**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10–K/A**

##### **AMENDMENT NO. 1**

** **

**ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 
| **For the fiscal year end** | **Commission File Number** |
|-----------------------------|----------------------------|
| **December 31, 1999**       | **0–671**             |

 

**MOTOR CLUB OF AMERICA**

(Exact name of registrant as specified in its charter)

 
| **New Jersey**           | **22-0747730**                       |
|--------------------------|--------------------------------------|
| (State of incorporation) | (I.R.S. Employer Identification No.) |

 
| **95 Route 17 South, Paramus, New Jersey** | **07653**  |
|--------------------------------------------|------------|
| (Address of principal executive offices)   | (Zip Code) |

 

Registrant’stelephone number, including area code **(201)291–2000**

 

Securitiesregistered pursuant to Section 12(b) of the Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 
| **Common Stock  (par value) $.50 per share** |
|----------------------------------------------|
| (Title of Class)                             |

 

Indicateby check mark whether the registrant (l) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No  o.

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S–K is not contained herein, and will not be contained, to thebest of registrant's knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10–K or any amendmentto this Form 10–K. ý

 

Theaggregate market value of the voting Common Stock (par value $.50 per share)held by non–affiliates on March 24, 2000 was $8,061,604 based on theclosing selling price.

 

2,124,387shares of Common Stock were outstanding as of March 24, 2000.

 

DocumentsIncorporated by Reference:  Portions ofthe Registrant's definitive proxy statement issued in conjunction with the June7, 2000 Annual Meeting of Shareholders (Part III).

 

 

###### **EXPLANATORY NOTE**

 

This Amendment No. 1 on Form 10-K/A to the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 1999 amendsthe Form 10-K by restating certain financial information for prior periodswhich is discussed in Note V of the notes to consolidated financial statements.

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this amendment to its Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 

# **MOTOR CLUB OFAMERICA**

**(Registrant)**

 

 
| Dated:  January 9, 2002 | By                                 | s/Patrick  J. Haveron |   |
|-------------------------|------------------------------------|-----------------------|--------|
|                    | Patrick  J. Haveron                |
|                    | Executive  Vice President,         |
|                    | Chief  Executive Officer and Chief |
|                    | Financial Officer                  |
|                    |                               |                  |
|                    | By                                 | s/Francis  J. Fenwick |   |
|                    | Francis  J. Fenwick                |
|                    | Vice  President - Finance          |
|                    | Chief  Accounting Officer          |

 

**MOTOR CLUB OF AMERICA**

**ANNUAL REPORT ON FORM 10-K/A**

**DECEMBER 31, 1999**

 
|      | PART I                                                                                 |   |
|-----------|----------------------------------------------------------------------------------------|--------|
|      |                                                                                   |
| ITEM 1.   | BUSINESS                                                                               |
| ITEM 2.   | PROPERTIES                                                                             |
| ITEM 3.   | LEGAL PROCEEDINGS                                                                      |
| ITEM  4.  | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |
|      |                                                                                   |
|      | PART II                                                                                |   |
|      |                                                                                   |
| ITEM  5.  | MARKET  FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS             |
| ITEM 6.   | SELECTED FINANCIAL  DATA                                                               |
| ITEM  7.  | MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| ITEM  8.  | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                           |
| ITEM  9.  | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |
|      |                                                                                   |
|      | PART III                                                                               |   |
|      |                                                                                   |
| ITEM  10. | DIRECTORS  AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |
| ITEM  11. | EXECUTIVE  COMPENSATION                                                                |
| ITEM  12. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |
| ITEM  13. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS                                        |
|      |                                                                                   |
|      | PART IV                                                                                |   |
|      |                                                                                   |
| ITEM 14.  | EXHIBITS, FINANCIAL STATEMENTS  SCHEDULES AND REPORTS ON FORM 8-K                      |

 

**CautionaryStatement**

 

                This Report onForm 10-K contains statements that are not historical facts and are considered"forward-looking statements" (as defined in the Private SecuritiesLitigation Reform Act of 1995), which can be identified by terms such as"believes", "expects", "may", "will", "should","anticipates", the negatives thereof, or by discussions ofstrategy.  Certain statements containedherein are forward-looking statements that involve risks, uncertainties,opinions and predictions, and no assurance can be given that the future resultswill be achieved since events or results may differ materially as a result ofrisks facing the Company.  Theseinclude, but are not limited to, economic, market or regulatory conditions aswell as risks associated with Motor Club of America's entry into newmarkets;  Motor Club of America'sacquisition of North East Insurance Company on September 24, 1999; Motor Clubof America's acquisition of Mountain Valley Indemnity Company on March 1, 2000;diversification; catastrophic events; potential future tax liabilities relatedto an insolvent subsidiary; and state regulatory and legislative actions whichcan affect the profitability of certain lines of business and impede Motor Clubof America's ability to charge adequate rates. Accordingly, Motor Club of America's premium growth and underwritingresults have been and will continue to be potentially materially affected bythese factors.

 

# **PARTI**

Item 1. Business

(a)**           General Development ofBusiness**

                MotorClub of America (the"Registrant") and a group of directly or indirectly wholly–ownedsubsidiaries of which the Registrant is parent are known as the "MotorClub 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 NewJersey", is the successor to a New Jersey corporation organized in 1926.The present name was adopted in 1958.

 

                The Registrant hasfour subsidiaries which write property and casualty insurance. Motor Club ofAmerica Insurance Company ("Motor Club"), incorporated in 1989,writes private passenger automobile ("PPA") business. PreserverInsurance Company ("Preserver"), incorporated in 1992, writes smallcommercial, homeowners and ancillary coverages. Motor Club and Preserver aredomiciled in the State of New Jersey and write insurance in that State only aswell.

 

                The Registrant ispursuing a strategy to: (1) increase its identification as a provider of smallcommercial lines insurance and has continued to expand its product line insupport of this objective; and (2) expand and diversify its insuranceoperations outside the State of New Jersey. The Registrant believes that bothof these objectives can be attained through the acquisition of other insurancecompanies which present opportunities to write these product lines in differentgeographic areas. The Registrant expects to continue to follow this strategy.

 

                On September 24,1999, the Registrant acquired North East Insurance Company ("NorthEast") and its subsidiaries. North East, incorporated in 1965 in the Stateof Maine, writes private passenger and commercial automobile as well as smallcommercial and ancillary coverages in that State. American Colonial InsuranceCompany ("American Colonial"), a wholly–owned subsidiary ofNorth East, was incorporated in 1982 and has not written any insurance coveragesince March 1990. American Colonial is domiciled in New York.

 

                Motor Club,Preserver, North East and American Colonial are collectively referred to as the"Insurance Companies".

 

                On March 1, 2000,the Registrant completed the acquisition of Mountain Valley Indemnity Company("Mountain Valley"). Mountain Valley was incorporated in 1995 in theState of New Hampshire and writes small and mid-sized commercial coverages inNew York and all of the New England states except Connecticut.  The Registrant believes that theseacquisitions fully establish it as a regional commercial lines company in New England and the Mid–Atlantic regions.

 

                The Company hasrestated certain financial information for prior periods, which is discussed inNote V of the Notes to Consolidated Financial Statements.

 

(b)**           Financial InformationAbout Industry Segments**

 

                The Registrantdoes not have any reportable industry segments for the three fiscal yearsreported in this Form 10–K.

 

(c)**           Narrative Description ofBusiness**

 

                See Items 1 (a)and 7

 

**Fire andCasualty Insurance Operations**

 

**General**

 

                The InsuranceCompanies distribute insurance policies and generate premium revenue throughapproximately 174 independent producers in New Jersey and 161 independentproducers in Maine.

 

                The Registrantanticipates continuing its emphasis of the small commercial and ancillarycoverages written by Preserver in the State of New Jersey and through newlyacquired American Colonial in New York and Mountain Valley in the States of NewYork, Massachusetts, New Hampshire, Vermont, Rhode Island and Maine. North Eastis expected to increase its emphasis of small commercial coverages aswell.  Motor Club and North east writeprivate passenger automobile ("PPA") business in the States of NewJersey and Maine, respectively. PPA business is expected to increase as well.

 

                At December 31,1999 Preserver and Motor Club were separately rated B+ (Very Good) by A.M.Best; North East was rated B (Fair). American Colonial plans to commenceinsurance operations in New York in the second quarter of 2000. Best ratingsare based upon factors relevant to policyholders and are not directed toward theprotection of investors.  Managementbelieves that the Best rating is an important factor in marketing the InsuranceCompanies' and Mountain Valley's products.

 

                Effective July 1,1998, Motor Club began converting its existing policies from six month terms totwelve month policy terms ( the "Policy Term Conversion"). While thePolicy Term Conversion temporarily increased the amount of premiums written byMotor Club in 1998, it did not effect the amount of premiums earned.  The Policy Term Conversion was implementedto reduce the frequency of renewal, thereby increasing operating efficiency andservice levels and reducing expenses.

 

                The results of theRegistrant include the operations of North East since its acquisition onSeptember 24, 1999.

 

                The tables whichfollow set forth the direct premiums written and earned, by line of insurance,for the last five years:

 

DirectWritten Premiums

(Amountsin Thousands - Exclusive of Service Charges)

 
| ** **           | **1999**    | ** ** | **1998**     | ** ** | **1997**    | ** ** | **1996**     | ** ** | **1995**    | ** ** |
|----------------------|-------------|------------|--------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **           | **Direct**  | ** ** | **Percent**  | ** ** | **Direct**  | ** ** | **Percent**  | ** ** | **Direct**  | ** ** | **Percent** | ** ** | **Direct** | ** ** | **Percent** | ** ** | **Direct** | ** ** | **Percent** | ** ** |
| **Program**          | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** |
|                 |        |       |         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Motor Club PPA       | $           | 39,611     |         | 64.2       | %           | $          | 54,254       |       | 76.7        | %          | $ | 43,238 |   | 74.7 | % | $ | 41,055 |   | 76.0 | % | $ | 32,100 |   | 73.1 | % |
| Preserver Commercial | 11,504      |       | 18.7         | %          | 9,672       |       | 13.7         | %          | 8,019       |       | 13.9 | % | 6,744 |   | 12.5 | % | 5,828 |   | 13.3 | % |
| Preserver Personal   | 6,804       |       | 11.0         | %          | 6,833       |       | 9.6          | %          | 6,596       |       | 11.4 | % | 6,216 |   | 11.5 | % | 5,972 |   | 13.6 | % |
| North East           | 3,777       |       | 6.1          | %          | 0           |       | 0.0          | %          | 0           |       | 0.0 | % | 0 |   | 0.0 | % | 0 |   | 0.0 | % |
| Total                | $           | 61,696     |         | 100.0      | %           | $          | 70,759       |       | 100.0       | %          | $ | 57,853 |   | 100.0 | % | $ | 54,015 |   | 100.0 | % | $ | 43,900 |   | 100.0 | % |

 

DirectEarned Premiums

(Amountsin Thousands - Exclusive of Service Charges)

 
| ** **          | **1999**    | ** ** | **1998**     | ** ** | **1997**    | ** ** | **1996**     | ** ** | **1995**    | ** ** |
|---------------------|-------------|------------|--------------|------------|-------------|------------|--------------|------------|-------------|------------|
| ** **          | **Direct**  | ** ** | **Percent**  | ** ** | **Direct**  | ** ** | **Percent**  | ** ** | **Direct**  | ** ** | **Percent** | ** ** | **Direct** | ** ** | **Percent** | ** ** | **Direct** | ** ** | **Percent** | ** ** |
| **Program**         | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** | **Premium** | ** ** | **of Total** | ** ** |
|                |        |       |         |       |        |       |         |       |        |       |   |   |   |   |   |   |   |   |   |   |
| Motor Club PPA      | $           | 41,781     |         | 65.9       | %           | $          | 43,631       |       | 73.6        | %          | $ | 43,381 |   | 75.4 | % | $ | 39,242 |   | 75.6 | % | $ | 29,841 |   | 73.5 | % |
| PreserverCommercial | 10,508      |       | 16.6         | %          | 8,916       |       | 15.0         | %          | 7,698       |       | 13.4 | % | 6,526 |   | 12.6 | % | 5,184 |   | 12.7 | % |
| PreserverPersonal   | 6,843       |       | 10.8         | %          | 6,764       |       | 11.4         | %          | 6,422       |       | 11.2 | % | 6,152 |   | 11.8 | % | 5,592 |   | 13.8 | % |
| North East          | 4,248       |       | 6.7          | %          | 0           |       | 0.0          | %          | 0           |       | 0.0 | % | 0 |   | 0.0 | % | 0 |   | 0.0 | % |
| Total               | $           | 63,380     |         | 100.0      | %           | $          | 59,311       |       | 100.0       | %          | $ | 57,501 |   | 100.0 | % | $ | 51,920 |   | 100.0 | % | $ | 40,617 |   | 100.0 | % |

 

                The followingtable sets forth ratios for the Insurance Companies prepared in accordance withgenerally accepted accounting principles ("GAAP") and with statutoryaccounting practices ("SAP") prescribed or permitted by stateinsurance authorities.  The SAP combinedratio, a standard measure of underwriting profitability, is the sum of: (i) theratio of incurred losses and loss expenses to net earned premium ("lossratio"); and (ii) the ratio of expenses incurred for commissions, premiumtaxes, administrative and other underwriting expenses to net written premium("expense ratio").  The GAAPcombined ratio is calculated in the same manner except that it is based on GAAPamounts and the denominator for each component is net earned premium.

 
|                        |   | **December 31,** |   |
|-----------------------------|--------|------------------|--------|
|                        |   | **1999**         |   | **1998** |   | **1997** |   |
| GAAP operating ratios:      |   |             |   |   |   |   |   |
| Loss ratio                  |   | 72.8             | %      | 68.6 | % | 65.1 | % |
| Expense ratio               |   | 36.4             | %      | 29.1 | % | 33.3 | % |
| Combined ratio              |   | 109.2            | %      | 97.7 | % | 98.4 | % |
| Statutory operating ratios: |   |             |   |   |   |   |   |
| Loss ratio                  |   | 74.7             | %      | 69.9 | % | 66.3 | % |
| Expense ratio               |   | 33.3             | %      | 28.8 | % | 32.4 | % |
| Combined ratio              |   | 108.0            | %      | 98.7 | % | 98.7 | % |

 

                In general, whenthe combined ratio is under 100%, underwriting results are consideredprofitable.  Conversely, when thecombined ratio is over 100%, underwriting results are generally consideredunprofitable.  The combined ratioreflects underwriting results and not investment income, federal income taxesor other non-operating income or expense. The Registrant's operating income is generally a function of bothunderwriting results and investment income.

 

**Loss Reserves**

                Reservesfor unpaid losses and loss expensesat any report date reflect the estimate of the liabilities for the ultimate netloss of reported claims and estimated incurred but not reported claims.

 

                Theliability for unpaid losses and loss expenses is determined using case–basisevaluations and statistical projections and represents estimates of theultimate net cost of all unpaid losses and loss expenses through December 31 ofeach year.  These estimates arecontinually reviewed and refined as historical experience develops, newinformation becomes known and the effects of trends in future claim severityand frequency are considered.

 

                The liabilities are adjusted accordingly with suchadjustments being reflected in the current year operations.  Apart from the emergence of PPA developmentfor claims occurring in 1999 related to PPA legislation enacted in New Jersey(discussed below), no trends that are considered abnormal have been identifiedas of the most recent evaluation date, December 31, 1999.

 

                MotorClub and Preserver generallyreinsure all risks in excess of $100,000 for property lines (increased from$75,000 for losses incurred before July 1, 1997) and $150,000 for casualtylines.  North East reinsures all risksin excess of $200,000 for both property and casualty lines.

 

                Thefollowing table presents a reconciliation of beginning and ending liabilitybalances for 1999, 1998 and 1997, reported under GAAP:

 

**RECONCILIATION OF LIABILITY FOR LOSSES AND LOSSEXPENSES**

 
|                                                                                             |   | **1999**                    |   | **1998** |   | **1997** |   |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|----------|--------|----------|--------|
|                                                                                             |   | **(Thousands of  Dollars)** |   |
| Liability for losses and loss expenses, net of  reinsurance recoverables, at January 1           |   | $                           | 39,814 |     | $      | 32,884   |   | $ | 28,114 |   |
| Liability for losses and loss expenses, net of  reinsurance recoverables, North East Acquisition |   | 8,820                       |   | -        |   | -        |   |
| **Incurred losses and loss expenses**                                                            |   |                        |   |     |   |     |   |
| Provision for current year claims                                                                |   | 37,272                      |   | 32,598   |   | 29,369   |   |
| Increase in provision for prior years' claims                                                    |   | 3,359                       |   | 3,881    |   | 3,773    |   |
| Total incurred losses and loss expenses                                                          |   | 40,631                      |   | 36,479   |   | 33,142   |   |
| **Payments for losses and loss expenses**                                                        |   |                        |   |     |   |     |   |
| Payments on current year claims                                                                  |   | 16,448                      |   | 12,038   |   | 12,169   |   |
| Payments on prior years' claims                                                                  |   | 20,288                      |   | 17,511   |   | 16,203   |   |
| Total payments for losses and loss expenses                                                      |   | 36,736                      |   | 29,549   |   | 28,372   |   |
| Liability for losses and loss expenses, net of  reinsurance recoverables, at December 31         |   | 52,529                      |   | 39,814   |   | 32,884   |   |
| Reinsurance recoverables on unpaid losses and loss  expenses, at December 31                     |   | 18,454                      |   | 18,521   |   | 17,363   |   |
| Liability for losses and loss expenses, gross of  reinsurance recoverables, at December 31       |   | $                           | 70,983 |     | $      | 58,335   |   | $ | 50,247 |   |

 

                The reconciliationshows a 1999 deficiency of $3,359,000 in the liability recorded at December 31,1998.  The deficiency is primarily theresult of initial net adverse development of reserves at December 31, 1998 and1997 which is consistent with the Registrant's loss development history.

 

                TheRegistrant believes that its book ofbusiness, particularly Motor Club's PPA book of business, has loss developmentcharacteristics which result in initial adverse development ("InitialDevelopment") but ultimately develop closer to the reserves initiallyestablished.  This Initial Developmenttypically occurs during the first 24 to 36 months of a given year’sreserves.  Historically, the InitialDevelopment has been offset by redundancies from older years approximating orgreater than the Initial Development. However, as Motor Club's PPA book of business has grown, the InitialDevelopment has been greater than the redundancies in  older years.

 

                TheRegistrant believes that as the new PPA book of business written by Motor Clubcontinues to stabilize and  mature, theNet Cumulative Deficiency in the more recent years will decline and thus thedeficiencies indicated will diminish. The Registrant believes this pattern is supported by the generallysequential decline in the Net Cumulative Deficiency from the most recent yearpresented to the oldest year presented. The Registrant also believes that the Initial Development referred to isgenerally consistent and identifiable in the table on page 15.

 

                TheRegistrant also believes that the 1996 adverse development is attributableprincipally to losses which occurred in 1996, primarily in Motor Club's PPAbook of business.  During 1996, MotorClub's new PPA book of business was in its first twelve months ofdevelopment.  As is consistent withapplicable New Jersey statutes, no new business had yet been non-renewed,resulting in a book of PPA business that lacked historical experience.  Thereafter, certain business was non-renewedand the performance of the book has improved. Given the adverse development of this particular year, it is possiblethat the Net Cumulative Deficiency for 1996 may not develop consistently withthe other years described above, but the Registrant does not believe that thisis indicative of prospective loss development for years after 1996.

 

                Thedifferences between the liability for unpaid losses and loss expenses reportedin the Registrant's consolidated financial statements prepared in accordancewith GAAP and those reported in the annual statements filed by the InsuranceCompanies with State insurance departments in accordance with SAP arereconciled as follows:

 
|                                                                                                                               |   | **December 31,**            |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                                               |   | **1999**                    |   | **1998** |   | **1997** |   |
|                                                                                                                               |   | **(thousands of  dollars)** |   |
| Liability for unpaid losses and loss expenses on a SAP  basis (net of reinsurance recoverables on unpaid losses and loss expenses) |   | $                           | 56,759 |   | $ | 43,111 |   | $ | 35,900 |   |
| Reinsurance recoverables on unpaid losses and loss  expenses                                                                       |   | 18,454                      |   | 18,521 |   | 17,363 |   |
| Anticipated salvage and subrogation recoveries                                                                                     |   | (4,230                      | )      | (3,297 | ) | (3,016 | ) |
| Liability for unpaid losses and loss expenses, as  reported in the Registrant's GAAP basis financial statements                    |   | $                           | 70,983 |   | $ | 58,335 |   | $ | 50,247 |   |

 

                The anticipatedeffect of inflation is implicitly considered when estimating liabilities forlosses and loss expenses.  Whileanticipated price increases due to inflation are considered in estimating theultimate claim costs, the increase in the average severity of claims is causedby a number of factors that vary with the individual type of policywritten.  These anticipated trends aremonitored based on actual development and are modified if necessary.

 

                The table on Page16 presents the development of the GAAP balance sheet liabilities for 1990through 1999; data is presented for those years in which the InsuranceCompanies had operations and were owned by the Registrant.

 

                The top line onthe table shows the estimated liability for unpaid losses and loss expensesrecorded at the balance sheet date for each of the indicated years.  This liability represents the estimatedamount of losses and loss expenses for claims arising in that and all prioryears that are unpaid at the balance sheet date, including losses that had beenincurred but not yet reported. The upper portion of the table shows the re–estimatedamount of the previously recorded liability, based on experience as of the endof each succeeding year.  The estimateis increased or decreased as more information becomes known about the frequencyand severity of claims for development years. The Net Cumulative Deficiency represents the aggregate change in theestimates over all prior years.  Thelower section of the table shows the cumulative amounts paid with respect topreviously recorded liabilities as of the end of each succeeding year.

 

                In evaluating thisinformation, it should be noted that each amount includes the effects of allchanges in amounts for prior periods. For example, the amount of deficiency relating to losses settled in1998, but incurred in 1993, will be included in the cumulative deficiency forthe 1998 year.

 

                This table doesnot present accident or policy year development data, which readers may be moreaccustomed to analyzing.  Conditions andtrends that have affected development of liabilities in the past may notnecessarily occur in the future. Accordingly, it may not be appropriate toextrapolate future redundancies or deficiencies based on this table.

 

                Prior to 1992, theRegistrant conducted private passenger operations in New Jersey through MotorClub of America Insurance Company ("Motor Club") (which continues)and nationwide general insurance operations through a separate subsidiary, MCAInsurance Company ("MCAIC") and its insurance subsidiary, PropertyCasualty Company of MCA ("PCCMCA"). The operations of Motor Club areincluded in the Registrant's loss reserve disclosures.  The operations of MCAIC and PCCMCA have notbeen included in the loss reserve disclosures due to MCAIC's insolvency in thatyear as a result of Hurricane Andrew. Since the Registrant wrote-off its investment in MCAIC that year, andbecause the losses attributable to MCAIC are subject to the control of itsReceiver, there is no additional loss development from those operations whichimpact the results of the Registrant since that time.  Accordingly, the loss reserve disclosures were amended to includeonly those operations in which the Registrant is currently involved.

 

LOSS AND LOSS EXPENSE DEVELOPMENT (In Thousands)
| **Year ended December 31**                                                      |   | **1990** |   | **1991** |   | **1992** |   | **1993** |   | **1994** |   | **1995** |   | **1996** |   | **1997** |   | **1998** |   | **1999** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                                            |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |
| Liability for unpaid losses and loss expenses,  net of reinsurance recoverables |   | $        | 27,362 |     | $      | 26,494   |   | $        | 28,469 |     | $      | 25,334   |   | $        | 22,356 |     | $      | 23,409   |   | $        | 28,114 |   | $ | 32,884 |   | $ | 39,814 |   | $ | 52,529 |   |
| Net Liability Re–estimated as of:                                          |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |
| One year later                                                                  |   | 28,770   |   | 30,173   |   | 27,145   |   | 26,253   |   | 23,468   |   | 24,313   |   | 31,887   |   | 36,765   |   | 43,173   |   | -        |   |
| Two years later                                                                 |   | 29,580   |   | 28,954   |   | 28,563   |   | 26,766   |   | 23,813   |   | 25,759   |   | 33,848   |   | 38,422   |   | -        |   | -        |   |
| Three years later                                                               |   | 28,760   |   | 29,733   |   | 28,454   |   | 26,819   |   | 24,181   |   | 25,680   |   | 33,527   |   | -        |   | -        |   | -        |   |
| Four years later                                                                |   | 28,636   |   | 28,934   |   | 28,702   |   | 26,572   |   | 23,759   |   | 25,252   |   | -        |   | -        |   | -        |   | -        |   |
| Five years later                                                                |   | 28,104   |   | 29,071   |   | 28,662   |   | 26,066   |   | 23,221   |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Six years later                                                                 |   | 28,229   |   | 28,954   |   | 28,516   |   | 25,330   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Seven years later                                                               |   | 28,205   |   | 28,920   |   | 27,719   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Eight years later                                                               |   | 28,197   |   | 28,653   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Nine years later                                                                |   | 27,953   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
|                                                                            |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |
| Net Cumulative Redundancy (Deficiency)                                          |   | $        | (591   | )        | $      | (2,159   | )      | $        | 750    |     | $      | 4        |   | $        | (865   | )        | $      | (1,843   | )      | $        | (5,413 | ) | $ | (5,538 | ) | $ | (3,359 | ) | - |   |
|                                                                            |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |
| Cumulative  Amount of Liability Paid Through:                                   |   |
|                                                                            |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |
| One year later                                                                  |   | 14,270   |   | 11,979   |   | 12,314   |   | 12,311   |   | 11,106   |   | 11,414   |   | 16,203   |   | 17,511   |   | 20,288   |   | -        |   |
| Two years later                                                                 |   | 19,593   |   | 18,855   |   | 20,270   |   | 18,992   |   | 17,231   |   | 18,357   |   | 24,830   |   | 28,427   |   | -        |   | -        |   |
| Three years later                                                               |   | 23,796   |   | 24,161   |   | 24,546   |   | 23,032   |   | 20,821   |   | 22,164   |   | 30,685   |   | -        |   | -        |   | -        |   |
| Four years later                                                                |   | 26,120   |   | 26,365   |   | 26,878   |   | 24,882   |   | 22,488   |   | 24,586   |   | -        |   | -        |   | -        |   | -        |   |
| Five years later                                                                |   | 26,900   |   | 27,696   |   | 27,642   |   | 25,373   |   | 23,297   |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Six years later                                                                 |   | 27,444   |   | 28,207   |   | 26,810   |   | 25,818   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Seven years later                                                               |   | 27,739   |   | 28,265   |   | 27,194   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Eight years later                                                               |   | 27,725   |   | 28,394   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
| Nine years later                                                                |   | 27,788   |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   | -        |   |
|                                                                            |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |     |   |
| Net liability - December 31                                                     |   | $        | 27,362 |     | $      | 26,494   |   | $        | 28,469 |     | $      | 25,334   |   | $        | 22,356 |     | $      | 23,409   |   | $        | 28,114 |   | $ | 32,884 |   | $ | 39,814 |   | 52,529 |   |
| Reinsurance recoverables                                                        |   | 20,037   |   | 29,003   |   | 21,698   |   | 20,484   |   | 19,309   |   | 16,415   |   | 19,553   |   | 17,363   |   | 18,521   |   | 18,454   |   |
| Gross  liability - December 31                                                  |   | $        | 47,399 |     | $      | 55,497   |   | $        | 50,167 |     | $      | 45,818   |   | $        | 41,665 |     | $      | 39,824   |   | $        | 47,667 |   | $ | 50,247 |   | $ | 58,335 |   | $ | 70,983 |   |

 

                The reserve fornet losses and loss expenses with respect to North East is only included in theconsolidated net losses and expenses as of December 31, 1999.  No reserve development is presented hereinas these operations were not owned prior to the third quarter of 1999.

