Item 1. Description of Business
(a) The Registrant and a group of affiliated corporations, of which the Registrant is parent, are known as the "Motor Club of America Companies" (the "Motor Club of America Group") and provide property and casualty insurance services. The Registrant, incorporated in New Jersey in 1933 as "Automobile Association of New Jersey", is the successor to a New Jersey corporation organized in 1926. The present name was adopted in 1958.
The Registrant has two wholly-owned subsidiaries which write property and casualty insurance, Motor Club of America Insurance Company ("Motor Club") and Preserver Insurance Company ("Preserver"). Motor Club writes private passenger automobile ("PPA") business; Preserver writes small commercial, homeowners and ancillary coverages. Motor Club and Preserver are collectively referred to as the "Insurance Companies". The Insurance Companies are domiciled in the State of New Jersey.
On December 2, 1996, the Registrant sold its wholly-owned subsidiary, Motor Club of America Enterprises, Inc. ("Enterprises") to JVL Holding Properties, Inc. ("JVL"), a non-affiliated Oklahoma corporation. Enterprises had operated a motor club under agency programs in 22 states. See "Motor Club Operations" for further information.
(b) The Registrant does not have any reportable industry segments for the three fiscal years reported in this Form 10-K.
(c) See Items 1 (a) and 7. The Registrant and its subsidiaries distribute insurance policies through independent producers.
Fire and Casualty Insurance Operations
The Insurance Companies generate premium revenue in New Jersey through approximately 160 independent producers.
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 1997 and beyond.
Concurrently, the Registrant anticipates continuing its emphasis of the small commercial and ancillary coverages written by Preserver in the State of New Jersey. New PPA writings by Motor Club are expected to continue as well.
New Jersey Private Passenger Automobile
PPA direct premiums written by Motor Club increased 28% in 1996 as compared to 1995 and increased 16% in 1995 as compared to 1994. The increases in 1996 and 1995 were attributable to Motor Club writing new PPA insurance business, beginning in the first quarter of 1995, for the first time since 1990. During 1996 and 1995, Motor Club wrote $16,276,000 and $6,011,000 in new business, respectively.
Motor Club had received relief under certain of the exemptive provisions of the New Jersey Fair Automobile Insurance Reform Act of 1990 ("FAIRA"). See Item 7 - New Jersey Private Passenger Automobile Insurance.
Small Commercial and Homeowners Insurance
Preserver writes small commercial and ancillary coverages along with homeowners and related coverages. Direct premiums written by Preserver increased 10% in 1996 as compared to 1995 and 24% in 1995 as compared to 1994.
The Registrant believes Preserver offers a competitive variety of small commercial lines products and coverages which will enable this class of business to grow steadily in the future. See Item 7 - Results of Operations.
Motor Club Operations
As referred to previously, on December 2, 1996, the Registrant sold Enterprises to JVL for $1,125,000, resulting in a gain of $702,000.
Pursuant to an additional agreement entered into concurrent with the sale of Enterprises, the Registrant will provide certain services to Enterprises' members whose memberships are written with PPA policies written by Motor Club. In exchange, the Registrant will receive a servicing fee from JVL. The Registrant will also receive certain fees for other memberships written by Enterprises, as defined by this additional agreement. The Registrant expects these fees to total approximately $125,000 in 1997.
Employees
At December 31, 1996, the Motor Club of America Group had approximately 107 employees.
Item 2.
Item 2. Properties
Effective January 1, 1996, the Registrant entered into a lease at 95 Route 17 South, Paramus, New Jersey. The Registrant's home office is now located at this facility. The lease expires on December 31, 2005. The Registrant has an option to terminate the lease after six years, and an option to extend the lease for an additional five years after the initial lease term expires.
Effective March 31, 1996, the Registrant entered into a Mutual Release Agreement (the "Release") with Fairmount Central Urban Renewal Corporation ("Fairmount"), Property-Casualty Company of MCA ("PCCMCA") and MCA Insurance Company ("MCAIC").
Pursuant to the terms of the Release, the lease of the office building in Newark, New Jersey in which the Registrant and its subsidiaries formerly operated was terminated in exchange for $132,000. The lease was to run to December 31, 2011 at an annual rent of $324,000, plus expenses. The Release also enabled the Registrant to terminate the Joint Service Agreement ("JSA"). See Note Q to the Notes to Consolidated Financial Statements of Motor Club of America and Subsidiaries ("Notes") for further information.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the fourth quarter of the fiscal year covered by this Report.
Item Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K. Executive Officers of the Registrant.
At December 31, 1996, the executive officers of the Registrant and their offices with the Registrant and principal occupations were as follows:
Years in Which Officer Has Served Office and Principal as Name Age Occupation Such(3)
Archer McWhorter (1) 75 Chairman of the Board of Directors of the Registrant and Director of Companies in the Motor Club of America Group 1986-1996
Stephen A. Gilbert (2) 58 President, Chief Executive Officer, General Counsel and Director of the Registrant and President of the Companies in the Motor Club of America Group 1975-1996
Patrick J. Haveron (2) 35 Executive Vice President, Chief Financial Officer and Director of the Registrant and Companies in the Motor Club of America Group; Treasurer of Motor Club of America Insurance Company and Preserver Insurance Company 1988-1996
Peter K. Barbano 46 Secretary; Associate General Counsel 1993-1996
Myron Rogow 53 Vice President 1987-1996
George B. Meyers 69 Vice President 1971-1996
G. Bruce Patterson 52 Vice President 1989-1996
Charles J. Pelosi 51 Vice President 1983-1996
Theodore Green 50 Vice President 1987-1996
Norma Rodriguez 47 Treasurer 1984-1996
(l) Member of Executive Committee: For the past five years, Mr. McWhorter has been President (to January 1996) of Acceptance, Inc., a finance company; from 1995 to March 1997, Director of National Car Rental Systems, Inc. and affiliated corporations, a car rental enterprise ("NCR"); from 1995 to February 1997, one-third owner of Santa Ana Holdings, Inc., which exchanged its 90% stock interest in NCR for stock in Republic Industries, Inc.; from February 1997, consultant of NCR; consultant (to 1994) of Thrifty Rent-A-Car System, Inc., a car rental company; Director (to November 1992) of Baggage, Inc., an airline service and security company.
(2) Member of Finance Committee.
(3) Includes years during any portion of which the officer served as such. All terms of office are until the date of the 1997 Annual Meetings of Stockholders and Directors.
Except for Archer McWhorter, each of the officers devoted substantially all of their business time to the affairs of the Registrant or one or more other companies in the Motor Club of America Group.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
The Registrant's Common Stock trades on the NASDAQ Stock Market under the symbol MOTR. The following are the high and the low selling prices for each quarter of 1995 and 1996, as reported by the NASDAQ:
Quarter High Low I .............................. 4 1/2 2 5/8 II .............................. 5 1/8 4 III .............................. 7 1/2 4 3/8 IV .............................. 7 1/8 6 5/8
Quarter High Low I .............................. 7 6 3/8 II .............................. 8 1/4 6 1/2 III .............................. 9 3/8 7 1/8 IV .............................. 9 5/8 7 3/4
There were approximately 630 holders of record of the Common Stock of the Registrant as of December 31, 1996.
The Registrant paid no dividends in 1995 and 1996.
Item 6.
Item 6. Selected Financial Data
See Chart on Page 9.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview of Business Operations
The Registrant provides property and casualty insurance related services through the Insurance Companies. The Registrant also operated until December 1, 1996 a motor club through Enterprises. The Insurance Companies form the largest segment of operations, which accounted for 96% of 1996 revenues.
One hundred percent of the Registrant's insurance operations are in the State of New Jersey. Please refer to the New Jersey Private Passenger Automobile Insurance section for further information on the Registrant's insurance operations in the State of New Jersey.
The Registrant anticipates continuing revenue growth in the State of New Jersey through small commercial and ancillary coverages written by Preserver as well as through new PPA writings by Motor Club.
The Registrant 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 1997 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.
Insolvency of MCA Insurance Company
On August 24, 1992, Hurricane Andrew struck the South Florida coast, causing losses to MCAIC which exceeded its surplus as regards policyholders. MCAIC was placed in liquidation on October 23, 1992 by the Oklahoma District Court, Oklahoma. The Registrant in 1992 wrote off its investment in MCAIC and MCAIC's subsidiaries, Property-Casualty Company of MCA ("PCCMCA") and Fairmount Central Urban Renewal Corporation ("Fairmount").
On December 30, 1994, the Oklahoma District Court approved a settlement between the MCAIC Receiver and its subsidiaries and the Registrant and its subsidiaries (the "Settlement"). Under the Settlement, the Registrant agreed to pay MCAIC approximately $5.4 million, $2 million of which was paid on December 30, 1994. The Settlement also dismissed with prejudice the litigation previously brought (in August 1993) by the MCAIC Receiver against the Registrant regarding the ownership of Motor Club. The Settlement released all parties from all potential claims against one another, and put in place agreements regarding the handling of consolidated taxes, common cost sharing and service agreements.
On February 15, 1995, pursuant to the Settlement Agreement, MCAIC was paid in full.
