-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R0P56R9/h7KQajYfsYEKZ8g09c7Of+8v/5JMQiFBOwdBMIxDxhfZ3EQJTwtai5oM 9JInwAqE8W9vZF/PTviCaQ== 0000910647-99-000150.txt : 19990518 0000910647-99-000150.hdr.sgml : 19990518 ACCESSION NUMBER: 0000910647-99-000150 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH EAST INSURANCE CO CENTRAL INDEX KEY: 0000352162 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 010278387 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-11184 FILM NUMBER: 99628531 BUSINESS ADDRESS: STREET 1: 482 PAYNE RD CITY: SCARBOROUGH STATE: ME ZIP: 04074 BUSINESS PHONE: 2078832232 MAIL ADDRESS: STREET 1: 482 PAYNE RD CITY: SCARBOROUGH STATE: ME ZIP: 04074 10QSB 1 BODY OF 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10 - QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended March 31,1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from --------- to --------- Commission File No. 0-11184 NORTH EAST INSURANCE COMPANY (Name of small business issuer as specified in its charter) Maine 01-0278387 (State or other jurisdiction of (I.R.S employer incorporation or organization) identification number) 482 Payne Road, Scarborough, Maine 04074 ( Address of principal executive offices ) (207) 883-2232 (Issuer's telephone number) 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 issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 7, 1999 there were 3,049,089 outstanding shares of Common Stock, $1.00 par value, the only authorized class of the issuer. Transitional Small Business Disclosure Format: Yes [ ] No [X] NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES INDEX ----- Part I. - Financial Information Item 1 - Financial Statements Consolidated Balance Sheet As of March 31,1999 3 Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31,1999 and 1998 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31,1999 and 1998 5 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of the Financial Condition and Results of Operations 9 Part II - Other Information Item 5 - Other Information 13 Item 6 - Exhibits and Reports on Form 8-K 15 Item 1. FINANCIAL INFORMATION - ----------------------------- North East Insurance Company and Subsidiaries Consolidated Balance Sheet As of March 31, 1999
1999 ---- ASSETS Investments: Fixed maturities available for sale, at fair value (amortized cost $13,841,644) $14,142,430 Equity securities available for sale, at fair value (cost $616,374) 626,667 Short-term investments 1,965,480 ----------- Total investments 16,734,577 Reinsurance (loss and loss adjustment expense reserves and paid recoverables) 2,709,001 Premium balances receivable 6,363,691 Reinsurance balances receivable 1,593,392 Deferred policy acquisition costs 1,892,979 Cash 280,952 Prepaid reinsurance premiums (ceded unearned premium) 775,581 Investment income due and accrued 235,792 Property and equipment, net of accumulated depreciation 242,758 Deferred tax asset 1,949,150 Prepaid federal income tax 9,242 Other assets 104,832 ----------- Total Assets $32,891,947 =========== LIABILITIES Losses and loss adjustment expenses $12,650,123 Unearned premiums 8,527,875 Reinsurance balances payable 893,549 Reserve for unpaid expenses 644,451 Book overdraft 372,654 Other liabilities 82,984 ---------- Total Liabilities 23,171,636 SHAREHOLDERS' EQUITY Common stock $1.00 par value, authorized 12,000,000 shares, issued 3,049,089 and outstanding shares 3,049,089 Additional paid-in capital 6,407,132 Accumulated other comprehensive income 205,312 Accumulated retained earnings 58,778 ------------ Total Shareholders' Equity 9,720,311 ------------ Total Liabilities and Shareholders' Equity $32,891,947 ============
The accompanying notes are an integral part of the consolidated financial statements. North East Insurance Company and Subsidiaries Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months ended March 31, Consolidated Statements of Operations -------------------------------------
1999 1998 ---- ---- Revenues: Premiums earned $3,763,399 $3,021,357 Premiums ceded 673,792 482,400 -------------------------- Net premiums earned 3,089,607 2,538,957 Net investment income 185,039 223,763 Realized capital gains 3,304 33,192 -------------------------- Total revenues 3,277,950 2,795,912 Expenses: Losses and loss adjustment expenses 2,614,489 2,644,689 Reinsurance recoveries (51,520) (166,513) -------------------------- Net losses and loss adjustment expenses 2,562,969 2,478,176 Underwriting expenses incurred 1,434,279 1,078,492 -------------------------- Total expenses 3,997,248 3,556,668 -------------------------- Income (loss) before provision for income taxes (719,298) (760,756) Provision (credit) for income taxes (245,685) (269,942) -------------------------- Net income (loss) $ (473,613) $ (490,814) ========================== Net income (loss) per common share: Basic $ (0.16) $ (0.16) ========================== Diluted $ (0.15) $ (0.16) ==========================
Consolidated Statements of Comprehensive Income (Loss)
