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, 1998
[ ] 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 12, 1998 there were 3,049,089 outstanding shares of Common
Stock, $1.00 par value, the only authorized class of equity security.
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
As of June 30, 1998 3
Consolidated Statements of Operations and
Comprehensive Income for the
Six Months Ended June 30,1998 and 1997 4
Consolidated Statements of Operations and
Comprehensive Income for the
Three Months Ended June 30,1998 and 1997 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30,1998 and 1997 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
the Financial Condition and Results of Operations 10
Part II - Other Information
Item 4 - Submission of Matters to a Vote of
Security Holders 13
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Exhibit Index 15
North East Insurance Company and Subsidiaries
Part I: FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Consolidated Balance Sheet
As of June 30, 1998
<TABLE>
<CAPTION>
ASSETS 1998
-----------
<S> <C>
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $15,020,837 ) $15,317,281
Equity securities available for sale,
at fair value (cost $262,241) 221,323
Short-term investments 2,324,764
-----------
Total investments 17,863,368
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 3,373,983
Premium balances receivable 5,433,921
Reinsurance premium balances receivable 816,543
Deferred policy acquisition costs 1,164,044
Cash 346,798
Prepaid reinsurance premiums (ceded unearned premium) 981,371
Investment income due and accrued 244,247
Property and equipment, net of accumulated depreciation 337,948
Deferred tax asset 1,941,605
Prepaid federal income tax 9,242
Other assets 161,740
-----------
Total Assets $32,674,810
===========
LIABILITIES
Losses and loss adjustment expenses $13,565,719
Unearned premiums 7,652,118
Ceded reinsurance balances payable 769,287
Reserve for unpaid expenses 615,976
Book overdraft 250,521
Other liabilities 89,990
-----------
Total Liabilities 22,943,611
SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 6,000,000 shares, issued
and outstanding 3,049,089 shares 3,049,089
Additional paid-in capital 6,407,132
Unrealized appreciation of investments 168,647
Accumulated retained earnings 106,331
-----------
Total Shareholders' Equity 9,731,199
-----------
Total Liabilities and Shareholders' Equity $32,674,810
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Six Months ended June 30,
Consolidated Statements of Operations
-------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Revenues:
Premiums earned $6,274,216 $5,668,596
Premiums ceded 937,583 1,840,812
------------------------
Net premiums earned 5,336,633 3,827,784
Net investment income 448,417 381,534
Realized capital gains 33,316 79,312
------------------------
Total revenues 5,818,366 4,288,630
Expenses:
Losses and loss adjustment expenses 4,375,950 3,994,508
Reinsurance recoveries (323,150) (980,741)
------------------------
Net losses and loss adjustment
expenses 4,052,800 3,013,767
Underwriting expenses incurred 2,189,355 1,182,921
------------------------
Total expenses 6,242,155 4,196,688
------------------------
Income (loss) before provision for
income taxes (423,789) 91,942
Provision (credit) for income taxes (155,416) 14,268
------------------------
Net income (loss) $ (268,373) $ 77,674
========================
Net income (loss) per common share:
Basic $ (0.09) $ 0.03
========================
Diluted $ (0.09) $ 0.03
========================
</TABLE>
Consolidated Statements of Comprehensive Income (Loss)
------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Net income (loss) $(268,373) $77,674
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation)
of securities (provision for income taxes
1998 - $4,204; 1997 -$0) 8,160 (61,540)
--------------------
Comprehensive income (loss) $(260,213) $16,134
====================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
North East Insurance Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Three Months ended June 30,
Consolidated Statements of Operations
-------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
Revenues:
Premiums earned $3,252,859 $2,911,799
Premiums ceded 455,183 1,175,365
------------------------
Net premiums earned 2,797,676 1,736,434
Net investment income 224,654 243,346
Realized capital gains (losses) 124 (3,112)
------------------------
Total revenues 3,022,454 1,976,668
Expenses:
Losses and loss adjustment expenses 1,731,261 1,878,410
Reinsurance recoveries (156,637) (615,795)
------------------------
Net losses and loss adjustment
expenses 1,574,624 1,262,615
Underwriting expenses incurred 1,110,863 344,526
------------------------
Total expenses 2,685,487 1,607,141
------------------------
Income before provision for
income taxes 336,967 369,527
Provision for income taxes 114,526 71,721
------------------------
Net income $ 222,441 $ 297,806
========================
Net income per common share:
Basic $ 0.07 $ 0.10
========================
Diluted $ 0.07 $ 0.10
========================
</TABLE>
Consolidated Statements of Comprehensive Income
-----------------------------------------------
<TABLE>
<CAPTION>
1998 1997
--------------------
<S> <C> <C>
Net income $222,441 $297,806
Other comprehensive income:
Change in unrealized appreciation (depreciation)
of securities (provision for income taxes
1998-$5,081; 1997-$0) 9,862 255,632
--------------------
Comprehensive income $232,303 $553,438
====================
