<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10 - KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from .................. to ................
Commission File No. 0-11184
NORTH EAST INSURANCE COMPANY
(Name of small business issuer 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 ) ( Zip code )
Issuer's telephone number: (207) 883-2232
Securities registered under to Section 12(b) of the Exchange Act: None
Securities registered under to Section 12(g) of the Exchange Act:
Common Stock, Par Value $1.00
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-KSB or any
amendment to Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $7,943,949
The aggregate market value of the voting stock held by non-affiliates as of
March 8, 1996 was $3,740,392.
There were 2,992,314 common shares outstanding as of March 8, 1996.
Documents Incorporated by Reference: Portions of the Proxy Statement for 1996
Annual Meeting of Shareholders (to be filed by April 30, 1996 are incorporated
into Part III Transitional Small Business Disclosure Format: Yes No X
--- ---
Page 1 of 91
Exhibit index on Page 55
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
North East Insurance Company ("North East" or "NEIC") was organized as a Maine
corporation on August 9, 1965 and began writing insurance in June, 1966. In
1981, North East's securities became publicly traded (Symbol: NEIC). The
Company has a wholly-owned subsidiary, American Colonial Insurance Company
("ACIC"), a New York corporation, which began business in 1982. In addition to
ACIC, North East owns 100% of North Atlantic Underwriters, Inc., a Maine
corporation ("NAU"), an in-house brokerage operation which assists North East
in marketing its insurance products to independent brokers. The consolidated
financial results of North East and its subsidiaries (the "Group") for 1995 and
prior years are presented and discussed elsewhere in this report. See
"Consolidated Financial Statements" and "Management's Discussion and Analysis".
At December 31, 1995 the Group employed thirty eight full-time employees and
two part time employees.
The Group is engaged in the business of underwriting and accepting property and
casualty insurance risks. Its principal insurance products consist of personal
and commercial automobile coverage (including automobile liability and
automobile physical damage) and other general lines including but not limited
to homeowners, general liability, commercial multi-peril, inland marine, fire
and allied lines. In 1995 the Company, as a result of poor performance, ceased
issuing new homeowners policies .
North East or its subsidiary, ACIC, is licensed to write business in the states
of Florida, Louisiana, Maine, Mississippi, Nevada, New York, Rhode Island,
Texas and Utah and in the District of Columbia. In addition, either North East
or ACIC is approved to write business as a surplus lines carrier on a
non-admitted basis in several other states. These licenses and approvals are
subject to regulatory limitations in certain of the named jurisdictions. North
East has limited its writing of insurance products to the State of Maine since
1986. ACIC, under an agreement with the Insurance Department of the State of
New York, has not written any new or renewed any existing business since March
1990 (see "Description of Business-Regulation).
The Group believes that it can compete favorably for small personal and
commercial insurance premium/risk accounts by providing prompt service to
agents and insureds. All products offered by North East include payment options
which afford the insured the opportunity to select an option in which the
payments are made over the policy term. The payment options further benefit
commercial insureds, providing an alternative to avoid costly premium finance
charges.
The following is a summary of selected consolidated financial information for
each of the three years in the period ended December 31, 1995. This information
is prepared in
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accordance with generally accepted accounting principles and should be read in
conjunction with the Consolidated Financial Statements and the Notes presented
elsewhere in this report.
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------
1995 1994 1993
<S> <C> <C> <C>
Total Assets $34,483,828 $34,335,453 $37,985,881
Total Liabilities 28,062,777 31,136,581 32,145,990
Shareholders' Equity 6,421,051 3,198,872 5,839,891
Net Premiums Written 5,798,259 9,963,504 9,769,432
Net Premiums Earned 6,871,074 10,252,642 10,075,705
Net Investment Income 1,298,601 1,530,734 1,851,051
Realized Capital Gains(Losses) (225,726) (473,102) 798,736
Total Revenue, Net 7,943,949 11,310,274 12,725,492
Income (Loss) Before
Provision for Income Taxes 762,818 (947,957) 490,314
Provision for Income Taxes 14,500 0 10,000
Net Income (Loss) $ 748,318 $ (947,957) $ 480,314
</TABLE>
The operating results of the Group have historically relied on income from
investment activities (including realized capital gains) to provide sufficient
income to offset underwriting losses. Underwriting losses amounted to $310,057,
$2,005,589 and $2,159,473 for the years ended December 31, 1995, 1994 and
1993, respectively.
UNDERWRITING
The Group experienced a loss and loss adjustment expense ratio of 58.0% and an
expense ratio of 55.1% in 1995. The combined ratio for the Group in 1995 was
113.1%, meaning that loss and loss adjustment expenses and underwriting
expenses exceeded related premium by 13.1%. This represents an improvement over
1994 and 1993, which had combined ratios of 120.6% and 122.7%, respectively.
The combined ratio is a key measure of underwriting profitability traditionally
used in the property and casualty insurance business. It equals the sum of the
ratio of losses and loss adjustment expenses to net premiums earned and the
ratio of underwriting expenses incurred to net premiums written.
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The Group's underwriting results may be best understood by viewing the book of
business underwritten and earned by North East separately from that of ACIC for
1995. The results of North East represent ongoing operations of the Group,
whereas the ACIC book is in run-off. ( For additional information see Item 6
"Management's Discussion and Analysis").
North East Insurance Company
- ----------------------------
<TABLE>
Underwriting results for North East by line of business for 1995 were as follows:
<CAPTION>
Net Net
Premiums Premiums Operating
Written Earned Gain (Loss)*
-------- ------ ------------
<S> <C> <C> <C>
Auto Liability $3,572,608 $4,295,285 $ (8,859)
Auto Physical Damage 1,371,315 1,628,961 (318,783)
Commercial Multi-peril 272,531 295,400 178,844
Homeowners 164,061 214,881 (245,525)
All Other 397,737 416,540 (325,732)
---------- ---------- ---------
TOTAL $5,778,252 $6,851,067 $(720,055)
========== ========== =========
<FN>
*Before net investment income and realized capital gains (losses).
</TABLE>
The Auto Liability book of business includes commercial vehicles, primarily in
the logging industry, non-standard private passenger coverage and snowmobiles.
The Auto Liability book produced a loss and loss adjustment expense ratio of
56.5% in 1995.
The Auto Physical Damage book primarily reflects coverage for private passenger
automobiles in Maine, a historically good performing line for North East. For
the year ended December 31, 1995, the loss and loss adjustment expense ratio
for Auto Physical Damage was 72.6%.
The Homeowners book, discontinued in 1995, experienced a loss and loss
adjustment expense ratio of 170.1% for the year ended December 31, 1995.
The remainder of North East's book consists of Commercial Multi-Peril, General
Liability, Fire & Allied Lines and Inland Marine. The loss and loss adjustment
expense ratio for these lines of business was 69.6% for the year ended December
31, 1995.
The loss and loss adjustment expense ratio for all lines of North East's
business in 1995 was 65.2% and the expense ratio was 53.7% resulting in a
combined loss and expense ratio of 118.9%. This combined ratio indicates the
business produced an underwriting loss of 18.9% for each net premium dollar for
the year ended December 31, 1995.
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American Colonial Insurance Company
- -----------------------------------
ACIC, which has not written any new or renewal business since March 1990,
experienced favorable development in its loss and loss adjustment expense
reserves in 1995 amounting to $482,135. This favorable development was
attributable to the auto liability and general liability lines of business.
The runoff of ACIC's book of business is well into its sixth year. As time
passes, the ability to predict the ultimate outcome of ACIC's unsettled claims
becomes less precise due to the majority of ACIC's outstanding claims being in
litigation making the outcome more difficult to predict. ACIC's total loss and
loss adjustment expense reserves amounted to $5,222,413 at December 31, 1995
compared with $6,541,918 at December 31, 1994. Management believes these
reserves are adequate to cover all future loss settlements and represent the
best estimate of the total liability as of the balance sheet date, however,
management is also cognizant that the final ultimate liability will yield a
varied result. Management will continue to monitor ACIC's claim settlements
closely in order to provide timely adjustments to this reserve when
appropriate.
MARKETING
NEIC utilizes independent agents to market its products. Management strives to
enhance agency relationships and encourage their longevity through an agency
relations program. An agents advisory board, established by North East in
1991, allows a forum for North East to identify problems facing agents and
implement changes, where appropriate. Through the advisory board, agents can
express their views on North East's performance and how North East may better
fill their needs. In addition, periodic regional roundtable meetings are held,
to which all agents and their representatives are invited to discuss the
direction of the Company and changes the Company plans to implement.
In March of 1995, management commenced an agency review utilizing quantitative
and qualitative measures. Factors in the review included volume - written
premium, historical loss ratios - one and three year analysis, mix of products,
North East's rank in agents' office, other carriers represented by the agency,
professionalism of agency personnel, long term plans of agency, geographic
location and agents' plans or needs for North East. The review concluded that
certain agents did not conform to the Company's needs, and approximately 40
agency relationships were canceled resulting in the loss of approximately
$1,000,000 in direct premium writings. The agency review process will continue
in 1996.
