% of the net proceeds received by the Company or
any Subsidiary of the Company from the issuance of any
new or refinanced debt or hybrid securities on the date
which is five Business Days following the date of such
issuance.
(f) Payments of Principal. The principal amount of
each Loan, together with all accrued and unpaid interest thereon,
shall be payable on the Credit Expiration Date.
(g) Payment of Interest. (i) The Borrower hereby
promises to pay to the Bank interest on the unpaid
principal amount of each Loan for the period commencing
on the date of such Loan until but not including the
stated maturity thereof (whether by acceleration or
otherwise) or the date of prepayment thereof (a) during
the periods such Loan is a Base Rate Loan, at the Base
Rate and (b) during the periods such Loan is a
Eurodollar Loan, at the Eurodollar Rate plus the
Applicable Margin Rate per annum; provided, however,
that after the occurrence and during the continuance of
an Event of Default, all outstanding Loans shall bear
interest at the Post-Default Rate.
(ii) Notwithstanding the foregoing, the Borrower
hereby promises to pay interest on any Loan or any
installment thereof and (to the extent that the payment
of such interest shall be legally enforceable) on any
overdue installment of interest, and on any other
amount payable by the Borrower hereunder which shall
not be paid in full when due (whether at stated
maturity, by acceleration or otherwise), for the period
commencing on the due date thereof until but not
including the date the same is paid in full at the
Post-Default Rate.
(iii) Except as provided in the next sentence,
accrued interest on each Loan shall be payable (x) in
respect of each Base Rate Loan, quarterly, on the last
Business Day of each calendar quarter, (y) in respect
of each Eurodollar Loan on the last day of each
Interest Period (and, in the case of Eurodollar Loans
with interest periods of over three months, at three-month
intervals following the first day of such
Interest Period) and (z) in the case of all Loans
together with each repayment of principal thereof.
Interest payable at the Post-Default Rate shall be
payable from time to time on demand of the Bank.
(h) Application of Payments. If the amount of any
payment or prepayment received by the Bank in respect of a Loan
is less than the principal of and interest accrued on such Loan
and required to be paid on the date of payment or prepayment, the
amount paid or prepaid on such Loan shall be applied first to
accrued interest and then to principal.
(i) Net Payments. (i) All payments made by the
Borrower under this Agreement or any other Facility
Document shall be made free and clear of, and without
reduction or withholding for or on account of, any
present or future Taxes now or hereafter imposed,
levied, collected, withheld or assessed by any
Governmental Authority, and all liabilities related
thereto. If any Taxes are required to be withheld or
deducted from any amounts payable under this Agreement
or any other Facility Document, the Borrower shall pay
the relevant amount of such Taxes and the amounts so
payable to the shall be increased to the extent
necessary to yield to the Bank (after payment of all
Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in
this Agreement and the other Facility Documents.
Whenever any Taxes are paid by the Borrower with
respect to payments made in connection with this
Agreement or any other Facility Document, as promptly
as possible thereafter, the Borrower shall send to the
Bank a certified copy of an original official receipt
received by the Borrower showing payment thereof.
(ii) The Borrower hereby agrees to indemnify the
Bank for the full amount of all Taxes attributable to
payments by or on behalf of the Borrower hereunder or
under any other Facility Document, any Taxes paid by
the Bank and any present or future claims, liabilities
or losses with respect to or resulting from any
omission to pay or delay in paying such Taxes
(including, without limitation, any incremental Taxes,
interest or penalties that may become payable by the
Bank as a result of any failure to pay such Taxes),
whether or not such Taxes were correctly or legally
asserted. Such indemnification shall be made within
three (3) days from the date the Bank makes written
demand therefor.
SECTION 3.2 Maximum Interest. Anything in this
Agreement or the Note to the contrary notwithstanding, the
interest rate on any Loan shall in no event be in excess of the
maximum permitted by Applicable Law.
SECTION 3.3 Computations. Interest on all Loans and
the Commitment Fee shall be computed on the basis of the actual
number of days elapsed in the period during which interest
accrues and a year of 365/366 days, in the case of Base Rate
Loans and the Commitment Fee, and a year of 360 days, in the case
of Eurodollar Loans. In computing interest on any Loan, the date
of the making of the Loan or the first day of an Interest Period,
as the case may be, shall be included and the date of payment or
the expiration date of an Interest Period, as the case may be,
shall be excluded; provided, that if a Loan is repaid on the same
day on which it is made, one day's interest shall be paid on such
Loan. All computations made by the Bank under this Agreement
shall be conclusive absent manifest error.
SECTION 3.4 Minimum Amounts. Except for conversions
or prepayments made pursuant to Sections 2.5 and 4.4 hereof, each
borrowing, conversion and prepayment of principal of Loans shall
be an integral multiple of $500,000 with a minimum amount of
$500,000 (borrowings, prepayments or conversions of or into Loans
of different types or with different Interest Periods, at the
same time hereunder are to be deemed separate borrowings,
conversions and prepayments for purposes of the foregoing, one
for each type).
ARTICLE IV
YIELD PROTECTION AND ILLEGALITY
SECTION 4.1 Additional Costs. (a) The Borrower shall
pay directly to the Bank from time to time within 10 days of
demand such amounts as the Bank may reasonably determine to be
necessary to compensate it (or any Booking Office) for any costs
incurred by the Bank (or any Booking Office) or any reduction of
the rate of return on assets or equity of the Bank (or any
Booking Office) to a level below that which the Bank (or any
Booking Office) could have achieved, which it determines are
attributable to its making or maintaining of any Loans hereunder
or its obligation to make or maintain any Loans hereunder, or any
reduction in any amount receivable by the Bank (or any Booking
Office) hereunder in respect of any Loans or such obligation
(such increases in costs and reductions in amounts receivable or
rate of return being herein called "Additional Costs"), resulting
from any Regulatory Change which (i) changes the basis of
taxation of any amounts payable to the Bank under this Agreement
or any Note payable to it (other than taxes imposed on the
overall net income of the Bank unless such tax is imposed solely
as a result of the transactions contemplated by the Facility
Documents); (ii) imposes or modifies any reserve, special
deposit, capital adequacy, capital maintenance or similar
requirements, or results in any change in the interpretation or
administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or
administration thereof, or the compliance by the Bank (or any
Booking Office) or the Bank's with any request or directive
regarding capital adequacy or capital maintenance (whether or not
having the force of law) or with any such authority, central bank
or comparable agency, other than such reserves as are included in
the determination of the Eurodollar Rate (but excluding
consequences of the Bank's gross negligence or willful disregard
of law or regulation); or (iii) imposes any other condition
affecting the Bank's return under this Agreement (or any of such
extensions of credit or liabilities). The Bank will notify the
Borrower of any event which will entitle the Bank to compensation
pursuant to this Section 4.1(a) as promptly as practicable after
it obtains knowledge thereof and determines to request such
compensation; provided, that the failure of the Bank to so notify
the Borrower shall not affect the obligations of the Borrower
hereunder in respect of such Additional Costs. The Bank will
furnish the Borrower with a notice setting forth the basis and
amount of each request by the Bank for compensation under this
Section 4.1(a) setting forth in reasonable detail the calculation
of the additional amount or amounts to be paid to it hereunder
and certifying that such claim is consistent with the Bank's
treatment of similar customers having similar provisions
generally in their agreements with the Bank.
(b) Without limiting the effect of the foregoing
provisions of this Section 4.1, in the event that, by reason of
any Regulatory Change, the Bank either (i) incurs Additional
Costs based on or measured by the excess above a specified level
of the amount of a category of deposits or other liabilities of
the Bank which includes deposits by reference to which the
interest rate on Eurodollar Loans is determined as provided in
this Agreement or a category of extensions of credit or other
assets of the Bank which includes Eurodollar Loans, or
(ii) becomes subject to restrictions on the amount of such a
category of liabilities or assets which it may hold, then, if the
Bank so elects by notice to the Borrower, the obligation of the
Bank to make, and to convert Base Rate Loans into, Eurodollar
Loans hereunder shall be suspended until the date such Regulatory
Change ceases to be in effect (and all Eurodollar Loans held by
the Bank then outstanding shall be converted into Base Rate Loans
in accordance with Section 4.4 hereof).
(c) Determinations by the Bank for purposes of this
Section 4.1 of the effect of any Regulatory Change on its costs
of making or maintaining the Loans, the Commitment or on amounts
receivable by it hereunder or under the Note, and of the
additional amounts required to compensate the Bank in respect of
any Additional Costs, shall be conclusive absent manifest error.