The JSA entered into as part of the Settlement was retroactive to May 1, 1994 and provided for the rendering of certain services by the parties to the JSA and amounts due for these services, as well as the sharing of certain common expenses. Common expenses emanated from the parties' co-tenancy in the office building in which the parties' principal offices resided. The JSA was terminated effective March 31, 1996.
In relation to the insolvency of MCAIC, there are no additional liabilities, contingent or otherwise, which require accrual or disclosure in the accompanying financial statements.
New Jersey Private Passenger Automobile Insurance
Motor Club received relief from the New Jersey Department of Banking and Insurance ("NJ DOBI") from certain provisions of the FAIRA. Such relief included the following: (1) exemption from its obligation to pay surtaxes and assessments on business written until December 31, 1992. These exemptions allowed Motor Club to reverse previously accrued surtaxes and assessments of $2,003,000 as a reduction of expense in 1994; (2) exemption (until January 1995) from the take-all-comers provisions of FAIRA, which requires the writing of new PPA insurance; (3) payment in 1994 of only $2,275,000 of the Market Transition Facility ("MTF") deficit (legislation retired the entire MTF deficit, enabling Motor Club to eliminate its remaining $1,653,445 MTF liability in 1994 as a reduction of expense); and (4) non-participation in the Personal Automobile Insurance ("Assigned Risk") Plan, through December 1996.
The NJ DOBI may grant an insurer relief, by written notification, from writing new PPA pursuant to the take-all-comers provisions of FAIRA described previously, 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 December 31, 1996 is 3.31 to 1. Motor Club has not received any notifications from the NJ DOBI nor made any requests of the NJ DOBI in this regard.
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. The State of New Jersey also maintains an excess profits law which provides that PPA insurers whose profits exceed a statutorily computed maximum over a period of years will be required to pay such excess to its policyholders. It would appear that Motor Club does not have such excess profits.
Results of Operations
Net income increased $2,913,000 or $1.43 per share in 1996 as compared to 1995, after decreasing $2,618,000 or $1.28 per share in 1995 as compared to 1994.
The table below reconciles operating net income to reported net income for 1996, 1995 and 1994 with adjustments for certain unusual and non-recurring items:
(1) These non-recurring charges were incurred in connection with the termination of the lease of the office building in which the Registrant and its subsidiaries formerly operated.
(2) These non-recurring charges were incurred in connection with the Registrant's tenancy at its former office building and its subsequent relocation.
(3) These non-recurring charges were incurred in connection with the settlement of a previously reported dispute with a reinsurer of Motor Club.
(4) This is a non-recurring gain.
(5) The Registrant believes that it is more likely than not that it will generate future taxable income to realize the benefits of the net deferred tax asset, which consists primarily of net operating loss carryforwards. The Registrant has accordingly eliminated the valuation allowance on its net deferred tax asset in 1996, resulting in a benefit to net income. The ultimate amounts realized, however, could be reduced if actual amounts of future taxable income differ from projected future taxable income.
(6) See the New Jersey Private Passenger Automobile Insurance section for further information.
(7) See the Insolvency of MCA Insurance Company section for further information.
The increases in operating net income in 1996 and 1995 are attributable to higher revenues overall, improved expense and combined ratios and reduced expenses from operations, primarily salaries and related benefits, and in 1996, the Registrant's relocation.
Operating net income was decreased by $529,000 or $.26 per share in 1996 as compared to 1995 and increased by $1,039,000 or $.51 per share in 1995 as compared to 1994, due to changes in the rate assessed for the New Jersey Unsatisfied Claim and Judgment Fund ("UCJF"), which pertains to New Jersey Personal Injury Protection claims in excess of Motor Club's statutory retention limit of $75,000. The premium rates assessed were approximately 4.5%, 1.4% and 6.4% in 1996, 1995 and 1994, respectively.
Revenues
Insurance Premiums
Insurance premiums increased $9,893,000 or 28% in 1996 as compared to 1995, primarily as a result of increases in new business written in 1996, particularly PPA.
The following table depicts increases in net earned premiums for 1996 as compared to 1995: Increase in Net Program Premium Percent
Private Passenger Automobile $8,532,000 32% Commercial Lines 1,185,000 27% Personal Property 176,000 4% Total $9,893,000 28%
Insurance premiums increased $7,409,000 or 27% in 1995 as compared to 1994, primarily as a result of:(1) the termination in February 1994 of Preserver's 80% quota share reinsurance treaty; (2) the reduction in the UCJF assessment rate; and (3) increases in new business written in 1995, particularly PPA.
In 1995, Motor Club began to write new PPA business for the first time since March 1990.
The following table depicts the composition of direct premiums written for the five years through 1996:
Net Investment Income
Net investment income increased $323,000 or 12% in 1996 as compared to 1995. Average invested assets were $46,296,000 in 1996 as compared to $41,806,000 in 1995. The growth in average invested assets and cash from operations is the result of the growth in revenues previously described. The investment portfolio, including short-term investments, yielded 6.25% in 1996 as compared to 6.23% in 1995. The Registrant's investment philosophy is to hold fixed maturity investments until maturity.
Net investment income increased $34,000 or 1% in 1995 as compared to 1994. Average invested assets were $41,806,000 in 1995 as compared to $42,272,000 in 1994. The investment portfolio, including short-term investments, yielded 6.23% in 1995 as compared to 6.21% in 1994. Although interest rate levels declined significantly during 1995, the increase in the Registrant's investment yield reflects investments made at higher interest rate levels in 1994.
Realized Gains on Sales of Investments
The Registrant does not actively trade its investment portfolio. Securities have been occasionally sold to reflect operating requirements or business circumstances, which have resulted in realized gains and losses.
Other Revenues
Other revenues decreased $11,000 or 9% in 1996 as compared to 1995, and $72,000 or 37% in 1995 as compared to 1994. The decreases were due to reduced mortgage loan revenue and other miscellaneous income reductions.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $8,411,000 or 41% in 1996 as compared to 1995 and increased $5,451,000 or 36% in 1995 as compared to 1994.
The combined loss and loss expense ratios were 64.5% in 1996, 58.7% in 1995 and 54.8% in 1994.
Motor Club's loss and loss expense ratio was 61.4% for 1996 as compared to 57.3% for 1995, while the Preserver loss and loss expense ratio was 75.5% for 1996 as compared to 63.1% for 1995. Despite the higher loss and loss expense ratio on a comparative basis, no significant adverse trends were experienced or identified during 1996.
The increase in PPA loss and loss expense ratio in 1996 as compared to 1995 is largely due to the new business written by Motor Club since January 1995. The Registrant has reserved the ultimate development of this new business at a loss and loss expense ratio of 78%; however it will be approximately twelve to eighteen months before the underlying loss development experience on this new business fully emerges.
Excluding the loss and loss expense ratio on the new PPA business, the PPA loss and loss expense ratio was 52.2% in 1996, which compares with the loss and loss expense ratios of 55.1% in 1995 and 52.9% in 1994 on the same business. The Registrant believes that it has reserved for the new business conservatively, particularly as compared to its other PPA business.
As the Registrant continues to write additional new PPA business, PPA loss and loss expense ratios should generally continue to trend higher, although within levels that should remain profitable. Concurrently, as was the case in 1996, the Registrant also will continue to experience continued reductions in its expense ratio, which should result in lower overall combined ratios for the Registrant.
The increase in Preserver's loss and loss expense ratio in 1996 as compared to 1995 is primarily attributable to: (1) winter storm losses of $635,000; and (2) poor liability experience caused by a limited number of large losses greater than $35,000. Frequency of losses has generally been at acceptable levels. This increase has been partially offset by the improved experience (excluding winter storm losses) in the homeowners line of business.
This improvement is largely attributable to the Registrant implementing certain measures in 1995 in this homeowner book aimed at improving its profitability prospectively. These measures included: (1) redefining what risks constitute "standard" risks and "preferred" risks. The Registrant now defines a standard risk as any home constructed before 1960 and a preferred risk is any home constructed after 1960. Previously, this definition was based on the value of a home; and (2) in November 1995, a 7.3% rate increase on standard risks (as now defined).
Amortization of Deferred Policy Acquisition Costs
Acquisition costs incurred increased $2,856,000 or 25% in 1996 as compared to 1995 and increased $788,000 or 7% in 1995 as compared to 1994. The increase in acquisition related costs generally corresponds to the premium growth previously described.
Other Operating Expenses
Other operating expenses in 1996 included the following: (1) certain non-recurring operational expenses (totaling $328,000 or $.16 per share) relating to the Registrant's tenancy at its former office building and relocation; and (2) a $197,000 or $.10 per share charge incurred associated with the settlement of a previously reported dispute with a reinsurer of Motor Club.
Excluding these non-recurring items, other operating expenses decreased $2,035,000 or 37% in 1996 as compared to 1995.
In February 1996, the Registrant relocated its headquarters to a smaller facility commensurate with the scope of its operations. This relocation will reduce the Registrant's expenses over $500,000 annually.
The decrease in other operating expenses in 1996 as compared to 1995 resulted from lower operating expenses in general, including lower salaries and the savings realized from the aforementioned relocation.
The decrease in expenses has allowed for a decrease in the expense ratio (as adjusted for the non-recurring charges described above) to 36.8% for 1996 as compared to 43.9% for 1995. This decrease is the realization of the Registrant's previously stated strategy to increase its revenue while decreasing its overhead expenditures.
