<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-QSB
(Mark One)
__X__ QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1996
____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________to __________.
Commission file number 0-24638
-------
MOUNTBATTEN, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2633708
- --------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
33 Rock Hill Road
Bala Cynwyd, Pennsylvania 19004
- --------------------------- ----------
(Address of principal executive offices) (Zip Code)
(610) 664-2259
---------------------------
(Issuer's telephone number)
n/a
---------------------------
(Former name, former address, and former fiscal year
if changed since last report)
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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X__ No____
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date:
Class Outstanding at October 23, 1996
------------------------ -------------------------------
Common Stock 2,528,530
Par value $.001 per share
Transitional Small Business Disclosure Format (check one) YES ____ NO __X__
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Mountbatten, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of As of
Septbember 30, December 31,
ASSETS 1996 1995
---- ----
(unaudited)
<S> <C> <C>
Fixed maturities
At fair value (amortized cost, $7,143,598 and
$6,665,324 at September 30, 1996 and
December 31, 1995, respectively) $7,063,325 $6,685,900
Cash and cash equivalents 1,311,338 755,639
Premiums receivable 1,125,636 385,372
Reinsurance receivable 56,471 205,037
Subrogation receivable 572,497 393,999
Accrued investment income 152,970 36,673
Property and equipment, net 64,186 52,519
Deferred acquisition costs 433,872 270,687
Prepaid reinsurance premiums - 39,166
Deferred tax asset 147,886 113,597
Other assets 20,459 59,318
----------- ----------
TOTAL ASSETS $10,948,640 $8,997,907
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid claims and claim adjustment expenses $1,120,839 $602,265
Unearned premiums 992,280 621,403
Reinsurance premium payable 202,748 -
Accrued expenses and other liabilities 126,425 246,592
Federal income taxes payable 232,752 196,624
----------- ----------
TOTAL LIABILITIES 2,675,044 1,666,884
----------- ----------
Shareholders' Equity
Common stock, par value $.001 per share;
authorized 20,000,000 shares; issued and
and outstanding, 2,528,530 shares. 2,529 2,529
Additional paid in capital 6,762,934 6,762,934
Net unrealized (depreciation) appreciation, fixed
maturities (52,980) 13,580
Retained earnings 1,561,113 551,980
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 8,273,596 7,331,023
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $10,948,640 $8,997,907
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
Mountbatten, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1996 1995
----------- ---------
<S> <C> <C>
Underwriting:
Gross written premiums $6,391,122 $3,249,566
Premiums ceded (1,092,884) (488,331)
----------- ---------
Net written premiums 5,298,238 2,761,235
Change in unearned premium (370,877) (193,259)
----------- ---------
Net earned premiums 4,927,361 2,567,976
----------- ---------
Claims and claims adjustment expenses 575,853 134,151
Commission expense 1,812,397 933,545
Salaries and benefits 758,309 545,822
Professional fees 110,006 92,350
Other operating expenses 505,197 332,841
----------- ---------
3,761,762 2,038,709
----------- ---------
Underwriting income 1,165,599 529,267
Other income (expense)
Interest income 305,482 295,664
Interest expense - (4,517)
----------- ---------
Income before income taxes 1,471,081 820,414
Provision for income taxes 461,948 278,941
----------- ---------
Net income $1,009,133 $541,473
=========== =========
Primary earnings per share: $0.38 $0.21
Weighted average shares outstanding 2,670,035 2,573,780
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
Mountbatten, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
September 30,
1996 1995
--------- ---------
<S> <C> <C>
Underwriting:
Gross written premiums $2,463,862 $1,453,550
Premiums ceded (421,323) (206,693)
--------- ---------
Net written premiums 2,042,539 1,246,857
Change in unearned premium (142,979) (87,279)
--------- ---------
Net earned premiums 1,899,560 1,159,578
--------- ---------
Claims and claims adjustment expenses 161,462 57,485
Commission expense 684,866 403,193
Salaries and benefits 278,269 185,564
Professional fees 30,946 35,238
