SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
----------------- -------------------
September 30, 1999 0-671
MOTOR CLUB OF AMERICA
----------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-0747730
---------------------- -----------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
95 Route 17 South, Paramus, New Jersey 07653
- ---------------------------------------- --------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (201) 291-2000
--------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x . No .
---- - ---
2,124,387 shares of Common Stock were outstanding as of November
11, 1999.
MOTOR CLUB OF AMERICA
FORM 10-Q
SEPTEMBER 30, 1999
PART I
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<S> <C> <C>
September 30, December 31,
1999 1998
------------- ------------
ASSETS
Investments $93,409,730 $75,951,241
Cash and cash equivalents 12,101,566 2,773,427
Premiums receivable 27,184,807 20,401,069
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 23,063,595 19,234,277
Notes and accounts receivable
- net 186,948 125,444
Deferred policy acquisition costs 10,211,346 8,708,329
Fixed assets - at cost, less
accumulated depreciation 1,906,246 1,671,902
Prepaid reinsurance premiums 1,852,817 1,015,581
Federal income tax recoverable - 26,724
Deferred tax asset 3,229,665 -
Goodwill 1,767,004 -
Other assets 1,547,482 1,104,782
------------ ------------
Total Assets $176,461,206 $131,012,776
============ ============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $ 74,869,967 $ 58,335,143
Unearned premiums 37,647,235 30,733,144
Other liabilities 12,728,155 10,163,520
Note payable 3,000,000 3,000,000
Convertible subordinated debentures 10,000,000 -
Due to North East shareholders 10,547,555 -
Deferred tax liability - 957,440
Federal income taxes payable 9,392 -
------------ -----------
Total Liabilities 148,802,304 103,189,247
------------ ------------
Shareholders' Equity:
Common Stock, par value $.50 per share:
(Authorized - 10,000,000 shares;
issued and outstanding - 2,116,429
(1999 and 1998) 1,058,215 1,058,215
Paid in additional capital 1,996,954 1,996,954
Accumulated other comprehensive loss (5,713,813) (3,422,387)
Retained earnings 30,317,546 28,190,747
------------ ------------
Total Shareholders' Equity 27,658,902 27,823,529
------------ -----------
Total Liabilities and
Shareholders' Equity $176,461,206 $131,012,776
============ ============
</TABLE>
(Financial statements should be read in
conjunction with the accompanying notes)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<S> <C> <C> <C> <C>
For the Nine Months Ended For the Three Months Ended
September 30, 1999 September 30,1998 September 30,1999 September 30, 1998
-------------------------------------- ------------------------------------
Revenues:
Insurance premiums (net of
premiums ceded totaling
$5,299,714, $5,178,978
$1,632,198 and $1,805,800) $39,643,239 $39,481,046 $13,376,548 $13,358,347
Net investment income 3,600,727 3,161,052 1,215,870 1,083,210
Realized gains (losses) on
sales of investments 5,365 28,623 (13) 282
Other revenues 109,579 129,560 34,679 39,299
----------- ----------- ----------- -----------
Total revenues 43,358,910 42,800,281 14,627,084 14,481,138
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $2,832,542, $2,414,667,
$989,726 and $1,258,035) 28,413,303 26,536,968 10,873,022 9,496,231
Amortization of deferred policy
acquisition costs and
operating expenses 12,532,366 11,923,009 3,792,530 3,644,605
Merger expenses 800,000 - 800,000 -
----------- ----------- ----------- -----------
Total losses and expenses 41,745,669 38,459,977 15,465,552 13,140,836
----------- ----------- ----------- -----------
Income (loss) before Federal
income taxes 1,613,241 4,340,304 (838,468) 1,340,302
Provision (benefit) for Federal
income taxes: current 45,159 165,458 (10,699) 104,121
deferred (558,717) 999,916 (957,514) 220,721
----------- ----------- ---------- ----------
Total provision (benefit) for
Federal income taxes (513,558) 1,165,374 (968,213) 324,842
----------- ----------- ----------- ----------
Net income $ 2,126,799 $ 3,174,930 $ 129,745 $1,015,460
=========== =========== =========== ==========
Net income per common share:
Basic $1.01 $1.51 $.06 $.48
===== ===== ==== ====
Diluted $1.00 $1.50 $.06 $.48
===== ===== ==== ====
Weighted average common and potential common shares outstanding:
Basic 2,116,429 2,106,125 2,116,429 2,116,429
========= ========= ========= =========