1999 1998 ---- ---- Net income (loss) $(473,613) $(490,814) Other comprehensive income (loss), net of income tax: Change in unrealized appreciation (depreciation) of securities (tax credit 1999 - $32,425; 1998 - $877) (59,639) 31,490 Reclassification adjustment for gains included in net income (tax expense (credit) 1999 - $ 0; 1998 - $ 0) (3,304) (33,192) ------------------------- Comprehensive income (loss) $(536,556) $(492,516) =========================
The accompanying notes are an integral part of the consolidated financial statements. North East Insurance Company And Subsidiaries Consolidated Statements of Cash Flows for the Three Months ended March 31,
1999 1998 ---- ---- Cash flow from operating activities: Insurance premium received $3,474,978 $3,472,758 Loss and loss adjustment expenses paid (2,866,964) (1,396,176) Operating expenses paid (1,640,340) (1,122,195) Investment income received 199,669 213,416 -------------------------- Net cash provided by (used) in operating activities (832,657) 1,167,803 -------------------------- Cash flows from investing activities: Fixed maturities available for sale, sold 2,382,898 2,065,995 Fixed maturities available for sale, purchased (984,100) (1,997,344) Equity securities available for sale, purchased (114,746) (41,485) Purchase of furniture, fixtures and equipment (22,571) (2,755) -------------------------- Net cash provided by investing activities 1,261,481 24,411 -------------------------- Cash flows from financing activities: Increase (decrease) in book overdraft (20,081) 314,437 -------------------------- Net cash provided by (used) in financing activities (20,081) 314,437 -------------------------- Net increase in cash, and short-term investments 408,743 1,506,651 Cash and short-term investments at beginning of year 1,837,689 3,772,738 -------------------------- Cash and short-term investments at end of period $2,246,432 $5,279,389 ==========================
The accompanying notes are an integral part of the consolidated financial statements. North East Insurance Company And Subsidiaries Consolidated Reconciliation of Cash Used In Operating Activities to Net Income (Loss) for the Three Months ended March 31,
1999 1998 -------------------------- Net income (loss) $(473,613) $ (490,814) Decrease in net premium and ceded reinsurance balances 237,437 535,646 Increase in unearned premium reserve 147,934 398,155 Increase (decrease) in net loss and loss adjustment expense reserve (303,995) 1,082,000 Decrease (increase) in investment income due and accrued 14,630 (10,347) Increase in deferred tax asset (245,685) (269,942) Increase in deferred policy acquisition costs (36,749) (69,332) Decrease in expense accruals (219,325) (36,795) Amortization of bond premium, net 20,218 15,069 Depreciation and amortization expense 29,795 48,031 Gain on investment activities (3,304) (33,868) -------------------------- Net cash provided by (used) in operating activities $(832,657) $1,167,803 ==========================
The accompanying notes are an integral part of the consolidated financial statements. North East Insurance Company and Subsidiaries Notes to Consolidated Financial Statements March 31, 1999 1. Basis of Presentation --------------------- The condensed financial statements included herein have been prepared by the Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Registrant believes that the disclosures which are made are adequate to make the information presented not misleading, particularly when read in conjunction with the financial statements and the notes thereto included in the Registrant's latest annual report on Form 10-KSB. In Management's opinion, the attached interim financial statements reflect all adjustments which are necessary for a fair statement of the results for the periods presented. 2. Accounting Pronouncements Adopted --------------------------------- On January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3, " Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" which provides guidance on accounting for insurance-related assessments. The adoption of SOP 97-3 did not have a material impact on North East's results of operation, liquidity or financial position. On January 1, 1999, the Company adopted SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk", which provides guidance on applying the deposit method of accounting to insurance and reinsurance contracts that do not transfer insurance risk. The adoption of SOP 98-7 did not have a material impact on North East's results of operation, liquidity or financial position. 3. Earnings per Share ------------------ Earnings per share are computed in accordance with the provisions of FAS No. 128 "Earnings Per Share" ("EPS") which requires the dual presentation of basic and diluted earnings per share. Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. The weighted average number of shares outstanding used to calculate basic EPS was 3,049,089 and 3,046,842 in 1999 and 1998, respectively. The weighted average number of shares outstanding used to calculate diluted EPS was 3,146,011 and 3,134,211 in 1999 and 1998, respectively. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding while giving effect to all dilutive potential common shares outstanding. The difference between basic and diluted shares used to calculate EPS is the dilutive effect of stock options. Net income used to calculate basic and diluted EPS was identical. 4. Reinsurance ----------- During the first quarter of 1999, the Company endorsed the aggregate coverage provided under its first layer excess of loss treaty for the 1999 calendar. The revision encompased premium rate, coverage period and attachment point for the experience rated premium adjustment. Effective for the coverage period January1, 1999 to March 31, 1999, the Company incurred $312,500 in reinsurance premium cost for coverage in the event that the Company's ratio of net losses and allocated loss adjustment expenses incurred to net premiums earned, before giving effect to this reinsurance arrangement, exceeded 75%. This contract did not meet the requirements of Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", and is being accounted for following the guidance of SOP 98-7. At March 31, 1999, the Company's deposit liability recorded in its Consolidated Balance Sheet was $ 62,500. 5. Litigation ---------- A former executive (Mr. Koren) has asserted employment-related claims against the Company under an Employment Continuity Agreement and for alleged discrimination on the basis of age, religion, and disability. The Employment Continuity claim is for special severance compensation of approximately $170,000 plus continuation of certain benefits; no amount of damages has been specified on the discrimination claims. The Company has denied liability, and management has stated an intention to defend vigorously against any claims that Mr. Koren may bring. 6. Merger Agreement ---------------- The Company has entered into an Agreement and Plan of Merger, dated as of March 16, 1999, with Motor Club of America. The agreement provides for a merger by which NEIC would become a wholly-owned subsidiary of Motor Club. Consummation of the merger is subject to various conditions, including approval of the transaction by shareholders of both NEIC and Motor Club and receipt of insurance regulatory approvals in Maine and New York. In its Maine regulatory filing, Motor Club has stated an intention to contribute at least $2 million of additional capital to NEIC upon consummation of the merger. North East Insurance Company and Subsidiaries Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 1999 - --------------------------------- Gross (direct plus assumed) premiums earned for the three months ended March 31,1999 amounted to $3,763,399 representing a growth of 24.6% over the $3,021,357 recorded in the first three months of 1998. This increase reflects substantial increased premium volume in the third and fourth quarters of 1998 from our new personal automobile insurance program ("AutoMatic"), introduced late in the second quarter of 1998. Net premiums written amounted to $3,237,541 for the three months ended March 31, 1999 compared with $2,937,112 for the three months ended March 31, 1998. During the first quarter of 1999, the Company endorsed the aggregate coverage provided under its first layer excess of loss treaty for the 1999 calendar. The revision encompassed premium rate, coverage period and attachment point for the experience rated premium adjustment. Effective for the coverage period January 1, 1999 to March 31, 1999, the Company incurred $312,500 in reinsurance premiums for coverage in the event that the Company's ratio of net losses and allocated loss adjustment expenses incurred to net premiums earned, before giving effect to this reinsurance arrangement, exceeded 75%. This contract did not meet the requirements of Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", and is being accounted for following the guidance of SOP 98-7. At March 31, 1999, the Company's deposit liability recorded in its Consolidated Balance Sheet was $62,500. Net premiums earned for the three months ended March 31, 1999 and 1998 amounted to $3,089,607 and $2,538,957, respectively, an increase of 21.6%, due principally to AutoMatic. Loss and loss adjustment expense represented 82.9% and 97.6% of net earned premium for the three months ended March 31, 1999 and 1998, respectively. Typically the loss and loss adjustment expense ratios in the first quarter are significantly higher than the second and third quarters; the fourth quarter normally exhibits a ratio higher than the second and third quarters but lower than the first quarter. The higher than normal loss and loss adjustment expense ratio experienced in 1998 was attributable to the ice storm which paralyzed much of southern Maine for more than 10 days and several lessor publicized snowstorms. Underwriting expenses incurred represented 44.3% and 36.7% of net premiums written for the three months ended March 31, 1999 and 1998, respectively. Expenses