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 June 30, 1997
[ ] 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 August 13, 1997 there were 3,046,842 outstanding shares of Common
Stock, $1.00 par value, the only authorized class of the issuer.
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
NORTH EAST INSURANCE COMPANY
AND SUBSIDIARIES
INDEX
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheet June 30, 1997 3
Consolidated Statements of Operations
Six Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Operations
Three Months Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 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 12
North East Insurance Company and Subsidiaries
Item 1. FINANCIAL INFORMATION
- -----------------------------
Consolidated Balance Sheet
as of June 30, 1997
<TABLE>
<CAPTION>
ASSETS 1997
----
<S> <C>
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $14,979,571) $14,871,356
Investment property, at cost less
accumulated depreciation of $47,666 62,334
Equity securities available for sale,
at fair value (cost $154,970) 90,168
Short-term investments 1,586,837
-----------
Total investments 16,610,695
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 5,884,556
Premium balances receivable 4,397,443
Deferred policy acquisition costs 775,821
Cash 21,502
Prepaid reinsurance premiums (ceded unearned premium) 736,412
Investment income due and accrued 246,437
Property and equipment, net of accumulated depreciation 450,332
Deferred tax asset 2,036,126
Prepaid federal income tax 9,242
Other assets 259,803
-----------
Total Assets $31,428,369
===========
LIABILITIES
Losses and loss adjustment expenses $14,232,995
Unearned premiums 6,277,989
Ceded reinsurance balances payable 847,760
Reserve for unpaid expenses 547,330
Book overdraft 34,930
Other liabilities 46,221
-----------
Total Liabilities 21,987,225
SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 6,000,000 shares, issued
and outstanding 3,046,842 shares 3,046,842
Additional paid-in capital 6,403,621
Unrealized depreciation of investment (173,017)
Accumulated retained earnings 163,698
-----------
Total Shareholders' Equity 9,441,144
-----------
Total Liabilities and Shareholders' Equity $31,428,369
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company and Subsidiaries
Consolidated Statements of Operations
for the Six Months ended June 30
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Revenues:
Premiums earned $5,668,596 $5,678,757
Premiums ceded 1,840,812 2,221,089
------------------------
Net premiums earned 3,827,784 3,457,668
Net investment income 381,534 518,260
Realized capital gains 79,312 70,730
------------------------
Total revenues 4,288,630 4,046,658
Expenses:
Losses and loss adjustment expenses 3,994,508 3,676,300
Reinsurance recoveries (980,741) (1,219,094)
------------------------
Net losses and loss adjustment expenses 3,013,767 2,457,206
Underwriting expenses incurred 1,182,921 1,255,299
------------------------
Total expenses 4,196,688 3,712,505
------------------------
Income before provision for income taxes 91,942 334,153
Provision for income taxes, net of $106,929
tax benefit from loss carryforward for 1996 14,268 6,683
------------------------
Net income $ 77,674 $ 327,470
========================
Earnings per common share:
Net income $ 0.03 $ 0.11
========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company and Subsidiaries
Consolidated Statements of Operations
for the Three Months ended June 30
<TABLE>
<CAPTION>
1997 1996
------------------------
<S> <C> <C>
Revenues:
Premiums earned $2,911,799 $2,880,649
Premiums ceded 1,175,365 1,328,360
------------------------
Net premiums earned 1,736,434 1,552,289
Net investment income 243,346 237,054
Realized capital losses (3,112) (8,410)
------------------------
Total revenues 1,976,668 1,780,933
Expenses:
Losses and loss adjustment expenses 1,878,410 1,411,339
Reinsurance recoveries (615,795) (607,538)
------------------------
Net losses and loss adjustment expenses 1,262,615 803,801
Underwriting expenses incurred 344,526 661,251
------------------------
Total expenses 1,607,141 1,465,052
------------------------
Income before provision for income taxes 369,527 315,881
Provision for income taxes, net of $101,082
tax benefit from loss carryforward for 1996 71,721 6,318
------------------------
Net income $ 297,808 $ 309,563
========================
Earnings per common share:
Net income $ 0.10 $ 0.10
========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company And Subsidiaries