</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>
1998 1997
------------------------
<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $6,455,633 $5,379,126
Loss and loss adjustment expenses paid (3,291,371) (4,962,879)
Operating expenses paid (2,158,056) (2,032,904)
Investment income received 414,074 419,448
------------------------
Net cash provided (used)
in operating activities 1,420,280 (1,197,209)
------------------------
Cash flows from investing activities:
Fixed maturities available for sale, sold 2,839,734 1,731,194
Fixed maturities available for sale, purchased (5,040,919) (1,850,675)
Equity securities available for sale, purchased (169,979) 0
Sale of furniture, fixtures and equipment 14,530 0
Purchase of furniture, fixtures and
equipment (23,978) (71,760)
------------------------
Net cash used in investing activities (2,380,612) (191,241)
------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,758 100,049
Decrease in book overdraft (146,602) 0
------------------------
Net cash provided
(used) in financing activities (140,844) 100,049
Net decrease in cash,
and short-term investments (1,101,176) (1,288,401)
Cash and short-term
investments at beginning of year 3,772,738 2,861,810
------------------------
Cash and short-term
investments at end of period $2,671,562 $1,573,409
========================
</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 (Loss)
for the Six Months ended June 30,
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Net income (loss) $ (268,373) $ 77,674
Decrease (increase) in net premium and ceded
reinsurance balances 347,064 (1,799,689)
Increase in unearned
premium reserve 771,936 2,374,507
Increase (decrease) in net loss and loss
adjustment expense reserve 761,429 (972,588)
Decrease (increase) in investment income
due and accrued (34,343) 37,914
Decrease (increase) in deferred tax asset (155,416) 14,268
Increase in deferred policy
acquisition costs (134,556) (377,226)
Increase (decrease) in expense accruals 37,769 (609,910)
Amortization of bond premium, net 32,152 40,337
Depreciation and amortization expense 96,929 97,183
Gain on investment activities (34,311) (79,679)
-------------------------
Net cash provided
(used) in operating activities $1,420,280 $(1,197,209)
=========================
</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, 1998
1. The condensed financial statements included herein have been prepared by
the Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange 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 1997, the Financial Accounting Standards Board ("FASB") issued
FAS No. 130, "Reporting Comprehensive Income", which establishes standards
for reporting and display of comprehensive income and its components in a
financial statement with the same prominence as other financial statements.
Comprehensive income is defined as net income adjusted for changes in
shareholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. North East adopted
the provisions of FAS 130 effective January 1, 1998.
In June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which establishes standards for
reporting information about operating segments. Generally, FAS 131 requires
that financial information be reported on the basis that is used internally
for evaluating performance. The Company is required to adopt FAS 131
effective January 1, 1998 and comparative information for earlier years must
be restated. This statement does not need to be applied to interim financial
statements in the initial year of application. The Company is currently
considering what impact, if any, FAS 131 will have on its year end reporting
format.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities.
Generally, FAS 133 requires recognition of all derivatives, at fair value,
as either assets or liabilities in the statement of financial position. The
Company is required to adopt the provisions of FAS 133 effective January 1,
2000. Adoption of FAS 133 is not expected to have a material effect on the
Company's consolidated results of operations or financial position as the
Company presently does not hold any derivative instruments nor does it
participate in any hedging transactions.
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 in accordance with the provisions of FAS
No. 128 "Earnings Per Share" which requires the dual presentation of basic
and diluted earnings per share. The weighted average number of shares
outstanding used to calculate basic earnings per share was 3,046,949 and
3,008,727 for the six months ended June 30, 1998 and 1997, respectively. The
weighted average number of shares outstanding used to calculate diluted
earnings per share was 3,140,601 and 3,069,241 for the six months ended June
30, 1998 and 1997, respectively.
North East Insurance Company and Subsidiaries
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Six Months Ended June 30, 1998
- ------------------------------
Gross premiums earned for the six months ended June 30, 1998 amounted to
$6,274,216 representing a growth of 10.7% over the $5,668,596 recorded in
the first six months of 1997. Net premiums earned amounted to $5,336,633 for
the six months ended June 30, 1998 compared with $3,827,784 for the six
months ended June 30, 1997. The increase in gross premiums is consistent
with the growth experienced in 1997. The increase in net earned premiums
reflects differences in the company's reinsurance programs for the
respective years. Results for 1997 included the effect of terminating a
quota share reinsurance treaty on a run off basis effective January 1, 1997.
