-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQfLTPm2NvFtUnGRnGYd3+GU04eZbAo/D/XKt2iRCk+ZcL/bMqpWAEy83i1QrSTQ Btjo6NujW1JnIBe4YH6/HA== 0000068480-98-000007.txt : 19981118 0000068480-98-000007.hdr.sgml : 19981118 ACCESSION NUMBER: 0000068480-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOTOR CLUB OF AMERICA CENTRAL INDEX KEY: 0000068480 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 220747730 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-00671 FILM NUMBER: 98751454 BUSINESS ADDRESS: STREET 1: 95 ROUTE 17 SOUTH CITY: PARAMUS STATE: NJ ZIP: 07653 BUSINESS PHONE: 201-291-2112 MAIL ADDRESS: STREET 1: 95 ROUTE 17 SOUTH CITY: PARAMUS STATE: NJ ZIP: 07653-0931 10-Q 1 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, 1998 0-671 MOTOR CLUB OF AMERICA (Exact name of registrant as specified in its charter) New Jersey 22-0747730 (State of Incorporation) (I.R.S. Employer Identification No.) 95 Route 17 South, Paramus, New Jersey 07653 (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (201) 291-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x . No . 2,116,429 shares of Common Stock were outstanding as of November 13, 1998 1 of 25 MOTOR CLUB OF AMERICA FORM 10-Q SEPTEMBER 30, 1998 PART I PAGE ITEM 1. FINANCIAL STATEMENTS 3 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
PART I FINANCIAL INFORMATION Item 1. Financial Statements MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, 1998 1997 ASSETS Investments $71,800,851 $64,503,999 Cash and cash equivalents 5,358,258 222,761 Premiums receivable 13,877,332 7,809,567 Reinsurance recoverable on paid & unpaid losses and loss expenses 18,208,043 18,666,066 Notes and accounts receivable - net 142,940 124,669 Deferred policy acquisition costs 7,080,572 5,858,650 Fixed assets - at cost, less accumulated depreciation 1,628,422 1,586,649 Prepaid reinsurance premiums 478,654 695,245 Deferred tax asset - 657,362 Other assets 895,266 1,221,723 Total Assets $119,470,338 $101,346,691 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Losses and loss expenses $54,875,451 $50,246,778 Unearned premiums 23,637,633 19,285,757 Other liabilities 9,604,732 8,800,272 Note Payable 3,000,000 - Federal income taxes payable - current - 12,851 Deferred tax liability 946,482 - Total Liabilities 92,064,298 78,345,658 Shareholders' Equity: Common Stock, par value $.50 per share: (Authorized - 10,000,000 shares; issued and outstanding - 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 Unfunded accumulated benefit obligation in excess of Plan assets (4,529,100) (4,529,100) Net unrealized gains on debt securities, net of deferred taxes 1,770,085 597,758 Retained earnings 27,109,886 23,934,956 Total Shareholders' Equity 27,406,040 23,001,033 Total Liabilities and Shareholders' Equity $119,470,338 $101,346,691
(Financial statements should be read in conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Nine Months Ended For the Three Months Ended September 30, 1998 September 30,1997 September 30,1998 September 30,1997 Revenues: Insurance premiums (net of premiums ceded totaling $5,178,978, $5,265,869, $1,805,800 and $1,712,385) $39,481,046 $38,214,590 $13,358,347 $12,635,632 Net investment income 3,161,052 2,653,173 1,083,210 946,253 Realized gains on sales of investments 28,623 - 282 - Other revenues 129,560 168,005 39,299 48,923 Total revenues 42,800,281 41,035,768 14,481,138 13,630,808 Losses and Expenses: Insurance losses and loss expenses incurred (net of reinsurance recoveries totaling $2,414,667, $2,401,641, $1,258,035 and $1,607,180) 26,536,968 25,203,606 9,496,231 8,705,299 Amortization of deferred policy acquisition costs 10,385,652 11,085,228 3,135,082 3,483,588 Other operating expenses 1,537,357 1,271,278 509,523 343,255 Total losses and expenses 38,459,977 37,560,112 13,140,836 12,532,142 Income before Federal income taxes 4,340,304 3,475,656 1,340,302 1,098,666 Provision (benefit) for Federal income taxes: current 165,458 25,273 104,121 (27,168) deferred 999,916 814,940 220,721 280,924 Total provision for Federal income taxes 1,165,374 840,213 324,842 253,756 Net income $ 3,174,930 $ 2,635,443 $ 1,015,460 $ 844,910 Net income per common share: Basic $1.51 $1.27 $.48 $.40 Diluted $1.50 $1.26 $.48 $.40 Weighted average common and potential common shares outstanding: Basic 2,106,125 2,068,045 2,116,429 2,091,429 Diluted 2,120,882 2,097,832 2,117,268 2,112,448