At year end 1995 there were approximately 90 active authorized agents who
represent North East and have binding authority and approximately 60 active
independent brokers whose business is subject to underwriting acceptance by
North East. The agents produced 89.4% of the business written by North East in
1995, with the independent brokers accounting for the remaining 10.6%. North
East chooses to utilize both independent agents and brokers in order to
maximize its geographical service and marketing coverage while
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maintaining a solid but smaller core of authorized agents who can directly
represent the Company.
Certain of the agents and brokers are under common ownership. Although no
single agency produced more than 5% of North East's direct premiums written in
1995, one affiliated group of agents was responsible for 8.6%, a second group
accounted for 7.9% and a third group accounted for 5.5%. Nine agents provided
the Company with direct premiums written in excess of $200,000, and twenty five
agents provided the Company with direct premiums written between $100,000 and
$200,000.
While the loss of any individual producing agent could have an impact on the
business of North East, management believes it has a good relationship with its
agents.
Independent brokers are compensated solely on a commission basis, whereas the
authorized agents, in recognition of North East's reliance on them for the
selection of profitable business, are compensated with both commissions and a
profit sharing plan. The profit sharing plan provides each agent with the
incentive to earn additional compensation provided certain volume and
underwriting profitability guidelines are met. Profit sharing payments amounted
to approximately $48,640, $98,129 and $118,206 in 1995, 1994 and 1993,
respectively, and are expected to continue to increase as agents recognize the
heightened incentives under the plan.
REINSURANCE
The Group operates under the philosophy of retaining as much risk as is prudent
for its size, purchasing reinsurance from qualified professional reinsurers and
continually monitoring these relationships. The Group's intention is to seek
out and develop reinsurance relationships only with those professional
reinsurers who meet the Group's criteria for financial integrity. The Group's
current reinsurance is placed through a reinsurer rated "A" by A.M. Best. In
formulating its reinsurance arrangements, the Group complies with both Maine
and New York insurance laws prohibiting the retention of any individual risk in
an amount exceeding 10% of its surplus.
The Group manages its risk exposure through both individual risk excess of loss
reinsurance arrangements (treaties), casualty clash excess of loss and property
catastrophic excess of loss reinsurance in which the reinsurers assume that
portion of the risk not retained by the Group. The Group also employed a 35%
quota share treaty for the full year ended December 31, 1995. The Group's
maximum net retention for the period between January 1, 1995 and November 30,
1995 was $65,000 and $32,850 for the period of December 1,1995 to December
31,1995.
The ceding of business to reinsurers does not discharge the Group from its
ultimate liability to the policyholder. The Company is liable to the
policyholder for the full claim amount and is responsible for collecting the
reinsured portion from its reinsurers. Management believes, based on the
information available to it, that its present reinsurers are of sound financial
condition and will honor their obligation.
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INVESTMENTS
At December 31, 1995, based on current market values, 57% of the fixed
maturities were invested in U.S. Treasuries or U.S. guaranteed instruments, 7%
were invested in public utilities and 36% were invested in corporate
securities. The Group does not purchase securities with the intention of
holding such securities through their maturity date and therefore does not
match the maturation dates to the anticipated payouts of its claim liabilities.
The Group anticipates, based on its most recent experience and trends, it will
be necessary to sell a portion of ACIC's invested assets in 1996 in order to
fund its day to day operating needs.
The Group also maintains short-term investments, primarily U. S. Government
backed funds, which are immediately available for operating activities should
cash outflow suddenly exceed incoming cash from premium collections and
investment income. At December 31, 1995, short-term investments amounted to
$1,868,258.
The gross average investment yield based on amortized cost of the investment
portfolio was 7.1% and 6.8% for the years ended December 31, 1995 and 1994,
respectively. The total return, including realized capital gains (losses) was
5.2% and 4.9% for the years ended December 31, 1995 and 1994, respectively.
The Board of Directors has recently established a committee to review the
Group's investment policy. It is anticipated that, as a result, the Group may
restructure its investment portfolio to include shorter duration securities.
REGULATION
The Group is subject to regulation and supervision by the Maine Superintendent
of Insurance or similar official in each of the jurisdictions in which it is
authorized to transact insurance business. Such regulation and supervision
includes, among other things, requirements as to capital and surplus, solvency
standards, granting and revoking licenses to transact business and the
licensing of agents, approval of policy forms and rates, restrictions on the
amount of risk assumed, deposits of securities, methods of computing reserves
and the types and concentration of investments permitted. The Group is
required to file detailed annual and other reports of its financial condition,
affairs and management with such regulatory agencies and is subject to periodic
examination by them.
During 1995 the Maine Bureau of Insurance conducted an examination of North
East for the three-year period ended December 31, 1994. The Bureau's report
(which is in the final stages of completion) calls for a reduction in the
Company's reported statutory surplus as of the end of 1994, from $3,765,107 to
$3,476,356. Of the reduction, $102,214 was attributable to the examiners'
write-down in the value of the mortgage note receivable held by NEIC on its
former office building. That building has since been resold and the full amount
of the write-down has been recovered. Also during 1995, the New York Insurance
Department conducted an examination of ACIC for the three-year period ended
December
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31, 1994; a preliminary report has been received indicating acceptance of the
Statutory Financial Statements as filed.
At December 31, 1989, ACIC's underwriting results caused its leverage ratio
(loss and loss adjustment expense reserves to surplus) to exceed industry
norms, causing both management and regulatory officials concern. At a meeting
with New York regulators held in July 1990, management agreed not to write any
new or renew any existing business through ACIC until such time as both parties
agreed that the leverage ratio was in line with industry norms and with the
types of business contemplated. ACIC's leverage ratio, which was 8.3 to 1 at
December 31, 1989, has improved to 1.4 to 1 at December 31, 1995. Management
does not have any immediate plans to write business through ACIC.
Statutory surplus at December 31, 1995 was $5,170,158. Based on guidelines
established by the National Association of Insurance Commissioners, the ratio
of net premiums written to statutory surplus should not exceed 3 to 1. Under
this formula, the Group may retain approximately $15,510,474 of net premiums
written for its own account (by comparison 1995 net written premiums amounted
to $5,798,259). The Group expects to remain within the constraints of this
guideline in 1996.
For the year ending December 31, 1994 the National Association of Insurance
Commissioners adopted the reporting of Risk Based Capital for Property and
Casualty Insurance Companies. Risk based capital is a method of measuring the
minimum amount of capital appropriate for an insurance company to support its
overall business operations in consideration of its size and risk profile. It
provides an elastic means of setting the capital requirement in which the
degree of risk taken by the insurer is the primary determinant. The four major
categories of risks involved are:
- Asset Risk; This is the risk of assets' default of
principal/interest or fluctuation in market value.
- Credit Risk; This is the risk of default on amounts due
from reinsurers, policyholders, or other creditors.
- Underwriting Risk; This is the risk of under-estimating
liabilities from business already written or inadequately
pricing business in the coming year.
- Off-Balance Sheet Risk; This is the risk associated with
items such as excessive premium growth, contingent
liabilities and other items not reflected on the balance
sheet.
The results of the risk based capital computation provide regulators with a
tool from which they can base regulatory action. Based on trigger points
included in the risk based capital computation the following action could
result should a company's surplus level be less than
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predetermined multiples of the authorized control level amount as determined by
the formula.
<TABLE>
<CAPTION>
Action % of Authorized Control Level Risk Based Capital
------ ------------------------------------------------
<S> <C>
None Greater than 200%
Company Action 200%
Regulatory Action 150%
Authorized Control 100%
Mandatory Control 70%
</TABLE>
Under the risk based capital formula the authorized control level risk based
capital for North East Insurance Company and American Colonial Insurance
Company at December 31, 1995 was $1,211,124 and $441,268, respectively. The
statutory surplus at December 31, 1995, as reported, was 426.9% for North East
Insurance Company and 825.9% for American Colonial Insurance Company of their
respective authorized control level risk based capital. Accordingly, the
statutory surplus levels of North East Insurance Company and American Colonial
Insurance Company were adequate under the risk based capital formula.
COMPETITION
The Group currently does not write any business outside the State of Maine. The
Company also competes with national and regional insurers that market their
products directly as well as through the independent agency system. Over the
past several years, the direct writers have significantly increased their
market share, at the expense of independent agents. The Company continues to
believe, however, that NEIC's own products are best marketed through the
network of independent agents.
The Company also faces competition from insurers that focus on non-standard
markets, particularly with regard to automobile insurance. This competition
includes pricing pressures and one time agents' incentives.
ITEM 2 - DESCRIPTION OF PROPERTY
North East currently leases approximately 10,000 square feet of office space at
482 Payne Road, Scarborough, Maine pursuant to a lease expiring December 31,
2000. Upon expiration North East has an option to extend the lease for an
additional 10 years. Management believes that the premises are adequate for
its current and foreseeable needs.
ITEM 3 - LEGAL PROCEEDINGS
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF AMERICAN MOTOR CLUB, INC. V.