The Registrant expects to reduce its expenses and expense ratio further by converting its information systems to a smaller, more contemporary computing platform which will allow for more efficient operations and by re-doubling the efforts made previously to reduce all unnecessary overhead expenditures.
During 1995 these expenditures decreased $990,000 or 15% as compared to 1994. The cause of the decrease in 1995 as compared to 1994 was reduced salaries, benefits and professional services.
Prior to 1995, the Registrant's expense ratio had increased because the reduction of overhead expenditures had not kept pace with the reduction in the Registrant's insurance premiums. With the commencement of new PPA writings in 1995, the Registrant began to realize economies of scale which enhanced the reduction of expenses and consequently expense ratio.
See the New Jersey Private Passenger Automobile section for an extended discussion of the New Jersey expenses mandated by FAIRA.
Lease Termination Charge
In 1996, the Registrant recorded $359,000 in lease termination charges on its former headquarters location in Newark, New Jersey, which consists of: (1) $132,000 for the termination of the lease; and (2) $227,000 for the charge-off of leasehold improvements on this facility. See Item 2 - Properties and Note P in the Notes for further information.
State Mandated Assessments
The Registrant is subject to certain assessments and required participations in mandated pools, associations and funds in the State of New Jersey. The most substantial assessments have been the FAIRA surtaxes and assessments. The surtaxes expired in 1992; the assessments are schedule to expire after 1997. FAIRA assessments totaled $962,000, $843,000 and $620,000 in 1996, 1995 and 1994, respectively.
During 1997, Motor Club will participate in the Assigned Risk Plan. Motor Club will pay a fee of approximately $300,000 to a servicing carrier rather than processing these policies. See the section on New Jersey Private Passenger Automobile for further information on these items.
Motor Club of America Membership Program
Motor Club membership fees written through Enterprises decreased $30,000 or 3% in 1996 as compared to 1995, and decreased $124,000 or 10% in 1995 as compared to 1994. As previously described, the Registrant operated Enterprises through November 30, 1996; the writings for 1996 are therefore only included through that date.
Loss Reserve Disclosures
Reserves for unpaid losses and loss expenses at any report date reflect the estimate of the liabilities for the ultimate net loss of reported claims and estimated incurred but not reported claims.
The liability for unpaid losses and loss expenses are determined using case-basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and loss expenses through December 31 of each year. These estimates are continually reviewed and refined as historical experience develops, new information becomes known and the effects of trends in future claim severity and frequency are considered.
The liabilities are adjusted accordingly with such adjustments being reflected in the current year operations. No trends that are considered abnormal have been identified as of the most recent evaluation date, December 31, 1996.
The Registrant's insurance subsidiaries generally reinsure all risks in excess of $150,000 for casualty lines and $75,000 for property lines.
The following table presents a reconciliation of beginning and ending liability balances for 1996, 1995 and 1994 reported under generally accepted accounting principles ("GAAP"):
The reconciliation shows a 1996 deficiency of $904,000 in the liability recorded at December 31, 1995. The deficiency is primarily the result of the latent development of a limited number of large losses incurred in 1995 and prior. Management believes this development does not indicate any adverse trends in the Registrant's loss development.
The difference between the reserves for unpaid losses and loss expenses reported in the Registrant's consolidated financial statements prepared in accordance with GAAP and those reported in the annual statements filed by the Insurance Companies with State insurance departments in accordance with Statutory Accounting Practices ("SAP") are reconciled as follows:
December 31, 1996 1995 1994 (thousands of dollars) Reserves for unpaid losses and loss expenses on a SAP basis (net of reinsurance recoverables on unpaid losses) $30,686 $25,519 $24,473 Reinsurance recoverables on unpaid losses and loss expenses 19,553 16,415 19,309 Anticipated salvage and subrogation recoveries (2,572) (2,110) (2,117) Reserves for unpaid losses and loss expenses, as reported in the Registrant's GAAP basis financial statements $47,667 $39,824 $41,665
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. These anticipated trends are monitored based on actual development and are modified if necessary.
The table on Page 25 presents the development of the GAAP balance sheet liabilities for 1992 through 1996; data is presented for those years in which the Insurance Companies had operations.
The top line on the table shows the estimated liability for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss expenses for claims arising in that and all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The upper portion of the table shows the re-estimated amount of the previously recorded liability, based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for development years. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year.
In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of deficiency relating to losses settled in 1996, but incurred in 1993, will be included in the cumulative deficiency for the 1996 year.
This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
Financial Condition, Liquidity and Capital Resources
The Registrant's book value increased to $9.17 per share at December 31, 1996 from $6.89 per share at December 31, 1995. The principal sources of the net increase are: (1) net income of $5,330,000 or $2.61 per share described previously; plus (2) an increase in shareholders' equity of $487,000 or $.24 per share due to the reduction of the minimum required pension liability for the defined benefit pension plan sponsored by the Registrant; offset by (3) a reduction in shareholders' equity of $1,122,000 or $.55 per share due to the decrease in the fair value of the fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115 ("Accounting for Certain Investments in Debt and Equity Securities").
The reduction in the minimum pension liability was the result of: (1) an increase in the discount rate used to compute pension plan liabilities to 7.50% at December 31, 1996, from 7.25% at December 31, 1995; and (2) the performance of the Plan assets was in excess of the expected return on these assets. See Note K of the Notes for additional information regarding the Registrant's minimum pension liability.
The Registrant's book value increased to $6.89 per share at December 31, 1995 from $5.16 per share at December 31, 1994. The principal sources of the net increase are: (1) net income of $2,417,000 or $1.18 per share; plus (2) an increase of $2,661,000 or $1.30 per share in the fair value of the fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115; offset by (3) a reduction in shareholders' equity of $1,545,000 or $.75 per share for recognition of additional minimum required pension liability. The additional minimum required liability was the result of a reduction in the discount rate used to compute pension plan liabilities to 7.25% at December 31, 1995 from 8.25% at December 31, 1994.
On July 1, 1996, the Insurance Companies obtained catastrophe reinsurance coverage in the increased amount of $29.5 million in excess of $500,000 with only a modest increase in premium.
The Insurance Companies' need for liquidity arises primarily from the obligation to pay claims. The primary sources of liquidity are premiums received, collections from reinsurers and proceeds from investments.
Reserving assumptions (except as noted in Loss Reserve Disclosures) and payment patterns of the Insurance Companies did not materially change from the prior year and there were no unusually large retained losses resulting from claim activity. Unpaid losses are not discounted.
Operating and Investing Activities
Net cash provided by operating activities was $6,851,000 in 1996 and $3,807,000 in 1995. Net cash utilized by operating activities was $3,060,000 in 1994. The higher amounts in both 1996 and 1995 as compared to 1995 and 1994, respectively, are attributable to the growth in premium revenue combined with the reduction in overhead expenses described previously.
Net cash utilized in investing activities was $6,015,000 in 1996 and $3,255,000 in 1995. Net cash provided by investing activities was $3,458,000 in 1994. The amounts used in both 1996 and 1995 reflect the investment of cash provided by operating activities; the amounts used in 1996 were offset by the $1,125,000 proceeds from the sale of Enterprises described previously. The amount provided in 1994 reflects the liquidation of investments required for the cash utilized by operating activities.
Aside from the changes in operating expenditures noted previously, particularly the State mandated assessments related to FAIRA, no unusual or nonrecurring operating expenditures have been incurred over this period.
The Registrant's cash and cash equivalents at year end 1996 were enhanced by the proceeds of the sale of Enterprises. As part of its strategy to expand and diversify its insurance operations, the Registrant seeks to increase the level of cash and cash equivalents available to enable the execution of this strategy.
The payout ratio of losses has not fluctuated substantially over this period. Cash flow from operations is expected to continue to increase as the Registrant increases its revenue through additional premium writings, specifically commercial lines and PPA and continues to reduce its expenses and expense ratio. This will be offset somewhat by the development and payment of losses on the new PPA which Motor Club is writing.
Management has maintained, in its opinion, a conservative investing philosophy. At December 31, 1996 and 1995, the Registrant's investment portfolio was comprised of the following types of securities:
December 31, 1996 December 31,1995 Carrying Carrying Amount Percent Amount Percent Taxable Fixed Maturities $47,927,093 95.3% $44,630,457 97.9% Short Term Investments 1,745,455 3.5% 200,719 0.4% Mortgage Loans 634,492 1.2% 766,101 1.7% Total Investment Portfolio $50,307,040 100.0% $45,597,277 100.0%
Tax exempt securities have not been acquired. Management believes that the current tax position of the Registrant, which includes substantial net operating loss carryforwards, dictates the exclusion of tax exempt securities from the portfolio, which historically provide substantially lower yields on a before tax basis than taxable securities.
Taxable fixed maturities consist of direct obligations of the United States Government, obligations of United States Government agencies, Government National Mortgage Association mortgage-backed securities ("GNMA's") and high quality corporate fixed maturity issues. The goal of the portfolio is to enhance investment returns within the structure of limited credit risk assumption which management has utilized, with evaluations of portfolio duration made in relation to the current interest rate environment.