(Financial statements should be read in conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 1998 September 30, 1997 Operating activities: Net income $ 3,174,930 $ 2,635,443 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and net amortization 444,565 413,908 Gain on sale of investments (28,623) - Changes in: Deferred policy acquisition costs (1,221,922) 487,843 Premiums receivable (6,067,765) 673,567 Notes and accounts receivable (18,271) 135,944 Other assets 329,083 65,014 Losses and loss expenses 4,628,673 988,171 Unearned premiums 4,351,876 (1,872,905) Federal income tax - current (15,480) (89,508) Federal income tax - deferred 999,916 814,940 Other liabilities 804,460 (1,308,359) Reinsurance recoverable on paid and unpaid losses 458,023 3,595,897 Prepaid reinsurance premiums 216,591 701 928 Net cash provided by operating activities $ 8,056,056 $7,241,883 Investing activities: Investments purchased (181,489,777) (69,247,424) Fixed assets purchased (426,299) (167,739) Proceeds from sales and maturities of investments 175,937,767 60,846,452 Net cash used in investing activities (5,978,309) (8,568,711) Financing activities: Note payable 3,000,000 - Common stock issued 57,750 235,284 Net cash provided by financing activities 3,057,750 235,284 Net increase (decrease) in cash and cash equivalents 5,135,497 (1,091,544) Cash and cash equivalents at beginning of period 222,761 3,476,948 Cash and cash equivalents at end of period $5,358,258 $2,385,404 Supplemental Disclosures of Cash Flow Information Interest paid $ 4,308 $ 7,096 Federal income taxes paid $ 95,400 $ 114,781
Non Cash Investing Activities: Invested assets and shareholders' equity increased by $1,172,327 and $104,298 in 1998 and 1997, 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)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) For the Nine Months Ended For the Three Months Ended September 30, 1998 September 30,1997 September 30, 1998 September 30, 1997 Net income $3,174,930 $2,635,443 $1,015,460 $ 844,910 Other comprehensive income: Unrealized gains on securities, net of tax: Unrealized holding gains arising during the period 1,191,218 104,298 972,879 324,743 Less: reclassification adjustment for gains included in earnings (18,891) - (186) - Other comprehensive income 1,172,327 104,298 972,693 324,743 Comprehensive income $4,347,257 $2,739,741 $1,988,153 $1,169,653
(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 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. 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 1997 Annual Report on Form 10-K. 2. Shareholders' Equity Shareholders' equity at September 30, 1998 and December 31, 1997 include the undistributed GAAP net income of Motor Club of America Insurance Company ("Motor Club") and Preserver Insurance Company ("Preserver") (collectively referred to as the "Insurance Companies"), the net assets of which exceed the consolidated net assets of the Registrant. 3. 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. 4. 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, 1998 and 1997, 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; and (ii) utilization of Net Operating Loss ("NOL") carryforwards. The Registrant's NOL carryforwards at September 30, 1998 are approximately $3.2 million. 5. Comprehensive Income Effective January 1, 1998, the Registrant adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires disclosure of comprehensive income in interim periods and additional disclosures of the components of comprehensive income on an annual basis. Comprehensive income includes all changes in equity during a period except those resulting from investments by and distributions to the Registrant's stockholders. The Registrant's comprehensive income is comprised of net income, unrealized gains or losses on securities and minimum pension liability adjustments. For the three and nine month periods ended September 30, 1998 and 1997, there were no adjustments to the minimum pension liability. 6. Long-Term Debt On September 14, 1998, the Registrant 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 Registrant 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 September 30, 1998, the interest rate under the Loan was 7.0625%. The Loan requires compliance with certain financial and operating covenants which limit, among other things, the incurrence of additional indebtedness by the Registrant and the Insurance Companies, investments by the Registrant, sales of assets and changes in control, along with maintenance by the Insurance Companies of their ratings by A.M. Best. At September 30, 1998, the Registrant was in compliance with these covenants. The commitment fee for any unborrowed portion of the Loan is 0.35%. 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. One hundred percent of the Registrant's insurance operations are in the State of New Jersey. The Registrant has two subsidiaries which are domiciled in the State of New Jersey and write property and casualty insurance, Motor Club and Preserver. The Registrant seeks to increase its identification as a provider of small commercial lines insurance. The Registrant also seeks to expand and diversify its insurance operations outside the State of New Jersey. The Registrant believes that both of these objectives can be attained through the acquisition of other insurance companies which present opportunities to write these product lines in different geographic areas. The Registrant expects to pursue these objectives during 1998 and beyond. The Registrant anticipates continuing revenue growth in the State of New Jersey through small commercial and ancillary coverages written by Preserver as well as through new private passenger automobile ("PPA") writings