BERNARD GERSHUNY, ET AL. (U.S. District Court for the Eastern District of New
York, 1992). This is an action brought by a committee of unsecured creditors
(the "Committee") previously appointed in the Chapter 11 bankruptcy proceeding
of American Motor Club, Inc. ("AMC"). The Committee alleges that Bernard
Gershuny, First National Life and Casualty, Nicholas
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Neu, and others improperly used AMC's funds to acquire NEIC stock. (Mr.
Gershuny is the subject of a 1987 order of the Maine Bureau of Insurance
prohibiting him from exercising voting control over 810,000 shares of common
stock owned by him, and requiring him to hold the shares in a non-voting trust.
First National Life and Casualty was the record owner of an additional 215,000
shares of NEIC common stock.) The Committee seeks recovery of the value of the
allegedly diverted funds and/or to impose a constructive trust on the relevant
North East shares. The complaint states that North East and the trustee of the
Gershuny non-voting trust are "nominal" defendants to the action. The
Committee does not seek any monetary damages from NEIC. Mr. Gershuny, Mr. Neu,
and other defendants have asserted various cross-claims in connection with this
action. With respect to North East, these include a claim that NEIC breached
contractual commitments to provide automobile insurance coverage to certain AMC
members. The claimants seek an unspecified amount of damages from North East,
believed to exceed $1 million; the claimants also seek recovery of $100,000
allegedly paid by AMC to North East. NEIC has denied these claims and believes
that it has valid defenses to these claims. An additional defendant (Mr. Ford)
has alleged that various persons, including the Company and Mr. Gershuny's
counsel, have committed abuse of process, the "tort of outrage," and violations
of the Federal Racketeer Influenced and Corrupt Organizations Act. Mr. Ford is
a convicted felon who filed this pleading from prison on a pro se basis. NEIC
believes Mr. Ford's claims to be frivolous. Over the past three years, certain
settlement arrangements have been tentatively entered into, with approval from
the court. All such arrangements have been contingent, however, on the sale of
NEIC stock by the Gershuny non-voting trust, with the proceeds to be allocated
as set forth in a settlement order of the court. Since 1994 two different
prospective purchasers (the Tanner/Chesapeake Group and the Nichols Group) have
filed Form A applications with the Maine Bureau of Insurance, seeking to obtain
requisite regulatory approvals for the purchase of these and other shares. In
each case, the applications have been withdrawn and the proposed purchases
terminated. As a result, the relevant shares remain unsold, thereby preventing
consummation of the proposed settlement.
Except for the foregoing matter, and other than ordinary routine litigation
incidental to the business, there are no material legal proceedings pending
with regard to NEIC or its wholly-owned subsidiary ACIC.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Substitute Annual Meeting of Shareholders was held on November 15, 1995. The
following matters were voted on by shareholders, and received the votes
indicated.
<TABLE>
1. Election of ten directors to serve until the 1996 Annual Meeting of
Shareholders.
<CAPTION>
Withhold
Authority Broker
For For Non-Votes
--- --- ---------
<S> <C> <C> <C>
Robert G. Schatz 1,779,974 22,200 0
Joseph M. Hochadel 1,779,874 22,300 0
Edward L. Dilworth, Jr. 1,432,970 369,204 0
Andrew Greenbaum 1,434,220 367,954 0
Bruce H. Suter 1,779,974 22,200 0
Edward B. Batal 1,759,724 42,450 0
David D. Chase 1,372,719 429,455 0
Terence P. Cummings 1,779,874 22,300 0
Robert A. Hancock 1,779,974 22,200 0
Wilson G. Hess 1,622,124 180,050 0
</TABLE>
<TABLE>
2. Ratification of the appointment of Coopers & Lybrand L.L.P. as independent
accountants to the Company for the fiscal year ending December 31, 1995.
<CAPTION>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
TOTAL 1,784,674 9,400 8,100 0
</TABLE>
3. Approval of a proposed Stock Option Plan.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
<S> <C> <C> <C> <C>
TOTAL 738,930 56,105 44,250 962,889
</TABLE>
Approval of the Stock Option Plan would have required the affirmative vote of
at least 1,496,158 shares of Common Stock, representing a majority of the
shares issued and outstanding. Since the requisite number of affirmative votes
was not obtained, this matter was defeated.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information concerning the executive officers of North East
Insurance Company.
Under the Company's bylaws, officers are elected annually by the Board of
Directors and serve at the pleasure of the Board.
There are no family relationships between any of the executive officers of the
Company, nor were there any special arrangements by which any of them was
elected to his or her position.
ROBERT G. SCHATZ, age 50, has served as President and Chief Executive Officer
of the Company since March 1988. He was elected as a Director in December 1987.
RONALD A. LIBBY, age 52, joined the Company in December 1994 and serves as its
Chief Operating Officer. From 1987 to 1994 he was President of Maine Mutual
Fire Insurance Company.
SAMUEL M. KOREN, age 55, is Senior Vice President and Secretary of NEIC. He
joined the Company in 1977 and has been an Officer since 1978.
GRAHAM S. PAYNE, age 50, has been Treasurer and Chief Financial Officer of the
Company since 1987.
REBECCA J. CERNY, age 43, has held the position of Vice President of the
Company since 1989. From 1986 to 1995 she also serve as a Director of the
Company.
Part II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
North East's common shares are traded on the over-the counter market.
Quotations are available from the National Quotation Bureau Inc.
As of March 8, 1996, there were 198 holders of record of North East's common
shares.
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<TABLE>
The high and low closing bid prices for North East's common shares for each
quarterly period for the two most recent fiscal years are as follows:
<CAPTION>
1995 1994
---- ----
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter $1.75 $1.25 $2.13 $1.50
Second Quarter 1.38 0.69 1.88 1.63
Third Quarter 1.75 1.13 2.38 1.63
Fourth Quarter 2.13 1.00 2.00 1.25
</TABLE>
Such prices reflect prices without retail mark-up, mark-down or commission and
may not represent actual transactions.
DIVIDENDS
North East has never paid and does not anticipate paying dividends in the
foreseeable future. Based on the current accumulated deficit of North East ,
the Company currently is prohibited from paying dividends.
Under the insurance laws of the State of Maine, cash dividends may only be paid
out of that part of the available accumulated surplus funds which are derived
from realized net operating profits on North East's insurance business and from
net realized capital gains. In addition, among other statutory restrictions, a
Maine insurer's policyholders' surplus following any dividends or distributions
to shareholders must be reasonable in relation to the insurer's outstanding
liabilities and its financial needs. Furthermore, North East may not pay
"extraordinary" dividends or make any other distribution (i.e. dividends or
distributions made within the next 12 months, which exceed the greater of (i)
10% of North East's surplus to policyholders or (ii) North East's net
investment income, in either case as of the December 31 preceding) unless the
Superintendent of Insurance of Maine has been notified of the declaration and
has either approved it or has failed to disapprove it within 60 days. Any
payment of cash dividends by North East would result in a reduction in the
capacity of North East to write new premiums since the volume of insurance that
can be written is determined by the available surplus of North.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Refer to Item 1 "Description of Business" for additional disclosure and
understanding of the operations of the Group.
GENERAL DISCUSSION
The results from operations for 1995 improved significantly compared with 1994
and 1993. Management of North East continues to work towards improving its
results from underwriting activities. The focus on underwriting results
includes a blending of adequate rates, agency relations, premium volume,
product mix, loss prevention awareness, data processing efficiency and
reinsurance support. Over emphasis or inattention to a single element of these
keys to managing our business can upset the balance required to achieve
underwriting profitability. Management of North East is working with the goal
of achieving this balance.
In the summer of 1994 the Company hired two experienced personal lines
underwriters and divided the underwriting department into teams under their
direction. The Company hired an experienced insurance professional for the
position of Chief Operating Officer in December 1994 to spearhead the Company's
operating activities. In 1994 and 1995 the Company also began the process of
updating its information systems by selecting an insurance software system
suited to it's current needs. During the latter half of 1995 the Company
completed testing of the new system and began the conversion process.
In 1995 management reviewed the Company's performance in order to determine the
steps necessary to improve the bottom line results. This review led to the
decision to withdraw from the homeowner insurance market. Despite efforts to
revive this product, premium levels remained stagnant and loss ratios
consistently exceeded 150%. The prospect of developing this program to a level
of premium volume which could support associated losses was marginal.
Accordingly, withdrawal from this program was appropriate at this time.
Management intends to revisit homeowners insurance products in 1997 or 1998 to
evaluate areas of specialty or uniqueness for which the Company may respond
with a program tailored to specific needs.
During 1995, the Company identified its auto programs, both personal and
commercial, as its core products. Management has identified a poor retention
history for these programs translating into increased operating costs relative
to premium retained. Management is considering incentives in the form of
premium credits which will be introduced to encourage insureds to maintain
their insurance coverage with the Company.
From a commercial lines perspective, management has determined that its efforts
during 1996 will be directed toward identification and development of small
commercial risk accounts that do not customarily attract predatory pricing and
underwriting tactics prevalent within the commercial insurance market.
