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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
- ----- ACT OF 1934
For the quarterly period ended September 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the transition period from __________to __________.
Commission file number 0-24638
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MOUNTBATTEN, INC.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2633708
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
33 Rock Hill Road
Bala Cynwyd, Pennsylvania 19004
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
(610) 664-2259
-----------------------------
(Issuer's telephone number)
n/a
----------------------------------------------------
(Former name, former address, and former fiscal year
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class Outstanding at November 6, 1997
----- -------------------------------
Common Stock 2,528,530
Par value $.001 per share
Transitional Small Business Disclosure Format (check one ) YES NO X
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Part I. Financial Information
Item 1. Financial Statements
Mountbatten, Inc. and Subsidiaries
Consolidated Balance Sheets
As of As of
September 30, December 31,
ASSETS 1997 1996
---- ----
(unaudited)
Fixed maturities
Available for sale, at fair value (amortized
cost of $6,404,757 and $8,596,475,
respectively) ................................ $ 6,345,993 $ 8,487,946
Cash and cash equivalents .................... 1,931,888 759,749
Premiums receivable .......................... 1,728,409 562,820
Miscellaneous accounts receivable ............ 148,073 2,200
Reinsurance receivable ....................... 224,048 294,911
Subrogation receivable ....................... 1,130,168 606,476
Accrued investment income .................... 151,342 60,196
Property and equipment, net .................. 85,525 56,838
Deferred acquisition costs ................... 708,744 393,447
Prepaid reinsurance premiums ................. 409,054
Deferred tax asset ........................... 8,582 32,223
Other assets ................................. 151,414 2,015
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TOTAL ASSETS ...................... $ 13,023,240 $ 11,258,821
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid claims and claim adjustment expenses .. $ 985,447 $ 1,153,270
Unearned premiums ............................ 1,681,809 954,101
Reinsurance premium payable .................. 353,834
Accrued expenses and other liabilities ....... 104,661 254,927
Job funds held on deposit .................... 28,182
Federal income taxes payable ................. 438,841 161,505
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TOTAL LIABILITIES .................. 3,238,940 2,877,637
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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, fixed
maturities ................................... (38,784) (71,629)
Retained earnings ............................ 3,057,621 1,687,350
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TOTAL SHAREHOLDERS' EQUITY ......... 9,784,300 8,381,184
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ... $ 13,023,240 $ 11,258,821
============ ============
The accompanying notes are an integral part of these financial statements
2
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Mountbatten, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Nine months ended
September 30,
1997 1996
---- ----
Underwriting:
Gross written premiums ................... $ 7,566,481 $ 6,391,122
Premiums ceded ........................... (1,154,645) (1,092,884)
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Net written premiums ..................... 6,411,836 5,298,238
Change in unearned premium ............... (727,708) (370,877)
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Net earned premiums ...................... 5,684,128 4,927,361
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Claims and claims adjustment expenses .... 154,907 575,853
Commission expense ....................... 2,116,807 1,812,397
Salaries and benefits .................... 999,245 758,309
Professional fees ........................ 108,025 110,006
Other operating expenses ................. 646,665 505,197
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4,025,649 3,761,762
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Underwriting income ........................ 1,658,479 1,165,599
Interest income ............................ 329,112 305,482
Fee income ................................. 89,400
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Income before income taxes ................. 2,076,991 1,471,081
Provision for income taxes ................. 706,720 461,948
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Net income ................................. $ 1,370,271 $ 1,009,133
=========== ===========
Primary earnings per share: ................ $ 0.49 $ 0.38
Weighted average shares outstanding ........ 2,823,230 2,670,035
The accompanying notes are an integral part of these financial statements
3
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Mountbatten, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three months ended
September 30,
1997 1996
---- ----
Underwriting:
Gross written premiums ................... $ 3,182,726 $ 2,463,862
Premiums ceded ........................... (458,505) (421,323)
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Net written premiums ..................... 2,724,221 2,042,539
Change in unearned premium ............... (254,802) (142,979)
