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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-----------------------
FORM 10-QSB
(Mark One)
__X__ QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 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 August 6, 1996
- -------------------------------- -----------------------------
Common Stock 2,528,530
Par value $.001 per share
Transitional Small Business Disclosure Format (check one ) YES__ NO _X_
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Part I. Financial Information
Item 1. Financial Statements
Mountbatten, Inc. and Subsidiary
Consolidated Balance Sheets
(unaudited)
As of As of
June 30, December 31,
ASSETS 1996 1995
---- ----
Fixed maturities
At fair value (amortized cost, $6,675,433 and
$6,665,324 at June 30, 1996 and
December 31, 1995, respectively) $6,581,007 $6,685,900
Cash and cash equivalents 843,214 755,639
Premiums receivable 1,094,290 385,372
Reinsurance receivable 227,483 205,037
Subrogation receivable 410,561 393,999
Accrued investment income 69,094 36,673
Property and equipment, net 63,444 52,519
Deferred acquisition costs 370,962 270,687
Prepaid reinsurance premiums -- 39,166
Deferred tax asset 152,698 113,597
Other assets 90,414 59,318
---------- ----------
TOTAL ASSETS $9,903,167 $8,997,907
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid claims and claim adjustment expenses $955,882 $602,265
Unearned premiums 849,301 621,403
Reinsurance premium payable 129,895 --
Accrued expenses and other liabilities 77,273 246,592
Federal income taxes payable 86,384 196,624
---------- ----------
TOTAL LIABILITIES 2,098,735 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 (62,321) 13,580
Retained earnings 1,101,290 551,980
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 7,804,432 7,331,023
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $9,903,167 $8,997,907
========== ==========
The accompanying notes are an integral part of these financial statements
2
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Mountbatten, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
Six months ended
June 30,
1996 1995
---- ----
Underwriting:
Gross written premiums $3,927,260 $1,796,016
Premiums ceded (671,561) (281,638)
---------- ----------
Net written premiums 3,255,699 1,514,378
Change in unearned premium (227,898) (105,980)
---------- ----------
Net earned premiums 3,027,801 1,408,398
---------- ----------
Claims and claims adjustment expenses 414,391 76,666
Commission expense 1,127,531 531,120
Salaries and benefits 480,040 359,491
Professional fees 79,060 57,112
Other operating expenses 329,684 207,282
---------- ----------
2,430,706 1,231,671
---------- ----------
Underwriting income 597,095 176,727
Other income (expense)
Interest income 197,775 195,273
Interest expense -- (4,517)
---------- ----------
Income before income taxes 794,870 367,483
Provision for income taxes 245,560 124,944
---------- ----------
Net ine $549,310 $242,539
========== ==========
Primary earnings per share: $0.21 $0.09
Weighted average shares outstanding 2,638,595 2,576,410
The accompanying notes are an integral part of these financial statements
3
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Mountbatten, Inc. and Subsidiary
Consolidated Statements of Operations
(unaudited)
Three months ended
June 30,
1996 1995
---- ----
Underwriting:
Gross written premiums $2,312,221 $1,068,967
Premiums ceded (394,979) (158,200)
---------- ----------
Net written premiums 1,917,242 910,767
Change in unearned premium (134,039) (63,725)
---------- ----------
Net earned premiums 1,783,203 847,042
---------- ----------
Claims and claims adjustment expenses 327,269 36,404
Commission expense 631,163 310,931
Salaries and benefits 255,342 187,412
Professional fees 49,935 35,065
Other operating expenses 174,729 126,138
---------- ----------
1,438,438 695,950
---------- ----------
Underwriting income 344,765 151,092
Other income (expense)
Interest income 98,166 106,381
Interest expense -- (766)
---------- ----------
Income before income taxes 442,931 256,707
Provision for income taxes 141,738 87,280
---------- ----------
Net income $301,193 $169,427
========== ==========
Primary earnings per share: $0.11 $0.07
Weighted average shares outstanding 2,673,584 2,576,410
The accompanying notes are an integral part of these financial statements
4
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Mountbatten, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Six months ended June 30,
-------------------------
1996 1995
---- ----
Operating activities:
Net income $549,310 $242,539
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 9,752 6,310
Change in:
Premiums receivable (708,918) 30,328
Reinsurance receivable (22,446) --
Subrogation receivable (16,562) (87,339)
Accrued investment income (32,421) (52,670)
Unearned premiums 227,898 105,980
Unpaid claims and claim adjustment
expenses 353,617 55,832
Prepaid reinsurance premiums 169,061 19,568
Accrued expenses and other liabilities (169,319) (21,024)
Deferred acquisition costs (100,275) (46,466)
Deferred tax asset (39,101) (853)
Federal income taxes payable (110,240) (26,857)
Other, net 8,004 (66,755)
---------- ----------
Net cash provided by (used in) operating activities 118,360 158,593