Diluted 2,140,275 2,120,882 2,173,028 2,117,268
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<S> <C> <C> <C> <C> <C>
For the Nine Months Ended
-------------------------
September 30, 1999 September 30, 1998
------------------ ------------------
Operating activities:
Net income $ 2,126,799 $ 3,174,930
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net assets of North East (1,653,398) -
Depreciation and net amortization 474,687 444,565
Gain on sale of investments (5,365) (28,623)
Changes in:
Deferred policy
acquisition costs 783,457 (1,221,922)
Premiums receivable 523,229 (6,067,765)
Notes and accounts
receivable (61,504) (18,271)
Other assets (16,978) 329,083
Losses and loss expenses 5,321,983 4,628,673
Unearned premiums (2,702,923) 4,351,876
Federal income tax - current 45,358 (15,480)
Federal income tax - deferred (558,717) 999,916
Other liabilities (748,468) 804,460
Reinsurance recoverable on
paid and unpaid losses (828,280) 458,023
Prepaid reinsurance premiums (14,352) 216,591
------------ ------------
Net cash provided by
operating activities $ 2,685,528 $8,056,056
Investing activities:
Investments purchased (75,516,508) (181,489,777)
Fixed assets purchased (489,140) (426,299)
Proceeds from sales and
maturities of investments 72,648,259 175,937,767
----------- -----------
Net cash used in
investing activities (3,357,389) (5,978,309)
Financing activities:
Note payable - 3,000,000
Convertible subordinated debentures 10,000,000 -
Common stock issued - 57,750
----------- ------------
Net cash provided by financing activities 10,000,000 3,057,750
----------- ----------
Net increase in cash and
cash equivalents 9,328,139 5,351,497
Cash and cash equivalents at
beginning of period 2,773,427 222,761
----------- ----------
Cash and cash equivalents at
end of period $12,101,566 $5,358,258
=========== ==========
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------
Interest paid $ 161,293 $ 4,308
========= ==========
Federal income taxes paid $ - $ 95,400
========= ==========
</TABLE>
Non Cash Investing Activities:
- ------------------------------
Invested assets and shareholders'equity decreased by $2,291,426 and $
1,172,327 in 1999 and 1998, respectively, as a result of changes in market
value pertaining to the Registrant's application of SFAS No. 115 - Accounting
for Certain Investments in Debt and Equity Securities.
(Financial statements should be read in
conjunction with the accompanying notes)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<S> <C> <C> <C> <C>
For the Nine Months Ended For the Three Months Ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
--------------------------------------- ---------------------------------------
Net income $2,126,799 $3,174,930 $129,745 $1,015,460
Other comprehensive income (loss):
Unrealized gains(losses)on
securities, net of tax:
Unrealized holding gains (losses)
arising during the period (2,287,885) 1,191,218 (279,155) 165,486
Less: reclassification adjustment
for gains included in earnings (3,541) (18,891) 9 7,195
---------- ---------- -------- --------
Other comprehensive income (loss) (2,291,426) 1,172,327 (279,146) 972,693
---------- ---------- --------- ----------
Comprehensive income (loss) ($ 164,627) $4,347,257 ($149,401) $1,307,620
=========== ========== ========= ==========
</TABLE>
(Financial statements should be read in
conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Preparation and Presentation
-------------------------------------
The accompanying condensed consolidated financial statements
of Motor Club of America (the "Registrant") include its accounts
and those of its subsidiary companies, Motor Club of America
Insurance Company ("Motor Club"), Preserver Insurance Company
("Preserver") (collectively referred to as the "Insurance
Companies"), and North East Insurance Company and its wholly-owned
subsidiary ("North East") and, in the opinion of management,
contain all adjustments necessary to present fairly the
Registrant's consolidated financial position, results of operations
and cash flows, in accordance with generally accepted accounting
principles.
The Registrant has included North East's balance sheet in its
consolidated balance sheet as of September 30, 1999, including allocation
of the acquisition cost to goodwill. North East's results of operations and
cash flows will be included in the Registrant's consolidated results of
operations and statement of cash flows effective October 1, 1999.
