<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 quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File No. 0-11184
NORTH EAST INSURANCE COMPANY
(Name of small business issuer as specified in its charter)
Maine 01-0278387
(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)
(207) 883-2232
(Issuer's telephone number)
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 (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of November 12, 1996 there were 3,002,375 outstanding shares of Common Stock,
$1.00 par value, the only authorized class of the issuer.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
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NORTH EAST INSURANCE COMPANY
AND SUBSIDIARIES
INDEX
-----
Part I - Financial Information
Item 1 - Financial Statements 3
Consolidated Balance Sheet September 30, 1996 3
Consolidated Statements of Operations Nine Months
Ended September 30, 1996 and 1995 4
Consolidated Statements of Operations Three Months
Ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of the Financial
Condition and Results of Operations 9
Part II - Other Information
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
2
<PAGE> 3
North East Insurance Company and Subsidiaries
PART I: FINANCIAL INFORMATION
- -----------------------------
Item 1. FINANCIAL INFORMATION
-----------------------------
<TABLE>
Consolidated Balance Sheet
as of September 30, 1996
<CAPTION>
1996
-----------
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $15,055,375) $14,814,452
Investment property, at cost less
accumulated depreciation of $43,541 66,458
Equity securities available for sale,
at fair value (cost $71,393) 24,012
Short-term investments 2,842,999
-----------
Total investments 17,747,921
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 5,166,702
Premium balances receivable 4,090,700
Deferred policy acquisition costs 250,370
Cash 929,773
Prepaid reinsurance premiums (ceded unearned premium) 2,703,333
Investment income due and accrued 348,221
Property and equipment, net of accumulated depreciation 440,377
Other assets 172,747
-----------
Total Assets $31,850,144
===========
LIABILITIES
Losses and loss adjustment expenses $17,324,943
Unearned premiums 6,041,606
Ceded reinsurance balances payable 1,384,094
Reserve for unpaid expenses 660,840
Federal income tax payable 8,420
-----------
Total Liabilities 25,419,903
SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 6,000,000 shares, issued
and outstanding 3,002,375 shares 3,002,375
Additional paid-in capital 6,348,039
Unrealized depreciation of investment (288,304)
Accumulated deficit (2,631,869)
-----------
Total Shareholders' Equity 6,430,241
-----------
Total Liabilities and Shareholders' Equity $31,850,144
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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North East Insurance Company and Subsidiaries
<TABLE>
Consolidated Statements of Operations
for the Nine Months ended September 30,
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Premiums earned $ 8,581,144 $ 9,047,866
Premiums ceded 3,455,500 3,705,791
----------- -----------
Net premiums earned 5,125,644 5,342,075
Net investment income 825,866 992,416
Realized capital gains (losses) 48,783 (170,791)
----------- -----------
Total revenues 6,000,293 6,163,700
Expenses:
Losses and loss adjustment expenses 5,574,888 5,978,089
Reinsurance recoveries (2,067,882) (1,992,069)
----------- -----------
Net losses and loss adjustment
expenses 3,507,006 3,986,020
Underwriting expenses incurred 1,822,264 1,973,463
----------- -----------
Total expenses 5,329,270 5,959,483
----------- -----------
Income before provision for income taxes 671,023 204,217
Provision for income taxes, net of $241,908
and $65,071 tax benefit from loss
carryforward for 1996 and 1995, respectively 13,420 4,067
----------- -----------
Net income $ 657,603 $ 200,150
=========== ===========
Earnings per common share:
Net income $ 0.22 $ 0.07
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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North East Insurance Company and Subsidiaries
<TABLE>
Consolidated Statements of Operations
for the Three Months ended September 30,
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Premiums earned $2,902,387 $2,910,536
Premiums ceded 1,234,411 1,011,445
---------- ----------
Net premiums earned 1,667,976 1,899,091
Net investment income 307,606 311,308
Realized capital losses (21,947) (20,854)
---------- ----------
Total revenues 1,953,635 2,189,545
Expenses:
Losses and loss adjustment expenses 1,898,588 1,456,124
Reinsurance recoveries (848,788) (416,534)
---------- ----------
Net losses and loss adjustment
expenses 1,049,800 1,039,590
Underwriting expenses incurred 566,965 1,004,109
---------- ----------
Total expenses 1,616,765 2,043,699
---------- ----------
Income before provision for income taxes 336,870 145,846
Provision for income taxes, net of $107,979
and $46,392 tax benefit from loss
carryforward for 1996 and 1995, respectively 6,737 2,900
---------- ----------
Net income $ 330,133 $ 142,946
========== ==========
Earnings per common share:
Net income $ 0.11 $ 0.05
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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North East Insurance Company And Subsidiaries
<TABLE>
Consolidated Statements of Cash Flows
for the Nine Months ended September 30,
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $ 4,626,182 $ 4,860,347
Loss and loss adjustment expenses paid (5,273,529) (5,401,644)
Operating expenses paid (1,657,630) (1,759,555)
Investment income received 806,429 1,096,026
----------- -----------