for the first quarter of 1999 include one time expenses associated with the proposed pending merger of approximately $100,000 or three percentage points when expressed as a percent of net written premium. Gross investment income amounted to $230,224 for the three months ended March 31, 1999 compared with $273,763 for the three months ended March 31, 1998. The return on fixed maturities, based on amortized cost, before expenses was 6.7% for both three month periods ended March 31, 1999 and 1998. The lower return in 1999 reflects a lower level of total invested assets and a decline in short term money rates for the periods under comparison. Net loss for the three months ended March 31, 1999 amounted to $473,613 or $0.16 per share compared with a net loss of $490,814 or $0.16 per share for the three months ended March 31, 1998. Shareholders' equity at March 31, 1999 amounted to $9,720,311 or $3.19 per share compared with $10,256,867 or $3.36 per share at December 31, 1998. Liquidity and Capital Resources - ------------------------------- Cash used by operating activities amounted to $832,657 for the three months ended March 31, 1999 compared with cash provided by operating activities of $1,167,803 for the three months ended March 31, 1998. Cash flow for the first quarter of 1998 included receipt of approximately $2,450,000 due the Company under its reinsurance treaties. Cash provided by investing activities amounted to $1,261,481 and $24,411 for the three months ended March 31, 1999 and 1998, respectively. The fair value of the Company's fixed maturities available for sale was $300,786 more than the amortized cost at March 31,1999 compared with $425,187 more than amortized cost at December 31,1998. During the first quarter of 1999 and 1998 the Company used $114,746 and $41,485, respectively for the purchase of equity securities. The Company maintains short-term investments to provide a cash resource should the demands from operations exceed incoming cash flow. Short-term investments amounted to $1,965,480 at March 31, 1999 compared with $1,526,752 at December 31, 1998. The Company believes that this level is sufficient to meet any unanticipated cash demands. YEAR 2000 ISSUES North East has substantially completed its review of internal systems and believes such systems to be Y2K compliant. NEIC is still in the process of contacting its independent agents and key vendors to ascertain their status relative to Y2K issues; the Company expects to have completed this process by July 1, 1999. The Company does not yet have a contingency plan for Y2K-related disruptions in its systems. It expects to complete such a plan by the fourth quarter of 1999. The Company estimates that the cost of upgrading its information processing systems (over and above normal systems maintenance costs) did not exceed $1,000,000 from 1995 through the date of substantial completion of the upgrade. This upgrade was motivated primarily by factors other than Y2K compliance. The Company estimates its additional expenditures for Y2K compliance will not exceed $100,000. No assurance can be given that the Company will be fully Y2K compliant by the dates required. However, based on current information, the Company believes that the effects of any noncompliance will not be material to the overall operations of the Company. Forward-Looking Information - --------------------------- From time to time, NEIC publishes information that includes forward-looking statements, as defined in Section 21E of the Securities Exchange Act of 1934. This "Management's Discussion and Analysis" section of this Form 10- QSB contains forward-looking statements, such as estimates of future revenue growth and estimates of costs and implementation dates associated with Y2K compliance efforts. The Company cautions readers that numerous factors beyond NEIC's control could cause projected revenue growth to differ materially from the levels reflected in these forward-looking statements, including changes in the changes in the pricing of competing policies, consolidation among insurance agents, and changes in consumer preferences. Factors that could cause Y2K- related costs to exceed expectations include the failure of agents and outside vendors to cooperate with NEIC compliance efforts and unanticipated problems with systems believed to be Y2K compliant. North East Insurance Company and Subsidiaries Part II: OTHER INFORMATION - -------------------------- Item 1. Legal Proceedings By letter from his counsel dated March 17, 1999, an executive officer (Samuel M. Koren) gave notice of termination of his employment, asserting a claim against NEIC for approximately $170,000 of special severance compensation under an Employment Continuity Agreement, plus continuation of certain benefits. Mr. Koren later stated an intention to file claims for unlawful discrimination against him on the basis of age, religion, and disability; he has not specified an amount of damages as to these discrimination claims. The Company has denied liability on all asserted claims. To date no litigation or arbitration has been commenced. Under an Agreement and Plan of Merger dated as of March 16, 1999 between NEIC and Motor Club of America, the Company generally may not settle claims in excess of $40,000 or pay additional severance compensation without the consent of Motor Club. Management of NEIC has stated an intention to defend vigorously against any claims that Mr. Koren may bring. Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information As previously reported, NEIC executed an Agreement and Plan of Merger, dated as of March 16, 1999, with Motor Club of America. Motor Club is an insurance holding company located in Paramus, New Jersey. Motor Club's common stock is publicly traded on the NASDAQ Stock Market, under the symbol "MOTR". The agreement provides for a merger by which NEIC would become a wholly-owned subsidiary of Motor Club. For each share of NEIC stock, a NEIC shareholder may elect to receive (a) $3.30 in cash, (b) 0.19048 shares of Motor Club stock, or (c) a combination of cash and stock. If the NEIC shareholders in the aggregate elect to exchange more than 50% of their shares for MOTR stock, the elections will be ratably reduced to 50%. Consummation of the merger is subject to various conditions, including receipt of shareholder approval and insurance regulatory approvals. As previously reported, NEIC executed an Agreement and Plan of Merger, dated as of March 16, 1999, with Motor Club of America. Motor Club is an insurance holding company located in Paramus, New Jersey. Motor Club's common stock is publicly traded on the NASDAQ Stock Market, under the symbol "MOTR". The agreement provides for a merger by which NEIC would become a wholly-owned subsidiary of Motor Club. For each share of NEIC stock, a NEIC shareholder may elect to receive (a) $3.30 in cash, (b) 0.19048 shares of Motor Club stock, or (c) a combination of cash and stock. If the NEIC shareholders in the aggregate elect to exchange more than 50% of their shares for MOTR stock, the elections will be ratably reduced to 50%. Consummation of the merger is subject to various conditions, including receipt of shareholder approval and insurance regulatory approvals. In a letter dated April 23, 1999, the Maine Bureau of Insurance notified NEIC that its total investments in subsidiaries and common stocks as of December 31, 1998 exceeded a statutory diversification threshold. Under Section 1106(2) of the Maine Insurance Code, an insurer "may not invest in aggregate amount in excess of surplus as to policyholders in [specified investments, including subsidiaries and common stocks]." The Bureau also expressed concern over the Company's year-end Risk Based Capital ratio of 271%, which is approaching a regulatory threshold that would require the filing of a plan to address capital issues. In its response dated April 30, 1999, management stated that NEIC's investment activities during 1998 complied with applicable diversification requirements. The Company listed three steps that it was taking to address capital issues in 1999: (1) Motor Club of America has stated its intention to invest at least $2 million of new capital in NEIC upon consummation of the contemplated merger transaction; (2) NEIC expects to receive an intercompany dividend in 1999 from its principal subsidiary (American Colonial Insurance Company) of just under $0.5 million, pending approval from the New York Insurance Department; and (3) the Company has suspended further purchases of common stock for its investment portfolio. Management expects that statutory limits on investment policies will not materially affect the Company. Item 6. Exhibits and Reports on Form 8 - K a) Exhibits 27 Financial Data Schedules b) Reports on Form 8-K The Company filed a Form 8-K report on January 27, 1999, regarding a non-binding agreement in principle for Motor Club of America to acquire NEIC through a merger. The Company filed a Form 8-K report on March 19, 1999, regarding execution of an Agreement and Plan of Merger dated as of March 16, 1999 with Motor Club. North East Insurance Company and Subsidiaries Form 10-QSB Exhibit Index Exhibit Number Description Page - ------------------------------------------------- 27 Financial Data Schedules 17 North East Insurance Company and Subsidiaries 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. North East Insurance Company Date: May 14, 1999 By /S/Robert G. Schatz Robert G. Schatz President and Chief Executive Officer Date: May 14, 1999 By /S/Graham S. Payne Graham S. Payne Treasurer and Chief Financial Officer EX-27 2 FDS ARTICLE 7
7 0000352162 NORTHEAST INSURANCE COMPANY 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 14,142,430 0 0 626,667 0 0 14,769,097 1,965,480 2,709,001 1,892,979 32,891,947 12,650,123 8,527,875 0 0 0 0 0 3,049,089 6,671,222 32,891,947 3,089,607 185,039 3,304 0 2,562,969 1,434,279 0 (719,298) (245,685) (473,613) 0 0 0 (473,613) (0.16) (0.15) 0 0 0 0 0 0 0
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