by Motor Club. The Registrant also anticipates continued reductions in its operating expenses, namely through the implementation of operating efficiencies which should reduce other overhead expenditures. New Jersey Private Passenger Automobile Insurance The New Jersey PPA market has historically been subject to regulatory and legislative volatility which has, at times, adversely affected the profitability of this line of business, despite New Jersey having among the highest average premium rate in the United States. New Jersey insurance law presently requires insurers to write all eligible personal automobile coverage presented to them from drivers with eight points or less on their driving record. This is commonly referred to as "take-all-comers". The New Jersey Department of Banking and Insurance ("NJ DOBI") may grant an insurer relief, by written notification, from writing new PPA pursuant to the take-all-comers provisions of New Jersey law if a showing finds that the insurer's premium to surplus ("leverage") ratio exceeds 3 to 1. Motor Club's present applicable leverage ratio for the twelve months ended September 30, 1998 is 2.52 to 1. 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 personal auto 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 current rating system which assesses surcharges to insureds' policies for specific driving violations and accidents with a broader-based tier rating system. The Registrant'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. In addition, additional PPA legislation was enacted in 1998 which will: 1) allow 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) revise 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) seek to limit lawsuits by claimants by redefining of the type of injury which would be grounds for litigation; 4) replace 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) appoint a special fraud prosecutor to increase enforcement of fraudulent acts committed against insurance companies; 6) remove 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) require 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 occur in 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, as the mandated rate reductions do not appear to be completely cost justified (based on information presently available) by the cost savings proposed in the legislation. Results of Operations On September 7, 1998, severe storms which affected New Jersey caused losses (principally in Preserver) which totaled $227,000 or $.11 basic net income per share, reducing the three and nine month results for the period ended September 30, 1998. Net income for the three and nine months ended September 30, 1998 was also reduced by $121,700 and $390,700, respectively, for the accrual of annual employee incentive awards, net of applicable taxes. In prior years, these awards were accrued in the fourth quarter for the entire year. The Registrant has begun to accrue these awards over the entire year given its continuing profitability. Excluding the storm losses and accruals in 1998, net income increased $519,000 or $.24 basic net income per share and $1,157,000 or $.53 basic net income per share in the three and nine months ended September 30, 1998 as compared to the same periods in 1997, respectively, primarily due to a lower expense ratio and improved investment income. The combined ratio (as adjusted) for the three and nine months ended September 30, 1998 was 94.9% and 95.3% as compared to 99.2% and 98.3% for the same periods in 1997, respectively. Revenues Insurance Premiums Insurance premiums increased $723,000 or 6% and $1,266,000 or 3% in the three and nine months ended September 30, 1998, compared to the same periods in 1997, respectively, the result of increases in new business written, along with lower reinsurance costs. The following table details the increases in Insurance Premiums for the three and nine month periods ended September 30, 1998 as compared to the same period in 1997:
Three Months Ended Nine Months Ended September 30, 1998 September 30, 1998 Increase in Increase in Net Net Class of Business Premium Percent Premium Percent Private Passenger Automobile $370,000 4% $237,000 1% Commercial Lines 185,000 11% 446,000 9% Personal Property 168,000 13% 583,000 16% Total $723,000 6% $1,266,000 3%