 

**Reinsurance**

                The InsuranceCompanies follow the customary industry practice of reinsuring a portion oftheir risks and paying to reinsurers a portion of the premiums received on thepolicies.  The Insurance Companies'reinsurance program permits greater diversification of business and the abilityto write larger policies while limiting maximum net losses; in addition, the reinsurance program is designed toprotect against catastrophic losses. Reinsurance does not legally discharge an insurer from its primaryliability for the full amount of the policies, although it does make thereinsurer liable to the insurer to the extent of the reinsurance ceded.  Therefore, the Insurance Companies aresubject to credit risk with respect to their reinsurers.

 

                Reinsurance forproperty losses of Preserver is maintained under a per risk excess of losstreaty affording recovery to $2 million, in excess of a retention of$100,000.  This retention had been$75,000 until July 1, 1997. Preserver also maintains a 100% quota share treatyfor boiler and machinery coverage.

 

                Casualtyreinsurance is currently maintained for Motor Club and Preserver under anexcess of loss treaty affording recovery up to $3 million, in excess of aretention of $150,000.  This retentionwas increased to $200,000 on January 1, 2000. Preserver also maintains reinsurance coverage for personal andcommercial umbrella policies up to $2 million for personal lines policies andup to $5 million for commercial lines policies.  Effective March 1, 1998, Preserver entered into reinsurancecontracts for the workers' compensation policies it commenced writing on thatdate.  An 80% quota share reinsurancecontract on the first $500,000 of workers' compensation coverage has beenimplemented; an excess of loss treaty affording coverage up to $10 million inexcess of the retention of $500,000 has also been implemented.

 

                Effective January1, 1999, Preserver purchased aggregate stop loss reinsurance for all of itslines of business which will provide $3 million coverage in excess of a lossratio of 67.5% (in 1999) after the application of all other reinsurance.  The treaty is subject to experienceadjustments over a three-year period. This treaty affords Preserver protectionagainst elevated levels of frequency or severity of losses which are notconsistent with its historical experience, and includes, but is not limited to,weather-related events which may not rise to the level of a catastrophe,subject to a dollar limit.

 

                Motor Club andPreserver also maintained an 80% quota share reinsurance agreement for theirnon-automobile policies issued prior to February 19, 1994, until theirexpiration dates.

 

                North East'sreinsurance protection is provided through two layers of excess of lossreinsurance.  The first layer assumes$150,000 of coverage beyond the first $50,000. The second layer allows North East to offer policy limits up to$1,000,000 by assuming $800,000 of coverage beyond the first $200,000.

 

                In addition, MotorClub, Preserver and North East's catastrophe reinsurance program presentlycovers substantially all of the losses in excess of $500,000 up to $42.5million.

 

                The InsuranceCompanies consider numerous factors in selecting reinsurers, the most importantof which is the financial stability of the reinsurer.  The Insurance Companies have not experienced any materialcollectibility problems for its reinsurance recoverables.

 

**Competition**

 

                The property andcasualty insurance industry is generally highly competitive on the basis of bothprice and service.

 

                There are numerouscompanies competing for the coverages which Preserver offers in New Jersey,many of which are substantially larger and have considerably greater resourcesthan Preserver.  In addition, becausePreserver's insurance products are marketed exclusively through independentinsurance agencies, most of which represent more than one insurance company,Preserver faces competition within each agency.

 

                The commerciallines markets that the Registrant's insurance subsidiaries engage in are highlycompetitive markets that are often subject to significant pressures, includingbut not limited to the pricing of individual risks.  As the Registrant's insurance subsidiaries become more involvedin the commercial lines markets, these competitive issues will become morewidespread.

 

                While Motor Clubdistributes its personal auto policies similarly and thus faces the same issuesas Preserver in concept, the personal auto regulatory environment in NewJersey, particularly its "take-all-comers" requirements (seeRegulation), has suppressed competition and effectively eliminated riskselection.  In addition, the New Jerseymarket has historically been subject to regulatory and legislative volatilitywhich has, at times, adversely affected the profitability of the PPA line ofbusiness, further suppressing competition. Finally, approximately 24% of Motor Club's appointed independentinsurance agencies represent only Motor Club for PPA coverage and thus, MotorClub has no competition for this business in those agencies.  New Jersey law also substantially restrictsthe ability of an insurer to terminate its agencies, limiting Motor Club'sability to manage its agency force for PPA. Management believes this lack of competition in PPA presents asignificant business risk which must be monitored very closely on an ongoingbasis.

 

                North Eastsimilarly distributes its products through the independent insurance agencysystem.

**Investmentsand Information about Market Risk**

 

                Management hasmaintained, in its opinion, a conservative investing philosophy.  The Registrant manages its investmentportfolio with the assistance of investment professionals based on guidelinesestablished by management and approved by the Board of Directors.

 

                The overall goalof the portfolio is to enhance investment returns within the structure oflimited credit risk assumption which management has utilized, with evaluationsof portfolio duration made in relation to the current interest rateenvironment.

 

                During 1998, the Registrant'sinvestment guidelines were expanded to allow for a higher percentage ofinvestments in investment grade corporate bonds and mortgage-backed securitiesand to include certain investment grade asset-backed securities, which providemore structured cash flows.   Theobjectives of these changes to the Registrant's investment policy were: (1) toreduce the amount of interest risk in the portfolio; and (2) enhance portfolioyield without unreasonably increasing credit risk.  The Registrant believes these objectives have been accomplished.

 

                The Registrantdoes not invest in or hold any derivative financial instruments.

 

                Tax exemptsecurities have not been acquired. Management believes that the current tax position of the Registrant,which includes net operating loss carryforwards, dictates the exclusion of taxexempt securities from the portfolio, which historically provide substantiallylower yields on a before tax basis than taxable securities.

 

                Market riskrepresents the potential for loss due to adverse changes in the fair value offinancial instruments.  The market risksrelated to the financial instruments of the Registrant relate to the investmentportfolio, which exposes the Registrant to risks related to interest rates, andto a lesser extent, credit quality and prepayment.  The Registrant does not have exposure to foreign currencyexchange rates or equity prices.

 

                Interest rate riskis the price sensitivity of a fixed income security to changes in interestrates.  The Registrant views thesepotential changes in price within the overall context of asset and liabilitymanagement.  The payout pattern ofinsurance liabilities are actuarially determined, to determine their duration,which is the present value of the weighted average payments expressed inyears.  Duration targets are then setfor the Registrant's fixed income investment portfolio after consideration ofthese liabilities and other factors, which the Registrant believes mitigatesthe overall effect of its exposure to interest rate risk.

 

                At December 31,1999 and 1998, the Registrant's investment portfolio was comprised of thefollowing types of securities:

 
|                       |   | **December 31,  1999** |       | **December 31,  1998** |   |
|----------------------------|--------|------------------------|------------|------------------------|--------|
|                       |   | **Market**             |       |                   |   | **Market** |   |   |   |
|                       |   | **Value**              |       | **Percent**            |   | **Value** |   | **Percent** |   |
| Taxable Fixed Maturities   |   | $                      | 78,242,322 |                   | 89.9   | % | $ | 69,594,904 |   | 91.6 | % |
| Equity Securities          |   | 57,053                 |       | 0.1                    | %      | - |   | - |   |
| Short Term Investments     |   | 8,528,858              |       | 9.8                    | %      | 5,995,299 |   | 7.9 | % |
| Mortgage Loans             |   | 153,616                |       | 0.2                    | %      | 361,038 |   | 0.5 | % |
| Total Investment Portfolio |   | $                      | 86,981,849 |                   | 100.0  | % | $ | 75,951,241 |   | 100.0 | % |

 

                AtDecember 31, 1999 and 1998, the taxable fixed maturity portfolio consisted ofthe following types of securities:

 
|                              |   | **December 31,  1999** |       | **December 31,  1998** |   |
|-----------------------------------|--------|------------------------|------------|------------------------|--------|
|                              |   | **Market**             |       |                   |   | **Market** |   |   |   |
|                              |   | **Value**              |       | **Percent**            |   | **Value** |   | **Percent** |   |
| United States Treasuries     |   | $                      | 16,247,679 |                   | 20.8   | % | $ | 18,669,055 |   | 26.8 | % |
| United States Government Agencies |   | 3,674,004              |       | 4.7                    | %      | 4,476,576 |   | 6.5 | % |
| Mortgage-Backed Securities        |   | 10,406,357             |       | 13.3                   | %      | 11,213,589 |   | 16.1 | % |
| Asset-Backed Securities           |   | 10,238,852             |       | 13.1                   | %      | 10,805,970 |   | 15.5 | % |
| Corporate Bonds                   |   | 37,675,430             |       | 48.1                   | %      | 24,429,714 |   | 35.1 | % |
| Total                             |   | $                      | 78,242,322 |                   | 100.0  | % | $ | 69,594,904 |   | 100.0 | % |

 

                Mortgage-backedsecurities ("MBS") consist primarily of Government National MortgageAssociation issues, along with other MBS issues of the United StatesGovernment.  Asset-backed securities("ABS") issues are all rated "Aaa" by Moody's and"AAA" by Standard & Poor's. The underlying collateral of ABS issues at December 31, 1999 consistsprimarily of home equity loans.

 

                The taxable fixedmaturity portfolio duration at December 31, 1999 and 1998 was 3.60 and 3.69years, respectively.

 

                United StatesTreasuries are weighted towards maturities of five years or less, to reduceinterest rate risk and match the Insurance Companies' claims payout ratios; corporateobligations are generally weighted towards five to ten year maturities, to takeadvantage of the yield curve; the average life of the GNMA portfolio has beenmaintained at approximately 10 years to reduce interest rate risk.

 

                Please refer to NoteC in the Notes to Consolidated Financial Statements ("Notes") forstatistics regarding portfolio maturity composition.

 

                The Registrant hasnot acquired, nor are there plans to acquire, below investment grade or"junk" bonds.  Ninety- threepercent of the fixed maturity portfolio as of December 31, 1999 was gradedClass 1 according to the National Association of Insurance Commissioners'valuation system.  This classificationis reserved for only the highest quality securities, generally rated A orbetter by two major rating services.

 

                At December 31,1999 and 1998, the Registrant's taxable fixed maturity investment portfolio atmarket value by Moody's rating was:

 
|                                |   | **December 31,  1999** |       | **December 31,  1998** |   |
|-------------------------------------|--------|------------------------|------------|------------------------|--------|
|                                |   | **Market**             |       |                   |   | **Market** |   |   |   |
|                                |   | **Value**              |       | **Percent**            |   | **Value** |   | **Percent** |   |
|                                |   |                   |       |                   |   |   |   |   |   |
| United States Government Securities |   | $                      | 29,806,727 |                   | 38.1   | % | $ | 34,359,229 |   | 49.4 | % |
| Aaa                                 |   | 10,238,852             |       | 13.1                   | %      | 11,311,103 |   | 16.2 | % |
| Aa                                  |   | 10,242,675             |       | 13.1                   | %      | 7,504,082 |   | 10.8 | % |
| A                                   |   | 23,062,545             |       | 29.4                   | %      | 13,388,045 |   | 19.2 | % |
| Baa                                 |   | 4,891,523              |       | 6.3                    | %      | 3,032,445 |   | 4.4 | % |
| Total                               |   | $                      | 78,242,322 |                   | 100.0  | % | $ | 69,594,904 |   | 100.0 | % |

 

                The followingtable provides information about the Registrant's taxable fixed maturityportfolio at December 31, 1999 that are sensitive to changes in interestrates.  The table presents cash flows ofprincipal amounts and related weighted average interest rates by expectedmaturity dates.  The cash flows arebased on the earlier of the call date or the maturity date or, for mortgage andasset-backed securities, expected payments patterns.  Actual cash flows could differ from the expected amounts.

 

## **EXPECTEDCASH FLOWS OF PRINCIPAL AMOUNTS**

 
|                                              |   |      |            |      |   |       |   |      |      |      |   |            |   |          |      | **ESTIMATED** |   |
|---------------------------------------------------|--------|-----------|-----------------|-----------|--------|------------|--------|-----------|-----------|-----------|--------|-----------------|--------|---------------|-----------|---------------|--------|
|                                              |   |      |            |      |   |       |   |      |      |      |   |            |   | **AMORTIZED** |      | **MARKET**    |   |
|                                              |   | **2000**  |            | **2001**  |   | **2002**   |   | **2003**  |      | **2004**  |   | **Thereafter**  |   | **COST**      |      | **VALUE**     |   |
| Taxable-- Other than mortgage-  backed securities |   | $         | 5,046,263       |      | $      | 6,167,374  |   | $         | 5,723,201 |      | $      | 4,697,212       |   | $             | 4,423,521 |          | $      | 33,663,944 |   | $ | 59,721,515 |   | $ | 57,600,113 |   |
| Average interest rate                             |   | 6.3       | %               | 7.0       | %      | 6.5        | %      | 6.1       | %         | 6.8       | %      | 6.4             | %      | 6.5           | %         |          |   |
| Mortgage- backed securities                       |   | 108,869   |            | 378,804   |   | 1,079,497  |   | 1,924,791 |      | 2,726,253 |   | 4,460,149       |   | 10,678,363    |      | 10,406,357    |   |
| Average interest rate                             |   | 7.1       | %               | 5.7       | %      | 6.6        | %      | 6.3       | %         | 7.2       | %      | 6.6             | %      | 6.7           | %         |          |   |
| Asset-backed securities                           |   | 1,772,715 |            | 3,499,834 |   | 999,971    |   | 1,997,409 |      | -         |   | 2,184,957       |   | 10,454,886    |      | 10,238,852    |   |
| Average interest rate                             |   | 6.3       | %               | 6.4       | %      | 6.4        | %      | 6.2       | %         | 0.0       | %      | 6.7             | %      | 6.4           | %         |          |   |
| Total                                             |   | $         | 6,927,847  |      | $      | 10,046,012 |   | $         | 7,802,669 |      | $      | 8,619,412  |   | $             | 7,149,774 |          | $      | 40,309,050 |   | $ | 80,854,764 |   | $ | 78,242,322 |   |

 

                Managementanticipates continuing this minimum risk approach to investing for theforeseeable future.  Management believesthat the mix of investments in both type and maturity length is appropriate inorder to preserve capital, take advantage of investment opportunities as theyare presented, and provide the Registrant and its subsidiaries with sufficientliquidity to react to economic and business circumstances as they evolve.

 

                The Registrant'sinvestment portfolio yielded 6.43%, 6.30% and 6.41% in 1999, 1998 and 1997,respectively. Including realized gains and losses, the investment portfolioyielded 6.57%, 6.34% and 6.41% in 1999, 1998 and 1997, respectively.

 

**Regulation**

 

General

 

                Insurancecompanies are subject to supervision and regulation in the states in which theytransact business.  Such supervision andregulation relate to numerous aspects of an insurance company's business andfinancial condition.  The primarypurpose of such supervision and regulation is the protection of policyholders.  The extent of such regulation varies, butgenerally derives from state statutes which delegate regulatory, supervisoryand administrative authority to state insurance departments. Accordingly, theauthority of the state insurance departments includes the establishment ofstandards of solvency which must be met and maintained by insurers; thelicensing to do business of insurers and agents; the nature of and limitationson investments; premium rates for property and casualty insurance; theprovisions which insurers must make for current losses and future liabilities;the deposit of securities for the benefit of policyholders; and the approval ofpolicy forms.  Insurance departmentsalso conduct periodic examinations of the affairs of insurance companies andrequire the filing of annual and other reports relating to the financialcondition of insurance companies.

 

                State law requiresthe Insurance Companies to participate in involuntary insurance programs forautomobile insurance, as well as other property and casualty lines. Theseprograms include joint underwriting associations, assigned risk plans, fairaccess to insurance requirements plans and reinsurance facilities.  These laws generally require all companiesthat write lines covered by these programs to provide coverage (either directlyor through reinsurance) for insureds who cannot obtain insurance in thevoluntary market.  The legislationcreating these programs usually allocates a pro rata portion of risksattributable to such insureds to each company on the basis of direct writtenpremiums or the number of automobiles insured. Generally, state law requires participation in such programs as acondition to doing business.  The lossratio on insurance written under involuntary programs generally has beengreater than the loss ratio on insurance in the voluntary market.

 

                During 1997, MotorClub began to participate in the New Jersey Personal Automobile Insurance Plan;fees totaling $153,000, $254,000 and $191,000 were paid in 1999, 1998 and 1997,respectively, to a servicing carrier rather than process these policies andtake a risk of further loss.

 

                State insuranceholding company acts regulate insurance holding company systems.  Each insurance company in the holdingcompany system is required to register with the insurance supervisory agency ofits state of domicile and furnish certain information concerning the operationsof companies within the holding company system that may materially affect theoperations, management or financial condition of the insurers within thesystem.  Such laws further requiredisclosure of material transactions including the payment of “extraordinarydividends” from the insurance subsidiaries to the Registrant.

 

                Insurance holdingcompany acts require that all transactions within the holding company systemaffecting the insurance subsidiaries must be fair and equitable.  Further, approval of the insurancecommissioner is required prior to the consummation of transactions affectingthe control of an insurer.

 

                Motor Club andPreserver are restricted by the insurance laws of New Jersey as to the amountof dividends they may pay to the Registrant without prior approval of theCommissioner of Banking and Insurance. To the extent that statutorily defined surplus is available, the maximumdividend that may be paid by either Motor Club or Preserver during any yearwithout prior regulatory approval is limited to the greater of 10% of thatCompany's statutory surplus as of the prior December 31, or adjusted net incomeof that Company, for the preceding year. Applying current regulatory restrictions as of December 31, 1999,approximately $1.2 and $1.3 million in dividends would be available fordistribution by Motor Club and Preserver, respectively, to the Registrantwithout prior regulatory approval during 2000. During 1999 and 1998, Motor Club paid $250,000 and $1,000,000 individends to the Registrant, respectively. No dividends were paid in 1997.

 

                North East isrestricted by the insurance laws of Maine as to the amount of dividends it maypay to the Registrant without prior approval of the Maine Superintendent ofInsurance.  To the extent thatstatutorily defined surplus is available, the maximum dividend that may be paidby North East without prior regulatory approval is limited to the greater of10% of the Company's statutory surplus as of the prior December 31 or netinvestment income.  Based on the currentaccumulated statutory unassigned deficit, North East is prohibited from payingdividends.

 

                American Colonialis restricted by the insurance laws of New York as to the amount of dividendsit may pay North East without prior approval of the Insurance Commissioner ofthe State of New York.  To the extentthat statutorily defined surplus is available, the maximum dividend that may bepaid by American Colonial without prior regulatory approval is limited to 100%of net investment income.  Applyingcurrent regulatory restrictions as of December 31, 1999, approximately $453,000in dividends would be available for distribution by American Colonial.  During 1999, American Colonial paid $499,031in dividends to North East.  Nodividends were paid in 1998 or 1997.

National Association of Insurance Commissioners("NAIC")

 

                The InsuranceCompanies are subject to the general statutory accounting practices andreporting formats established by the NAIC as well as accounting practicesprescribed or permitted by the respective Departments of Insurance in thestates in which they are domiciled.  TheNAIC has codified SAP to afford preparers and users of statutory basisfinancial statements a more uniform application of SAP by insurers in differingstates of domicile.  It is not knownwhether regulatory authorities in the State of New York will recognize SAP ascodified by the NAIC as the approved basis of financial statement preparationfor insurers domiciled in that State. The States of Maine and New Jersey have adopted codification ofSAP.  The Registrant has not yetdetermined the impact of codification of SAP on the Insurance Companiesstatutory financial statements.

 

                The NAIC alsopromulgates model insurance laws and regulations relating to the financial andoperational regulation of insurance companies, which includes the InsuranceRegulating Information System (“IRIS”). IRIS identifies eleven industry ratiosand specifies "usual values" for each ratio.  Departure from the usual values on four ormore of the ratios can lead to inquiries from individual state insurancecommissioners as to certain aspects of an insurer’s business.  The Insurance Companies have, in recentyears, met substantially all of the IRIS test ratios.

 

                NAIC model rulesand regulations generally are not directly applicable to an insurance companyuntil they are adopted by applicable state legislatures and departments ofinsurance.  However, NAIC model laws andregulations have become increasingly important in recent years, due primarilyto the NAIC's Financial Regulations Standards and Accreditation Program. Underthis program, states which have adopted certain required model laws andregulations and meet various staffing and other requirements are"accredited" by the NAIC. Such accreditation reflects an eventual nationwide regulatory network ofaccredited states.  The States of New Jersey,New York and Maine are accredited by the NAIC.

 

                The NAIC hasadopted Risk-Based Capital ("RBC") requirements for property/casualtyinsurance companies, to evaluate the adequacy of statutory capital and surplusin relation to investment and insurance risks such as asset quality, creditrisk, loss reserve adequacy and other business factors.  The RBC formula is used by State insuranceregulators as an early warning tool to identify, for the purpose of initiatingregulatory action, insurance companies that potentially are inadequatelycapitalized.  Regulatory compliance isdetermined by a ratio of the insurer's regulatory total adjusted capital to itsauthorized control level RBC, as defined by the NAIC.  Insurers below specific trigger points or ratios are classifiedwithin certain levels, each of which requires specific corrective action.  The ratios of the Insurance Companies are inexcess of that required, therefore requiring no action.

 

New Jersey Private Passenger Automobile

 

                The New Jersey PPAmarket has historically been subject to regulatory and legislative volatilitywhich has, at times, adversely affected the profitability of this line ofbusiness, despite New Jersey having among the highest average premium rates inthe United States.  New Jersey insurancelaw presently requires insurers to write all eligible PPA coverage presented tothem from drivers with eight points or less on their driving record.  This is commonly referred to as"take-all-comers".

 

                The NJ DOBI maygrant an insurer relief, by written notification, from writing new PPA businesspursuant to the take-all-comers provisions of New Jersey law if a showing findsthat the insurer's premium to surplus ("leverage") ratio exceeds 3 to1.  Motor Club's present applicableleverage ratio for the year ended December 31, 1999 is 2.90 to 1.

 

                In June 1997, theState of New Jersey enacted PPA legislation, which principally: (1) repealedthe annual "flex" rate increase available to insurers, which wasrequired by law to be no less than 3%, and replaced it with an expedited priorapproval rate filing process for rate increase requests up to 3% on an overallbasis.  Subsequent to the enactment ofthis legislation, the Commissioner of the NJ DOBI froze all PPA insurance ratesuntil March 1998, but still has not yet promulgated the regulations requiredfor insurers to file for an expedited rate increase; (2) restricted the abilityof insurers to non-renew at their discretion up to 2% of their policies; (3)repealed the ability of insurers to non-renew one policy for every two newpolicies written in each rating territory; and (4) replaced the rating systemwhich assessed surcharges to insureds' policies for specific driving violationsand accidents with a broader-based tiered rating system. Motor Club’s tierrating system was approved by the NJ DOBI and was implemented on all PPA policieswith effective dates on and after November 1, 1998.