Other operating expenses 175,513 125,559
--------- ---------
1,331,056 807,039
--------- ---------
Underwriting income 568,504 352,539
Other income (expense)
Interest income 107,707 100,391
--------- ---------
Income before income taxes 676,211 452,930
Provision for income taxes 216,388 153,997
--------- ---------
Net income $459,823 $298,933
========= =========
Primary earnings per share: $0.17 $0.12
Weighted average shares outstanding 2,732,916 2,573,780
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
Mountbatten, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-----------------------------
1996 1995
---------- --------
<S> <C> <C>
Operating activities:
Net income $1,009,133 $541,473
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,330 10,969
Change in:
Premiums receivable (740,264) (226,709)
Reinsurance receivable 148,566 -
Subrogation receivable (178,498) (281,039)
Accrued investment income (116,297) (49,591)
Unearned premiums 370,877 193,260
Unpaid claims and claim adjustment
expenses 518,574 110,058
Prepaid reinsurance premiums 241,914 (17,739)
Accrued expenses and other liabilities (120,167) 230,916
Deferred acquisition costs (163,185) (84,869)
Deferred tax asset (34,289) -
Federal income taxes payable 36,128 97,338
Other, net 73,208 (14,298)
---------- --------
Net cash provided by (used in) operating activities 1,062,030 509,769
---------- --------
Investing activities:
Purchase of equipment (27,997) (40,997)
Purchase of investments (1,047,299) (15,366,652)
Maturities of investments 568,965 15,248,933
---------- --------
Net cash provided by (used in) investing activities (506,331) (158,716)
---------- --------
Financing activities:
Repayment of note payable - (170,000)
---------- --------
Net cash (used in) financing activities - (170,000)
Net increase in cash and cash equivalents 555,699 181,053
Cash and cash equivalents at beginning of period 755,639 172,670
---------- ---------
Cash and cash equivalents at end of period $1,311,338 $353,723
========== =========
</TABLE>
Supplemental disclosure of cash flow information:
The Company made payments of $425,800 during the nine months ended September 30,
1996 for federal income taxes. Payments of $4,517 and $181,601 were made by the
Company during the nine months ended September 30, 1995 for interest and federal
income taxes, respectively.
The accompanying notes are an integral part of these financial statements
5
<PAGE>
Mountbatten, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)
Note 1 - Description of Business:
Mountbatten, Inc. ("Mountbatten") commenced operations in February 1992.
Mountbatten acts as a holding company for The Mountbatten Surety Company, Inc.
(the "Surety Company"). The Surety Company underwrites performance, payment and
other bonds, and is licensed to conduct business in the Commonwealths of
Pennsylvania, Virginia, and Kentucky, the States of Delaware, Maryland, New
Jersey, New York, Ohio, Indiana, and Tennessee, and the District of Columbia. In
these jurisdictions, the Surety Company underwrites primarily construction and
performance bonds through independent agents and brokers. (Mountbatten together
with the Surety Company are referred to below as the "Company").
Note 2 - Summary of Significant Accounting Policies:
Basis of presentation:
The consolidated financial statements include the accounts of Mountbatten and
its wholly owned subsidiary, Surety Company. These statements have been prepared
in accordance with generally accepted accounting principles ("GAAP"), with the
instructions to Form 10-QSB and Article 10 of Regulation S-X. The preparation of
interim financial statements necessarily relies heavily on estimates. This and
certain other factors, such as the seasonal nature of the surety bond business
as well as competitive and other market conditions, call for caution in drawing
specific conclusions from interim results. In the opinion of management, the
interim financial statements reflect all adjustments, consisting only of normal
recurring accruals, necessary for the fair presentation of the Company's results
of operations and financial position for the periods presented. Operating
results for the nine and three month periods ended September 30, 1996 are not
necessarily indicative of results that can be expected for the fiscal year
ending December 31, 1996. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in
Mountbatten's Report on Form 10-KSB dated March 19, 1996, for the year ended
December 31, 1995.