SECTION 4.2 Limitation on Types of Loans. Anything
herein to the contrary notwithstanding, if, on or prior to the
determination of any interest rate for any Eurodollar Loan for
any Interest Period therefor:
(a) the Bank determines in good faith (which
determination shall be conclusive) that quotations of
interest rates for the relevant deposit referred to in
the definition of the Eurodollar Rate in Section 1.1
hereof are not being provided in the relevant amounts
or for the relevant maturities for purposes of
determining the rate of interest for such Eurodollar
Loan as provided in this Agreement; or
(b) the Bank determines in good faith (which
determination shall be conclusive) that the relevant
rates of interest referred to in the definition of the
Eurodollar Rate in Section 1.1 hereof upon the basis of
which the rate of interest for such Eurodollar Loan for
such Interest Period is to be determined do not
accurately reflect the cost to the Bank of making or
maintaining such Eurodollar Loan for such Interest
Period;
then the Bank shall give the Borrower prompt notice thereof, and
so long as such condition remains in effect, (i) the Bank shall
be under no obligation to make Eurodollar Loans or to convert
Base Rate Loans into Eurodollar Loans, (ii) each request for a
Eurodollar Loan from the Bank shall instead be deemed to be a
request for a Base Rate Loan, and (iii) the Borrower shall, on
the last day(s) of the then current Interest Period(s) for the
outstanding Eurodollar Loans, either prepay such Eurodollar Loans
or convert such Eurodollar Loans into Base Rate Loans in
accordance with Section 4.4 hereof.
SECTION 4.3 Illegality. Notwithstanding any other
provision in this Agreement, in the event that it becomes
unlawful for the Bank or its Booking Office to (a) honor its
obligation to make Eurodollar Loans hereunder, or (b) maintain
Eurodollar Loans hereunder, then the Bank shall promptly notify
the Borrower thereof, and all obligations to make Eurodollar
Loans and to convert Base Rate Loans into Eurodollar Loans
hereunder shall be suspended until such time as the Bank may
again make and maintain Eurodollar Loans, and all outstanding
Eurodollar Loans shall be converted into Base Rate Loans in
accordance with Section 4.4 hereof.
SECTION 4.4 Certain Conversions. If a Eurodollar Loan
(such Eurodollar Loan being herein called "Affected Loan") is to
be converted pursuant to Sections 4.1, 4.2 or 4.3 hereof, such
Affected Loan shall be automatically converted into a Base Rate
Loan on the last day(s) of the then current Interest Period for
the Affected Loan (or, in the case of a conversion required by
Section 4.3 hereof, on such earlier date as the Bank may specify
to the Borrower) and, unless and until the Bank gives notice that
the circumstances specified in Sections 4.1, 4.2 or 4.3 hereof
which gave rise to such conversion no longer exist, to the extent
that the Affected Loan has been so converted, all payments and
prepayments of principal which would otherwise be applied to the
Affected Loans shall be applied instead to its Base Rate Loans.
SECTION 4.5 Compensation. The Borrower shall pay to
the Bank, upon request, such amount or amounts as shall be
sufficient (in the reasonable opinion of the Bank) to compensate
it for any loss, cost or expense incurred by it as a result of:
(a) any payment, prepayment or conversion of a
Eurodollar Loan on a date other than the last day of an
Interest Period for such Eurodollar Loan; or
(b) any failure by the Borrower to borrow,
convert or prepay a Eurodollar Loan on the date for
such borrowing, conversion or prepayment specified in
the relevant Loan Request, Notice of Conversion or
Continuation or notice of prepayment delivered under
Section 3.1(d) hereof, respectively;
such compensation to include, without limitation, an amount equal
to the excess, if any, of (i) the amount of interest which would
have accrued on the principal amount so paid, prepaid or
converted or not borrowed for the period from the date of such
payment, prepayment or conversion or failure to borrow to the
last day of the then current Interest Period for such Eurodollar
Loan (or, in the case of a failure to borrow, the Interest Period
for such Eurodollar Loan which would have commenced on the date
of such failure to borrow) at the applicable rate of interest for
such Eurodollar Loan provided for herein over (ii) the interest
component (as reasonably determined by the Bank) of the amount
(as reasonably determined by the Bank) the Bank would have bid in
the Eurocurrency market for Dollar deposits of amounts comparable
to such principal amount and maturities comparable to such
period.
ARTICLE V
CONDITIONS PRECEDENT
Each borrowing of a Loan pursuant to this Agreement may
be made only if the following conditions precedent are met and
each request for a Loan shall constitute a representation and
warranty that such conditions precedent have been met:
SECTION 5.1 No Default. On the date of each
borrowing, no Default or Event of Default shall have occurred and
be continuing.
SECTION 5.2 Opinion of Counsel. On or prior to the
date of the initial borrowing, the Bank shall have received the
favorable written opinion of counsel to the Borrower (which may
be in-house counsel), addressed to and reasonably satisfactory in
form, scope and substance to the Bank.
SECTION 5.3 Other Supporting Documents. On or prior
to the date of the initial borrowing, the Borrower shall deliver,
or cause to be delivered, to the Bank:
(a) this Agreement, executed by each of the
parties hereto, together with all schedules hereto;
(b) an executed Note payable to the Bank;
(c) good standing certificates as of dates no
more than ten days prior to the date of such initial
borrowing, with respect to each of the Borrower and
each Subsidiary, from the Secretary of State,
Department of the Treasury, Commissioner of Insurance
or other appropriate officer or office of the state of
its incorporation and from the Secretary of State of
each state in which each of the Borrower or such
Subsidiary, as applicable, is qualified to do business;
(d) a certificate of the Secretary or an
Assistant Secretary and President or Chief Financial
Officer of the Borrower substantially in the form
attached hereto as Exhibit B;
(e) a copy of the consolidated annual audited
financial statements of the Borrower and its
Subsidiaries for the fiscal year ended December 31,
1997, including therein the consolidated balance sheet
of the Borrower and such Subsidiaries as at the end of
such year and the related consolidated statements of
income and cash flows of the Borrower and such
Subsidiaries for such year, certified by the Borrower's
independent accountants as fairly presenting the
financial position and the results of operations of the
Borrower and such Subsidiaries as at and for such year
and as having been prepared in accordance with GAAP;
(f) an actuarial reserve study, made by an
independent auditor reasonably satisfactory to the
Bank, of the sufficiency of loss reserves of the
Borrower's operating insurance company Subsidiaries,
which study shall be in form, scope and substance
reasonably satisfactory to the Bank; and
(g) such other documents as the Bank or its
counsel may reasonably request.
SECTION 5.4 Loan Request. The Borrower shall have
delivered to the Bank a Loan Request complying with the
provisions of Section 2.2.
SECTION 5.5 Fees Paid. There shall have been paid to
the Bank the fees due and payable under Section 10 hereof on the
date or through the date of such borrowing.
SECTION 5.6 Representations and Warranties. The
representations and warranties of the Borrower set forth herein
and in the Facility Documents shall be true and correct in all
material respects.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Bank on the
date hereof and on each borrowing of a Loan that:
SECTION 6.1 Organization, Powers, etc. The Borrower
and each of its Subsidiaries is a corporation duly incorporated,
validly existing and in good standing under the laws of its
jurisdiction of organization and is duly qualified and licensed
to do business as a foreign corporation in each other
jurisdiction in which the conduct of its business requires such
qualification. The Borrower and each of its Subsidiaries has all
requisite corporate power and authority to conduct its business
as reasonably contemplated to be conducted, to own its
properties, and in the case of the Borrower to execute, deliver,
and perform all of its obligations under this Agreement and the
other Facility Documents to which it is a party.
SECTION 6.2 Corporate Authority, etc. The execution,
delivery and performance by the Borrower of this Agreement and
the other Facility Documents to which it is a party have been
duly authorized by all necessary corporate action on its part and
do not and will not (i) violate any provision of any Applicable
Law or of its certificate of incorporation or by-laws,
(ii) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement,
lease or instrument to which it is a party or by which it is
bound, or (iii) result in, or require, the creation or imposition
of any mortgage, deed of trust, assignment, pledge, Lien,
security interest or other charge or encumbrance of any nature
upon or with respect to any of its properties except as otherwise
provided by this Agreement or the other Facility Documents; nor
is it in violation of any Applicable Law or in default under any
such indenture, agreement, lease or instrument.
SECTION 6.3 Government Approvals. No authorization,
consent, approval, license, exemption of or filing or
registration with any Governmental Authority or other Person, is
or will be necessary to the valid execution, delivery or
performance by the Borrower of this Agreement and the other
Facility Documents to which it is a party.
