<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 0R 15 (d) OF THE SECURITIES EXCHANGE ACT
- ----- OF 1934
For the quarterly period ended March 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- ----- OF 1934
For the transition period from to .
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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
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(Issuer's telephone number)
n/a
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(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
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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 May 11, 1998
------------------------- ---------------------------
Common Stock 2,528,530
Par value $.001 per share
Transitional Small Business Disclosure Format (check one ) YES NO X
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<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
Mountbatten, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of As of
March 31, 1998 December 31, 1997
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(unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities
Available for sale, at fair value (amortized
cost of $6,888,790 and $7,715,677, respectively) $ 6,875,790 $ 7,687,211
Cash and cash equivalents 160,091 601,587
Premiums receivable 1,324,461 928,301
Miscellaneous accounts receivable 130,005 30,005
Reinsurance receivable 3,725,943 2,200,283
Subrogation receivable 3,470,879 2,539,976
Accrued investment income 134,647 59,466
Property and equipment, net 150,481 112,736
Deferred policy acquisition costs 581,348 653,725
Prepaid reinsurance premiums 244,226 394,887
Other assets 212,562 83,830
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TOTAL ASSETS $ 17,010,433 $ 15,292,007
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid claims and claim adjustment expenses $ 4,900,073 $ 3,358,578
Unearned premiums 1,366,763 1,536,800
Accrued expenses and other liabilities 24,786 200,307
Deferred tax liability 91,750 86,491
Federal income taxes payable 179,252 105,864
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TOTAL LIABILITIES 6,562,624 5,288,040
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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
Accumulated other comprehensive income (1,860) (12,068)
Retained earnings 3,684,206 3,250,572
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TOTAL SHAREHOLDERS' EQUITY 10,447,809 10,003,967
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 17,010,433 $ 15,292,007
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
Mountbatten, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Underwriting:
Gross written premiums $ 2,623,800 $ 1,758,600
Premiums ceded (451,638) (279,266)
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Net written premiums 2,172,162 1,479,334
Change in unearned premium 170,037 (103,538)
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Net earned premiums 2,342,199 1,375,796
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Claims and claims adjustment expenses 273,998 (14,755)
Commission expense 838,733 481,828
Salaries and benefits 444,190 334,907
Professional fees 28,033 29,279
Other operating expenses 284,204 188,759
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1,869,158 1,020,018
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Underwriting income 473,041 355,778
Other income
Interest income 107,981 118,605
Fee income 76,000 18,000
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Income before income taxes 657,022 492,383
Provision for income taxes 223,388 167,411
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Net income $ 433,634 $ 324,972
=========== ===========
Shares outstanding - basic 2,528,530 2,528,530
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Earnings per common share - basic $ 0.17 $ 0.13
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Shares outstanding - diluted 2,800,157 2,731,854
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Earnings per share - diluted $ 0.15 $ 0.12
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</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
Mountbatten, Inc.
Consolidated Statements of Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 433,634 $ 324,972
Other comprehensive income (loss):
Unrealized appreciation (depreciation) on investments
during the period, net of tax of $4,420 and $29,538 10,208 (57,338)
--------- ---------
Total other comprehensive income (loss) 10,208 (57,338)
========= =========
Comprehensive income $ 443,842 $ 267,634
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 433,634 $ 324,972
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,746 8,538
Change in:
Premiums receivable (396,160) (190,966)
Miscellaneous accounts receivable (100,000)
Reinsurance receivable (1,525,660) 20,892
Subrogation recoverable (930,908) 29,056
Accrued investment income (75,181) (92,586)
Unearned premiums (170,037) 103,538
Unpaid claims and claim adjustment expenses 1,541,495 (205,318)
Prepaid reinsurance premiums 150,661 (838,642)
Accrued expenses and other liabilities (175,519) (92,279)
Deferred acquisition costs 72,377 (66,419)
Deferred tax liability 5,259 (22,816)
Federal income taxes payable 73,388 (11,973)
Other, net (133,988) (158,142)
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Net cash used in operating activities (1,213,893) (1,192,145)
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Investing activities:
Purchase of equipment (54,491) (32,442)
Purchase of investments (251,605) (238,063)
Maturities of investments 1,078,493 1,139,489
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Net cash provided by investing activities 772,397 868,984
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Net decrease in cash and cash equivalents (441,496) (323,161)
Cash and cash equivalents at beginning of period 601,587 759,749
----------- -----------
Cash and cash equivalents at end of period $ 160,091 $ 436,588
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information:
The Company made payments of $150,000 and $175,000 during the three months
ended March 31, 1998 and 1997 for federal income taxes, respectively.