Consolidated Statements of Cash Flows
for the Six Months ended June 30
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $5,379,126 $3,214,068
Loss and loss adjustment expenses paid (4,962,879) (4,082,423)
Operating expenses paid (2,032,904) (1,300,518)
Investment income received 419,448 590,698
--------------------------
Net cash used in operating activities (1,197,209) (1,578,175)
--------------------------
Cash flows from investing activities:
Fixed maturities available for sale, sold 1,731,194 3,829,782
Fixed maturities available for sale, purchased (1,850,675) (2,339,671)
Proceeds from mortgage note 0 459,139
Proceeds from issuance of common stock 100,049 16,944
Purchase of furniture, fixtures and
equipment, net (71,760) (50,592)
-------------------------
Net cash provided (used)
in investing activities (91,192) 1,915,602
-------------------------
Net increase (decrease) in cash, book
overdraft and short-term investments (1,288,401) 337,427
Cash, book overdraft and short-term
investments at beginning of year 2,861,810 1,722,100
-------------------------
Cash, book overdraft and short-term
investments at end of period $1,573,409 $2,059,527
=========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company And Subsidiaries
Consolidated Reconciliation of Cash Used In
Operating Activities to Net Income
for the Six Months ended June 30
<TABLE>
<CAPTION>
1997 1996
--------------------------
<S> <C> <C>
Net income $ 77,674 $ 327,470
Decrease (increase) in net premium
and ceded reinsurance balances (1,799,689) 590,145
Increase (decrease) in unearned
premium reserve 2,374,507 (60,006)
Decrease in loss and loss adjustment
expense reserve (972,588) (2,398,956)
Decrease in investment income
due and accrued 37,914 72,438
Decrease (increase) in deferred policy
acquisition costs (377,226) 66,660
Decrease in deferred tax asset 14,268 0
Decrease in federal income tax payable 0 (7,817)
Decrease in expense accruals (609,910) (241,292)
Amortization of bond premium, net 40,337 39,080
Depreciation and amortization expense 97,183 104,833
Loss (gain) on investment activities (79,679) 8,409
Write down of mortgage note in default 0 (79,139)
--------------------------
Net cash used in operating activities $(1,197,209) $(1,578,175)
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company and Subsidiaries
Notes to Consolidated Financial Statements
JUNE 30, 1997
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 June 1996 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 125 ("Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities") which provides standards whereby an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, de-recognizes financial assets when control has been surrendered,
and de-recognizes liabilities when extinguished. The Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. The effect of adopting the
provisions of FAS No. 125 did not have a material effect on the Company's
consolidated results of operations or financial position.
In March 1997 the FASB issued FAS No. 128 ("Earnings Per Share") which
provides for a "basic" earnings per share computation based upon the
weighted-average shares outstanding. The new standard requires a dual
presentation of basic and diluted earnings per share. The effect of adopting
the provisions of FAS No. 128 did not have a material effect on the
Company's per share earnings.
In March 1997 the FASB also issued FAS No. 129 ("Disclosures of Information
About Capital Structure"). The effect of adopting the provision of FAS No.
129 did not result in significant disclosure due in part to the simplified
nature of the Company's capital structure.
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.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
Six Months Ended June 30, 1997
- ------------------------------
Net premiums written amounted to $6,202,291 for the six months ended June
30, 1997 compared with $3,397,662 for the six months ended June 30, 1996.
Net premiums earned for the six months ended June 30, 1997 and 1996 amounted
to $3,827,784 and $3,457,668, respectively. The increase in net premiums
written reflects the decision to cancel the 35% quota share treaty effective
January 1, 1997 on a runoff basis.
Loss and loss adjustment expenses represented 78.7% and 71.1% of net
premium earned for the six months ended June 30, 1997 and 1996,
respectively. The loss ratios reflect very favorable loss experience in the
second quarter of 1996 compared with normal results experienced in 1997.