SECTION 6.4 Government Regulation. The Borrower is
not subject to regulation under the Investment Company Act of
1940, as amended, or any other federal or state statute or
regulation which limits the ability of the Borrower to incur
indebtedness or the ability of the Borrower to consummate the
transactions contemplated by this Agreement and the other
Facility Documents.
SECTION 6.5 Valid and Binding Obligations. This
Agreement and the other Facility Documents to which the Borrower
is a party are the legal, valid and binding obligations of the
Borrower enforceable against the Borrower in accordance with
their terms.
SECTION 6.6 Litigation. There are no actions, suits or
proceedings pending or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or any Subsidiary of
the Borrower, the business or any property of any of them, or
involving the legality, validity or enforceability of any
Facility Document at law or in equity before any Governmental
Authority, which, if adversely determined, could reasonably be
expected to have a Material Adverse Effect.
SECTION 6.7 Use of Proceeds. The Borrower shall use
the proceeds of the Loans for general corporate purposes and as
set forth on Schedule 6.7 hereto. No part of the proceeds of any
Loan will be used to purchase or carry any "margin stock" (as
defined in Federal Reserve Regulation U) or to extend credit to
others for such purpose. The Borrower does not engage in, nor
have as one of its important activities, the business of
extending credit for the purpose of purchasing or carrying any
margin stock.
SECTION 6.8 Accuracy of Information. All information,
financial or otherwise, written or verbal, furnished or to be
furnished at any time by or on behalf of the Borrower to the Bank
is and will be true, complete and accurate in all material
respects as of its date, and does not or will not contain any
untrue statement of a material fact or omit to state a material
fact as of such date.
SECTION 6.9 Accuracy of Representations and
Warranties. The representations and warranties of the Borrower
contained in each Facility Document to which it is a party are
and will be true and correct as of the date given.
SECTION 6.10 Financial Position. The consolidated
balance sheets of the Borrower and its consolidated Subsidiaries
as at December 31, 1997 and the related statements of income and
shareholders' equity of the Borrower and its consolidated
Subsidiaries for the fiscal year then ended, audited by its
independent accountants, copies of which have been furnished to
the Bank, present the consolidated financial position of the
Borrower and its consolidated Subsidiaries as at such date and
the consolidated results of the operations of the Borrower and
its consolidated Subsidiaries for the period ended on such date,
all in accordance with GAAP.
SECTION 6.11 Tax Returns. Except for taxes being
contested in good faith by appropriate proceedings diligently
pursued and for which adequate reserves have been established,
the Borrower and each Subsidiary (i) has filed all federal tax
returns and state tax returns for the state in which it is
incorporated and the state in which it has its principal place of
business, and all other state and local tax returns required to
be filed by it (or has obtained extensions as to any not so
filed), and (ii) has not failed to pay any taxes, or interest and
penalties relating thereto, due on or before the date hereof. To
the Borrower's knowledge, there are no federal, state or local
tax liabilities of the Borrower or any Subsidiary due or to
become due for any tax year ended on or prior to the date of
execution of this Agreement relating to the Borrower or such
Subsidiary, whether incurred in respect of or measured by the
income of the Borrower or such Subsidiary, which are required to
be reflected in accordance with GAAP in the financial statements
delivered pursuant to Section 7.06 and have not been so
reflected, and to the Borrower's knowledge there are no claims
pending, proposed or threatened against the Borrower or any
Subsidiary for past federal, state or local taxes, except those,
if any, as to which proper reserves in accordance with GAAP are
reflected in such financial statements.
SECTION 6.12 ERISA. Each Plan of the Borrower or any
Subsidiary is in material compliance with all of the applicable
provisions of ERISA, and each such Plan intended to be qualified
under Section 401(a) of the Code is so qualified. No Plan of the
Borrower, any Subsidiary or any ERISA Affiliate has incurred an
"accumulated funding deficiency" (within the meaning of Section
302 of ERISA or Section 412 of the Code) whether or not waived.
Neither the Borrower nor any ERISA Affiliate (i) has incurred or
expects to incur any liability under Title IV of ERISA with
respect to any Plan which could give rise to a Lien in favor of
the PBGC, other than liability for the payment of premiums, all
of which have been timely paid when due in accordance with
Section 4007 of ERISA, (ii) has incurred or expects to incur any
withdrawal liability, within the meaning of Section 4201 of
ERISA, except as set forth in Schedule 6.7, (iii) is subject to
any Lien under Section 412(n) of the Code or Sections 302(f) or
4068 of ERISA or arising out of any action brought under Sections
4070 or 4301 of ERISA, or (iv) is required to provide security to
a Plan under Section 401(a)(29) of the Code. The PBGC has not
instituted proceedings to terminate any Plan or to appoint a
trustee or administrator of any such Plan and no circumstances
exist that constitute grounds under Section 4042 of ERISA to
commence any such proceedings.
SECTION 6.13 No Material Adverse Change. Since
December 31, 1997, there has occurred no event which has or had,
or could reasonably be expected to have, a Material Adverse
Effect.
SECTION 6.14 Compliance with Laws. (a) The Borrower
is in compliance in all material respects with all Applicable
Laws; and
(b) Each Subsidiary of the Borrower is in compliance
in all material respects with all Applicable Laws;
except in each case where the failure to so comply would not have
a Material Adverse Effect.
SECTION 6.15 Franchises, Licenses. The Borrower and
its Subsidiaries have all material franchises, permits, licenses
and other authority as are necessary to enable them to conduct
their respective businesses as currently being conducted and as
proposed to be conducted, and none of them is in default under
any of such material franchises, permits, licenses or other
authority.
SECTION 6.16 No Default. The Borrower is in
compliance with all of the terms and provisions contained herein
and in the other Facility Documents and no Default or Event of
Default has occurred and is continuing.
SECTION 6.17 Subsidiaries. Set forth on Schedule 6.17
is a listing of all Subsidiaries of the Borrower, setting forth
the jurisdiction of origination of each thereof and the
percentage ownership of each thereof by the Borrower.
SECTION 6.18. Year 2000 Problem. The Borrower has a
reasonable basis to believe that no Year 2000 Problem will cause
a Material Adverse Effect.
Section 6.19. Environmental Matters. Except as set
forth on Schedule 6.19, neither the Borrower nor any existing
Subsidiary has knowledge of any claim or has received any notice
of any claim, and no proceeding has been instituted raising any
claim against the Borrower or any of its Subsidiaries or any of
their respective real properties now or formerly owned, leased or
operated by any of them or other assets, alleging any damage to
the environment or violation of any Environmental Laws, except,
in each case, such as could not reasonably be expected to result
in a Material Adverse Effect. Except as otherwise disclosed to
the Bank in writing,
(a) neither the Borrower nor any Subsidiary has knowledge
of any facts which would give rise to any claim, public or
private, of violation of Environmental Laws or damage to the
environment emanating from, occurring on or in any way
related to real properties now or formerly owned, leased or
operated by any of them or to other assets or their use,
except, in each case, such as could not reasonably be
expected to result in a Material Adverse Effect;
(b) to the Borrower's knowledge, neither the Borrower nor
any of its Subsidiaries has stored any Hazardous Materials
on real properties now or formerly owned, leased or operated
by any of them and has not disposed of any Hazardous
Materials in a manner contrary to any Environmental Laws in
each case in any manner that could reasonably be expected to
result in a Material Adverse Effect; and
(c) to the Borrower's knowledge all buildings on all real
properties now owned, leased or operated by the Borrower or
any of its Subsidiaries are in compliance with applicable
Environmental Laws, except where failure to comply could not
reasonably be expected to result in a Material Adverse
Effect.
ARTICLE VII
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees with the Bank that
from and after the Effective Date and so long as this Agreement
shall remain in effect or any Loans or any other amounts owing
under this Agreement or any Facility Document shall be unpaid, it
shall:
SECTION 7.1 Payment of Taxes, etc. Pay and discharge,
and cause each of its Subsidiaries to pay and discharge, all
taxes imposed upon it or such Subsidiary or upon its or such
Subsidiary's income or profits, prior to the date on which
penalties attach thereto; provided, however, that neither the
Borrower nor any Subsidiary shall be required to pay or discharge
any taxes which are being contested in good faith by appropriate
proceedings diligently pursued and for which adequate reserves
have been established.
SECTION 7.2 Preservation of Existence. Continue to
engage, and cause each of is Subsidiaries to continue to engage,
in business of the same general type as now conducted and
preserve and maintain its corporate existence in the jurisdiction
of its incorporation, and its rights, franchises and privileges
material to the conduct of its business as now being conducted.
