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