Revenue recognition:
Premiums are recognized as earned over the estimated period of bond performance
or project completion, which is generally less than one year. Ceded reinsurance
premiums are recognized on a similar basis. Unearned premiums represent the
portion of net premiums applicable to the unexpired portion of the bond. The
estimates are based primarily on management's understanding of a bonded
project's stage of completion supplemented by historical completion patterns.
Cash equivalents:
Cash equivalents include highly liquid money market instruments with original
maturities of three months or less.
Investments:
The Company invests in U.S. Treasury securities with maturities ranging from
nine months to five years. The Company's investments in debt securities are
classified as available-for-sale. Accordingly, any changes in carrying value are
reflected as adjustments to Shareholders' Equity.
6
<PAGE>
Reinsurance receivable:
Reinsurance receivable is an estimate of amounts to be received from the Surety
Company's reinsurer on paid and unpaid losses, respectively.
Subrogation receivable:
The Surety Company requires bond applicants to enter into an indemnity agreement
which obligates the insured to reimburse the Surety Company for any claims paid
and costs incurred that are related to the bond. Subrogation receivable
represents amounts due to the Surety Company from bonded principals for claim
costs incurred by the Surety Company after a failure of a bonded principal to
fulfill a bonded obligation. The Company records subrogation receivable when
costs associated with a bonded loss are incurred and it is probable that the
costs will be recovered. Changes in estimates of subrogation receivable are
credited or charged to income in the period in which they are determined and are
included in claims and claim adjustment expenses.
Unpaid claims and claim adjustment expenses:
The reserve for claims and claim adjustment expenses is based on management's
individual case estimates of the ultimate future payments to be made on reported
claims and related expenses, and on estimates for incurred but not reported
("IBNR") claims. Claim reserve estimates are revised by management as new
information becomes available. Changes in these estimates are charged or
credited to income in the period in which they are determined. Claim adjustment
expenses include costs associated directly with specific claims paid or in the
process of settlement.
Note 3 - Income Taxes
The Company files a consolidated income tax return with its wholly owned
subsidiary, the Surety Company, and is a party to a tax sharing agreement with
the Surety Company. The Company had a deferred tax asset of $147,886 and
$113,597 at September 30, 1996 and December 31, 1995, respectively.
Note 4 - Shareholders' Equity
In January 1996, the Company granted incentive stock options to selected
individuals to purchase 83,750 shares of common stock, consisting of 63,750
shares at an exercise price of $5.25 per share, vesting over a five year period
and exercisable for a ten year period after the date of grant, and 20,000 shares
at an exercise price of $5.78 per share, vesting over a five year period and
exercisable for a five year period after the date of grant.
In January 1996, the Company granted non-qualified options to selected
individuals to purchase 35,000 shares of common stock at an exercise price per
share of $5.25. These options became vested in July 1996 and are exercisable for
a ten year period after the date of grant.
In May 1996, the Company granted non-qualified options to selected individuals
to purchase 8,000 shares of common stock at an exercise price per share of
$5.50. These options became vested immediately and are exercisable for a ten
year period after the date of grant.
Note 5 - Reinsurance
Prior to November 1, 1995, the Company's reinsurance program provided three
layers of reinsurance. Under the first layer, the Company retained 100% of each
loss up to $150,000 and the reinsurer assumed the next $350,000, subject to a
maximum annual recovery by the Company of the greater of 200% of annual ceded
premium or $850,000. The second coverage layer provided $1.5 million of coverage
on any loss in excess of the first $500,000 of loss, subject to a maximum annual
recovery by the Company of $3 million. The third layer
7
<PAGE>
provided $2.5 million of coverage on any loss in excess of the first $2 million
of loss, subject to a maximum annual recovery by the Company of $2.5 million.
The reinsurance program provided that the Company would not write any bond
exceeding $3 million or bonds on the same work program in favor of the principal
exceeding $4.5 million in the aggregate. Under the treaty, the maximum bond
duration could not exceed 24 months.