These statements should be read in conjunction with the
Summary of Significant Accounting Policies and other notes included
in the Notes to Financial Statements in the Registrant's 1998
Annual Report on Form 10-K.
2. Per Share Data
--------------
Basic earnings per share are computed based upon the weighted
average number of common shares outstanding during each year.
Diluted earnings per share are computed based upon the weighted
average number of common shares outstanding including outstanding
stock options and convertible subordinated debentures.
3. Federal Income Taxes
--------------------
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the three and nine month periods
ended September 30, 1999 and 1998, the provision for Federal income
taxes resulted in effective tax rates different from the expected
statutory Federal income tax rates, principally as a result of (i)
certain adjustments, principally those enacted under the Tax Reform
Act of 1986; (ii) utilization of Net Operating Loss ("NOL")
carryforwards; and (iii) in 1999, the recognition as a deferred tax
asset of certain tax credit carryforwards for alternative minimum
tax purposes and additional NOL's from an insolvent subsidiary. As
of September 30, 1999, the Registrant has $1.4 million in NOL
carryforwards remaining.
4. North East Merger
-----------------
On September 24, 1999, the Registrant completed the
acquisition of 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 headquartered in
Scarborough, Maine and was a NASDAQ listed property and casualty
insurance company.
Under the terms of the Merger, North East shareholders received
7,958 shares of its common stock to shareholders representing
41,781 shares of North East common stock; the remaining outstanding
shareholders and holders of North East stock options were paid
$10,409,678 in cash subsequent to September 30, 1999.
The aggregate purchase price for the transaction was $10,482,796. The
acquisition has been recorded using the purchase method of accounting, and
based on the fair value of net assets acquired at September 24, the
Registrant estimates that $1,767,004 of goodwill exists at
September 30, 1999 which is recorded as an asset to be amortized on a
straight-line basis over twenty years.
The Registrant has recorded $800,000 of merger-related expenses
in its results of operations for the three and nine-month periods
ended September 30, 1999.
5. Convertible Subordinated Debentures
-----------------------------------
In connection with its acquisition of North East, on September
23, 1999, the Registrant issued $10 million of Convertible
Subordinated Debentures ("Debentures"), in one series, under a plan
previously approved by its shareholders.
The Debentures are due on September 23, 2009 and bear an
interest rate of 8.44%, which is 2.5% over the London Interbank
Offered Rate, fixed as of September 23, 1999, the date the series
was issued.
At each holder's option, the Debenture is convertible at any
time, in whole or in part, into 645,578 of the Registrant's common
shares ($10 million divided by 130% of the average trading price of
the Registrant's common stock over the twenty day period
immediately prior to September 23, 1999 ("Conversion Price")). The
applicable Conversion Price is $15.49.
Members of the Registrant's Executive Committee purchased
$9,253,785 of the $10 million in Debentures issued. If the members
of the Executive Committee convert those Debentures, their
percentage ownership in the Registrant's common stock will
substantially increase. Based on the Registrant's common shares
outstanding as of September 30, 1999 and those subsequently issued
to North East shareholders as part of their elections under the
Merger, the Executive Committee could increase its collective
percentage stock ownership from the current 42.2% to 53.8%.
6. Note Payable
------------
As of September 30, 1999, the Registrant is in violation with
a convenant and one term of its Loan Agreement with Dresdner Bank,
AG ("Dresdner"). The Registrant has received a waiver of both
conditions from Dresdner. Should Dresdner withdraw the waivers,
mandatory repayment of the $3 million note payable is required
under the Loan Agreement. The Registrant has sufficient liquidity
to make such a repayment.
Item 2. Management's Discussion and Analysis of Financial Condition
- ------ -----------------------------------------------------------
and Results of Operations
- -------------------------
Overview of Business Operations
- -------------------------------
The Registrant and a group of affiliated corporations provide
property and casualty insurance related services in the
northeastern United States. The Registrant has four subsidiaries,
two of which are domiciled in the State of New Jersey and write
property and casualty insurance, Motor Club and Preserver. On
September 24, 1999, the Registrant acquired North East, domiciled
in the State of Maine, and its wholly owned subsidiary, American
Colonial Insurance Company ("American Colonial"), domiciled in the
State of New York. North East writes property and casualty
insurance in the State of Maine; American Colonial is licensed to
write property and casualty insurance in the State of New York, but
is presently inactive, with the exception of liquidating claims
which have been outstanding for more than eight years. Until this
time, one hundred percent of the Registrant's insurance operations
were in the State of New Jersey; now approximately 20% are in the
State of Maine.