SECTION 7.3 Compliance with Laws, etc. Comply, and
cause each of its Subsidiaries to comply, in all material
respects with the requirements of all Applicable Laws of any
Governmental Authority.
SECTION 7.4 Inspection Rights. At any time and from
time to time, upon reasonable prior notice from the Bank, during
normal business hours permit the Bank or any of its agents or
representatives to examine and make copies of the records and
books of account of the Borrower and its Subsidiaries and to
visit its properties, and to discuss its affairs, finances and
accounts with any of its authorized agents or officers designated
by the Borrower.
SECTION 7.5 Maintenance of Approvals, Filings and
Registrations. At all times maintain in effect, renew and comply
with, and cause each of its Subsidiaries to maintain in effect,
renew and comply with, all the terms and conditions of all
consents, licenses, approvals and authorizations as may be
necessary or appropriate under any Applicable Law (i) for the
execution, delivery and performance of the Facility Documents,
(ii) to make the Facility Documents legal, valid, binding and
enforceable against the Borrower, and (iii) to conduct its
business.
SECTION 7.6 Reporting Requirements. Furnish or cause
to be furnished to the Bank:
(a) as soon as available, but, in any event not
later than ninety (90) days after the end of each
fiscal year of the Borrower, a copy of the annual
audited consolidated reports for the Borrower and its
Subsidiaries for such year, including therein the
consolidated and consolidating balance sheets of the
Borrower and its Subsidiaries as at the end of such
year and the related consolidated and consolidating
statements of income and cash flows of the Borrower and
its Subsidiaries for such year, or statements providing
substantially similar information, in each case
certified without qualification by an independent
public accountant of recognized national standing as
fairly presenting the financial condition of the
Borrower and its Subsidiaries as of the dates indicated
and results of operation of the Borrower and its
Subsidiaries for the periods indicated and having been
prepared in accordance with GAAP; and
(b) as soon as available, but in any event not
later than forty-five (45) days after the end of each
of the first three quarterly periods of each fiscal
year of the Borrower, the unaudited consolidated
balance sheets of the Borrower and its Subsidiaries as
at the end of each such quarter and the related
unaudited consolidated and consolidating statements of
income and cash flows of the Borrower and its
Subsidiaries for such quarter and the portion of the
fiscal year through such date, certified by a
responsible officer of the Borrower as fairly
presenting the financial position and the results of
operations of the Borrower and its Subsidiaries in all
material respects as at and for the quarter ending on
its date and as having been prepared in accordance with
GAAP (subject to normal year-end audit adjustments);
(c) concurrently with the delivery of the
financial statements referred to in Sections 7.6(a) and
(b) above, (i) a certificate of a duly authorized
officer of the Borrower stating that such officer has
reviewed the terms of this Agreement and the other
Facility Documents to which the Borrower is a party and
has made, or caused to be made under his supervision, a
review in reasonable detail of the transactions and
condition of the Borrower during the accounting period
covered by such financial statements and that such
review has not disclosed the existence during or at the
end of such accounting period, and that such officer
does not have knowledge of the existence as at the date
of such certificate, of any Default or Event of Default
except as specified in such certificate and (ii) a
certificate of the chief financial officer of the
Borrower demonstrating in detail satisfactory to the
Agent compliance by the Borrower and its Subsidiaries
with the financial covenants set forth in Section 7.12
hereof;
(d) promptly and in any event within five (5)
Business Days after the same are publicly available,
copies of all regular and periodic financial
information, proxy materials and other information and
reports, if any, which the Borrower or any of its
Subsidiaries shall file with the Securities and
Exchange Commission, any securities exchange or any
state insurance regulatory authority; and
(e) such other information with respect to the
business, condition or operations of the Borrower or
any of its Subsidiaries, financial or otherwise, as the
Bank may from time to time reasonably request.
SECTION 7.7 Performance of Agreements. Duly and
punctually pay and perform each of its obligations under this
Agreement and the other Facility Documents.
SECTION 7.8 Notices. Promptly give notice to the Bank
of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any
contractual obligation of the Borrower or any of its Subsidiaries
or (ii) litigation, investigation or proceeding to which the
Borrower or any of its Subsidiaries is a party, including any
which may exist at any time between the Borrower or any of its
Subsidiaries and any Governmental Authority, which in either
case, if not cured or if adversely determined, as the case may
be, could reasonably be expected to have a Material Adverse
Effect;
(c) the occurrence of any event which could reasonably
be expected to have a Material Adverse Effect;
(d) any material regulatory action with respect to the
Borrower or any Subsidiary, together with a copy of any notice of
such action, within ten days after such action is taken or such
notice given; and
(e) the release of the triennial examination of the
Borrower and each of its Subsidiaries that is an insurance
company, together with a copy of that report, within 30 days
after the release of such report; and
(f) any written agreement or letter of intent that
involves the sale or merger of the Borrower or the Borrower's
acquisition of any Person.
Each notice pursuant to this subsection shall be accompanied by a
statement of a responsible officer setting forth details of the
occurrence referred to therein and stating what action are being
taken with respect thereto.
SECTION 7.9 Books and Records. Keep, and cause its
Subsidiaries to keep, adequate records and books of account, in
which complete entries are to be made reflecting its business and
financial transactions and its performance under the Facility
Documents, such entries to be made in accordance with GAAP as in
effect in the United States consistently applied in the case of
financial transactions or as otherwise required by Applicable
Laws.
SECTION 7.10 Year 2000 Matters. The Borrower has
reviewed, or will expeditiously review, its operations and those
of its Subsidiaries with a view to assessing whether its
businesses, or the businesses of any of its Subsidiaries, will be
vulnerable to a Year 2000 Problem. The Borrower shall take all
actions necessary and commit adequate resources to assure that
its computer-based and other systems (and those of all
Subsidiaries) are able to effectively process data, including
dates before, on and after January 1, 2000, without experiencing
any Year 2000 Problem that could reasonably be expected to cause
a Material Adverse Effect. At the request of the Bank the
Borrower will provide the Bank with assurances and
substantiations (including but not limited to, the results of
internal or external audit reports prepared in the ordinary
course of business) reasonably acceptable to the Bank as to the
capability of the Borrower and its Subsidiaries to conduct its
and their business and operations before, on and after January 1,
2000 without experiencing a Year 2000 Problem causing a Material
Adverse Effect.
SECTION 7.11 Other Agreements. Comply in all material
respects with all indentures, loan or credit agreements and any
other agreement, lease or instrument to which the Borrower is a
party.
SECTION 7.12 Financial Covenants.
(a) Maintain at all times a Consolidated Leverage
Ratio of not greater than 20%; and
(b) Cause each of its Subsidiaries which is an
operating insurance company
(x) to maintain an A.M. Best rating of
"B+" or better; and
(y) to maintain a ratio of (I) Total
Adjusted Capital to (II) Authorized Control Level Risk-Based Capital
of at least 3 to 1; provided, that for
the fiscal year ending December 31, 1998 such ratio
with respect to Motor Club of America Insurance Company
shall be at least 2.5 to 1.
SECTION 7.13 Maintenance of Properties. Maintain,
preserve, protect and keep its properties in good repair, working
order and condition, and make necessary and proper repairs,
renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times
unless the Borrower determines in good faith that the continued
maintenance of any of its properties is no longer economically
desirable, and maintain with reputable insurers adequate
insurance coverage for all of its properties and operations as is
customarily carried by businesses similarly situated.
ARTICLE VIII
NEGATIVE COVENANTS
The Borrower covenants and agrees with the Bank that,
from and after the Effective Date and so long as this Agreement
shall remain in effect or Loans or any other amounts owing under
this Agreement or any other Facility Document shall be unpaid, it
shall not, directly or indirectly:
SECTION 8.1 Use of Proceeds. Use the proceeds of the
Loans for any purpose other than to pay fees and transaction
expenses incurred in connection with the transactions
contemplated by the Facility Documents and provide funds for
general corporate purposes and as set forth on Schedule 6.7
hereto in accordance with the terms of this Agreement.
SECTION 8.2 Prohibition of Fundamental Changes.
Except as set forth on Schedule 6.7 hereto, wind-up, liquidate or
dissolve its affairs or enter into any transaction of merger or
consolidation, or convey, sell, lease or otherwise dispose of (or
agree to do any of the foregoing at any future time), whether in
one or a series of transactions, all or substantially all of its
assets, or permit any of its Subsidiaries to do any of the
foregoing.
SECTION 8.3 Business. Make or permit any material
change in the character of its or its Subsidiaries' business or
operations which could reasonably be expected to adversely affect
the rights and remedies of the Bank under the Facility Documents.