The accompanying notes are an integral part of these financial statements
5
<PAGE>
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, Tennessee,
Indiana, Connecticut, Mississippi, Illinois, South Carolina, West Virginia,
Alabama, Michigan and the District of Columbia. The Surety Company distributes
bonds in these states through independent agents and brokers. Dreadnought
commenced operations in February 1997, and provides escrow and disbursement
services, inspections, subrogation recovery, dispute resolution, claims
handling, construction management and other surety related services.
(Mountbatten together with the Surety Company and Dreadnought are referred to
below as the "Company").
On May 6, 1998, Mountbatten entered into an Agreement and Plan of Merger with
Fidelity and Deposit Company of Maryland, a member of the Zurich Group. Upon
consummation of the merger, which is subject to certain conditions including
approval by Mountbatten's shareholders and by the Pennsylvania Insurance
Department, (a) each share of Mountbatten stock will be coverted into the
right to receive $14.60 in cash, and (b) each outstanding and unexercised
option and warrant to purchase Mountbatten's common stock will be cancelled
and, in consideration of such cancellation, the holder thereof will receive an
amount in cash equal to the excess of $14.60 over the exercise price per share
of such option or warrant for each share of common stock subject to such
option or warrant. The merger is expected to close in the third quarter of
1998.
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 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 adjustment expenses are discussed
throughout these notes. Actual results could differ from those estimates. All
intercompany amounts are eliminated in consolidation. Operating results for
the three-month period ended March 31, 1998 are not necessarily indicative of
results that can be expected for the fiscal year ending December 31, 1998.
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, 1997.
Premium and fee income 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 in connection with bonds written by the
Surety Company.
Cash equivalents:
Cash equivalents include highly liquid money market instruments with original
maturities of three months or less.
6
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Note 2 - Summary of Significant Accounting Policies: - (continued)
Investments:
The Company invests in U.S. Treasury securities with maturities ranging from
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 and are included in the
Statement of Comprehensive Income.
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 includes an estimate of an amount to be received from
its reinsurer relating to unpaid claims and claim adjustment expenses, and
includes amounts receivable for paid 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
receivable 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 receivable when a claim is incurred and it is highly
probable that the costs will be recovered from available job funds, from
assets belonging to the bonded principal or from assets belonging to other
indemnitors on the bond. Changes in estimates of subrogation receivable are
credited or charged to income in the period in which they are determined and
are included in claims and claim adjustment expenses.
Unpaid claims and claim adjustment expenses:
The reserve for unpaid claims and claim adjustment expenses represents the
estimated indemnity cost and claims adjustment expense to cover the ultimate
net cost of investigating, defending and settling claims. Such estimates are
based upon (a) an accumulation of case reserves, on an individual basis, for
claims reported prior to the close of the accounting period, (b) estimates for
incurred but unreported claims, as well as additional developments on reported
claims, as determined on the basis of industry experience, and (c) expenses
directly associated with specific claims paid or in the process of settlement.
Management believes that its reserve for unpaid and claim adjustment expense
at March 31, 1998 is reasonable and adequate to cover the ultimate cost of
losses on reported and unreported claims, but such reserve is necessarily
based on estimates and such estimates may be more or less than the amounts
ultimately paid when claims are settled. These estimates are periodically
reviewed and adjusted as necessary. Such adjustments are reflected in current
operations.
Reclassification:
Certain amounts in the 1997 Statement of Operations have been reclassified to
conform with current year presentation as follows: $18,000 has been
reclassified from claims and claim adjustment expenses to fee income. This
amount represents loss adjustment expense activities performed by Dreadnought.
7
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Note 3 - Income Taxes
The Company files a consolidated income tax return with its wholly owned
subsidiaries, the Surety Company and Dreadnought. Current taxes are allocated
among the Companies based upon a written tax sharing agreement. The Company
had a deferred tax liability of $91,750 and $86,491 at March 31, 1998 and
December 31, 1997, 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.
Effective November 1, 1995 to October 31, 1996:
The Company's reinsurance program for losses discovered during this period
provides four layers of reinsurance. Under the first layer, the Company
retains 100% of all losses up to $150,000 and the reinsurer assumes the next
$350,000, subject to a maximum annual recovery by the Company of the greater
of 250 percent of ceded premiums or $2,250,000. The second layer provides
$1,500,000 of coverage (95% to be assumed by the reinsurer) on any loss
discovered for any principal in excess of the first $500,000 of loss with an
aggregate annual maximum of $4,500,000. The third layer provides $2,500,000 of
coverage on any loss discovered for any principal in excess of the first
$2,000,000 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.
Effective November 1, 1996 to October 31, 1997:
The Company's reinsurance program for losses discovered during this period
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
$3,400,000. 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
$3,000,000. 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.