Effective November 1, 1995, the Company secured a new reinsurance treaty that
increased the maximum single bond limit to $5 million, and the work program
aggregate to $7.5 million. Under the first layer of reinsurance, the maximum
annual recovery by the Company increased from the greater of 200% of annual
ceded premium or $850,000 to the greater of 250% of annual ceded premium or
$2,250,000. Under the second layer of reinsurance, the maximum annual recovery
by the Company increased from $3 million to $4.5 million. Under the third layer
of reinsurance, the maximum annual recovery by the Company increased from $2.5
million to $5 million. In addition to the above, a fourth layer of reinsurance
with an aggregate limit of $3 million of coverage on any loss in excess of the
first $4.5 million was added. Under the new reinsurance program, the Company
will retain 5% of all losses in the second layer up to a maximum of $75,000 per
year.
Note 6 - Statutory Surplus and Dividend Restrictions
The Surety Company is subject to minimum surplus requirements under the
Commonwealth of Pennsylvania insurance laws and regulations. Under applicable
Pennsylvania laws and regulations, the Surety Company is required to maintain a
minimum of $1,125,000 of paid in capital. The maximum amount of dividends which
can be paid by the Surety Company to shareholders without prior approval of the
Insurance Commissioner is subject to restrictions relating to statutory surplus.
Note 7 - Unpaid Claims and Claim Adjustment Expenses and Reinsurance Receivable
The process by which reserves are established for insured events and related
litigation requires reliance upon estimates based on the Surety Company's
limited claims experience, supplemented with available industry data. The Surety
Company's limited claims experience creates uncertainty with respect to the
estimation of loss and loss adjustment expense reserves. As information develops
which varies from expected experience, provides additional data or, in some
cases, augments data which previously was not considered sufficient in
determining reserves, adjustments to reserves may be required. Unpaid claims and
claim adjustment expenses of $1,120,839 at September 30, 1996, consist of case
reserves totaling $399,839 and reserves for IBNR losses of $721,000.
Included in unpaid claims and claim adjustment expenses of $602,265 at December
31, 1995 are case reserves totaling $300,010 and IBNR reserves of $302,255.
The Company has reinsurance receivable of $56,471 and $205,037 at September 30,
1996 and December 31, 1995, respectively, consisting of unpaid losses of $56,471
at September 30, 1996, and paid and unpaid losses of $129,199 and $75,838 at
December 31, 1995, respectively.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company's principal business activity is to underwrite surety bonds through
its wholly owned subsidiary, the Surety Company. On September 11, 1992, the
Surety Company was licensed by the Commonwealth of Pennsylvania Insurance
Department to write surety bonds in that state. The Surety Company received its
authority to write surety bonds on federally financed projects ("Treasury
Listing" or "T-Listing") in May 1994. The following table sets forth
information, chronologically, with respect to jurisdictions in which the Surety
Company is presently licensed to write bonds:
State Date of Admission
- ----- -----------------
Pennsylvania September 11, 1992
Delaware July 13, 1994
Maryland October 7, 1994
New Jersey March 31, 1995
Virginia August 17, 1995
District of Columbia September 1, 1995
New York October 19, 1995
Ohio November 28, 1995
Kentucky April 26, 1996
Tennessee September 23, 1996
Indiana September 30, 1996
In addition, the Surety Company has applied for a license to underwrite bonds in
Alabama,Connecticut, Georgia, Illinois, Mississippi, North Carolina, and South
Carolina, and anticipates filing license applications in various other states.
Results of Operations
Nine months ended September 30, 1996 compared to nine months ended
September 30, 1995:
During the nine-month period ended September 30, 1996, the Surety Company
generated $6,391,122 of gross written premiums, compared to $3,249,566 of gross
written premiums during the nine-month period ended September 30, 1995,
representing an increase of $3,141,556 or 97%. Management attributes the
increase in gross written premiums primarily to the Surety Company's increased
penetration of the Pennsylvania, New Jersey, Delaware, Maryland and Virginia
markets. Because the Surety Company became licensed in the District of Columbia,
New York and Ohio relatively late in 1995, and Kentucky, Tennessee, and Indiana
in 1996, its expansion in these markets did not significantly impact gross
written premiums during the 1996 period.
For the nine months ended September 30, 1996, gross ceded reinsurance premiums
totaled $1,092,884, representing approximately 17.1% of gross written premiums.