---------- ----------
Investing activities:
Purchase of equipment (20,677) (20,108)
Purchase of investments (286,295) (9,652,455)
Maturities of investments 276,187 9,878,891
---------- ----------
Net cash provided by (used in) investing activities (30,785) 206,328
---------- ----------
Financing activities:
Repayment of note payable -- (170,000)
---------- ----------
Net cash (used in) financing activities 0 (170,000)
Net increase in cash and cash equivalents 87,575 194,921
Cash and cash equivalents at beginning of period 755,639 172,670
---------- ----------
Cash and cash equivalents at end of period $843,214 $367,591
========== ==========
Supplemental disclosure of cash flow information:
The Company made payments of $355,800 during the six months ended June 30, 1996
for federal income taxes. Payments of $4,517 and $151,801 were made by the
Company during the six months ended June 30, 1995 for interest and federal
income taxes, respectively.
The accompanying notes are an integral part of these financial statements
5
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Mountbatten, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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, Kentucky, the States of Delaware, Maryland, New Jersey,
New York, Ohio, 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, Inc.
("the Company") and its wholly owned subsidiary, The Mountbatten Surety Company,
Inc. ("the 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 six and three month periods ended June 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 the
Company's Report on Form 10-KSB dated March 19, 1996, for the year ended
December 31, 1995.
Statutory accounting principles:
The Surety Company follows accounting practices prescribed by the Insurance
Department of the Commonwealth of Pennsylvania, which is a comprehensive basis
of accounting other than GAAP. Accordingly, certain adjustments have been made
in order to conform the consolidated financial statements to GAAP.
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.
6
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Note 2 - Summary of Significant Accounting Policies: - (continued)
Investments:
The Company invests in U.S. Treasury securities with maturities ranging from six
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.
Reinsurance receivable:
Reinsurance receivable is an estimate of amounts to be received from the Surety
Company's reinsurer.
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 $152,698 and
$113,597 at June 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.
7
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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 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 $955,882 at June 30, 1996, consist of case reserves
totaling $396,344 and reserves for IBNR losses of $559,538.
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 at June 30, 1996 and December 31, 1995 of
$227,483 and $205,037, respectively, consisting of $178,483 and $49,000, at June
30, 1996, and $129,199 and $75,838 at December 31, 1995 of paid and unpaid
losses, respectively.
8
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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
In addition, the Surety Company has applied for a license to underwrite bonds in
Indiana, North Carolina, South Carolina, Tennessee and Connecticut, and
anticipates filing license applications in various other states.
Results of Operations
Six months ended June 30, 1996 compared to Six months ended June 30,
1995: During the six-month period ended June 30, 1996, the Surety Company
generated $3,927,260 of gross written premiums, compared to $1,796,016 of gross
written premiums during the six-month period ended June 30, 1995, representing
an increase of $2,131,244 or 119%. 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 in April 1996, its expansion in these
markets did not significantly impact gross written premiums during the 1996
period.
For the six months ended June 30, 1996, gross ceded reinsurance
premiums totaled $671,561, representing approximately 17.1% of gross written
premiums. For the six months ended June 30, 1995, gross ceded reinsurance
premiums totaled $281,638, representing approximately 15.7% of gross written
premiums. The increase in ceded reinsurance premiums from the 1995 period to the
1996 period 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.
For the six months ended June 30, 1996, claims and claim adjustment
expenses incurred were $414,391 compared to $76,666 for the six months ended
June 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.
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A limited number of claims have been filed on the Surety Company's
bonds. Accordingly, the Surety Company has established case reserves of $396,344
to provide for future claims and claim adjustment expense payments.
For the six months ended June 30, 1996, commission expenses were
$1,127,531, representing approximately 29% of gross written premiums, compared
to $531,120, or approximately 30% of gross written premiums, for the six months
ended June 30, 1995. The increase in commission expenses in 1996 relates
primarily to the increase in gross written premiums.