14
<PAGE> 15
The new information system will be fully operational during 1996. It will
provide the Company with the ability to interface claims activity with policy
issuance. All inforce policies will be captured in this system by year end
1996,thereby providing increased efficiencies for 1997 policy renewal and
policy endorsement transactions.
RESULTS OF OPERATIONS IN 1995
COMPARED WITH 1994 AND 1994 COMPARED WITH 1993
The Company's operations for the three years ended December 31, 1995 comprise
two major components. Direct business represents insurance income and expenses
associated with policies issued directly by the Company to its policyholders.
Ceded business, commonly referred to as reinsurance, includes excess of loss,
catastrophe and clash reinsurance arrangements which provide the Company with
insurance protection against excessive losses and through quota share
reinsurance coverage in which the reinsurer assumes a contractually agreed to
percentage or limit of each risk insured by the Company, net of all other
reinsurance.
Direct
- ------
The following comparative table illustrates the components of direct business
(including assumed business) written by the Group for each of the three years
ended December 31, 1995:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums Written $11,250,681 $13,273,333 $12,976,884
=========== =========== ===========
Premiums Earned $11,876,468 $13,114,948 $12,087,226
Loss and Loss Adjustment
Expenses Incurred 6,855,949 11,411,107 10,008,268
Underwriting Expenses Incurred 4,988,502 4,472,133 4,602,154
----------- ----------- -----------
Underwriting Gain (Loss) $ 32,017 $(2,768,292) $(2,523,196)
=========== =========== ===========
Loss Ratio 57.7% 87.0% 82.8%
Expense Ratio 44.3 33.7 35.5
----------- ----------- -----------
Combined Ratio 102.0% 120.7% 118.3%
=========== =========== ===========
</TABLE>
Direct premiums written in 1995 declined $2,022,652 in 1995 compared with 1994.
The decline is attributable to the cancellation of approximately 40 agency
relationships in March of 1995, and reflects tighter underwriting standards
applied by two experienced personal lines underwriters hired by the Company in
the summer of 1994. The tighter underwriting standards resulted in a
significant decline in the loss ratio for the twelve months ended December 31,
1995 compared with 1994 and 1993.
Direct losses and loss adjustment expenses incurred in 1994 and 1993 included
claims activity on commercial policies which provided the maximum amount of
insurance protection
15
<PAGE> 16
offered by North East ($1,000,000). Premium, loss and expense levels for the
twelve months ended December 31, 1994 approximated those recorded for the
twelve months ended December 31, 1993.
The 1995 increase in expenses was primarily attributable to legal costs
associated with the, now terminated, merger plans with Patrons Oxford Mutual
Insurance Company and with two potential change in control filings as well as
the conversion to a new data processing system (to be fully operational in
1996) which caused increases to both salary and outside consulting expenses to
increase.
Ceded
- -----
<TABLE>
The following comparative table illustrates the components of ceded business
written by the Group for each of the three years ended December 31, 1995:
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums Written $5,452,422 $3,309,829 $3,207,452
========== ========== ==========
Premiums Earned $5,005,394 $2,862,306 $2,011,521
Loss and Loss Adjustment
Expenses Incurred 2,868,984 3,038,217 1,893,162
Underwriting Expenses Incurred 1,794,336 586,792 482,082
---------- ---------- ----------
Underwriting Gain (Loss) $ 342,074 $ (762,703) $ (363,723)
========== ========== ==========
Loss Ratio 57.3% 106.1% 94.1%
Expense Ratio 32.9 17.7 15.0
---------- ---------- ----------
Combined Ratio 90.2% 123.8% 109.1%
========== ========== ==========
</TABLE>
The Group manages its risk exposure through both individual risk excess of loss
reinsurance arrangements (treaties), casualty clash excess of loss and property
catastrophic excess of loss reinsurance in which the reinsurers assume that
portion of the risk not retained by the Group. The Group also utilizes quota
share reinsurance.
The maximum gross policy limits offered by the Company during 1995, 1994 and
1993 was $1,000,000. The Company's maximum net retention during 1993 was
$45,000, $100,000 for the period covering January 1, 1994 through June 1, 1994,
$65,000 for the period covering June 1,1994 through December 1,1995 and $32,850
for the period covering December 1, 1995 through December 31, 1995.
Effective January 1, 1995 the Company modified the terms of its excess of loss
reinsurance treaties, excluding the property catastrophe coverages, to include
a ceding commission. Commission revenue is offset by a corresponding increase
to ceded premiums written. This modification provides a more appropriate
matching of premium revenues with incurred expenses. Expense recovery from
reinsurers amounted to $1,794,336 in 1995 compared with $586,792 in 1994 and
$482,082 in 1993.
16
<PAGE> 17
The current excess of loss coverage provides protection for the Company through
two layers. The first layer, considered to be the working layer of the
coverage, assumes $150,000 of coverage beyond the first $50,000. The second
layer, allowing the Company to provide policy limits of our immediate
competition, assumes $800,000 of coverage beyond the first $200,000. The
casualty clash excess of loss coverage provides for $1,000,000 of coverage in
excess of $1,000,000 in the event more than one of our insureds is involved in
a single loss occurrence exposing the coverage limits of the policies. The
property catastrophe coverage provides for $4,500,000 of coverage in excess of
$500,000 in the event of a catastrophe.
The loss ratio in 1995 was significantly improved over 1994 and 1993 due to the
absence of claim severity experienced in both 1994 and 1993.
Net
- ---
<TABLE>
The following comparative table illustrates the components of net business
retained by the Group for each of the three years ended December 31, 1995:
<CAPTION>
Year ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Premiums Written $5,798,259 $ 9,963,504 $ 9,769,432
========== =========== ===========
Premiums Earned $6,871,074 $10,252,642 $10,075,705
Loss and Loss Adjustment
Expenses Incurred 3,986,965 8,372,890 8,115,106
Underwriting Expenses Incurred 3,194,166 3,885,341 4,120,072
---------- ----------- -----------
Underwriting Loss $ (310,057) $(2,005,589) $(2,159,473)
========== =========== ===========
Loss Ratio 58.0% 81.7% 80.5%
Expense Ratio 55.1 39.0 42.2
---------- ----------- -----------
Combined Ratio 113.1% 120.7% 122.7%
========== =========== ===========
</TABLE>
Losses resulting from underwriting activities amounted to $310,057 in 1995
compared with a loss of $2,005,589 in 1994 and $2,159,473 in 1993. Losses and
loss adjustment expenses represented 58.0%, 81.7% and 80.5% of net earned
premium for the years ended December 31, 1995, 1994 and 1993, respectively.
Losses and loss adjustment expenses incurred benefited from the redundant
development of 1994 and prior loss and loss adjustment expense reserves.
Underwriting expenses incurred decreased from $3,885,341 experienced in 1994 to
$3,194,166 in 1995; however the relationship to net premiums written increased
from 37.9% in 1994 to 55.1% in 1995. The 1995 decline in underwriting expenses
is directly attributable to a modification to our reinsurance treaties wherein
the majority of our reinsurance arrangements now include commission offsets.
17
<PAGE> 18
<TABLE>
Underwriting profit (loss) by major category for the years ended December 31,
1995, 1994 and 1993 were as follows:
<CAPTION>
Years ended December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Auto Liability and
Physical Damage $(106,762) $(1,041,829) $(1,109,501)
Commercial Multi-Peril 169,229 (778,259) (199,670)
Homeowners (245,525) (522,724) (77,966)
All Other Lines (126,999) 337,223 (772,336)
--------- ----------- -----------
TOTAL $(310,057) $(2,005,589) $(2,159,473)
========= =========== ===========
</TABLE>
Underwriting losses for the auto book improved in 1995 as a result of the
redundancy in loss and loss adjustment expense reserves for accident years 1994
and prior. Underwriting losses for homeowners resulted in the decision to
discontinue providing this coverage in 1996. The fluctuation in underwriting
profit (loss) results for the Company's other categories of business reflect
the unpredictability of loss experience associated with low premium volume.
The Group has historically relied on income from investment activities to
provide sufficient income to offset underwriting losses to achieve overall
profitability. Results from underwriting activities improved significantly in
1995 compared with 1994 and 1993. The improved results reflect management's
goal of achieving a breakeven position from its underwriting activities. The
1995 results reflect tighter risk selection standards, rate adjustments to
counteract adverse risk submissions, emphasis on agency management and a
restructuring of reinsurance terms.
Net investment income was $1,298,601 for 1995 compared with $1,530,734 in 1994
and $1,851,051 in 1993. The gross average yield of the investment portfolio was
7.1%, 6.8% and 7.6% for 1995, 1994 and 1993, respectively. The Company realized
investment losses of $225,726 for 1995 compared with realized investment losses
of $473,102 in 1994 and a realized investment gain of $798,736 in 1993. Total
investment return (including realized investment losses) was 5.1%, 4.9% and
10.5% for 1995, 1994 and 1993, respectively. The realized investment loss in
1995 included a loss of $67,214 pertaining to the write down of a mortgage
note, which defaulted in 1995, to the fair value of its collateral (fully
recovered in 1996) and $106,171 from the sale of two low grade securities. The
1994 realized loss included $351,010 resulting from the default of a bond which
was subsequently converted to an equity security. The 1993 realized gain of
$798,736 resulted from the Company's decision to emphasize high grade
securities in its investment portfolio and dispose of all securities considered
below investment grade.