SECTION 8.4 Liens. Contract for, create, incur,
assume or suffer to exist any Lien, security interest, charge or
other encumbrance of any nature upon any of its assets, except:
(a) Liens for taxes, assessments or other governmental
charges or levies not at the time delinquent or thereafter
payable without penalty or being diligently contested in
good faith by appropriate proceedings and for which adequate
reserves in accordance with GAAP shall have been set aside
on its books:
(b) Liens incurred in the ordinary course of business
in connection with workers' compensation, unemployment
insurance or other forms of governmental insurance or
benefits, or to secure performance of tenders, statutory
obligations, leases and contracts (other than for borrowed
money) entered into in the ordinary course of business or to
secure obligations on surety or appeal bonds;
(c) judgment Liens in existence less than 15 days
after the entry thereof or with respect to which execution
has been stayed or the payment of which is covered in full
(subject to a customary deductible) by insurance maintained
with responsible insurance companies;
(d) statutory Liens of landlords and Liens of
carriers, warehousemen, mechanics, materialmen, repairmen,
workmen and other similar Liens imposed by law created in
the ordinary course of business for amounts which are not
past due for more than 60 days and which are being contested
in good faith by appropriate proceedings and with respect to
which the Borrower has maintained adequate reserves in
accordance with GAAP; and
(e) Liens identified on Schedule 8.4 hereto.
SECTION 8.5 Transactions with Affiliates. Make any
sale to, make any purchase from, make payment (including, without
limitation, any management fee payment) for services rendered by,
or enter into any other transaction with, any Affiliate unless as
a whole such sales, purchases, payments and other transactions
are (at the time such sale, purchase, rendition of services, or
other transaction is entered into) on terms and conditions
reasonably fair in all material respects to the Borrower or such
Subsidiary.
SECTION 8.6 Dividends to the Borrower by Subsidiaries.
Permit any Subsidiary to issue any securities or enter into any
agreements (other than with or as required by applicable
regulatory authorities) that will either (i) limit such
Subsidiary's ability to declare or pay or set apart any funds for
the payment of any dividend or make any distribution to the
Borrower or (ii) prevent such Subsidiary from paying to the
Borrower the entire amount available to be paid as dividends or
distributions by such Subsidiary; provided, that in no event
shall any Subsidiary be permitted to transfer assets to the
Borrower or another Subsidiary in excess of such Subsidiary's
surplus (computed in accordance with statutory accounting
principles).
SECTION 8.7 Debt.
(a) Permit any Subsidiary which is an operating
insurance company to incur or suffer to exist any Indebtedness in
excess of $500,000 at any time outstanding; and
(b) Incur or suffer to exist any Indebtedness which is
senior to or pari-passu with the Loans.
ARTICLE IX
EVENTS OF DEFAULT
SECTION 9.1 Events of Default. In case of the
happening of any of the following events (herein sometimes called
"Events of Default"):
(a) the principal amount of any Loan or any Note, any
interest payable thereon, the Commitment Fee or any other
fees or expenses related to this Agreement or the
transactions contemplated hereby or any other amount payable
under this Agreement shall not be paid in full within one
Business Day after the date due and payable; or
(b) any representation or warranty made or deemed to
be made or reaffirmed by the Borrower or any other Person
herein or in any Facility Document, certificate, agreement,
instrument or statement made or delivered pursuant to or in
connection herewith, shall prove to have been materially
incorrect when made or deemed made; or
(c) the Borrower shall fail to perform or observe any
term, covenant or agreement contained in this Agreement or
any other Facility Document, and (in the case of any such
failure with respect to Sections 7.1, 7.3, 7.4, 7.5, 7.6,
7.7, 7.9, 7.10, 7.11 and 7.13) such failure is not cured
within 30 days after the occurrence thereof; or
(d) any Facility Document shall, at any time after its
execution and delivery, for any reason cease to be in full
force and effect (unless such occurrence is in accordance
with its terms or after payment thereof) or shall be
declared to be null and void or the validity or
enforceability thereof shall be contested by the Borrower,
or the Borrower shall deny that it has any or further
liability or obligation thereunder; or
(e) the Borrower or any Subsidiary shall (i) apply for
or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator
of itself or of all or a substantial part of its property,
(ii) admit in writing its inability, or be generally unable,
to pay its debts as they become due, (iii) make a general
assignment for the benefit of its creditors, (iv) commence a
voluntary case under the Federal Bankruptcy Code (as now or
hereafter in effect), (v) be adjudicated a bankrupt or
insolvent, (vi) commence a voluntary case under, or file a
petition seeking to take advantage, of any other law
relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts, (vii)
acquiesce in writing to, any allegations, or any petition
filed, against it in an involuntary case under such Federal
Bankruptcy Code or other law, or (viii) take any corporate
action for the purpose of effecting any of the foregoing; or
(f) a proceeding or case shall be commenced without
the application or consent of the Borrower or any Subsidiary
of any of them in any court of competent jurisdiction,
seeking (i) the liquidation, reorganization, dissolution or
winding-up, or the composition or readjustment of debts, of
the Borrower or any Subsidiary, (ii) the appointment of a
trustee, receiver, custodian, liquidator, supervisor or the
like of the Borrower or any Subsidiary or of all or any
substantial part of their respective assets or (iii) similar
relief in respect of the Borrower or any Subsidiary under
any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order,
judgment or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in
effect, for a period of sixty consecutive days, or an order
for relief against the Borrower or any Subsidiary shall be
entered in an involuntary case under the Federal Bankruptcy
Code (as now or hereafter in effect); or any judgment, writ,
warrant of attachment or execution or similar process shall
be issued or levied in respect of an obligation (alleged or
otherwise) of the Borrower or any Subsidiary against a
substantial part of its respective properties and such
judgment, writ, or similar process shall not be released,
vacated, stayed or fully bonded within thirty days after its
issue or levy; or
(g) the Borrower or any Subsidiary shall fail to pay
when due any amount in respect of any obligation in excess
of $500,000 in the aggregate for money borrowed or for the
deferred purchase price of property created, issued,
guaranteed, incurred or assumed by such Person or any other
event shall occur or any condition shall exist in respect of
any such the effect of which is to cause (or permit any
holder thereof or a trustee to cause), without giving effect
to the giving of notice or the lapse of time, or both, such
to become due prior to its stated maturity; or
(h) a final judgment or judgments for the payment of
money in excess of $250,000 in the aggregate shall be
rendered by a court or courts against the Borrower or any
Subsidiary (exclusive of any judgment amount fully covered
by insurance), and the same shall not be discharged (or
provision shall not be made for such discharge), or a stay
of execution thereof shall not be procured, within thirty
(30) days from the date of entry thereof; or
(i) except as provided in Schedule 9.1(i),a
Termination Event shall have occurred with respect to a
Plan, resulting in the imposition of material liability
against the Borrower or any Subsidiary or any ERISA
Affiliate; or
(j) a Material Adverse Effect shall occur; or
(k) a Change of Control shall occur;
then, at any time after the occurrence of such event, the Bank
may take one or more of the following actions: (i) give notice
(which may be telephone notice confirmed in writing) to the
Borrower of the occurrence of an Event of Default, and the date
of the giving of such notice shall become the Credit Expiration
Date and the Bank's obligation to make Loans shall be terminated;
(ii) by notice to the Borrower (except that in the case of the
occurrence of any Event of Default described in Section 9.1(e) or
9.1(f), no such notice shall be required and such termination and
acceleration shall be automatic) declare the unpaid principal
amount and interest under the Note, the Loans and all other
amounts payable to the Bank hereunder to be forthwith due and
payable, whereupon such amounts shall become forthwith due and
payable, both as to principal and interest, without presentment,
demand, protest or any other notice of any kind, all of which are
hereby expressly waived, anything contained herein or in the Note
to the contrary notwithstanding; and (iii) any and all other and
further acts and actions which the Bank may take pursuant to
Applicable Law.
ARTICLE XI
FEES
SECTION 10.1 Fees. As consideration for incurring the
obligation to make the Loans, the Borrower shall pay to the Bank
from and as of the date hereof:
(a) a Facility Origination Fee in an amount and at the
time set forth in a separate letter agreement as of even date
herewith between the Borrower and the Bank; and
(b) a fee (the "Commitment Fee") equal to the product
of the Commitment Fee Percentage and the difference between
(i) the Commitment and (ii) the outstanding principal amount of
the Loans from time to time, computed on a daily basis and
payable quarterly in arrears on the first day of each calendar
quarter, commencing October 1, 1998, and on the Credit Expiration
Date.