 

                Additional PPAlegislation was enacted in 1998 which: 1) allows insureds to reduce levels ofcompulsory coverages, including the option to reduce their coverage forPersonal Injury Protection ("PIP") to as low as $15,000, from thepresently required $250,000; 2) revises the PIP policy form to set forth themedical treatments and services, valid diagnostic tests and appropriate healthcare protocols which are eligible to be paid; 3) seeks to limit lawsuits byclaimants by redefining of the type of injury which would be grounds forlitigation; 4) replaces the present PIP arbitration system which utilizespart-time arbitrators who render only oral decisions without consulting medicalprofessionals with one using full-time dispute resolution professionals who mayrefer questions of medical necessity or diagnosis to medical revieworganizations and who must render written decisions; 5) appoints a specialfraud prosecutor to increase enforcement of fraudulent acts committed againstinsurance companies; 6) removes the system of territorial rating caps whichhave been in place since 1983, enabling insurers to modify (as appropriate)rates charged in various rating territories, which will be redefined; and 7) requiresup to a 15% reduction in rates on all PPA policies.

 

                Implementation ofmost of the provisions of the 1998 legislation (with one exception) commencedwith new policies issued on March 22, 1999. The only exception is the redefinition of the territories and removal ofthe territorial rating caps, which was scheduled to be implemented in2000.  The Registrant believes that thelegislation ultimately will have only a modest net negative effect on MotorClub's PPA operations and profitability, because the mandated rate reductionsdo not appear to be completely cost justified (based on information presentlyavailable) by the cost savings in the legislation.  However, in 1999, the Registrant did experience a more adversenegative effect which is discussed in greater detail in Item 7 - Management'sDiscussion and Analysis.

 

                Consistent withNew Jersey's regulatory and legislative history, the enacted and proposedlegislation, current rate freeze and ongoing volatility could adversely affectthe Registrant's long-term profitability in the PPA line of business.

 

                The State of NewJersey also maintains an excess profits law which provides that PPA insurerswhose profits exceed a statutorily computed maximum over a three year periodwill be required to pay such excess to its policyholders.  Motor Club has never reported any  excess profits under this law and theRegistrant believes that in 2000 none will be reported.

 

                The InsuranceCompanies were subject to certain assessments in the State of New Jersey, themost substantial of which had been the FAIR Act surtaxes and assessmentscommencing in 1990; the surtaxes expired after 1992 and the assessments expiredafter 1997.  FAIR Act assessmentstotaled $971,000 in 1997.

 

**Year2000**

 

                The computersystems of the Registrant and its subsidiaries successfully made the transitionto the Year 2000.  The Registrant'sinternal operating systems (hardware and software), infrastructure elements,communications systems, and personal computer hardware and software continuedto function properly in the Year 2000. No external vendor or business partner experienced century changedisruptions that materially affected the Registrant or its subsidiaries.  The Registrant did not experience anybusiness interruptions related to the Year 2000.  The Company's total cost of testing, contingency planning andadministrative support, including cost of personnel involved, cost to constructthe technical test environment and cost of consulting resources was less than$250,000.  All Year 2000 related costshave been expensed as incurred.  Therelated costs incurred in 2000 are not expected to be material.

 

**Employees**

 

                At December 31,1999, the Motor Club of America Group had approximately 132 employees.

 

Item 2. Properties

 

                Effective January1, 1996, the Registrant entered into a lease at 95 Route 17 South, Paramus, NewJersey.  The Registrant's home office islocated at this facility.  The leaseexpires on December 31, 2005.  TheRegistrant has an option to terminate the lease after six years, and an optionto extend the lease for an additional five years after the initial lease termexpires.

 

                North East leasesits home office located in Scarborough, Maine. The lease expires on December31, 2000 and North East pays annual rent of $145,000.

Item 3.  Legal Proceedings

 

                The InsuranceCompanies are a party to numerous lawsuits arising in the ordinary course oftheir insurance business.  TheRegistrant believes that the resolution of these lawsuits will not have amaterial adverse effect on its results of operations, financial condition, orcash flows.

 

Item 4.  Submission of Matters to a Vote of SecurityHolders

 

                No matter wassubmitted to a vote of security holders in the fourth quarter of 1999.

 

Item Pursuant to Instruction 3 to Paragraph (b) of Item401 of Regulation S–K. Executive Officers of the Registrant.

 

                At December 31,1999, the executive officers of the Registrant and their offices with theRegistrant and principal occupations were as follows:
|                   |   |   |    |                                                                                                                                                                                                                                                |           | **Years in**      |        |
|------------------------|--------|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|-------------------|-------------|
|                   |   |   |    |                                                                                                                                                                                                                                                |           | **Which Officer** |        |
|                   |   |   |    |                                                                                                                                                                                                                                                |           | **Has Served**    |        |
|                   |   |   |    | **Office and  Principal**                                                                                                                                                                                                                           |           | **as**            |        |
| **Name**               |   |   | **Age** |                                                                                                                                                                                                                                                | **Occupation** |              | **Such(3)** |   |
| Archer McWhorter (1)   |   | 78     |    | Chairman  of the Board of Directors and Director of the Registrant and Companies in the  Motor Club of America Group                                                                                                                                |           | 1986-1999         |        |
| Stephen A. Gilbert (2) |   | 60     |    | President,  Chief Executive Officer, General Counsel and Director of the Registrant and  Companies in the Motor Club of America Group; Chairman of the Board, Chief  Executive Officer and Director of North East Insurance Company                 |           | 1975-1999         |        |
| Patrick J. Haveron (2) |   | 38     |    | Executive  Vice President, Chief Executive Officer, 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 |           | 1988-1999         |        |
| Peter K. Barbano       |   | 49     |    | Vice  President, Secretary and Associate General Counsel                                                                                                                                                                                            |           | 1993-1999         |        |
| Myron Rogow            |   | 56     |    | Vice  President                                                                                                                                                                                                                                     |           | 1987–1999    |        |
| G. Bruce Patterson     |   | 55     |    | Vice  President                                                                                                                                                                                                                                     |           | 1989–1999    |        |
| Charles J. Pelosi      |   | 54     |    | Vice  President                                                                                                                                                                                                                                     |           | 1983–1999    |        |
| Norma Rodriguez        |   | 50     |    | Treasurer                                                                                                                                                                                                                                           |           | 1984–1999    |        |
|                        |        |        |         |                                                                                                                                                                                                                                                     |                |                   |             |  |

----

(1)           Chairmanof the Board of Directors of Companies in the Motor Club of America Group; from1995 to March 1997, Director of National Car Rental Systems, Inc. andaffiliated corporations, a car rental enterprise ("NCR"); from 1995to February 1997, one-third owner of Santa Ana Holdings, Inc., which exchangedits 90% stock interest in NCR for stock in Republic Industries, Inc.; fromFebruary 1997 to February 1998, consultant to NCR; President (to January 1996) ofAcceptance Inc., a finance company.

(2)           Memberof Finance Committee.

 

(3)           Includesyears during any portion of which the officer served as such.  All terms of office are until the date ofthe 2000 Annual Meetings of Stockholders and Directors.

 

                Except for ArcherMcWhorter, each of the officers devoted substantially all of their businesstime to the affairs of the Registrant or one or more other companies in theMotor Club of America Group.

** **

**PART II**

 

Item5.  Market for the Registrant's CommonEquity and Related Stockholder Matters

 

                The Registrant'sCommon Stock trades on the NASDAQ Stock Market under the symbol MOTR.  The following are the high and the lowselling prices for each quarter of 1998 and 1999, as reported by the NASDAQ:

 

| **1998**    |   |     |   |    |
|-------------|--------|----------|--------|---------|
| **Quarter** |   | **High** |   | **Low** |
| I           |   | 17  1/2  |   | 13  5/8 |
| II          |   | 17  5/8  |   | 15      |
| III         |   | 15  3/4  |   | 10      |
| IV          |   | 15  1/4  |   | 11  1/2 |

 

 

| **1999**    |   |     |   |    |
|-------------|--------|----------|--------|---------|
| **Quarter** |   | **High** |   | **Low** |
| I           |   | 14  7/8  |   | 13      |
| II          |   | 14       |   | 12      |
| III         |   | 13  1/2  |   | 10      |
| IV          |   | 10  7/8  |   | 7  1/2  |

 

                Therewere approximately 460 holders of record of the Common Stock of the Registrantas of December 31, 1999.  The Registrantpaid no dividends in 1998 and 1999.

Item6.  Selected Financial Data

 
|                                                  |   | **Years ended  December 31,**                    |    |
|-------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                  |   | **1999(1)(2)**                                   |    | **1998(2)** |   | **1997(2)** |   | **1996(2)** |   | **1995** |   |
|                                                  |   | **(in thousands,  except as to per share data)** |    |
| **Operating Results:**                                |   |                                             |    |   |   |   |   |   |   |   |   |
| Revenues from operations                              |   | $                                                | 55,951  |   | $ | 53,347 |   | $ | 51,102 |   | $ | 46,525 |   | $ | 36,703 |   |
| Realized gains on sale of investments                 |   | 36                                               |    | 28 |   | - |   | 5 |   | 57 |   |
| Realized gain on sale of subsidiary                   |   | -                                                |    | - |   | - |   | 702 |   | - |   |
| Net investment income                                 |   | 5,081                                            |    | 4,305 |   | 3,595 |   | 3,087 |   | 2,764 |   |
| Total revenues                                        |   | $                                                | 61,068  |   | $ | 57,680 |   | $ | 54,697 |   | $ | 50,319 |   | $ | 39,524 |   |
| Income before federal income taxes                    |   | $                                                | 102     |   | $ | 5,719 |   | $ | 4,630 |   | $ | 3,297 |   | $ | 2,455 |   |
| Net income                                            |   | $                                                | 91      |   | $ | 3,778 |   | $ | 3,356 |   | $ | 5,330 |   | $ | 2,417 |   |
|                                                  |   |                                             |    |   |   |   |   |   |   |   |   |
| **Financial Condition:**                              |   |                                             |    |   |   |   |   |   |   |   |   |
| Total assets                                          |   | $                                                | 156,588 |   | $ | 131,046 |   | $ | 102,787 |   | $ | 97,128 |   | $ | 81,959 |   |
| Convertible subordinated debentures                   |   | 10,000                                           |    | - |   | - |   | - |   | - |   |
| Shareholders' equity                                  |   | $                                                | 26,909  |   | $ | 28,814 |   | $ | 24,415 |   | $ | 20,381 |   | $ | 14,081 |   |
|                                                  |   |                                             |    |   |   |   |   |   |   |   |   |
| **Per Common Share:**                                 |   |                                             |    |   |   |   |   |   |   |   |   |
| Net income – Basic                               |   | $                                                | 0.04    |   | $ | 1.79 |   | $ | 1.62 |   | $ | 2.61 |   | $ | 1.18 |   |
| Net income – Diluted                             |   | $                                                | 0.04    |   | $ | 1.78 |   | $ | 1.60 |   | $ | 2.56 |   | $ | 1.17 |   |
| Book Value                                            |   | $                                                | 12.67   |   | $ | 13.61 |   | $ | 11.66 |   | $ | 9.95 |   | $ | 6.89 |   |
|                                                  |   |                                             |    |   |   |   |   |   |   |   |   |
| **Weighted average number of****shares outstanding**: |   |                                             |    |   |   |   |   |   |   |   |   |
| Basic                                                 |   | 2,117,912                                        |    | 2,108,722 |   | 2,074,473 |   | 2,045,590 |   | 2,043,197 |   |
| Diluted                                               |   | 2,121,697                                        |    | 2,121,366 |   | 2,102,395 |   | 2,081,080 |   | 2,061,791 |   |
|                                                  |   |                                             |    |   |   |   |   |   |   |   |   |
| **Significant Insurance Indicators:**                 |   |                                             |    |   |   |   |   |   |   |   |   |
| Net premiums written                                  |   | $                                                | 54,508  |   | $ | 64,303 |   | $ | 51,680 |   | $ | 47,337 |   | $ | 38,073 |   |
|                                                  |   |                                             |    |   |   |   |   |   |   |   |   |
| Loss and loss expense ratio                           |   | 72.8                                             | %       | 68.6 | % | 65.1 | % | 64.5 | % | 58.7 | % |
| Expense ratio                                         |   | 36.4                                             | %       | 29.1 | % | 33.3 | % | 37.9 | % | 43.9 | % |
| Combined ratio                                        |   | 109.2                                            | %       | 97.7 | % | 98.4 | % | 102.4 | % | 102.6 | % |

----

(1)           IncludesNorth East's balance sheet as of December 31, 1999 and results of operationsfor the three months ended December 31, 1999.

(2)           Thefinancial data as of and for the years ended December 31, 1996, 1997, 1998 and1999 have been restated as described in Note V in the Notes to the ConsolidatedFinancial Statements.

 

Item7.  Management's Discussion and Analysisof Financial Condition and Results of Operations

 

**Overview ofBusiness Operations**

 

                The Registrant and a group ofaffiliated corporations provide property and casualty insurance relatedservices.

 

                The Registrant has foursubsidiaries which write property and casualty insurance. Motor Club writes PPAbusiness in the State of New Jersey. Preserver writes small commercial,homeowners and ancillary coverages in that State.

 

                The Registrant is pursuing astrategy to: (1) increase its identification as a provider of small commerciallines insurance and has continued to expand its product line in support of thisobjective; and (2) expand and diversify its insurance operations outside theState of New Jersey. The Registrant believes that both of these objectives canbe attained through the acquisition of other insurance companies which presentopportunities to write these product lines in different geographic areas. TheRegistrant expects to continue to follow this strategy.

 

                On September 24, 1999, theRegistrant acquired North East and its subsidiaries for $10,483,000,principally in cash. North East writes private passenger and commercialautomobile as well as small commercial and ancillary coverages in the State ofMaine. American Colonial, a wholly–owned subsidiary of North East, hasnot written any insurance coverage since March 1990.

 

                On March 1, 2000, the Registrantcompleted the acquisition of Mountain Valley Indemnity Company ("MountainValley") from Unitrin, Inc. for $7.5 million in cash. Mountain Valley wasincorporated in 1995 in the State of New Hampshire and writes small and mid-sizedcommercial coverages in New York and all of the New England states exceptConnecticut.  The Registrant believesthat these acquisitions fully establish it as a regional  commercial lines company in New England andthe Mid–Atlantic regions.

 

                The Registrant anticipatescontinuing its emphasis of the small commercial and ancillary coverages writtenby Preserver in the State of New Jersey and through newly acquired AmericanColonial in New York and Mountain Valley in the States of New York,Massachusetts, New Hampshire, Vermont, Rhode Island and Maine. North East isexpected to increase its emphasis of small commercial coverages as well.  Motor Club and North East write PPA businessin the States of New Jersey and Maine, respectively. PPA business is expectedto increase.

 

                The Registrant also anticipatescontinued reductions in its operating expenses, namely through theimplementation of operating efficiencies which should reduce other overheadexpenditures.

 

                Historically, the InsuranceCompanies' results of operations have been influenced by factors affecting theproperty and casualty insurance industry in general and the New Jersey PPAmarket in particular.  The operatingresults of the U.S. property and casualty insurance industry have been subjectto significant variations due to competition, weather, catastrophic events,regulation, general economic conditions, judicial trends, fluctuations ininterest rates and other changes in the investment environment.

 

**Results ofOperations**

 

                In March 2001, the Company’s managementdetermined that certain tax benefits should not have been recognized and thatcertain deferred tax liabilities had not been recorded.  These tax matters relate to the tax effectsof temporary differences arising from MCAIC, which was de-consolidated forfinancial reporting purposes due to its insolvency in 1992(see Note I in theNotes to the Consolidated Financial Statements).  These tax matters have no impact on the operations, cash flow orcapital and surplus of the Company’s active insurance subsidiaries or onconsolidated income before Federal income taxes for the periods presented, noris the Company subject to penalties and interest on the recording of thedeferred tax liabilities.

 

                As a result, the 1997, 1998 and1999 Consolidated Financial Statements have been restated from amountspreviously reported.  The principaleffects of these items on the accompanying financial statements are presentedin Note V in the Notes to Consolidated Financial Statements.

 

                In addition,deferred tax assets were not recorded for the tax effects of the minimumpension liability that is presented as a component of other comprehensiveincome.  Shareholders’ equity atDecember 31, 1996 increased by $1,594,906, representing the cumulative effecton prior periods’ results of revising the tax accrual.

 

**1999 Comparedto 1998**

 

                On September 24, 1999 theRegistrant acquired North East. Accordingly, the consolidated results ofoperations include, using the purchase method of accounting, the results ofoperation of North East for the three months ended December 31, 1999. The tablebelow details the North East results from September 24 through December 31,1999:

 
| Insurance premiums                                |   | $         | 4,184,755 |   |
|---------------------------------------------------|--------|-----------|-----------|--------|
| Net investment income                             |   | 246,204   |      |
| Realized gains on sales of investments (net)      |   | 31,382    |      |
| Total revenues                                    |   | 4,462,341 |      |
|                                              |   |      |      |
| Losses and loss expenses incurred                 |   | 2,373,245 |      |
| Amortization of deferred policy acquisition costs |   | 981,149   |      |
| Other operating expenses                          |   | 857,655   |      |
| Total losses and expenses                         |   | 4,212,049 |      |
|                                              |   |      |      |
| Income before federal income taxes                |   | 250,292   |      |
| Provision for federal income taxes                |   | 79,371    |      |
| Net income                                        |   | $         | 170,921   |   |

 

                In addition, the Registrantincurred $800,000 in expenses related to the acquisition of North East.  For purposes of this discussion, the  North East results and non-recurring mergerexpenses are excluded in order to afford comparability.

 

                Excluding these items, netincome decreased $2,621,779 to $1,634,012 in 1999 from the $4,255,791 reportedin 1998. The decrease was the result of significantly higher New Jersey PPAlosses occurring in 1999, specifically PIP (No Fault) first party claims.  The provision for current year claims was$2,301,000 higher in 1999 than 1998. The Company believes that this development is attributable to the 1999implementation of the New Jersey Automobile Cost Reduction Act("AICRA"), which was designed to reduce both premium and losses inthat line of business in that State.

 

                The Registrant'snet income was also reduced by $511,000 of losses and expenses incurred as aresult of Hurricane Floyd which struck New Jersey in September 1999 and$217,000 in losses from severe storms which struck New Jersey in September1998.

 

                Insurance premiums declined by $1,553,000 or 3% in1999 as compared to 1998, due principally to the rate rollback provisions ofAICRA which were implemented commencing in 1999.  These amounts were offset by increases in Preserver insurancepremiums, particularly those generated by its commercial lines business.  The following table details the annualchanges in the 1999 Insurance Premiums and underlying in force policy counts ascompared to 1998:

 
|                          |   |            |             |        |   | **Change in** |   |
|-------------------------------|--------|-----------------|------------------|-------------|--------|---------------|--------|
|                          |   | **Change in**   |             |        |   | **Policy**    |   | **Change** |   |
| **Class of Business**         |   | **Net Premium** |             | **Percent** |   | **Count**     |   | **in Percent** |   |
| Private  Passenger Automobile |   | $               | (2,069,000       | )           | (5     | )%            | 14     |   | 0 | % |
| Commercial Lines              |   | 537,000         |             | 7           | %      | 404           |   | 7 | % |
| Personal Property             |   | (21,000         | )                | 0           | %      | (268          | )      | (2 | )% |
| Total                         |   | $               |  (1,553,000 | )           | (3     | )%            | 150    |   | 0 | % |

 

                As the table identifies, thedecrease in PPA business written by Motor Club was attributable to the raterollback and not a significant change in the number of policies inforce atDecember 31, 1999 as compared to 1998. The increase in Commercial Lines insurance premiums is reflective of theincreased number of policies that Preserver wrote during 1999.  Personal Property insurance premiums writtenby Preserver reflect modest amounts of new business written offset by aslightly higher attrition rate on existing policies in 1999 as compared to1998.

 

                Net investment income increased$530,000 or 12% resulting from an increase in invested assets. Average assets(at amortized cost) were $73,420,000 during 1999 compared to $68,374,000 during1998. The average rate of return on invested assets increased to 6.6% in 1999from 6.3% in 1998.

 

                Losses and loss expensesincreased by $1,778,217 or 5%, which produced the following loss and lossexpense ratios:

 

|       |   | **1999** |   | **1998** |   |
|------------|--------|----------|--------|----------|--------|
| Motor Club |   | 76.8     | %      | 71.6     | %      |
| Preserver  |   | 66.7     | %      | 59.6     | %      |
|       |   | 74.1     | %      | 68.6     | %      |

 

                As noted, the increase in theMotor Club loss ratio was largely driven by significantly higher PIP (No Fault)first party medical claims occurring in 1999 ("Accident Year1999").  The provision for AccidentYear 1999 PPA claims was $1,723,000 higher in 1999 as compared to 1998,accounting for 75% of the consolidated increase.  These losses did not increase until after the rate rollback andother provisions of AICRA were implemented. The Registrant believes that claimants filing more severe claims on anaccelerated basis than historical patterns dictated caused this increase.  The Registrant further believes that thisacceleration was caused by the implementation of regulations tightening the feeschedule, allowing pre-certification methodologies and permitting a revisedarbitration system, all of which should serve to ultimately reduce PIP claimcosts.

 

                While this accelerationincreased the level of reported losses incurred by Motor Club in 1999, theRegistrant reserved for its projected ultimate losses for Accident Year 1999 incoverage, generally using historical loss development patterns which indicatelonger development patterns than those which may occur in Accident Year1999.  Therefore the Registrantincreased the amount of incurred but not reported reserves for this coverage by$317,000 or 19% in 1999 as compared to 1998.

 

                The Registrant does not believethat the Motor Club Accident Year 1999 loss experience is indicative oflonger-term trends in PPA.  TheRegistrant expects to closely monitor loss development patterns in 2000 andbeyond to ensure that the level of reserves carried for PPA is adequate andappropriate as dictated by actual loss development.

 

                In addition, elements of AICRAand other statutory amendments have yet to be implemented, and as such, maystill have an impact on Motor Club's operations. The New Jersey PPA marketcontinues to be subject to volatility, and consistent with the Registrant'slong-stated goal to increase its identification as a provider of smallcommercial lines insurance and expand and diversify its operations outside theState of New Jersey, the Registrant is reviewing strategies to improve theprofitability of its PPA business and to otherwise add more value to itsshareholders.

 

                The net loss ratio for Preserverin 1998 was historically low; therefore the increase in Preserver's net lossratio in 1999 as compared to 1998 was partially caused by the net loss ratiosreturning to more representative experience. However, Preserver's direct loss ratio actually declined in 1999 ascompared to 1998, as the table below shows:

 

|              |   | **1999** |   | **1998** |   |
|-------------------|--------|----------|--------|----------|--------|
| Direct Loss Ratio |   | 56.7     | %      | 69.2     | %      |
| Ceded Loss Ratio  |   | 16.7     | %      | 117.2    | %      |
| Net Loss Ratio    |   | 66.7     | %      | 59.6     | %      |

 

                With Preserver'sreinsurance rates essentially unchanged during 1999 as compared to 1998, theremainder of the increase in the net loss ratio was attributable to anincreased number of severe losses that did not have any reinsurance recoveries,as compared to 1998.  Given therelatively small size of the Preserver book of business, a limited number ofsevere losses can adversely affect Preserver's net loss ratio results,depending on whether these losses were severe enough to generate a reinsurancerecovery. There were no trends or indications in 1999 that Preserver'sreinsurance programs were ineffective or that loss experience was adverse.

 

                The increase inamortization of deferred policy acquisition costs relates to the amortizationof expenses associated with the Policy Term Conversion which began in 1998 andwas completed in 1999.

 

                The 30% increasein other operating expenses is primarily due to the write off of uncollectiblepremium balances, which should be non-recurring. Expenses for 1999 alsoinclude  $800,000 of general merger andacquisition expense and $448,000 of interest expense.

 

                The Registrantcontinues to place emphasis on reducing overhead expenses relative to premiumvolume. Though the expense ratio increased to 34.3% in 1999 from 29.1% in 1998,the increase is primarily related to nonrecurring events. The Policy TermConversion, completed in 1999, will provide greater consistency in the amountof expense amortized related to acquisition expenses in 2000. Expensesassociated with merger and acquisition efforts, by definition are included inthe expense ratio, and are part of the Registrant's ongoing efforts to expandand diversify its operations beyond the State of New Jersey.

 

                The Registrant'sbook value decreased to $12.67 per share at December 31, 1999 from $13.61 pershare at December 31, 1998.

 

                The principalsources of the net decrease were: (1) net income of $91,000 or $.04 per sharedescribed previously; (2) an increase of $938,000 or $.44 per share (net ofapplicable deferred taxes) due to the decrease of the minimum required pensionliability for the defined benefit pension plan sponsored by the Registrant as aresult of asset gains and higher interest rates; offset by (3) a decrease of$3,007,000 or $1.42 per share due to the decrease (net of applicable deferredtaxes) in the fair value of fixed maturity and equity security investmentsaccounted for as available-for-sale securities under SFAS No. 115 ("Accountingfor Certain Investments in Debt and Equity Securities").

 

                As a company withinsurance subsidiaries that invests substantial sums in fixed incomesecurities, the Registrant is accustomed to fluctuations in the value of itsfixed income investments.  As noted, ithas also identified one hundred percent of those investments as available forsale pursuant to SFAS 115.  Accordingly,changes in the value of those investments are recorded as other comprehensiveincome.  Because the Registrant and theInsurance Companies' investment portfolios are composed completely ofsecurities which are generally highly liquid (i.e., U.S. government securitiesand investment grade corporate bonds), and that no default notices have beenreceived on any of those securities, there are no grounds to believe that theunrealized losses incurred in 1999 are other than temporary.  In addition, the combination of the durationof the portfolio being sufficiently short (approximately 3.60 years at December31, 1999), combined with the highly liquid nature of those securities and theRegistrant's proclivity to hold those bonds to maturity (although they areclassified as available to sale), the par value of those bonds should be fullyrealized at maturity, resulting in those unrealized losses being temporary.

