<PAGE>
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
__X__ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1996
OR
____ TRANSITION REPORT PURSUANT TO 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.
( 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)
Registrant's telephone number, including area code (610) 664-2259
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-------------------------------
(Title of class)
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
-- ---
Check if disclosure of delinquent filers in response to Item 405
of Regulation S-B, is not contained in this form, and no disclosure
will be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for the most recent fiscal year: $7,829,171
The aggregate market value of the voting stock held by non-affiliates, as of
March 24, 1997 was approximately $15.9 million.
As of March 24, 1997 the aggregate number of shares outstanding was 2,528,530.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Form 10-KSB incorporates by reference information from the
registrant's proxy statement in connection with its 1997 Annual Meeting of
Shareholders to be filed with the Commission pursuant to Rule 14a-6(b) under
the Exchange Act.
Transitional Small Business Disclosure Format (check one) Yes__ No X
---
<PAGE>
Item 1. Description of Business
A. Description of the Business
Mountbatten, Inc. (the "Company") engages in the underwriting of
surety bonds, primarily contract bonds, through its wholly owned
subsidiary, The Mountbatten Surety Company, Inc. (the "Surety Company").
Contract bonds constitute a specialty market within the property and
casualty insurance industry, and are generally posted by contractors (and/or
subcontractors) to guarantee completion of their work on government and
private construction projects.
Suretyship is an extension of credit in the form of an agreement by
the "surety" for the benefit of the "obligee" to guarantee payment or
performance by the "principal." When a surety bond is issued, the obligee
holds the surety responsible for the obligation of the principal. The surety
and the principal are jointly responsible to the obligee for the debt or
obligation, which is the subject of the surety bond. Surety bonds are often
required by law, and a typeof surety bond known as a "contract bond" is often
required by a party, whether private or governmental, entering into a
construction, rehabilitation, remediation or similar contract. In some
instances, bonds are furnished in lieu of cash deposits, but often a bond is
required and a cash alternative is not permitted.
The Surety Company wrote its first bond in October 1992. In May 1994,
the Surety Company received a Treasury Listing (the "T-Listing") to
write federally required bonds anywhere in the United States and its
territories. Prior to July 1994, the Surety Company was licensed to write
bonds only in the Commonwealth of Pennsylvania. The following table sets
forth information, chronologically, with respect to those states 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
Connecticut December 1, 1996
Mississippi December 1, 1996
Illinois December 5, 1996
South Carolina February 3, 1997
In addition, the Surety Company has applied for a license to underwrite bonds
in Alabama, Georgia, North Carolina and West Virginia, and anticipates filing
license applications in various other states.
B. Bond Products
The Surety Company writes primarily contract bonds to guarantee
the required performance and payments of contractors and subcontractors
engaged in construction and, to a lesser extent, environmental remediation
projects. Projects bonded by the Surety Company generally have durations
that do not exceed two years; most are completed in one year or less. The
Surety Company also writes a variety of other surety bonds, although it
is focusing increasingly on contract bonds. The Surety Company does not
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provide financial guarantee bonds, bail bonds, bonds for remediation of
groundwater contamination or bonds covering a variety of risks deemed
inappropriate for the Surety Company; nor does it underwrite any liability
insurance.
The following table sets forth information concerning the nature of
the bonds written by the Surety Company for the years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1996 1995
---- ----
% of % of
Gross Gross Gross Gross
% of Premiums Premiums % of Premiums Premiums
Type of Bond Number Total Written Written Number Total Written Written
- - ------------ ------ ----- -------- -------- ------ ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract bonds 1,112 80.1% $ 7,541,676 96.3% 892 81.4% $ 4,450,089 95.3%
Non-contract bonds 277 19.9% 287,495 3.7% 204 18.6% 221,588 4.7%
----- ----- ----------- ----- --- ----- ----------- -----
Total 1,389 100.0% $ 7,829,171 100.0% 1,096 100.0% $ 4,671,677 100.0%
===== ===== =========== ====== ===== ====== =========== ======
</TABLE>
Prior to November 1995, the reinsurance program required that
the Company 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. 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. Effective November 1, 1996, the Company
secured a new reinsurance treaty that increased the work program aggregate to
$10 million. While future increases in the Surety Company's maximum bond
size are anticipated, management believes that the current maximum bond
size of $5 million will allow the Surety Company to continue to penetrate
selected markets for contract bonds.
The following table sets forth information concerning the dollar
amount of bonds written by the Surety Company for the years ended December 31,
1996 and 1995:
<TABLE>
<CAPTION>
Years ended December 31
-----------------------
1996 1995
---- ----
% of % of
Gross Gross Gross Gross
% of Premiums Premiums % of Premiums Premiums
Bond Amount Number Total Written Written Number Total Written Written
- - ------------ ------ ----- -------- -------- ------ ----- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$150,000 orless 896 64.5% $912,120 11.7% 774 70.6% $ 771,796 16.5%
$150,001 - $250,000 132 9.5% 565,590 7.2% 103 9.4% 477,384 10.2%
$250,001 - $500,000 168 12.1% 1,331,933 17.0% 101 9.2% 818,754 17.5%
$500,001 - $750,000 59 4.2% 726,215 9.2% 45 4.1% 578,867 12.4%
$750,001 - $1,000,000 36 2.6% 663,188 8.5% 26 2.4% 464,714 10.0%
$1,000,001 - $1,500,000 36 2.6% 886,583 11.3% 23 2.1% 576,936 12.3%
$1,500,001 - $2,000,000 23 1.7% 804,420 10.3% 13 1.2% 477,356 10.2%
$2,000,001 - $3,000,000 22 1.6% 945,908 12.1% 10 0.9% 419,623 9.0%
OVER $3,000,000 17 1.2% 993,214 12.7% 1 0.1% 86,247 1.9%
----- ------ ---------- ------ ----- ------ ------------ ------
Total 1,389 100.0% $7,829,171 100.0% 1,096 100.0% $ 4,671,677 100.0%
</TABLE>
The Surety Company uses bond forms prepared by the American Institute
of Architects ("AIA"), or bond forms specified by the bond obligee, for
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performance, payment and bid bonds. The Surety Company also uses an internally
generated indemnity agreement to document its rights with respect to entities
or persons it bonds. Among other things, the indemnity agreement provides
the Surety Company with an assignment of the principal's contract rights and a
confession of judgment against the bond principal in the event of a default
under the indemnity agreement, the principal's obligation, or both.
C. Underwriting
The Surety Company places a high priority on minimizing bond claims
and losses. Accordingly, the Surety Company underwrites each bond submission
at its home office and has granted no binding authority to its independent
brokers and agents. The Surety Company believes that its use of both financial
analysis and technical analysis in the bond underwriting process permits it to
achieve better underwriting results than would otherwise be possible through
financial analysis alone. Technical analysis procedures in the underwriting
process using management's expertise in the construction industry can provide
an indication of substandard construction or record-keeping practices that
might increase the likelihood of a bond claim.
D. Claims and Reserves
The Surety Company attempts to actively manage disputes and claims
in an effort to minimize losses. Depending on the relevant factors, the Surety
Company can pursue its rights at law and under the general indemnity agreements
associated with a bond; may enforce its rights with respect to collateral
securing the bond; may pay the claim or may complete the project using any
remaining project funds due the bonded contractor as well as, or in addition
to, seeking the remedies referred to previously.
While the Surety Company does not bond projects with durations
exceeding two years, and while it attempts to obtain releases from bond
obligees upon completion of bonded projects, in cases where releases are not
obtained, claims may be asserted following completion of the contract. AIA
performance bonds permit claims for up to two years following the scheduled
date of the final contract payment, and AIA payment bonds permit claims up to
one year after the bond principal ceases work on the project.
The Surety Company maintains incurred but not reported loss ("IBNR")
reserves with respect to claims that have been incurred but not reported.
Because of the Company's limited operating history and claims experience, its
IBNR reserves are primarily based on both data derived from the experience of
industry, as well as the Surety Company's actual experience. A limited number
of claims have been filed against the Surety Company. The Surety Company has
established case reserves to provide for all anticipated payments and related
expenses on known claims.
IBNR reserves are reviewed and certified at least annually by
the Surety Company's independent actuary. Such certification has been obtained
as of December 31, 1996. The Surety Company believes that aggregate reserves
make reasonable and sufficient provision for payments on reported and
unreported claims.
E. Sales and Marketing
Substantially all the Surety Company's business is produced by its
network of independent brokers and independent agents. The Surety Company
documents its agent relationships with a broad agency agreement, which relies
on pre-negotiated commission and incentive commission schedules. The Surety
Company has established similar agency arrangements in all of the states in
which it is licensed to write bonds.
<PAGE>
F. Regulation
Surety companies are generally regulated as property and casualty
insurance companies even though surety bonds differ in important respects from
traditional forms of property and casualty insurance. Thus, surety companies,
like other types of insurance companies, are subject to supervision and
regulation in the states in which they transact business. Such supervision and
regulation, designed primarily for the protection of policyholders (or bond
obligees) and not shareholders, relates to most aspects of an insurance
company's business and includes such matters as authorized lines of business,
underwriting standards, financial condition standards, licensing, investment
policies, premium levels and the filing of quarterly, annual and other reports
based on statutory accounting principles and a variety of other financial and
nonfinancial matters.
Because the Company is domiciled in the Commonwealth of Pennsylvania,
the Pennsylvania Insurance Department (the "Department") has primary
authority over it. The Surety Company is also subject to the supervision and
regulation of the appropriate agency in any state in which the Surety
Company obtains a license to transact business.
In general, the Surety Company must obtain a license in a given state
in order to write bonds covering risks therein. In order to obtain a license,
the Surety Company must submit detailed financial and other information, and
satisfy statutory and regulatory requirements, as well as informal criteria
applied by the state insurance department.
In May 1994, the Surety Company received a certificate of authority,
or "T-Listing," from the United States Department of the Treasury, allowing it
to write bonds required by the United States government. The T-Listing entitles
the Surety Company to write federally required bonds anywhere in the United
States or its territories, currently in amounts up to $669,000
(representing approximately 10% of the Surety Company's statutory
policyholders' surplus at December 31, 1995). The Surety Company is authorized
to write larger bonds so long as a T-Listed reinsurer with greater bonding
authority (such as the Surety Company's current reinsurer) provides a "Miller
Act" endorsement undertaking to be liable directly to the bond obligee in the
event the Surety Company defaults on its bond. The Surety Company intends to
write bonds regularly on this basis. The Company expects its T-Listing amount
to increase in the 1997 Treasury Circular.
The range of premium rates charged by the Surety Company for its
bonds has been filed with and approved by the Department. The Department's
approval is required to increase or decrease premiums in the future beyond
the current ranges of approved premium rates. The Surety Company would
additionally require rate approvals from other states in which it is licensed
in order to change its premium rates from the ranges currently approved.
Most states, including Pennsylvania, have enacted legislation that
regulates insurance holding company systems. Each insurance holding company
system is required to register with the insurance supervisory agency of its
state of domicile, and furnish information concerning the operations of
companies within the system. Pursuant to these laws, the Department may
examine the Company and the Surety Company, require disclosure of material
transactions by the holding company, and require prior approval of certain
transactions, such as extraordinary dividends from an insurance company to its
holding company.