Effective November 1, 1997 to October 31, 1998
The Company's reinsurance program for losses discovered during this period
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
$4,250,000. The second layer provides $2,000,000 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
$6,000,000. The third layer provides $3,000,000 of coverage on any loss
discovered for any principal in excess of the first $3,000,000 of loss with an
aggregate annual maximum of $6,000,000. The fourth layer provides $4,000,000
of coverage on any loss discovered for any principal in excess of the first
$6,000,000 with an aggregate annual maximum of $4,000,000.
Prior to November 1997, 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 $10 million in the aggregate. Under this program,
the maximum bond duration could not exceed 24 months.
Effective November 1997, the reinsurance program required that the Company not
write any bond exceeding $6 million, or bonds on the same work program in
favor of the principal exceeding $12 million in the aggregate. The maximum
bond duration of 24 months remained the same.
8
<PAGE>
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 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 was not considered sufficient
in determining reserves, adjustments to reserves may be required. Included in
loss reserves at March 31, 1998 and December 31, 1997 are case reserves
totaling $4,271,922 and $2,749,759, respectively, and IBNR reserves of
$628,151 and $608,819, respectively.
Reinsurance receivable of $3,725,943 at March 31, 1998 includes $1,723,458
related to paid losses, offset by $20,349 received from the reinsurer as a
prepayment, and $2,022,834 of receivables related to unpaid losses.
Reinsurance receivable of $2,200,283 at December 31, 1997 includes $1,012,519
related to paid losses, offset by $20,349 received from the reinsurer as a
prepayment, and $1,228,462 of receivables related to unpaid losses.
9
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The Company's principal business activity is to underwrite surety bonds
through its wholly owned subsidiary, the Surety Company. 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 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 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
Michigan March 3, 1998
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
Three months ended March 31, 1998 compared to three months ended
March 31, 1997:
During the three-month period ended March 31, 1998, the Surety Company
generated $2,623,800 of gross written premiums, compared to $1,758,600 of
gross written premiums during the three-month period ended March 31, 1997,
representing an increase of $865,200 or 49%. 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
1997.
For the three months ended March 31, 1998, gross ceded reinsurance premiums
totaled $451,638, comprised of approximately $370,353 (a reinsurance rate of
approximately 14.1% of gross written premiums), plus $81,285 paid to the
reinsurer as a reinstatement charge associated with adverse development of a
claim from a prior year. For the three months ended March 31, 1997, gross
ceded reinsurance premiums totaled $279,266, representing a rate of
approximately 15.9% of gross written premiums. The increase in ceded
reinsurance premiums was primarily the result of the reinstatement charge, as
well as 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, 1997.
10
<PAGE>
Effective November 1, 1996 through October 31, 1997, the Company's work
program aggregate under its reinsurance treaty increased to $10 million from
$7.5 million. The maximum single bond limit remained at $5 million. However,
the Company's aggregate reinsurance coverage limits and reinstatements
increased, and ceded reinsurance premiums were calculated at approximately
15.3% of gross written premiums, net of the Company's 5% participation in the
first and second layers.
Effective November 1, 1997, for the twelve-month period ending
October 31, 1998, the Company's maximum single bond limit increased to $6
million from $5 million, and the work program aggregate increased to $12
million from $10 million. In addition, the Company's aggregate reinsurance
coverage limits and reinstatements increased, and ceded reinsurance premiums
will represent approximately 14.1% of gross written premiums, net of the
Company's 5% participation in the first and second layers.
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 $4,250,000. The second layer
provides $2,000,000 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 $6,000,000. The third layer provides
$3,000,000 of coverage on any loss discovered for any principal in excess of
the first $3,000,000 of loss with an aggregate annual maximum of $6,000,000.
The fourth layer provides $4,000,000 of coverage on any loss discovered for
any principal in excess of the first $6,000,000 with an aggregate annual
maximum of $4,000,000.
For the three months ended March 31, 1998 claims and claim adjustment expenses
incurred were $273,998, or an incurred loss and loss adjustment expense ratio
of 11.7%. This included approximately $230,515 of retention and participation
expenses associated with one bonded principal (or an incurred loss and loss
adjustment expense ratio of 9.8%). Net of the claims and claim adjustment
expenses associated with the one bonded principal, claims and claim adjustment
expenses incurred for the three months ended March 31, 1998 were $43,483, or
an incurred loss and loss adjustment expense ratio of 1.9%.
For the three months ended March 31, 1997, claims and claim adjustment
expenses incurred resulted in a benefit of $14,755, or an incurred loss and
loss adjustment expense benefit ratio of 1.1%.
The increase in claims and claim adjustment expenses between the periods,
exclusive of the loss associated with the one bonded principal in 1998, is the
result of less favorable development on prior year reserves, offset by
favorable claims experience for the first quarter of 1998.