 

                Inaddition, the Registrant generally believes that the longer-term trend forfuture movements in interest rates is toward lower interest rates, which wouldpositively effect the value of fixed income investments and reduce those unrealizedlosses and possibly convert those losses to unrealized gains, which wereexperienced as recently as twelve to eighteen months ago.  The Registrant believes the combination ofeconomic circumstances, which should result in slower overall economic growth,modest inflation and real long-term interest rates that remain historicallyhigh, all combines to result in lower longer-term interest rate trends.  The Registrant therefore would expect theunrealized losses experienced in 1999 to be temporary.

**1998 Compared to 1997**

 

                The13% increase in net income was largely due to the elimination of FAIR Actassessments paid through 1997, when $971,000 in expenses were incurred for thisassessment.  Absent the FAIR Actassessments in 1997, pre-tax income increased $118,000 or 2% in 1998 ascompared to 1997, due to continuing improvements in the combined ratio andhigher revenues for Preserver, higher investment income, offset by highercombined ratios for Motor Club due to the increasing effects of the new PPAbusiness which it has written.

 

                Insurance premiumsincreased by $2,298,000 or 5% during the year, due primarily to commerciallines premiums written by Preserver and savings on reinsurance programs. Thefollowing table details the annual increases in the 1998 Insurance Premiums andunderlying in force policy counts as compared to 1997:

 
|                         |   | **Increase in** |      | **Change in** |   |
|------------------------------|--------|-----------------|-----------|---------------|--------|
|                         |   | **Net**         |      |          |   | **Policy** |   |   |   |
| **Class of  Business**       |   | **Premium**     |      | **Percent**   |   | **Count** |   | **Percent** |   |
| Private Passenger Automobile |   | $               | 659,000   |          | 2      | % | (36 | ) | 0 | % |
| Commercial Lines             |   | 951,000         |      | 14            | %      | 476 |   | 9 | % |
| Personal Property            |   | 688,000         |      | 14            | %      | 140 |   | 1 | % |
| Total                        |   | $               | 2,298,000 |          | 5      | % | 580 |   | 1 | % |

 

                The Registrantcontinued to write new amounts of personal lines business, both PPA by MotorClub and Homeowners by Preserver. However, the growth in those respective linesof business was at  a slower rate thanthe Commercial Lines business written by Preserver.

 

                Net investmentincome increased $710,000 or 20% resulting from an increase in invested assets.Average invested assets (at amortized cost) were $68,374,000 during 1998 ascompared to $56,239,000 during 1997. The increase in insurance premiums notedabove, combined with the Note Payable discussed in Liquidity and CapitalResources, provided the increase in invested assets. Other revenues decreased$53,000 or 24%, due to declines in mortgage loan revenue, servicing fee incomeand other miscellaneous income items.

 

                Losses and lossexpenses incurred increased by $3,338,000 or 10%, which produced the followingloss and loss expense ratios:

 

|       |   | **1998** |   | **1997** |   |
|------------|--------|----------|--------|----------|--------|
| Motor Club |   | 71.6     | %      | 66.8     | %      |
| Preserver  |   | 59.6     | %      | 59.7     | %      |
| Total      |   | 68.6     | %      | 65.1     | %      |

 

                Despite the higherloss and loss expense ratio on a comparative basis, no significant adversetrends were experienced or identified during 1998.

 

                The increase inMotor Club's PPA loss and loss expense ratio was largely due to the newbusiness written by Motor Club since January 1995 which constituted 53% ofMotor Club's total PPA business as of December 31, 1998.

 

                As the Registrantcontinues to write additional new PPA business, PPA loss and loss expenseratios should generally continue to trend higher, although within levels thatshould remain profitable. However, the effects of the 1997 and 1998 PPA reformscontinue to be uncertain as to their ultimate outcome.  As noted previously, the Registrant believesthat the collective effect of these reforms to be a modest net negative.  During 1999 however, PPA revenue may declineon a per policy basis and its combined ratio may increase as a result of thereforms.

 

                Preservercontinues to experience stable loss and loss expenses and loss ratios.  During September 1998, severe storms struckNew Jersey, resulting in $217,000 in losses to Preserver which increased itsloss ratio by 2 points during 1998.  Frequency of losses remains at acceptable levels for all lines ofPreserver's business.

 

                More than half ofthe $1,787,000 or 12% decrease in acquisition costs was attributable to the1998 elimination of the FAIR Act assessments previously paid, which totaled$971,000 in 1997. The remainder of the decrease was attributable to thetemporary effects of the Policy Term Conversion, which has resulted inadditional expenses being deferred to reflect the increase in unearned premiumsthrough December 31, 1998.  Thiscircumstance was temporary as noted, and the amount of expense amortized in1999 related to acquisition expenses was expected to rise in conjunction withthe completion of the Policy Term Conversion.

 

                The $343,000 or20% increase in other operating expenses was due to increased expendituresrelated to the Registrant’s merger and acquisition efforts along withexpenditures to comply with the PPA reforms being implemented in New Jersey.

 

                This decrease innet expenses is the realization of the Registrant's previously stated strategyto increase its revenue while decreasing its overhead expenditures and resultedin a decrease in the expense ratio to 29.1% in 1998 as compared to 31.4% in1997 (as adjusted for the FAIR Act assessments described above).

 

                The Registrantexpects to reduce its expenses and expense ratio further in the long-term bypursuing further automation of its policy processing functions, particularly asrelates to data provided by and to its independent agents.  During 1997, the Registrant converted itsinformation systems to a smaller, more contemporary computing platform whichwill allow for more efficient operations and lower maintenance costs.  The Registrant expects to continue theefforts made previously to reduce all unnecessary overhead expenditures.

 

                However, during1999, the aforementioned completion of the Policy Term Conversion, inconjunction with the rate rollback required under the 1998 PPA reforms,increased the Registrant's expense ratio. Although the Registrant continues to anticipate that the net impact ofthese reforms will be a modest net negative, the impact of these reforms onpremiums, losses, expenses or related financial ratios cannot be completelyquantified.

 

                The Registrant'sbook value increased to $13.61 per share at December 31, 1998 from $11.66 pershare at December 31, 1997.  Theprincipal sources of the net increase were: (1) net income of $3,778,000 or $1.79 per share described previously;and (2) $668,400 or $.32 per share increase due to the increase (net ofapplicable deferred taxes) in the fair value of the fixed maturity investmentsaccounted for as available-for-sale securities under SFAS No. 115("Accounting for Certain Investments in Debt and Equity Securities").

 

                Theseincreases in book value were offset by (1) $105,000 or $.05 decrease per share(net of applicable deferred taxes) due to the increase of the minimum requiredpension liability for the defined benefit pension plan sponsored by theRegistrant; and (2) the dilutive effects ($.11 per share) of the issuance of22,000 shares of common stock upon exercise of employee stock options grantedunder the 1987 and 1992 Stock Option plans. See Note P of the Notes for additional information regarding the Registrant'sstock option plans.

 

                The increase inthe minimum pension liability was the result of a decrease in the discount rateused to compute Plan liabilities to 6.75% at December 31, 1998, from 7.25% atDecember 31, 1997, offset by the performance of the Plan assets in excess ofthe expected return on these assets. See Note L of the Notes for additionalinformation regarding the Registrant's minimum pension liability.

 

**Liquidity andCapital Resources**

 

                The InsuranceCompanies' need for liquidity arises primarily from the obligation to pay claims.  The primary sources of liquidity arepremiums received, collections from reinsurers and proceeds from investments.

 

                Deferred taxliabilities related to MCAIC (captioned as “Excess Loss Account” in theschedule of net deferred tax assets in Note I in the Notes to ConsolidatedFinancial Statements) will likely be payable on the final liquidation of MCAICby its Receiver, which the Company does not control.  It is not presently known when MCAIC’s final liquidation willoccur, although the Company does anticipate that it will have approximately oneyear notice before this event occurs and that this should occur prior to2006.  Accordingly, the Company may berequired to seek financing depending on the timing and magnitude of thisliability.

 

                Except as noted inMotor Club's PPA business, reserving assumptions and payment patterns of theInsurance Companies did not materially change from the prior year and therewere no unusually large retained losses resulting from claim activity.  Unpaid losses are not discounted.

 

**Operating andInvesting Activities**

 

                Net cash providedby operating activities was $910,000, $10,547,000 and $10,389,000 in 1999, 1998and 1997, respectively.  The loweramount for 1999 is attributable to the reduction in insurance premiums in 1999as a result of the New Jersey PPA rate rollback and increased payment of PIPlosses for the 1999 Accident Year.

 

                Net cash utilizedin investing activities was $10,313,000, $11,054,000 and $13,886,000 in 1999,1998 and 1997, respectively.  The amountsused in 1999 reflect the investment of cash provided by operating and financeactivities.  The amounts used in 1998and 1997 reflect the investment of cash provided by operating activities.

 

                Aside from thechanges in operating expenditures noted previously, particularly theexpenditures associated with the acquisition of North East, no unusual ornonrecurring operating expenditures have been incurred over this period.

 

                The payout ratioof losses, other than PIP, has not fluctuated substantially over thisperiod.  Cash flow from operations isexpected to increase as the Registrant increases its revenue through additionalpremium writings, specifically commercial lines and PPA, and continues toreduce its expenses and expense ratio. This will be offset somewhat by the development and payment of losses onthe new PPA which Motor Club is writing.

 

**FinancingActivities**

 

                The Registrantpaid no dividend on its common stock in 1999, 1998 and 1997.

 

                In connection withits acquisition of North East, on September 23, 1999, the Registrant issued $10million of Convertible Subordinated Debentures ("Debentures"), in oneseries, under a plan previously approved by its shareholders.  For more information on the Debentures,please refer to Note H in the Notes to Consolidated Financial Statements.

 

                On December 27,1999, the Registrant repaid the $3 million borrowed from Dresdner Bank, AG("Dresdner") in September 1998. As of September 30, 1999, the Registrant had been in violation with onecovenant and one term of its Loan Agreement with Dresdner.  The Registrant had received a waiver of bothconditions from Dresdner and the parties mutually agreed to have the loanrepaid and the facility closed.

 

                Inconnection with its acquisition of Mountain Valley, on February 29, 2000 theRegistrant borrowed $11.5 million ("Debt") from its three ExecutiveCommittee members, who presently own 42% of the Registrant's outstandingshares.  For more information on theDebt, please refer to Note T in the Notes to Consolidated Financial Statements.

 

**RecentAccounting Pronouncements**

 

                In October 1998, AcSEC issuedSOP 98-7, "Deposit Accounting: Accounting for Insurance and ReinsuranceContracts That Do Not Transfer Insurance Risk."  This Statement identifies several methods of deposit accountingand provides guidance on the application of each method.  This Statement classifies insurance andreinsurance contracts for which the deposit method is appropriate as contractsthat (i) transfer only significant timing risk, (ii) transfer only significantunderwriting risk, (iii) transfer neither significant timing nor underwritingrisk, and (iv) have an indeterminate risk. This Statement is effective forfinancial statements for the year commencing January 1, 2000.  Restatement of previously issued financialstatements is not permitted.  TheRegistrant does not believe the Insurance Companies' reinsurance contractswould require the deposit method of accounting.

 

Item8.  Financial Statements andSupplementary Data

 

                                See Item 14 (a).

 

Item9.  Disagreements with Accountants onAccounting and Financial Disclosures

 

                None

 

**PART III**

 

                                Items 10, 11, 12and 13 are omitted from this Report on Form 10–K; the Registrant shallfile a definitive proxy statement pursuant to Regulation 14A not later than May1, 2000, which is 120 days after the close of the fiscal year of theRegistrant.

 

**PART IV**

 

Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8–K

 

(a)           (1)           Thefollowing financial statements are included in Part II, Item 8:

 
| Report of Independent  Accountants                                                                     |
|--------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets  at December 31, 1999 and 1998                                             |
| Consolidated  Statements of Operations for  the  years ended December 31, 1999, 1998 and 1997     |
| Consolidated  Statements of Shareholders' Equity for the years ended December 31, 1999,  1998 and 1997 |
| Consolidated  Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997            |
| Notes to  Consolidated Financial Statements                                                            |

 

                                                (2)                                  The following financial statement schedules forthe years 1999, 1998 and 1997 (pursuant 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                                |
| 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 theconditions requiring their filing do not exist, or because the information isgiven in the financial statements filed herewith, including the notes thereto.

 

                (b)  Exhibits:

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                        |   | **Reference**                                                                                                          |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------|
| 2–a        |   | Agreement  and Plan of Merger between Motor Club of America and North East Insurance  Company, dated as of March 16, 1999                                                              |   | Exhibit  2 to Motor Clubof America's Form  8-Kdated March 17, 1999                                                     |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 3–a        |   | Restated  and Amended Certificate of Incorporation of Motor Club of America, dated June  12, 1972                                                                                      |   | Exhibit  1(i) to MotorClub of America'sAnnual Report on Form 10–K for fiscal  year ended December 31, 1972        |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 3–b        |   | By–Laws  of Motor Club of America, effective March 15, 1989                                                                                                                       |   | Exhibit  3-l to MotorClub of America's  Annual Report on Form 10-K for fiscal year ended December 31, 1988             |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 3-c             |   | By-law  Amendment of Motor Club of America, effective August 3, 1994                                                                                                                   |   | Exhibit  3-m to MotorClub of America'sForm 8-K dated July 21, 1994                                                     |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 4–a        |   | Specimen  Certificate representing Common Stock, $.50 par value                                                                                                                        |   | Exhibit  4 to FileNo. 2–39996 onForm S–1                                                                     |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10–a       |   | Motor  Club of America 1987 Stock Option Plan                                                                                                                                          |   | Exhibit  10–o to MotorClub of  America's Annual Report on Form 10–K for fiscal year ended December 31,  1987 |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10–b       |   | Specimen  copy of Motor Club of America 1987 Stock Option Agreement                                                                                                                    |   | Exhibit  10–p to MotorClub of  America'sAnnual Report on Form 10–K  for fiscal year ended December 31, 1987  |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10–c       |   | Motor  Club of America 1992 Stock Option Plan                                                                                                                                          |   | Exhibit  A to MotorClub of America's Proxy  Statement for fiscal year ended December 31, 1991                          |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-d            |   | Motor  Club of America 1999 Stock Option Plan                                                                                                                                          |   | Exhibit  A to MotorClub of America's Proxy  Statement for the fiscal year ended December 31, 1998                      |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-e            |   | Specimen  copy Motor Club of America 1992 Stock Option Plan Agreement                                                                                                                  |   | Exhibit  10-r toMotor Club ofAmerica's Annual Report on Form 10-K for fiscal  year ended December 31, 1992             |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-f            |   | Settlement  Agreement between Motor Club of America et als. and Receiver of MCA Insurance  Company in Liquidation et als. and related documents                                        |   | Exhibit  99 to MotorClub of America'sForm 8-K datedDecember 20, 1994                                                   |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-g            |   | Order  dated December 30, 1994 Approving Settlement between Motor Club of America et  als and Receiver of MCA Insurance Company in Liquidation et als and related  conformed documents |   | Exhibit  99-C to MotorClub of America'sForm 8-K datedDecember 30, 1994                                                 |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-h            |   | Stock  Purchase Agreement between Motor Club of America and JVL Holding Properties,  Inc                                                                                               |   | Exhibit  99-F to MotorClub of America'sForm 8-K dated December 2, 1996                                                 |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-i            |   | Agreement  dated December 2, 1996 between Motor Club of America and Motor Club of  America Enterprises, Inc                                                                            |   | Exhibit  99-G to MotorClub of America'sForm 8-K datedDecember 2, 1996                                                  |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10–j       |   | $3  Million Senior Unsecured Revolving Credit Facility between Motor Club of  America and Dresdner Bank, AG and related documents                                                      |   | Exhibit  10-i to MotorClub of America's  AnnualReport on Form 10-Kfor fiscal year ended December 31, 1998              |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-k            |   | Purchase  Agreement dated as of December 16, 1999 between Valley Insurance Company and  Motor Club of America                                                                          |   | Exhibit  10.1 to MotorClub of America's  Form8-K dated December 16,1999                                                |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-l            |   | Specimen  copy of Form of Convertible Subordinated Debentures                                                                                                                          |   | Exhibit  1 to Form 13D ofArcher McWhorter  datedSeptember 23, 1999                                                     |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 10-m            |   | Specimen  copy of Promissory Note                                                                                                                                                      |   | Exhibit  10-m to Motor Club of America’s Annual Report on Form 10-K for fiscal year  ended December 31, 1999      |
|            |   |                                                                                                                                                                                   |   |                                                                                                                   |
| 22              |   | Specimen  copy of Promissory Note                                                                                                                                                      |   | Exhibit  22 to Motor Club of America’s Annual Report on Form 10-K for fiscal year  ended December 31, 1999        |

 

                Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                        | **MOTOR CLUB OF AMERICA**                                                                                 |
|-----------------------------|-----------------------------------------------------------------------------------------------------------|
|                        | **(Registrant)**                                                                                          |
|                        |                                                                                                      |   |
|                        |                                                                                                      |   |
| Dated:  March 29, 2000 | By                                                                                                        | s/Stephen  A. Gilbert |   |
|                        | Stephen  A. Gilbert                                                                                       |
|                        | President,  Chief Executive Officer, General Counsel and Director                                         |
|                        |                                                                                                      |   |
| Dated:  March 29, 2000 | By                                                                                                        | s/Patrick  J. Haveron |   |
|                        | Patrick  J. Haveron                                                                                       |
|                        | Executive  Vice President, Chief Executive Officer, Chief Financial Officer and Chief  Accounting Officer |

 

                Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
| Dated:  March 29, 2000 | By                                  | s/Archer  McWhorter      |   |
|-----------------------------|-------------------------------------|--------------------------|--------|
|                        | Archer McWhorter                    |
|                        | Chairman of the Board  and Director |
|                        |                                |                     |
| Dated:  March 29, 2000 | By                                  | s/Alvin  E. Swanner      |   |
|                        | Alvin  E. Swanner                   |
|                        | Director                            |
|                        |                                |                     |
| Dated:  March 29, 2000 | By                                  | s/William  E. Lobeck,Jr. |   |
|                        | William  E. Lobeck, Jr.             |
|                        | Director                            |

 

REPORT OF INDEPENDENTACCOUNTANTS

____________

 

Tothe Board of Directors of

MotorClub of America:

 

 

                In our opinion, the consolidatedfinancial statements listed in the index appearing under Item 14(a)(1) on page58 present fairly, in all material respects, the financial position of MotorClub of America and Subsidiaries at December 31, 1999 and 1998, and the resultsof their operations and their cash flows for each of the three years in the periodended December 31, 1999, in conformity with accounting principles generallyaccepted in the United States. In addition, in our opinion, the financialstatement schedules listed in the index appearing under Item 14(a)(2) on page53 present fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financialstatements.  These financial statementsand financial statement schedules are the responsibility of the Company'smanagement; our responsibility is to express an opinion on these financialstatements and financial statement schedules based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Stateswhich require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for the opinion expressed above.

 

Asdiscussed in Note V, the Company has restated its December 31, 1999 and 1998financial statements for certain tax matters.

 

 

 

PricewaterhouseCoopersLLP

New York, New York

March 14, 2000, except for Note V, as to which the date is April 16,2001.

 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

__________

 

 
|                                                                                                                                               |   | **December 31,** |        |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                               |   | **1999**         |        | **1998** |   |
|                                                                                                                                               |   | **(Restated)**   |        | **(Restated)** |   |
| **ASSETS**                                                                                                                                         |   |             |        |   |   |
| Investments:                                                                                                                                       |   |             |        |   |   |
| Fixed maturity securities, available- for-sale, at fair  value (amortized cost $80,854,764 -1999 and $67,676,411 -1998)                            |   | $                | 78,242,322  |   | $ | 69,594,904 |   |
| Equity securities, at fair value (cost $43,346 -1999)                                                                                              |   | 57,053           |        | - |   |
| Mortgage loans on real estate – at the unpaid  principal amount                                                                               |   | 153,616          |        | 361,038 |   |
| Short–term investments, at fair value  which approximates cost                                                                                |   | 8,528,858        |        | 5,995,299 |   |
| Total investments                                                                                                                                  |   | 86,981,849       |        | 75,951,241 |   |
| Cash and cash equivalents                                                                                                                          |   | 443,733          |        | 2,773,427 |   |
| Premiums receivable                                                                                                                                |   | 27,132,246       |        | 20,401,069 |   |
| Reinsurance recoverable on paid and unpaid losses and  loss expenses                                                                               |   | 21,163,574       |        | 19,234,277 |   |
| Notes and accounts receivable                                                                                                                      |   | 212,598          |        | 125,444 |   |
| Deferred policy acquisition costs                                                                                                                  |   | 10,560,763       |        | 8,708,329 |   |
| Fixed assets – at cost, less accumulated  depreciation                                                                                        |   | 1,858,621        |        | 1,671,902 |   |
| Federal income tax recoverable                                                                                                                     |   | 47,100           |        | 12,993 |   |
| Prepaid reinsurance premiums                                                                                                                       |   | 1,485,450        |        | 1,015,581 |   |
| Deferred tax asset                                                                                                                                 |   | 3,637,551        |        | 46,625 |   |
| Goodwill, less accumulated amortization                                                                                                            |   | 1,593,801        |        | - |   |
| Other assets                                                                                                                                       |   | 1,470,744        |        | 1,104,782 |   |
| Total Assets                                                                                                                                       |   | $                | 156,588,030 |   | $ | 131,045,670 |   |
|                                                                                                                                               |   |             |        |   |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                           |   |             |        |   |   |
| Liabilities:                                                                                                                                       |   |             |        |   |   |
| Losses and loss expenses                                                                                                                           |   | $                | 70,983,383  |   | $ | 58,335,143 |   |
| Unearned premiums                                                                                                                                  |   | 38,698,028       |        | 30,733,144 |   |
| Commissions payable                                                                                                                                |   | 2,802,516        |        | 2,835,408 |   |
| Accounts payable                                                                                                                                   |   | 1,397,263        |        | 875,327 |   |
| Accrued expenses                                                                                                                                   |   | 3,112,157        |        | 4,763,950 |   |
| Drafts outstanding                                                                                                                                 |   | 2,685,423        |        | 1,688,835 |   |
| Note payable                                                                                                                                       |   | -                |        | 3,000,000 |   |
| Convertible subordinated debentures                                                                                                                |   | 10,000,000       |        | - |   |
| Total liabilities                                                                                                                                  |   | 129,678,770      |        | 102,231,807 |   |
|                                                                                                                                               |   |             |        |   |   |
| Shareholders' Equity:                                                                                                                              |   |             |        |   |   |
| Common Stock, par value $.50 per share: Authorized -  10,000,000 shares; issued and outstanding shares 2,124,387 - 1999 and  2,116,429 – 1998 |   | 1,062,194        |        | 1,058,215 |   |
| Paid in additional capital                                                                                                                         |   | 2,066,089        |        | 1,996,954 |   |
| Accumulated other comprehensive loss                                                                                                               |   | (3,897,396       | )           | (1,828,343 | ) |
| Retained earnings                                                                                                                                  |   | 27,678,373       |        | 27,587,037 |   |
| Total Shareholders' Equity                                                                                                                         |   | 26,909,260       |        | 28,813,863 |   |
| Total Liabilities and Shareholders' Equity                                                                                                         |   | $                | 156,588,030 |   | $ | 131,045,670 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**CONSOLIDATED****STATEMENTS****OF****OPERATIONS**

__________

 
|                                                                                                              |   | **For the years  ended December 31,** |       |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                                              |   | **1999**                              |       | **1998** |   | **1997** |   |
|                                                                                                              |   | **(Restated)**                        |       | **(Restated)** |   | **(Restated)** |   |
|                                                                                                              |   |                                  | ** ** |   | ** ** |   | ** ** |
| **REVENUES**                                                                                                      |   |                                  |       |   |   |   |   |
|                                                                                                              |   |                                  |       |   |   |   |   |
| Insurance premiums (net of premiums ceded totaling  $8,358,946, $6,776,174 and $7,151,207)                        |   | $                                     | 55,807,330 |   | $ | 53,175,663 |   | $ | 50,877,890 |   |
| Net investment income                                                                                             |   | 5,080,939                             |       | 4,304,507 |   | 3,594,509 |   |
| Realized gains on sales of investments (net)                                                                      |   | 36,040                                |       | 28,545 |   | - |   |
| Other revenues                                                                                                    |   | 143,410                               |       | 171,171 |   | 224,271 |   |
| Total revenues                                                                                                    |   | 61,067,719                            |       | 57,679,886 |   | 54,696,670 |   |
|                                                                                                              |   |                                  |       |   |   |   |   |
| **LOSSES AND EXPENSES**                                                                                           |   |                                  |       |   |   |   |   |
|                                                                                                              |   |                                  |       |   |   |   |   |
| Losses and loss expenses incurred (net of reinsurance  recoveries totaling $1,544,026, $4,736,671 and $3,650,474) |   | 40,631,053                            |       | 36,479,591 |   | 33,141,691 |   |
| Amortization of deferred policy acquisition costs                                                                 |   | 14,305,501                            |       | 13,375,221 |   | 15,162,320 |   |
| Other operating expenses                                                                                          |   | 4,780,902                             |       | 2,105,668 |   | 1,762,192 |   |
| Merger-related expenses                                                                                           |   | 800,000                               |       | - |   | - |   |
| Interest expense                                                                                                  |   | 448,117                               |       | - |   | - |   |
| Total losses and expenses                                                                                         |   | 60,965,573                            |       | 51,960,480 |   | 50,066,203 |   |
| Income before Federal income taxes                                                                                |   | 102,146                               |       | 5,719,406 |   | 4,630,467 |   |
| Benefit (provision) for Federal income taxes:                                                                     |   |                                  |       |   |   |   |   |
| current                                                                                                           |   | 28,331                                |       | (179,661 | ) | (37,573 | ) |
| deferred                                                                                                          |   | (39,141                               | )          | (1,763,361 | ) | (1,236,495 | ) |
| Total Federal income tax                                                                                          |   | 91,336                                |       | (1,941,022 | ) | (1,274,068 | ) |
|                                                                                                              |   |                                  |       |   |   |   |   |
| Net income                                                                                                        |   | $                                     | 91,336     |   | $ | 3,778,384 |   | $ | 3,356,399 |   |
|                                                                                                              |   |                                  |       |   |   |   |   |
| **Net Income per common share:**                                                                                  |   |                                  |       |   |   |   |   |
| Basic                                                                                                             |   | $                                     | .04        |   | $ | 1.79 |   | $ | 1.62 |   |
| Diluted                                                                                                           |   | $                                     | .04        |   | $ | 1.78 |   | $ | 1.60 |   |
|                                                                                                              |   |                                  |       |   |   |   |   |
| **Weighted average common and potential common shares  outstanding:**                                             |   |                                  |       |   |   |   |   |
|                                                                                                              |   |                                  |       |   |   |   |   |
| Basic                                                                                                             |   | 2,117,912                             |       | 2,108,722 |   | 2,074,473 |   |
| Diluted                                                                                                           |   | 2,121,697                             |       | 2,121,366 |   | 2,102,395 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