SECTION 10.2 Expenses. The Borrower shall pay, no
later than five (5) days after its receipt of a statement
therefor, all reasonable out-of-pocket costs and expenses
incurred by the Bank (including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel to the
Bank) (i) in connection with the preparation of this Agreement
and the other Facility Documents (whether or not the transactions
hereby or thereby contemplated shall be consummated), (ii) in
connection with any waivers, amendments or extensions with
respect to any of the foregoing documents, (iii) in connection
with the Loans hereunder, and (iv) in connection with the
administration of this Agreement and the other Facility
Documents. The Borrower will also pay all costs and expenses
incurred by the Bank (including the reasonable fees and out-of-pocket
expenses of counsel) in connection with the enforcement
and protection of the rights of the Bank, as the case may be, in
connection with this Agreement and the other Facility Documents.
ARTICLE XI
INDEMNIFICATION
SECTION 11.1 Indemnification by Borrower. Without
limiting any other rights which the Bank and its officers,
directors, employees, agents and affiliates may have hereunder or
under Applicable Law, the Borrower hereby agrees to indemnify
such parties and hold them harmless from and against any and all
damages, losses, claims, liabilities and related costs and
expenses (including reasonable attorneys' fees and disbursements)
incurred by any of them arising out of or resulting from the
transactions contemplated by this Agreement and the other
Facility Documents (other than in respect of any of the foregoing
arising out of the gross negligence or willful misconduct of such
indemnified party, including, without limitation:
(a) the reliance by the Bank on any representation or
warranty made by the Borrower (or any of its officers) under or
in connection with this Agreement or any other Facility Document
which was incorrect when made;
(b) the failure by the Borrower to comply with any
covenant set forth in this Agreement or in any other Facility
Document; or
(c) the use of proceeds of the Loans.
If and to the extent that the foregoing undertaking may be
unenforceable for any reason, the Borrower hereby agrees to make
the maximum contribution to the payment of the amounts
indemnified against in this Section which is permissible under
applicable law.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 Notices. Except where telephonic (which
shall be confirmed in writing promptly) instructions or notices
are authorized herein to be given, all notices, demands,
instructions and other communications required or permitted to be
given under this Agreement shall be in writing and shall be
personally delivered or sent by registered, certified or express
mail, postage prepaid, return receipt requested, or by facsimile
(with telephone confirmation of such transmission), or telegram
(with messenger delivery specified in the case of a telegram),
and shall be deemed to be given for purposes of this Agreement on
the date on which such writing is personally delivered or sent by
facsimile or four (4) days after being sent by mail to the
intended recipient thereof in accordance with the provisions of
this Section 12.1. Unless otherwise specified in a notice sent
or delivered in accordance with the foregoing provisions of this
Section 12.1, notices, demands, instructions and other
communications in writing shall be given to or made upon the
respective parties hereto at their respective addresses (or to
their respective facsimile numbers) indicated below, and, in the
case of telephonic instructions or notices, by calling the
telephone number or numbers indicated for such party below:
(a) with respect to the Borrower:
Motor Club of America
95 Route 17 South
Paramus, New Jersey 07653-0931
Attention: Mr. Patrick J. Haveron,
Executive
Vice President, Chief
Financial
Officer and
Treasurer
Telephone: (201) 291-2112
Facsimile: (201) 291-2125
with a copy to:
Sills Cummis Zuckerman Radin Tischman
Epstein & Gross, P.A.
One Riverfront Plaza
Newark, New Jersey 07102-5400
Attention: Stanley U. North, III, Esq.
Telephone: (973) 643-7000
Facsimile: (973) 643-6500
(b) with respect to the Bank:
Dresdner Bank AG,
New York and Grand Cayman Branches
75 Wall Street
New York, New York 10005
Attention: Mr. Robert P. Donohue,
Vice President
Telephone: (212)429-3256
Facsimile: (212)429-2524
with a copy to:
Dresdner Bank AG,
New York Branch
75 Wall Street
New York, New York 10005
Attention: Credit Services Department
Any party may designate a different or additional address for the
delivery of notices by providing notice thereof to the other
parties. Except as provided to the contrary above, all notices,
demands, and other communications shall be effective upon
personal delivery or upon the date of receipt by the addressee as
shown on the return receipt. Rejection or other refusal to
accept notices, demands, or other communications shall be of no
effect, and all notices, demands, and other communications which
are rejected or acceptance of which is refused shall be deemed to
be effective upon the date on which the same were rejected or
refused.
SECTION 12.2 Survival and Termination of Agreement.
All covenants, agreements, representations and warranties made
herein and in the certificates and other documents delivered
pursuant hereto shall survive (i) the making by the Bank of the
Loans herein contemplated, (ii) the execution and delivery to the
Bank of the Note, and (iii) the making of any investigation, and
shall continue in full force and effect to the Credit Expiration
Date or so long as any Loan or any amount payable to any Bank in
connection with this Agreement or any other Facility Document is
unpaid, whichever is later, at which time this Agreement shall
terminate, it being expressly understood that the obligations of
the Borrower under Article IV, X and XI hereof shall survive any
termination of this Agreement.
SECTION 12.3 Applicable Law. THIS AGREEMENT AND THE
NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK.
SECTION 12.4 Waiver; Modifications in Writing. No
failure or delay on the part of the Bank in exercising any right,
power or remedy hereunder or under the Note or with respect to
the Loans shall operate as a waiver thereof, nor shall any single
or partial exercise of any such right, power or remedy preclude
any other or further exercise thereof or the exercise of any
other right, power or remedy. The remedies provided for herein
are cumulative and are not exclusive of any remedies that may be
available to the Bank at law or in equity. No amendment,
modification, supplement, termination or waiver of or to any
provision of this Agreement, nor consent to any departure by the
Borrower therefrom, shall be effective unless the same shall be
in writing and signed by the Bank. Any waiver of any provisions
of this Agreement, and any consent to any departure by the
Borrower from the terms of any provision of this Agreement, shall
be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower
in any case shall entitle the Borrower to any other or further
notice or demand in similar or other circumstances.
SECTION 12.5 Non-Waiver of Rights. Neither any
failure nor any delay on the part of the Bank in exercising any
right, power or privilege hereunder or under the Facility
Documents shall operate as a waiver thereof, nor shall a single
or partial exercise thereof preclude any other or further
exercise of any other right, power or privilege.
SECTION 12.6 Successors and Assigns. (a) This
Agreement shall be binding upon and inure to the benefit of each
party hereto and its respective successors and assigns, except
that the Borrower shall not assign or transfer (by operation of
law or otherwise) all or any part of its rights or obligations
hereunder without the prior written consent of the Bank.
(b) Notwithstanding the foregoing, the Bank may at any
time change the Booking Office designated by it on Schedule 1.
The Bank shall give prompt notice to the Borrower of any change
in any Booking Office.
SECTION 12.7 Right to Grant Assignments and
Participations. The Borrower and the Bank agree that the Bank
may, from time to time, with the prior written consent of the
Borrower (which consent shall not be unreasonably withheld), sell
a portion of the Bank's obligation to make Loans hereunder and of
the Bank's rights hereunder, or grant participations herein, to
financial institutions. Any such financial institution shall
have the same rights as the Bank in respect of the rights granted
to the Bank under Sections 4.1, 4.5, 10 and 11. In such
connection, it is agreed that the Bank shall not be responsible
for a failure by any such financial institution, and that each
such financial institution shall not be responsible for a failure
by the Bank (or another such financial institution), to make or
fund, as the case may be, any Loan or its pro rata portion of any
Loan. The Bank may furnish any information concerning the
Borrower in its possession from time to time to such financial
institutions (including prospective purchasers of assignments and
participations hereunder).
SECTION 12.8 Captions. Captions and section headings
appearing herein are included solely for convenience of reference
and are not intended to affect the interpretation of any
provision of this Agreement.
SECTION 12.9 Counterparts. This Agreement may be
executed in counterparts which, taken together, shall constitute
a single document.
SECTION 12.10 Severability. In case any one or more
of the provisions contained in this Agreement or any Note should
be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or
impaired thereby.