All transactions between the Company and the Surety Company must be
fair and equitable. Approval by the applicable Insurance Commissioner is
required prior to consummation of transactions affecting the control of an
insurer. In Pennsylvania, the acquisition of 10% or more of the outstanding
capital stock of an insurer or its holding company is presumed to be a change
in control.
<PAGE>
G. Competition
The surety industry is highly competitive. Many surety companies are
larger than the Surety Company, have considerably greater financial and other
resources, have greater experience in the surety industry and, unlike the
Surety Company, offer a broad line of insurance products. In addition, the
Surety Company is at a competitive disadvantage against companies that have
an A.M. Best "letter" rating and/or licenses to write surety bonds on a
broader geographic basis. A.M. Best has assigned a "number" rating of 5
(Secure) to the Surety Company, and will assign a "letter" rating to the Surety
Company in 1998, once five full years of operations have been completed.
While many of the largest surety companies have targeted the market for bonds
of $5 million or more, many other surety companies actively target the Surety
Company's primary market niche for bonds up to $5 million. The Surety Company
attempts to meet this competition by providing its brokers, agents and
customers with high quality, timely and innovative services.
H. Employees
The Company employs 17 full time employees at its Bala Cynwyd,
Pennsylvania offices. Management believes that employee relations are
generally good.
Item 2. Description of Property
The Company leases 3,675 square feet of office space at 33 Rock
Hill Road, Bala Cynwyd, Pennsylvania 19004 at an annual cost of approximately
$64,782, exclusive of sublease income (approximately $7,692) from a single
tenant presently occupying approximately 400 square feet of such office space
with a month-to-month term. The lease term expires September 30, 1999, provided
that the Company may terminate the lease at any time by giving 60 days advance
written notice and paying a specified amount of the landlord's cost to improve
the space. The Company has not purchased or developed real estate for
investment purposes, or made real estate loans. Accordingly, it has no
properties arising from such activities.
Item 3. Legal Proceedings
The Company is not involved in any pending or threatened legal or
administrative proceedings other than those undertaken in the ordinary course
of its surety business.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the year
ended December 31, 1996.
Executive Officers of the Company
The names of the executive officers of the Company, together with
certain information regarding them, are as follows:
Name Age Position
- - ---- --- --------
Kenneth L. Brier 47 President and Chief Executive Officer since
1992
Ted A. Drauschak 36 Executive Vice President since 1992
Joel D. Cooperman 44 Vice President - Finance, Treasurer, and
Chief Financial Officer since 1995;
Formerly Vice President - Finance,
Treasurer, and Chief Financial Officer with
O'Brien Environmental Energy, Inc. from
January 1981 through April 1995
Stephen C. Fletcher 40 Vice President and President of the Surety
Company Bond Division since 1992
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Registrant's common stock was originally traded in the
over-the-counter market on the Nasdaq SmallCap Market System under the
symbol MTBN. The Company publicly listed its common stock as a result of an
initial public offering that was completed in September 1994. On December 26,
1995 the Registrant's common stock began trading on the Nasdaq National Market
System under the same symbol. The following table sets forth the high and low
trading prices as reported by Nasdaq:
<TABLE>
<CAPTION>
1996 1995
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
First Quarter 6 1/4 5 6 3/8 4 1/2
Second Quarter 8 1/2 5 1/4 6 5 1/4
Third Quarter 8 1/2 7 6 5 1/8
Fourth Quarter 8 3/4 7 3/4 5 3/4 4 7/8
</TABLE>
On March 24, 1997 the closing price was $9.375. There were
approximately 51 holders of record of the common stock of the Company. The
Company believes that there are approximately 750 beneficial owners of its
common stock.
The Registrant has paid no dividends in the past, though it may elect
to do so in the future. Dividends are subject to the dividend restrictions
imposed on the Surety Company by the Department. Pennsylvania insurance laws
currently prohibit dividends that would leave the Surety Company with total
capital and surplus in an amount less than the Department requires to conduct a
surety business. These laws also afford the Department 30 days to disapprove
the payment of dividends in excess of "unassigned surplus" (i.e.,
undistributed accumulated surplus including net income and realized gains) or
"extraordinary dividends" (i.e. dividends over a twelve-month period that
exceed the greater of 10% of policyholders' surplus as shown on the latest
annual statement filed with the Department, or net income shown on such
statement).
<PAGE>
Item 6.
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. The Surety
Company wrote its first bond in October 1992. In May 1994, the Surety Company
received a Treasury Listing (the "T-Listing") to write federally required bonds
anywhere in the United States and its territories. Prior to July 1994, the
Surety Company was licensed it write bonds only in the Commonwealth of
Pennsylvania. The following table sets forth information, chronologically,
with respect to those states 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
Connecticut December 1, 1996
Mississippi December 1, 1996
Illinois December 5, 1996
South Carolina February 3, 1997
In addition, the Surety Company has applied for a license to underwrite bonds
in Alabama, Georgia, North Carolina and West Virginia, and anticipates filing
license applications in various other states.
Results of Operations
Year ended December 31, 1996 compared to year ended December 31,
1995: During the year ended December 31, 1996, the Surety Company generated
$7,829,171 of gross written premiums, compared to $4,671,677 of gross written
premiums during the year ended December 31, 1995, representing an increase of
$3,157,494 or 68%. Management attributes the increase in gross written
premiums primarily to the Surety Company's increased penetration of the states
in which the Surety Company became licensed prior to 1996. Because the Surety
Company either began marketing efforts or became licensed in the other states
listed above relatively late in 1996, its expansion in these markets did not
significantly impact gross written premiums in 1996.
For the year ended December 31, 1996, ceded reinsurance premiums
totaled $1,287,308, representing approximately 16% of gross written premiums.
For the year ended December 31, 1995, ceded reinsurance premiums totaled
$717,741, representing approximately 15% of gross written premiums. The
increase in ceded reinsurance premiums from the 1995 period to the 1996
1
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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 imit 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 this treaty (effective from
November 1995 through October 1996) the ceded reinsurance premiums represented
approximately 16.75% of gross written premiums, adjusted for the Company's 5%
participation in the first layer. Effective November 1, 1996, the Company
secured a new reinsurance treaty that increased the Company's work program
aggregate limit from $7.5 million to $10 million. Under the new reinsurance
treaty (effective from November 1996 through October 1997), the maximum single
bond limit remains at $5 million. However, the Company's aggregate reinsurance
coverage limits and reinstatements are increased, and ceded reinsurance
premiums are expected to represent approximately 15.26% of gross written
premiums, adjusted for the Company's 5% participation in the first and second
layers.
For the year ended December 31, 1996, claims and claim adjustment
expenses incurred were $519,708, or an incurred loss and loss adjustment
expense ratio of 8.4%, compared to $369,639, or an incurred loss and loss
adjustment expense ratio of 9.7%, for the year ended December 31, 1995. The
increase in claim and claim adjustment expenses in 1996 reflects primarily the
increase in the Company's business volume.
Of the $519,708 of claims and claim adjustment expenses incurred in
1996, $340,784 relates to known claims, most of which is associated with two
bonded principals, and $178,924 relates to the increase in reserves for IBNR,
which is primarily driven by net earned premiums in force at December 31, 1996.
A limited number of claims have been filed on the Surety Company's
bonds. Accordingly, the Surety Company has established case reserves of
$634,156, gross of reinsurance, to provide for future claims and claim
adjustment expense payments.
For the year ended December 31, 1996, commission expenses were
$2,233,048, representing approximately 29% of gross written premiums, compared
to $1,338,794, or approximately 29% of gross written premiums, for the year
ended December 31, 1995. The increase in commission expenses in 1996 relates
primarily to the increase in gross written premiums.
For the years ended December 31, 1996 and 1995, the Company incurred
salary and benefits costs of $1,299,702 and $1,013,571, 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,
a controller, increased compensation and merit bonuses for these personnel,
as well as additional compensation awarded to senior management by the
Company's compensation committee.
For the year ended December 31, 1996, the Company incurred
approximately $144,128 for professional services and $705,188 for other
operating expenses, compared to $131,715 and $451,054, respectively, for the
similar period in 1995. This increase reflected legal, accounting, auditing,
and various other expenses incurred to comply with regulatory reporting
obligations, licensure and tax requirements in states in which 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.
For the years ended December 31, 1996 and 1995, the Company generated
$421,810 and $389,991, respectively, of income from its investments, comprised
exclusively of U.S. Government securities. The yield on average invested assets
for 1996 and 1995 was 5.6% and 5.9%, respectively. The increase in interest
income in 1996 was due to the investment of additional funds generated from the
2
<PAGE>
Company's operations, offset by lower 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%.
Interest expense (associated with a note payable in the original
amount of $170,000) for 1996 and 1995 was $0 and $4,517, respectively. The note
was repaid in April 1995.
The provision for income taxes for 1996 was $593,831 (an effective tax
rate of 34.3%), as compared to $172,206 (an effective tax rate of 19.6%) for
1995. The 1995 effective tax rate was reduced by the elimination in 1995 of the
deferred tax asset valuation allowance in the amount of $112,895. The valuation
allowance was eliminated due to management's favorable assessment of the
earnings potential of the Company.
Net income for the year ended December 31, 1996 was $1,135,370, as
compared to $705,125 for the year ended December 31, 1995, an increase of
$430,245, or 61%.
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
and generates business in states having more temperate climates.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995
Except for historical information provided in the Management's
Discussion and Analysis, statements made throughout this document are
forward-looking and contain information about financial results, economic
conditions, trends and known uncertainties. The Company cautions the reader
that actual results could differ materially from those expected by the Company,
depending on the outcome of certain factors (some of which are described with
the forward-looking statements) including: 1) adverse loss development for
projects bonded by the Company in prior years; 2) heightened competition,
particularly price competition, reducing margins; 3) significant changes in
interest rates.
Liquidity and Capital Resources
Initial operations of the Surety Company were financed by
contributions from the Company, principally from the sale of common stock by
the Company. Continuing operations have been financed by internally generated
cash flow from operations. 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. As in 1996, the Surety Company may elect to
pay dividends 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 and other high-grade
investment instruments.
During 1996, approximately $1,018,000 of the Company's cash and
investment portfolio was converted to U.S. Treasury instruments in conjunction
with the final licensure requirements of the Commonwealth of Kentucky and the
State of Illinois. 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.
3
<PAGE>
The Company had approximately $9,248,000 of investments and cash
equivalents at December 31, 1996, and approximately $7,442,000 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 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 $7,975,000 at December 31, 1996, will be sufficient to support
the Surety Company's current and anticipated premiums and losses.