For the six-month periods ended June 30, 1996 and 1995, the Company
incurred salary and benefits costs of $480,040 and $359,491, 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 six months ended June 30, 1996, the Company incurred $79,060
for professional services and $329,684 for other operating expenses, compared to
$57,112 and $207,282, respectively, for the similar period in 1995. This
increase reflects legal, accounting, auditing, and various other expenses
associated with the Company's status as a public company and the associated
regulatory reporting obligations, in addition to compliance with licensure and
tax requirements in the various states in which the Company is licensed, the
licensing of additional agents, and the infrastructure changes required to
support the Company's current and expected future increased level of gross
written premiums in a greater number of markets.
For the six-month periods ended June 30, 1996 and 1995, the Company
generated $197,775 and $195,273, respectively, of income from its investments,
comprised exclusively of U.S. Government securities. The slight 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 six months ended June 30, 1996 was $549,310, as
compared to $242,539 for the six months ended June 30, 1995, an increase of
$306,771, or 126%.
Three months ended June 30, 1996 compared to Three months ended June
30, 1995: During the three-month period ended June 30, 1996, the Surety Company
generated $2,312,221 of gross written premiums, compared to $1,068,967 of gross
written premiums during the three-month period ended June 30, 1995, representing
an increase of $1,243,254 or 116%. 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 in April 1996, its expansion in these
markets did not significantly impact gross written premiums during the 1996
period.
For the three months ended June 30, 1996, gross ceded reinsurance
premiums totaled $394,979, representing approximately 17.1% of gross written
premiums. For the three months ended June 30, 1995, gross ceded reinsurance
premiums totaled $158,200, representing approximately 14.8% of gross written
premiums. The increase in ceded reinsurance premiums from the 1995 period to the
1996 period 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.
For the three months ended June 30, 1996, claims and claim adjustment
expenses incurred were $327,269 compared to $36,404 for the three months ended
June 30, 1995. The increase in claim and claims adjustment expenses in 1996
10
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relates primarily to increases in IBNR and a case reserve. 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 $396,344
to provide for future claims and claim adjustment expense payments.
For the three months ended June 30, 1996, commission expenses were
$631,163, representing approximately 27% of gross written premiums, compared to
$310,931, or approximately 29% of gross written premiums, for the three months
ended June 30, 1995. The increase in commission expenses in 1996 relates
primarily to the increase in gross written premiums.
For the three-month periods ended June 30, 1996 and 1995, the Company
incurred salary and benefits costs of $255,342 and $187,412, 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 June 30, 1996, the Company incurred $49,935
for professional services and $174,729 for other operating expenses, compared to
$35,065 and $126,138, respectively, for the similar period in 1995. This
increase reflects legal, accounting, auditing, and various other expenses
associated with the Company's status as a public company and the associated
regulatory reporting obligations, in addition to compliance with licensure and
tax requirements in the various states in which the Company is licensed, the
licensing of additional agents, and the infrastructure changes required to
support the Company's current and expected future increased level of gross
written premiums in a greater number of markets.
For the three-month periods ended June 30, 1996 and 1995, the Company
generated $98,166 and $106,381, respectively, of income from its investments,
comprised exclusively of U.S. Government securities. The decrease in interest
income in 1996 is primarily the result of a decline in investment 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 June 30, 1996 was $301,193, as
compared to $169,427 for the three months ended June 30, 1995, an increase of
$131,766, or 78%.
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. While the Surety Company has paid no dividends in the past, it may
elect to do so in the future, subject to the dividend restrictions of the
Commonwealth of Pennsylvania insurance laws and regulations. The Company expects
to maintain a high level of liquidity through, among other things, 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
11
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of New York. In April 1996, an additional $515,000 of the Company's cash and
investment portfolio was restricted in conjuction with the final licensure
requirements of the Commonwealth of Kentucky. Management anticipates that
additional "deposit" requirements will be required to be satisfied in those
states in which the Surety Company intends to seek a license to write surety
bonds.
The Company had approximately $7,424,221 of investments and cash
equivalents at June 30, 1996, and approximately $7,441,539 of investments and
cash equivalents at December 31, 1995. The Company's anticipated expansion plans
and its status as a public company will require additional personnel and
financial resources. While certain costs are expected to increase due to the
changes in infrastructure as discussed above, 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 $7,246,419 at June 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 2. Changes in Securities.