SECTION 12.11 Waiver of Trial by Jury; Consent to
Jurisdiction; Certain Waivers. THE PARTIES HERETO, TO THE EXTENT
PERMITTED BY LAW, WAIVE TRIAL BY JURY IN ANY LITIGATION IN ANY
COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF,
THIS AGREEMENT OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT
TO THIS AGREEMENT, OR THE VALIDITY, PROTECTION, INTERPRETATION,
COLLECTION OR ENFORCEMENT THEREOF. The Borrower irrevocably
consents that any legal action or proceeding against it under,
arising out of or in any manner relating to this Agreement or any
instrument or document delivered pursuant to this Agreement may
be brought in the Supreme Court of the State of New York, County
of New York, or in the United States District Court for the
Southern District of New York. The Borrower, by its execution
and delivery of this Agreement, expressly and irrevocably assents
and submits to the personal jurisdiction of any of such courts in
any such action or proceeding. The Borrower has irrevocably
appointed Sills, Cummis, Zuckerman, Radin, Tischman, Epstein &
Gross, P.A., 712 Fifth Avenue, New York, New York 10019 as its
agent to receive, accept and acknowledge for and on its behalf,
service of any and all legal process, summons, notices and
documents which may be served in any proceeding brought in any
court which may be made on such agent. If for any reason such
agent shall cease to be available to act as such, the Borrower
agrees to designate a new agent in The City of New York on the
terms and for the purposes of this Section 12.11 satisfactory to
the Bank. The Borrower further irrevocably consents to the
service of summons, notice, or other process relating to any such
action or proceeding by delivery thereof to it by hand or by mail
in the manner provided for in Section 12.1 hereof. The Borrower
hereby expressly and irrevocably waives any claim or defense in
any such action or proceeding in either such court based on any
alleged lack of personal jurisdiction, improper venue or forum
non conveniens or any similar basis. Nothing in this Section
12.11 shall affect or impair in any manner or to any extent the
right of the Bank to commence legal proceedings or otherwise
proceed against the Borrower in any jurisdiction or to serve
process in any manner permitted by law. The Borrower hereby
waives, to the fullest extent permitted by applicable law, the
right to seek punitive or consequential damages against the Bank
arising out of the transaction contemplated by this Agreement or
the Facility Documents.
SECTION 12.12 Set-off. Upon the occurrence and during
the continuance of an Event of Default, the Bank (including any
of its branches) is hereby authorized at any time or from time to
time, without notice to the Borrower or to any other Person, any
such notice being hereby expressly waived, to set off and to
appropriate any and all deposits (general or special, matured or
unmatured, time or demand, in whatever currency) and any other at
any time held or owing by the Bank to or for the credit or the
account of the Borrower against and on account of the obligations
and liabilities of the Borrower to the Bank under this Agreement
or any other Facility Document, irrespective of whether or not
the Bank shall have made any demand hereunder and although said
obligations, liabilities or claims, or any of them, shall be
contingent or unmatured.
SECTION 12.13 Confidentiality. The Bank shall hold
all information which the Bank reasonably understands to be non-public
information obtained pursuant to the requirements of this
Agreement confidential in accordance with its customary
procedures for handling confidential information of this nature
and in accordance with safe and sound banking practices; provided
that in any event the Bank shall have the right to make
disclosure to any of its examiners, Affiliates, outside auditors,
counsel and other professional advisors in connection with this
Agreement or as reasonably required by any bonafide transferee,
participant or assignee or as required or requested by any
governmental agency or representative thereof or pursuant to
legal process; provided, however, that
(a) unless specifically prohibited by applicable law
or court order, the Bank shall notify the Borrower of any
request by any governmental agency or representative thereof
(other than any such request in connection with an
examination of the financial condition of the Bank by such
governmental agency) for disclosure of any such non-public
information prior to disclosure of such information;
(b) prior to any such disclosure pursuant to this
Section 12.13, the Bank shall require any such bona fide
transferee, participant and assignee receiving a disclosure
of non-public information to agree in writing
(i) to be bound by this Section 12.13, and
(ii) to require such Person to require any other
Person to whom such Person discloses such non-public
information to be similarly bound by this Section 12.13; and
(c) except (i)as may be required by an order of a
court of competent jurisdiction and to the extent set forth
therein or (ii) to the extent not needed by the Bank for
archival purposes, the Bank shall not be obligated or
required to return any materials furnished by the Borrower.
SECTION 12.14. Acknowledgements. The Borrower hereby
acknowledges that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the other
Facility Documents;
(b) the Bank has no fiduciary relationship with or
fiduciary duty to the Borrower arising out of or in
connection with this Agreement or any of the other Facility
Documents, and the relationship between the Bank, on the one
hand, and the Borrower, on the other hand, in connection
herewith or therewith is solely that of debtor and creditor;
and
(c) no joint venture is created hereby or by the other
Facility Documents or otherwise exists by virtue of the
transactions contemplated hereby.
IN WITNESS WHEREOF,
the parties hereto and the Agent
have caused this Agreement to be duly executed by their duly
authorized officers, all of the day and year first above written.
MOTOR CLUB OF AMERICA,
as Borrower
By:s/Patrick J. Haveron
Authorized Signatory
DRESDNER BANK AG, New York and
Grand Cayman Branches
By:s/Robert P. Donohue
Authorized Signatory
By:s/J. Curtin Beaudouin
Authorized Signatory
<PAGE>
Schedule I
to the Loan
Agreement
Booking Offices
Base Rate and Eurodollar Rate Lending Offices:
Dresdner Bank AG, New York and Grand Cayman Branches
75 Wall Street
New York, New York 10005
EXHIBIT A
to the Loan Agreement
[Form of Note]
$3,000,000 September __, 1998
FOR VALUE RECEIVED, the undersigned hereby promises
to pay to the order of DRESDNER BANK AG, NEW YORK AND GRAND
CAYMAN BRANCHES (the "Bank"), the principal sum of Three
Million Dollars ($3,000,000), and the aggregate unpaid
principal amount from time to time outstanding of all Loans
made by the Bank to the undersigned pursuant to Section 2.1 of
the Loan Agreement (defined below), in immediately available
funds and in lawful money of the United States of America on
the dates and in the principal amount provided in the Loan
Agreement, and to pay interest on the unpaid balance of said
principal sum from time to time outstanding, from the date
hereof, until the principal sum shall become due (whether by
acceleration or otherwise), in like funds and money, at the
office of the Bank set forth in the Loan Agreement, at the
rates per annum and on the dates provided in said Loan
Agreement.
This promissory note is the Note referred to in the
Loan Agreement dated as of September __, 1998 (as the same
may from time to time be amended, the "Loan Agreement"),
between the undersigned, and the Bank, to which Loan Agreement
reference is made for a description of the rights of
prepayment, the Events of Default and the rights of
acceleration of maturity upon the occurrence of an Event of
Default. All advances made by the Bank to the undersigned in
respect of Loans pursuant to the Loan Agreement and all
payments made on account of principal hereof shall be recorded
by the Bank and, prior to any transfer hereof, endorsed on the
grid attached hereto which is part of this promissory note
(provided that any failure by the Bank to make any such
endorsement shall not affect the obligations of the
undersigned under this Note in respect of any such advance).
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
MOTOR CLUB OF AMERICA
By:_________________________
Authorized Signatory
[REVERSE OF NOTE OR SCHEDULE THERETO]
This Note evidences the Loans made by the Bank under
Section 2.3 of the Loan Agreement dated as of September __,
1998, as from time to time amended, between Motor Club of America
and Dresdner Bank AG, New York and Grand Cayman Branches, in the
principal amounts and on the dates set forth below, subject to
the payments and prepayments of principal set forth below:
PRINCIPALPRINCIPAL PRINCIPAL
AMOUNTAMOUNT PAID BALANCE TYPE
OF
DATE LOANED OR PREPAID OUTSTANDING
LOAN
EXHIBIT B
to the Loan Agreement
[Form of Certificate]
MOTOR CLUB OF AMERICA
Certificate
I, the undersigned, Secretary of MOTOR CLUB OF AMERICA,
a ____________ corporation (the "Borrower"), DO HEREBY CERTIFY
that:
1. This Certificate is furnished pursuant to Section
5.3(d) of that certain Loan Agreement dated as of
September __, 1998 (the "Agreement") among the Borrower and
Dresdner Bank AG, New York and Grand Cayman Branches.
Unless otherwise defined herein, capitalized terms used in
this Certificate have the meanings assigned to those terms
in the Agreement.
2. Attached hereto as Exhibit A is a copy of the
Certificate of Incorporation of the Borrower, certified by
the Secretary of State of the State of __________.
3. There have been no amendments to the Certificate
of Incorporation of the Borrower since __________, 199_.1
4. Attached hereto as Exhibit B is a true and correct
copy of the by-laws of the Borrower as in effect on the date
hereof.
5. Attached hereto as Exhibit C is a true and correct
copy of resolutions duly adopted by the Board of Directors
of the Borrower on _____________, 1998, which resolutions
have not been revoked, modified, amended or rescinded and
are still in full force and effect.