At December 31, 1996 and 1995, the taxable fixed maturity portfolio consisted of the following types of securities:
December 31, 1996 December 31, 1995 Carrying Carrying Amount Percent Amount Percent United States Treasuries $27,758,603 57.9% $25,924,344 58.1% United States Government Agencies 6,637,485 13.9% 5,864,485 13.1% GNMA Mortgage-Backed Securities 8,363,964 17.4% 7,798,432 17.5% Corporate Bonds 5,167,041 10.8% 5,043,196 11.3% Total $47,927,093 100.0% $44,630,457 100.0%
The fixed maturity portfolio duration at December 31, 1996 and 1995 is 3.35 and 3.32 years, respectively.
United States Treasuries are weighted towards maturities of five years or less, to reduce interest rate risk and match the Insurance Companies claims payout ratio; corporate obligations are generally weighted towards five to ten year maturities, to take advantage of the yield curve; the average life of the GNMA portfolio has been maintained at approximately 10 years to reduce interest rate risk.
Please refer to Note D in the Notes for statistics regarding portfolio maturity composition.
The Registrant has not acquired, nor are there plans to acquire, below investment grade or "junk" bonds. Ninety-seven percent of the fixed maturity portfolio as of December 31, 1996 is graded Class 1 according to the National Association of Insurance Commissioners' valuation system. This classification is reserved for only the highest quality securities, generally rated A or better by two major rating services.
Management anticipates continuing this minimum risk approach to investing for the foreseeable future.
Management believes that the mix of investments in both type and maturity length is appropriate in order to preserve capital, take advantage of investment opportunities as they are presented, and provide the Registrant and its subsidiaries with sufficient liquidity to react to economic and business circumstances as they evolve.
As noted previously, the investment portfolio yielded 6.25% in 1996 as compared to 6.23% in 1995.
Including realized gains and losses, the investment portfolio yielded 6.26% in 1996 as compared to 6.36% in 1995.
Financing Activities
The Registrant paid no dividend on its common stock in 1996, 1995 and 1994.
The Registrant has no material outstanding capital commitments which would require additional financing. In 1995 the Registrant repaid the $2,750,000 borrowed from Midlantic Bank, N.A. in conjunction with the Settlement with the MCAIC Receiver.
Risk-Based Capital
The National Association of Insurance Commissioners ("NAIC") has adopted Risk-Based Capital ("RBC") requirements for property/casualty insurance companies, to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, credit risk, loss reserve adequacy, and other business factors. The RBC formula is used by State insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. Regulatory compliance is determined by a ratio of the insurer's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Insurers below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The Insurance Companies' ratios are in excess of that required, therefore requiring no action.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 129 - Disclosure of Information About Capital Structure. This Statement becomes effective for financial statements for periods ending after December 15, 1997. This Statement establishes standards for disclosing information about an entity's capital structure. The Registrant does not believe that this Statement will materially change its disclosures regarding its capital structure.
In February 1997, FASB issued SFAS No. 128 - Earnings per Share. This Statement becomes effective for financial statements issued for periods ending after December 15, 1997. This Statement establishes standards for computing and presenting earnings per share ("EPS"). This Statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, which the Registrant is considered to have, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement requires restatement of all prior-period EPS data presented. The Registrant anticipates presenting its EPS in compliance with the dual presentation standards mandated by this Statement at December 31, 1997.
In October 1995, FASB issued SFAS No. 123 - Accounting for Stock-Based Compensation. This Statement became effective beginning in the first quarter of 1996 and applies to options granted in 1995 and subsequent years. No options were granted in 1995 and 1996 and therefore the adoption of this Statement does not have any effect on the Registrant's financial position or results of operations. The Registrant will continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees and will provide pro forma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS No. 123 had been applied in measuring compensation expense.
Item 8.
Item 8. Financial Statements and Supplementary Data See Item 14 (a).
Item 9.
Item 9. Disagreements with Accountants on Accounting and Financial Disclosures
None PART III
Items 10, 11, 12 and 13 are omitted from this Report on Form 10-K; the Registrant shall file a definitive proxy statement pursuant to Regulation 14A not later than April 30, 1997, which is 120 days after the close of the fiscal year of the Registrant.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) (1) The following financial statements are included in Part II, Item 8: Page (s)
Report of Independent Accountants Consolidated Balance Sheets at December 31, 1996 and 1995 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 to Notes to Consolidated Financial Statements to
(2) The following financial statement schedules for the years 1996, 1995 and 1994 (pursuant to Rule 5-04 of Regulation S-X) are presented herewith:
Schedule I - Summary of Investments - Other than Investments in Related Parties* Schedule II - Condensed Financial Information of Registrant to
Schedule IV - Reinsurance*
Schedule V - Valuation and Qualifying Accounts and Reserves
Schedule VI - Supplemental Information Concerning Property/ Casualty Insurance Operations*
*Presented pursuant to Rule 7-05 of Regulation S-X.
Schedules other than those mentioned above are omitted because the conditions requiring their filing do not exist, or because the information is given in the financial statements filed herewith, including the notes thereto.
(b) Exhibits:
Exhibit No. Description Reference
3-a Restated and Amended Certificate Exhibit 1(i) to Motor of Incorporation of Motor Club of Club of America's America, dated June 12, 1972 Annual Report on Form 10-K for fiscal year ended December 31, 1972
3-l By-Laws of Motor Club of America, Exhibit 3-l to Motor effective March 15, 1989 Club of America's Annual Report on Form 10-K for fiscal year ended December 31, 1988
3-m By-law Amendment of Motor Club Exhibit 3-m to Motor of America, effective Club of America's August 3, 1994 Form 8-K dated July 21, 1994
4-a Specimen Certificate Exhibit 4 to File representing Common Stock, No. 2-39996 on $.50 par value Form S-1
10-o Motor Club of America 1987 Stock Exhibit 10-o to Motor Option Plan Club of America's Annual Report on Form 10-K for fiscal year ended December 31, 1987
10-p Specimen copy of Motor Club of Exhibit 10-p to Motor America 1987 Stock Option Club of America's Agreement Annual Report on Form 10-K for fiscal year ended December 31, 1987
10-q Motor Club of America 1992 Exhibit A to Motor Stock Option Plan Club of America's Proxy Statement for fiscal year ended December 31, 1991
10-r Specimen copy Motor Club of Exhibit 10-r to America 1992 Stock Option Motor Club of Plan Agreement America's Annual Report on Form 10-K for fiscal year ended December 31, 1992
10-s Settlement Agreement between Exhibit 99 to Motor Motor Club of America et als. Club of America's and Receiver of MCA Insurance Form 8-K dated Company in Liquidation et als. December 20, 1994 and related documents
10-t Term Note between Motor Club Exhibit 99-B to Motor of America and Midlantic Bank, Club of America's N.A., and related documents Form 8-K dated December 20, 1994
10-u Order dated December 30, 1994 Exhibit 99-C to Motor Approving Settlement between Club of America's Motor Club of America et als and Form 8-K dated Receiver of MCA Insurance December 30, 1994 Company in Liquidation et als and related conformed documents
10-v Cash Collateral Agreement between Exhibit 99-D to Motor between Motor Club of America Club of America's and Principal Shareholders Form 8-K dated December 30, 1994
10-w Term Note between Motor Club Exhibit 99-E to Motor of America and Midlantic Bank, Club of America's N.A., and related documents Form 8-K dated December 30, 1994
10-x Stock Purchase Agreement Exhibit 99-F to Motor between Motor Club of America Club of America's and JVL Holding Properties, Inc. Form 8-K dated December 2, 1996
10-y Agreement dated December 2, 1996 Exhibit 99-G to Motor between Motor Club of America Club of America's and Motor Club of America Form 8-K dated Enterprises, Inc. December 2, 1996
22 Subsidiaries of Motor Club of America Page 38
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MOTOR CLUB OF AMERICA (Registrant)
Dated: March 27, 1997 By /s/ Stephen A. Gilbert Stephen A. Gilbert President, General Counsel and Director
Dated: March 27, 1997 By /s/ Patrick J. Haveron Patrick J. Haveron Executive Vice President, Chief Financial Officer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Dated: March 27, 1997 By /s/ Archer McWhorter Archer McWhorter Chairman of the Board and Director
Dated: March 27, 1997 By /s/ Alvin E. Swanner Alvin E. Swanner Director
Dated: March 27, 1997 By /s/ Robert S. Fried Robert S. Fried Director
MOTOR CLUB OF AMERICA
Exhibit (22) Subsidiaries of the Registrant.