Net cash used in operating activities (1,498,548) (1,204,826)
----------- -----------
Cash flows from investing activities:
Fixed maturities available for sale, sold 5,759,622 2,355,073
Fixed maturities available for sale, purchased (2,770,473) 0
Proceeds from mortgage note 459,139 0
Proceeds from sale of real estate 108,000 0
Proceeds from issuance of common stock 16,944 0
Purchase of furniture, fixtures and
equipment, net (24,012) (40,397)
----------- -----------
Net cash provided
in investing activities 3,549,220 2,314,676
----------- -----------
Net increase in cash, book overdraft
and short-term investments 2,050,672 1,109,850
Cash, book overdraft and short-term
investments at beginning of year 1,722,100 844,155
----------- -----------
Cash, book overdraft and short-term
investments at end of period $ 3,772,772 $ 1,954,005
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
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North East Insurance Company And Subsidiaries
<TABLE>
Consolidated Reconciliation of Cash Used In
Operating Activities to Net Income
for the Nine Months ended September 30,
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net income $ 657,603 $ 200,150
Decrease (increase) in net premium
and ceded reinsurance balances (588,291) 9,280
Increase (decrease) in unearned
premium reserve 4,088 (725,888)
Decrease in loss and loss adjustment
expense reserve (1,681,782) (1,180,744)
Decrease (increase) in investment income
due and accrued (19,437) 104,479
Decrease in deferred policy acquisition
costs 61,853 16,470
Decrease in federal income tax payable (6,080) 0
Increase (decrease) in expense accruals (81,415) 47,838
Amortization of bond premium, net 60,339 59,029
Depreciation and amortization expense 143,357 93,769
Loss on investment activities 17,231 103,577
Loss on sale of real estate 13,125 0
Adjustment to book value of
mortgage note receivable (79,139) 67,214
----------- -----------
Net cash used in operating activities $(1,498,548) $(1,204,826)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
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North East Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
SEPTEMBER 30, 1996
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 all adjustments which are necessary for a fair statement of the
results for the periods presented.
2. In March 1995, the FASB issued FAS No. 121 ("Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), which
requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Statement is effective for financial statements for fiscal
years beginning after December 15, 1995. The Company adopted the provisions
of FAS No. 121 effective January 1, 1996. Adopting FAS No. 121 did not have a
material effect on the Company's consolidated results of operations or
financial position.
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
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Nine Months Ended September 30, 1996
- ------------------------------------
Net premiums written amounted to $5,129,732 for the nine months ended September
30, 1996 compared with $4,616,186 for the nine months ended September 30, 1995.
Net premiums earned for the nine months ended September 30, 1996 and 1995
amounted to $5,125,644 and $5,342,075, respectively.
Loss and loss adjustment expenses represented 68.4 % and 74.6 % of net premium
earned for the nine months ended September 30, 1996 and 1995, respectively. The
1996 improvement is the result of favorable loss experience in the most recent
six months ended September 30, 1996. The first three months ended March 31, 1996
included higher than normal weather related claims. This is in sharp contrast to
1995 in which we experienced a mild winter and higher losses in the second
quarter of 1995, primarily from our property lines of business.
Underwriting expenses incurred represented 35.5% and 42.8% of net premiums
written for the nine months ended September 30, 1996 and 1995, respectively. The
expense ratio benefits from the Company's reinsurance arrangements whereby the
Company is recovering expenses from its reinsurers proportional to its direct
experience.
Total return from investment activities amounted to $874,649 for the nine months
ended September 30, 1996 compared with $821,625 for the nine months ended
September 30, 1995. The return on invested assets, based on amortized cost, net
of allocated expenses was 6.1 % for the nine months ended September 30, 1996
compared with 5.0 % for the nine months ended September 30, 1995.
Net income for the nine months ended September 30, 1996 amounted to $657,603 or
$0.22 per share compared with $200,150 or $0.07 per share for the nine months
ended September 30, 1995.
Shareholders' equity at September 30, 1996 amounted to $6,430,241 or $2.14 per
share compared with $6,421,051 or $2.15 per share at December 31, 1995. Common
stock issued and outstanding amounted to 3,002,375 and 2,992,314 at September
30, 1996 and December 31, 1995, respectively, representing an additional 10,061
shares issued during 1996. The increase in shareholders' equity for the nine
month period ending September 30, 1996 includes net income of $657,603 plus
proceeds from new shares of common stock totaling $16,944 less a $665,357
decline in the market value of the Company's fixed maturities and equity
securities available for sale.
9
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Three Months Ended September 30, 1996
- -------------------------------------
Net premiums written amounted to $1,732,070 for the three months ended September
30, 1996 compared with $1,995,724 for the three months ended September 30, 1995.