___________________
(1) Insert the date of the Secretary of State's Certificate
furnished pursuant to paragraph 2.
6. The below-named persons have been duly elected,
have duly qualified as of and at all times since
___________, 1998(2) (to and including the date hereof) have
been officers of the Borrower, holding the respective
offices below set opposite their names, and the signatures
below set opposite their names are their genuine signatures.
Name Office Signatures
_______________________ [Title] _____________________
_______________________ [Title] _____________________
_______________________ [Title] _____________________
7. There are no proceedings pending for the
dissolution or liquidation of the Borrower.
WITNESS my hand and the seal of the Borrower this ___
day of ________________, 1998.
________________________
Secretary
__________________
(2) Insert the date next preceding the effective date of adoption
of the resolutions referred to in paragraph 4 above.
I, the undersigned, [title] of the Borrower, DO HEREBY
CERTIFY that:
1. [Name of Secretary] is the duly elected and
qualified Secretary of the Borrower and the signature above is
[his/her] genuine signature.
2. Each of the Loan Agreement and each other Facility
Document to which the undersigned is a party is in existence and
is in full force and effect on the date hereof.
3. The representations and warranties on the part of
the Borrower contained or reaffirmed and repeated in the Loan
Agreement and in each other Facility Document to which the
undersigned is a party are true and correct at and as of the date
hereof as though made on and as of the date hereof.
4. No Event of Default or Default (or event which
with the passage of time or notice or both would constitute an
Event of Default) has occurred and is continuing, or would result
from the consummation of the initial borrowing on this date.
WITNESS my hand on this _____ day of ____________,
1998.
__________________________
Authorized Signatory
EXHIBIT C
to the Loan Agreement
[Form of Loan Request]
Dresdner Bank AG, New York and Grand Cayman Branches
75 Wall Street
New York, New York 10005
Attention: [Name]
[Title]
This Loan Request is delivered to you pursuant to
Section 2.2 and Section 5.4 of the Loan Agreement dated as of
September __, 1998 (as it may be amended, supplemented, restated
or otherwise modified from time to time, the "Agreement") between
Motor Club of America (the "Borrower") and Dresdner Bank AG, New
York and Grand Cayman Branches (the "Bank"). Unless otherwise
defined herein or the context otherwise requires, all capitalized
terms used herein will have the respective meanings assigned to
them in the Agreement.
The Borrower hereby requests that Loans be made in the
aggregate principal amount of $___________ on ___________, 199_
as [a Eurodollar Loan/a Base Rate Loan]. [The Borrower requests
that the Interest Period for the Eurodollar Loan requested hereby
be [1/2/3/6/9/12] month(s).]
The Borrower hereby affirms that (i) the
representations and warranties of the Borrower set forth in
Section 6 of the Agreement are on the date hereof, and will be on
the date of the proposed borrowing, true and correct as if made
on and as of each such date, (ii) no Event of Default has
occurred and is continuing on the date hereof or shall have
occurred and be continuing on the date of the proposed borrowing,
and (iii) after giving effect to the making of the Loans
requested hereby, the aggregate principal amount of all Loans
outstanding will not exceed the Commitment.
The Borrower agrees that if, prior to the time that the
borrowing requested hereby is made, any matter affirmed herein
shall no longer be true and correct, it will immediately so
notify the Bank. Except to the extent, if any, that prior to the
time that the borrowing requested hereby is made the Bank shall
receive written notice to the contrary from the Borrower each
matter affirmed herein shall be deemed once again to be affirmed as true
and correct as of the date of such borrowing as if then
made.
Please wire transfer the proceeds of the requested
borrowing to the account(s) of the following Persons at the
financial institution(s) indicated below:
Amount to be Person to be Paid Name,
Address, etc.
Transferred Name Account No. of Payee
Bank
$__________ _____________ _________ __________________
__________________
ABA
#_____________
Attention: _______
$__________ _____________ _________ __________________
__________________
ABA
#_____________
Attention: _______
The Borrower has caused this Loan Request to be
executed and delivered, and the affirmations and warranties
contained herein to be made, by its duly authorized officer this
____ day of __________, 199_.
MOTOR CLUB OF AMERICA
By:_________________________
Name:
Title:
EXHIBIT D
to the Loan Agreement
[Form of Notice of Conversion or Continuation]
Dresdner Bank AG, New York and Grand Cayman Branches
75 Wall Street
New York, New York 10005
Attention: [Name]
[Title]
This Notice of Conversion or Continuation is delivered
to you pursuant to Section 3.1(c) of the Loan Agreement dated as
of September __, 1998 (as it may be amended, supplemented,
restated or otherwise modified from time to time, the
"Agreement") between Motor Club of America (the "Borrower") and
Dresdner Bank AG, New York and Grand Cayman Branches (the
"Bank"). Unless otherwise defined herein or the context
otherwise requires, all capitalized terms used herein will have
the respective meanings assigned to them in the Agreement.
The Borrower hereby requests that on ____________,
199_,
(1) $_________ of the currently outstanding
principal amount of the Loans originally made on
__________, 199_,
(2) all currently being maintained as [Base Rate
Loans/Eurodollar Loans],
(3) be [converted into/continued as] [Base Rate
Loans/Eurodollar Loans].
The Borrower hereby certifies that (i) the
representations and warranties of the Borrower set forth in
Section 6 of the Agreement are on the date hereof, and will be on
the date of the proposed [conversion/continuation], true and
correct as if made on and as of such dates, and (ii) no Default
or Event of Default has occurred and is continuing on the date
hereof or shall have occurred and be continuing on the date of
the proposed [conversion/continuation].
The Borrower agrees that if, prior to the time that the
[conversion/continuation] requested hereby is made, any matter
certified to herein shall no longer be true and correct, it will
immediately so notify the Bank. Except to the extent, if any,
that prior to the time that the [conversion/continuation]
requested hereby is made the Bank shall receive written notice to
the contrary from the Borrower, each matter certified to herein
shall be deemed once again to be certified as true and correct as
of the date of such [conversion/continuation] as if then made.
The Borrower has caused this Notice of Conversion or
Continuation to be executed and delivered, and the certifications
and warranties contained herein to be made, by its duly
authorized officer this ____ day of __________, 199_.
MOTOR CLUB OF AMERICA
By:_________________________
Name:
Title:
Schedule 6.17
to the Loan Agreement
COMPANY NAME DOMICILE %OWN
Motor Club of America Insurance Company NJ 100%
Preserver Insurance Company NJ 51%1
___________________________________
1 The remaining 49% ownership resides with Motor Club of
America Insurance Company.
Schedule 6.7
to the Loan Agreement
Borrower may enter into one or more of the following
transactions:
1. The Motor Club of America Employees Retirement Plan (a
defined benefit plan which was partially terminated in 1992)
may be fully terminated by the Borrower prior to the
termination of the Loan Agreement.
2. Preserver Insurance Company ("Preserver") is 51% owned by
Motor Club of America, a public New Jersey corporation (the
"Borrower") and 49% owned by Motor Club of America Insurance
Company ("MCAIC"). Subject to New Jersey Department of
Insurance approval (which is expected to be received in
September 1998), the Borrower will purchase from MCAIC the
49% of Preserver not owned by Borrower for a purchase price
of up to $3,000,000 in a transaction which is expected to
close prior to December 31, 1998.
3. In the ordinary course of business, MCAIC shall distribute
to Borrower a dividend of $500,000 in September 1998.
4. After acquiring 100% ownership of Preserver, the Borrower is
expected to make a $5,000,000 cash contribution to the
capital and surplus of Preserver on or before December 31,
1998.
Schedule 6.19
to the Loan Agreement
None.
Schedule 8.4
to the Loan Agreement
None.
Schedule 9.1(i)
to the Loan Agreement
The following liabilities against the Borrower or any Subsidiary
or any ERISA Affiliate arising from a Termination Event shall not
in and of themselves constitute an Event of Default:
The liabilities arising due to the immediate vesting of
participants in the Motor Club of America Employees
Retirement Plan (the "Plan") due the cession of
participation in the Plan by the employees of the Borrower
or any Subsidiary or former Subsidiary which is or could be
determined to be a partial termination under Section
411(d)(3) of the Code; and
The liabilities associated with any immediate vesting and
with the purchase of annuities or the payment of benefits
upon the termination of the Plan and the liabilities
associated with any penalty tax due on amounts that revert
to the Borrower upon such termination; provided, however,
that such termination is initiated by the board of directors
of the Borrower.