The increases in Commercial Lines and Personal Property were enhanced by $208,000 and $633,000 in savings on reinsurance programs for the three and nine month periods ended September 30, 1998, respectively, 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. Reinsurance costs related to the New Jersey Automobile Insurance Risk Exchange ("NJ AIRE") were $399,000 and $343,000 lower in the three and nine months ended September 30, 1998 as compared to the same periods in 1997. Please refer to Note F in the Notes to Financial Statements in the Registrant's Annual Report on Form 10-K for additional information on NJ AIRE. Effective July 1, 1998, Motor Club began converting its existing six month policies, which constitute 98% of its personal automobile book of business, to twelve month policies. This measure will further improve the Registrant's operating efficiency and service levels, and reduce expenses. The Registrant believes this is particularly important since the NJ DOBI has not proposed or adopted regulations which would provide for expedited prior approval rate increases, as required by legislation passed by the New Jersey Legislature in 1997. While conversion to twelve month policies will, for a one year period commencing July 1, 1998, temporarily increase the amount of premiums written by the Registrant, it will 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 made in 1997, enable Preserver to offer a broad, competitive product line which will grow steadily in the future. Preserver produced $557,000 in direct written premium in its workers' compensation program through September 30, 1998. Net Investment Income Net investment income increased $137,000 or 14% and $508,000 or 19% for the three and nine months ended September 30, 1998 as compared to the same periods in 1997, respectively. Average invested assets for the nine months period ended September 30, 1998 were $65,911,000 as compared to $53,527,000 for the same period in 1997. The investment portfolio (including short-term investments and excluding realized capital gains) yielded 6.39% for the nine months ended September 30, 1998 as compared to 6.21% for the same period in 1997, despite a generally lower interest rate environment. While the 23% increase in average invested assets principally contributed to the increase in investment income, the increase in investment yield during 1998 as compared to 1997 is primarily due to changes in the Registrant's investment policy made effective January 1, 1998, which are discussed in Liquidity and Capital Resources. Losses and Expenses Losses and Loss Expenses Incurred Losses and loss expenses incurred increased $791,000 or 9% and $1,333,000 or 5% in the three and nine months ended September 30, 1998 as compared to the same periods in 1997, respectively. Losses and loss expenses incurred for the three and nine months ended September 30, 1998 include $299,000 in losses related to the aforementioned September 7, 1998 severe storms in New Jersey. Loss ratios for the three and nine month periods ended September 30, 1998 and 1997 were:
Three Months Ended Nine Months Ended September 30, 1998 September 30,1997 September 30, 1998 September 30, 997 Motor Club 70.1% 71.4% 68.9% 67.6% Preserver 73.9% 60.9% 62.1% 60.4% Total 71.1% 68.9% 67.2% 66.0%
The personal automobile loss ratio for Motor Club remains in line with expectations which consider the increased amounts of new personal automobile written since 1995. The September storm increased Preserver's loss ratios for the third quarter and nine months by 7.9% and 2.7%, respectively. On a consolidated basis, these storms increased the loss ratio by 2.2% and 0.8% in the three and nine months ended September 30, 1998, respectively. Excluding these losses, the Preserver loss ratio reflects the generally positive trends which Preserver has experienced over the last two years (including lower reinsurance costs). Despite the higher loss and loss expense ratios for Motor Club on a comparative basis, no significant adverse trends were experienced or identified during the three and nine month periods ended September 30, 1998. Amortization of Deferred Policy Acquisition Costs and Other Operating Expenses As noted previously, other operating expenses in the three and nine month periods ended September 30, 1998 included $160,000 and $534,000, respectively, relating to the Registrant's accrual of employee incentive awards. In prior years, these awards were accrued in the fourth quarter for the entire year. Excluding these charges, expenses decreased $342,000 or 9% and $967,000 or 8% in the three and nine months ended September 30, 1998 as compared to the same periods in 1997, respectively, primarily due to the elimination of certain statutory assessments and lower operating expenses, particularly salaries. The decrease in expenses (as adjusted) allowed for a decrease in the expense ratio to 26.1% and 28.8% for the three and nine month periods ended September 30, 1998 as compared to 30.3% and 32.3% for the same periods in 1997. The Registrant remains committed to reducing its expense ratio by increasing revenues while limiting increases in its overhead expenditures. Financial Condition, Liquidity and Capital Resources The Registrant's book value increased to $12.95 per share at September 30, 1998 from $10.98 per share at December 31, 1997. The principal sources of the net increase were: (1) net income of $3,175,000 or $1.51 per share described previously; and (2) an increase of $1,172,000 or $.56 per share (net of deferred taxes) in the market value of fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115. These increases in book value were offset by the dilutive effects ($.10 per share) of the issuance of 22,000 shares of common stock upon exercise of employee stock options granted under the Stock Option Plans. See Note M of the Registrant's 1997 Consolidated Financial Statements for additional information regarding the Company's Stock Options Plans. 