<PAGE>
Item 7. Financial Statements
Page
----
Report of Independent Accountants 12
Consolidated Balance Sheets as of December 31, 1996 and 1995 13
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 14
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1996 and 1995 15
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 16
Notes to Consolidated Financial Statements 17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mountbatten, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Mountbatten, Inc. and its subsidiary at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 21, 1997
<PAGE>
Mountbatten, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of As of
December 31, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
ASSETS
Fixed maturities:
Available-for-sale, at fair value (amortized cost of
$8,596,475 and $6,665,324, respectively) $8,487,946 $6,685,900
---------- ----------
8,487,946 6,685,900
Cash and cash equivalents 759,749 755,639
Premiums receivable 562,820 385,372
Reinsurance receivable 294,911 205,037
Subrogation recoverable 606,476 393,999
Accrued investment income 60,196 36,673
Property and equipment, net 56,838 52,519
Deferred acquisition costs 393,447 270,687
Prepaid reinsurance premiums - 39,166
Deferred tax asset 32,223 113,597
Other assets 4,215 59,318
----------- ----------
TOTAL ASSETS $11,258,821 $8,997,907
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid claims and claim adjustment expenses $1,153,270 $602,265
Unearned premiums 954,101 621,403
Reinsurance premium payable 353,834 -
Accrued expenses and other liabilities 254,927 246,592
Federal income taxes payable 161,505 196,624
---------- --------
TOTAL LIABILITIES 2,877,637 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 (71,629) 13,580
Retained earnings 1,687,350 551,980
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 8,381,184 7,331,023
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $11,258,821 $8,997,907
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Mountbatten, Inc. and Subsidiary
Consolidated Statements of Operations
Year ended
December 31,
------------
1996 1995
Underwriting:
Gross written premiums $7,829,171 $4,671,677
Premiums ceded (1,287,308) (717,741)
----------- -----------
Net written premiums 6,541,863 3,953,936
Change in unearned premium (332,698) (157,306)
---------- ----------
Net earned premiums 6,209,165 3,796,630
--------- ---------
Claims and claims adjustment expenses 519,708 369,639
Commission expense 2,233,048 1,338,794
Salaries and benefits 1,299,702 1,013,571
Professional fees 144,128 131,715
Other operating expenses 705,188 451,054
--------- ---------
4,901,774 3,304,773
--------- ---------
Underwriting income 1,307,391 491,857
Other income (expense)
Interest income 421,810 389,991
Interest expense - (4,517)
--------- ----------
Income before income taxes 1,729,201 877,331
Provision for income taxes 593,831 172,206
--------- --------
Net income $1,135,370 $705,125
========== ========
Earnings per share: $0.42 $0.27
Weighted average shares outstanding 2,691,751 2,590,733
The accompanying notes are an integral part of these financial statements
<PAGE>
Mountbatten, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
December 31, 1996
<TABLE>
<CAPTION>
Net unrealized
appreciation, Retained Total
Common Additional fixed earnings shareholders
Shares Amount paid in capital maturities (deficit) equity
------ ------ --------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 2,528,530 2,529 6,762,934 (153,145) 6,612,318
Net income 705,125 705,125
Net unrealized appreciation,
Fixed maturities 13,580 13,580
--------- ------ ---------- -------- ---------- ----------
Balance at December 31,1995 2,528,530 $2,529 $6,762,934 $13,580 $ 551,980 $7,331,023
========= ====== ========== ======== ========== ==========
Net income 1,135,370 1,135,370
Net unrealized depreciation,
Fixed maturities (85,209) (85,209)
---------- ------- ---------- --------- ---------- -----------
Balance at December 31,1996 2,528,530 $2,529 $6,762,934 $(71,629) $1,687,350 $8,381,184
========= ====== ========== ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Mountbatten, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Year ended December 31,
-----------------------
1996 1995
------ ------
Operating activities:
Net income $1,135,370 $705,125
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 26,391 17,654
Change in:
Premiums receivable (177,448) (26,953)
Reinsurance receivable (89,874) (205,037)
Subrogation recoverable (212,477) (257,641)
Accrued investment income (23,523) 18,188
Unearned premiums 332,698 157,307
Unpaid claims and claim adjustmentexpenses 551,005 406,607
Prepaid reinsurance premiums 39,166 2,088
Reinsurance premium payable 353,834 -
Accrued expenses and other liabilities 8,335 196,572
Deferred acquisition costs (122,760) (56,554)
Deferred tax asset 81,374 (97,866)
Federal income taxes payable (35,119) 65,667
Other, net 99,059 (35,867)
-------- --------
Net cash provided by operating activities 1,966,031 889,290
--------- --------
Investing activities:
Purchase of equipment (30,710) (43,200)
Purchase of investments (3,952,428) (23,472,564)
Maturities of investments 2,021,217 23,379,443
---------- ------------
Net cash used in investing activities (1,961,921) (136,321)
----------- ------------
Financing activities:
Repayment of note payable - (170,000)
----------- ------------
Net cash provided by financing activities - (170,000)
----------- ------------
Net increase in cash and cash equivalents 4,110 582,969
Cash and cash equivalents at beginning of period 755,639 172,670
----------- -----------
Cash and cash equivalents at end of period $759,749 $755,639
Supplemental disclosure of cash flow information: The Company made payments of
$503,680 during the year ended December 31, 1996 for federal income taxes.
Payments of $4,517 and $211,401 were made by the Company during the year ended
December 31, 1995 for interest and federal income taxes, respectively.
The accompanying notes are an integral part of these financial statements
<PAGE>
Mountbatten, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Description of Business:
Mountbatten, Inc. ("Mountbatten") commenced operations on February 1, 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, Tennessee, Indiana, Connecticut, Mississippi, Illinois,
South Carolina, and the District of Columbia. The Surety Company distributes
bonds in these states 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 have been prepared in conformity with
generally accepted accounting principles (GAAP). The consolidated financial
statements include the accounts of Mountbatten, Inc. and its subsidiary, the
Surety Company. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and related disclosures in the notes to the consolidated financial
statements. Significant estimates used in determining subrogation recoverable,
unearned premiums and unpaid claims and claim expenses are discussed throughout
these notes. Actual results could differ from those estimates. All intercompany
amounts are eliminated in consolidation.
New accounting pronouncements:
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 "Accounting for Stock-Based Compensation" (SFAS No. 123). The statement
defines a fair value based method of accounting for an employee stock option.
Companies may, however, elect to adopt this new accounting rule through a pro
forma disclosure option, while continuing to use the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the disclosure option, companies must make pro
forma disclosures of net income and earnings per share, as if the fair value
method of accounting below had been applied.
Under the new fair value method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service (or
vesting) period. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date
over the amount an employee must pay to acquire the stock.
The Company has elected to adopt the disclosure option under SFAS No. 123 and
will continue to account for stock-based compensation using the intrinsic value
based method under APB No. 25. See Note 9 to the consolidated financial
statements for additional information.
During the fourth quarter of 1995, the FASB issued a guide to implementation of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 required that debt and equity securities be
classified into different categories and carried at fair value if they are not
classified as held-to-maturity. The guide permitted a one-time opportunity to
reclassify securities subject to SFAS No. 115. Consequently, Mountbatten
reclassified all of its securities to available-for-sale as of
6
<PAGE>
Note 2 - Summary of Significant Accounting Policies: - (continued)
November 30, 1995. This reclassification did not have a material effect on the
consolidated financial statements.
Premium 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 accounts for its investments in fixed maturity securities in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires that an enterprise classify debt and
equity securities into either of these categories as applicable:
held-to-maturity, available for sale or trading. SFAS No. 115 also requires that
unrealized gains and losses for trading securities be included in earnings,
while unrealized gains and losses for available-for-sale securities be excluded
from earnings and reported as a separate component of shareholders' equity until
realized. At December 31, 1996 and 1995, the Company's investments in fixed
maturity securities were classified as available-for-sale.
Prior to the Company reclassifying its securities as available for sale at
November 30, 1995, the Company classified its investment in debt securities as
held-to-maturity. These securities were carried at amortized cost, which
approximated market. Any premium or discount was amortized on a monthly basis
as interest was earned.
Fixed assets:
Fixed assets, which are comprised of furniture and fixtures, computer equipment
and leasehold improvements, are recorded at cost and are depreciated using the
straight line method over their useful lives, which range from three to five
years.
Deferred policy acquisition costs:
Acquisition costs which vary with and are primarily related to the production
of premiums, primarily commissions, premium taxes, and certain underwriting
expenses, are deferred and amortized ratably over the terms of the related
insurance contracts, to the extent such costs are deemed to be recoverable.
Future underwriting and investment income are considered in determining the
recoverability of such acquisition costs. Amortization expense related to
deferred policy acquisition cost is included as an adjustment to commission
expense, salaries and benefits, and other operating expenses.
7
<PAGE>
Note 2 - Summary of Significant Accounting Policies: - (continued)
Reinsurance receivable:
Reinsurance receivable is an estimate of an amount to be received from its
reinsurer relating to unpaid claims and claims adjustment expenses, offset by
an amount received from the reinsurer.
Subrogation recoverable:
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 recoverable
represents amounts estimated to be recovered by 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 recoverable when a claim is incurred and it is probable that the
costs will be recovered. Changes in estimates of subrogation recoverable 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
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.
Income taxes:
Income taxes are provided based on income reported in the financial statements.
Deferred federal income taxes are provided based on an asset and liability
approach in accordance with SFAS 109, "Accounting for Income Taxes," which
requires the recognition of deferred income tax assets and liabilities for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax basis of assets and liabilities.
Note 3 - Investments:
The amortized cost and estimated fair values of fixed maturity investments at
December 31, 1996 and 1995 are as follows:
December 31, 1996 December 31, 1995
----------------- -----------------
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
U.S. Treasury Securities $8,596,475 $8,487,946 $6,665,324 $6,685,900
U.S. Treasury instruments with a fair market value of approximately $1,819,000
and $812,000 were held on deposit with various insurance departments as of
December 31, 1996 and 1995, respectively.
8
<PAGE>
Note 3 - Investments (continued):
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1996 and 1995 are shown below by the expected maturity period:
December 31, 1996
-----------------
Cost Fair Value
---- ----------
Less than one year $3,968,458 $3,967,729
Due after one year through five 4,628,017 4,520,217
years ---------- -----------
Total $8,596,475 $8,487,946
========== ==========
Note 4 - Fixed Assets
Fixed assets consists of:
December 31,
-----------
1996 1995
---- ----
Furniture and fixtures $41,733 $31,890
Office equipment (primarily computers) 58,212 43,814
Leasehold Improvements 14,900 8,431
------- -------
114,845 84,135
Less: accumulated depreciation/amortization (58,007) (31,616)
-------- --------
$56,838 $52,519
======= =======
The Company occupies its office space under operating leases that expire
September 30, 1999, if not terminated by either party by delivering written
notice 60 days prior to the expiration of the current term. Rent expense for
1996 and 1995 was $58,374 and $43,916, respectively.
As of December 31, 1996, the future minimum rental commitments payable under
its operating lease are as follows:
1997 $ 64,782
1998 64,782
1999 48,587
---------
$178,151
=========
Note 5 - Income Taxes
Mountbatten, Inc. 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 gross deferred tax asset at December 31,
1994, which was offset by a valuation allowance of $112,895. The valuation
allowance reflected management's assessment that, based upon available
information at that time, there was not sufficient positive
evidence to determine that it was more likely than not that the
9
<PAGE>
Note 5 - Income Taxes (continued)
entire deferred tax asset would be realized due to management's assessment of
the Company's earnings potential. Adjustments to the valuation allowance are
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. During 1995, the valuation allowance of
$112,895 was eliminated to reflect the reversal of certain temporary
differences and management's assessment that the earnings potential of the
Company was sufficient to provide positive evidence that the deferred tax asset
will be realized.