For the nine months ended September 30, 1995, gross ceded reinsurance premiums
totaled $488,331, representing approximately 15% of gross written premiums. The
increase in ceded reinsurance premiums was primarily the result of the increase
in gross written premiums as well as an increase in reinsurance coverage limits
and reinstatements.
Effective November 1, 1995, the Company secured a new reinsurance treaty that
increased the Company's maximum single bond limit and work program aggregate
limit from $3 million and $4.5 million, respectively, to $5 million and $7.5
million, respectively. In addition, the Company's reinsurance coverage limits
and reinstatements were increased. Under its new reinsurance program, ceded
reinsurance premiums represent approximately 17.1% of gross written premiums.
9
<PAGE>
For the nine months ended September 30, 1996, claims and claim adjustment
expenses incurred were $575,853 compared to $134,151 for the nine months ended
September 30, 1995. The increase in claim and claims adjustment expenses in 1996
relates primarily to increases in incurred but not reported ("IBNR") reserves.
The increase in IBNR reserves relates primarily to the increase in gross written
premiums.
A limited number of claims have been filed on the Surety Company's bonds.
Accordingly, the Surety Company has established case reserves of $399,839 to
provide for future claims and claim adjustment expense payments.
For the nine months ended September 30, 1996, commission expenses were
$1,812,397, representing approximately 28% of gross written premiums, compared
to $933,545, or approximately 29% of gross written premiums, for the nine months
ended September 30, 1995. The increase in commission expenses in 1996 relates
primarily to the increase in gross written premiums.
For the nine-month periods ended September 30, 1996 and 1995, the Company
incurred salary and benefits costs of $758,309 and $545,822, respectively. The
increase in salary and benefit costs in 1996 reflects an increase in the number
of employees, including additional underwriters and related support personnel,
as well as increased compensation levels.
For the nine months ended September 30, 1996, the Company incurred $110,006 for
professional services and $505,197 for other operating expenses, compared to
$92,350 and $332,841, respectively, for the similar period in 1995. This
increase reflects legal, accounting, auditing, and various other expenses
incurred to comply with regulatory reporting obligations, licensure and tax
requirements in states where the Company is licensed to transact business,
licensing of additional agents, and required infrastructure changes to support
the Company's current and expected future levels of gross written premiums in a
greater number of markets.
For the nine-month periods ended September 30, 1996 and 1995, the Company
generated $305,482 and $295,664, respectively, of income from its investments,
comprised exclusively of U.S. Government securities. The increase in interest
income in 1996 is the result of variances in both the level of invested funds as
well as their respective yields. On December 29, 1995 the Company sold primarily
all of its U.S. government securities having original maturities of less than
one year, and reinvested the proceeds of $4,635,219 in a U.S. government
security maturing in November 2000 with an effective yield to maturity of 5.44%.
Net income for the nine months ended September 30, 1996 was $1,009,133, as
compared to $541,473 for the nine months ended September 30, 1995, an increase
of $467,660, or 86%.
Three months ended September 30, 1996 compared to three months ended
September 30, 1995:
During the three-month period ended September 30, 1996, the Surety Company
generated $2,463,862 of gross written premiums, compared to $1,453,550 of gross
written premiums during the three-month period ended September 30, 1995,
representing an increase of $1,010,312 or 70%. Management attributes the
increase in gross written premiums primarily to the Surety Company's increased
penetration of the Pennsylvania, New Jersey, Delaware, Maryland and Virginia
markets. Because the Surety Company became licensed in the District of Columbia,
New York and Ohio relatively late in 1995, and Kentucky, Tennessee and Indiana
in 1996, its expansion in these markets did not significantly impact gross
written premiums during the 1996 period.
For the three months ended September 30, 1996, gross ceded reinsurance premiums
totaled $421,323, representing approximately 17.1% of gross written premiums.
For the three months ended September 30, 1995, gross ceded reinsurance premiums
totaled $206,693, representing approximately 14.2% of gross written premiums.
The increase in ceded reinsurance premiums was primarily the result of the
increase in gross written premiums as well as an increase in reinsurance
coverage limits and reinstatements.