Net income for 1995 was $748,318 or $0.25 per share compared with a net loss of
$947,957 or $0.32 per share in 1994 and $480,314 or $0.16 per share in 1993.
The results for 1995 improved significantly compared with 1994, whereas, the
1994 results approximated those experienced in 1993.
18
<PAGE> 19
Book value per share amounted to $2.15 at December 31, 1995 compared with $1.07
at December 31, 1994 and $1.96 at December 31, 1993. The 1995 increase in per
share book value of $1.08 reflects the recovery of the Company's investment
portfolio from a market value which was significantly below amortized cost at
December 31,1994 to a level whereby market value exceeded amortized cost at
December 31, 1995. The decrease in book value per share experienced in 1994 of
$0.89 includes $0.57 pertaining to the write down of the Company's investment
portfolio from amortized cost to market value at December 31, 1994. These
fluctuations reflect the sensitivity of the Company's investment portfolio to
interest rate changes regulated by the Federal Reserve. The Company's Board of
Directors has recently established a committee to review the Group's investment
policy. The following table reconciles book value per share at December 31,
1994 to book value per share at December 31,1995.
<TABLE>
<CAPTION>
Book Value Per Share Year ended December 31,
- -------------------- -----------------------
1995 1994
---- ----
<S> <C> <C>
Beginning of year $1.07 $1.96
Change in unrealized appreciation
of investments 0.83 (0.57)
Net income 0.25 (0.32)
----- -----
End of year $2.15 $1.07
===== =====
</TABLE>
NEW ACCOUNTING POLICIES
In May 1993, the FASB issued FAS No. 114 ("Accounting by Creditors for the
Impairment of a Loan"), which defines the principles to measure and record a
loan when it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
In October 1994, the FASB issued FAS No. 118 ("Accounting by Creditors for the
Impairment of a Loan - Income Recognition and Disclosure"), which amends FAS
114 to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. The Company adopted the
provisions of FAS 114 and FAS 118 effective January 1, 1995. The effect of
adopting these standards on January 1, 1995 did not have a material effect on
the Company's consolidated results of operations or financial position.
In March 1995, the FASB issued FAS No. 121("Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), which requires
that long-lived assets and certain intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Statement is
effective for financial statements for fiscal years beginning after December
15,1995. The Company intends to adopt the provisions of FAS No. 121 effective
January 1, 1996. Adopting FAS No. 121 is not expected to have a material effect
on the Company's consolidated results of operations or financial position.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the years ended December 31, 1995 and
1994 amounted to $2,199,403 and $2,108,651, respectively. Cash provided from
investing activities amounted to $3,077,348 for the year ended December 31,
1995 compared with cash used of $965,679 for the year ended December 31, 1994.
The Company's investment portfolio, carried at fair value, sustained a
significant unrealized gain during 1995 amounting to $2,473,861 primarily the
result of decreases in interest rates by the Federal Reserve. Should the
Federal Reserve initiate further rate adjustments in 1996 the difference
between fair value and amortized cost will fluctuate and shareholders' equity
will be adjusted accordingly. In order to reduce its exposure to interest rate
fluctuations, management and the board of directors are considering reducing
the average maturity of securities in its investment portfolio during 1996.
The Company believes that the current level of short-term investments is
adequate to meet any shortfall resulting from its immediate operating
activities. The Company anticipates, based on its most recent experience and
trends, it will be necessary to sell a portion of ACIC's invested assets in
1996 in order to fund its day to day operating needs.
LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES
Reserves for losses and loss adjustment expenses (LAE) represent estimates of
the ultimate net cost of all unpaid losses and loss adjustment expenses
incurred through December 31 of each year. The reserves are determined using
adjuster's individual case estimates and statistical projections. These
projections are subject to the effects of trends in claims severity and
frequency. Statistical projections are employed in four specific areas: (1) to
calculate the incurred but not reported (IBNR) reserves; (2) to calculate the
adequacy of case basis estimates of loss reserves; (3) to calculate the
allocated LAE reserves; and (4) to calculate the unallocated LAE reserves.
These projections are reviewed on a quarterly basis and as experience develops
and new information becomes known, they are adjusted as necessary. Such
adjustments are reflected in the current year's operations.
The IBNR reserve is based on the historical relationship between the emergence
of late reported claims and the historical development of past incurred and
paid claims. The reserve also includes components for changes in the projected
ultimate cost in settling an outstanding claim resulting from trends in
severity. The effect of inflation on these estimates is thereby implicitly
incorporated into the calculations. The results obtained from these methods
are reviewed to determine if indicated reserve levels are consistent with
reasonable assumptions regarding future rates of inflation.
Allocated LAE reserves are based on long term historical relationships of
incurred expenses to incurred losses and the historical development of prior
accident year paid allocated loss adjustment expenses. The calculations do not
contain specific provisions for inflation. It is
20
<PAGE> 21
presumed that the implicit inflation assumptions applicable to loss reserves
apply equally to expense reserves.
Unallocated LAE reserves are based on historical relationships of paid
unallocated loss adjustment expenses to paid losses. As is the case with
allocated LAE, the implicit inflation assumptions applicable to loss reserves
are presumed to apply equally to the expense reserves.
<TABLE>
The following table provides a reconciliation of the changes in loss and LAE
reserves, after deducting amounts recoverable from reinsurers for 1995 and
1994.
Reconciliation of Liability for Losses and
Loss Adjustment Expenses
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $21,517,289 $21,623,131
Amounts recoverable from reinsurers
on unpaid losses 4,045,132 2,918,501
----------- -----------
Beginning of year, net 17,472,157 18,704,630
Add:
Provision for losses and LAE for claims arising in:
Current year 6,119,285 9,392,203
Prior years (2,132,320) (1,019,313)
Less:
Losses and LAE paid on claims arising in:
Current year 3,312,336 4,585,965
Prior years 3,843,299 5,019,398
----------- -----------
End of year, net 14,303,487 17,472,157
Amounts recoverable from reinsurers
on unpaid losses 4,703,238 4,045,132
----------- -----------
Losses and loss adjustment expenses
per Consolidated Balance Sheet $19,006,725 $21,517,289
=========== ===========
</TABLE>
The table on the page following illustrates the original ultimate reserve
established and the reestimated reserve after deducting amounts recoverable
from reinsurers over each of the subsequent years through the balance sheet
date.
21
<PAGE> 22
<TABLE>
Analysis of Losses and Loss Adjustment Expenses Development
(in Thousands)
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for unpaid losses
and loss adjustment expenses $21,825 $21,507 $21,749 $24,062 $20,085 $18,342 $18,661 $18,705 $17,472 $14,303
Cumulative Amount Paid
- ----------------------
One Year Later 6,174 6,009 7,402 7,521 5,048 4,619 3,899 5,019 3,843
Two Years Later 10,798 10,587 11,515 11,212 8,503 7,004 7,460 7,595
Three Years Later 14,279 12,914 13,479 14,039 10,212 9,931 9,590
Four Years Later 15,974 13,753 15,147 15,373 12,718 11,685
Five Years Later 16,657 14,969 15,363 16,995 14,254
Six Years Later 17,416 14,834 16,559 18,483
Seven Years Later 17,196 15,782 17,764
Eight Tears Later 17,756 16,860
Nine Years Later 18,624
Net Reserves reestimated as of
- ------------------------------
end of year
- -----------
One Year Later 21,598 21,073 22,310 24,653 20,605 18,329 17,974 17,685 15,340
Two Years Later 22,133 20,148 22,193 24,743 20,676 18,823 18,087 16,829
Three Years Later 21,293 19,864 22,103 24,316 21,009 19,022 17,457
Four Years Later 21,369 20,144 21,882 25,108 21,247 18,675
Five Years Later 21,439 19,660 22,379 24,624 20,902
Six Years Later 20,963 20,038 22,012 24,581
Seven Years Later 21,036 19,721 22,147
Eight Tears Later 20,651 19,934
Nine Years Later 20,970
Redundancy (deficiency) $ 855 $ 1,573 $ (398) $ (519) $ (817) $ (333) $ 1,204 $ 1,876 $ 2,132
</TABLE>
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Gross liability for unpaid losses
and loss adjustment expenses $21,517 $19,007
Cumulative Amount Paid
- ----------------------
One Year Later 4,766
Gross reserves reestimated as of
- --------------------------------
end of year
- -----------
One Year Later 19,618
Redundancy (deficiency) $ 1,899
</TABLE>
22
<PAGE> 23
The top line shows the original reserves at the balance sheet date for each of
the indicated years. These amounts represent initial reserve estimates for the
current and all prior accident years. The lower portion of the table shows the
Group's re-estimated values for the previously recorded reserves based on the
experience at the end of each succeeding year. The upper portion of the table
shows the cumulative amounts paid on claims settled subsequent to the end of
each calendar year.