The tax effect of temporary differences, which give rise to deferred income tax
assets and liabilities as of December 31 were as follows:
1996 1995
---- ----
Deferred tax liabilities:
Deferred acquisition costs ($133,772) ($92,034)
Subrogation receivable discounting (30,958) (21,918)
Other - (6,246)
-------- ---------
Gross deferred tax liabilities (164,730) (120,198)
-------- ---------
Deferred tax assets:
Loss reserve discounting 30,828 17,466
Net unrealized value, fixed maturities 36,900 -
Unearned premium reserve 64,879 42,256
Organizational and startup costs 62,606 108,113
Accrued salaries and benefits - 65,960
Other 1,740 -
-------- --------
Gross deferred tax asset 196,953 233,795
-------- --------
Deferred tax asset, net $32,223 $113,597
======== ========
The components of income tax expense were as follows:
1996 1995
---- ----
Current federal tax expense $468,561 $277,068
Deferred federal tax expense 125,270 (104,862)
-------- ---------
Total federal income tax expense $593,831 $172,206
======== ========
The provision for income taxes differs from the amount of income tax determined
by applying the applicable statutory federal income tax to pretax income from
operations as a result of the following differences:
1996 1995
---- ----
Tax expense at statutory rate (34%) $587,928 $298,293
Other, net 5,903 (13,192)
Valuation allowance - (112,895)
-------- ---------
Total federal income tax expense $593,831 $172,206
======== ========
10
<PAGE>
Note 5 - Income Taxes (continued)
The tax effect of temporary differences which resulted in the deferred tax
(benefit) were as follows:
1996 1995
---- ----
Deferred acquisition costs $ 41,738 $ 19,228
Accrued salaries and benefits 65,960 (65,960)
Organizational and startup costs 45,508 45,508
Loss reserve discounting (13,362) (11,872)
Subrogation receivable discounting 9,041 13,758
Unearned premium reserve (22,623) (13,502)
Professional fees - 21,728
Other (992) (910)
Valuation allowance - (112,895)
--------- ----------
Deferred tax benefit $125,270 ($104,862)
======== ==========
Note 6 - Unpaid Claims and Claim Expense Reserves 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 were not considered sufficient in
determining reserves, adjustments to reserves may be required. Included in loss
reserves at December 31, 1996 and 1995 are case reserves totaling $634,156 and
$300,090, respectively, and IBNR reserves of $519,114 and $302,175,
respectively.
Reinsurance receivable of $294,911 at December 31, 1996 includes $324,994
related to unpaid losses, offset by $30,083 received from the reinsurer as an
overpayment. Reinsurance receivable of $205,037 at December 31, 1995 includes
$129,199 and $75,838 of receivables related to paid and unpaid losses,
respectively.
Activity in the reserve for unpaid claims and claim adjustment expenses for the
years ended December 31, 1996 and 1995 were as follows:
1996 1995
---- ----
Gross Reserves - January 1 $ 602,265 $ 195,658
Less subrogation recoverable 393,999 136,358
Less reinsurance receivable 75,838 -
---------- ---------
Net reserve- January 1 132,428 59,300
---------- ---------
Incurred losses related to:
Current year 768,722 407,957
Prior year (249,014) (38,318)
Paid related to:
Current Year 409,802 214,310
Prior Year 20,531 82,201
---------- --------
Net reserve- December 31 221,800 132,428
Plus subrogation receivable 606,476 393,999
Plus reinsurance receivable 324,994 75,838
---------- --------
Gross Reserves - December 31 $1,153,270 $602,265
========== ========
11
<PAGE>
Note 6 - Unpaid Claims and Claim Expense Reserves and Reinsurance Receivable
(continued)
As part of an ongoing process, the reserves have been re-estimated for all
prior accident years and were decreased by $249,014 and $38,318 in 1996 and
1995, respectively.
Note 7 - Note Payable
The note payable of $170,000, due to a commercial bank, was repaid in April
1995.
Note 8 - Reinsurance:
In the normal course of business, the Company enters into contracts to cede
reinsurance primarily to limit losses from large exposures and to permit
recovery of a portion of direct losses; however, such a transfer of risk does
not relieve the Company from contingent liability for these losses.
The Company's current reinsurance program provides four layers of reinsurance.
Under the first layer, the Company retains 100% of all losses up to $150,000
and the reinsurer assumes 95% of the next $850,000, subject to a maximum annual
recovery by the Company of $3,230,000. The second layer provides $1,000,000 of
coverage (95% to be assumed by the reinsurer) on any loss discovered for any
principal in excess of the first $1,000,000 of loss with an aggregate annual
maximum of $2,850,000. The third layer provides $2,500,000 of coverage on any
loss discovered for any principal in excess of the first $2,000,000 of loss
with an aggregate annual maximum of $5,000,000. The fourth layer provides
$3,000,000 of coverage on any loss discovered for any principal in excess of
the first $4,500,000 with an aggregate annual maximum of $3,000,000.
Prior to November 1995, the reinsurance program required that the Company not
write any bond exceeding $3,000,000 or bonds on the same work program in favor
of the principal exceeding $4,500,000 in the aggregate. Under this program, the
maximum bond duration could not exceed 24 months.
Effective November 1995, the reinsurance program required that the Company not
write any bond exceeding $5,000,000, or bonds on the same work program in favor
of the principal exceeding $7,500,000 in the aggregate. The work program limit
of $7,500,000 increased to $10,000,000 effective November 1996.
Note 9 - Shareholders' Equity
Statutory surplus and dividend restrictions:
The Surety Company is subject to the minimum capital and surplus requirements
of the Commonwealth of Pennsylvania insurance laws and regulations. Under
applicable Pennsylvania laws and regulations, the 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 the
prior approval of the Insurance Commissioner is subject to restrictions
relating to statutory surplus. Statutory surplus at December 31, 1996 and 1995
was $7,975,119 and $6,691,311, respectively, and statutory net income for the
years ended December 31, 1996 and 1995 was $1,260,999 and $601,970,
respectively. In September 1996, the Surety Company paid a dividend of $336,242
to its shareholder. The maximum dividend that may be paid without the approval
prior to October 1997 is approximately $332,000. After September 1997 the
maximum dividend that may be paid without prior approval is approximately
$798,000, less any dividends paid during the previous twelve months.
12
<PAGE>
Note 9 - Shareholders' Equity (continued)
Subject to these restrictions, dividends may be paid as determined by the
Board of Directors.
Stock options and warrants:
In November 1993 the Company granted incentive stock options to selected
individuals to purchase 186,000 shares of common stock (35,000 shares and
151,000 shares at an exercise price of $4.95 and $4.50, respectively). 500 of
these incentive stock options were cancelled in December 1995. These options
become exercisable over a five-year period commencing one year after the date
of grant.
In November 1993 the Company granted non-qualified stock options to selected
individuals to purchase 81,000 shares of common stock at an exercise price of
$4.50 per share. These options vested immediately, and are exercisable for a
ten-year period after the date of grant.
In July 1993, the Company issued a warrant to an underwriter to purchase 4,800
shares of common stock at an exercise price of $4.50 per share of common stock
until July 1996. The exercise price then increases by $.45 per share until July
1999. The warrant expires July 2000.
The Company sold to the underwriter, for nominal consideration in connection
with the initial public offering, warrants to purchase 100,000 shares of common
stock at an exercise price of $6.00 per share. These warrants became
exercisable during a four-year period commencing August 1995, and they expire
August 1999.
In February 1995, the Company granted incentive stock options to selected
individuals to purchase 19,000 shares of common stock at an exercise price of
$5.00 per share. These options vest over a four-year period and are exercisable
for a ten-year period after the date of grant. In September 1995, 2,000 of
these incentive stock options were canceled.
In February 1995, the Company granted incentive stock options to an individual
to purchase 15,000 shares of common stock at an exercise price of $5.50 per
share. These options vest over a two-year period and are exercisable for a
five-year period after the date of grant
In February 1995, the Company granted non-qualified stock options to selected
individuals to purchase 8,000 shares of common stock at an exercise price of
$5.00 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant. In June 1995, 4,000 of these
non-qualified stock options were canceled.
In April 1995, the Company granted non-qualified and incentive stock options to
a selected individual to purchase 10,000 and 30,000 shares, respectively, of
common stock at an exercise price of $5.25 per share. The non-qualified stock
option vested immediately, and is exercisable for a ten-year period after the
date of the grant. The incentive stock option vests over a five-year period,
and is exercisable for a ten-year period after the date of the grant.
On November 3, 1995, the Company adopted the Equity Incentive Plan for Key
Employees and the non-qualified Equity Incentive Plan for Outside Directors
whereby key employees and outside directors may be granted options to purchase
shares of the Company's common stock at a price not less than the fair market
value of such shares, as determined by the Company's Board of Directors, at the
date on which the options are granted. The options are exercisable during the
period selected by the Board of Directors, but no earlier than six months after
the date of grant and no later than ten years from the date of grant. A total
of 250,000 and 50,000 shares of common stock were reserved for issuance
under the Key Employees and Outside Directors Plans, respectively.
13
<PAGE>
Note 9 - Shareholders' Equity (continued)
As of December 31, 1996, reserved shares for stock options granted under all
plans totaled approximately 665,000.
In January 1996, the Company granted incentive stock options to selected
individuals to purchase 63,750 and 20,000 shares of common stock at an exercise
price of $5.25 and $5.78 per share, respectively. These options all vest over a
five-year period, and are exercisable for a ten-year and five-year period,
respectively, after the date of the grant. 250 and 500 of these incentive stock
options were cancelled in September and December 1995, respectively.
In January 1996, the Company granted non-qualified stock options to selected
individuals to purchase 35,000 shares of common stock at an exercise price of
$5.25 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.
In May 1996, the Company granted non-qualified stock options to selected
individuals to purchase 8,000 shares of common stock at an exercise price of
$5.50 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.
In December 1996, the Company granted incentive stock options to selected
individuals to purchase 28,000 shares of common stock at an exercise price of
$8 per share. These options vest over a five-year period, and are exercisable
for a ten-year period after the date of grant.
In December 1996, the Company granted non-qualified stock options to selected
individuals to purchase 64,000 shares of common stock at an exercise price of
$8 per share. These options vest immediately, and are exercisable for a
ten-year period after the date of grant.