**MOTOR****CLUB****OF****AMERICA****AND****SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS' EQUITY**

________

 
|                                                             |   | **Common Stock (a)** |   |       |      | **Paid–In** |   | **Accumulated Other** |   |           |       |           |   |
|------------------------------------------------------------------|--------|----------------------|--------|------------|-----------|------------------|--------|-----------------------|--------|----------------|------------|----------------|--------|
|                                                             |   | **Shares**           |   |       |      | **Additional**   |   | **Comprehensive**     |   | **Retained**   |       |           |   |
|                                                             |   | **Issued**           |   | **Amount** |      | **Capital**      |   | **Income (Loss)(b)**  |   | **Earnings**   |       | **Total**      |   |
|                                                             |   |                 |   |       |      |             |   | **(Restated)**        |   | **(Restated)** |       | **(Restated)** |   |
|                                                             |   |                 |   |       |      |             |   |                  |   |           |       |           |   |
| Balance at December 31, 1996                                     |   | 2,047,504            |   | $          | 1,023,752 |             | $      | 1,730,508             |   | $              | (2,825,957 | )              | $      | 20,452,254 |   | $ | 20,380,557 |   |
| Net income                                                       |   |                 |   |       |      |             |   |                  |   | 3,356,399      |       | 3,356,399      |   |
| Other comprehensive income,  netof tax:                          |   |                 |   |       |      |             |   |                  |   |           |       |           |   |
| Unrealized investment gains,  netof reclassification adjustment  |   |                 |   |       |      |             |   | 327,721               |   |           |       | 327,721        |   |
| Minimum pension liabilityadjustment                              |   |                 |   |       |      |             |   | 106,788               |   |           |       | 106,788        |   |
| Comprehensive income                                             |   |                 |   |       |      |             |   |                  |   |           |       | 3,790,908      |   |
| Common stock issued                                              |   | 46,925               |   | 23,463     |      | 219,696          |   |                  |   |           |       | 243,159        |   |
| Balance at December 31, 1997                                     |   | 2,094,429            |   | 1,047,215  |      | 1,950,204        |   | (2,391,448            | )      | 23,808,653     |       | 24,414,624     |   |
|                                                             |   |                 |   |       |      |             |   |                  |   |           |       |           |   |
| Net income                                                       |   |                 |   |       |      |             |   |                  |   | 3,778,384      |       | 3,778,384      |   |
| Other comprehensive income,  netof tax:                          |   |                 |   |       |      |             |   |                  |   |           |       |           |   |
| Unrealized investment gains,  netof reclassification adjustment  |   |                 |   |       |      |             |   | 668,309               |   |           |       | 668,309        |   |
| Minimum pension liabilityadjustment                              |   |                 |   |       |      |             |   | (105,204              | )      |           |       | (105,204       | )      |
| Comprehensive income                                             |   |                 |   |       |      |             |   |                  |   |           |       | 4,341,489      |   |
| Common stock issued                                              |   | 22,000               |   | 11,000     |      | 46,750           |   |                  |   |           |       | 57,750         |   |
| Balance at December 31, 1998                                     |   | 2,116,429            |   | 1,058,215  |      | 1,996,954        |   | (1,828,343            | )      | 27,587,037     |       | 28,813,863     |   |
|                                                             |   |                 |   |       |      |             |   |                  |   |           |       |           |   |
| Net income                                                       |   |                 |   |       |      |             |   |                  |   | 91,336         |       | 91,336         |   |
| Other comprehensive income,  netof tax:                          |   |                 |   |       |      |             |   |                  |   |           |       |           |   |
| Unrealized investment losses,  netof reclassification adjustment |   |                 |   |       |      |             |   | (3,006,583            | )      |           |       | (3,006,583     | )      |
| Minimum pension liabilityadjustment                              |   |                 |   |       |      |             |   | 937,530               |   |           |       | 937,530        |   |
| Comprehensive loss                                               |   |                 |   |       |      |             |   |                  |   |           |       | (1,977,717     | )      |
| Common stock issued                                              |   | 7,958                |   | 3,979      |      | 69,135           |   |                  |   |           |       | 73,114         |   |
| Balance at December 31, 1999                                     |   | 2,124,387            |   | $          | 1,062,194 |             | $      | 2,066,089             |   | $              | (3,897,396 | )              | $      | 27,678,373 |   | $ | 26,909,260 |   |

----

(a)          Par value $.50 per share;authorized – 10,000,000 shares.

(b)          Net of deferred taxes.

 

The accompanying notesare an integral part of these consolidatedfinancial statements.

 

**MOTOR****CLUB****OF****AMERICA****AND****SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

__________

 
|                                                                        |   | **For the years  ended December 31,** |   |
|-----------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                        |   | **1999**                              |   | **1998** |   | **1997** |   |
|                                                                        |   | **(Restated)**                        |   | **(Restated)** |   | **(Restated)** |   |
| Net income                                                                  |   | $                                     | 91,336 |   | $ | 3,778,384 |   | $ | 3,356,399 |   |
|                                                                        |   |                                  |   |   |   |   |   |
| Adjustments to reconcile net incometo cash provided byoperating activities: |   |                                  |   |   |   |   |   |
| Depreciation expense                                                        |   | 639,119                               |   | 527,644 |   | 461,845 |   |
| Amortization of bondpremium - net                                           |   | 50,354                                |   | 35,375 |   | 103,308 |   |
| Amortization of goodwill                                                    |   | 21,174                                |   | - |   | - |   |
| Gain on sale of investments                                                 |   | (36,040                               | )      | (28,545 | ) | - |   |
| Deferred tax provision (benefit)                                            |   | 39,141                                |   | 1,761,361 |   | 1,236,495 |   |
|                                                                        |   |                                  |   |   |   |   |   |
| Changes in:                                                                 |   |                                  |   |   |   |   |   |
| Premiums receivable                                                         |   | 575,790                               |   | (12,591,502 | ) | (7,984 | ) |
| Notes and accounts receivable                                               |   | (87,154                               | )      | (775 | ) | 124,206 |   |
| Deferred policy acquisition costs                                           |   | 434,040                               |   | (2,849,679 | ) | (97,154 | ) |
| Federal income tax - current                                                |   | (24,526                               | )      | (53,035 | ) | (13,118 | ) |
| Reinsurance recoverable on paid andunpaid losses and loss expenses          |   | 1,071,741                             |   | (568,211 | ) | 3,101,263 |   |
| Prepaid reinsurance premiums                                                |   | 353,015                               |   | (320,336 | ) | 450,699 |   |
| Other assets                                                                |   | 57,273                                |   | 116,941 |   | (100,563 | ) |
| Losses and loss expenses                                                    |   | 1,435,399                             |   | 8,088,365 |   | 2,579,922 |   |
| Unearned premiums                                                           |   | (1,652,130                            | )      | 11,447,387 |   | 351,557 |   |
| Commissions payable                                                         |   | (32,892                               | )      | 1,512,739 |   | (121,991 | ) |
| Accounts payable                                                            |   | 521,936                               |   | 312,874 |   | (33,332 | ) |
| Accrued expenses                                                            |   | (3,544,396                            | )      | (914,385 | ) | (1,089,809 | ) |
| Drafts outstanding                                                          |   | 996,588                               |   | 292,620 |   | 86,778 |   |
| Total cash provided byoperating activities                                  |   | 909,750                               |   | 10,547,222 |   | 10,388,521 |   |
|                                                                             |        |                                       |        |  |  |  |  |  |  |  |

 

The accompanying notes are anintegral part of these consolidated financial statements.

**MOTORCLUB OF AMERICA AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

__________

 
|                                           |   | **For the years  ended December 31,** |    |
|------------------------------------------------|--------|---------------------------------------|---------|
|                                           |   | **1999**                              |    | **1998** |   | **1997** |   |
|                                           |   | **(Restated)**                        |    | **(Restated)** |   | **(Restated)** |   |
| Investing activities:                          |   |                                  |    |   |   |   |   |
| Proceeds from:                                 |   |                                  |    |   |   |   |   |
| Maturities of fixed maturities                 |   | 8,074,333                             |    | 17,444,834 |   | 4,852,707 |   |
| Sales of fixed maturities                      |   | 1,205,824                             |    | 2,000,000 |   | 2,700,000 |   |
| Sale of equity securities                      |   | 630,612                               |    | - |   | - |   |
| Payments received on mortgageloan  principal   |   | 207,422                               |    | 161,517 |   | 111,937 |   |
| Sale or maturities of short-term investments   |   | 89,390,755                            |    | 245,390,264 |   | 86,804,893 |   |
| Purchase of:                                   |   |                                  |    |   |   |   |   |
| Fixed maturities                               |   | (9,343,352                            | )       | (31,304,235  | ) | (15,927,470 | ) |
| Short–term investments                    |   | (87,656,130            | )       | (244,133,789 | ) | (92,206,193 | ) |
| Acquisition of North East,net of cash acquired |   | (12,200,953                           | )       | - |   | - |   |
| Fixed assets                                   |   | (621,069                              | )       | (612,897 | ) | (221,741 | ) |
| Total cash utilized ininvesting activities     |   | (10,312,558                           | )       | (11,054,306  | ) | (13,885,867 | ) |
| Financing activities:                          |   |                                  |    |   |   |   |   |
| Convertible subordinateddebentures             |   | 10,000,000                            |    | - |   | - |   |
| Note payable                                   |   | (3,000,000                            | )       | 3,000,000 |   | - |   |
| Common stock issued                            |   | 73,114                                |    | 57,750 |   | 243,159 |   |
| Total cash provided by financingactivities     |   | 7,073,114                             |    | 3,057,750 |   | 243,159 |   |
| Net increase (decrease) in cash                |   | (2,329,694                            | )       | 2,550,666 |   | (3,254,187 | ) |
| Cash and cash equivalentsat beginning of year  |   | 2,773,427                             |    | 222,761 |   | 3,476,948 |   |
| Cash and cash equivalentsat end of year        |   | $                                     | 443,733 |   | $ | 2,773,427  |   | $ | 222,761 |   |
|                                                |        |                                       |         |  |  |  |  |  |  |  |

----

SupplementalDisclosures of Cash Flow Information

 

                (1)           Total interest paid was $448,782(1999) $60,389 (1998), and $8,890 (1997).

                (2)           Total Federal income taxes paid was$0 (1999), $212,738 (1998), and $50,691 (1997).

 

The accompanying notes are anintegral part of these consolidated financial statements.

**MOTORCLUB OF AMERICA AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

__________

 

Note A – Summary of Significant AccountingPolicies:

 

(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 directly orindirectly wholly–owned subsidiary companies.  The financial statements have been prepared on the basis ofgenerally accepted accounting principles ("GAAP").  The preparation of financial statements inconformity with these practices requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during theperiod.  Actual results could differfrom those estimates.

 

The Company's insurance subsidiaries, Motor Club of America InsuranceCompany ("Motor Club"), Preserver Insurance Company("Preserver"), North East Insurance Company ("North East")and its subsidiary American Colonial Insurance Company ("AmericanColonial") are collectively referred to as the "InsuranceCompanies".  All materialintercompany items and transactions have been eliminated in consolidation.  With respect to North East, certain accountshave been reclassified in the financial statements to conform to the Company'spresentation.

 

(b)           Nature of Operations:

 

The Company is a New Jersey corporation which owns the InsuranceCompanies. The Company acquired North East and its subsidiaries on September24, 1999; see Note B for more information on this transaction.  The Insurance Companies engage in propertyand casualty insurance, principally private passenger automobile, smallcommercial and homeowners insurance, produced by independent agents. TheCompany generates substantially all of its revenues from its insuranceoperations.

 

Motor Club and Preserver's operations are in the State of NewJersey.  North East's operations are inthe State of Maine.  American Colonial,which has not written any business since March 1990, plans to recommenceoperations in the State of New York in 2000.

 

(c)           Insurance Premiums:

 

Insurance premiums are credited to income by the monthly pro ratamethod over the terms of the contracts. Beginning July 1, 1998, Motor Club began converting its contracts forprivate passenger automobile insurance from six month to twelve month policies("Policy Term Conversion"). While the Policy Term Conversion temporarily increased, for a one yearperiod commencing July 1, 1998, the amount of premiums written by Motor Club,it did not effect the amount of premiums earned. Insurance contracts forpolicies other than private passenger automobile are for terms of twelvemonths.

 

 

(d)           Investments:

 

All of the Company's fixed maturity and equity securities areclassified as available-for-sale securities, and are therefore reported at fairvalue, with unrealized gains and losses excluded from earnings and reported asa separate component of shareholders' equity, net of applicable deferred taxes.

 

The Company does not invest in, hold or issue any derivative financialinstruments.

 

Premium and discount amounts are amortized into income based on thestated contractual life of the securities. The Company recognizes income forthe mortgage-backed and asset-backed bond portion of its fixed maturitysecurities portfolio using the constant effective yield method.

 

When actual prepayments differ from this assumption, the effectiveyield is recalculated to reflect actual payments to date.  The net investment in the security isadjusted to the amount that would have existed had the new effective yield beenapplied since the acquisition of the security. That adjustment is included in net investment income.

 

Gains and losses on investments are recognized when investments aresold or redeemed on a specific certificate basis.

 

(e)           Other Revenues:

 

Other revenues consist principally of interest on mortgage loans andservicing fees from motor club membership fees.

 

(f)            Losses and Loss Expenses:

 

The estimated liability for losses is based on (1) the accumulation ofcost estimates for unpaid losses reported prior to the close of the accountingperiod; and (2) estimates of incurred but not reported losses based upon pastexperience; less (3) estimates of anticipated salvage and subrogationrecoveries. In the normal course of business, the Company seeks to reduce theloss that may arise from catastrophes or other events that cause unfavorableunderwriting results by reinsuring certain levels of risk in various areas ofexposure with other insurance enterprises or reinsurers.

 

Changes to the estimated liabilities are reflected in the results ofoperations currently.

 

The liability for loss expenses is based on estimates of expenses to beincurred in the settlement of claims.

 

 

(g)           Deferred Policy Acquisition Costs:

 

Deferred policy acquisition costs are costs that vary with and areprimarily related to the production of new and renewal business.  Such costs include commissions, premiumtaxes, certain State mandated assessments and certain underwriting and policyissuance costs which are deferred when incurred (subject to a maximum) and  amortized to income as the related writtenpremiums are earned.  Investment incomeis anticipated in determining whether a premium deficiency relating to thesecosts exists.

 

(h)           Fixed Assets:

 

Depreciation on leasehold improvements is computed by the straight–linemethod over the remaining lease term.  Depreciation on furniture and fixtures, data processing  and other equipment, is computed by thestraight–line method over the estimated useful lives, ranging from threeto twenty years.

 

Expenditures for major renewals and betterments are capitalized, andexpenditures for maintenance and repairs are charged to income asincurred.  When property units areretired, or otherwise disposed of, the cost thereof and related accumulateddepreciation are eliminated from the accounts. Any gain or loss on disposal is credited or charged to operations.

 

(i)            Federal Income Taxes:

 

Deferred Federal income taxes are provided for temporary differencesbetween the financial statement and tax basis of assets and liabilities usingenacted tax rates expected to apply in the years in which the differences areexpected to reverse.

 

(j)            Goodwill:

 

Under the purchase method of accounting for business combinations, thetotal purchase price is allocated to the acquired assets and liabilities basedon their fair values.  Any differencesbetween the excess of the cost of the transaction and the fair value of netassets acquired is recorded as goodwill, which will be amortized on astraight-line basis over twenty years after the merger.

 

(k)           Statement of Cash Flows:

 

For purposes of the statement of cash flows, the Company considersdemand deposits held with financial institutions and money market mutual fundholdings to be cash equivalents.

 

 

(l)            Per Share Data:

 

Basic earnings per share are computed based upon the weighted averagenumber of common shares outstanding during each year.  Diluted earnings per share are computed based upon the weightedaverage number of common shares outstanding including outstanding stockoptions.  See Note P for more informationon outstanding stock options and Note R for more information on the computationof Earnings per Share.

 

(m)          Comprehensive Income:

 

In 1998, the Company adopted SFAS No. 130 ("ComprehensiveIncome"), which established standards for the reporting and disclosure ofcomprehensive income and its components. Comprehensive income consists of net income, the unfunded accumulatedbenefit obligation in excess of plan assets and net unrealized investment gainsor losses and is presented separately. The adoption of SFAS No. 130 had no impact on shareholders’ equity.  Prior year financial statements have beenreclassified to conform to these requirements. These amounts are reported net of deferred Federal income taxes.

 

NoteB - Acquisition of North East:

 

On September 24, 1999, the Company acquired North East, headquarteredin Scarborough, Maine, through a merger of a wholly-owned subsidiary of theCompany with and into North East.

 

Under the terms of the merger, certain North East shareholders electedand received 7,958 shares of the Company's common stock representing 41,781shares of North East common stock; the remaining shareholders and holders ofNorth East stock options elected and were paid $10,409,678 in cash.  The aggregate purchase price for thetransaction was $10,482,796.

 

The acquisitionhas been accounted for using the purchase method of accounting and, based onthe fair value of the net assets acquiredat September 24, 1999, the Company recorded $1,614,957 of goodwill associated with the purchase which isbeing amortized on a straight-line basis over twenty years.  The consolidated results of operationsinclude the results of operations of North East for the three months endedDecember 31, 1999.  The amount ofgoodwill amortization expense recorded in 1999 was $21,174.

 

The following unaudited pro forma consolidated results of operation forthe years ended December 31, 1999 and 1998 assume the North East acquisitionoccurred as of January 1, 1998:

 
|                                        |   | **1999**       |             | **1998**       |   |
|---------------------------------------------|--------|----------------|------------------|----------------|--------|
|                                        |   | **(Restated)** |             | **(Restated)** |   |
| Insurance premiums                          |   | $              | 66,002,646  |           | $      | 65,756,095 |   |
| Net investment income                       |   | 5,695,332      |             | 5,175,055      |   |
| Realized gains on sales ofinvestments (net) |   | 3,102          |             | 82,817         |   |
| Other revenue                               |   | 143,410        |             | 171,171        |   |
| Total revenues                              |   | 71,844,490     |             | 71,185,138     |   |
| Losses and loss expensesincurred            |   | 47,398,423     |             | 44,837,264     |   |
| Other operating expenses                    |   | 25,860,049     |             | 21,339,295     |   |
| Total losses and expenses                   |   | 73,258,472     |             | 66,176,559     |   |
| Income (loss) before federalincome taxes    |   | (1,413,982     | )                | 5,008,579      |   |
| Benefit (provision) forfederal income taxes |   | 488,475        |             | (1,687,859     | )      |
| Net income                                  |   | $              | (925,507         | )              | $      | 3,320,720 |   |
| Earnings per share:                         |   |           |             |           |   |
| Basic                                       |   | (.44           | )                | 1.57           |   |
| Diluted                                     |   | (.44           | )                | 1.40           |   |

 

NoteC – Investments:

 

(a)           The amortized cost and estimated fair value of investmentsin fixed maturity securities at December 31, 1999 were as follows:

 
|                      |   |          |             | **Gross**      |   | **Gross**      |   |       |             |
|---------------------------|--------|---------------|------------------|----------------|--------|----------------|--------|------------|------------------|
|                      |   | **Amortized** |             | **Unrealized** |   | **Unrealized** |   | **Fair**   |             |
|                      |   | **Cost**      |             | **Gains**      |   | **Losses**     |   | **Value**  |             |
| U.S. Governmentsecurities |   | $             | 20,031,827       |           | $      | 128,984        |   | $          | (239,128    | ) | $ | 19,921,683 |   |
| Mortgage-backedsecurities |   | 10,678,363    |             | 29,476         |   | (301,482       | )      | 10,406,357 |             |
| Asset-backedsecurities    |   | 10,454,886    |             | -              |   | (216,034       | )      | 10,238,852 |             |
| Corporatesecurities       |   | 39,689,688    |             | 9,436          |   | (2,023,694     | )      | 37,675,430 |             |
| Total                     |   | $             | 80,854,764  |           | $      | 167,896        |   | $          | (2,780,338  | ) | $ | 78,242,322 |   |
|                           |        |               |                  |                |        |                |        |            |                  |  |  |  |  |  |

 

The amortized costand estimated fair value of investments in fixed maturity securities atDecember 31, 1998 were as follows:

 
|                      |   |          |             | **Gross**      |   | **Gross**      |   |       |    |
|---------------------------|--------|---------------|------------------|----------------|--------|----------------|--------|------------|---------|
|                      |   | **Amortized** |             | **Unrealized** |   | **Unrealized** |   | **Fair**   |    |
|                      |   | **Cost**      |             | **Gains**      |   | **Losses**     |   | **Value**  |    |
| U.S. Governmentsecurities |   | $             | 22,027,700  |           | $      | 1,128,251      |   | $          | (10,320 | ) | $ | 23,145,631 |   |
| Mortgage-backedsecurities |   | 11,053,686    |             | 165,978        |   | (6,075         | )      | 11,213,589 |    |
| Asset-backedsecurities    |   | 10,698,352    |             | 107,618        |   | -              |   | 10,805,970 |    |
| Corporatesecurities       |   | 23,896,673    |             | 558,555        |   | (25,514        | )      | 24,429,714 |    |
| Total                     |   | $             | 67,676,411  |           | $      | 1,960,402      |   | $          | (41,909 | ) | $ | 69,594,904 |   |

 

The amortized costand fair value of investments in fixed maturity securities at December 31,1999, by contractual maturity, wereas follows:

 
|                                  |   | **Amortized** |          | **Fair**   |          |
|---------------------------------------|--------|---------------|---------------|------------|---------------|
|                                  |   | **Cost**      |          | **Value**  |          |
| Due in one year or less               |   | $             | 4,943,415     |       | $             | 4,928,712 |   |
| Due after one year throughfive years  |   | 21,037,686    |     | 20,953,774 |     |
| Due after five years throughten years |   | 30,933,494    |     | 29,040,693 |     |
| Due after ten years                   |   | 23,940,169    |          | 23,319,143 |          |
|                                  |   | $             | 80,854,764    |       | $             | 78,242,322 |   |

 

 

The above maturity tablesinclude $20,645,209 (at fair value) of mortgage-backed and asset-backedsecurities, which were classified as due after ten years based on thecontractual life of the securities.

 

Expected maturities may differ from contractual maturities becauseborrowers may have the right to call or prepay obligations with or without callor prepayment penalties.  Gross gains of$6,213 and $50,099 were realized on proceeds of $546,789 and $10,434,411 in1999 and 1998, respectively, on those sales and calls.  Gross losses of $595 and $21,554 on fixedmaturities were realized on proceeds of $250,000 and $5,391,130 in 1999 and1998 on those sales and calls.  Therewere no gross gains or gross losses in 1997.

 

(b)           Net investment income by category of investments consistedof the following:

 
| **Category**                                 |   | **1999**  |      | **1998**  |   | **1997**  |   |
|----------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Fixed maturities                             |   | $         | 4,665,066 |      | $      | 3,950,500 |   | $ | 3,387,140 |   |
| Other, principallyshort–terminvestments |   | 593,366   |      | 498,253   |   | 431,932   |   |
| Total investmentincome                       |   | 5,258,432 |      | 4,448,753 |   | 3,819,072 |   |
| Investmentexpenses                           |   | 177,493   |      | 144,246   |   | 224,563   |   |
| Net investmentincome                         |   | $         | 5,080,939 |      | $      | 4,304,507 |   | $ | 3,594,509 |   |
|                                              |        |           |           |           |        |           |        |  |  |  |  |

 

(c)           At December 31, 1999 and 1998, fixed maturity investments(at fair value) deposited with the various states where the Insurance Companiesconduct business amounted to $2,986,560 and $222,784, respectively.

 

(d)           There were no investments in any persons and itsaffiliates in excess of ten percent of shareholders' equity.