The "cumulative deficiency (redundancy)" represents the total change in initial
estimates over all subsequent calendar years. For example the 1986 net reserve
developed a redundancy of $855,000 over nine years. That amount is reflected in
income over the nine year period. Its full impact was not reflected in any one
calendar year. New or modified products can produce different results from
historical trends of similar product lines utilized in forecasting their
ultimate loss exposure.
Claim payment patterns can be affected by numerous circumstances such as
changes in reinsurance retention's or changes in claim practices that could
lead to a speeding up or slowing of claim settlement rates.
In evaluating the information contained in the reserve development table, it
should be noted that each entry includes the effects of all changes in amounts
for prior periods. For example, the redundancy or deficiency related to losses
settled in 1995 but incurred in 1985 will be included in the cumulative
deficiency amounts for 1985 through 1995. Conditions and trends, such as
inflation, that have affected reserve development in the past may not
necessarily occur in the future. Therefore, it is not appropriate to
extrapolate future deficiencies or redundancies from this table.
At December 31, 1995 and 1994 the loss and loss adjustment expense reserves as
reported under generally accepted accounting principles (GAAP) were identical
to those reported under statutory accounting principles (SAP).
The development in 1995 totaling $2,132,000 redundancy includes approximately
$1,300,000 of favorable development pertaining to the 1994 accident year.
Approximately 70% of the 1994 accident year development relates to the personal
and commercial auto lines of business. In determining ultimate losses and loss
adjustment expenses the Company utilizes historic payment and incurred loss
patterns to project its ultimate loss exposure. In the last three years, these
patterns have indicated a change has occurred in which the loss tail has
shortened compared to the Company's previous experience. Recognition of the
shorter loss tail was not acknowledged in the projection of ultimate losses and
loss adjustment expenses until such time that it was evident that a trend had
been established. The 1994 accident year redundancy in 1995 recognizes this
change.
23
<PAGE> 24
ITEM 7. - CONSOLIDATED FINANCIAL STATEMENTS
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants 25
Financial Statements:
Consolidated Balance Sheet as of December 31, 1995 26
Consolidated Statements of Operations for the years
ended December 31, 1995 and 1994 27
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1995 and 1994 28
Consolidated Statements of Cash Flows for the years
ended December 31, 1995 and 1994 29
Notes to Consolidated Financial Statements 31
</TABLE>
24
<PAGE> 25
Coopers COOPERS & LYBRAND L.L.P
& Lybrand
a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
North East Insurance Company:
We have audited the consolidated balance sheet of North East Insurance Company
and subsidiaries, as of December 31, 1995 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
East Insurance Company and subsidiaries as of December 31, 1995 and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/S/ Coopers & Lybrand L.L.P.
Portland, Maine
March 15, 1996
25
<PAGE> 26
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of December 31, 1995
<CAPTION>
ASSETS 1995
- ------ ---------
<S> <C>
Investments (Note G) :
Fixed maturities available for sale, at fair value
(amortized cost $18,122,444) $18,549,712
Investment property, at cost, less accumulated
depreciation of $81,916 198,084
Mortgage note receivable, at fair value of collateral (Note H) 380,000
Equity securities available for sale, at fair value
(cost $71,393) 21,178
Short-term investments 1,868,258
-----------
Total investments 21,017,232
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables (Note D)) 5,081,961
Premium balances receivable 4,354,923
Deferred policy acquisition costs 312,223
Prepaid reinsurance premiums (ceded unearned premium (Note D)) 2,725,689
Investment income due and accrued 328,784
Property and equipment, net of accumulated depreciation (Note I) 548,871
Other assets 114,145
-----------
Total Assets $34,483,828
===========
LIABILITIES
Losses and loss adjustment expenses (Note D and J) $19,006,725
Unearned premiums 6,059,874
Ceded reinsurance balances payable (Note D) 2,151,867
Reserve for unpaid expenses and other liabilities 683,653
Book overdraft, net 146,158
Federal income tax payable (Note C) 14,500
Total Liabilities
-----------
28,062,777
-----------
Commitments and contingent liabilities (Notes D and L)
SHAREHOLDERS' EQUITY (Note E)
Common stock $1.00 par value, authorized 6,000,000 shares, issued
and outstanding 2,992,314 shares 2,992,314
Additional paid-in capital 6,346,156
Unrealized appreciation of investments 377,053
Accumulated deficit ( Note K) (3,289,472)
-----------
6,426,051
Treasury stock, at cost, 5,000 shares (5,000)
-----------
Total Shareholders' Equity 6,421,051
-----------
Total Liabilities and Shareholders' Equity $34,483,828
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE> 27
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1995 and 1994
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Premiums earned $11,876,468 $13,114,948
Premiums ceded (Note D) (5,005,394) (2,862,306)
----------- -----------
Net premiums earned 6,871,074 10,252,642
Net investment income (Note G) 1,298,601 1,530,734
Realized capital losses (Note G) (225,726) (473,102)
----------- -----------
Total revenues 7,943,949 11,310,274
Expenses:
Losses and loss adjustment expenses 6,855,949 11,411,107
Reinsurance recoveries (Note D) (2,868,984) (3,038,217)
----------- -----------
Net losses and loss adjustment expenses 3,986,965 8,372,890
Underwriting expenses incurred (Note B) 3,194,166 3,885,341
----------- -----------
Total expenses 7,181,131 12,258,231
----------- -----------
Income (loss) before provision for income taxes 762,818 (947,957)
Provision for income taxes, net of $244,858 tax
benefit from loss carryforward in 1995 (Note C) 14,500 0
----------- -----------
Net income (loss) (Note E) $ 748,318 $ (947,957)
=========== ===========
Earnings per common share:
Net income (loss) $ 0.25 $ (0.32)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE> 28
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1995 and 1994
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Common stock, par value:
Balance at beginning of year $ 2,992,314 $ 2,988,003
Change during year 0 4,311
----------- -----------
Balance at end of year 2,992,314 2,992,314
----------- -----------
Additional paid-in capital:
Balance at beginning of year 6,346,156 6,343,731
Change during year 0 2,425
----------- -----------
Balance at end of year 6,346,156 6,346,156
----------- -----------
Unrealized appreciation (depreciation):
Balance at beginning of year (2,096,808) (397,010)
Change during year 2,473,861 (1,699,798)
----------- -----------
Balance at end of year 377,053 (2,096,808)
----------- -----------
Accumulated Deficit:
Balance at beginning of year (4,037,790) (3,089,833)
Net income (loss) 748,318 (947,957)
----------- -----------
Balance at end of year (3,289,472) (4,037,790)
----------- -----------
Treasury stock, at cost:
Balance at beginning of year (5,000) (5,000)
Change during year 0 0
----------- -----------
Balance at end of year (5,000) (5,000)
----------- -----------
Total shareholders' Equity at end of year $ 6,421,051 $ 3,198,872
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE> 29
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1995 and 1994
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Insurance premiums received $ 6,656,160 $ 9,907,005
Loss and loss adjustment expenses paid (7,212,545) (9,886,606)
Operating expenses paid (3,023,383) (3,702,686)
Investment income received 1,380,365 1,573,636
----------- -----------
Net cash used in operating activities (2,199,403) (2,108,651)
----------- -----------
Cash flows from investing activities:
Fixed maturities sold 3,448,993 4,874,551
Fixed maturities purchased (312,258) (4,952,747)
Due to (from) broker 0 (543,460)
Purchase of property and equipment (60,537) (367,025)
Sale of property and equipment 1,150 23,002
----------- -----------
Net cash provided by (used in)
investing activities 3,077,348 (965,679)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of new
common shares 0 6,736
----------- -----------
Net cash provided from financing activities 0 6,736
----------- -----------
Net increase (decrease) in cash, book overdraft
and short-term investments 877,945 (3,067,594)
Cash, book overdraft and short-term
investments at beginning of year 844,155 3,911,749
----------- -----------
Cash, book overdraft and short-term
investments at end of year $ 1,722,100 $ 844,155
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(Continued)
29
<PAGE> 30
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF CASH USED IN
OPERATING ACTIVITIES TO NET INCOME (LOSS)
for the years ended December 31, 1995 and 1994
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net income (loss) $ 748,318 $ (947,957)
Decrease in loss and loss adjustment expense reserve (2,510,564) (105,843)
Decrease in unearned premium reserve, net (1,072,815) (289,138)
Decrease in expense accruals and other liabilities (138,618) (100,714)
Loss on investment activities 158,512 473,102
Decrease in deferred policy acquisition costs 146,184 9,220
Depreciation and amortization expense 123,745 161,310
Decrease (increase) in net premium and ceded
reinsurance balances 142,885 (1,426,794)
Decrease in investment income due and accrued 81,764 42,902
Amortization of bond premium, net 77,576 72,945
Loss on mortgage note in default 67,214 0
Decrease (increase) in other assets (38,104) 2,316
Provision for federal income taxes 14,500 0
----------- -----------
Net cash used in operating activities $(2,199,403) $(2,108,651)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE> 31
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies:
------------------------------------------
Basis of Presentation
- ---------------------
North East Insurance Company and Subsidiaries' ("the Company") consolidated
financial statements have been prepared on the basis of generally accepted
accounting principles. The consolidated financial statements include the
Company and its wholly-owned subsidiaries American Colonial Insurance Company
(ACIC) and North Atlantic Underwriters, Inc. (NAU). All significant
intercompany transactions have been eliminated.
