<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10 - QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-11184
NORTH EAST INSURANCE COMPANY
(Name of small business issuer)
Maine 01-278387
(State or other jurisdiction of (I.R.S employer
incorporation or organization) identification number)
482 Payne Road, Scarborough, Maine 04074
(Address of principal executive offices)
Issuer's telephone number: (207) 883-2232
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
----- -----
There were 2,992,314 common shares outstanding as of August 10, 1995.
Transitional Small Business Disclosure Format: Yes No X
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1
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NORTH EAST INSURANCE COMPANY
AND SUBSIDIARIES
INDEX
Part I. - Financial Information
<TABLE>
<S> <C>
Item 1 - Consolidated Balance Sheet
June 30, 1995 3
Consolidated Statements of Operations
Six Months Ended June 30, 1995 and 1994 4
Consolidated Statements of Operations
Three Months Ended June 30, 1995 and 1994 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
the Financial Condition and Results of Operations 9
Part II - Other Information
None 11
</TABLE>
2
<PAGE> 3
North East Insurance Company And Subsidiaries
Consolidated Balance Sheet
as of June 30, 1995
<TABLE>
<CAPTION>
ASSETS 1995
-------------
<S> <C>
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $20,116,082) $ 19,956,559
Investment property, at cost less
accumulated depreciation of $76,845 205,469
Equity securities for sale, at fair value (cost $80,258) 40,361
Short-term investments 1,422,247
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Total investments 21,624,636
Mortgage note receivable 380,000
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 4,909,208
Premium balances receivable 4,532,518
Deferred policy acquisition costs 372,850
Prepaid reinsurance premiums (ceded unearned premium) 2,654,536
Investment income due and accrued 370,236
Property and equipment, net of accumulated depreciation 570,616
Other assets 37,726
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Total Assets $ 35,452,326
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LIABILITIES
Losses and loss adjustment expenses $ 21,285,709
Unearned premiums 6,239,014
Ceded reinsurance balances payable 1,920,547
Reserve for unpaid expenses 478,307
Book overdraft 253,073
Other liabilities 121,216
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Total Liabilities 30,297,866
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SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 6,000,000 shares, issued
and outstanding 2,992,314 shares 2,992,314
Additional paid-in capital 6,346,156
Unrealized depreciation of investment (198,424)
Accumulated deficit (3,980,586)
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5,159,460
Treasury stock, at cost, 5,000 shares (5,000)
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Total Shareholders' Equity 5,154,460
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Total Liabilities and Shareholders' Equity $35,452,326
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
North East Insurance Company And Subsidiaries
Consolidated Statements of Operations
for the Six Months ended June 30
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revenues:
Premiums earned $ 6,137,330 $ 6,381,123
Premiums ceded 2,694,346 1,382,422
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Net premiums earned 3,442,984 4,998,701
Net investment income 681,108 781,392
Realized capital losses (149,937) (16,136)
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Total revenues 3,974,155 5,763,957
Expenses:
Losses and loss adjustment expenses 4,521,965 4,569,740
Reinsurance recoveries (1,575,535) (462,213)
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Net losses and loss adjustment
expenses 2,946,430 4,107,527
Underwriting expenses incurred 969,354 1,913,693
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Total expenses 3,915,784 6,021,220
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Income (loss) before provision for
income taxes 58,371 (257,263)
Provision for income taxes, net of $18,679
tax benefit from loss carryforward for 1995 1,167 0
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Net income (loss) $ 57,204 ($ 257,263)
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Earnings per common share:
Net income (loss) $ 0.02 ($ 0.09)
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
North East Insurance Company And Subsidiaries
Consolidated Statements of Operations
for the Three Months ended June 30
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Revenues:
Premiums earned $ 3,022,903 $ 3,248,933
Premiums ceded 1,558,418 528,930
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Net premiums earned 1,464,485 2,720,003
Net investment income 328,884 402,706
Realized capital losses (149,937) (42,703)
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Total revenues 1,643,432 3,080,006
Expenses:
Losses and loss adjustment expenses 2,411,112 2,234,736
Reinsurance recoveries (819,771) (101,832)
------------ ------------
Net losses and loss adjustment
expenses 1,591,341 2,132,904
Underwriting expenses incurred (64,934) 912,120
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Total expenses 1,526,407 3,045,024
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Income (loss) before provision for
income taxes 117,025 34,982
Provision for income taxes, net of $18,679
tax benefit from loss carryforward for 1995 1,167 0
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Net income (loss) $ 115,858 $ 34,982
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Earnings per common share:
Net income (loss) $ 0.04 $ 0.01
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
North East Insurance Company And Subsidiaries
Consolidated Statements of Cash Flows
for the Six Months ended June 30
<TABLE>
<CAPTION>
1995 1994
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<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $ 3,318,177 $ 7,126,038
Loss and loss adjustment expenses paid (3,720,273) (6,627,094)
Operating expenses paid (1,214,690) (2,444,089)
Investment income received 721,420 790,536