 

(e)           The change in net unrealized gains (losses) on investmentsare as follows:

 
|            |   | **Years Ended  December 31,** |       |
|-----------------|--------|-------------------------------|------------|
|            |   | **1999**                      |       | **1998** |   | **1997** |   |
| Fixedmaturities |   | $                             | (4,517,228 | ) | $ | 1,012,666 |   | $ | 635,790 |   |
|                 |        |                               |            |  |  |  |  |  |  |  |

 

(f)            In the opinion of management there has been no permanentimpairment in the carrying amount of investments.

 

NoteD - Unpaid Losses and Loss Expenses:

 

(a)           The following table provides a reconciliation of thebeginning and ending balances for unpaid losses and loss expenses for 1999,1998 and 1997:

 
|                                        |   | **1999**   |                         | **1998**   |   | **1997**   |   |
|---------------------------------------------|--------|------------|------------------------------|------------|--------|------------|--------|
| Balance at January 1                        |   | $          | 58,335,143    |       | $      | 50,246,778 |   | $ | 47,666,856 |   |
| Less: Reinsurancerecoverables               |   | 18,520,866 |                         | 17,363,319 |   | 19,553,223 |   |
| Net balance atJanuary 1                     |   | 39,814,277 |                         | 32,883,459 |   | 28,113,633 |   |
| Acquired in 1999                            |   | 8,820,265  |                         | -          |   | -          |   |
| Incurred losses andloss expenses:           |   |       |                         |       |   |       |   |
| Provision for currentyear claims            |   | 37,271,781 |                         | 32,598,287 |   | 29,368,738 |   |
| Increase in provisionfor prior years'claims |   | 3,359,272  |                         | 3,881,304  |   | 3,772,953  |   |
| Total incurred lossesand loss expenses      |   | 40,631,053 |                         | 36,479,591 |   | 33,141,691 |   |
| Payment for losses andloss expenses:        |   |       |                         |       |   |       |   |
| Payment on currentyear claims               |   | 16,447,458 |                         | 12,038,000 |   | 12,169,000 |   |
| Payment on prioryears' claims               |   | 20,288,404 |                         | 17,510,773 |   | 16,202,865 |   |
| Total payments forlosses and lossexpenses   |   | 36,735,862 |                         | 29,548,773 |   | 28,371,865 |   |
| Net balance atDecember 31                   |   | 52,529,733 |                         | 39,814,277 |   | 32,883,459 |   |
| Plus: Reinsurancerecoverables               |   | 18,453,650 |                         | 18,520,866 |   | 17,363,319 |   |
| Balance at December 31                      |   | $          | 70,983,383                   |       | $      | 58,335,143 |   | $ | 50,246,778 |   |

 

 

The reconciliation shows a 1999 deficiency of $3,359,272 in theliability recorded at December 31, 1998. The deficiency is primarily the result of initial adverse development ofreserves at December 31, 1998 and 1997 which is consistent with the Company'sloss development history.

 

(b)           Losses incurred are reduced by salvage and subrogationapproximating $3,144,175, $2,661,000 and $2,801,000 for the years endedDecember 31, 1999, 1998 and 1997, respectively.

 

NoteE – Fixed Assets:

 

                                Fixed assetsconsist of the following:

 
|                                                    |   | **1999**  |      | **1998**  |   |
|---------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Leasehold improvements                                  |   | $         | 202,275   |      | $      | 191,937 |   |
| Office furniture, fixtures anddata processing equipment |   | 3,984,231 |      | 3,287,546 |   |
|                                                    |   | 4,186,506 |      | 3,479,483 |   |
| Less accumulated depreciation                           |   | 2,327,885 |      | 1,807,581 |   |
|                                                    |   | $         | 1,858,621 |      | $      | 1,671,902 |   |

 

NoteF – Reinsurance:

 

(a)           Unearned premiums and unpaid loss and loss expenses arestated gross of the effects of reinsurance.

 

(b)           Ceded premiums are earned in a manner consistent with thecoverage provided.  Amounts recoverablefrom reinsurers are estimated in a manner consistent with the claimsliabilities associated with the reinsurance.

 

(c)           Reinsurance contracts do not relieve the InsuranceCompanies from their obligations to policyholders.  Failure of reinsurers to honor their obligations could result inlosses to the Insurance Companies. Generally, for Motor Club and Preserver all risks in excess of $150,000for liability lines and $100,000 for property lines are reinsured.  Prior to July 1, 1997 the property retentionwas $75,000.

 

North East's reinsurance protection is provided through two layers ofexcess of loss reinsurance.  The firstlayer assumes $150,000 of coverage beyond the first $50,000.  The second layer allows North East to offerpolicy limits up to $1,000,000 by assuming $800,000 of coverage beyond thefirst $200,000.

 

The Insurance Companies evaluate the financial condition of theirreinsurers and monitor concentrations of credit risk arising from activities oreconomic characteristics of the reinsurers to minimize their exposure tosignificant losses from reinsurer insolvencies.

 

As referred to in Note A, Motor Club and Preserver's operations arepresently located in the State of New Jersey, the laws of which requireparticipation in certain reinsurance funds.

 

Reinsurance recoverable on paid and unpaid loss and loss expensesinclude amounts recoverable from the Unsatisfied Claim and Judgment Fund("UCJF") of the State of New Jersey, which pertains to New JerseyPersonal Injury Protection claims in excess of Motor Club’s statutory retentionlimit of $75,000.  Reinsurancerecoverable from the UCJF was $8,672,127 and $9,139,160 as of December 31, 1999and 1998, respectively.

Motor Club isrequired to participate in the New Jersey Automobile Insurance Risk Exchange("NJ AIRE").  NJ AIRE isdesigned to balance differencesbetween Motor Club's bodily injury exposures and loss payments as compared toindustry exposures and loss payments under New Jersey's dual tort thresholdsystem.

 

Assessments paid to NJ AIRE based on subject bodily injury exposuresare accounted for as ceded premiums written and totaled $1,805,185, $1,113,756and $1,728,341 in 1999, 1998 and 1997, respectively.  Reimbursements from NJ AIRE based on subject claim paymentexperience are accounted for as ceded losses incurred and totaled $1,347,565,$548,415 and $500,657 in 1999, 1998 and 1997, respectively.

 

Prepaid reinsurance premiums of $1,485,450 and $1,015,581 as ofDecember 31, 1999 and 1998, respectively, are mainly attributable toPreserver's workers' compensation program and excess of loss reinsurancetreaties.

 

The effect of reinsurance on premiums written and earned is as follows:

 
|    |   | **1999**    |       | **1998**   |   | **1997**    |   |
|---------|--------|-------------|------------|------------|--------|-------------|--------|
|    |   | **Written** |       | **Earned** |   | **Written** |   | **Earned** |   | **Written** |   | **Earned** |   |
| Direct  |   | $           | 62,467,203 |       | $      | 64,151,936  |   | $ | 71,399,224 |   | $ | 59,951,837 |   | $ | 58,380,651  |   | $ | 58,029,094 |   |
| Assumed |   | 46,946      |       | 14,340     |   | -           |   | - |   | - |   | - |   |
| Ceded   |   | (8,005,934  | )          | (8,358,946 | )      | (7,096,511  | )      | (6,776,174 | ) | (6,700,505  | ) | (7,151,204 | ) |
| Net     |   | $           | 54,508,215 |       | $      | 55,807,330  |   | $ | 64,302,713 |   | $ | 53,175,663 |   | $ | 51,680,146  |   | $ | 50,877,890 |   |

 

NoteG - Note Payable:

 

On September 14, 1998, the Company entered into a $3 million revolvingcredit facility (the "Loan") and drew on the entire amount of theLoan on September 30, 1998.  The Loanwas repaid in full on December 27, 1999. The weighted-average effective rate ofinterest on the loan was 7.28% and 7.0625% in 1999 and 1998, respectively.Interest paid on the loan in 1999 and 1998 was $216,017 and $54,146,respectively.

 

NoteH – Convertible Subordinated Debentures:

 

In connection with its acquisition of North East, on September  23, 1999, the Company issued $10 million of Convertible Subordinated Debentures("Debentures"),  in  one series, under a plan previously approvedby its shareholders.

 

The Debentures are due on September 23, 2009 and bear an  interest rate of 8.44%, which is 2.5% over the London Interbank Offered Rate, fixed as of September 23, 1999, thedate the series was issued.

 

At each holder's option, the Debenture is convertible at any time, inwhole or in part, into 645,578 of the Company's common shares ($10 milliondivided by  130% of the average tradingprice of the Company's common stock over the twenty day period immediatelyprior to  September 23, 1999("Conversion Price")).  Theapplicable Conversion Price is $15.49.

 

Three of the Company's directors ("Ownership Group")purchased  $9,253,785  of the  $10  million in Debentures issued.   If the members of the Ownership Groupconvert those Debentures, their percentage ownership in the Company's common stock will substantially   increase. Based on the Company's common shares outstanding as of December 31,1999, the Ownership Group could increase its collective percentage stockownership from the current 42.0% to 53.8%.

 

Interest paid on the Debentures was $232,100 in 1999.

 

NoteI – Taxes:

 

(a)           The Company and its subsidiaries (including MCA InsuranceCompany in Liquidation and its subsidiaries (“MCAIC”), former affiliates) filea consolidated Federal income tax return, and participate in a Tax SharingAgreement.

 

Despite beingdeclared insolvent in 1992, MCAIC is required to continue to be included in theCompany’s consolidated tax return filed with the Internal Revenue Service.Since that time, MCAIC has generally continued to generate taxable lossesincluded in the consolidated tax return.

 

Under the applicable rules, the Company is entitled to, and has takencurrent tax benefits for net operating losses that MCAIC and its subsidiarieshave generated since 1992. However, to the extent that the Company does nothave positive basis (as defined by the Internal Revenue Code), it may also berequired to pay future tax liabilities (which may offset the current taxbenefit) subject to certain events which may trigger such payments.  Accordingly, when such current tax benefitsare recognized, a corresponding deferred tax liability is recorded.

 

In March, 2001, the Company’s management determined that certain taxbenefits should not have been recognized and that certain deferred taxliabilities had not been recorded.  Inaddition, deferred tax assets were not recorded that should have been for thetax effects of the minimum pension liability that is presented as a componentof other comprehensive income. As a result, the 1998 and 1999 ConsolidatedFinancial Statements have been restated from amounts previously reported andare discussed in Note V.

 

At the time of its insolvency, MCAIC realized approximately $150million in losses, which generated anet operating loss (“NOL”) thatcould not be utilized at that timeby either the Company or MCAIC under applicableIRS regulations and whichexpirein 2006. Additional net operatinglosses have beenexperiencedbyMCAICsince1992, some of which were utilized by the Company at a time whenit had no tax basis in MCAIC, thuscreating a deferred tax liabilityrepresented by the $910,664 “Excess Loss Account” item (for the yearended December 31, 1999) as shown in the deferred tax reconciliationof this Note.  The $150 million of NOL’sgenerated in 1992 will likely increase the Company’sexcess loss account at the time theyexpire in 2006.

 

An excess loss account in a subsidiary generally creates taxable incomeat the time of the sale, liquidation or other disposition of the subsidiary.

 

Management expects that the liquidation or other disposition of MCAICwill take place prior to the expiration of these NOL’s in 2006 and  prior to the corresponding increase in theCompany’s excess loss account.  As thecontrol of the liquidation process rests with the Insurance Department of theState of Oklahoma (the “Receiver”) and not with management, there is apotential risk that such tax liability could be incurred by the Company after2006 when the1992 generated NOL’s will have been converted into theCompany’s excess loss account. Management believes it is unlikely that suchrisk will occur, as the liquidation of MCAIC is probable before the expirationof the NOL.  However, the tax effects ofthese transactions are subject to the circumstances of the liquidation processitself and tax-planning strategies exist which could mitigate the impact ofsuch a tax exposure.

 

With respect to the Company’s excess loss account created by theCompany’s utilization of MCAIC’s post 1992 NOL’s, these excess losses willlikely result in the Company recognizing taxable income in the year MCAIC isliquidated or otherwise disposed of. The effect of the deferred taxes attributable to such income has beenreflected in the Consolidated Financial Statements.

 

(b)           The tax effects of temporary differences that give rise tosignificant portions of the deferred tax assets and liabilities were asfollows:
|                                                             |   | **December 31,** |      |
|------------------------------------------------------------------|--------|------------------|-----------|
|                                                             |   | **1999**         |      | **1998** |   |
|                                                             |   | **(Restated)**   |      | **(Restated)** |   |
| Deferred tax assets:                                             |   |             |      |   |   |
| Net operating loss ("NOL")carryforward                 |   | $                | 2,969,144 |   | $ | 429,513 |   |
| Unpaid losses and lossexpenses                                   |   | 2,046,251        |      | 1,637,930 |   |
| Unearned premium                                                 |   | 2,530,457        |      | 2,020,794 |   |
| Unrealized loss on debtsecurities                                |   | 888,230          |      | - |   |
| Minimum pension liability                                        |   | 1,111,120        |      | 1,594,090 |   |
| Alternative minimum tax andgeneral business credit carryforwards |   | 300,611          |      | 328,942 |   |
| Other deferred tax assets                                        |   | 313,353          |      | - |   |
| Total deferred tax assets                                        |   | 10,159,166       |      | 6,011,269 |   |
| Deferred tax liabilities:                                        |   |             |      |   |   |
| Deferred acquisition costs                                       |   | (3,590,659       | )         | (2,960,832 | ) |
| Excess loss account                                              |   | (910,664         | )         | (710,916 | ) |
| Unrealized gain on debtsecurities                                |   | -                |      | (652,288 | ) |
| Prepaid pension cost                                             |   | (1,181,989       | )         | (1,173,680 | ) |
| Other deferred tax liabilities                                   |   | (223,447         | )         | (166,071 | ) |
| Total deferred tax liabilities                                   |   | (5,906,759       | )         | (5,663,787 | ) |
| Less: valuation allowance fordeferred tax assets                 |   | (614,856         | )         | (300,857 | ) |
| Net deferred taxasset                                            |   | $                | 3,637,551 |   | $ | 46,625 |   |

 

The NOL carryforward of $8,732,775 expires beginning in 2009.  The NOL carryforward includes $6,327,667 ofattributable to North East, which expire in 2014.  Under the prevailing tax laws, these losses must be used tooffset taxable income of North East only, are not available to offset taxableincome of other operations and are subject to an annual limitation of $587,000.

 

The Companybelieves it is more likely than not that it will generate future taxable incometo realize the benefits of the net deferredtax asset, including those net deferred tax assets attributable to North Eastonly.  The Company has provided avaluation allowance at December 31, 1999 for those deferred tax assets relatedto NOL carryforwards of MCAIC and its subsidiaries as a percentage of the totalNOL carryforward in the Consolidated return and the capital loss carryforwardof North East, including the temporary difference.  The ultimate amountsrealized, however, could be reduced if actual amounts of future taxable incomediffer from projected future taxable income.

 

(c)           The provision for Federal income taxes resulted ineffective tax rates lower than the statutory Federal income tax rates, asfollows:

 
|                                                         |   | **1999**       |                | **1998**       |   | **1997**       |   |
|--------------------------------------------------------------|--------|----------------|---------------------|----------------|--------|----------------|--------|
|                                                         |   | **(Restated)** |                | **(Restated)** |   | **(Restated)** |   |
| Tax provisioncomputed  at statutoryfederal income tax  rates |   | $              | (34,730             | )              | $      | (1,944,598     | )      | $ | (1,574,359 | ) |
| Goodwill                                                     |   | (7,199         | )                   | -              |   | -              |   |
| Other-net                                                    |   | 31,119         |                | 3,576          |   | 300,291        |   |
| Benefit (provision)                                          |   | $              | (10,810   | )              | $      | (1,941,022     | )      | $ | (1,274,068 | ) |

 

(d)           The Consolidated Statements of operations for the yearsended December 31, 1999, 1998 and 1997 include state taxes based on insurance premiumsof $230,606, $189,346 and $153,333.

 

NoteJ – Shareholders' Equity:

 

(a)           The Insurance Companies prepare their statutory financialstatements in accordance with accounting practices prescribed or permitted bythe respective Departments of Insurance in which they are domiciled("SAP").

Prescribed statutory accounting practices include a variety ofpublications of the National Association of Insurance Commissioners, as well asstate laws, regulations and general administrative rules.  Permitted statutory accounting practicesencompass all accounting practices not so prescribed.

 

The maximum amount of dividends which the Motor Club and Preserver canpay to shareholders without approval of the Insurance Commissioner of the Stateof New Jersey is subject to restrictions. To the extent that surplus as definedis available, the maximum amount distributable is limited to the greater of:(1) ten percent of statutory surplus as regards policyholders; or (2) netincome, excluding realized capital gains. Accordingly, the maximum dividend which may be paid to the Companywithout prior approval in 2000 is $1.2 million and $1.3 million for Motor Cluband Preserver, respectively.  Motor Clubpaid $250,000 and $1 million in dividends to the Company in 1999 and 1998,respectively.

 

The maximum amount of dividends that North East can pay without theprior approval of the Superintendent of the Maine Bureau of Insurance islimited by Maine regulation to not more than the greater of: (a) 10% of itsstatutory surplus as reported on its last annual statement, or (b) 100% of itsnet investment income as reported on its last annual statement.  North East is presently unable to paydividends to the Company and did not pay any dividends in 1999.

 

The amount of dividends that North East's New York-domiciledsubsidiary, American Colonial, can pay without the prior approval of the NewYork Superintendent of Insurance is limited to the lesser of:(a) 10% of itsstatutory surplus as reported on its last annual statement, or (b) 100% of itsadjusted net investment income during such period.  At December 31, 1999, the maximum dividend North East couldreceive from American Colonial was $453,000. American Colonial paid $499,000 in dividends to North East in 1999.

 

(b)           The consolidated financial statements ofthe Company's insurance subsidiaries have been prepared in accordance withGAAP, which differ in certain respects from SAP.

 

The principal differences relate to (1) acquisition costs incurred inconnection with acquiring new business which are charged to expense underSAP but under GAAP are deferred and amortized as the related premiums areearned; (2) anticipated salvage and subrogation recoveries which have not beencredited to losses incurred for SAP; (3) net deferred tax assets created by thetax effects of temporary differences; (4) unpaid losses, unpaid loss adjustmentexpenses and unearned premium reserves are presented gross of reinsurance witha corresponding asset recorded; and (5) fixed maturity portfolios that qualifyas available for sale are carried at fair value and changes in fair value arereflected directly in unassigned surplus, net of related deferred taxes.

 

The consolidated capital and surplus, shareholders' equity and incomeof the Insurance Companies on a statutory and GAAP basis were as follows:

 
|                                      |   | **December 31,** |       |
|-------------------------------------------|--------|------------------|------------|
|                                      |   | **1999**         |       | **1998** |   |
| Capital and surplus –Statutory basis |   | $                | 30,211,579 |   | $ | 24,886,388 |   |
| Shareholders' equity –GAAP basis     |   | $                | 47,647,953 |   | $ | 42,143,091 |   |

 
|               |   | **Years ended  December 31,** |      |
|--------------------|--------|-------------------------------|-----------|
|               |   | **1999**                      |      | **1998** |   | **1997** |   |
| Net income (loss): |   |                          |      |   |   |   |   |
| Statutory basis    |   | $                             | 204,073   |   | $ | (762,471 | ) | $ | 3,719,782 |   |
| GAAP basis         |   | $                             | 1,265,286 |   | $ | 5,157,732 |   | $ | 4,316,713 |   |

 

Distribution by the Insurance Companies of the excess of GAAPshareholders' equity over statutory capital and surplus to the Company isprohibited by law.

NoteK – Contingencies:

 

The Company and its subsidiaries are parties to various legal actionsand administrative proceedings and subject to various claims arising in theordinary course of business.  TheCompany believes that the disposition of these matters will not have a materialadverse effect on the financial position, the results of operations or cashflows of the Company.

 

NoteL – Pensions:

 

(a)           The Company has a non–contributory defined benefitplan (the "Plan").  Eligiblesalaried and hourly employees of the Company participate in the Plan aftertwelve months of continuous employment with the Company when age 21 has beenattained.  Retirement benefits are basedon each participant's average compensation and years of service.  Vesting of benefits  begins after five years of servicecommencing from the minimum age of 21 or date of hire, if later.

 

The Company's contributions are designed to fund the Plan’s normalcosts on a current basis and to  fundthe unfunded prior service costs, including accrued benefits arising fromqualifying employee service occurring prior to the establishment of the Plan,over 40 years.

 

On January 15, 1992, the Company suspended the accrual of benefitsarising from participant service.  TheCompany continues to fund the Plan for benefits earned through January 31,1992.

 

The Plan maintained a significant amount of assets in group annuitycontracts with Mutual Benefit Life Insurance Company ("Mutual"),which was placed in rehabilitation by the NJ DOBI on July 16, 1991.

 

In October 1994, MBLLAC approved and subsequently paid a "hardshipwithdrawal" of $2,666,204 (net of an administrative charge of $470,507) tothe Plan.

 

The Plan also received $91,938, $183,876 and $183,876 in distributionsfrom MBLLAC and Mutual in 1999, 1998 and 1997, respectively, under provisionsof the Plan of Rehabilitation.

 

On June 1, 1999, $3,424,869 was received from MBLLAC and an additional$14,670 was received on August 27, 1999. The restructured contract has how been paid in full and the Plan nolonger has any assets with MBLLAC.

 

(b)           Pension expense for 1999, 1998 and 1997 included thefollowing components:

 
|                                        |   | **1999**   |    | **1998** |   | **1997** |   |
|---------------------------------------------|--------|------------|---------|----------|--------|----------|--------|
|                                        |   |       |    |     |   |     |   |
| Interest cost                               |   | $          | 784,400 |     | $      | 813,900  |   | $ | 837,900 |   |
| Expected return onplan assets               |   | (1,032,700 | )       | (946,800 | )      | (862,000 | )      |
| Recognized loss                             |   | 342,100    |    | 312,500  |   | 277,900  |   |
| Net periodicbenefit  costbenefit obligation |   | $          | 93,800  |     | $      | 179,600  |   | $ | 253,800 |   |

 

Measurement of the Company's benefit obligation and pensionexpense as of December 31 of each year used the following assumptions:

 
|                          |   | **1999** |   | **1998** |   | **1997** |   |
|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                          |   |     |   |     |   |     |   |
| Discount rate                 |   | 7.75     | %      | 6.75     | %      | 7.25     | %      |
| Expected return on planassets |   | 10.00    | %      | 10.00    | %      | 10.00    | %      |
| Rate of compensationincrease  |   | N/A      |   | N/A      |   | N/A      |   |

 

 

(c)           A reconciliation of the changes in the Plan's benefitobligations and fair value of assets during 1999 and 1998 and a statement ofthe funded status of the Plan as of December 31 of each year is as follows:

 
|                                    |   | **1999**   |          | **1998**   |   |
|-----------------------------------------|--------|------------|---------------|------------|--------|
| Change in benefit obligation:           |   |       |          |       |   |
| Benefit obligation atJanuary 1          |   | $          | 11,968,900    |       | $      | 11,605,700 |   |
| Service cost                            |   | -          |          | -          |   |
| Interest Cost                           |   | 784,400    |          | 813,900    |   |
| Actuarial (gain)/loss                   |   | (886,400   | )             | 568,000    |   |
| Benefits paid                           |   | (1,022,000 | )             | (1,018,700 | )      |
| Benefit obligation atDecember 31        |   | $          | 10,844,900    |       | $      | 11,968,900 |   |
| Change in plan assets:                  |   |       |          |       |   |
| Fair value of plan assets atJanuary     |   | $          | 10,618,700    |       | $      | 9,340,000 |   |
| Actual return on plan assets            |   | 1,325,700  |          | 1,165,300  |   |
| Employer contribution                   |   | 239,900    |          | 1,254,500  |   |
| Benefits paid                           |   | (1,022,000 | )             | (1,018,700 | )      |
| Other                                   |   | (101,000   | )             | (122,400   | )      |
| Fair value of plan assets atDecember 31 |   | $          | 11,061,300    |       | $      | 10,618,700 |   |
| Funded Status at December 31            |   | $          | 216,400  |       | $      | (1,350,200 | ) |
| Unrecognized loss                       |   | 3,268,000  |          | 4,688,500  |   |
| Net amount recognized atDecember 31     |   | $          | 3,484,400     |       | $      | 3,338,300 |   |
|                                         |        |            |               |            |        |  |  |  |

 

Following are the amounts recognized in the statement offinancial position as of December 31 of each year:

 
| Prepaid benefit cost                  |   | $          | 216,400       |       | -             |      |
|---------------------------------------|--------|------------|---------------|------------|---------------|-----------|
| Accrued  benefit liability            |   | -          |          | $          | (1,350,200    | )         |
| Accumulated other comprehensiveincome |   | 3,268,000  |     | 4,688,500  |     |
| Deferred tax benefit, asrestated      |   | (1,111,120 | )             | (1,594,090 | )             |
| Net amount recognized                 |   | $          | 2,373,280     |       | $             | 1,744,210 |   |
|                                       |        |            |               |            |               |           |  |  |

 

 

The adjustment required to recognize the minimum liability is reflectedas a component of accumulated comprehensive income  (loss) as of December 31, 1999 and 1998, respectively.

 

(d)           The Company maintains a defined contribution plan forsubstantially all employees.   Employercontributions of a discretionary amount are made by the Company and itssubsidiaries.  Employer contributions inthe amount of $124,458, $116,329 and $115,995 were made by the Company in 1999,1998 and 1997, respectively, for its employees and charged to expense.

 

(e)           In1997, the Company established a non-qualified deferred compensation plan forcertain employees.  Employercontributions of a discretionary amount are made by the Company.