The Company is engaged in the business of underwriting and accepting property
and casualty insurance risks in the State of Maine. Its principal insurance
products consist of personal and commercial automobile coverage (including
automobile liability and automobile physical damage) and other general lines
including but not limited to homeowners, general liability, commercial multi-
peril, inland marine, fire and allied lines.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain 1994 amounts have been reclassified to conform to their presentation in
1995.
Premiums and Unearned Premiums
- ------------------------------
Premium revenues are reported as earned, principally on a monthly pro rata
basis over the terms of the respective policies. Unearned premiums represent
the portion of premiums written applicable to the unexpired terms of the
policies.
Premium balances receivable represent amounts to be collected from agents and
insureds. The Company offers insureds installment plans under which insureds
may remit amounts due, in accordance with a predetermined schedule, over the
term of the policy. Premium balances receivable are recorded for the full
premium amount when the policy is written. These receivables include amounts
not currently due under the installment plan. Premium balances receivable
include $3,473,944 for amounts not yet due at December 31, 1995. The allowance
for doubtful accounts at December 31, 1995 was $130,000.
31
<PAGE> 32
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
____________________
A. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
Losses and Loss Adjustment Expenses
- -----------------------------------
The reserve for losses and loss adjustment expenses includes unpaid losses and
loss adjustment expenses and a provision for incurred but not reported losses.
Unpaid losses and loss adjustment expenses are based primarily on loss
adjusters' evaluations, estimates for losses incurred but not reported and an
estimate for salvage and subrogation recoverable. Reserves are continually
reviewed and modified and any resulting adjustments are reflected in current
operating results.
Deferred Policy Acquisition Costs
- ---------------------------------
Policy acquisition costs, such as commissions, underwriting salaries and other
costs incurred in connection with acquiring new business have been capitalized
to the extent that the related costs are recoverable and are being amortized
over the period in which the related premiums are earned. Anticipated losses
and loss adjustment expenses and investment income attributable to the related
premiums are considered in determining the amount of costs to be deferred.
Reinsurance
- -----------
Premiums earned ceded are reported as earned, principally on a monthly pro rata
basis over the terms of the respective policies. Unearned premiums ceded
represent the portion of premiums written applicable to the unexpired terms of
the policies.
Ceded premium adjustments for loss sensitive reinsurance contracts are reported
immediately as ceded earned premium based on the Company's best estimate of the
ultimate loss exposure for the contract as of the balance sheet date.
Reinsurance commission income is recognized on the effective date of the policy
to which it applies.
32
<PAGE> 33
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
A. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
Property and Equipment
- ----------------------
Property and equipment are stated at cost, net of accumulated depreciation.
The Company provides for depreciation on the straight- line method by charges
to expense which are sufficient to write off the cost of the assets over their
estimated useful lives. Maintenance and repairs are charged to expense as
incurred; expenditures for improvements are capitalized. Upon sale or
retirement, the cost and related accumulated depreciation are eliminated from
their respective accounts and any resulting gain or loss is included in the
results of operations.
Employee Benefits
- -----------------
The Company provides a 401-K Profit Sharing Plan (the "Plan") covering all
employees. The Plan is intended to provide funds for participants' use at
retirement. Employees may elect to contribute up to 10% of their pre-tax
earnings to the Plan. The Company provides a matching contribution of 25% of
the first 4% of an employee's elective contribution. The Plan also provides
that the Company may make an additional contribution subject to the
profitability of the Company for the related calendar year. For the years
ended December 31, 1995 and 1994, the Company contributed $9,871 and $9,641,
respectively, pursuant to the matching formula. No contribution was made
under the profitability formula in 1995 or 1994.
The Company does not provide any post-retirement benefits to its employees.
Income Taxes
- ------------
The provision for income taxes includes amounts currently payable and deferred
income taxes, which result from differences between financial reporting and tax
basis reporting of assets and liabilities, and are measured using enacted tax
rates and laws. Deferred tax assets are recognized to the extent future
realization of the tax benefit is more likely than not. The Company has not
recognized a deferred tax asset resulting from the significant loss
carryforwards presently available to offset future taxable earnings in that the
realization of such assets is not likely in the foreseeable future.
33
<PAGE> 34
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
A. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
Investments
- -----------
Fixed maturities and equity securities, all of which are available for sale,
are stated at fair value. Short-term investments are carried at cost which
approximates fair value. The Company, at times, may be at risk on short-term
investments as the values on deposit may exceed the amount protected through
federally guaranteed insurance programs, however, the Company has never
experienced a loss of this nature.
Realized capital gains and losses from the sale of investments are determined
on the basis of identified cost and are credited or charged to income.
Unrealized capital gains and losses from the valuation of fixed maturities and
equity securities at fair value are credited or charged directly to
shareholders' equity. If a decline in fair value of an invested asset is
considered to be other than temporary, the investment is reduced to its net
realizable fair value and the reduction is accounted for as a realized loss.
The following methods and assumptions were used in estimating fair value
disclosure for financial instruments:
Fixed Maturities Available for Sale: Fair value for fixed maturities
available for sale are based on quoted market prices, where
available. If quoted market prices are not available, fair values
are estimated using values obtained from independent pricing
services.
Equity Securities Available for Sale: Fair value for equity securities
available for sale are based on quoted market prices.
Short-term Investments: Fair value for these instruments approximate
the amounts reported in the Consolidated Balance Sheet.
Mortgage Note Receivable: Fair value for the mortgage note receivable
is estimated based on the fair value of the collateral.
Investment Property: Fair value of investment properties is cost less
accumulated depreciation which approximates market value.
New Accounting Pronouncements
- -----------------------------
In May 1993, the FASB issued FAS No. 114 ("Accounting by Creditors for the
Impairment of a Loan"), which defines the principles to measure and record a
loan when it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
34
<PAGE> 35
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
A. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
In October 1994, the FASB issued FAS No. 118 ("Accounting by Creditors for the
Impairment of a Loan - Income Recognition and Disclosure"), which amends FAS
114 to allow a creditor to use existing methods for recognizing, measuring and
displaying interest income on an impaired loan. The Company adopted the
provisions of FAS 114 and FAS 118 effective January 1, 1995. The effect of
adopting these standards on January 1, 1995 did not have a material effect on
the Company's consolidated results of operations or financial position.
In March 1995, the FASB issued FAS No. 121("Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"), which requires
that long-lived assets and certain intangibles to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Statement is
effective for financial statements for fiscal years beginning after December
15,1995. The Company intends to adopt the provisions of FAS No. 121 effective
January 1, 1996. Adopting FAS No. 121 is not expected to have a material effect
on the Company's consolidated results of operations or financial position.
Earnings per Common Share:
- -------------------------
Earnings per common share are calculated using the weighted average method. For
the years ended December 31, 1995 and 1994 the weighted average number of
shares used in the calculation was 2,992,314 and 2,990,490, respectively.
Statements of Cash Flows
- ------------------------
The Company utilizes the direct method of presenting cash flows from operating
activities. For purposes of the statements of cash flows, cash was determined
to include cash, short term (highly liquid) investments with original
maturities less than three months, and book overdraft.
35
<PAGE> 36
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
B. Underwriting Expenses:
---------------------
<TABLE>
The composition of underwriting expenses, including the change in deferred
policy acquisition costs, is as follows:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Commissions $ 152,338 $1,561,853
Salaries and employee
benefits 1,891,479 1,730,211
Consulting fees 663,975 456,674
Legal and audit 349,404 199,452
Office supplies and
communications 360,599 385,817
Taxes, licenses & fees 313,932 370,916
Surveys and other
underwriting reports 204,565 247,679
Rent expense and rent items 178,227 176,920
Equipment 123,745 161,310
Travel & entertainment 106,235 119,637
Write off of receivables 117,501 127,512
Service fees (478,648) (511,137)
Other 348,641 256,325
Decrease in
deferred policy
acquisition costs 146,184 9,220
---------- ----------
Total expenses 4,464,455 5,285,019
Less expenses allocated to claims 1,089,232 1,243,168
Less expenses allocated to investments 181,057 156,510
---------- ----------
Total underwriting expenses $3,194,166 $3,885,341
========== ==========
</TABLE>
Commission expense includes reinsurance commission received amounting to
$1,794,336 and $586,792 for the years ended December 31, 1995 and 1994,
respectively.
Deferred policy acquisition costs ($312,223 at December 31,1995) represent the
Company's best estimate of amounts expected to be recovered against future
earned premium from policies currently inforce and anticipated investment
income. The estimates take into account an estimate for anticipated future loss
experience of these policies. While the Company believes that the recovery of
this asset is likely, it is remotely possible that the assumptions used will
prove inappropriate and the Company's estimate that it will recover the
carrying amount of this asset could change in the near term.