The Registrant anticipates continuing revenue growth in the
State of New Jersey through small commercial and ancillary
coverages written by Preserver as well as through new private
passenger automobile ("PPA") writings by Motor Club. North East
anticipates continuing revenue growth in the State of Maine through
its "Automatic" personal automobile insurance product and by
introducing in 2000 small commercial lines and ancillary coverages
similar to those written by Preserver. The Registrant anticipates
recommencing operations of American Colonial in New York in the
second quarter of 2000 utilizing small commercial lines and
ancillary coverages similar to those written by Preserver.
The Registrant seeks to continue to increase its identification as
a provider of small commercial lines insurance. The Registrant
also seeks to continue to expand and diversify its insurance
operations outside the State of New Jersey. The Registrant
believes that both of these objectives can be attained through the
acquisition of other insurance companies, which present
opportunities to write these product lines in different geographic
areas. The Registrant expects to continue to pursue these
objectives during 1999 and beyond.
The Registrant also anticipates continued reductions in its
operating expenses, namely through the implementation of operating
efficiencies, which should reduce other overhead expenditures.
New Jersey Private Passenger Automobile Insurance
- -------------------------------------------------
The New Jersey PPA market has historically been subject to
regulatory and legislative volatility which has, at times,
adversely affected the profitability of this line of business,
despite New Jersey having among the highest average premium rate in
the United States. New Jersey insurance law presently requires
insurers to write all eligible personal automobile coverage
presented to them from drivers with eight points or less on their
driving record. This is commonly referred to as "take-all-comers".
The New Jersey Department of Banking and Insurance ("NJ DOBI")
may grant an insurer relief, by written notification, from writing
new PPA pursuant to the take-all-comers provisions of New Jersey
law if a showing finds that the insurer's premium to surplus
("leverage") ratio exceeds 3 to 1. Motor Club's present applicable
leverage ratio for the twelve months ended September 30, 1999 is
3.43 to 1. However, this ratio is temporarily elevated due to the
conversion from six month policies to twelve month policies that
began July 1, 1998. It appears that Motor Club's leverage ratio,
adjusted for this conversion, was below 3 to 1 at September 30,
1999.
The Registrant's tier rating system implemented as part of the
1997 New Jersey PPA legislation was approved by the NJ DOBI and has
been implemented on all PPA policies with effective dates on and
after November 1, 1998.
Additional New Jersey PPA legislation was enacted in 1998 and
implemented with new policies issued on and after March 22, 1999,
which: 1) allows insureds to reduce levels of compulsory coverages,
including the option to reduce their coverage for Personal Injury
Protection ("PIP") to as low as $15,000, from the presently
required $250,000; 2) revises the PIP policy form to set forth the
medical treatments and services, valid diagnostic tests and
appropriate health care protocols which are eligible to be paid; 3)
seeks to limit lawsuits by claimants by redefining of the type of
injury which would be grounds for litigation; 4) replaces the
present PIP arbitration system which utilizes part-time arbitrators
who render only oral decisions without consulting medical
professionals with one using full-time dispute resolution
professionals who may refer questions of medical necessity or
diagnosis to medical review organizations and who must render
written decisions; 5) appoints a special fraud prosecutor to
increase enforcement of fraudulent acts committed against insurance
companies; 6) removes the system of territorial rating caps which
have been in place since 1983, enabling insurers to modify (as
appropriate) rates charged in various rating territories, which
will be redefined; and 7) requires up to a 15% reduction in rates
on all PPA policies.
The only element of the 1998 legislation not implemented in
1999 is the redefinition of the territories and removal of the
territorial rating caps, which is scheduled to be implemented in
2000. The Registrant believes that the legislation will have a
modest net negative effect on Motor Club's PPA operations and
profitability, as the mandated rate reductions do not appear to be
completely cost justified (based on information presently
available) by the cost savings contained in the legislation.