Net premiums earned for the three months ended September 30, 1996 and 1995
amounted to $1,667,976 and $1,899,091, respectively.
Loss and loss adjustment expenses represented 62.9 % and 54.7 % of net premium
earned for the three months ended September 30, 1996 and 1995, respectively.
Both ratios reflect favorable results with the ratio for the three months ended
September 30, 1995 being exceptional.
Underwriting expenses incurred amounted to $566,965 for the three months ended
September 30, 1996 compared with $1,004,109 for the three months ended September
30, 1995. Underwriting expenses for 1996 benefit from the Company's reinsurance
arrangements whereby the Company is recovering expenses from its reinsurers
proportional to its direct experience.
Net income for the three months ended September 30, 1996 amounted to $330,133 or
$0.11 per share compared with $142,946 or $0.05 per share for the three months
ended September 30, 1995.
Shareholders' equity at September 30, 1996 amounted to $6,430,241 or $ 2.14 per
share compared with $6,059,911 or $2.02 per share at June 30, 1996. The increase
in shareholders' equity for the three month period ending September 30, 1996
comprises net income of $330,133 plus a $40,197 net increase in the market value
of the Company's fixed maturities and equity securities available for sale.
10
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North East Insurance Company and Subsidiaries
PART II: OTHER INFORMATION
- --------------------------
Item 5. Other Information
As previously reported, the Company and Ballantrae Partners, LLC ("Ballantrae")
as of August 22, 1996 entered into a Standstill Agreement concerning future
ownership and control of NEIC stock. Ballantrae has entered into a contract to
purchase 810,000 shares of NEIC Common Stock beneficially owned by Bernard D.
Gershuny. The shares represent approximately 27% of the NEIC Common Stock
presently outstanding. Ballantrae's purchase of the Gershuny shares was made
subject to a number of conditions, including the receipt of prior regulatory
approval from the Maine Bureau of Insurance and the New York Insurance
Department, as required by applicable law. On September 20, 1996 the Maine
Bureau of Insurance issued an Order approving Ballantrae's proposed transaction.
To the Company's knowledge, the New York Insurance Department has not yet acted
on Ballantrae's pending application for approval.
The Company, in June 1996, commenced a private placement of Common Stock through
Advest, Inc., a registered broker-dealer. As previously reported, the Company
terminated the offering in October 1996, and has returned all subscription funds
to subscribers. The Company's decision to discontinue the private placement was
based upon a number of factors, including changes in prevailing trading prices
for NEIC stock since the commencement date of the offering, continued increases
in retained earnings since such date due to favorable operating results, the
status of Ballantrae's pending proposal to acquire Mr. Gershuny's stock and the
execution of a Standstill Agreement with Ballantrae regarding future control of
the Company, management's assessment of the prospects for achieving future
improvements in the A.M. Best rating for the Company even without the private
placement, costs associated with a further change in the terms of the private
placement, potential costs of threatened litigation over the private placement,
possible alternative capital raising transactions, and other factors. The
Company plans to evaluate other alternatives for raising additional capital, but
no decision has been made on whether to seek additional capital at this time.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits pursuant to Item 601 of Regulation S-B
27 Financial Data Schedules
b) Reports on Form 8-K
The Company filed reports on Form 8-K on August 28, 1996 and October 23, 1996.
11
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North East Insurance Company and Subsidiaries
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTH EAST INSURANCE COMPANY
Date: November 12, 1996 By /s/ Robert G. Schatz
----------------------------------
Robert G. Schatz
President and Chief Executive Officer
Date: November 12, 1996 By /s/ Graham S. Payne
----------------------------------
Graham S. Payne
Treasurer and Chief Financial Officer
12
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North East Insurance Company and Subsidiaries
Form 10-QSB
Exhibit Index
Exhibit
Number Description Page
- ------ ----------- ----
27 Financial Data Schedules 14
13
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 14,814,452
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,012
<MORTGAGE> 0
<REAL-ESTATE> 66,458
<TOTAL-INVEST> 17,747,921
<CASH> 3,772,772
<RECOVER-REINSURE> 5,166,702
<DEFERRED-ACQUISITION> 250,370
<TOTAL-ASSETS> 31,850,144
<POLICY-LOSSES> 17,324,943
<UNEARNED-PREMIUMS> 6,041,606
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 3,002,375
0
0
<OTHER-SE> 3,427,866
<TOTAL-LIABILITY-AND-EQUITY> 31,850,144
5,125,644
<INVESTMENT-INCOME> 825,866
<INVESTMENT-GAINS> 48,783
<OTHER-INCOME> 0
<BENEFITS> 3,507,006
<UNDERWRITING-AMORTIZATION> 1,822,264
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 671,023
<INCOME-TAX> 13,420
<INCOME-CONTINUING> 657,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 657,603
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