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Net earned premiums ...................... 2,469,419 1,899,560
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Claims and claims adjustment expenses .... 216,956 161,462
Commission expense ....................... 933,920 684,866
Salaries and benefits .................... 359,888 278,269
Professional fees ........................ 41,116 30,946
Other operating expenses ................. 249,751 175,513
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1,801,631 1,331,056
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Underwriting income ........................ 667,788 568,504
Interest income ............................ 105,777 107,707
Fee income ................................. 89,400
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Income before income taxes ................. 862,965 676,211
Provision for income taxes ................. 292,831 216,388
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Net income ................................. $ 570,134 $ 459,823
=========== ===========
Primary earnings per share: ................ $ 0.20 $ 0.17
Weighted average shares outstanding ........ 2,863,111 2,732,916
The accompanying notes are an integral part of these financial statements
4
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Mountbatten, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended
September 30,
1997 1996
---- ----
Operating activities:
Net income ...................................... $ 1,370,271 $ 1,009,133
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization ................. 28,657 16,330
Change in:
Premiums receivable ........................ (1,165,589) (740,264)
Miscellaneous accounts receivable .......... (145,873)
Reinsurance receivable ..................... 70,863 191,903
Subrogation recoverable .................... (523,692) (178,498)
Accrued investment income .................. (91,146) (116,297)
Unearned premiums .......................... 727,708 370,877
Unpaid claims and claim adjustment expenses (167,823) 518,574
Prepaid reinsurance premiums ............... (762,888) 198,577
Accrued expenses and other liabilities ..... (150,144) (120,167)
Job funds held on deposit .................. 28,182
Deferred acquisition costs ................. (315,297) (163,185)
Deferred tax asset ......................... 23,641 (34,289)
Federal income taxes payable ............... 277,336 36,128)
Other, net ................................. (166,440) 73,208
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Net cash provided by (used in) operating activities (962,234) 1,062,030
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Investing activities:
Purchase of equipment ........................... (57,344) (27,997)
Purchase of investments ......................... (640,324) (1,047,299)
Maturities of investments ....................... 2,832,041 568,965
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Net cash provided by (used in) investing activities 2,134,373 (506,331)
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Net increase (decrease) in cash and cash equivalents 1,172,139 (555,699)
Cash and cash equivalents at beginning of period ... 759,749 755,639
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Cash and cash equivalents at end of period ......... $ 1,931,888 $ 1,311,338
=========== ===========
Supplemental disclosure of cash flow information:
The Company made payments of $425,000 and $425,800 during the nine months
ended September 30, 1997 and 1996 for federal income taxes, respectively.
The accompanying notes are an integral part of these financial statements
5
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Mountbatten, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 - Description of Business:
Mountbatten, Inc. ("Mountbatten") commenced operations in February 1992.
Mountbatten acts as a holding company for The Mountbatten Surety Company, Inc.
(the "Surety Company") and HMS Dreadnought, Inc. ("Dreadnought"). The Surety
Company underwrites performance, payment and other bonds, and is licensed to
conduct business in the Commonwealths of Pennsylvania, Virginia, and Kentucky,
the States of Delaware, Maryland, New Jersey, New York, Ohio, Indiana,
Tennessee, Connecticut, Mississippi, Illinois, South Carolina, West Virginia
and Alabama, and the District of Columbia. In these jurisdictions, the Surety
Company underwrites primarily construction and performance bonds through
independent agents and brokers. Dreadnought commenced operations in February
1997, and provides escrow, dispute resolution, claims handling and
construction management services to Mountbatten. (Mountbatten together with
the Surety Company and Dreadnought 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 subsidiaries. The
preparation of interim financial statements necessarily relies heavily on
estimates. This and certain other factors, such as the seasonal nature of the
surety bond business as well as competitive and other market conditions, call
for caution in drawing specific conclusions from interim results. In the
opinion of management, the interim financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for the
fair presentation of the Company's results of operations and financial
position for the periods presented. Operating results for the nine and three
month periods ended September 30, 1997 are not necessarily indicative of
results that can be expected for the fiscal year ending December 31, 1997.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in Mountbatten's Report on
Form 10-KSB for the year ended December 31, 1996.