Results of Operations
- ---------------------
Results for the three and nine month period ended September
30, 1999 and 1998 included the following unusual or non-recurring
events: 1) losses and expenses from Hurricane Floyd in September
1999 and severe storms in September 1998 totaling $482,000 or $.23
basic net income per share and $227,000 or $.11 basic net income
per share, respectively, net of taxes; 2) in 1999, expenses related
to the North East acquisition of $597,000 or $.28 per share, net of
taxes; and 3) in 1999, recognition as deferred tax assets of additional
net operating loss carryforwards from an insolvent subsidiary and certain
minimum tax credits not previously recognized totaling $756,000 or $.36 basic
net income per share and $874,000 or $.41 basic net income per
share for the three month and nine month periods ended September
30, 1999, respectively.
Excluding these items, net income decreased $789,000 or $.37
basic net income per share and $1,070,000 or $.51 basic net income
per share in the three and nine months ended September 30, 1999 as
compared to the same periods in 1998, respectively.
The principal cause of the decrease is poor loss experience in
the current accident year in Motor Club's PPA book of business, in
addition to lower insurance premiums as a result of the mandated
rate rollback in that business. The Registrant does not believe
that the poor loss experience is related to the mandated rate
rollback and other changes in the NJ PPA market at this time. This
has been offset by improvements in results of operations by
Preserver, which continues to produce excellent loss and combined
ratios.
Revenues
- --------
INSURANCE PREMIUMS
Insurance premiums increased $18,000 and $162,000 in the three
and nine months ended September 30, 1999, compared to the same
period in 1998, respectively, both less than one percent increases.
Motor Club's insurance premiums have declined due to the rate
rollback provisions of the 1998 PPA reform legislation implemented
in 1999 and previously described. The decline in premium, however,
has been less than anticipated due to higher average premium on new
business from the tier rating program implemented in the fourth
quarter of 1998.
This decrease was offset in the first nine months of 1999 by higher
insurance premiums in Preserver, principally in its commercial
lines programs. The Registrant expects a continued decline in Motor
Club's insurance premiums during the remainder of 1999, as policies
renew and the imposed rate rollback provisions are applied.
The following table details the net changes in insurance
premiums for the three and nine months period ended September 30,
1999 as compared to the same periods in 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
Net Net
Class of Business Premium Percent Premium Percent
Private Passenger Automobile ($144,000) (1%) ($432,000) (2%)
Commercial Lines 189,000 10% 628,000 12%
Personal Property (27,000) (4%) (34,000) (1%)
--------- --- -------- ---
Total $ 18,000 0% $162,000 4 %
========= == ======== ===
</TABLE>
Effective July 1, 1998, Motor Club began converting its
existing six month policies to twelve month policies. This measure
will further improve the Registrant's operating efficiency and
service levels, and reduce expenses. The Registrant believes this
is particularly important since the NJ DOBI has not proposed or
adopted regulations which would provide for expedited prior
approval rate increases, as required by legislation passed by the
New Jersey Legislature in 1997. While conversion to twelve month
policies did, for a one year period commencing July 1, 1998,
temporarily increase the amount of premiums written by the
Registrant, it did not effect the amount of premium earned.
During the first quarter of 1998, Preserver introduced its new
workers' compensation product. The Registrant believes the
introduction of this product, along with other product
improvements, enable Preserver to offer a broad, competitive
product line which will grow steadily in the future. Insurance
premiums in Preserver's workers' compensation program increased
$200,000 and $520,000 in the three and nine months ended September
30, 1999 as compared to the same periods in 1998, respectively.
NET INVESTMENT INCOME
Net investment income increased $133,000 or 12% and $440,000
or 14% for the three and nine months ended September 30, 1999 as
compared to the same period in 1998, respectively, due to an
increase in invested assets. Average invested assets for the nine
months period ended September 30, 1999 were $75,196,000 as compared
to $65,911,000 for the same period in 1998. The investment
portfolio (including short-term investments and excluding realized
capital gains) yielded 6.37% for the nine months ended September
30, 1999 as compared to 6.39% for the same period in 1998.
