-----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, GjSSq8AQL3rwXMHB2sddrHgSp2pk0BbOyay/85Kjb0oTQyxYGJzFlLkdiyLN5QoJ Z9CvP2xop1qc5bNklFWmTw== 0000068480-99-000009.txt : 19991117 0000068480-99-000009.hdr.sgml : 19991117 ACCESSION NUMBER: 0000068480-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99756110 BUSINESS ADDRESS: STREET 1: 95 ROUTE 17 SOUTH CITY: PARAMUS STATE: NJ ZIP: 07653 BUSINESS PHONE: 2012912000 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, 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
PART I FINANCIAL INFORMATION Item 1. Financial Statements MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) 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 ============ ============
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 ============ ============
(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, 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 ----------- ----------- ----------- -----------
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 ========= ========= ========= =========
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 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 ========= ==========
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)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) 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 =========== ========== ========= ==========
(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:
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 % ========= == ======== ===
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:
Three Months Ended ------------------------------------------ September 30, 1999 September 30, 1998 ------------------------------------------- Motor Club 81.6% 70.1% Preserver 80.3% 73.9% ---- ---- Total 81.3% 71.1% ==== ====
Nine Months Ended ----------------------------------------- September 30, 1999 September 30, 1998 ----------------------------------------- Motor Club 74.2% 68.9% Preserver 64.6% 62.1% ---- ---- Total 71.1% 67.2% ==== ====
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 EX-27 2 ARTICLE 7 FOR 3RD QTR 1999
7 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. 9-MOS DEC-31-1999 SEP-30-1999 92,564,833 0 0 673,957 170,940 0 93,409,730 12,101,566 23,063,595 10,211,346 176,461,206 74,869,967 37,647,235 0 0 3,000,000 0 0 1,058,215 26,600,687 176,461,206 39,643,239 3,600,727 5,365 109,579 28,413,303 11,658,039 1,674,327 1,613,241 (513,558) 2,126,799 0 0 0 2,126,799 1.01 1.00 58,335,143 34,860,185 (3,614,340) 5,413,412 9,297,609 74,869,967 (3,614,340)
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