Underwriting expenses incurred represented 19.1% and 36.9% of net premiums
written for the six months ended June 30, 1997 and 1996, respectively. The
improvement in 1997 is directly attributable to favorable loss experience of
the quota share reinsurance program, now in runoff. Expense sharing for this
treaty is experience rated with favorable development providing increased
expense sharing on the ceded earned premium.
Total return from investment activities amounted to $460,846 for the six
months ended June 30, 1997 compared with $588,990 for the six months ended
June 30, 1996. The return on invested assets, based on amortized cost, net
of allocated expenses was 5.4% for the six months ended June 30, 1997
compared with 5.9% for the six months ended June 30, 1996.
Net income for the six months ended June 30, 1997 amounted to $77,674 or
$0.03 per share compared with $327,470 or $0.11 per share for the six months
ended June 30, 1996.
Shareholders' equity at June 30, 1997 amounted to $9,441,144 or $3.10 per
share compared with $9,324,961 or $3.11 per share at December 31, 1996. The
decline in market value of the Company's fixed maturities available for sale
resulted in a charge to surplus of $55,498 or $0.02 per share for the six
months ended June 30, 1997.
Three Months Ended June 30, 1997
- --------------------------------
Net premiums written amounted to $3,212,607 for the three months ended June
30, 1997 compared with $1,966,684 for the three months ended June 30, 1996.
Net premiums earned for the three months ended June 30, 1997 and 1996
amounted to $1,736,434 and $1,552,289, respectively.
Loss and loss adjustment expenses represented 72.7% and 51.8% of net
premium earned for the three months ended June 30, 1997 and 1996,
respectively. As previously stated, the loss ratios are the result of very
favorable loss experience in the second quarter of 1996 compared with normal
experience in 1997.
Underwriting expenses incurred amounted to $344,526 for the three months
ended June 30, 1997 compared with $661,251 for the three months ended June
30, 1996. Expenses for 1997 benefited from the increased expense recovery
from the quota share reinsurance, previously discussed.
Net income for the three months ended June 30, 1997 amounted to $297,808 or
$0.10 per share compared with $309,563 or $0.10 per share for the three
months ended June 30, 1996.
Shareholders' equity at June 30, 1997 amounted to $9,441,144 or $3.10 per
share compared with $8,787,657 or $2.93 per share at March 31, 1997.
Liquidity and Capital Resources
- -------------------------------
Cash used in operating activities amounted to $1,197,209 for the six months
ended June 30, 1997 compared with $1,578,175 for the six months ended June
30, 1996. The decrease in cash used in operating activities is the result of
the cancellation of the quota share reinsurance arrangement on a runoff
basis effective January 1, 1997. Cash used by investing activities amounted
to $91,192 for the six months ended June 30, 1997 compared with cash
provided of $1,915,602 for the six months ended June 30, 1996.
The fair value of the Company's fixed maturities available for sale was
$108,215 less than the amortized cost at June 30, 1997 compared with $52,717
less than amortized cost at December 31, 1996.
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 $1,586,837 at June 30, 1997 compared with $2,868,875
at December 31, 1996. The Company believes that this level is sufficient to
meet any unanticipated cash demands.
Part II: OTHER INFORMATION
Item 4.- Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on June 10, 1997. The
following matters were voted on by shareholders, and received the
votes indicated.
To consider a proposed amendment to the Articles of Incorporation
which provides for a staggered Board of Directors.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
----------------------------------------
<S> <C> <C> <C> <C>
TOTAL 182,970 1,169,100 11,350 514,029
</TABLE>
To Elect Directors.