Reinsurance treaties for 1998 remained unchanged from those in effect at
December 31, 1997; however, the first half of 1998 includes an endorsement
to the first layer excess of loss treaty for a net premium cost of
approximately $140,000 not present in 1997.
Loss and loss adjustment expense represented 75.9% and 78.7% of net earned
premium for the six months ended June 30, 1998 and 1997, respectively. Both
of these ratios show significant improvement from the 97.6% and 83.7%
reported for the three month periods ending March 31,1998 and 1997,
respectively. The improvement primarily reflects the seasonality of the
business wherein loss frequency is higher during the winter months.
Underwriting expenses incurred represented 35.8% and 19.1% of net premiums
written for the six months ended June 30, 1998 and 1997, respectively. The
lower expense ratio for 1997 was directly attributable to favorable loss
experience of the quota share reinsurance program, in run off, which
generated additional expense recoveries.
Investment income, including realized gains, amounted to $481,733 for the
six months ended June 30, 1998 compared with $460,846 for the six months
ended June 30, 1997. The return on invested assets, based on amortized cost,
net of allocated expenses was 5.6% for the six months ended June 30, 1998
compared with 5.4% for the six months ended June 30, 1997.
Net loss for the six months ended June 30, 1998 amounted to $268,373 or
$0.09 per share compared with net income of $77,674 or $0.03 per share for
the six months ended June 30, 1997.
Shareholders' equity at June 30, 1998 amounted to $9,731,199 or $3.19 per
share compared with $9,985,654 or $3.28 per share at December 31, 1997.
Three Months Ended June 30, 1998
- --------------------------------
Gross premiums earned for the three months ended June 30, 1998 and 1997
amounted to $3,252,859, representing a growth of 11.7% over the $2,911,799
recorded in the three months ended June 30, 1997. Net premiums earned
amounted to $2,797,676 for the three months ended June 30, 1998 compared
with $1,736,434 for the three months ended June 30, 1997. The increase in
net earned premiums reflects the aforementioned reinsurance changes. In the
latter part of the second quarter the Company introduced a new personal
automobile insurance program ("Automatic") to replace both its existing non-
standard and standard/preferred personal automobile insurance programs.
Policies issued under the previous non-standard and standard/preferred
programs will be renewed under the new Automatic program. Key features of
the new program include assignment of drivers to specific vehicles and
Company initiated mid term premium credits upon eligibility date as opposed
to policy renewal date. The Company anticipates personal automobile premium
volume to increase as a result of this new program.
Loss and loss adjustment expense represented 56.3% and 72.7% of net earned
premium for the three months ended June 30, 1998 and 1997, respectively. The
Company's second quarter 1998 loss experience was excellent with both
severity and frequency posting near record lows.
Underwriting expenses incurred amounted to $1,110,864 and $344,526 for the
three months ended June 30, 1998 and 1997, respectively. Expenses incurred
in 1997 benefited from favorable loss experience of the quota share
reinsurance program, in run off, which generated additional expense
recoveries.
Investment income, including realized gains, amounted to $224,778 for the
three months ended June 30, 1998 compared with $240,234 for the three months
ended June 30, 1997.
Net income for the three months ended June 30, 1998 amounted to $222,441 or
$0.07 per share compared with net income of $297,806 or $0.10 per share for
the three months ended June 30, 1997.
Shareholders' equity at June 30, 1998 amounted to $9,731,199 or $3.19 per
share compared with $9,493,138 or $3.12 per share at March 31, 1998.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities amounted to $1,420,280 for the six
months ended June 30, 1998 compared with cash used by operating activities
of $1,197,209 for the six months ended June 30, 1997. Cash flow for the six
months ended June 30, 1998 included receipt of approximately $2,841,243 due
the Company under its reinsurance treaties. Cash used in investing
activities amounted to $2,380,612 for the six months ended June 30, 1998
compared with cash used by investing activities of $191,241 for the six
months ended June 30,1997.
The fair value of the Company's fixed maturities available for sale was
$296,445 more than the amortized cost at June 30,1998 compared with $243,162
more than amortized cost at December 31,1997. During the six months ended
June 30, 1998 the Company used $169,979 for the purchase of equity
securities.
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 $2,324,764 at June 30, 1998 compared with $3,397,581
at December 31, 1997. The Company believes that the level short-term
investments is adequate to meet any shortfall resulting from its immediate
operating activities.