The following are the subsidiaries of the Registrant as of March 27, 1997: State of Name Organization
Motor Club of America Finance Company New Jersey
Motor Club of America Insurance Company New Jersey
Preserver Insurance Company New Jersey
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Motor Club of America:
We have audited the consolidated financial statements and the financial statement schedules of Motor Club of America and Subsidiaries listed in Item 14(a) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Motor Club of America and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York March 12, 1997
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1996 1995
ASSETS Investments: Fixed maturity securities, available- for-sale, at fair value (amortized cost $47,657,056 - 1996 and $43,238,185 - 1995) $47,927,093 $44,630,457 Mortgage loans on real estate - at the unpaid principal amount 634,492 766,101 Short-term investments, at fair value which approximates cost 1,745,455 200,719 Total investments 50,307,040 45,597,277 Cash and cash equivalents 3,476,948 2,630,909 Premiums receivable 7,801,583 7,135,231 Reinsurance recoverable on paid and unpaid losses & loss expenses 21,767,329 17,638,854 Notes and accounts receivable 248,875 209,953 Deferred policy acquisition costs 5,761,496 5,069,222 Fixed assets - at cost, less accumulated depreciation 1,826,753 1,219,125 Federal income tax recoverable - current - 13,680 Prepaid reinsurance premiums 1,145,944 1,193,098 Deferred tax asset 2,075,535 - Other assets 1,121,599 1,251,419 Total assets $95,533,102 $81,958,768
LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Losses and loss expenses $47,666,856 $39,823,552 Unearned premiums and membership fees ($524,896 -1995) 18,934,200 17,363,031 Commissions payable 1,444,660 1,357,752 Accounts payable 595,785 302,791 Accrued expenses 6,770,544 7,673,251 Drafts outstanding 1,309,437 1,357,315 Federal income taxes payable - current 25,969 - Total liabilities 76,747,451 67,877,692 Shareholders' Equity: Common Stock, par value $.50 per share: Authorized - 10,000,000 shares; issued and outstanding - 1996 2,047,504, 1995 - 2,043,754 shares 1,023,752 1,021,876 Paid in additional capital 1,730,508 1,722,539 Unfunded accumulated benefit obligation in excess of Plan assets (4,690,900) (5,177,900) Net unrealized gains on debt securities 270,037 1,392,415 Retained earnings 20,452,254 15,122,146 Total Shareholders' Equity 18,785,651 14,081,076 Total Liabilities and Shareholders' Equity $95,533,102 $81,958,768
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements. [CAPTION]
(a) Par value $.50 per share; authorized - 10,000,000 shares.
The accompanying notes are an integral part of these consolidated financial statements.
(Continued)
Supplemental Disclosures of Cash Flow Information
(1) Total interest paid was $8,166 (1996), $33,934 (1995) and $53 (1994). (2) Total Federal income taxes paid was $38,462 (1996), $52,000 (1995) and $54,227 (1994).
The accompanying notes are an integral part of these consolidated financial statements.
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies:
(a) Basis of Presentation and Principles of Consolidation:
The consolidated financial statements of Motor Club of America (the "Company") include its accounts and those of its wholly-owned subsidiary companies. The financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with these practices requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
The Company's insurance subsidiaries, Motor Club of America Insurance Company ("Motor Club") and Preserver Insurance Company ("Preserver") are collectively referred to as the "Insurance Companies". All material intercompany items and transactions have been eliminated in consolidation.
(b) Nature of Operations:
The Company is a New Jersey corporation which owns the Insurance Companies and a finance company. The Company's subsidiary, Motor Club of America Enterprises, Inc., ("Enterprises") was sold on December 2, 1996 (See Note B, Sale of Subsidiary for further details). Enterprises operates a motor club. The Insurance Companies engage in property and casualty insurance produced by independent agents; one hundred percent of the Insurance Companies' operations are conducted in the State of New Jersey. The Company generates 96% of its revenues from insurance revenues. There is one agent who individually produces more than ten percent of the Company's insurance premiums.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (Continued):
(c) Insurance Premiums:
Insurance premiums are credited to income by the monthly pro rata method over the terms of the contracts. Contracts for private passenger automobile insurance are for terms of six months. Insurance contracts for policies other than private passenger automobile are for terms of twelve months.
(d) Motor Club Operations:
Motor Club membership fees are credited to income by the straight-line method over the terms of the contracts. Commission expense is deferred and amortized in the same manner as the related unearned membership fees. Other related costs are charged to expense as incurred.
(e) Investments:
All of the Company's fixed maturity securities are classified as available-for-sale securities, and are therefore reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of applicable deferred taxes.
The Company recognizes income for the mortgage-backed bond portion of its fixed maturity securities portfolio using the constant effective yield method. Premium and discount amounts are amortized based on the stated contractual life of the securities.
When actual prepayments differ from this assumption, the effective yield is recalculated to reflect actual payments to date. The net investment in the security is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. That adjustment is included in net investment income.
Gains and losses on investments are recognized when investments are sold or redeemed on a specific certificate basis.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (Continued):
(f) Other Revenues:
Other revenues consist principally of interest on mortgage loans.
(g) Losses and Loss Expenses:
The estimated liability for losses is based on (i) the accumulation of cost estimates for unpaid losses reported prior to the close of the accounting period; and (ii) estimates of incurred but unreported losses based upon past experience; less (iii) estimates of anticipated salvage and subrogation recoveries. In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.
Changes to the estimated liabilities are reflected in the results of operations currently.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. The liability for loss expenses is based on estimates of expenses to be incurred in the settlement of claims.
(h) Deferred Policy Acquisition Costs:
Deferred policy acquisition costs are costs that vary with and are directly related to the production of new and renewal business. Such costs include commissions, premium taxes, certain State mandated assessments and certain underwriting and policy issuance costs which are deferred when incurred (subject to a maximum) and amortized to income as the related written premiums are earned. Investment income is anticipated in determining whether a premium deficiency relating to these costs exists.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (Continued):
(i) Fixed Assets:
Depreciation on leasehold improvements is computed by the straight-line method over the remaining lease term. Depreciation on furniture and fixtures, data processing and other equipment, is computed by the straight-line method over the estimated useful lives, ranging from three to twenty years.
Expenditures for major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged to income as incurred. When property units are retired, or otherwise disposed of, the cost thereof and related accumulated depreciation are eliminated from the accounts. Any gain or loss on disposal is credited or charged to operations.
(j) Federal Income Taxes:
Deferred Federal income taxes are provided for temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to apply in the years in which the differences are expected to reverse.
(k) Statement of Cash Flows:
For purposes of the statement of cash flows, the Company considers demand deposits held with financial institutions and money market mutual fund holdings to be cash equivalents.
(l) Per Share Data:
Earnings per share are computed based upon the weighted average number of common shares outstanding during each year.
Note B - Sale of Subsidiary:
On December 2, 1996, the Company sold Enterprises to JVL Holding Properties, Inc., ("JVL") a non-affiliated Oklahoma corporation, for $1,125,000. As a result of this transaction, the Company recorded a gain of $702,419.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Sale of Subsidiary (Continued):
Pursuant to an additional agreement entered into concurrent with the sale, the Company will provide certain services to members whose memberships are written with private passenger automobile ("PPA") policies written by Motor Club. In exchange the Company will receive a servicing fee from JVL. The Company will also receive certain fees for other memberships written by Enterprises, as defined by this additional agreement. During 1996, these fees collectively totaled $11,000.
Note C - PPA Business:
Motor Club received relief from the New Jersey Department of Banking and Insurance ("NJ DOBI") from certain provisions of the New Jersey Fair Automobile Insurance Reform Act of 1990 ("FAIRA"). Such relief included the following: (1) exemption from its obligation to pay surtaxes and assessments on business written until December 31, 1992 (these exemptions allowed Motor Club to reverse previously accrued surtaxes and assessments of $2,003,000, as a reduction of expense in 1994); (2) exemption (until January 1995) from the take-all-comers provisions of FAIRA, which requires the writing of new PPA insurance; (3) payment in 1994 of only $2,275,000 of the Market Transition Facility ("MTF") deficit (legislation retired the entire MTF deficit, enabling Motor Club to eliminate its remaining $1,653,000 MTF liability in 1994 as a reduction of expense); and (4) non-participation in the Personal Automobile Insurance ("Assigned Risk") Plan, through December 1996.
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. The State of New Jersey also maintains an excess profits law which provides that PPA insurers whose profits exceed a statutorily computed maximum over a period of years will be required to pay such excess to its policyholders. It would appear that Motor Club does not have such excess profits.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Investments:
(a) The amortized cost and estimated fair value of investments in fixed maturity securities at December 31, 1996 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government securities $34,036,186 $543,591 ($183,689) $34,396,088 GNMA Mortgage- backed securities 8,409,509 63,883 (109,428) 8,363,964 Corporate securities 5,211,361 37,865 (82,185) 5,167,041 Total $47,657,056 $645,339 ($375,302) $47,927,093
The amortized cost and estimated fair value of investments in fixed maturities at December 31, 1995 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value U.S. Government securities $30,583,393 $1,221,968 ($16,532) $31,788,829 GNMA Mortgage- backed securities 7,684,299 150,474 ( 36,341) 7,798,432 Corporate securities 4,970,493 82,902 ( 10,199) 5,043,196 Total $43,238,185 $1,455,344 ($63,072) $44,630,457
The amortized cost and fair value of investments in fixed maturities at December 31, 1996, by contractual maturity, are as follows:
Amortized Fair Cost Value
Due in one year or less $ 7,035,350 $ 7,038,256 Due after one year through five years 23,064,172 23,376,093 Due after five years through ten years 7,833,142 7,914,145 Due after ten years 9,724,392 9,598,599 $47,657,056 $47,927,093
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Investments (Continued):
The above maturity tables includes $8,363,964 (at fair value) of Government National Mortgage Association mortgage-backed securities, which are classified as due after ten years based on the contractual life of the securities.
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Gross gains of $5,485, $53,851 and $44,783, were realized in 1996, 1995 and 1994, respectively, on those sales and calls. Gross losses of $88,064 were realized in 1994 on those sales and calls.