Information regarding these plans is as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ----------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ---------------
<S> <C> <C> <C> <C>
Options outstanding-
beginning of year 447,300 $5.00 371,300 $4.95
Options granted 218,000 $6.47 76,000 $5.23
------- ----- ------- -----
Options outstanding-
end of year 665,300 $5.48 447,300 $5.00
======= ===== ======= =====
Weighted average fair value
of options, granted during
the year $3.20 $2.59
===== =====
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation." Accordingly, under SFAS No. 123, no compensation expense has
been recognized for the stock option plans. Had compensation cost been
determined based on the fair value at the grant date for awards in 1996 and
1995 consistent with the accounting provision of SFAS No. 123, where the fair
value of the stock option grants are recognized on a straight line basis over
the vesting period of the grant, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
<PAGE>
Note 9 - Shareholders' Equity (continued)
1996 1995
Net earnings - as reported $1,135,370 $705,125
Net earnings - pro forma $793,370 $497,206
Earnings per share - as reported $0.42 $0.27
Earnings per share - pro forma $0.29 $0.19
For 1996 and 1995, no compensation expense has been recognized for stock
options under the intrinsic value based method under APB No. 25.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the respective year of grant:
1996 1995
Dividend yield 0% 0%
Expected volatility 50% 50%
Risk-free interest rate 5.4% 6.2%
Expected life of option 5 years 5 years
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Exercise Outstanding Remaining Average Exercisable at Average
Prices at 12/31/96 Contractual Life Exercise Price 12/31/96 Exercise Price
------------------------------------------------- ----------------------------------
<C> <C> <C> <C> <C> <C>
$4.50-$5.50 453,300 6.9 years $4.84 323,600 $4.77
$5.78-$8.00 212,000 5.9 years $6.85 164,000 $6.78
---------------------------------------------- ----------------------------------
665,300 6.6 years $5.48 487,600 $5.45
============================================ ==================================
</TABLE>
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.
See Part I for certain information regarding the Company's executive officers.
Item 10. Executive Compensation.
The answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.
Item 12. Certain Relationships and Related Transactions.
The answer to this item is incorporated by reference to the Company's
definitive proxy statement for the 1997 Annual Meeting of Shareholders to be
filed with the Commission pursuant to Rule 14a-6(b) under the Exchange Act.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Financial Statements and exhibits filed:
(1) Financial Statements included in Item 7 of this Form 10-KSB
Report.
Page
Report of Independent Accountants 12
Consolidated Balance Sheets as of December 31, 1996 and 1995 13
Consolidated Statements of Operations for the two years
ended December 31, 1996 and 1995 14
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996 and 1995 15
Consolidated Statements of Cash Flows for the
years ended December 31, 1996 and 1995 16
Notes to the Consolidated Financial Statements 17
(2) Exhibits
Exhibit No. Description of Exhibit
(3.2)* Amended and Restated Articles of Incorporation of the Registrant
(3.3)** By-laws of Registrant
(10.1)*** Reinsurance Treaty with Transatlantic Reinsurance Company dated
March 1, 1995
Management Contracts and Compensatory Plans or Arrangements
(10.2)*** Amended and Restated Employment Agreement between the Company and
Kenneth L. Brier dated March 8, 1996
(10.3)*** Amended and Restated Employment Agreement between the Company and
Ted A. Drauschak dated March 8, 1996
(10.4) Amended and Restated Employment Agreement between the Company and
Stephen C. Fletcher dated September 26, 1996
(10.5) Amended and Restated Employment Agreement between the Company and
Joel D. Cooperman dated June 14, 1996
(10.6)** 1993 Non-Qualified Stock Option Plan and Form of 1993 Non-
Qualified Stock Option Agreement
14
<PAGE>
Item 13. (continued) Exhibits and Reports on Form 8-k
(10.7)** 1993 Incentive Stock Option Plan and Form of 1993 Incentive
Stock Option Agreement
(10.8)**** 1995 Equity Incentive Plan for Key Employees
(10.9)***** 1995 Equity Incentive Plan for Outside Directors
Other Material Contracts
(10.10)*** Amended and Restated Services Agreement dated December 31, 1995
between the Company and The Surety Company
(10.11)*** Summary of First, Second, Third, and Fourth Surety Excess of
Loss Reinsurance Agreement dated November 1, 1995
(10.12) Summary of First, Second, Third, and Fourth Surety Excess of
Loss Reinsurance Agreement dated November 1, 1996
(20) Proxy Statement relating to the 1997 Annual Meeting
of Shareholders (to be filed with the Commission pursuant
to Rule 14a-6(b) under the Exchange Act)
(21) Subsidiaries of the Company
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, the Registrant did not
file any reports on Form 8-K.
* Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form 10-QSB quarterly report for the period
ended March 31, 1996.
** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's SB-2 Registration Statement No. 33-78336
declared effective September 1, 1994.
*** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1996.
**** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form S-8 Registration Statement No. 333-23055
filed on March 10, 1997.
***** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form S-8 Registration Statement No. 333-23057
filed on March 10, 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of Exchange Act, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
March 27,1997 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)
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
/s/ Kenneth L. Brier President, Chief March 27, 1997
- - -------------------------- Executive Officer,
Kenneth L. Brier and Director (principal
executive officer)
/s/ Ted Drauschak Executive Vice President, March 27, 1997
- - -------------------------- Secretary, and Director
Ted Drauschak
/s/ Joel D. Cooperman Vice President, Finance, March 27, 1997
- - -------------------------- Treasurer, and Chief Financial
Joel D. Cooperman Officer (principal financial
and accounting officer)
/s/ J. Michael Adams Director March 27, 1997
- - --------------------------
J. Michael Adams
/s/ Thomas P. Garry Director March 27, 1997
- - --------------------------
Thomas P. Garry
<PAGE>
Exhibit Index
(3.2)* Amended and Restated Articles of Incorporation of the Registrant
(3.3)** By-laws of Registrant
(10.1)*** Reinsurance Treaty with Transatlantic Reinsurance Company dated
March 1, 1995
Management Contracts and Compensatory Plans or Arrangements
(10.2)*** Amended and Restated Employment Agreement between the Company and
Kenneth L. Brier dated March 8, 1996
(10.3)*** Amended and Restated Employment Agreement between the Company and
Ted A. Drauschak dated March 8, 1996
(10.4) Amended and Restated Employment Agreement between the Company and
Stephen C. Fletcher dated September 26, 1996
(10.5) Amended and Restated Employment Agreement between the Company and
Joel D. Cooperman dated June 14, 1996
(10.6)** 1993 Non-Qualified Stock Option Plan and Form of 1993 Non-
Qualified Stock Option Agreement
(10.7)** 1993 Incentive Stock Option Plan and Form of 1993 Incentive
Stock Option Agreement
(10.8)**** 1995 Equity Incentive Plan for Key Employees
(10.9)***** 1995 Equity Incentive Plan for Outside Directors
Other Material Contracts
(10.10)*** Amended and Restated Services Agreement dated December 31, 1995
between the Company and The Surety Company
(10.11)*** Summary of First, Second, Third, and Fourth Surety Excess of
Loss Reinsurance Agreement dated November 1, 1995
(10.12) Summary of First, Second, Third, and Fourth Surety Excess of Loss
Reinsurance Agreement dated November 1, 1996
(20) Proxy Statement relating to the 1997 Annual Meeting
of Shareholders (to be filed with the Commission pursuant
to Rule 14a-6(b) under the Exchange Act)
(21) Subsidiaries of the Company
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
15
<PAGE>
Exhibit Index (continued)
* Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form 10-QSB quarterly report for the period
ended March 31,1996.
** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's SB-2 Registration Statement No. 33-78336
declared effective September 1, 1994.
*** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form 10-KSB Annual Report for the year ended
December 31, 1996.
**** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form S-8 Registration Statement No.
333-23055 filed on March 10, 1997.
***** Such exhibit is hereby incorporated by reference to the like-described
exhibit in the Registrant's Form S-8 Registration Statement No.
33-23057 filed on March 10, 1997.
<PAGE>
Exhibit 10.4
AMENDMENT NO. 1
TO EMPLOYMENT AGREEMENT
-----------------------
This Amendment No. 1 is entered into on this 26th day of September,
1996, between STEPHEN C. FLETCHER ("Employee") and THE MOUNTBATTEN SURETY
COMPANY, INC. (the "Corporation"). In consideration of the mutual covenants
herein, and intending to be legally bound hereby, the parties agree as follows:
1. Background. The parties entered into an Employment Agreement dated
March 15, 1992 (the "Agreement"), and Employee commenced his employment with the
Corporation on April 16, 1992. In May 1994, the Corporation changed its name
from the Mountbatten Environmental Insurance & Surety Company, Inc. to its
present name. Thereafter, the Corporation became a public company and the
parties now desire to amend the Agreement on the terms set forth below.
2. Amendment. Paragraph 5 of the Agreement shall be amended to read in
its entirety as follows: ---------
"5. At-will Employment
"(a) Employee's employment with Corporation began on April 16,
1992 and will continue until terminated as hereafter set forth.
"(b) This Agreement and all of Employee's rights hereunder
shall terminate upon the death of Employee, and neither Employee nor his
estate shall have any further rights hereunder except for any unpaid
compensation and reimbursements through the date of death.
"(c)Employee's employment hereunder shall be "at will" and
except as set forth in paragraph (d) and (e) below, either party shall have
the right to terminate this Agreement at any time, pursuant to the
following terms and conditions:
<PAGE>
(1) Corporation shall have the right to terminate Employee's
employment and rights to compensation hereunder by providing to Employee
either (a) 90 days' prior written notice of such termination or (b)
immediate notice of termination together with an undertaking to continue
payment of Employee's compensation under this Agreement for 90 days,
provided that Employee abides by all obligations of his under this
Agreement. Upon the effective date of termination specified in such notice,
this Agreement shall terminate except for the provisions which expressly
survive termination, and Employee shall vacate the offices of the
Corporation.
(2) Employee shall have the right to terminate his employment
hereunder by providing ninety (90) days' written notice to the Board of
Directors. Thereafter, this Agreement shall terminate except for the
provisions which expressly survive termination.
"(d) Corporation shall have the right at any time upon prior
written notice immediately to terminate Employee's employment hereunder for
just cause. For the purpose of this Agreement, "termination for just cause"
shall mean termination only for personal dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties (if Corporation gives Employee written notice thereof
and he fails to correct such failure within 30 days), willful violation of
any law, rule or regulation or final cease-and-desist order to be enforced
by any regulatory agency with jurisdiction over Corporation or any of its
affiliates or material breach of any provision of this Agreement (if
Corporation gives Employee written notice thereof and he fails to correct
such failure within 30 days). For purposes of this paragraph, no act or
failure to act on the Employee's part shall be considered "willful" or
"intentional" unless done or omitted to be done by him in bad faith and
without reasonable belief that his action or omission was in the best
interest of Corporation; provided that any act or omission to act on the
Employee's behalf in reliance upon an opinion of counsel to Corporation
shall not be deemed to be willful or intentional. In the event employment
is terminated for just cause, Employee shall have no right to compensation
or other benefits for any period after such date of termination.