Revenue recognition:
Premiums are recognized as earned over the estimated period of bond
performance or project completion, which is generally less than one year.
Ceded reinsurance premiums are recognized on a similar basis. Unearned
premiums represent the portion of net premiums applicable to the unexpired
portion of the bond. The estimates are based primarily on management's
understanding of a bonded project's stage of completion supplemented by
historical completion patterns. Fee income represents amounts earned by
Dreadnought for various services (including escrow, dispute resolution, claims
handling, and construction management) rendered to third parties.
Cash equivalents:
Cash equivalents include highly liquid money market instruments with original
maturities of three months or less.
Investments:
The Company invests in U.S. Treasury securities with maturities ranging from
several months to five years. The Company's investments in debt securities are
classified as available-for-sale. Accordingly, any changes in carrying value
are reflected as adjustments to Shareholders' Equity.
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Note 2 - Summary of Significant Accounting Policies: - (continued)
Miscellaneous accounts receivable:
Miscellaneous accounts receivable primarily represents amounts invoiced for
escrow, dispute resolution, claims handling, and construction management
services performed by Dreadnought.
Reinsurance receivable:
Reinsurance receivable is an estimate of amounts to be received from the
Surety Company's reinsurers on ceded paid and unpaid losses.
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 highly
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. Individual case reserve estimates represent
management's best estimate of the ultimate unpaid liability remaining on each
claim, regardless of any collateral sources that may exist (i.e., subrogation
and/or reinsurance receivable), and are revised by management as new
information becomes available. Changes in these estimates are charged or
credited to income in the period in which they are determined. Claim
adjustment expenses include costs associated directly with specific claims
paid or in the process of settlement. Job funds held on deposit represents
cash temporarily held by Dreadnought for the purpose of completing certain
jobs as part of the dispute resolution and claims handling process.
Note 3 - Income Taxes
The Company files a consolidated income tax return with its wholly owned
subsidiaries, and is a party to a tax sharing agreement. The Company had a
deferred tax asset of $8,582 and $32,223 at September 30, 1997 and December
31, 1996, respectively.
Note 4 - 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
7
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Note 4 - Reinsurance: - (continued)
$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.
Effective November 1995, the reinsurance program required that the Company not
write any bond exceeding $5 million or bonds on the same work program in favor
of the principal exceeding $7.5 million in the aggregate. The work program
limit of $7.5 million increased to $10 million effective November 1996.
Note 5 - Statutory Surplus and Dividend Restrictions
The Surety Company is subject to minimum surplus requirements under the
Commonwealth of Pennsylvania insurance laws and regulations. Under applicable
Pennsylvania laws and regulations, the Surety Company is required to maintain
minimum capital of $1,125,000. The maximum amount of dividends, which can be
paid by the Surety Company to shareholders without prior approval of the
Insurance Commissioner, is subject to restrictions relating to statutory
surplus.
Note 6 - Unpaid Claims and Claim Adjustment Expenses and Reinsurance Receivable
The process by which reserves are established for insured events and related
litigation requires reliance upon estimates based on the Surety Company's
limited claims experience, supplemented with available industry data. The
Surety Company's limited claims experience creates uncertainty with respect to
the estimation of loss and loss adjustment expense reserves. As information
develops which varies from expected experience, provides additional data or,
in some cases, augments data, which previously was not considered sufficient
in determining reserves, adjustments to reserves may be required. Included in
loss reserves at September 30, 1997 and December 31, 1996 are case reserves
totaling $462,904 and $634,156, respectively, and IBNR reserves of $522,543
and $519,114, respectively.
Reinsurance receivable of $224,048 at September 30, 1997 includes $162,361
related to unpaid losses, offset by $73,045 received from the reinsurer as a
prepayment, and $134,732 related to paid losses.