(b) Investment income (including net realized gains and losses) by category of investments consists of the following:
Category 1996 1995 1994
Fixed maturities $3,093,534 $2,837,597 $2,741,045 Other, principally short-term investments 196,457 168,335 126,268 Total investment income 3,289,991 3,005,932 2,867,313 Investment expenses 197,394 184,921 180,394 Net investment income $3,092,597 $2,821,011 $2,686,919
(c) At December 31, 1996 and 1995, fixed maturity investments deposited with various state insurance departments (at fair value) amounted to $220,275 and $439,821, respectively.
(d) There were no investments in any persons and its affiliates in excess of ten percent of shareholders' equity.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Investments (Continued):
(e) The change in net unrealized gains (losses) on investments are as follows:
Years Ended December 31, 1996 1995 1994 Fixed maturities ($1,122,378) $2,661,043 ($3,416,148)
(f) In the opinion of management there has been no permanent impairment in the carrying amount of investments.
Note E - Unpaid Losses and Loss Expenses:
(a) The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss expenses for 1996, 1995 and 1994:
1996 1995 1994 Balance at January 1 $39,823,552 $41,665,101 $45,818,203
Less: Reinsurance recover- ables 16,414,610 19,311,132 20,485,582
Net balance at January 1 23,408,942 22,353,969 25,332,621
Incurred losses and loss expenses: Provision for current year claims 28,244,599 19,625,070 14,367,183
Increase in provision for prior years' claims 903,681 1,112,478 919,118
Total incurred losses and loss expenses 29,148,280 20,737,548 15,286,301
Payment for losses and loss expenses: Payment on current year claims 13,029,214 8,577,000 5,953,183
Payment on prior years' claims 11,414,375 11,105,578 12,311,770
Total payments for losses and loss expenses 24,443,589 19,682,578 18,264,953
Net balance at December 31 28,113,633 23,408,939 22,353,969
Plus: Reinsurance recover- ables 19,553,223 16,414,613 19,311,132
Balance at December 31 $47,666,856 $39,823,552 $41,665,101
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E - Unpaid Losses and Loss Expenses (Continued):
The reconciliation shows a 1996 deficiency of $904,000 in the liability recorded at December 31, 1995. The deficiency is primarily the result of the latent development of a limited number of large losses incurred in 1995 and prior. Management believes this development does not indicate any adverse trends in the Company's loss development.
(b) Losses incurred are reduced by salvage and subrogation approximating $2,188,000, $1,661,000 and $1,495,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Note F - Fixed Assets:
Fixed assets consist of the following:
1996 1995
Leasehold improvements $ 191,142 $ 446,744 Office furniture, fixtures and data processing equipment 2,934,793 2,375,989 3,125,935 2,822,733 Less accumulated depre- ciation 1,299,182 1,603,608 $1,826,753 $1,219,125
Note G - Reinsurance:
(a) Unearned premiums and unpaid loss and loss expenses are stated gross of the effects of reinsurance.
(b) Reinsurance contracts do not relieve the Insurance Companies from their obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Insurance Companies. Generally, all risks in excess of $150,000 for liability lines and $75,000 for property lines are reinsured.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Reinsurance (Continued):
The Insurance Companies also maintained an 80% quota share reinsurance agreement for their non-automobile business. The quota share reinsurance agreement was terminated as of February 19, 1994, and covers policies inforce as of the termination date through the policies' respective expiration dates.
The Insurance Companies evaluate the financial condition of their reinsurers and monitor concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize their exposure to significant losses from reinsurer insolvencies.
As referred to in Note A, one hundred percent of the Company's insurance operations are located in the State of New Jersey, the laws of which require participation in certain reinsurance funds.
Reinsurance recoverable on paid and unpaid loss and loss expenses are principally attributable to the amounts of reinsurance recoverable from the Unsatisfied Claim and Judgment Fund ("UCJF") of the State of New Jersey, which pertains to New Jersey Personal Injury Protection claims in excess of Motor Club's statutory retention limit of $75,000. Reinsurance recoverable from the UCJF was $12,955,544 and $11,717,543 as of December 31, 1996 and 1995, respectively.
Motor Club is required to participate in the New Jersey Automobile Insurance Risk Exchange ("NJ AIRE"). NJ AIRE is designed to balance differences between company bodily injury exposures and loss payments as compared to industry exposures and loss payments under New Jersey's dual tort threshold system.
Assessments paid to NJ AIRE based on subject bodily injury exposures are accounted for as ceded premiums written and totaled $1,613,095, $1,541,875 and $1,578,064 in 1996, 1995 and 1994, respectively. Reimbursements from NJ AIRE based on subject claim payment experience are accounted for as ceded losses incurred and totaled $482,105, $800,872 and $1,057,817 in 1996, 1995 and 1994, respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Reinsurance (Continued):
Prepaid reinsurance premiums of $1,145,944 and $1,193,098 as of December 31, 1996 and 1995, respectively, are attributable to the Insurance Companies' excess of loss reinsurance treaties which are with one reinsurer.
The effect of reinsurance on premiums written and earned is as follows:
(c) During 1993, Motor Club was notified by one of its reinsurers of a dispute. The reinsurer did not deny the validity of coverage; rather, the reinsurer indicated that it believed that a right of set-off existed for the reinsurance which Motor Club had ceded to the reinsurer for accident years 1973 to 1975 against reinsurance which MCA Insurance Company ("MCAIC") had assumed from the reinsurer between 1968 and 1976. Motor Club assumed the ceded reinsurance from MCAIC in 1991. The reinsurer had indicated that payments to Motor Club would be held in abeyance pending resolution of the dispute. Motor Club had recorded a liability of $1,695,774 at December 31, 1995.
On November 6, 1996, Motor Club and the reinsurer settled the dispute. Motor Club paid the reinsurer $1,950,000, in three installments prior to December 31, 1996. In return, the reinsurer agreed to: (1) pay Motor Club all past amounts due under the reinsurance agreement applicable to accident years 1973 to 1975, totaling $640,698 as of June 30, 1996; and (2) to pay Motor Club future amounts which may be recoverable from the reinsurer under the terms of the same reinsurance agreement.
The Consolidated Statement of Operations includes in other operating expenses $254,226, $239,357 and $100,084 for this matter in 1996, 1995 and 1994, respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Taxes:
(a) The Company and its subsidiaries (including MCAIC and its subsidiaries - see Note Q) file a consolidated Federal income tax return. The benefit (provision) for Federal income taxes consists of the following:
1996 1995 1994
Current provision ($ 42,324) ($38,320) ($4,420) Deferred benefit 2,075,535 - - Total benefit (provision) $2,033,211 ($38,320) ($4,420)
(b) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows: December 31, 1996 1995 Deferred tax assets: Net operating loss carryforward $2,549,738 $3,645,058 Unpaid losses and loss expenses 1,137,478 1,006,482 Unearned premium 1,209,601 1,063,862 Other deferred tax assets - 189,068 Alternative minimum tax and general business credit carry- forwards 128,701 64,270 Total deferred tax assets 5,025,518 5,968,740
Deferred tax liabilities: Deferred acquisition costs (1,958,909) (1,723,535) Unrealized gain on debt securities (91,693) (473,421) Prepaid pension cost (753,512) (665,338) Other deferred tax liabilities (145,869) (132,038) Total deferred tax liabilities (2,949,983) (2,994,332) Less: valuation allowance for deferred tax assets - (2,974,408) Net deferred tax asset $2,075,535 $ -
The Company believes it is more likely than not that it will generate future taxable income to realize the benefits of the net deferred tax asset. Accordingly, the Company has not provided a valuation allowance at December 31, 1996. The ultimate amounts realized, however, could be reduced if actual amounts of future taxable income differ from projected future taxable income. (Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Taxes (Continued):
The net operating loss carryforward of $7,499,229 expires beginning in 2007.
(c) The provision for Federal income taxes resulted in effective tax rates lower than the statutory Federal income tax rates, as follows: 1996 1995 1994 Tax provision computed at statutory federal income tax rates ($1,120,945 ($ 834,734) ($1,713,283) Change in valuation allowance 2,075,535 1,191,781 1,713,283 Impact of alternative minimum tax ("AMT") calculation (36,298) (38,320) - Effect of net operating loss carryforward 1,095,320 - - Other-net 19,599 (357,047) ( 4,420) Benefit (provision) $2,033,211 ($ 38,320) ($ 4,420)
(d) The Consolidated Statements of operations for the years ended December 31, 1996, 1995 and 1994 include state taxes based on insurance premiums of $143,262, $116,410 and $98,625 and state income tax expense (benefit) of $8,244, ($19,928) and $9,255, respectively.
Note I - Shareholders' Equity:
(a) The Insurance Companies are domiciled in the State of New Jersey and therefore prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the NJ DOBI.
Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Shareholders' Equity (Continued):
The maximum amount of dividends which the Insurance Companies can pay to shareholders without approval of the Insurance Commissioner is subject to restrictions. The maximum amount distributable is limited to the greater of: (1) ten percent of statutory surplus as regards policyholders; or (2) net income, excluding realized capital gains. Accordingly, the maximum dividend which the Insurance Companies may pay without prior approval in 1997 is $1,721,000.
(b) The consolidated financial statements of the Company's insurance subsidiaries have been prepared in accordance with GAAP, which differ in certain respects from accounting practices prescribed or permitted by insurance regulatory authorities (statutory basis).