<PAGE>
"(e) Employee may terminate his employment hereunder for good
reason. For purposes of this Agreement, "good reason" shall mean any of the
following occurrences without Employee's express written consent within one
year subsequent to a change in control of the Corporation:
(1) the assignment to Employee of any duties inconsistent with
Employee's positions, duties, responsibilities and status with the
Corporation;
(2) a change in Employee's reporting responsibilities, titles
or offices as in effect immediately prior to a change in control of the
Corporation;
(3) any removal of Employee from, or any failure to re-elect
Employee to, any of such positions, except in connection with a termination
of employment for just cause, death, or retirement;
(4) a reduction by the Corporation in Employee's annual salary
as in effect immediately prior to a change in control or as the same may be
increased from time to time; or
(5) the failure of the Corporation to continue effect any
bonus, benefit or compensation plan, life insurance plan, health and
accident plan or disability plan in which Employee is participating at the
time of a change in control of the Corporation, or the taking of any action
by the Corporation which would adversely affect Employee's participation in
or materially reduce Employee's benefits under any such plans.
<PAGE>
"(f) For purposes of this Agreement, a "change in control of
the Corporation" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") whether or not the Corporation is then subject
to such reporting requirement; provided that, without limitation, such a
change in control shall be deemed to have occurred if (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act in effect
on the date first written above), other than the Corporation or any
"person" who on the date hereof is a director or officer of the
Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities, or (ii) during any period of two
consecutive years during the term of this Agreement, individuals who at the
beginning of such period constitute the Board of Directors of the
Corporation cease for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at the
beginning of such period has been approved in advance by directors
representing at least two-thirds of the directors then in office who were
directors at the beginning of the period.
"(g) If Employee shall terminate his Employment for good
reason pursuant to paragraph (e) or if the Corporation terminates Employee
other than for just cause within one year after a change in control of the
Corporation, then in lieu of any further salary payments to Employee for
periods subsequent to the date of termination, the Corporation shall pay as
severance to Employee an amount equal to (i) the average aggregate annual
compensation paid to the Employee and includable in the Employee's gross
income for federal income tax purposes during the five calendar years
preceding the taxable year in which the date of termination occurs (or such
lesser amount of time if the Employee has not been employed by the
Corporation for five years at the time of termination) by the Corporation
and any of its subsidiaries subject to United States income tax, multiplied
by (ii) 2.99, such payment to be made in a lump sum on or before the fifth
day following the date of termination; provided, however, that if the lump
sum severance payment under this paragraph, either alone or together with
other payments which the Employee has the right to receive from the
Corporation, would constitute an "excess parachute payment" as defined in
Section 280G of the Internal Revenue Code of 1986 (the "Code"), such that
Employee has or may have liability for any excise tax under Section 4999 of
the Code, at the time payment is due or at the time of determination that
the same includes an "excess parachute payment", whichever is later, that
portion characterized as "excess" shall be treated as a loan by the
Corporation to the Employee, repayable on the following terms: the
principal shall be payable on the tenth annual anniversary of the actual
date of payment or the date of determination of the "excess", whichever is
later, with interest until paid, fixed at the applicable federal rate in
<PAGE>
effect under Section 7872(f) (2) for the month in which such date occurs
and which shall accrue annually if not paid and thereupon be added to
principal, subject to the Employee's right to prepay interest or principal
in whole or in part at any time without premium or penalty. The
determination of the amount of any "excess parachute payment" shall be made
by independent counsel to the Corporation in consultation with the
independent certified public accountants of the Corporation. If for any
reason the basis for termination of this Agreement or payment of amounts
under this paragraph is disputed by either party to this Agreement or any
other person or agency, then pending resolution of any such dispute, within
five days after the due date of such payment, the Corporation shall deliver
the entire amount calculated in accordance with this paragraph to an
independent trustee to hold in an interest-bearing account in trust for the
benefit of the Employee and the Corporation, whichever may be ultimately
entitled to the same. The trustee shall be a bank or savings institution
(other than the Corporation) with deposits of at least $50,000,000,
unrelated to any parties in the dispute, and disinterested in any
transaction arising out of or engendering the dispute. If the parties are
unable to agree upon a trustee within the foregoing time period, then
either party may seek immediate relief from a court of competent
jurisdiction. In addition, the Corporation agrees that Employee would have
no adequate remedy at law for breach of the foregoing obligations, and
Employee shall be entitled to immediate injunctive and other appropriate
equitable relief to enforce the same."
3. Notices. Subparagraph (b) of Paragraph 9 is amended with regard to
notice to the Corporation as follows:
"(b) If to Corporation to:
The Mountbatten Surety Company, Inc.
33 Rock Hill Road
Bala Cynwyd, PA 19004
with a required copy to:
Gary L. Bragg, Esquire
O'Neill, Bragg & Staffin, P.C.
531 Plymouth Road, Suite 500
Plymouth Meeting, PA 19462"
<PAGE>
4. Effect. Except as set forth in this Amendment No. 1, the Agreement
shall remain in full force and effect, and as Amended hereby, the Agreement is
hereby ratified and confirmed by the parties.
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Amendment No. 1 on the date first written above.
"Employee":
/s/ Stephen C. Fletcher
-------------------
Stephen C. Fletcher
"Corporation":
THE MOUNTBATTEN SURETY
COMPANY, INC.
By: /s/ Kenneth L. Brier
--------------------
Kenneth L. Brier,
President
<PAGE>
Exhibit 10.5
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT, dated June 14, 1996 is
by and between MOUNTBATTEN, INC., a Pennsylvania corporation ("Corporation"),
and JOEL D. COOPERMAN, an individual residing at 10 Buttonwood Circle, Lafayette
Hill, PA 19444 ("Employee"). In consideration of the mutual promises contained
herein, and intending to be legally bound hereby, Corporation and Employee agree
as follows:
1. Employment
----------
Corporation employs Employee under an Employment Agreement dated April
21, 1995, and desires to continue such employment on the amended terms set forth
in this Restated Agreement. Employee shall continue to serve as Vice
President-Finance and Treasurer of the Corporation or any of its affiliates
(collectively referred to as the "Corporation") on the terms set forth in this
Agreement, and Employee hereby accepts employment on such terms.
2. Compensation
------------
In consideration of the services rendered by Employee to Corporation
hereunder, Corporation shall pay to Employee a salary at the monthly rate of
$9,166.67, payable at the times of Corporation's regular payrolls or as
otherwise agreed by Corporation and Employee. The Corporation shall review
Employee's performance at least annually.
<PAGE>
3. Expenses
--------
Corporation shall reimburse Employee for all expenses reasonably
incurred by him in carrying out his duties hereunder, upon presentation to
Corporation by Employee, from time to time, of an itemized account of such
expenses together with such receipts and forms as are required pursuant to
Corporation's normal policies and practices.
4. Duties
------
During the term of his employment hereunder, Employee shall report to
the President of the Corporation and perform duties as assigned to him by the
President or the Board of Directors in his capacity as Vice President-Finance
and Treasurer. Employee shall devote his full time, energy, skill and best
efforts to promote the business and affairs of the Corporation. Except as herein
provided, Employee agrees that during his employment hereunder he will not be
employed by, participate or engage in or take part in any manner, directly or
indirectly, in the affairs of any other business enterprise or occupation
without approval of the President or the Board of Directors.
5. At-will Employment
------------------
(a) Employee's employment with Corporation began on May 15, 1995 and
will continue until terminated as hereafter set forth.
(b) This Agreement and all of Employee's rights hereunder shall
terminate upon the death of Employee, and neither Employee nor his estate shall
have any further rights hereunder except for any unpaid compensation and
reimbursements through the date of death. Exercise of any stock options after
death shall be governed by the applicable plan(s) and option agreement(s).
<PAGE>
(c) Employee's employment hereunder shall be "at will" and except as
set forth in paragraph (d) and (e) below, either party shall have the right to
terminate this Agreement at any time, pursuant to the following terms and
conditions:
(1) Corporation shall have the right to terminate
Employee's employment and rights to compensation hereunder by providing
to Employee either (a) five months' prior written notice of such
termination or (b) immediate notice of termination together with an
undertaking to continue payment of Employee's compensation under this
Agreement for five months, provided that Employee abides by all
obligations of his under this Agreement. Upon the effective date of
termination specified in such notice, this Agreement shall terminate
except for the provisions which expressly survive termination, and
Employee shall vacate the offices of the Corporation.
(2) Employee shall have the right to terminate his
employment hereunder by providing five months' written notice to the
President or the Board of Directors. Upon the effective date of
termination specified in such notice, this Agreement shall terminate
except for the provisions which expressly survive termination.
<PAGE>
(d) Corporation shall have the right at any time upon prior
written notice immediately to terminate Employee's employment hereunder for just
cause. For the purpose of this Agreement, "termination for just cause" shall
mean termination only for personal dishonesty, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties (if Corporation gives Employee written notice thereof and he fails to
correct such failure within 30 days), willful violation of any law, rule or
regulation or final cease-and-desist order to be enforced by any regulatory
agency with jurisdiction over Corporation or any of its affiliates or material
breach of any provision of this Agreement (if Corporation gives Employee written
notice thereof and he fails to correct such failure within 30 days). For
purposes of this paragraph, no act or failure to act on the Employee's part
shall be considered "willful" or "intentional" unless done or omitted to be done
by him in bad faith and without reasonable belief that his action or omission
was in the best interest of Corporation; provided that any act or omission to
act on the Employee's behalf in reliance upon an opinion of counsel to
Corporation shall not be deemed to be willful or intentional. In the event
employment is terminated for just cause, Employee shall have no right to
compensation or other benefits for any period after such date of termination.
(e) Employee may terminate his employment hereunder for good
reason. For purposes of this Agreement, "good reason" shall mean any of the
following occurrences without Employee's express written consent within one year
subsequent to a change in control of the Corporation:
<PAGE>
(1) the assignment to Employee of any duties
inconsistent with Employee's positions,
duties, responsibilities and status with the
Corporation;
(2) a change in Employee's reporting
responsibilities, titles or offices as in
effect immediately prior to a change in
control of the Corporation;
(3) any removal of Employee from, or any
failure to re-elect Employee to, any of such
positions, except in connection with a
termination of employment for just cause,
death, or retirement;
(4) a reduction by the Corporation in
Employee's annual salary as in effect
immediately prior to a change in control or
as the same may be increased from time to
time; or
(5) the failure of the Corporation to
continue effect any bonus, benefit or
compensation plan, life insurance plan,
health and accident plan or disability plan
in which Employee is participating at the
time of a change in control of the
Corporation, or the taking of any action by
the Corporation which would adversely affect
Employee's participation in or materially
reduce Employee's benefits under any such
plans.
<PAGE>
(f) For purposes of this Agreement, a "change in control of
the Corporation" shall mean a change in control of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") whether or not the Corporation is then subject to such reporting
requirement; provided that, without limitation, such a change in control shall
be deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act in effect on the date first written above),
other than the Corporation or any "person" who on the date hereof is a director
or officer of the Corporation, is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of
the Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities, or (ii) during any period of two
consecutive years during the term of this Agreement, individuals who at the
beginning of such period constitute the Board of Directors of the Corporation
cease for any reason to constitute at least a majority thereof, unless the
election of each director who was not a director at the beginning of such period
has been approved in advance by directors representing at least two-thirds of
the directors then in office who were directors at the beginning of the period.