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 a
prepayment.
Note 7 - Shareholders' Equity
In May 1997, the Company granted non-qualified stock options to selected
individuals to purchase 10,000 shares of common stock at an exercise price of
$8.50 per share. These options vest six months after the date of grant, and
are exercisable for a ten-year period after the date of grant.
In June 1997, the Company granted incentive stock options to selected
individuals to purchase 7,500 shares of common stock at an exercise price of
$8.50 per share. These options vest over a five-year period, and are
exercisable for a ten-year period after the date of grant.
In June 1997, the Company granted non-qualified stock options to selected
individuals to purchase 25,000 shares of common stock at an exercise price of
$8.50 per share. These options vest six months after the date of grant, and
are exercisable for a ten-year period after the date of grant.
All of the above stock options were granted at exercise prices equal to the
market value of the underlying stock as of the date of grant. Accordingly, no
compensation expense related to these grants has been recorded.
8
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company's principal business activity is to underwrite surety bonds
through its wholly owned subsidiary, the Surety Company. 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. The following table sets
forth information, chronologically, with respect to those jurisdictions in
which the Surety Company is presently licensed to write bonds:
State Date of Admission
- ----- -----------------
Pennsylvania September 11, 1992
Delaware July 13, 1994
Maryland October 7, 1994
New Jersey June 30, 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
West Virginia May 8, 1997
Alabama August 6, 1997
In addition, the Surety Company has applied for a license to underwrite bonds
in Florida, Georgia and North Carolina, and anticipates filing license
applications in various other states.
Results of Operations
Nine months ended September 30, 1997 compared to nine months ended
September 30, 1996:
During the nine-month period ended September 30, 1997, the Surety Company
generated $7,566,481 of gross written premiums, compared to $6,391,122 of
gross written premiums during the nine-month period ended September 30, 1996,
representing an increase of $1,175,359 or 18%. 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 in late
1995 and throughout 1996.
For the nine months ended September 30, 1997, gross ceded reinsurance premiums
totaled $1,154,645, representing approximately 15.26% of gross written
premiums. For the nine months ended September 30, 1996, gross ceded
reinsurance premiums totaled $1,092,884, representing approximately 17.1% of
gross written premiums. The increase in ceded reinsurance premiums was
primarily the result of the increase in gross written premiums, offset by a
lower reinsurance rate afforded the Surety Company under the reinsurance
agreement that became effective on November 1, 1996.
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.
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Prior to November 1996, the reinsurance program required that the Company not
write any bond exceeding $5 million or bonds on the same work program in favor
of the principal exceeding $7.5 million in the aggregate. The work program
limit of $7.5 million increased to $10 million effective November 1996.
For the nine months ended September 30, 1997, claims and claim adjustment
expenses incurred were $154,907 (or an incurred loss and loss adjustment
expense ratio of 2.7%). For the nine months ended September 30, 1996, claims
and claim adjustment expenses incurred were $575,853 (or an incurred loss and
loss adjustment expense ratio of 11.7%). The decrease in claims and claim
adjustment expenses between the periods is the result of favorable development
on prior year reserves, coupled with favorable claims experience for the first
three quarters of 1997.
A limited number of claims have been filed on the Surety Company's bonds.
Accordingly, at September 30, 1997 the Surety Company has established IBNR and
case reserves of $522,543 and $462,904, respectively, gross of reinsurance, to
provide for future claims and claim adjustment expense payments.
For the nine months ended September 30, 1997, commission expenses were
$2,116,807, compared to $1,812,397 for the nine months ended September 30,
1996. The increase in commission expenses in 1997 relates to the higher level
of gross written premiums versus the 1996 period.
For the nine-month periods ended September 30, 1997 and 1996, the Company
incurred salary and benefits costs of $999,245 and $758,309, respectively. The
increase in salary and benefit costs in 1997 reflects an increase in the
number of employees, including underwriters and related support personnel, as
well as increased compensation levels.