The principal differences relate to (1) acquisition costs incurred in connection with acquiring new business which are charged to expense under statutory practices but under GAAP are deferred and amortized as the related premiums are earned; (2) anticipated salvage and subrogation recoveries which have not been credited to losses incurred for statutory purposes; (3) net deferred tax assets created by the tax effects of temporary differences; (4) unpaid losses, unpaid loss adjustment expenses and unearned premium reserves are presented gross of reinsurance with a corresponding asset recorded; and (5) fixed maturity portfolios that qualify as available for sale are carried at fair value and changes in fair value are reflected directly in unassigned surplus, net of related deferred taxes.
The consolidated capital and surplus, shareholders' equity and income (loss) of Motor Club and Preserver on a statutory and GAAP basis were as follows: December 31, 1996 1995 Capital and surplus - Statutory basis $14,753,760 $13,877,312 Shareholders' equity - GAAP basis $24,704,123 $23,323,722
Years ended December 31, 1996 1995 1994 Net income (loss): Statutory basis $ 212,807 $1,811,612 ($ 905,394) GAAP basis $2,737,318 $2,808,466 $5,076,289
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Shareholders' Equity (Continued):
Distribution by the Insurance Companies of the excess of GAAP shareholders' equity over statutory capital and surplus to the Company is prohibited by law.
Note J - Contingencies:
The Company and its subsidiaries are parties to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on the financial position, the results of operations or cash flows of the Company.
Note K - Pensions:
(a) The Company has a non-contributory defined benefit plan (the "Plan"). Eligible salaried and hourly employees of the Company participate in the Plan after twelve months of continuous employment with the Company when age 21 has been attained. Retirement benefits are based on each participant's average compensation and years of service. Vesting of benefits begins after five years of service commencing from the minimum age of 21 or date of hire, if later.
The Company's contributions are designed to fund the Plan's normal costs on a current basis and to fund the unfunded prior service costs, including accrued benefits arising from qualifying employee service occurring prior to the establishment of the Plan, over 40 years.
On January 15, 1992, the Company suspended the accrual of benefits arising from participant service. The Company continues to fund the Plan for benefits earned through January 31, 1992.
The Plan maintains a significant amount of assets in group annuity contracts with Mutual Benefit Life Insurance Company ("Mutual"), which was placed in rehabilitation by the NJ DOBI on July 16, 1991. The Plan has not received payment on the group annuity contracts that matured on July 15, 1991 and thereafter.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Pensions (Continued):
On November 10, 1993, a Plan of Rehabilitation for Mutual was confirmed by the Superior Court of New Jersey. As a result, certain amendments were made to the Plan's contracts ("the restructured contract"), which is now transferred to the MBL Life Assurance Corporation ("MBLLAC"), the successor corporation of Mutual, where the restructured contract continues.
Under the Plan of Rehabilitation, as amended, payment of all maturities and interest will be held subject to payout which will not begin until December 31, 1999, the end of the Rehabilitation period.
In October 1994, MBLLAC approved and subsequently paid a "hardship withdrawal" of $2,666,204 (net of an administrative charge of $470,507) to the Plan.
The Plan also received $177,517, $167,368 and $61,449 in distributions from MBLLAC and Mutual in 1996, 1995 and 1994, respectively, under provisions of the Plan of Rehabilitation.
(b) Pension expense for 1996, 1995 and 1994 included the following components: 1996 1995 1994
Interest cost on projected benefit obligation $ 831,800 $862,600 $818,400 Actual return on assets (1,027,700) (809,900) (371,600) Net amortization and deferral 542,800 214,400 (295,800) Net periodic pension cost $ 346,900 $267,100 $151,000
Net amortization and deferral consists of amortization of net assets at transition, amortization of unrecognized prior service cost and deferral of subsequent net gains and losses. The assumptions used included a discount rate of 7.25% (1996), 8.25% (1995) and 7.5% (1994) and an expected long-term rate of return on assets of 10.0%.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Pensions (Continued):
(c) The following table sets forth the funded status of the Plan and amounts recognized in the Company's balance sheet at December 31, 1996 and 1995. The discount rate assumed as of December 31, 1996 and 1995 is 7.50% and 7.25%, respectively.
1996 1995 Actuarial present value of benefit obligations: Vested benefit obligation $11,591,100 $11,856,000 Accumulated benefit obli- gation $11,591,100 $11,856,000 Projected benefit obli- gation $11,591,100 $11,856,000 Plan assets at fair value, including guaranteed insurance contracts with MBL Life Assurance Corporation, in rehabil- itation, $3,088,000 (1996) and $3,080,000 (1995) 8,791,900 8,462,000 Projected benefit obligation in excess of plan assets 2,799,200 3,394,000 Unrecognized net loss (4,690,000) (5,177,900) Adjustment required to recognize minimum liability 4,690,000 5,177,900 Pension liability recognized in the statement of financial position $ 2,799,200 $ 3,394,900
The adjustment required to recognize the minimum liability is reflected as a reduction of shareholders' equity as of December 31, 1996 and 1995, respectively.
(d) The Company maintains a defined contribution plan for substantially all employees (including those of MCAIC). Employer contributions of a discretionary amount are made by the Company and its subsidiaries. MCAIC and its subsidiaries provide similar employer contributions. Employer contributions in the amount of $116,938, $134,987 and $110,458 were made by the Company in 1996, 1995 and 1994, respectively, for its employees and charged to expense.
(Continued) MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Post-retirement Benefits:
The Company currently provides certain life and health benefits to retired employees with twenty-five or more years of service, subject to certain eligibility restrictions. These benefits consist of the payment of medical, life and dental premiums for the retired employees. The Company's funding policy is to pay for the premiums currently; any future increases in the cost of these benefits will be borne by the retirees and not the Company. The following table sets forth the funded status and amounts recognized in the Company's balance sheet: December 31, 1996 1995
Accumulated postretirement benefit obligation: Retirees $266,000 $362,000 Fully eligible active plan participants 186,000 194,000 Other active plan participants 75,000 56,000 Total 527,000 612,000 Plan assets at fair value - -
Accumulated postretirement benefit obligation in excess of plan assets 527,000 612,000 Unrecognized net (gain) from past experience different from that assumed and from changes in assumptions (189,000) (219,000) Unrecognized transition obli- gation (445,000) (473,000) Prepaid postretirement benefit cost recognized in the state- ment of financial position ($107,000) ($80,000)
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Post-retirement Benefits (Continued):
Net periodic postretirement benefit cost for 1996 and 1995, respectively, included the following components:
1996 1995
Service cost of benefits attributed to service during the period $ 2,000 $ 2,000 Interest cost on accumulated post- retirement benefit obligation 40,000 45,000 Net amortization and deferral 45,000 37,000 Net periodic postretirement benefit cost $87,000 $84,000
It is the policy of the Company that any future increase in life and health care benefits will be borne by the retirees and not the Company; as a result, there will be no increase in either the accumulated postretirement benefit obligation or the service and interest cost components of net periodic postretirement benefit cost related to a 1% increase in the health care trend rate.
The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.50% in 1996 and 7.25% in 1995.
Note M - Selected Quarterly Financial Data (Unaudited):
(a) Year ended December 31, 1996:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Revenues $11,690,835 $12,225,704 $12,838,694 $13,563,407
Losses and expenses $11,757,187 $11,255,479 $11,947,466 $12,061,611
Net income (loss) $ (69,827) $ 950,658 $ 891,999 $3,557,278
Net income (loss) per common share $ (.03) $ .46 $ .44 $ 1.74
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Selected Quarterly Financial Data (Unaudited) (Continued):
During the 1996 fourth quarter, the Company determined that it was more likely than not that sufficient future taxable income will be generated to realize the benefits of the net deferred tax assets; therefore, the deferred tax asset valuation allowance was reversed during the fourth quarter.
(b) Year ended December 31, 1995:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter
Revenues $9,497,890 $9,517,606 $10,185,612 $10,322,712
Losses and expenses $9,047,624 $8,867,995 $ 9,525,441 $9,627,661
Net income $ 439,266 $ 638,611 $ 646,171 $ 692,731
Net income per common share $ .22 $ .31 $ .31 $ .34
Note N - Stock Option Plans:
The Motor Club of America 1987 and 1992 Stock Option Plans ("the 1987 Option Plan" and "the 1992 Option Plan", respectively) provide for the issuance of options to purchase 100,000 common shares, respectively, by key executives at the market price at date of grant.
Options under the 1987 Option Plan are exercisable for a five year period in twenty-five percent increments each year, commencing one year from the date of grant. As of December 31, 1996, 61,000 shares under the 1987 Option Plan are available for grant; 25,875 shares were exercisable and 4,500 shares had been exercised as as of that date.