Effective November 1, 1995, the Company secured a new reinsurance treaty that
increased the Company's maximum single bond limit and work program aggregate
limit from $3 million and $4.5 million, respectively, to $5 million and $7.5
million, respectively. In addition, the Company's reinsurance coverage limits
and reinstatements were increased. Under its new reinsurance program, ceded
reinsurance premiums represent approximately 17.1% of gross written premiums.
10
<PAGE>
For the three months ended September 30, 1996, claims and claim adjustment
expenses incurred were $161,462 compared to $57,485 for the three months ended
September 30, 1995. The increase in claim and claims adjustment expenses in 1996
relates primarily to increases in IBNR. The increase in IBNR reserves relates
primarily to the increase in gross written premiums.
A limited number of claims have been filed on the Surety Company's bonds.
Accordingly, the Surety Company has established case reserves of $399,839 to
provide for future claims and claim adjustment expense payments.
For the three months ended September 30, 1996, commission expenses were
$684,866, representing approximately 27.8% of gross written premiums, compared
to $403,193, or approximately 27.7% of gross written premiums, for the three
months ended September 30, 1995. The increase in commission expenses in 1996
relates primarily to the increase in gross written premiums.
For the three-month periods ended September 30, 1996 and 1995, the Company
incurred salary and benefits costs of $278,269 and $185,564, respectively. The
increase in salary and benefit costs in 1996 reflects an increase in the number
of employees, including additional underwriters and related support personnel,
as well as increased compensation levels.
For the three months ended September 30, 1996, the Company incurred $30,946 for
professional services and $175,513 for other operating expenses, compared to
$35,238 and $125,559, respectively, for the similar period in 1995. This
increase in operating expenses reflects the required infrastructure changes to
support the Company's current and expected future levels of gross written
premiums in a greater number of markets.
For the three-month periods ended September 30, 1996 and 1995, the Company
generated $107,707 and $100,391, respectively, of income from its investments,
comprised exclusively of U.S. Government securities. The increase in interest
income in 1996 is the result of variances in both the level of invested funds as
well as their respective yields. On December 29, 1995 the Company sold all of
its U.S. government securities having original maturities of less than one year,
and reinvested the proceeds of $4,635,219 in a U.S. government security maturing
in November 2000 with an effective yield to maturity of 5.44%.
Net income for the three months ended September 30, 1996 was $459,823, as
compared to $298,933 for the three months ended September 30, 1995, an increase
of $160,890, or 54%.
Seasonality
Because most of the Surety Company's premiums are generated on construction
related bonds, and are associated with jobs primarily in mid-atlantic states,
the Surety Company's business has been seasonal. Accordingly, operating results
have varied from quarter to quarter, with premium levels lowest from November to
March. Seasonality is expected to have less of an effect on premium activity as
the Surety Company becomes licensed in states having more temperate climates.
Liquidity and Capital Resources
Operations of the Surety Company have been financed by contributions from the
Company, principally from the sale of common stock by the Company. Costs
incurred by the Company are shared with the Surety Company under a services
agreement which provides for the Surety Company to reimburse the Company for
costs paid by the Company which are deemed to benefit the Surety Company. The
Company expects to maintain a high level of liquidity through the continued
investment in U.S. government securities.
During 1995, approximately $706,000 of the Company's cash and investment
portfolio was converted to U.S. Treasury Notes in conjunction with the final
licensure requirements of the Commonwealth of Virginia and the State of New
York. In April 1996, an additional $515,000 of the Company's cash and investment
portfolio was deposited with the Commonwealth of Kentucky in conjuction with
final licensure requirements. Management anticipates that additional "deposits"
will be required in those states in which the Surety Company intends to seek a
license to write surety bonds.
11
<PAGE>
The Company had approximately $8,374,663 of investments and cash equivalents at
September 30, 1996, and approximately $7,441,539 of investments and cash
equivalents at December 31, 1995. The Company's anticipated expansion plans will
require additional personnel and financial resources. While certain costs are
expected to increase due to the changes in infrastructure, management believes
that the Company and the Surety Company have adequate liquidity to pay all
claims and meet all other obligations for the next twelve months, at a minimum.