On July 31, 1998 the Board of Directors authorized the Company to proceed
with a rights offering that, upon completion, would result in additional new
capital for the Company. Final terms of the rights offering have not yet
been determined.
North East Insurance Company and Subsidiaries
Part II: OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on June 25, 1998. The following
matters were voted on by shareholders, and received the votes indicated.
1. 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 456,632 1,110,030 816,200 495,737
</TABLE>
2. To elect directors.
<TABLE>
<CAPTION>
Withhold Broker
For Authority Non-Votes
-------------------------------------
<S> <C> <C> <C>
Robert G. Schatz 2,188,831 689,768 0
Edward B. Batal 2,193,819 684,780 0
Terence P. Cummings 2,190,831 687,768 0
Robert A. Hancock 2,194,119 684,480 0
Wilson G. Hess 2,190,831 687,768 0
Joseph M. Hochadel 2,190,831 687,768 0
Jonathan S. Kern 2,194,119 684,480 0
Bruce H. Suter 2,188,831 689,768 0
Murray N. Gunty 2,193,119 685,480 0
Peter A. Russ 2,784,799 93,800 0
Deborah L. Harmon 2,194,119 684,480 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, 1998.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--------------------------------------------
<S> <C> <C> <C> <C>
TOTAL 2,030,299 37,300 811,000 0
</TABLE>
4. To consider a proposed amendment to the Articles of Incorporation to
increase the authorized common stock to 12,000,000 shares.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--------------------------------------------
<S> <C> <C> <C> <C>
TOTAL 1,879,099 181,755 817,745 0
</TABLE>
5. To consider a proposal amendment to the Stock Option Plan in order to
increase the number of shares issuable under the Plan.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--------------------------------------------
<S> <C> <C> <C> <C>
TOTAL 414,737 1,046,080 925,045 492,737
</TABLE>
Item 5. Other Information
As previously reported, Ballantrae Partners L.L.C. sold 810,000 shares of
Common Stock of the Company on June 29, 1998. These shares represent 26.6%
of the total outstanding shares of Common Stock of the Company. The shares
were sold in a direct placement to four investors: The Foothold Fund, L.P.
(84,000 shares), Richard H. Konrad (299,000 shares), Capitol Indemnity
Corporation (299,000 shares), and Everest Partners, L.P. (128,000 shares).
Ballantrae and the Company had been parties to a standstill agreement. In
connection with the sale, Ballantrae delivered notice of termination of such
agreement. Under Section 5(i) of that agreement, either party may terminate
the agreement if Ballantrae's percentage ownership drops below 10% through
transactions permitted by the agreement. Section 4(a) permits Ballantrae to
resell shares in "a private sale to a person who will not (to Ballantrae's
knowledge after reasonable investigation) thereby own 10% or more of the
outstanding NEIC stock."
Following consummation of the sale, each of the principals of Ballantrae
(Jonathan S. Kern, Deborah L. Harmon, and Murray N. Gunty) resigned as
directors of the Company, effective July 30, 1998. The Company's Board of
Directors now consists of eight members.
Item 6. Exhibits and Reports on Form 8 - K
a) Exhibits
27 Financial Data Schedules
b) Reports on Form 8-K
On July 15, 1998, the Company filed a report on Form 8-K, regarding the sale
by Ballantrae Partners L.L.C. of 810,000 shares of Common Stock of the
Company.
North East Insurance Company and Subsidiaries
Form 10-QSB
Exhibit Index
Exhibit
Number Description Page
- ------------------------------------------------
27 Financial Data Schedules 17
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, 1998 By /S/Robert G. Schatz
-------------------------
Robert G. Schatz
President and Chief Executive Officer
Date: August 13, 1998 By /S/Graham S. Payne
-------------------------
Graham S. Payne
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 15,317,281
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 221,323
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 15,538,604
<CASH> 2,671,562
<RECOVER-REINSURE> 3,373,983
<DEFERRED-ACQUISITION> 1,164,044
<TOTAL-ASSETS> 32,674,810
<POLICY-LOSSES> 13,565,719
<UNEARNED-PREMIUMS> 7,652,118
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 3,049,089
<OTHER-SE> 6,682,110
<TOTAL-LIABILITY-AND-EQUITY> 32,674,810
5,336,633
<INVESTMENT-INCOME> 448,417
<INVESTMENT-GAINS> 33,316
<OTHER-INCOME> 0
<BENEFITS> 4,052,800
<UNDERWRITING-AMORTIZATION> 2,189,355
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (423,789)
<INCOME-TAX> (155,416)
<INCOME-CONTINUING> (268,373)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (268,373)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