 

NoteM – Post–retirement Benefits:

 

(a)           The Company currently provides certain life and healthbenefits to retired employees who had twenty-five or more years of service,subject to certain eligibility restrictions. These benefits consist of the payment of medical, life and dentalpremiums for the retired employees.  TheCompany’s funding policy is to pay for the premiums currently; any futureincreases in the cost of these benefits will be borne by the retirees and notthe Company.

 

(b)           Net periodic post-retirement benefit cost for 1999, 1998and 1997 included the following components:

 
|                                 |   | **1999** |   | **1998** |   | **1997** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                 |   |     |   |     |   |     |   |
| Service cost                         |   | $        | 2,700  |     | $      | 2,500    |   | $ | 2,300 |   |
| Interest cost                        |   | 30,100   |   | 36,000   |   | 40,200   |   |
| Amortization oftransition obligation |   | 28,000   |   | 28,000   |   | 28,000   |   |
| Amortization of netloss              |   | 22,600   |   | 21,800   |   | 22,400   |   |
| Net postretirementexpense            |   | $        | 83,400 |     | $      | 88,300   |   | $ | 92,900 |   |

 

 

Measurement of the Company’s benefit obligation and post-retirementbenefit expense as of December 31 of each year used the following assumptions:

 
|                                     |   | **1999** |   | **1998** |   | **1997** |   |
|------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                     |   |     |   |     |   |     |   |
| Discount Rate                            |   | 7.75     | %      | 6.75     | %      | 7.25     | %      |
| Expected return on assets                |   | N/A      |   | N/A      |   | N/A      |   |
| Average rate of increase in compensation |   | N/A      |   | N/A      |   | N/A      |   |

 

(c)           A reconciliation of the changes in the benefit obligationsand fair value of assets during 1999 and 1998 and a statement of the fundedstatus as of December 31 of each year is as follows:

 
|                                     |   | **1999** |     | **1998** |   |
|------------------------------------------|--------|----------|----------|----------|--------|
| Change in Accumulated Postretirement     |   |     |     |     |   |
| Benefit Obligation                       |   |     |     |     |   |
| Benefit Obligation at January 1          |   | $        | 502,600  |     | $      | 552,900 |   |
| Service Cost                             |   | 2,700    |     | 2,500    |   |
| Interest Cost                            |   | 30,100   |     | 36,000   |   |
| Employee Contributions                   |   | 45,700   |     | 12,400   |   |
| Benefit Paid                             |   | (157,900 | )        | (125,100 | )      |
| Actuarial (gain) loss                    |   | (47,900  | )        | 23,900   |   |
| Benefit Obligation at December 31        |   | $        | 375,300  |     | $      | 502,600 |   |
|                                     |   |     |     |     |   |
| Change in Plan Assets                    |   |     |     |     |   |
| Fair Value of Plan Assets at January 1   |   | $        | -        |     | $      | - |   |
| Company Contributions                    |   | 112,200  |     | 112,700  |   |
| Employee Contributions                   |   | 45,700   |     | 12,400   |   |
| Benefits Paid                            |   | (157,900 | )        | (125,100 | )      |
| Fair Value of Plan Assets at December 31 |   | $        | -        |     | $      | - |   |
|                                     |   |     |     |     |   |
| Funded Status of the Plan                |   |     |     |     |   |
| Benefit obligation less than plan assets |   | $        | (375,300 | )        | $      | (502,600 | ) |
| Unamortized transition obligation        |   | 361,000  |     | 389,000  |   |
| Unamortized net loss                     |   | 187,100  |     | 257,600  |   |
| Net prepaid asset                        |   | $        | 172,800  |     | $      | 144,000 |   |

 

 

The following are the amounts recognized in the statement of financialposition as of December 31 of each year:

 
|                                   |   | **1999** |    | **1998** |   |
|----------------------------------------|--------|----------|---------|----------|--------|
|                                   |   |     |    |     |   |
| Prepaid benefit cost                   |   | $        | 172,800 |     | $      | 144,000 |   |
| Accumulated other comprehensive income |   | -        |    | -        |   |
| Net amount recognized                  |   | $        | 172,800 |     | $      | 144,000 |   |

 

(d)           It is the policy of the Company that any future increasein life and health care benefits will be borne by the retirees and not theCompany; as a result, there will be no increase in either the accumulatedpost-retirement benefit obligation or the service and interest cost componentsof net periodic post-retirement benefit cost related to a 1% increase in thehealth care trend rate.

 

NoteN - Selected Quarterly Financial Data (Unaudited):

 

(a)           Year ended December 31, 1999 (Restated):

 
|                 |   | **1st**     |       | **2nd**     |   | **3rd**     |   | **4th**      |       |
|----------------------|--------|-------------|------------|-------------|--------|-------------|--------|--------------|------------|
|                 |   | **Quarter** |       | **Quarter** |   | **Quarter** |   | **Quarter*** |       |
| Revenues             |   | $           | 14,314,773 |        | $      | 14,417,053  |   | $            | 14,627,084 |   | $ | 17,708,809 |   |
|                 |   |        |       |        |   |        |   |         |       |
| Losses  and expenses |   | $           | 13,106,674 |        | $      | 13,173,443  |   | $            | 15,465,552 |   | $ | 19,219,904 |   |
|                 |   |        |       |        |   |        |   |         |       |
| Net income (loss)    |   | $           | 1,080,247  |        | $      | 1,112,000   |   | $            | (749,734   | ) | $ | (1,351,177 | ) |

----

           *Includes North Eastand subsidiaries

 

           Net income (loss) percommon share:

 
| Basic   |   | $ | .51 |   | $ | .53 |   | $ | (.35 | ) | $ | (.64 | ) |
|---------|--------|---|-----|--------|---|-----|--------|---|------|---|---|------|---|
| Diluted |   | $ | .51 |   | $ | .52 |   | $ | (.35 | ) | $ | (.64 | ) |

 

 

Reconciliation of previously reported to restated net income and pershare information:

 
| Net income (loss):        |   |        |      |        |   |        |   |         |       |
|---------------------------|--------|-------------|-----------|-------------|--------|-------------|--------|--------------|------------|
|                      |   |        |      |        |   |        |   |         |       |
|                      |   | **1st**     |      | **2nd**     |   | **3rd**     |   | **4th**      |       |
|                      |   | **Quarter** |      | **Quarter** |   | **Quarter** |   | **Quarter*** |       |
| Previously reported       |   | $           | 985,621   |        | $      | 1,011,433   |   | $            | 129,745    |   | $ | (849,866 | ) |
| Effect  of tax adjustment |   | 94,626      |      | 100,567     |   | (879,479    | )      | (501,311     | )          |
| As restated               |   | $           | 1,080,247 |        | $      | 1,112,000   |   | $            | (747,734   | ) | $ | (1,351,177 | ) |
|                      |   |        |      |        |   |        |   |         |       |
| Per share information:    |   |        |      |        |   |        |   |         |       |
| Basic:                    |   |        |      |        |   |        |   |         |       |
| Previously reported       |   | $           | .47       |        | $      | .48         |   | $            | .06        |   | $ | (.40 | ) |
| Effect of tax adjustment  |   | .04         |      | .05         |   | (.41        | )      | (.24         | )          |
| As restated               |   | $           |  .51 |        | $      |  .53   |   | $            |  (.35 | ) | $ |  (.64 | ) |
|                      |   |        |      |        |   |        |   |         |       |
| Diluted:                  |   |        |      |        |   |        |   |         |       |
| Previously reported       |   | $           | .46       |        | $      | .48         |   | $            | .06        |   | $ | (.40 | ) |
| Effect of tax adjustment  |   | .05         |      | .04         |   | (.41        | )      | (.24         | )          |
| As restated               |   | $           |  .51 |        | $      |  .52   |   | $            |  (.35 | ) | $ |  (.64 | ) |

----

                *Includes NorthEast and subsidiaries

 

(a)           Year ended December 31, 1998 (Restated):

 
|                         |   | **1st**     |       | **2nd**     |   | **3rd**     |   | **4th**     |       |
|------------------------------|--------|-------------|------------|-------------|--------|-------------|--------|-------------|------------|
|                         |   | **Quarter** |       | **Quarter** |   | **Quarter** |   | **Quarter** |       |
| Revenues                     |   | $           | 14,122,238 |        | $      | 14,196,905  |   | $           | 14,481,138 |   | $ | 14,879,605 |   |
|                         |   |        |       |        |   |        |   |        |       |
| Losses and expenses          |   | $           | 12,689,535 |        | $      | 12,629,606  |   | $           | 13,140,836 |   | $ | 13,500,503 |   |
|                         |   |        |       |        |   |        |   |        |       |
| Net income                   |   | $           | 946,480    |        | $      | 1,035,397   |   | $           | 885,437    |   | $ | 911,070 |   |
|                         |   |        |       |        |   |        |   |        |       |
| Net income per common share: |   |        |       |        |   |        |   |        |       |
|                         |   |        |       |        |   |        |   |        |       |
| Basic                        |   | $           | .45        |        | $      | .49         |   | $           | .42        |   | $ | .43 |   |
| Diluted                      |   | $           | .45        |        | $      | .48         |   | $           | .42        |   | $ | .43 |   |

 

Reconciliation of previously reported to restated net income and pershare information:

 

Net income (loss):

 
|                      |   | **1st**     |      | **2nd**     |   | **3rd**     |   | **4th**      |      |
|---------------------------|--------|-------------|-----------|-------------|--------|-------------|--------|--------------|-----------|
|                      |   | **Quarter** |      | **Quarter** |   | **Quarter** |   | **Quarter*** |      |
| Previously reported       |   | $           | 1,024,531 |        | $      | 1,134,939   |   | $            | 1,015,460 |   | $ | 1,080,861 |   |
| Effect  of tax adjustment |   | (78,051     | )         | (99,542     | )      | (229,565    | )      | (169,791     | )         |
| As restated               |   | $           | 946,480   |        | $      | 1,035,397   |   | $            | 885,437   |   | $ | 911,070 |   |

 

                                Pershare information:

 
| Basic:                   |   |   |   |   |   |   |   |   |   |
|--------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Previously reported      |   | $      | .49    |   | $      | .54    |   | $      | .48    |   | $ | .51 |   |
| Effect of tax adjustment |   | (.04   | )      | (.05   | )      | (.06   | )      | (.08   | )      |
| As restated              |   | $      | .45    |   | $      | .49    |   | $      | .42    |   | $ | .43 |   |
|                     |   |   |   |   |   |   |   |   |   |
| Diluted:                 |   |   |   |   |   |   |   |   |   |
| Previously reported      |   | $      | .48    |   | $      | .54    |   | $      | .48    |   | $ | .51 |   |
| Effect of tax adjustment |   | (.03   | )      | (.06   | )      | (.06   | )      | (.08   | )      |
| As restated              |   | $      | .45    |   | $      | .48    |   | $      | .42    |   | $ | .43 |   |

 

NoteO - Comprehensive Income **(Restated)**:

 

                                Comprehensiveincome consisted of the following:

 
|                                                                                                         |   | **1999**   |       | **1998** |   | **1997**  |   |
|--------------------------------------------------------------------------------------------------------------|--------|------------|------------|----------|--------|-----------|--------|
| Net income                                                                                                   |   | $          | 91,336     |     | $      | 3,778,384 |   | $ | 3,356,399 |   |
| Other comprehensive income                                                                                   |   |       |       |     |   |      |   |
| Unrealized gains (losses) on securities:                                                                     |   |       |       |     |   |      |   |
| Unrealized gains (losses) during period (net of taxes  of ($1,536,862), $354,057 and $216,243                |   | (2,982,797 | )          | 687,149  |   | 327,721   |   |
| Less: Reclassification adjustment for gains included in  net income (net of taxes of $12,254, $9,705 and $0) |   | (23,786    | )          | (18,840  | )      | -         |   |
| Net unrealized gains (losses)                                                                                |   | (3,006,583 | )          | 668,309  |   | 327,721   |   |
| Minimum pension liability adjustment (net of taxes of  $482,970, ($54,916) and $55,012)                      |   | 937,530    |       | (105,204 | )      | 106,788   |   |
| Other comprehensive income (loss)                                                                            |   | (2,069,053 | )          | 563,105  |   | 434,509   |   |
| Comprehensive income (loss)                                                                                  |   | $          | (1,977,717 | )        | $      | 4,341,489 |   | $ | 3,790,908 |   |

 

 

NoteP – Stock Option Plans:

 

The Motor Club of America 1987, 1992 and 1999 Stock Option Plans("1987 Option Plan", "1992 Option Plan" and "1999Option Plan", respectively) provide for the issuance of options topurchase 100,000 common shares, respectively, by key executives at the  market price at date of grant.

 

Options under allOption Plans are exercisable for a five year period in twenty-five percentincrements each year, commencing one year from the date of grant. As ofDecember 31, 1999: (1) 5,125 shares under the 1987 Option Plan are available for grant; 57,000 shares were exercisable and 37,875 shares hadbeen exercised as of that date; (2) 1,950 shares under the 1992 Option Plan areavailable for grant; 62,500 shares were exercisable and 35,550 shares had beenexercised as of that date; and (3) 100,000 shares under the 1999 Option Planare available for grant.

 

Transactions during 1997, 1998 and 1999 relating to the 1987 OptionPlan are as follows:

 
|                                              |   |          |   |          |   | **Weighted**  |    |
|---------------------------------------------------|--------|---------------|--------|---------------|--------|---------------|---------|
|                                              |   |          |   | **Exercise**  |   | **Average**   |    |
|                                              |   | **Number of** |   | **Price per** |   | **Aggregate** |    |
|                                              |   | **Shares**    |   | **Share**     |   | **Amount**    |    |
|                                              |   |          |   |          |   |          |    |
| Options outstanding at December 31, 1996          |   | 34,500        |   | $             | 2.625  |          | $       | 90,562 |   |
| Options exercised in 1997                         |   | (11,375       | )      | $             | 2.625  |          | (29,859 | ) |
| Options lapsed in 1997                            |   | (1,125        | )      | $             | 2.625  |          | (2,953  | ) |
| Options granted in 1997                           |   | 62,000        |   | $             | 12.75  |          | 790,500 |   |
| Options outstanding at December 31, 1997          |   | 84,000        |   | $             | 10.098 |          | 848,250 |   |
| Options exercised in 1998                         |   | (22,000       | )      | $             | 2.625  |          | (57,750 | ) |
| Options lapsed in 1998                            |   | (5,000        | )      | $             | 12.75  |          | (63,750 | ) |
| Options outstanding at December 31, 1998 and 1999 |   | 57,000        |   | $             | 12.75  |          | $       | 726,750 |   |

 

 

Transactions during 1997, 1998 and 1999 relating to the 1992 OptionPlan are as follows:

 
|                                         |   |          |   |          |   | **Weighted**  |     |
|----------------------------------------------|--------|---------------|--------|---------------|--------|---------------|----------|
|                                         |   |          |   | **Exercise**  |   | **Average**   |     |
|                                         |   | **Number of** |   | **Price per** |   | **Aggregate** |     |
|                                         |   | **Shares**    |   | **Share**     |   | **Amount**    |     |
|                                         |   |          |   |          |   |          |     |
| Options outstanding at December 31, 1996     |   | 51,000        |   | $             | 6.00   |          | $        | 306,000 |   |
| Options exercised in 1997                    |   | (35,550       | )      | $             | 6.00   |          | (213,300 | ) |
| Options lapsed in 1997                       |   | (15,450       | )      | $             | 6.00   |          | (92,700  | ) |
| Options granted in 1997                      |   | 3,000         |   | $             | 12.75  |          | 38,250   |   |
| Options outstanding at December 31, 1997     |   | 3,000         |   | $             | 12.75  |          | 38,250   |   |
| Options granted in 1998                      |   | 28,500        |   | $             | 11.75  |          | 334,875  |   |
| Options outstanding at December 31, 1998 and |   | 31,500        |   | $             | 11.845 |          | $        | 373,125 |   |
| Options granted in 1999                      |   | 31,000        |   | $             | 12.875 |          | 399,125  |   |
| Options outstanding at December 31, 1999     |   | 62,500        |   | $             | 12.36  |          | $        | 772,250 |   |

 

There were no transactions during 1999 relating to the 1999 OptionPlan.

 

The Company has adopted the provision of SFAS No. 123 ("Accountingfor Stock-Based Compensation"), which calls for companies to measureemployee stock compensation expense based on the fair value method ofaccounting.  However, as allowed by SFASNo. 123, the Company has elected the continued use of APB Opinion No. 25("Accounting for Stock Issued to Employees"), with pro formadisclosures of net income and earnings per share determined as if the fairvalue method had been applied in measuring compensation cost.

 

These calculations only take into consideration options issued sinceJanuary 1, 1995.  In 1999, 1998 and1997, had the fair value method been applied, net income would have beenreduced by $70,900, $21,100 and $10,200, $.03, $.01 and less than $.01 basicnet earnings per share, respectively.

 

The average fair value of options granted during 1999, 1998 and 1997was $6.34, $5.79 and $6.52, respectively. The fair value was estimated using the Black-Scholes option pricingmodel based on the following assumptions for 1999, 1998 and 1997: risk-free interestrate of 6.55%, 4.66% and 5.65%; volatility of 50.5%, 52.3% and 54.5%; andexpected life of 4.5, 4.75 and 4.5 years. The Company does not pay a dividendon its common stock.  The followingtable summarizes options outstanding and exercisable at December 31, 1999:

 
| **Options  Outstanding** |   | **Options  Exercisable** |   |
|--------------------------|--------|--------------------------|--------|
|                     |   |                     |   |   |   |   |   |   |   | **Average** |   |
| **Exercise**             |   |                     |   | **Average** |   | **Exercise** |   |   |   | **Exercise** |   |
| **Price**                |   | **Options**              |   | **Life(a)** |   | **Price** |   | **Options** |   | **Price** |   |
|                     |   |                     |   |   |   |   |   |   |   |   |   |
| $ 11.75                  |   | 28,500                   |   | 3.75 |   | $ | 11.75 |   | 7,125 |   | $ | 11.75 |   |
| $ 12.75                  |   | 60,000                   |   | 2.25 |   | $ | 12.75 |   | 30,000 |   | 12.75 |   |
| $ 12.875                 |   | 31,000                   |   | 4.50 |   | $ | 12.875 |   | 0 |   | - |   |
| Total                    |   | 119,500                  |   | 3.19 |   | $ | 12.54 |   | 37,125 |   | $ | 12.56 |   |

----

(a)           Average contractual life remaining years.

 

NoteQ – Lease Obligations:

 

Effective January 1, 1996, the Company entered into a lease("Paramus Lease") at 95 Route 17 South, Paramus, New Jersey.  The Paramus Lease expires on December 31,2005.  The Company has an option to terminatethe Paramus Lease after six years, and an option to extend the Paramus Leasefor an additional five years after the initial lease term expires. The Companywill pay a base annual rental of $371,745 through  December 31, 2000 and $416,805 thereafter until the Paramus Leaseexpires.  Additional charges forelectricity and escalation of certain operating costs apply.  Rent expense paid by the Company on theParamus Lease was $410,000 in 1999, 1998 and 1997.

 

North East leases office space at 482 Payne Road, Scarborough,Maine.  The lease expires on December31, 2000.  The minimum lease payment for2000 is $144,823.

 

NoteR - Earnings per Share ("EPS"):

 

In 1997, the Company adopted SFAS No. 128 ("Earnings PerShare") specifying the computation, presentation and disclosurerequirements for EPS. The new standard defines "basic" and"diluted" earnings per share. Basic earnings per share are based on weighted average basic sharesoutstanding.  Diluted earnings per shareare based on weighted average diluted shares outstanding, which is calculatedby adding shares contingently issuable under stock options and sharescontingently issuable under the Debentures (if dilutive) to the average basicshares outstanding.  The calculations ofaverage basic and diluted common shares outstanding and net income per commonshare are as follows:

 
|                                                            |   | **1999**       |   | **1998**       |   | **1997**       |   |
|-----------------------------------------------------------------|--------|----------------|--------|----------------|--------|----------------|--------|
|                                                            |   | **(Restated)** |   | **(Restated)** |   | **(Restated)** |   |
|                                                            |   |           |   |           |   |           |   |
| Net income (numerator)                                          |   | $              | 91,336 |           | $      | 3,778,384      |   | $ | 3,356,399 |   |
| Weighted average basic common shares outstanding  (denominator) |   | 2,117,912      |   | 2,108,722      |   | 2,074,473      |   |
| Shares contingently issuable under Stock Option plans           |   | 3,785          |   | 12,644         |   | 27,922         |   |
| Average diluted common shares outstanding (denominator)         |   | 2,121,697      |   | 2,121,366      |   | 2,102,395      |   |
|                                                            |   |           |   |           |   |           |   |
| Net income per common share:                                    |   |           |   |           |   |           |   |
| Basic                                                           |   | $              | .04    |           | $      | 1.79           |   | $ | 1.62 |   |
| Diluted                                                         |   | $              | .04    |           | $      | 1.78           |   | $ | 1.60 |   |

 

NoteS - Reportable Segments:

 

In 1998, the Company adopted SFAS No. 131 ("Disclosures aboutSegments of an Enterprise and Related Information").  Under this Statement, the Company does nothave any reportable segments but is required to disclose certainenterprise-wide information.

 

The Company writes property and casualty insurance in the States of NewJersey and Maine only through independent producers, none of which generatemore than 10% of the Company's insurance premiums.  Products include private passenger automobile, homeowners andancillary coverages ("Personal Property"), and small commercial linesinsurance, including commercial auto. Insurance premiums generated by these products during 1999, 1998 and1997 were as follows:

 
| **Product**                  |   | **1999**    |   | **1998**    |   | **1997**    |   |
|------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|
|                         |   |        |   |        |   |        |   |
| Private Passenger Automobile |   | $40,989,903 |   | $39,872,261 |   | $39,213,154 |   |
| Commercial Lines             |   | 9,237,955   |   | 7,703,054   |   | 4,912,797   |   |
| Personal Property            |   | 5,579,472   |   | 5,600,348   |   | 6,751,939   |   |
| Total                        |   | $55,807,330 |   | $53,175,663 |   | $50,877,890 |   |

 

Note T - Subsequent Event (Unaudited):

 

On March 1, 2000 the Company completed its acquisition of MountainValley Indemnity Company ("Mountain Valley"), formerly known as WhiteMountains Insurance Company, from Unitrin Inc. for $7.5 million in cash.

 

Mountain Valley, formed in 1995, presently writes small and mediumsized commercial lines business in New York and all of New England exceptConnecticut.  Statutory surplus atDecember 31, 1999 was $7.3 million.

 

Under the terms of the purchase, Mountain Valley will run-off itspresent 100% intercompany quota share reinsurance agreement; thus at closingthere are no net loss and loss expense reserves for claims occurring prior toclosing, including those which develop subsequently.

 

Mountain Valley will be assuming the unearned premium at closing(subject to certain adjustments).

 

In connection with the acquisition of Mountain Valley, the OwnershipGroup extended unsecured debt financing in the amount of $11.5 million tofinance the transaction and to provide additional working capital to theCompany.  This debt will mature in twoyears and pay interest quarterly at a rate of 10.605%.  The Company will be pursuing longer-termfinancing options to replace this debt during that period.  At the Company's election, if acceptablefinancing is not identified by Motor Club during the two-year period, the debtcan be extended for up to five years utilizing successive one-year renewals, inexchange for an increased interest rate on the debt.

 

NoteU – Related Party Transactions:

 

The Ownership Group owns 42% of the outstanding common stock of theCompany at December 31, 1999.  TheCompany paid directors fees' of $180,000 during 1999, 1998 and 1997 to theOwnership Group.

 

As noted, the Ownership Group's participation in the Debentures couldpotentially increase their share ownership of the Company from its present42.0% to 53.8%.  During 1999, theOwnership Group received $214,780 in interest payments on the Debentures.

NoteV - Restatement:

 

In March 2001, the Company’s management determined that certain taxbenefits should not have been recognized and that certain deferred taxliabilities had not been recorded. These tax matters, which are discussed in Note I, relate to the taxeffects of temporary differences arising from a subsidiary that wasdeconsolidated for financial reporting purposes due to its insolvency in 1992.

 

As a result, the 1997, 1998 and 1999 Consolidated Financial Statementshave been restated from amounts previously reported.

 

Finally, deferred tax assets were not recorded for the tax effects ofthe minimum pension liability that is presented as a component of othercomprehensive income. Shareholders’ equity at December 31, 1996 increased by$1,594,906, representing the cumulative effect on prior periods’ results ofrevising the tax accrual.