The Surety Company requires capital to support its bond underwriting. Management
believes that the statutory surplus of the Surety Company, which was
approximately $7,688,350 at September 30, 1996, will be sufficient to support
the Surety Company's current and anticipated premiums and losses.
12
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PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.2 Amended and Restated Articles of Incorporation of
Registrant, as amended (incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-QSB report for the quarter ended March 31, 1996)
Exhibit 3.3 By-Laws of Registrant (incorporated by reference to Exhibit
3.3 of Registrant's Form SB-2 Registration Statement No. 33-78336
declared effective September 1, 1994)
Exhibit 11. Computation of Earnings per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period for which this
report is filed.
13
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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.
November 12, 1996 MOUNTBATTEN, INC.
By /s/ Kenneth L. Brier
-------------------------------------
Kenneth L. Brier
President and Chief Executive Officer
(principal executive officer)
By /s/ Joel D. Cooperman
--------------------------------------
Joel D. Cooperman
Vice President, Finance, Treasurer, and
Chief Financial Officer
(principal financial and accounting officer)
14
<PAGE>
Exhibit Index
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.2 Amended and Restated Articles of Incorporation of Registrant,
as amended (incorporated by reference to Exhibit 3.2 of
Registrant's Form 10-QSB report for the quarter ended March
31, 1996)
3.3 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.3 of Registrant's Form SB-2 Registration Statement
No. 33-78336 declared effective September 1, 1994)
11 Computation of Eanings per Share
27 Financial Data Schedule
<PAGE>
MOUNTBATTEN, INC.
COMPUTATION OF NET INCOME PER SHARE (UNAUDITED) Exhibit 11
-----------
Primary Net Income Per Share
Three months ended September 30,
1996 1995
----------- ---------
Net Income available to
Common Shareholders $459,823 $298,933
============= =============
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 204,386 45,250
------------- -------------
Total 2,732,916 2,573,780
============= =============
Primary Net Income per Share $ 0.17 $ 0.12
============= =============
Fully Diluted Net Income Per Share
Net Income available to
Common Shareholders $ 459,823 $298,933
============= =============
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 226,470 45,250
------------- -------------
Total 2,755,000 2,573,780
============= =============
Fully Diluted Net Income per Share $ 0.17 $ 0.12
============= =============
<PAGE>
MOUNTBATTEN, INC.
COMPUTATION OF NET INCOME PER SHARE (UNAUDITED) Exhibit 11
----------
Primary Net Income Per Share
Nine months ended September 30,
1996 1995
---- ----
Net Income available to
Common Shareholders $1,009,133 $541,473
=========== ===========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 141,505 45,250
----------- -----------
Total 2,670,035 2,573,780
=========== ===========
Primary Net Income per Share $ 0.38 $ 0.21
=========== ===========
Fully Diluted Net Income Per Share
Net Income available to
Common Shareholders $1,009,133 $541,473
=========== ===========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 169,034 45,250
----------- -----------
Total 2,697,564 2,573,780
=========== ===========
Fully Diluted Net Income per Share $ 0.37 $ 0.21
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 7,063,325
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 7,063,325
<CASH> 1,311,338
<RECOVER-REINSURE> 43,337
<DEFERRED-ACQUISITION> 433,872
<TOTAL-ASSETS> 10,905,303
<POLICY-LOSSES> 1,120,839
<UNEARNED-PREMIUMS> 992,280
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,529
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,905,303
6,391,122
<INVESTMENT-INCOME> 305,482
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 575,853
<UNDERWRITING-AMORTIZATION> (163,185)
<UNDERWRITING-OTHER> 3,349,094
<INCOME-PRETAX> 1,471,081
<INCOME-TAX> 461,948
<INCOME-CONTINUING> 1,009,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,009,133
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.37
<RESERVE-OPEN> 602,265
<PROVISION-CURRENT> 575,852
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 6,477
<PAYMENTS-PRIOR> 50,801
<RESERVE-CLOSE> 1,120,839
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