For the nine months ended September 30, 1997, the Company incurred $108,025
for professional services and $646,665 for other operating expenses, compared
to $110,006 and $505,197, respectively, for the similar period in 1996. The
increase in operating expenses reflects the required infrastructure changes to
support the Company's current and expected future levels of gross written
premiums in a greater number of markets.
For the nine-month periods ended September 30, 1997 and 1996, the Company
generated $329,112 and $305,482, respectively, of income from its investments,
comprised exclusively of U.S. Government securities. The yield on average
invested assets for the 1997 and 1996 periods was 5.22% and 5.47%,
respectively. The increase in interest income in 1997 is the result of an
increased level of average invested assets, offset by a slightly lower yield
during most of 1997.
The provision for income taxes for the nine months ended September 30, 1997
was $706,720 (an effective tax rate of 34%), as compared to $461,948 (an
effective tax rate of 31%) for 1996.
Net income for the nine months ended September 30, 1997 was $1,370,271, as
compared to $1,009,133 for the nine months ended September 30, 1996, an
increase of $361,138, or 36%.
Three months ended September 30, 1997 compared to three months ended
September 30, 1996:
During the three-month period ended September 30, 1997, the Surety Company
generated $3,182,726 of gross written premiums, compared to $2,463,862 of
gross written premiums during the three-month period ended September 30, 1996,
representing an increase of $718,864 or 29%. 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 in late
1995 and throughout 1996.
For the three months ended September 30, 1997, gross ceded reinsurance
premiums totaled $458,505, representing approximately 14.41% of gross written
premiums. For the three months ended September 30, 1996, gross ceded
reinsurance premiums totaled $421,323, representing approximately 17.1% of
gross written premiums. The increase in ceded reinsurance premiums was
primarily the result of the increase in gross written premiums, offset by a
lower reinsurance rate afforded the Surety Company under the reinsurance
agreement that became effective on November 1, 1996.
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For the three months ended September 30, 1997, claims and claim adjustment
expenses incurred were $216,956 (or an incurred loss and loss adjustment
expense ratio of 8.8%). For the three months ended September 30, 1996, claims
and claim adjustment expenses incurred were $161,462 (or an incurred loss and
loss adjustment expense ratio of 8.5%).
For the three months ended September 30, 1997, commission expenses were
$933,920, compared to $684,866 for the three months ended September 30, 1996.
The increase in commission expenses in 1997 relates to the higher level of
gross written premiums versus the 1996 period.
For the three-month periods ended September 30, 1997 and 1996, the Company
incurred salary and benefits costs of $359,888 and $278,269, respectively. The
increase in salary and benefit costs in 1997 reflects an increase in the
number of employees, including underwriters and related support personnel, as
well as increased compensation levels.
For the three months ended September 30, 1997, the Company incurred $41,116
for professional services and $249,751 for other operating expenses, compared
to $30,946 and $175,513, respectively, for the similar period in 1996. The
increase in operating expenses reflects the required infrastructure changes to
support the Company's current and expected future levels of gross written
premiums in a greater number of markets.
For the three-month periods ended September 30, 1997 and 1996, the Company
generated $105,777 and $107,707, respectively, of income from its investments,
comprised exclusively of U.S. Government securities. The yield on average
invested assets for the 1997 and 1996 periods was 5.5%. The slight decrease in
interest income in 1997 is the result of a decreased level of average invested
assets.
The provision for income taxes for the three months ended September 30, 1997
was $292,831 (an effective tax rate of 34%), as compared to $216,388 (an
effective tax rate of 32%) for 1996.
Net income for the three months ended September 30, 1997 was $570,134, as
compared to $459,823 for the three months ended September 30, 1996, an
increase of $110,311, or 24%.
Seasonality
Because most of the Surety Company's premiums are generated on construction
related bonds, and are associated with jobs primarily in mid-atlantic and
mid-western states, the Surety Company's business has been seasonal.