<PAGE>
(g) If Employee shall terminate his Employment for good reason
pursuant to paragraph (e) or if the Corporation terminates Employee other than
for just cause within one year after a change in control of the Corporation,
then in lieu of any further salary payments to Employee for periods subsequent
to the date of termination, the Corporation shall pay as severance to Employee
an amount equal to (i) the average aggregate annual compensation paid to the
Employee and includable in the Employee's gross income for federal income tax
purposes during the five calendar years preceding the taxable year in which the
date of termination occurs (or such lesser amount of time if the Employee has
not been employed by the Corporation for five years at the time of termination)
by the Corporation and any of its subsidiaries subject to United States income
tax, multiplied by (ii) 2.99, such payment to be made in a lump sum on or before
the fifth day following the date of termination; provided, however, that if the
lump sum severance payment under this paragraph, either alone or together with
other payments which the Employee has the right to receive from the Corporation,
would constitute an "excess parachute payment" as defined in Section 280G of the
Internal Revenue Code of 1986 (the "Code"), such that Employee has or may have
liability for any excise tax under Section 4999 of the Code, at the time payment
is due or at the time of determination that the same includes an "excess
parachute payment", whichever is later, that portion characterized as "excess"
shall be treated as a loan by the Corporation to the Employee, repayable on the
following terms: the principal shall be payable on the tenth annual anniversary
of the actual date of payment or the date of determination of the "excess",
whichever is later, with interest until paid, fixed at the applicable federal
rate in effect under Section 7872(f)(2) for the month in which such date occurs
and which shall accrue annually if not paid and thereupon be added to principal,
subject to the Employee's right to prepay interest or principal in whole or in
part at any time without premium or penalty. The determination of the amount of
any "excess parachute payment" shall be made by independent counsel to the
Corporation in consultation with the independent certified public accountants of
the Corporation. If for any reason the basis for termination of this Agreement
or payment of amounts under this paragraph is disputed by either party to this
Agreement or any other person or agency, then pending resolution of any such
dispute, within five days after the due date of such payment, the Corporation
shall deliver the entire amount calculated in accordance with this paragraph to
an independent trustee to hold in an interest-bearing account in trust for the
benefit of the Employee and the Corporation, whichever may be ultimately
entitled to the same. The trustee shall be a bank or savings institution (other
than the Corporation) with deposits of at least $50,000,000, unrelated to any
parties in the dispute, and disinterested in any transaction arising out of or
engendering the dispute. If the parties are unable to agree upon a trustee
within the foregoing time period, then either party may seek immediate relief
from a court of competent jurisdiction. In addition, the Corporation agrees that
Employee would have no adequate remedy at law for breach of the foregoing
obligations, and Employee shall be entitled to immediate injunctive and other
appropriate equitable relief to enforce the same.
<PAGE>
6. Benefits; Stock Options
-----------------------
Corporation shall provide and Employee shall be entitled to
participate in all benefit plans and programs generally available to employees
of Corporation on the same terms as other employees. Corporation shall consider
Employee for a bonus for his efforts and based on the consolidated results of
operations of Corporation and its affiliates from year to year, all on such
terms and with such conditions and restrictions as may be determined by the
Board of Directors in its discretion. As promptly as practicable, Corporation
shall adopt a new Incentive Stock Option Plan and grant Employee qualified
incentive stock options exercisable for a period of ten years, to purchase up to
30,000 shares of Corporation's common stock (the "Shares") at an exercise price
equal to the fair market value on the date of grant, vesting as follows: an
option to purchase up to 20,000 Shares vesting at 20% per year over a period of
five years commencing on the first anniversary of this Agreement, and an option
to purchase up to 10,000 Shares vesting at 20% per year over a period of five
years commencing in January, 1996 upon satisfactory review of Employee's
performance by the Board of Directors at that time. In addition to the foregoing
options, Corporation shall also grant Employee as promptly as practicable a
nonqualified option to purchase up to 10,000 Shares at an exercise price equal
to the fair market value on the date of grant of the option, vesting 100%
immediately on the date of grant.
7. Automobile Allowance
--------------------
In addition to Employee's salary, Corporation shall pay to
Employee an automobile allowance of $700 per month payable on the first day of
each month, or in installments at the time of his salary payments, as the
Corporation may elect. This allowance is to cover expenses, direct and indirect
(including depreciation) of Employee for the use of his automobile while on
business of the Corporation, and is in lieu of payment or reimbursement for
mileage, insurance, lease costs, maintenance and repair costs, and any other
expenses incurred by Employee in connection with the operation, ownership and
use of his automobile. Other than this automobile allowance, Corporation shall
have no obligation or liability with respect to provision or use of Employee's
automobile.
<PAGE>
8. Non-Disclosure; Non-Competition
-------------------------------
(a) At all times after the date hereof, including after
termination of this Agreement for any or no reason, Employee shall not, except
with the express prior written consent of the Board of Directors of the
Corporation, directly or indirectly, other than in the ordinary course of
business:
(1) communicate, disclose or divulge to any Person,
or use for his own benefit or the benefit of any Person, any knowledge
or information which he may have acquired, no matter from whom or in
what manner such knowledge or information may have been acquired,
heretofore or hereafter, concerning the conduct and details of the
business of Corporation or its shareholders, including, but not limited
to, names of insureds, insurers or agents, expiration dates of
policies, customers or prospective customers, suppliers, properties,
trade secrets, techniques, equipment, materials, premiums, costs,
marketing methods, operations, policies, prospects and financial
condition;
(2) solicit or induce, directly or indirectly, any
employee, consultant or other agent of the Corporation or any affiliate
to leave the employ of the Corporation or otherwise terminate the
relationship with the Corporation;
(3) for a period of six months after termination,
initiate or receive any contact with or otherwise deal with or have a
business relationship with any clients, insureds or others with
business relationships with the Corporation at the date of termination;
or
<PAGE>
(4) make any statement which criticizes, denigrates
or otherwise reflects adversely on the Corporation.
(b) Employee hereby acknowledges that any breach by him of any
of the covenants contained in this paragraph 8 ("Covenants") will result in
irreparable injury to Corporation for which money damages could not adequately
compensate Corporation. In the event of any such breach, Corporation shall be
entitled, in addition to any other rights and remedies which it may have at law
or in equity, to have an injunction issued by any competent court enjoining and
restraining Employee or any other Person involved therein from continuing such
breach. The existence of any claim or cause of action which Employee or any such
other Person may have against Corporation shall not constitute a defense or bar
to the enforcement of any of the Covenants. If Corporation must resort to the
courts for enforcement of any of the Covenants, or if any of the Covenants is
otherwise the subject of litigation between Corporation and Employee or any such
other Person, then the term of any such Covenant which has a fixed term shall be
extended for a period of time equal to the period of such breach, commencing on
the date of a final court order (without further right of appeal) acknowledging
the validity of such Covenant.
(c) If any portion of the Covenants or the application thereof
is construed to be invalid or unenforceable, then the other portions of the
Covenants, and of all other terms of this Agreement, or the application thereof
shall not be affected thereby and shall be given full force and effect without
regard to the invalid or unenforceable portions. If any of the Covenants is
determined to be unenforceable because of the geographical area covered thereby,
the duration thereof or the scope thereof, then the court making such
determination shall have the power to reduce such area or duration, or to limit
such scope, and such Covenant shall then be enforceable in its reduced form.
<PAGE>
(d) The provisions of this paragraph 8 are identical to those
of the original Agreement executed prior to the date Employee commenced his
employment with the Corporation.
9. Vacation
--------
Employee shall be entitled to four weeks' paid vacation per
calendar year, to be scheduled at the mutual convenience of Employee and
Corporation.
10. Notices
-------
All notices and other communication which are required or
permitted hereunder shall be given in writing and either delivered by hand or
mailed by certified mail, return receipt requested, postage prepaid, as follows:
(a) If to Employee, to:
Mr. Joel D. Cooperman
10 Buttonwood Circle
Lafayette Hill, PA 19444
(b) If to Corporation, to:
Mountbatten, Inc.
33 Rock Hill Road
Bala Cynwyd, PA 19004
<PAGE>
11. Miscellaneous
-------------
(a) This Agreement shall be binding upon, inure to the benefit
of, and be enforceable by the successors and assigns of Corporation and the
heirs, estate, personal representatives and beneficiaries of Employee. The
rights, obligations and duties of the Employee hereunder are personal and are
not assignable or delegable by him in any manner whatsoever.
(b) This Agreement constitutes the entire understanding of the
parties with respect to the subject matter hereof, supersedes all prior
discussions, promises and representations and the Agreement dated April 21,
1995, and shall not be modified, terminated or any provisions waived orally,
including this clause.
(c) No failure to exercise, delay in exercising, or single or
partial exercise of any right, power or remedy hereunder shall preclude any
other or further exercise of the same or any other right, power or remedy.
(d) The headings of the paragraphs of this Agreement have been
inserted for convenience of reference only and shall not constitute a part of
this Agreement.
(e) This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Pennsylvania applicable to
contracts made and to be performed solely therein, and each party consents to
the exclusive jurisdiction and venue of the state and Federal courts of
Pennsylvania to resolve any disputes between the parties.
<PAGE>
(f) Employee represents and warrants that he is under no
competition restriction or other restraint at the time of execution of this
Agreement which would prevent or hinder in any way his performance of duties
hereunder.
(g) As used herein, "Person" shall mean a natural person, sole
proprietorship, joint venture, partnership, corporation, association,
cooperative, trust, estate, government (or any branch, subdivision or agency
thereof), or any other entity.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first written above.
MOUNTBATTEN, INC. EMPLOYEE:
By: /s/ Kenneth L. Brier /s/ Joel D. Cooperman
------------------------------- ---------------------
Kenneth L. Brier, President Joel D. Cooperman
<PAGE>
SUMMARY OF
THE MOUNTBATTEN SURETY COMPANY, INC.
FIRST, SECOND, THIRD, AND FOURTH SURETY EXCESS OF LOSS
REINSURANCE AGREEMENT
<TABLE>
<CAPTION>
<S> <C>
REINSURED COMPANY: The Mountbatten Surety Company, Inc. (PREAMBLE)
Bala Cynwyd, Pennsylvania
BUSINESS REINSURED: In force, new and renewal business classified by the Company as Surety ARTICLE 1
Business.
ACCOUNT BASIS: Losses Discovered.
COVER: Per attached Schedule A. ARTICLE 2
COMMENCEMENT AND Continuous at November 1, 1996 on a losses discovered basis, with ARTICLE 3
TERMINATION: respect to bonds in force, and written or renewed thereafter. Either
party may terminate as of any November 1 by giving 90 days written
notice. Runoff at termination not to exceed 24 months. Cut-off at
Company's option.
TERRITORY: This Agreement shall cover wherever the Company's Bonds cover but is ARTICLE 4
limited to Bonds issued in the United States of America, its
territories and possessions, on risks normally located therein.
WARRANTY: It is warranted for purposes of this Agreement that: ARTICLE 5
Maximum Any One Bond $5,000,000
Maximum Any One Bonded Work Program $10,000,000
Maximum Bond Duration 24 Months
EXCLUSIONS: Attached. ARTICLE 6
PREMIUM: Per attached Schedule A. Deposit Premium payable quarterly beginning ARTICLE 7
November 1, 1996.