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Net cash used in operating activities (895,366) (1,154,609)
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Cash flows from investing activities:
Fixed maturities matured, called or paid down 0 3,456,872
Fixed maturities sold 1,247,973 0
Fixed maturities purchased 0 (3,736,073)
Equity securities purchased 0 (412,715)
Due from broker 0 (138,842)
Purchase of furniture, fixtures and
equipment (27,587) (543,460)
New issuance of common stock 0 6,736
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Net cash used in investing activities 1,220,386 (1,367,482)
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Net increase (decrease in cash, book overdraft
and short-term investments 325,020 (2,522,091)
Cash, book overdraft and short-term
investments at beginning of year 844,155 3,911,749
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Cash, book overdraft and short-term
investments at end of period $ 1,169,175 $ 1,389,658
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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North East Insurance Company And Subsidiaries
Consolidated Reconciliation of Cash Used In
Operating Activities to Net Income (Loss)
for the Six Months ended June 30
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net income (loss) $ 57,204 ($ 257,263)
Increase in net premium and ceded
reinsurance balances (93,277) (621,692)
Increase (decrease) in unearned
premium reserve (822,522) 1,189,039
Decrease in loss and loss adjustment
expense reserve (231,580) (959,577)
Decrease in investment income
due and accrued 40,312 9,144
Decrease in deferred policy acquisition
costs 85,557 (199,168)
Decrease in expense accruals (184,433) (428,500)
Amortization of bond premium, net 39,621 26,190
Depreciation and amortization expense 63,815 71,082
Loss on investment activities 82,723 16,136
Write down of mortgage note in default 67,214 0
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Net cash used in operating activities $ (895,366) $(1,154,609)
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE> 8
North East Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
JUNE 30, 1995
1. The condensed financial statements included herein have been prepared by the
registrant, without audit, pursuant to the rules and regulations of the
Commission. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the registrant believes that the disclosures which are
made are adequate to make the information presented not misleading, particularly
when read in conjunction with the financial statements and the notes thereto
included in the registrant's latest annual report on Form 10-KSB. In
Management's opinion, the attached interim financial statements reflect
adjustments which are necessary for a fair statement of the results for the
periods presented.
2. In May 1993, the FASB issued FAS No. 114 ("Accounting by Creditors for the
Impairment of a Loan"), which defines the principles to measure and record a
loan when it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
In October 1994 the FASB issued FAS No. 118 ("Accounting by Creditors for the
Impairment of a Loan - Income Recognition and Disclosure), which amends FAS 114
to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan.
The Company adopted the provisions of FAS 114 and FAS 118 in the first quarter
of 1995. In the second quarter of 1995 it became apparent that the
mortgage note receivable was in default under the terms of the mortgage
agreement. Accordingly the Company has written down this mortgage note to the
market value of the property securing its value.
3. North East Insurance Company owns 100% of American Colonial Insurance Company
and North Atlantic Underwriters, Inc. whose results are consolidated herein.
4. Earnings per share are computed using the weighted average method.
8
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North East Insurance Company and Subsidiaries
Part 1 - Financial Information Three Months Ended June 30, 1995
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Six Months Ended June 30, 1995
Net premiums written amounted to $2,620,462 for the six months ended June 30,
1995 compared with $6,187,740 for the six months ended June 30, 1994. This
decrease is the result of a decline in direct premiums written from $6,712,778
for the six months ended June 30, 1994 to $5,667,210 for the six months ended
June 30, 1995 and restructuring of current reinsurance arrangements for rate and
expense recovery. The Company is continuing to renegotiate the terms of its
reinsurance arrangements with regard to coverages and anticipates finalization
of the remaining items being discussed in the latter half of 1995. Net earned
premiums declined to $3,442,984 for the six months ended June 30, 1995 from
$4,998,701 for the six months ended June 30, 1994 for these same reasons.
Loss and loss adjustment expenses represented 85.6% and 82.2% of net earned
premium for the six months ended June 30 1995 and 1994, respectively. The
increase in 1995 reflect adverse experience in the Company's property lines of
business during the six months ended June 30, 1995.
Underwriting expenses incurred amounted to $969,354 and $1,913,693 for the six
months ended June 30, 1995 and 1994, respectively. The ratio of expenses to net
written premiums was 37.0% for the six months ended June 30, 1995 compared with
30.9% for the six months ended June 30, 1994.
Net investment income amounted to $681,108 for the six months ended June 30 ,
1995 compared with $781,302 for the six months ended June 30, 1994. The
reduction is attributable to lower yields in our overall investment portfolio.
Net income for the six months ended June 30, 1995 was $57,204 or $0.02 per share
compared with a loss of $257,263 or $0.09 per share for the six months ended
June 30, 1994.
Three Months Ended June 30, 1995
Net premiums written amounted to $1,261,296 for the three months ended June 30,
1995 compared with $4,071,178 for the three months ended June 30, 1994. Net
earned premiums declined to $1,464,485 for the three months ended June 30, 1995
from $2,720,003 for the three months ended June 30, 1994 for these same reasons
as the six month decline.