Losses and Expenses
- -------------------
LOSSES AND LOSS EXPENSES INCURRED
Losses and loss expenses incurred increased $1,376,000 or 15%
and increased $1,876,000 or 7% in the three and nine months ended
September 30, 1999 as compared to the same period in 1998. Losses
and loss expenses incurred include $523,000 from Hurricane Floyd in
1999 and $299,000 from severe storms in September 1998. Loss
ratios for the three and nine month periods ended September 30,
1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
September 30, 1999 September 30, 1998
-------------------------------------------
<S> <C> <C>
Motor Club 81.6% 70.1%
Preserver 80.3% 73.9%
---- ----
Total 81.3% 71.1%
==== ====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------
September 30, 1999 September 30, 1998
-----------------------------------------
<S> <C> <C>
Motor Club 74.2% 68.9%
Preserver 64.6% 62.1%
---- ----
Total 71.1% 67.2%
==== ====
</TABLE>
Motor Club's personal automobile losses for the three and nine
months ended September 30, 1999 were sharply higher as compared to
the same period in 1998. This activity is due to a higher
frequency of larger losses in the current accident year (1999) as
compared to the current accident year as of the same evaluation
point in 1998, in particular on new personal automobile policies
written since 1995. This business now constitutes 58% of the total
Motor Club book of business. The Registrant cannot state whether
this activity represents a significant adverse trend; the
Registrant did not experience or identify any other significant
adverse trends in accident years other than the current year in
Motor Club's book of business during the three and nine month
periods ended September 30, 1999.
Preserver, excluding the effects of storm losses in 1999 and
1998, continued the excellent loss ratios which it has experienced
in recent years.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND OTHER
OPERATING EXPENSES
During 1999, the completion of the Policy Term Conversion, in
conjunction with the rate rollback required under the 1998 PPA
reforms, has increased the Registrant's expense ratio and resulted
in increased amortization of deferred acquisition expenses.
Consequently, these expenses increased $148,000 or 4% and
$600,000 or 5% in the three and nine month periods ended
September 30, 1999 as compared to the same period in 1998,
respectively. This resulted in an increase in the expense ratio to
34.3% and 33.6% for the three and nine month periods ended
September 30, 1999 as compared to 27.3% and 30.2% for the same
periods in 1998, respectively.
The Registrant remains committed to reducing its expense ratio by
increasing revenues while either limiting increases or reducing where
possible its overhead expenditures.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
The Registrant's book value decreased to $13.07 per share at
September 30, 1999 from $13.15 per share at December 31, 1998. The
sources of the net decrease were net income of $2,127,000 described
previously, offset by a decrease of $2,291,000 (net of deferred
taxes) in the market value of fixed maturity investments accounted
for as available-for-sale securities under SFAS No. 115. Interest
rates have risen sharply in 1999, causing substantial unrealized
losses during this period in the Registrant's investment portfolio.
The Insurance Companies' need for liquidity arises primarily
from the obligation to pay claims. The primary sources of
liquidity are premiums received collections from reinsurers and
proceeds from investments.
Reserving assumptions and payment patterns of the Insurance
Companies did not materially change from the prior year and there
were no unusually large retained losses resulting from claim
activity. Unpaid losses are not discounted.
Operating and Investing Activities
- ----------------------------------
Net cash provided by operating activities were $2,685,528 and
$8,056,000 in the nine months ended September 30, 1999 and 1998,
respectively. The lower cash flow provided by operating
activities in the nine months ended September 30, 1999 as compared
to 1998 reflects the lower growth in the Insurance Companies' premium revenue
during those periods. Net cash used by investing activities was
$3,357,389 in 1999 and $5,978,000 in 1998, reflecting the decline in Motor Club
insurance premium as a result of the rate rollback associated with
the 1998 PPA reform.
No unusual or nonrecurring operating expenditures have been
incurred over these periods. Additionally, the payout ratio of
losses has not fluctuated substantially over these periods.
Financing Activities
- --------------------
The Registrant paid no dividend on its common stock in 1999 or
1998.
The Registrant issued $10 million of Convertible Subordinated
Debentures on September 23, 1999 as described in Note 5 to the
Financial Statements of this Form 10-Q.
The Registrant has no other material outstanding capital
commitments which would require additional financing.
Year 2000
- ---------
The Registrant has been addressing the issues resulting from
computer programs which use two digits, rather than four digits to
define a year and which may be affected by the use of dates after
January 1, 2000 ("Y2K Issue"). The Registrant has divided the Y2K
Issue into the following three areas: (1) Internal Technology; (2)
External Technology; and (3) Insurance Issues.