REPORTS: Annually within 60 days. ARTICLE 10
DEFINITIONS: Ultimate Net Loss, expenses included ARTICLE 11
Work Program - Attached
Gross Net Written Premium Income
Bond - Attached
Losses Discovered - Attached
Principal - Attached
Underwriting Year - Attached
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CLAUSES: Net Retained Lines ARTICLE 12
Currency ARTICLE 13
Loss/Unearned Premium Reserve Funding ARTICLE 14
Taxes (Reinsurers pay FET as applicable) ARTICLE 15
Notice of Loss and Loss Settlements ARTICLE 16
Offset ARTICLE 17
Delay, Omission or Error ARTICLE 18
Inspection ARTICLE 19
Arbitration ARTICLE 20
Service of Suit ARTICLE 21
Insolvency ARTICLE 22
Sedgwick Re Intermediary Clause ARTICLE 23
Extra Contractual Obligations (90%)
PARTICIPATION: ARTICLE 24
REGULATION 98: Premium and loss payments made to Sedgwick Re shall be deposited in a
Premium and Loss Account in accordance with Section 32.3(a)(1) of
Regulation 98 of the New York Insurance Department. The parties
hereto consent to withdrawals from said Account in accordance with
Section 32.3(a)(3) of the Regulation, including interest and Federal
Excise Tax.
</TABLE>
Reinsurers Effective: November 1, 1996
- - --------------------------------------
Per attached Schedule
This confirms the terms and conditions as negotiated with reinsurers on your
behalf.
Final placement Summaries reflecting the same terms and conditions have been
presented to reinsurers for confirmation and signature. Amendments, if any, will
be confirmed in writing.
It is requested you review this document and notify us immediately if the
placement details or security do not meet with your approval. If all is in
order, please sign and return one copy of this Summary.
For and on behalf of: Sedgwick Re, Inc.
- - ------------------------------------------- ----------------
Joseph F. Stanoch, Vice President Date
- - ------------------------------------------- ----------------
The Mountbatten Surety Company, Inc. Date
<PAGE>
The Mountbatten Surety Company, Inc.
Surety Excess of Loss Reinsurance
Terms Effective: November 1, 1996
Definitions
Loss Discovered
For the purposed of this Agreement, the Company shall have discovered a loss on
the date on which the Company, in the normal course of business, establishes an
incurred loss through the actual payment of all of, or a portion of a claim, the
creation of an outstanding loss reserve, or a combination thereof which exceeds
$75,000 with respect to the First and Second Excess layers, $1,000,000 with
respect to the Third Excess layer, and $2,250,000 with respect to the Fourth
Layer.
Work Program
The term "work program" as used in this Agreement shall mean, for any contractor
Principal, the greater of (a) the aggregate line of credit issued by the Company
and outstanding at the time a contract bond is executed, or (b) the uncompleted
portion of construction contracts or supply contracts (including the Principal's
share of joint ventures, and outstanding bids and the contract being bonded, and
excluding cost plus work not subject to a guaranteed maximum price) as known to
the Company and outstanding at the time any contract is executed.
Bond
The term "Bond" as used in this Agreement shall mean any bond, undertaking,
guarantee, indemnity, binder, or other obligation, including riders and
endorsements and letters and agreements in connection therewith, at any time
issued, assumed, or accepted by the Company and classified by any Federal or
State body as surety business at the effective date of such business.
Principal
The term "Principal" as used in this Agreement shall mean any legal entity under
the same management and control, or one or more legal entities for which bonds
are executed relying upon the indemnity of the same person, firm, or
corporation, or relying upon the indemnity of a related group of persons, firms,
or corporations, or the Company is furnished and named in a supporting indemnity
agreement.
<PAGE>
The Mountbatten Surety Company, Inc.
Surety Excess of Loss Reinsurance
Terms Effective: November 1, 1996
Exclusions
This Agreement does not cover:
1. Bank Depository Bonds.
2. Note Guarantee Bonds.
3. Mortgage Deficiency Bonds.
4. Guarantees of Installment Paper.
5. Insurance Company Qualifying Bonds.
6. Securities Exchange Commission Liability Bonds.
7. Insurance Patent Infringement Bonds.
8. Bail Bonds.
9. Lease Bonds.
10. Mortgage Guarantee Insurance.
11. Defeasance Bonds.
12. Small Business Administration Guarantees.
13. Financial Guarantees which shall mean any bonds of coverage which guarantee
to any beneficiaries of the bonds or coverage against or indemnify such
beneficiaries for financial loss or the incurrence of additional costs or
expenses by reason of 1) non-payment of any sums required to be paid to the
beneficiaries of the bonds or coverage pursuant to any financial
obligations, 2) any fluctuations in financial markets or commodity prices,
3) any changes in law, 4) the failure to receive any anticipated payments of
monies or money equivalents, 5) the inaccuracy of any valuations and 6)
overpayments of any financial obligations for any reasons, including, but
not limited to, Accounts Receivable Coverage, Change-in-Law Coverage,
Commercial Mortgage Guarantees, Commercial Paper Coverage, Coupon
Over-Redemption Coverage, Cram Down bonds, Excess Federal Deposit Insurance
Corporation Coverage, Excess Federal Savings and Loan Insurance Corporation
Coverage, Excess Securities Investment Protection Corporation Coverage,
Golden Parachute Coverage, Guarantees of Bank Letters Credit, Guarantees of
Mortgaged Backed Securities, Housing Bonds, Industrial bond Insurance
Coverage, Interest Rate Cap Coverage, Lease Bonds or Guarantees, Limited
Partnership Investor Note Bonds or Guarantees, Mobile Home Loan Guarantees,
Money Market Coverage, Mortgage Backed Securities, Guarantees, Mortgage
Services Performance bonds, Movie Completion bonds or Insurance Municipal
Bond Insurance, Repurchase Agreement Guarantees,
<PAGE>
Residual Value Insurance or Guarantees, Retroactive Liability Insurance,
Student Loan Guarantees, Systems Performance Insurance, Weather-Related
Coverage, and Bonds used in Lieu of Letters of Credit (except where such
bonds are allowed to be substituted for Letter of Credit for Contract Bid,
Performance, or Labor and Material payment obligations outside the United
States).
14. Bonds written on an excess of loss basis.
15. Appeal bonds unless 100% collateralized.
16. No coverage for fraudulent or misuse of powers of attorney or granted
authority by producing agents.
17. Nuclear Incident liability reinsurance.
18. War Risks exclusion clause.
19. Pools and Associations.
20. Insolvency Funds.
21. Third Party Liability cover of all types, including strict liability.
In respect of a bond or bonds issued, to guarantee the performance of a
contract, this Agreement does not cover loss or loss expenses which arise
from liability, for bodily injury (including sickness, disease or death),
property damage (including cleanup or remediation costs), damage to the
environment, diminution in value of property), or economic loss of any kind
(including loss of use of property).
Under no circumstances shall the Reinsurer follow the fortunes of the
Company where the Company is found legally liable to pay such loss or loss
expense under a bond or bonds.
22. Reinsurance assumed, but not to exclude business underwritten by the Company
and otherwise subject to the treaty, but issued on another Company's policy
due to license or other considerations.
23. Strip Mining Bonds.
24. Co-Surety Bond business.
25. Super Fund Clean-Up or similar exposures.
26. Ground water contamination exposures.
<PAGE>
The Mountbatten Surety Company Inc.
Surety Excess of Loss Reinsurance
Schedule A
Terms Effective November 1, 1996
Basis: Losses Discovered, Each Principal
<TABLE>
<CAPTION>
First Excess Second Excess Third Excess Fourth Excess
<S> <C> <C> <C> <C>
Limit: $850,000 $1,000,000 $2,500,000 $3,000,000
Excess of
Retention: $150,000 $1,000,000 $2,000,000 $4,500,000
Reinstatements/ 1st reinstatement free, 2.0 with additional premium 1 with additional premium Nil
Limitations: next two reinstatements pro rata as to amount and pro rata as to amount and
with additional premium 50% as to time. 100% as to time.
prorata as to amount, 50%
as to time
Premium:
Rate applicable to
SWP 8.1% 4.25% 2.20% 1.33%
Profit Sharing: 20% of profits after 20%
Reinsurer Expense
Annual Deposit: $850,000 $445,000 $230,000 $139,000
Minimum Premium: $765,000 $400,000 $205,000 $125,000
Payable: Quarterly Quarterly Quarterly Quarterly
</TABLE>
Other: Company to retain 5% of the First and Second Excess of Loss Layers
Bonds exceeding $3,000,000 and Work Programs exceeding 7,500,000 to
have sign off by either the Chairman or EVP. One page summary of bonds
over $3,000,000 to be sent to lead reinsurer within two working days of
commitment.
<PAGE>
The Mountbatten Surety Company Inc.
Bala Cynwyd, PA.
Surety Excess of Loss Reinsurance
Reinsurers Effective: November 1, 1996
- - --------------------------------------
<TABLE>
Reinsurer First Excess Second Excess Third Excess Fourth Excess
- - --------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Transatlantic 47.50% 47.50% 50.00% 50.00%
Reinsurance Co.
Underwriters at Lloyds,
London through
Ballantyne, McKean
& Sullivan, Ltd. 23.75% 23.75% 25.00% 25.00%
Chatham
Reinsurance Corp. 0.00% 4.00% 4.00% 3.00%
Hartford Fire Insurance Co. 23.75% 19.75% 21.00% 22.00%
------ ------ ----- -----
95.00% 95.00% 100.0% 100.0%
</TABLE>
<PAGE>
EXHIBIT 21
----------
SUBSIDIARIES OF REGISTRANT
The Mountbatten Surety Company, Inc., incorporated under the laws of the
Commonwealth of Pennsylvania, is 100% owned by Registrant.
HMS Dreadnought, Inc., incorporated under the laws of the State of Delaware, is
100% owned by Registrant.
<PAGE>
EXHIBIT 23
----------
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the incorporation by reference in the Registration
Statement on Forms S-8 (No. 333-23055 and No. 333-23057) of Mountbatten, Inc. of
our report dated February 21, 1997 which appears in this Annual Report on Form
10-KSB.
PRICE WATERHOUSE LLP
Boston, Massachusetts
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 8,487,946
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,487,946
<CASH> 759,749
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 393,447
<TOTAL-ASSETS> 11,258,821
<POLICY-LOSSES> 1,153,270
<UNEARNED-PREMIUMS> 954,101
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,529
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,258,821
7,829,171
<INVESTMENT-INCOME> 421,810
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 519,708
<UNDERWRITING-AMORTIZATION> (122,760)
<UNDERWRITING-OTHER> 4,504,826
<INCOME-PRETAX> 1,729,201
<INCOME-TAX> 593,831
<INCOME-CONTINUING> 1,135,370
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,135,370
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
<RESERVE-OPEN> 602,265
<PROVISION-CURRENT> 712,790
<PROVISION-PRIOR> 55,056
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 216,841
<RESERVE-CLOSE> 1,153,270
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