 

These tax matters have no impact on the operations, cash flow orcapital and surplus of the Company’s active insurance subsidiaries or on theconsolidated income before Federal income taxes for the periods presented noris the Company subject to penalties and interest in the recording of thedeferred tax liabilities.  The effect ofthese tax items on the accompanying are set forth below:

 

 
|                                        |   | **Consolidated Balance Sheet as of** |        |
|---------------------------------------------|--------|--------------------------------------|-------------|
|                                        |   | **December 31, 1999**                |        | **December 31, 1998** |   |
|                                        |   | **As**                               |        |   |   | **As** |   |   |   |
|                                        |   | **previously**                       |        | **As** |   | **previously** |   | **As** |   |
|                                        |   | **Reported**                         |        | **Restated** |   | **Reported** |   | **Restated** |   |
| **ASSETS**                                  |   |                                 |        |   |   |   |   |   |   |
| Investments:                                |   |                                 |        |   |   |   |   |   |   |
| Fixed maturity securities                   |   | $                                    | 78,242,322  |   | $ | 78,242,322 |   | $ | 69,594,904 |   | $ | 69,594,904 |   |
| Equity securities                           |   | 57,053                               |        | 57,053 |   | 0 |   | 0 |   |
| Mortgage loans on real estate               |   | 153,616                              |        | 153,616 |   | 361,038 |   | 361,038 |   |
| Short-term investments                      |   | 8,528,858                            |        | 8,528,858 |   | 5,995,299 |   | 5,995,299 |   |
| Total investments                           |   | 86,981,849                           |        | 86,981,849 |   | 75,951,241 |   | 75,951,241 |   |
| Cash and cash equivalents                   |   | 443,733                              |        | 443,733 |   | 2,773,427 |   | 2,773,427 |   |
| Premiums receivable                         |   | 27,132,246                           |        | 27,132,246 |   | 20,401,069 |   | 20,401,069 |   |
| Reinsurance recoverable                     |   | 21,163,574                           |        | 21,163,574 |   | 19,234,277 |   | 19,234,277 |   |
| Notes and accounts receivable               |   | 212,598                              |        | 212,598 |   | 125,444 |   | 125,444 |   |
| Deferred policy acquisition costs           |   | 10,560,763                           |        | 10,560,763 |   | 8,708,329 |   | 8,708,329 |   |
| Fixed assets                                |   | 1,858,621                            |        | 1,858,621 |   | 1,671,902 |   | 1,671,902 |   |
| Federal income tax recoverable              |   | 54,026                               |        | 47,100 |   | 26,724 |   | 12,993 |   |
| Prepaid reinsurance premiums                |   | 1,485,450                            |        | 1,485,450 |   | 1,015,581 |   | 1,015,581 |   |
| Deferred tax asset                          |   | 4,128,766                            |        | 3,637,551 |   | 0 |   | 46,625 |   |
| Goodwill                                    |   | 1,745,848                            |        | 1,593,801 |   | 0 |   | 0 |   |
| Other assets                                |   | 1,470,744                            |        | 1,470,744 |   | 1,104,782 |   | 1,104,782 |   |
| Total Assets                                |   | $                                    | 157,238,218 |   | $ | 156,588,030 |   | $ | 131,012,776 |   | $ | 131,045,670 |   |
|                                        |   |                                 |        |   |   |   |   |   |   |
| **LIABILITIES AND  SHAREHOLDERS' EQUITY**   |   |                                 |        |   |   |   |   |   |   |
| Liabilities:                                |   |                                 |        |   |   |   |   |   |   |
| Losses and loss expenses                    |   | $                                    | 70,983,383  |   | $ | 70,983,383 |   | $ | 58,335,143 |   | $ | 58,335,143 |   |
| Unearned premiums                           |   | 38,698,028                           |        | 38,698,028 |   | 30,733,144 |   | 30,733,144 |   |
| Commission payable                          |   | 2,802,516                            |        | 2,802,516 |   | 2,835,408 |   | 2,835,408 |   |
| Accounts Payable                            |   | 1,397,263                            |        | 1,397,263 |   | 875,327 |   | 875,327 |   |
| Accrued expenses                            |   | 3,112,157                            |        | 3,112,157 |   | 4,763,950 |   | 4,763,950 |   |
| Drafts outstanding                          |   | 2,685,423                            |        | 2,685,423 |   | 1,688,835 |   | 1,688,835 |   |
| Convertible subordinated debentures         |   | 10,000,000                           |        | 10,000,000 |   | 0 |   | 0 |   |
| Note payable                                |   | 0                                    |        | 0 |   | 3,000,000 |   | 3,000,000 |   |
| Deferred tax liability                      |   | 0                                    |        | 0 |   | 957,440 |   | 0 |   |
| Federal income tax payable                  |   | 0                                    |        | 0 |   | 0 |   | 0 |   |
| Other liabilities                           |   | 0                                    |        | 0 |   | 0 |   | 0 |   |
| Total liabilities                           |   | 129,678,770                          |        | 129,678,770 |   | 103,189,247 |   | 102,231,807 |   |
| Shareholders' Equity:                       |   |                                 |        |   |   |   |   |   |   |
| Common stock                                |   | 1,062,194                            |        | 1,062,194 |   | 1,058,215 |   | 1,058,215 |   |
| Paid in capital                             |   | 2,066,089                            |        | 2,066,089 |   | 1,996,954 |   | 1,996,954 |   |
| Accumulated other comprehensive  income     |   | (5,036,515                           | )           | (3,897,396 | ) | (3,422,387 | ) | (1,828,343 | ) |
| Retained earnings                           |   | 29,467,680                           |        | 27,678,373 |   | 28,190,747 |   | 27,587,037 |   |
| Total Shareholders' Equity                  |   | 27,559,448                           |        | 26,909,260 |   | 27,823,529 |   | 28,813,863 |   |
| Total Liabilities and Shareholders'  Equity |   | $                                    | 157,238,218 |   | $ | 156,588,030 |   | $ | 131,012,776 |   | $ | 131,045,670 |   |

** **
|                                           |   | **Consolidated Income Statements for the  Years Ended December 31,** |      |
|------------------------------------------------|--------|----------------------------------------------------------------------|-----------|
|                                           |   | **1999**                                                             |      | **1998** |   | **1997** |   |
|                                           |   | **As previously Reported**                                           |      | **As Restated** |   | **As previously Reported** |   | **As Restated** |   | **As previously Reported** |   | **As Restated** |     |
| Income before Federal income taxes             |   | $                                                                    | 102,146   |   | $ | 102,146 |   | $ | 5,719,406 |   | $ | 5,719,406 |   | $ | 4,630,467 |   | $ | 4,630,467 |   |
|                                           |   |                                                                 |      |   |   |   |   |   |   |   |   |   |   |
| Benefit (provision) for Federal  income taxes: |   |                                                                 |      |   |   |   |   |   |   |   |   |   |   |
| Current                                        |   | 21,865                                                               |      | 28,331 |   | (193,121 | ) | (179,661 | ) | (37,573 | ) | (37,573 | ) |
| Deferred                                       |   | 1,152,922                                                            |      | (39,141 | ) | (1,270,494 | ) | (1,761,361 | ) | (1,110,192 | ) | (1,236,495 | ) |
| Total Federal income tax                       |   | 1,174,787                                                            |      | (10,810 | ) | (1,463,615 | ) | (1,941,022 | ) | (1,147,765 | ) | (1,274,068 | ) |
| Net income                                     |   | $                                                                    | 1,276,933 |   | $ | 91,336 |   | $ | 4,255,791 |   | $ | 3,778,384 |   | $ | 3,482,702 |   | $ | 3,356,399 |   |
|                                           |   |                                                                 |      |   |   |   |   |   |   |   |   |   |   |
| Net income per common share:                   |   |                                                                 |      |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |   | $                                                                    | 0.60      |   | $ | 0.04 |   | $ | 2.02 |   | $ | 1.79 |   | $ | 1.68 |   | $ | 1.62 |   |
| Diluted                                        |   | $                                                                    | 0.60      |   | $ | 0.04 |   | $ | 2.01 |   | $ | 1.78 |   | $ | 1.66 |   | $ | 1.60 |   |

 

 

**MOTOR CLUB OF AMERICA****ANDSUBSIDIARIES**

**SCHEDULE I.  SUMMARY OF INVESTMENTS****–**

**OTHER THAN INVESTMENTS IN RELATEDPARTIES**

**at December 31, 1999**

__________

 
| **Column A**                                                   |   | **Column B** |           | **Column C**          |           | **Column D**                                |                  |
|----------------------------------------------------------------|--------|--------------|----------------|-----------------------|----------------|---------------------------------------------|-----------------------|
|                                                           |   | **Cost(a)**  |           | **Market**            |           | **Amount atwhich shownin thebalance sheet** |        |
| Type of investment                                             |   |         |           |                  |           |                                        |                  |
|                                                           |   |         |           |                  |           |                                        |                  |
| Fixed maturity securitiesavailable-for-sale:                   |   |         |      |                  |      |                                        |             |
| United States Governmentand government agenciesand authorities |   | $            | 30,710,190     |        | $              | 30,328,040                             |        | $ | 30,328,040 |        |
| Industrial andmiscellaneous                                    |   | 46,544,011   |      | 44,532,565            |      | 44,532,565                                  |             |
| Public utilities                                               |   | 3,600,563    |           | 3,381,717             |           | 3,381,717                                   |                  |
|                                                           |   |         |           |                  |           |                                        |                  |
| Total fixed maturities                                         |   | 80,854,764   |           |                  |           | 78,242,322                                  |                  |
| Equity securities:                                             |   |         |           |                  |           |                                        |                  |
| Common stock                                                   |   | 43,346       |           | 57,053                |           | 57,053                                      |                  |
| Mortgage loans on realestate                                   |   | 153,616      |      |                  |      | 153,616                                     |             |
|                                                           |   |         |           |                  |           |                                        |                  |
| Short–term investments,available-for-sale                 |   | 8,528,858    |      | 8,528,858             |      | 8,528,858                                   |             |
|                                                           |   |         |           |                  |           |                                        |                  |
| Total investments                                              |   | $            | 89,580,584     |                  |           |                                        | $                     | 86,981,849 |   |
|                                                                |        |              |                |                       |                |                                             |                       |  |  |  |

----

Note: (a)                                                  Represents originalcost of investments reduced by repayment and as to fixed maturities, adjustedfor 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,** |       |
|--------------------------------------------|--------|------------------|------------|
|                                       |   | **1999**         |       | **1998** |   |
|                                       |   | **(Restated)**   |       | **(Restated)** |   |
| **Assets:**                                |   |             |       |   |   |
|                                       |   |             |       |   |   |
| Cash and cash equivalents                  |   | $                | -          |   | $ | 1,238,530 |   |
| Investments in subsidiaries                |   | 46,399,026       |       | 40,707,745 |   |
| Insurance premiums receivable              |   | 18,896,067       |       | 19,587,908 |   |
| Other assets                               |   | 4,781,710        |       | 2,024,056 |   |
| Total assets                               |   | $                | 70,076,803 |   | $ | 63,558,239 |   |
|                                       |   |             |       |   |   |
| **Liabilities and shareholders' equity:**  |   |             |       |   |   |
| Indebtedness to subsidiaries               |   | $                | 28,276,495 |   | $ | 26,498,457 |   |
| Convertible subordinated  debentures  |   | 10,000,000       |       | - |   |
| Note payable                               |   | -                |       | 3,000,000 |   |
| Other liabilities                          |   | 4,891,048        |       | 5,245,919 |   |
| Total liabilities                          |   | 43,167,543       |       | 34,744,376 |   |
| Shareholders' equity                       |   | 26,909,260       |       | 28,813,863 |   |
| Total liabilities andshareholders' equity  |   | $                | 70,076,803 |     | $ | 63,558,239 |     |

 

 

**Notes to Schedule**

 

The Notes to Consolidated FinancialStatements of Motor Club of America and Subsidiaries are incorporated byreference to this schedule.

 

The Statements of Shareholders'Equity are the same as those presented for Motor Club of America andSubsidiaries.

 

 

 

(Continued)

**MOTOR CLUB OFAMERICA AND SUBSIDIARIES**

**SCHEDULE II.  CONDENSED FINANCIAL INFORMATION**

**OF REGISTRANT(PARENT COMPANY)**

**__________**

 

**STATEMENTS OFOPERATIONS**

 

 
|                                         |   | **For the years ended December 31,** |           |
|----------------------------------------------|--------|--------------------------------------|----------------|
|                                         |   | **1999**                             |           | **1998** |   | **1997** |   |
|                                         |   | **(Restated)**                       |           | **(Restated)** |   | **(Restated)** |   |
| **Revenues:**                                |   |                                 |           |   |   |   |   |
|                                         |   |                                 |           |   |   |   |   |
| Membership servicing fees                    |   | $                                    | 118,924        |   | $ | 133,531 |   | $ | 152,791 |   |
| Commission income                            |   | -                                    |           | - |   | 1,595 |   |
| Interest on mortgage loans                   |   | 16,974                               |           | 35,251 |   | 4,973 |   |
| Other income (1)                             |   | 168,222                              |           | 204,640 |   | 216,161 |   |
| Total revenues                               |   | 304,120                              |           | 373,422 |   | 375,520 |   |
|                                         |   |                                 |           |   |   |   |   |
| **Expenses:**                                |   |                                 |           |   |   |   |   |
|                                         |   |                                 |           |   |   |   |   |
| Merger expenses                              |   | 800,000                              |           | - |   | - |   |
| Interest expense                             |   | 448,117                              |           | 60,389 |   | 8,890 |   |
| General and administrativeexpenses (1)       |   | 298,514                              |      | (248,636 | ) | (512,054 | ) |
| Total expenses                               |   | 1,546,631                            |           | (188,247 | ) | (503,164 | ) |
|                                         |   |                                 |           |   |   |   |   |
| Income beforeFederal income taxes            |   | (1,242,511                           | )              | 561,669 |     | 878,684 |     |
| Benefit (provision) forFederal income taxes: |   |                                 |      |   |      |   |      |
| current                                      |   | 28,331                               |           | 1,384,611 |   | (37,573 | ) |
| deferred                                     |   | 40,230                               |           | (1,761,361 | ) | (1,236,495 | ) |
| Total Federal income tax                     |   | 68,561                               |           | (376,750 | ) | (1,274,068 | ) |
|                                         |   |                                 |           |   |   |   |   |
| Income (loss) before itemshown below         |   | (1,173,950                           | )              | 184,919 |     | (395,384 | ) |
| Equity in net incomeof subsidiaries          |   | 1,265,286                            |      | 3,593,465 |     | 3,751,783 |     |
| Net income                                   |   | $                                    | 91,336         |   | $ | 3,778,384 |   | $ | 3,356,399 |   |

 

 

(1)           Amount is net of $285,762 (1999),$296,810 (1998) and  $535,816 (1996) ofmanagement fees charged to subsidiaries.

 

 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**SCHEDULE II.  CONDENSED FINANCIAL INFORMATION**

**OF REGISTRANT (PARENT COMPANY)**

**__________**

 

**STATEMENTS OF CASH FLOWS**

 
|                                                                            |   | **For the years ended December 31,** |                  |
|---------------------------------------------------------------------------------|--------|--------------------------------------|-----------------------|
|                                                                            |   | **1999**                             |                  | **1998** |   | **1997** |   |
|                                                                            |   | **(Restated)**                       |                  | **(Restated)** |   | **(Restated)** |   |
| Net income                                                                      |   | $                                    | 91,336                |   | $ | 3,778,384 |   | $ | 3,356,399 |   |
| Adjustments to reconcile netincome to net cash provided byoperating activities: |   |                                 |        |   |        |   |        |
| Depreciation expense                                                            |   | 499,503                              |                  | 426,703 |   | 371,756 |   |
| Deferred tax benefit                                                            |   | (40,230                              | )                     | 1,761,361 |   | 1,274,068 |   |
|                                                                            |   |                                 |                  |   |   |   |   |
| Changes in:                                                                     |   |                                 |                  |   |   |   |   |
| Premiums receivable                                                             |   | 691,841                              |                  | (12,221,216 | ) | 172,024 |   |
| Investments in subsidiaries                                                     |   | 340,204                              |                  | (10,818,776 | ) | (2,676,923 | ) |
| Other assets                                                                    |   | (7,716                               | )                     | 125,831 |   | 229,053 |   |
| Other liabilities                                                               |   | 1,065,629                            |                  | 451,011 |   | (305,577 | ) |
| Indebtedness to related parties                                                 |   | 1,778,038                            |                  | 11,857,053 |   | (922,446 |   |
| Net cash provided by (utilized in)operating activities                          |   | 4,418,605                            |             | (4,639,649 | ) | 1,498,354 |     |
|                                                                            |   |                                 |                  |   |   |   |   |
| Investing activities:                                                           |   |                                 |                  |   |   |   |   |
| Proceeds from:                                                                  |   |                                 |                  |   |   |   |   |
| Disposal of short–terminvestments                                          |   | -                                    |             | 28,900,000 |     | 47,287,674 |     |
| Payments received on mortgageloan principal                                     |   | 207,422                              |             | 161,517 |     | 4,490 |     |
| Purchase of:                                                                    |   |                                 |                  |   |   |   |   |
| Fixed maturities                                                                |   | -                                    |                  | - |   | - |   |
| Short–term investments                                                     |   | -                                    |                  | (25,750,000 | ) | (48,692,219 | ) |
| Acquisition of North East                                                       |   | (10,409,682                          | )                     | - |   | - |   |
| Fixed assets                                                                    |   | (454,875                             | )                     | (491,088 | ) | (168,878 | ) |
| Mortgage loans from Finance Company                                             |   | -                                    |                  | - |   | (527,045 | ) |
| Net cash provide by (utilized in)investing activities                           |   | (10,657,135                          | )                     | 2,820,429 |     | (2,095,978 | ) |
| Financing activities:                                                           |   |                                 |                  |   |   |   |   |
| Convertible subordinated debentures                                             |   | 10,000,000                           |                  | - |   | - |   |
| Note payable                                                                    |   | (3,000,000                           | )                     | 3,000,000 |   | - |   |
| Capital contribution to subsidiary                                              |   | (2,000,000                           | )                     | - |   | - |   |
| Common stock issued                                                             |   | -                                    |                  | 57,750 |   | 243,159 |   |
| Net cash provided byfinancing activities                                        |   | 5,000,000                            |             | 3,057,750 |     | 243,159 |     |
| Increase (decrease) in cash andcash equivalents                                 |   | (1,238,530                           | )                     | 1,238,530 |     | (354,465 | ) |
| Cash and cash equivalents atbeginning of year                                   |   | 1,238,530                            |             | - |     | 354,465 |     |
| Cash and cash equivalent at end ofyear                                          |   | $                                    | -                     |     | $ | 1,238,530 |     | $ | - |     |

----

Supplemental Disclosures of Cash FlowInformation

(1)           Total interest paid was $448,782(1999), $60,389 (1998) and $8,890 (1997).

 

(2)           Total federal income taxes paid was$0 (1999), $212,738 (1998) and $50,691 (1997).

 

 

(Continued)

 

**MOTORCLUB OF AMERICA AND SUBSIDIARIES**

**SCHEDULE IV. REINSURANCE**

**FOR THE YEARS ENDED DECEMBER 31, 1999,1998 and 1997**

                                                                                                            __________

 

 
| **Column A**                                         |   | **Column B**     |           | **Column C**               |           | **Column D**                   |           | **Column E**   |           | **Column F**                |           |
|------------------------------------------------------|--------|------------------|----------------|----------------------------|----------------|--------------------------------|----------------|----------------|----------------|-----------------------------|----------------|
|                                                 |   | **Gross Amount** |           | **Ceded tootherCompanies** |           | **Assumed fromotherCompanies** |           | **Net Amount** |           | **% ofAmountAssumedto Net** |           |
| December 31, 1999:                                   |   |             |           |                       |           |                           |           |           |           |                        |           |
|                                                 |   |             |           |                       |           |                           |           |           |           |                        |           |
| Total property and casualtyinsurance premiums earned |   | $                | 64,151,936     |                  | $              | 8,358,946                      |      | $              | 14,340         |                   | $              | 55,807,330 |     | 0.03 |   % |
|                                                 |   |             |           |                       |           |                           |           |           |           |                        |           |
| December 31, 1998:                                   |   |             |           |                       |           |                           |           |           |           |                        |           |
|                                                 |   |             |           |                       |           |                           |           |           |           |                        |           |
| Total property and casualtyinsurance premiums earned |   | $                | 59,951,837     |                  | $              | 6,776,174                      |      | $              | -              |                   | $              | 53,175,663 |     | 0.00 |   % |
|                                                 |   |             |      |                       |      |                           |      |           |      |                        |      |
| December 31, 1997:                                   |   |             |           |                       |           |                           |           |           |           |                        |           |
|                                                 |   |             |           |                       |           |                           |           |           |           |                        |           |
| Total property and casualtyinsurance premiums earned |   | $                | 58,029,094     |                  | $              | 7,151,204                      |      | $              | -              |                   | $              | 50,877,890 |     | 0.00 |   % |

 

 

 

(Continued)

 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**SCHEDULE V. VALUATION ANDQUALIFYING**

**ACCOUNTS AND RESERVES**

**FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997**

__________

 

 
| **Column A**                                        |   | **Column B**                       |      | **Column C**                     |           | **Column D**                  |           | **Column E**   |           |
|-----------------------------------------------------|--------|------------------------------------|-----------|----------------------------------|----------------|-------------------------------|----------------|----------------|----------------|
|                                                |   |                               |      | **Additions**                    |           |                          |           |           |           |
| **Description**                                     |   | **Balance at Beginning of Period** |      | **Charged to Cost and Expenses** |           | **Charged toOther  Accounts** |           | **Deductions** |           | **Balanceat  endof Period** |     |
| Allowance fordoubtfulreceivables:                   |   |                               |      |                             |           |                          |           |           |           |   |   |
|                                                |   |                               |      |                             |           |                          |           |           |           |   |   |
| December 31, 1999                                   |   | $                                  | 68,091    |                             | $              | -                             |           | $              | –         |   | $ | - |   | $ | 68,091 |   |
|                                                |   |                               |      |                             |           |                          |           |           |           |   |   |
| December 31, 1998                                   |   | $                                  | 68,091    |                             | $              | -                             |           | $              | –         |   | $ | - |   | $ | 68,091 |   |
|                                                |   |                               |      |                             |           |                          |           |           |           |   |   |
| December 31, 1997                                   |   | $                                  | 41,340    |                             | $              | 26,751                        |           | $              | –         |   | $ | - |   | $ | 68,091 |   |
|                                                |   |                               |      |                             |           |                          |           |           |           |   |   |
| Valuation allowancefor deferred taxes, as restated: |   |                               |      |                             |      |                          |      |           |      |   |      |
|                                                |   |                               |      |                             |           |                          |           |           |           |   |   |
| December 31, 1999                                   |   | $                                  | 300,857   |                             | $              | 313,999                       |           | $              | -              |   | $ | - |   | $ | 614,856 |   |
|                                                |   |                               |      |                             |           |                          |           |           |           |   |   |
| December 31, 1998                                   |   | $                                  | 1,920,162 |                             | $              | -                             |           | $              | -              |   | $ | 1,619,305  |   | $ | 300,857 |   |
|                                                |   |                               |      |                             |           |                          |           |           |           |   |   |
| December 31, 1997                                   |   | $                                  | -         |                             | $              | 1,920,162                     |           | $              | -              |   | $ | - |   | $ | 1,920,162 |   |

 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**SCHEDULEVI. SUPPLEMENTAL INFORMATION CONCERNING**

**PROPERTY/CASUALTY INSURANCE OPERATIONS**

 

**__________**

 

**For the years ended December 31, 1999, 1998 and 1997**

 

 
| **Column  A**               |       | **Column B**                           |                 | **Column C**                                                  |                | **Column D**                                |          | **Column E**          |          | **Column F**         |       | **Column G**                                |   | **Column H**                                           |          | **Column I**                                     |      | **Column J**           |   | **Column K**     |
|-----------------------------|------------|----------------------------------------|----------------------|---------------------------------------------------------------|---------------------|---------------------------------------------|---------------|-----------------------|---------------|----------------------|------------|---------------------------------------------|--------|--------------------------------------------------------|---------------|--------------------------------------------------|-----------|------------------------|--------|------------------|
|                        |       | **Deferred Policy  Acquisition Costs** |                 | **Reserves for Unpaid Claims  and Claim Adjustment Expenses** |                | **Discount, if any, Deducted  in Column C** |          | **Unearned Premiums** | ** **    | **Claims and Claim** | ** ** | **Adjustment Expenses Incurred Related to** |   | **Amortization of deferred  policy acquisition Costs** |          | **Paid Claims and Claim Adjustment****Expenses** |      | **Premium****Written** |
| **Earned Premiums**         | ** ** | **Net Investment Income (a)**          | **(1) Current Year** |                                                          | **(2) Prior Years** |
| Year endedDecember 31, 1999 |       | $                                      | 10,560,763           |                                                     | $                   | 70,983,383                                  |     | –                |     | $                    | 38,698,028 |                                   | $      | 55,807,330                                             |     | $                                                | 4,920,229 |              | $      | 37,271,781  |     | $ | 3,359,272 |     | $ | 14,305,501 |     | $ | 36,735,862  |     | $ | 54,508,215 |
|                        |       |                                   |                 |                                                          |                |                                        |          |                  |          |                 |       |                                        |   |                                                   |          |                                             |      |                   |   |             |   |   |
| Year endedDecember 31, 1998 |       | $                                      | 8,708,329            |                                                     | $                   | 58,335,143                                  |     | –                |     | $                    | 30,733,144 |                                   | $      | 53,175,663                                             |     | $                                                | 4,102,255 |              | $      | 32,598,287  |     | $ | 3,881,304 |     | $ | 13,375,221 |     | $ | 29,548,773  |     |   $64,302,713 |
|                        |       |                                   |                 |                                                          |                |                                        |          |                  |          |                 |       |                                        |   |                                                   |          |                                             |      |                   |   |             |   |   |
| Year endedDecember 31, 1997 |       | $                                      | 5,858,650            |                                                     | $                   | 50,246,778                                  |     | –                |     | $                    | 19,285,757 |                                   | $      | 50,877,890                                             |     | $                                                | 3,384,004 |              | $      | 29,368,738  |     | $ | 3,772,953 |     | $ | 15,162,320 |     | $ | 28,371,865  |     |   $51,680,146 |

----

Note:  (a)  Excludes non–insurance subsidiaries'investment income and realized investment gains.