The Company's Articles of Incorporation were amended to eliminate
cumulative voting by shareholders in elections for directors. The amendment was
approved by the Company's shareholders at the Company's annual meeting of
shareholders on April 30, 1996.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders on April 30, 1996.
The matters voted upon at the meeting and the number of votes cast for, against
or withheld, as well as the number of abstentions and broker non-votes, as to
each such matter, including a separate tabulation with respect to each nominee
for director, are set forth as follows:
1. The following persons were elected as directors:
Name of Nominee No. of Votes "For" No. of Votes "Withheld"
- --------------- ------------------ -----------------------
Kenneth L. Brier 9,087,248 6,800
----------------- -----
Ted A. Drauschak 9,087,248 6,800
----------------- -----
J. Michael Adams 9,087,248 6,800
----------------- -----
Thomas P. Garry 9,087,248 6,800
----------------- -----
2. The proposal to elect of Price Waterhouse LLP as auditors for
the Company for 1996:
For 2,266,012
-----------------
Against 7,500
-----------------
Abstain 0
3. The proposal to adopt the Company's Equity Incentive Plan for
Key Employees:
For 1,503,318
-----------------
Against 29,100
-----------------
Abstain 22,800
-----------------
Broker
non-votes 718,294
-----------------
4. The proposal to adopt the Company's Equity Incentive Plan for
Outside Directors:
For 1,492,018
-----------------
Against 38,600
-----------------
Abstain 24,600
-----------------
Broker
non-votes 718,294
-----------------
5. The proposal to amend the Company's Articles of Incorporation
to eliminate cumulative voting by shareholders in elections for directors:
For 1,512,418
-----------------
Against 39,900
-----------------
Abstain 2,900
-----------------
Broker
non-votes 718,294
-----------------
13
<PAGE>
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.
14
<PAGE>
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.
August 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)
15
<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 Earnings per Share
27 Financial Data Schedule
<PAGE>
Exhibit 11
MOUNTBATTEN, INC.
Primary Net Income Per Share
Six months ended June 30,
1996 1995
---- ----
Net Income available to
Common Shareholders $549,310 $242,539
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to preferred stock 0 0
Common share equivalents
applicable to stock options 110,065 47,880
---------- ----------
Total 2,638,595 2,576,410
========== ==========
Primary Net Income per Share $ 0.21 $ 0.09
========== ==========
Fully Diluted Net Income Per Share
Net Income available to
Common Shareholders $549,310 $242,539
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to preferred stock 0 0
Common share equivalents
applicable to stock options 126,210 47,880
---------- ----------
Total 2,654,740 2,576,410
========== ==========
Fully Diluted Net Income per Share $ 0.21 $ 0.09
========== ==========
<PAGE>
MOUNTBATTEN, INC.
COMPUTATION OF NET INCOME PER SHARE (UNAUDITED)
Primary Net Income Per Share
Three months ended June 30,
1996 1995
---- ----
Net Income available to
Common Shareholders $301,193 $169,427
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 145,054 47,880
---------- ----------
Total 2,673,584 2,576,410
========== ==========
Primary Net Income per Share $ 0.11 $ 0.07
========== ==========
Fully Diluted Net Income Per Share
Net Income available to
Common Shareholders $301,193 $169,427
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 140,317 47,880
---------- ----------
Total 2,668,847 2,576,410
========== ==========
Fully Diluted Net Income per Share $ 0.11 $ 0.07
========== ==========
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 6,581,007
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,581,007
<CASH> 843,214
<RECOVER-REINSURE> 178,483
<DEFERRED-ACQUISITION> 370,962
<TOTAL-ASSETS> 9,903,167
<POLICY-LOSSES> 955,882
<UNEARNED-PREMIUMS> 849,301
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
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0
0
<COMMON> 2,529
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<TOTAL-LIABILITY-AND-EQUITY> 9,903,167
3,927,260
<INVESTMENT-INCOME> 197,775
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<OTHER-INCOME> 0
<BENEFITS> 414,391
<UNDERWRITING-AMORTIZATION> (100,275)
<UNDERWRITING-OTHER> 2,116,590
<INCOME-PRETAX> 794,870
<INCOME-TAX> 245,560
<INCOME-CONTINUING> 549,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 549,310
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
<RESERVE-OPEN> 602,265
<PROVISION-CURRENT> 413,840
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 6,477
<PAYMENTS-PRIOR> 76,742
<RESERVE-CLOSE> 955,882
<CUMULATIVE-DEFICIENCY> 22,996
</TABLE>