This disclosure updates the disclosure made in the
Registrant's 1998 Annual Report on Form 10-K. All terms used
herein are as defined in that Report.
The Registrant has not experienced any significant Y2K related
problems from its Business Critical Internal Technology to date in
1999, including processing of policy information and changes, which
have, date information after January 1, 2000. A rating mechanism
for certain Business Critical Internal Technology, which represents
less than 5% of the Registrant's direct premium revenue, was
discovered in the 1999 second quarter to require additional Y2K
remedation, which was completed by October 31, 1999. The
Registrant is now complete with the certification of the LAN and PC
environments utilized in its Internal Technology as Y2K compliant.
All conversions of Other Internal Technology to Y2K compliant
versions have been completed.
The Registrant has expended less than $200,000 to address Y2K
issues in 1999, consisting primarily of the purchase of new PC's
and file servers for its LAN's which are Y2K compliant and are
replacing obsolete equipment. Estimated costs to complete work
related to the Y2K issues are currently less than $50,000.
The risks associated with the Registrant's Internal
Technology, External Technology and Insurance Issues with regard to
the Y2K Issue could result in an interruption in, or a failure of,
certain normal business activities or operations, in addition to
increased amounts of losses and loss expenses incurred. This could
materially and adversely affect the Registrant's results of
operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K Issue, the Registrant is unable to
determine at this time whether the consequences of Y2K failures
will have a material impact on the Registrant's results of
operations, liquidity and financial condition. The Registrant's
efforts to address the Y2K Issue are expected to significantly
reduce its level of uncertainty about the Y2K Issue. The Registrant
believes that, with the steps described herein, the possibility of
significant interruptions of normal operations should be reduced.
This disclosure regarding the Y2K Issue contains statements which
are forward looking and that involve risks and uncertainties and
qualify for the statutory safe harbor under the Private Securities
Litigation Reform Act of 1995. Future activities related to the
Y2K Issue may not adhere to the anticipated schedule and cost
estimates because the Registrant may encounter: (1) more problems
than anticipated in bringing its Internal Technology in compliance
with the Y2K Issue and not be able to provide adequate resources to
address those problems; (2) unexpected problems with External
Technology due to Business Partners who are not able to be in
compliance with the Y2K Issues despite their communications with
the Registrant to the contrary; and (3) public policy decisions
related to Insurance Issues which adversely affect the Registrant's
operations.
Safe Harbor Statement Under the Private Securities Litigation
- -------------------------------------------------------------
Reform Act of 1995
- ------------------
This Report on Form 10-Q contains statements that are not
historical facts and are considered "forward-looking statements"
(as defined in the Private Securities Litigation Reform Act of
1995), which can be identified by terms such as "believes",
"expects", "may", "will", "should", "anticipates", the negatives
thereof, or by discussions of strategy. Certain statements
contained herein are forward-looking statements that involve risks,
uncertainties, opinions and predictions, and no assurance can be
given that the future results will be achieved since events or
results may differ materially as a result of risks facing the
Registrant. These include, but are not limited to, economic,
market or regulatory conditions as well as risks associated with
Motor Club of America's entry into new markets; diversification;
catastrophic events; and state regulatory and legislative actions
which can affect the profitability of certain lines of business and
impede Motor Club of America's ability to charge adequate rates.
Accordingly, Motor Club of America's premium growth and
underwriting results has been and will continue to be potentially
materially affected by these factors.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Annual Meeting of Stockholders
- ------------------------------
The annual meeting of stockholders of Motor Club of America was
held on June 9, 1999, with the following result:
The total number of shares represented at the Annual Meeting in
person or by proxy was 1,897,195 of the 2,116,429 shares of
common stock outstanding and entitled to vote at the Meeting.