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 $8,056,000 and $7,242,000 in the nine months ended September 30, 1998 and 1997, respectively. Cash flow provided by operating activities in the nine months ended September 30, 1998 reflects the growth in the Insurance Companies' premium revenue, combined with the reduction in overhead expenses described previously. Net cash utilized in investing activities was $5,978,000 in 1998 and $8,569,000 in 1997. The amounts used reflect the investment of cash provided by operating activities. No unusual or nonrecurring operating expenditures have been incurred over these periods. Additionally, the payout ratio of losses has not fluctuated substantially over these periods. Effective January 1, 1998, the Registrant modified its investment policy to include certain investment grade asset-backed securities and allow for a higher percentage of investments in investment grade corporate bonds and mortgage-backed securities. The Registrant's duration for its investment portfolio was 3.3 years at September 30, 1998 as compared to 3.09 years at December 31, 1997. As part of the transition to this revised investment policy, the Registrant may periodically recognize limited realized gains and losses from sales of investments which are not deemed to be within the modified policy's guidelines. Management anticipates maintaining this approach to investing for the foreseeable future. Financing Activities The Registrant paid no dividend on its common stock in 1998 or 1997 and has no material outstanding capital commitments which would require additional financing. 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 A.M. Best Company, which the Registrant believes will be achieved during the 1998 fourth quarter. Please refer to Note 6 in the Notes to Condensed Consolidated Financial Statements for further information on the Loan. 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. 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 and administrative technology systems ("Other Internal Technology"). The Registrant's 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 September 30, 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 September 30, 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. This 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) communicated 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 policy; 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. Response 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 over the next year and will develop contingency plans as appropriate in 1999. 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. Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 This Report on Form 10-Q contains statements that are not historical facts and are considered "forward-looking statements" (as defined in the Private Securities Litigation Reform Act of 1995), which can be identified by terms such as "believes", "expects", "may", "will", "should", "anticipates", the negatives thereof, or by discussions of strategy. Certain statements contained herein are forward-looking statements that involve risks, uncertainties, opinions and predictions, and no assurance can be given that the future results will be achieved since events or results may differ materially as a result of risks facing the Registrant. These include, but are not limited to, economic, market or regulatory conditions as well as risks associated with Motor Club of America's entry into new markets; diversification; catastrophic events; and state regulatory and legislative actions which can affect the profitability of certain lines of business and impede Motor Club of America's ability to charge adequate rates. Accordingly, Motor Club of America's premium growth and underwriting results have been and will continue to be potentially materially affected by these factors. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits None b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MOTOR CLUB OF AMERICA By: Stephen A. Gilbert President By: Patrick J. Haveron Executive Vice President - Chief Financial Officer and Chief Accounting Officer Dated: November 13, 1998 EX-27 2 ARTICLE 7 FOR 3RD QTR 1998
7 These schedules contain summary financial information extracted from Motor Club of America's Consolidated Balance Sheets for the period ending September 30, 1998 and the Consolidated Statements of Operations for the nine months then ended and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1998 SEP-30-1998 71,428,752 0 0 0 372,099 0 71,800,851 5,358,258 0 7,080,572 119,470,338 54,875,451 23,637,633 0 0 0 0 0 1,058,215 26,347,825 119,470,338 39,481,046 3,161,052 28,623 129,560 26,536,968 10,385,652 1,537,357 4,340,304 1,165,374 3,174,930 0 0 0 3,174,930 1.51 1.50 50,246,778 18,397,248 2,283,171 8,538,873 15,784,089 54,875,451 2,283,171
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