<TABLE>
<CAPTION>
For Against Abstain Non-Votes
----------------------------------------
<S> <C> <C> <C> <C>
Edward B. Batal 1,870,749 6,700 0 0
Wilson G. Hess 1,872,949 4,500 0 0
Robert G. Schatz 1,873,449 4,000 0 0
Robert A. Hancock 1,873,449 4,000 0 0
Deborah L. Harmon 1,873,449 4,000 0 0
Bruce H. Suter 1,873,949 4,500 0 0
Terence P. Cummings 1,872,949 4,500 0 0
Joseph M. Hochadel 1,872,949 4,500 0 0
Jonathan S. Kern 1,872,449 4,000 0 0
</TABLE>
3. To ratify the appointment of Coopers & Lybrand L.L.P. as
independent accountants to the Company for the year ending
December 31, 1997.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
----------------------------------------
<S> <C> <C> <C> <C>
TOTAL 1,855,049 11,500 10,900 0
</TABLE>
4. To consider approval of a Stock Option Plan.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--------------------------------------
<S> <C> <C> <C> <C>
TOTAL 755,070 121,075 20,150 981,154
</TABLE>
Item 5. Other Information
On July 29, 1997, 215,000 shares of the Company's common stock held
of record by First National Life and Casualty were sold at public
auction, held pursuant to an order entered in the Superior Court,
Cumberland County, Maine, to satisfy, in part, liens in favor of
Official Committee of Unsecured Creditors of American Motor Club, Inc.
These shares represent approximately 7.2% of the outstanding common
stock of the Company. According to its Schedule 13D filed on August 6,
1997, the purchaser, The Foothold Fund, L.P. ("Foothold"), is a New
York limited partnership with its principal business and principal
office located at 408 Route 22, Unit 2, North Salem, NY 10560. The
sole general partner of Foothold is The Foothold Management Corp.
("Foothold Management"), a New York corporation with its principal
business and principal office located at 408 Route 22, Unit 2,
North Salem, NY 10560. Foothold has indicated that it and Foothold
Management are principally engaged in investing in various publicly
traded companies. The President, sole director, and sole
shareholder of Foothold Management is Mr. Peter A. Russ, whose
principal employment is as a securities analyst with Shelby Cullom
Davis & Co., L.P., a securities brokerage firm with an address at
609 Fifth Avenue, New York, NY 10017. According to its Schedule
13D, Foothold is acquiring the common stock of the Company for
investment purposes and not for the purpose of acquiring control of
the Company.
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
On May 5, 1997, the Company filed a report on Form 8-K reporting
the Company's April 30, 1997, announcement that A. M. Best Company
upgraded North East Insurance Company to a "B-" rating. Prior to
the upgrade, the Company had previously announced its intention to
seek an improved rating on the basis of a significant improvement
in its financial condition and resolution of uncertainties
surrounding the sale of a large block of the Company's common stock
formerly held in a non-voting trust.
North East Insurance Company and Subsidiaries
Form 10-QSB
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- -----------------------------------------------
<S> <C> <C>
27 Financial Data Schedules 15
</TABLE>
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: August 13, 1997 By /S/Robert G. Schatz
----------------------------
Robert G. Schatz
President and Chief Executive Officer
Date: August 13, 1997 By /S/Graham S. Payne
----------------------------
Graham S. Payne
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000352162
<NAME> NORTHEAST INSURANCE COMPANY
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 14,871,356
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 90,168
<MORTGAGE> 0
<REAL-ESTATE> 62,334
<TOTAL-INVEST> 16,610,695
<CASH> 1,586,837
<RECOVER-REINSURE> 5,884,556
<DEFERRED-ACQUISITION> 775,821
<TOTAL-ASSETS> 31,428,369
<POLICY-LOSSES> 14,232,995
<UNEARNED-PREMIUMS> 6,277,989
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,046,842
<OTHER-SE> 6,394,302
<TOTAL-LIABILITY-AND-EQUITY> 31,428,369
3,827,784
<INVESTMENT-INCOME> 384,534
<INVESTMENT-GAINS> 79,312
<OTHER-INCOME> 0
<BENEFITS> 3,013,767
<UNDERWRITING-AMORTIZATION> 1,182,921
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 36,526
<INCOME-TAX> 14,268
<INCOME-CONTINUING> 77,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,674
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