On the resolution to elect eight directors of the Registrant to
hold office until the 2000 Annual Meeting of Stockholders and until
their successors shall have been duly elected and qualified, the
nominees for director received the number of votes set forth
opposite their respective names:
Number of Votes
For Withheld
Archer McWhorter 1,802,886 94,309
Stephen A. Gilbert 1,802,886 94,309
Robert S. Fried 1,802,886 94,309
William E. Lobeck, Jr. 1,802,886 94,309
Alvin E. Swanner 1,802,886 94,309
Malcolm Galatin 1,788,286 108,909
Patrick J. Haveron 1,802,886 94,309
Archer McWhorter, Jr. 1,788,786 108,409
There were no abstentions or broker non-votes recorded. On the
basis of the above vote, all eight nominees were elected as
directors to serve until the expiration of their terms and until
their successors are duly qualified and elected.
On the resolution to approve the 1999 Stock Option Plan, there were
1,839,328 votes for the resolution, 52,525 votes against the
resolution and 5.342 votes abstaining.
On the resolution to amend Article Fourth of the Restated and
Amended Certificate of Incorporation of the Company to add
10,000,000 shares of undesignated preferred stock to the shares of
capital stock the Company is authorized to issue, there were
1,416,205 votes for the resolution, 224,489 votes against the
resolution and 4,337 votes abstaining.
Special Meeting of Stockholders
- -------------------------------
A special meeting of stockholders of Motor Club of America was held
on July 12, 1999, with the following result:
The total number of shares represented at the Annual Meeting in
person or by proxy was 1,363,368 of the 2,116,429 shares of
common stock outstanding and entitled to vote at the Meeting.
On the resolution to approve the Agreement and Plan of Merger,
dated as of March 16, 1999 between Motor Club of America and North
East Insurance Company, as amended and restated as of May 28, 1999
and of the merger of NEIC Insurance Acquisition Corporation, a
wholly-owned subsidiary of Motor Club of America, with and into
North East Insurance Company, there were 1,325,097 votes for the
resolution, 14,150 votes against the resolution and 23,400 votes
abstaining.
On the resolution to approve the alternative plan of financing the
merger, there were 1,145,947 votes for the resolution, 207,585
votes against the resolution and 9,115 votes abstaining.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a) Exhibits
None
b) Reports on Form 8-K
A report on Form 8-K, dated July 12, 1999 was filed
during the quarter for which this report is filed and was reported
in Item 5 - Other Events, regarding the Registrant's acquisition of
North East.
A report on Form 8-K, dated September 24, 1999 was filed
during the quarter for which this report is filed and was report in
Item 5 - Other Events, regarding the Registrant's acquisition of
North East.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
MOTOR CLUB OF AMERICA
s/Stephen A. Gilbert
By: Stephen A. Gilbert
President and Chief Executive
Officer
s/Patrick J. Haveron
By: Patrick J. Haveron
Executive Vice President
Chief Executive Officer and
Chief Financial Officer
s/Graham S. Payne
By: Graham S. Payne
Controller and Chief Accounting
Officer
Dated: November 15, 1999
<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 ended September 30, 1999
and the Consolidated Statements of Operations for the nine months ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 92,564,833
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 673,957
<MORTGAGE> 170,940
<REAL-ESTATE> 0
<TOTAL-INVEST> 93,409,730
<CASH> 12,101,566
<RECOVER-REINSURE> 23,063,595
<DEFERRED-ACQUISITION> 10,211,346
<TOTAL-ASSETS> 176,461,206
<POLICY-LOSSES> 74,869,967
<UNEARNED-PREMIUMS> 37,647,235
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 3,000,000
0
0
<COMMON> 1,058,215
<OTHER-SE> 26,600,687
<TOTAL-LIABILITY-AND-EQUITY> 176,461,206
39,643,239
<INVESTMENT-INCOME> 3,600,727
<INVESTMENT-GAINS> 5,365
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<BENEFITS> 28,413,303
<UNDERWRITING-AMORTIZATION> 11,658,039
<UNDERWRITING-OTHER> 1,674,327
<INCOME-PRETAX> 1,613,241
<INCOME-TAX> (513,558)
<INCOME-CONTINUING> 2,126,799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,126,799
<EPS-BASIC> 1.01
<EPS-DILUTED> 1.00
<RESERVE-OPEN> 58,335,143
<PROVISION-CURRENT> 34,860,185
<PROVISION-PRIOR> (3,614,340)
<PAYMENTS-CURRENT> 5,413,412
<PAYMENTS-PRIOR> 9,297,609
<RESERVE-CLOSE> 74,869,967
<CUMULATIVE-DEFICIENCY> (3,614,340)
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