At March 31, 1998 the Surety Company has established IBNR and case reserves of
$628,151 and $4,271,922, respectively, gross of reinsurance, to provide for
future claims and claim adjustment expense payments. Included in case reserves
is $2,850,000 associated with the one bonded principal mentioned above. The
Surety Company expects this case reserve to be funded by approximately
$1,157,000 of job funds and approximately $1,530,000 of reinsurance proceeds.
These amounts have been included in subrogation receivable and reinsurance
receivable, respectively, at March 31, 1998.
For the three months ended March 31, 1998 commission expenses were $838,733,
compared to $481,828 for the three months ended March 31, 1997. The increase
in commission expenses in 1998 relates to the higher level of gross written
premiums versus the 1997 period.
For the three-month periods ended March 31, 1998 and 1997, the Company
incurred salary and benefits costs of $444,190 and $334,907, respectively. The
increase in salary and benefit costs in 1998 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 March 31, 1998 the Company incurred $28,033 for
professional services and $284,204 for other operating expenses, compared to
$29,279 and $188,758, respectively, for the similar period in 1997. 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.
11
<PAGE>
For the three-month periods ended March 31, 1998 and 1997, the Company
generated $107,981 and $118,605, respectively, of income from its investments,
comprised exclusively of U.S. Government securities. The yield on average
invested assets for the 1998 and 1997 periods was 5.81% and 5.56%,
respectively. The decrease in interest income in 1998 is the result of a
decreased level of average invested assets, offset by a slightly higher yield.
The provision for income taxes for the three months ended March 31, 1998 was
$223,388 (an effective tax rate of 34%), as compared to $167,411 (an effective
tax rate of 31%) for 1997.
Net income for the three months ended March 31, 1998 was $433,634, as compared
to $324,973 for the three months ended March 31, 1997, an increase of
$108,661, or 33%.
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 these
subsidiaries to reimburse the Company for costs paid by the Company which are
deemed to benefit the subsidiaries. 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.
The Company had approximately $7,035,881 of investments and cash equivalents
at March 31, 1998, and approximately $8,288,798 of investments and cash
equivalents at December 31, 1997. The decrease in investments and cash
equivalents at March 31, 1998 results primarily from the payment during the
first quarter of 1998 of case reserves, most of which are associated with
claims submitted for reimbursement from the reinsurer. As of May 12, 1998
approximately $953,000 had been received from the reinsurer. The Company
expects additional funds to be received from the reinsurer during the second
quarter of 1998.
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 $9,597,043 at March 31, 1998, will be sufficient to support
the Surety Company's current and anticipated premiums and losses.
The Year 2000 Issue
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000.
The Year 2000 Issue affects virtually all companies and organizations.
Management believes the Year 2000 Issue will not have a material adverse
effect on the Company's financial position or operations.
12
<PAGE>
PART II: OTHER INFORMATION
Item 5. Other Information
The Registrant has entered into an Agreement and Plan of Merger (the
"Agreement") with Fidelity and Deposit Company of Maryland, dated May
6, 1998, which is subject to approval by the Company's shareholders
and by the Insurance Department of the Commonwealth of Pennsylvania.
The Registrant intends to a file a Form 8-K Current Report regarding
such Agreement.
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.
May 12, 1998 MOUNTBATTEN, INC.
By /s/ Kenneth L. Brier
--------------------------------------
Kenneth L. Brier
President and Chief Executive Officer
(principal executive officer)
By /s/ Joel D. Cooperman
---------------------------------------
Joel D. Cooperman
Vice President, Finance, Treasurer, and
Chief Financial Officer
(principal financial and accounting officer)
14
<PAGE>
Exhibit Index
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.2 Amended and Restated Articles of Incorporation of
Registrant, as amended (incorporated by reference to Exhibit
3.2 of Registrant's Form 10-QSB report for the quarter ended
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)
Basic Net Income Per Share
Three months ended March 31,
1998 1997
--------- ----------
Net Income available to
Common Shareholders $ 433,634 $ 324,972
========= ==========
Weighted Average Shares:
--------- ----------
Common shares 2,528,530 2,528,530
========= ==========
Basic Net Income per Share $ 0.17 $ 0.13
========= ==========
Diluted Net Income Per Share
Net Income available to
Common Shareholders $ 433,634 $ 324,972
========= ==========
Weighted Average Shares:
Common shares 2,528,530 2,528,530
Common share equivalents
applicable to stock options 271,627 203,324
--------- ----------
Total 2,800,157 2,731,854
========= ==========
Diluted Net Income per Share $ 0.15 $ 0.12
========= ==========
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 6,875,790
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
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<TOTAL-INVEST> 6,875,790
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0
0
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2,623,800
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<EPS-PRIMARY> 0.17
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<RESERVE-OPEN> 3,358,578
<PROVISION-CURRENT> 106,136
<PROVISION-PRIOR> 167,862
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