Accordingly, operating results have varied from quarter to quarter, with
premium levels lowest from November to March. Seasonality is expected to have
less of an effect on premium activity as the Surety Company becomes licensed
in states having more temperate climates.
Liquidity and Capital Resources
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 and Dreadnought under a services agreement which provides for the
Surety Company and Dreadnought to reimburse the Company for costs paid by the
Company which are deemed to benefit the Surety Company and Dreadnought. 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 1997, approximately $230,000 of the Company's cash and investment
portfolio was converted to U.S. Treasury Notes in conjunction with the
licensure requirements of various states. Management anticipates that
additional "deposits" will be required in those states in which the Surety
Company intends to seek a license to write surety bonds.
The Company had approximately $8,278,000 of investments and cash equivalents
at September 30, 1997, and approximately $9,248,000 of investments and cash
equivalents at December 31, 1996. The decrease in investments and cash
equivalents at September 30, 1997 results primarily from the payment of
federal and state tax obligations, reinsurance premiums, claims and other
operating expenses in 1997, and an increase in premiums receivable.
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The Company's anticipated expansion plans will require additional personnel
and financial resources. While certain costs are expected to increase due to
the changes in infrastructure, management believes that the Company has
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 $9,238,000 at September 30, 1997, will be sufficient to
support the Surety Company's current and anticipated premiums and losses.
12
<PAGE>
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.2 Amended and Restated Articles of Incorporation of
Registrant, as amended (incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-QSB report for the quarter ended June 30, 1996)
Exhibit 3.3 By-Laws of Registrant (incorporated by reference to
Exhibit 3.3 of Registrant's Form SB-2 Registration Statement
No. 33-78336 declared effective September 1, 1994)
Exhibit 11. Computation of Earnings per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period for which this
report is filed.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
November 12, 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)
<PAGE>
Exhibit Index
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.2 Amended and Restated Articles of Incorporation of
Registrant, as amended (incorporated by reference to Exhibit
3.2 of Registrant's Form 10-QSB report for the quarter ended
June 30, 1996)
3.3 By-Laws of the Registrant (incorporated by reference to
Exhibit 3.3 of Registrant's Form SB-2 Registration Statement
No. 33-78336 declared effective September 1, 1994)
11 Computation of Earnings per Share
27 Financial Data Schedule
<PAGE>
Exhibit 11
----------
MOUNTBATTEN, INC.
COMPUTATION OF NET INCOME PER SHARE (UNAUDITED)
Primary Net Income Per Share
Nine months ended September 30,
1997 1996
---- ----
Net Income Available to
Common Shareholders $1,370,271 $1,009,133
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 294,700 141,505
---------- ----------
Total 2,823,230 2,670,035
========== ==========
Primary Net Income per Share $ 0.49 $ 0.38
========== ==========
Fully Diluted Net Income Per Share
Net Income Available to
Common Shareholders $1,370,271 $1,009,133
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 295,365 169,034
---------- ----------
Total 2,823,895 2,697,564
========== ==========
Fully Diluted Net Income per Share $ 0.49 $ 0.37
========== ==========
<PAGE>
Exhibit 11
----------
MOUNTBATTEN, INC.
COMPUTATION OF NET INCOME PER SHARE (UNAUDITED)
Primary Net Income Per Share
Three months ended September 30,
1997 1996
---- ----
Net Income Available to
Common Shareholders $ 570,134 $ 459,823
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 334,581 204,386
---------- ----------
Total 2,863,111 2,732,916
========== ==========
Primary Net Income per Share $ 0.20 $ 0.17
========== ==========
Fully Diluted Net Income Per Share
Net Income Available to
Common Shareholders $ 570,134 $ 459,823
========== ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 336,574 226,470
---------- ----------
Total 2,865,104 2,755,000
========== ==========
Fully Diluted Net Income per Share $ 0.20 $ 0.17
========== ==========
<TABLE> <S> <C>
<ARTICLE> 7
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 6,345,993
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0
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