9
<PAGE> 10
Loss and loss adjustment expenses amounted to $1,591,341 and $2,132,904 for the
three months ended June 30 1995 and 1994, respectively. Underwriting expenses
incurred amounted to a credit of $64,934 for the three months ended June 30,
1995, due to the reinsurance modifications, compared with a charge of $912,120
for the three months ended June 30, 1994. Total insurance deductions amounted to
$1,526,407 for the three months ended June 30, 1995 compared with $3,045,024 for
the three months ended June 30, 1994. Total deductions amounted to 104.2% of net
earned premium for the three months ended June 30, 1995 compared with 111.9% for
the three months ended June 30, 1994.
Net investment income amounted to $328,884 for the three months ended June 30 ,
1995 compared with $402,706 for the three months ended June 30, 1994. The
reduction is attributable to lower yields in our overall investment portfolio.
Net income for the three months ended June 30, 1995 was $115,858 or $0.04 per
share compared with 34,982 or $0.01 per share for the three months ended June
30, 1994.
Liquidity and Capital Resources
Cash used in operating activities amounted to $895,366 for the six months ended
June 30, 1995 compared with $1,154,609 for the six months ended June 30, 1994.
The Company maintains short term investments to provide a cash resource should
the demands from operations exceed incoming cash flow. Short term investments
amounted to $1,422,247 at June 30, 1995 compared with $1,071,761 at December 31,
1994. The Company believes that this level is sufficient to meet its cash
demands.
10
<PAGE> 11
North East Insurance Company
Part II: OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in the Company's Form 10-KSB for the fiscal year
ended December 31, 1994, the Company was the subject of a Form A application of
Chesapeake Capital Group, Inc. et al. (the "Applicant"), seeking approval from
the Maine Bureau of Insurance for the acquisition of a controlling stock
interest in the Company, and certain other related transactions.
By letter dated May 3, 1995, the Applicant filed a motion to withdraw its
application for Form A approval. By Order dated May 15, 1995, the Deputy
Superintendent of the Maine Bureau of Insurance granted that motion. In that
same Order, the Deputy Superintendent denied earlier motions of the Bureau
Advocacy Panel seeking sanctions against individuals associated with the
Applicant.
On May 5, 1995, the Advocacy Panel filed a motion to modify or vacate the
May 15, 1995 Order of the Deputy Superintendent. The Company and the Applicant
have each made filings in opposition to the Advocacy Panel's motion; counsel for
Bernard D. Gershuny filed a statement in support of the Advocacy Panel's motion.
On June 16, 1995 the Advocacy Panel filed a reply in support of its earlier
motion. The matter is still pending.
Item 5. Other Information
A group consisting of Robert S. Nichols, Albert E. Gibbons, David D.
Chase, and other unnamed investors has reportedly entered into a purchase and
sale agreement with Bernard D. Gershuny regarding the purchase by such group of
810,000 shares of Common Stock of North East Insurance Company beneficially
owned by Mr. Gershuny. The Company is advised that the purchase price under such
agreement is $.90 per share in cash, and that consummation of the purchase of
these shares is subject to various conditions.
Mr. Gershuny's shares presently are held in a non-voting trust, under an
indenture dated as of February 3, 1987 among the Company, Mr. Gershuny, and (as
trustee) Stephen F. Dubord, Esq. The shares represent approximately 27.1% of the
outstanding Common Stock of the Company.
The Company believes that prior approval of the Maine Bureau of Insurance
and the New York Insurance Department would be required as a condition to
consummation of the proposed purchase of Mr. Gershuny's shares. To the Company's
knowledge, no applications seeking such approval have yet been filed with either
agency.
11
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Item 6. Exhibits and Reports on Form 8 - K
a) Exhibits
None
b) Reports on Form 8-K
No report on Form 8-K was filed during the most recent fiscal
quarter.
12
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North East Insurance Company
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH EAST INSURANCE COMPANY
Date: August 11, 1995 By /S/ Robert G. Schatz
--------------------
Robert G. Schatz
President and Chief Executive Officer
Date: August 11, 1995 By /S/ Graham S. Payne
-------------------
Graham S. Payne
Treasurer and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000352162
<NAME> NORTH EAST INSURANCE COMPANY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 19,956,559
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 40,361
<MORTGAGE> 380,000
<REAL-ESTATE> 205,469
<TOTAL-INVEST> 21,624,636
<CASH> 1,422,247
<RECOVER-REINSURE> 4,909,208
<DEFERRED-ACQUISITION> 372,850
<TOTAL-ASSETS> 35,452,326
<POLICY-LOSSES> 21,285,709
<UNEARNED-PREMIUMS> 6,239,014
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 2,992,314
0
0
<OTHER-SE> 2,162,146
<TOTAL-LIABILITY-AND-EQUITY> 35,452,326
3,442,984
<INVESTMENT-INCOME> 681,108
<INVESTMENT-GAINS> (149,937)
<OTHER-INCOME> 0
<BENEFITS> 2,946,430
<UNDERWRITING-AMORTIZATION> 969,354
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 58,371
<INCOME-TAX> 1,167
<INCOME-CONTINUING> 57,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,204
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