Options under the 1992 Option Plan are exercisable for a five year period in twenty-five percent increments each year, commencing one year from the date of grant. As of December 31, 1996, 49,000 shares under the 1992 Option Plan are available for grant and 51,000 shares were exercisable as of that date.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N - Stock Option Plans (Continued):
Transactions during 1994, 1995 and 1996 relating to the 1987 Option Plan are as follows:
Exercise Number of Price per Aggregate Shares Share Amount
Options outstanding at December 31, 1993 70,000 $2.625 to $356,407 Options lapsed in 1994 (28,750) $10.75 (248,126) Options outstanding at December 31, 1994 41,250 108,281 Options exercised in 1995 (750) $2.625 (1,969) Options lapsed in 1995 (2,250) $2.625 (5,906) Options outstanding at December 31, 1995 38,250 $2.625 100,406 Options exercised in 1996 (3,750) $2.625 (9,844) Options outstanding at December 31, 1996 34,500 $2.625 $ 90,562
Transactions during 1994, 1995 and 1996 relating to the 1992 Option Plan are as follows: Exercise Number of Price per Aggregate Shares Share Amount
Options outstanding at December 31, 1993 65,000 $390,000 Options lapsed in 1994 (10,000) $6.00 (60,000) Options outstanding at December 31, 1994 55,000 330,000 Options lapsed in 1995 (4,000) $6.00 (24,000) Options outstanding at December 31, 1996 and 1995 51,000 $6.00 $306,000
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N - Stock Option Plans (Continued):
The Financial Accounting Standards Board has issued SFAS No. 123 - Accounting for Stock-Based Compensation. This Statement became effective beginning in the first quarter of 1996 and applies to options granted in 1995 and subsequent years. No options were granted in 1995 and 1996 and therefore the adoption of this Statement does not have any effect on the Company's financial position or results of operations. The Company will continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees and will provide, when necessary, pro forma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS No. 123 had been applied in measuring compensation expense.
Note O - Related Party Transactions:
Thrifty Rent-A-Car System, Inc. ("Thrifty") owned 39.2% of the outstanding common stock of the Company through July 25, 1994.
On July 25, 1994, Thrifty sold all of its shares to three of the Company's directors ("Acquisition Group"). The Acquisition Group owns 43.5% of the outstanding common stock of the Company at December 31, 1996. The Company paid directors fees and certain expenses to the Acquisition Group of $180,000, $180,000 and $256,530 during 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, mortgage loans receivable from directors, officers and employees amounted to $336,101 and $462,068, respectively, all of which are collateralized by real property.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P - Lease Obligations:
Effective January 1, 1996, the Company entered into a lease ("the Paramus Lease") at 95 Route 17 South, Paramus, New Jersey. The Paramus Lease expires on December 31, 2005. The Company has an option to terminate the Paramus Lease after six years, and an option to extend the Paramus Lease for an additional five years after the initial lease term expires. The Company will pay a base annual rental of $371,745 through December 31, 2000 and $416,805 thereafter until the Paramus Lease expires. Additional charges for electricity and escalation of certain operating costs apply. In 1996, rent expense paid by the Company on the Paramus Lease was $310,000.
Through March 31, 1996, the Company was party to a lease ("the Newark Lease") with Fairmount Central Urban Renewal Corporation ("Fairmount"), a subsidiary of MCAIC, for the lease of the office building in which the Company and its subsidiaries formerly operated. Rent of $324,000 per year, subject to adjustment for property taxes in excess of $200,000, was paid by the Company, along with other costs as defined in the Newark Lease.
Effective March 31, 1996, the Company entered into a Mutual Release Agreement (the "Release") with Fairmount, Property-Casualty Company of MCA and MCAIC. Pursuant to the terms of the Release, the Newark Lease was terminated in exchange for $132,000.
The Newark Lease was to run to December 31, 2011. The Release also enabled the Company to terminate the Joint Service Agreement ("JSA") (See Note Q "Insolvency of MCA Insurance Company"). Concurrent with the execution of the Release in 1996, the Company charged off $227,000 in leasehold improvements at that facility.
In 1996, 1995 and 1994, rent expense paid by the Company (net of amounts paid by MCAIC) on the Newark Lease was $75,000, $252,000 and $261,000, respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q - Insolvency of MCA Insurance Company:
On August 24, 1992, Hurricane Andrew struck the South Florida coast, causing losses to MCAIC which exceeded its surplus as regards policyholders. MCAIC was placed in liquidation on October 23, 1992 by the Oklahoma District Court, Oklahoma.
On December 30, 1994, the Oklahoma District Court approved a settlement between the MCAIC Receiver and its subsidiaries and the Company and its subsidiaries (the "Settlement"). Under the Settlement, the Company agreed to pay MCAIC approximately $5.4 million, $2 million of which was paid on December 30, 1994. The Settlement also dismissed with prejudice the litigation previously brought (in August 1993) by the MCAIC Receiver against the Company regarding the ownership of Motor Club. The Settlement released all parties from all potential claims against one another, and put in place agreements regarding the handling of consolidated taxes, common cost sharing and service agreements.
On February 15, 1995, pursuant to the Settlement Agreement, MCAIC was paid in full.
The JSA entered into as part of the Settlement was retroactive to May 1, 1994 and provided for the rendering of certain services by the parties to the JSA and amounts due for these services, as well as the sharing of certain common expenses. Common expenses emanate from the parties' co-tenancy in the office building in which the parties' principal offices resided. The JSA was terminated effective March 31, 1996 as part of the Release for the Newark Lease.
In relation to the insolvency of MCAIC, there are no additional liabilities, contingent or otherwise, which require accrual or disclosure in the accompanying financial statements.
MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE I. SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES at December 31, 1996
Column A Column B Column C Column D Amount at which shown in the Cost(a) Market balance sheet
Type of investment
Fixed maturity securities available-for-sale:
United States Government and government agencies and authorities $42,445,695 $42,760,052 $42,760,052 Industrial and miscellaneous 4,668,881 4,617,591 4,617,591 Public utilities 542,480 549,450 549,450
Total fixed maturities 47,657,056 47,927,093
Mortgage loans on real estate 634,492 634,492
Short-term investments, available-for-sale 1,745,455 1,745,455 1,745,455
Total investments $50,037,003 $50,307,040
Note: (a) Represents original cost of investments reduced by repayment and as to fixed maturities, adjusted for amortization of premiums or accrual of discounts.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
December 31, 1996 1995
Assets:
Cash and cash equivalents $ 354,465 $ -
Investments in subsidiaries 25,614,714 25,072,857
Insurance premiums receivable 7,538,716 7,018,662
Deferred tax asset 2,075,535 -
Other assets 3,868,956 1,444,902
Total assets $39,452,386 $33,536,421
Liabilities and shareholders' equity:
Indebtedness to subsidiaries $15,563,850 $13,968,869
Other liabilities 5,102,885 5,486,476
Total liabilities 20,666,735 19,455,345
Shareholders' equity 18,785,651 14,081,076 Total liabilities and shareholders' equity $39,452,386 $33,536,421
Notes to Schedule
The Notes to Consolidated Financial Statements of Motor Club of America and Subsidiaries are incorporated by reference to this schedule.
The Statements of Shareholders' Equity are the same as those presented for Motor Club of America and Subsidiaries.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF OPERATIONS
For the years ended December 31, 1996 1995 1994
Revenues:
Motor Club membership fees $ 21,481 $ 113 $ 35,566 Commission income 9,960 10,093 8,425 Realized gain on sale of subsidiary 702,419 - - Other income (1) 135,704 157,012 160,576 Total revenues 869,564 167,218 204,567
Expenses:
General and administrative expenses (2) (32,945) 52,759 806,473 Discount of Note Payable to Receiver of MCA Insurance Insurance Company in Liquidation - - (624,850) Total expenses (32,945) 52,759 181,623
Income before Federal income taxes 902,509 114,459 22,944 Benefit (provision) for Federal income taxes: current (42,324) (38,320) (4,420) deferred 2,075,535 - - Total Federal income tax 2,033,211 (38,320) (4,420)
Income before item shown below 2,935,720 76,139 18,524 Equity in net income of subsidiaries 2,394,388 2,340,640 5,016,123 Net income $5,330,108 $2,416,779 $5,034,647
(1) Amount includes $31,559 (1996), $67,117 (1995) and $94,676 (1994) of interest due from Motor Club.
(2) Amount is net of $520,579 (1996), $223,691 (1995) and $335,590 (1994) of management fees charged to subsidiaries.
(Continued)
Supplemental Disclosures of Cash Flow Information (1) Total interest paid was $8,166 (1996), $33,934 (1995) and $53 (1994). (2) Total federal income taxes paid was $38,462 (1996), $52,000 (1995) and $54,227 (1994).
(Continued)
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
Column A Column B Column C Column D Column E Additions Balance at Charged to Charged to Balance Beginning Cost and Other at end Description of Period Expenses Accounts Deductions of Period
Allowance for doubtful receivables:
December 31, 1996 $ 656,083 $ - $ - $ 614,743 $ 41,340
December 31, 1995 $ 439,309 $316,774 $ - $ 100,000 $ 656,083
December 31, 1994 $ 200,000 $239,309 $ - $ - $ 439,309
Valuation allowance for deferred taxes:
December 31, 1996 $2,974,408 $ - $ 722,894 $3,697,302 $ -
December 31, 1995 $5,070,974 $ - $ 682,329 $2,778,895 $2,974,408
December 31, 1994 $7,057,259 $ - $1,309,191 $3,295,476 $5,070,974
(Continued)
Note: (a) Excludes non-insurance subsidiaries' investment income and realized investment gains.
Note: (a) Excludes non-insurance subsidiaries' investment income and realized investment gains.