36
<PAGE> 37
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-------------------------
C. Federal Income Taxes:
--------------------
As a result of loss carryforwards, the Company is subject to the alternative
minimum tax under the Internal Revenue Code. In 1995 the Company utilized
approximately $650,000 of its net operating loss carryforwards under the
alternative minimum tax basis in determining its 1995 tax liability. In 1994
the Company was not subject to federal income tax as a result of its operating
loss. The federal income tax returns for 1987 and subsequent are open to
examination.
The Company has available unused net operating tax loss carryforwards of
approximately $3,300,000 for federal income tax purposes expiring in varying
amounts between 2005 and 2009. The Company also has available unused capital
tax loss carryforwards of approximately $289,000 expiring in 2009.
The corresponding deferred tax asset for these loss carryforwards is
$1,220,000. The Company has recorded a full valuation allowance against this
deferred tax asset. Management has determined, based on the Company's history
of prior operating earnings and the lack of consistent trend of current and
future earnings, that the Company cannot justify recognition of this asset at
December 31, 1995.
D. Commitments and Contingent Liabilities
--------------------------------------
Reinsurance
- -----------
The Company cedes various risks to other insurers and reinsurers. The Company
utilizes excess of loss and quota share reinsurance as well as catastrophe and
clash coverage. Ceding of insurance does not discharge the Company's obligation
to the policyholder in the event the reinsurer is unable to fulfill its
obligation.
The reinsurance balances below include $1,216,000 payable to Motors Insurance
Corp. ("A" rated) at December 31, 1995. No other reinsurer accounts for more
than 10% of the total reinsurance balances at December 31, 1995.
Reinsurance balances payable represent unpaid ceded premiums payable of
$1,520,554 and funds held under reinsurance contracts of $631,313 at December
31,1995. Paid loss and loss adjustment expenses recoverable from reinsurers at
December 31, 1995 amounted to $458,723. The allowance for uncollectible
reinsurance balances at December 31, 1995 was $80,000.
37
<PAGE> 38
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
D. Commitments and Contingent Liabilities, continued:
-------------------------------------------------
<TABLE>
Written premium amounts reflected in the financial statements are as follows:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Direct Written Premiums $11,212,664 $13,235,755
Assumed Written Premiums 38,017 37,578
Ceded Written Premiums 5,452,422 3,309,829
----------- -----------
Net Written Premiums $ 5,798,259 $ 9,963,504
=========== ===========
</TABLE>
<TABLE>
Earned premium amounts reflected in the financial statements are as follows:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Direct Earned Premiums $11,855,001 $13,089,349
Assumed Earned Premiums 21,467 25,599
Ceded Earned Premiums 5,005,394 2,862,306
----------- -----------
Net Earned Premiums $ 6,871,074 $10,252,642
=========== ===========
</TABLE>
<TABLE>
Other ceded reinsurance amounts reflected in the financial statements are as
follows:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Reinsurance commission $1,794,336 $ 586,792
Loss and loss adjustment expense reserves 4,703,238 4,045,132
Prepaid reinsurance premiums (ceded
unearned premium) $2,725,689 $2,278,661
</TABLE>
38
<PAGE> 39
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
D. Commitments and Contingent Liabilities, continued:
-------------------------------------------------
Ceded loss and loss adjustment expense reserves include estimates of the
reinsurers share of the ultimate cost for all unpaid losses and loss adjustment
expenses incurred as of the balance sheet date. The reserves are determined
using statistical projections based on historical relationships between the
emergence of late reported claims and the historical development of past
incurred and paid claims. Management believes these reserves are adequate to
cover all future loss settlements and represent the best estimate of the total
liability as of the balance sheet date, however, management is also cognizant
that the final ultimate liability will yield a varied result. Management will
continue to monitor the Company's claim settlements closely in order to provide
timely adjustments to this reserve when appropriate.
Other
- -----
The Company has an Employment Agreement with Mr. Schatz, dated March 26, 1991.
The Agreement was recently renewed for one year and is scheduled to expire on
February 28, 1997 unless further extended prior to such date. The Agreement
provides for (i) a base salary of $175,000 per annum commencing in 1991
(subject to annual adjustments based on increases in the Consumer Price Index)
and (ii) a profit sharing bonus calculated on a sliding scale between 4% and 6%
of net after-tax profits of the Company before extraordinary items. Profit
sharing bonuses are paid through a combination of Common Stock and cash. In the
event that the Company terminates Mr. Schatz's employment without cause, the
Agreement provides for severance compensation to him in the amount of one
year's salary and up to one year related insurance benefits. Furthermore, under
certain conditions following a change in control of the Company, Mr. Schatz
may be entitled to a lump sum cash payment equal to 200% of his average annual
compensation with the Company for the most recent five full years.
Effective February 17, 1992, Mr. Schatz, on his own initiative in light of the
Company's financial position, voluntarily reduced his annual salary to $150,000
per annum for an unspecified period.
39
<PAGE> 40
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
E. Statutory Surplus and Statutory Net Income (Loss):
-------------------------------------------------
<TABLE>
The following tables reconcile statutory surplus and net income (loss) amounts
reported under statutory accounting principles to those reported herein under
GAAP at December 31, 1995 and 1994 and for the years then ended.
<CAPTION>
As of December 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Statutory surplus,
as reported by the Company $5,170,158 $ 3,765,107
Reconciliation to GAAP basis:
Deferred policy acquisition costs 312,223 458,407
Provision for unauthorized reinsurance 106,296 188,917
Excess of statutory reserve over
statement reserves 47,104 30,000
Other non-admitted assets
Data processing equipment 145,072 139,603
Other 304,267 344,150
Premiums receivable 185,928 338,106
Adjustment for difference in
valuation method for certain
fixed maturities 465,003 (1,795,418)
GAAP basis reserves in lieu of
provision for unauthorized
and other statutorily non-
admitted assets (315,000) (270,000)
---------- -----------
GAAP basis, surplus $6,421,051 $ 3,198,872
========== ===========
</TABLE>
40
<PAGE> 41
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
E. Statutory Surplus and Statutory Net Income (Loss), Continued:
------------------------------------------------------------
<CAPTION>
Year ended December 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Statutory net income (loss) $ 593,805 $(631,160)
Reconciliation to GAAP basis:
Change in deferred policy acquisition costs (146,184) (9,220)
Equity in loss on non insurance
subsidiary net income (loss) (5,313) (485)
GAAP basis reserves in lieu of
provision for unauthorized
and other statutorily non-
admitted assets (45,000) 43,918
Write down of fixed maturity to
realizable value on conversion to
an equity security 351,010 (351,010)
--------- ---------
GAAP basis, net income (loss) $ 748,318 $(947,957)
========= =========
</TABLE>
F. Employee Stock Option Plan:
--------------------------
The Company adopted an Employees' Stock Option Plan in 1981 (the "1981 Plan")
under which the Company may grant officers and key employees options to
purchase common stock, within ten years from the grant date, at option prices
not lower than the fair market value on the day of the grant. The options
become exercisable in cumulative amounts of 20% per year, so that all options
are fully exercisable after five years from the date of grant. Unexercised
options terminate not later than ten years after the grant date. The option
price and number of shares that may be exercised are subject to adjustment due
to stock splits, recapitalization and reorganizations. All outstanding options
expired in 1994. No further options may be issued under the Plan.
No options were exercised during the year ended December 31, 1994.
41
<PAGE> 42
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
G. Investments:
-----------
(a) Invested Assets:
<TABLE>
The amortized cost and fair value of investments in fixed maturities available
for sale at December 31, 1995 were as follows:
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- -------- --------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury Securities and
Obligations of U.S.
Government agencies $10,264,899 $339,108 $13,299 $10,590,708
Public Utilities 1,194,992 33,324 0 1,228,316
Corporate Securities 6,662,553 106,530 38,395 6,730,688
----------- -------- ------- -----------
Total Fixed Maturities $18,122,444 $478,962 $51,694 $18,549,712
=========== ======== ======= ===========
</TABLE>
At December 31, 1995, equity securities available for sale had gross unrealized
gains of $549 and gross unrealized losses of $50,764.
<TABLE>
The investment concentration of corporate fixed maturities for each investment
category which in the aggregate exceeds 10% of shareholders' equity at December
31,1995 is as follows:
<CAPTION>
Estimated
Fair
Value %
--------- -
<S> <C> <C>
Category:
- ---------
Consumer & Industrial
Products $1,915,728 28.5
Retail 267,135 4.0
Oil Industry 801,500 11.9
Financial Services 3,746,325 55.6
---------- -----
$6,730,688 100.0
========== =====
</TABLE>
42
<PAGE> 43
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
G. Investments, Continued:
----------------------
The amortized cost and estimated fair value of all fixed maturities available
for sale at December 31, 1995 are shown below by contractual maturity. Actual
dates for realization of such proceeds will differ from the contractual
maturity date because the borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- ----------
Due to Mature:
- --------------
<S> <C> <C>
Within one year $ 1,703,535 $ 1,711,000
After one year through five years 2,918,636
2,951,648
After five years through ten years 6,282,417
6,506,972
After ten years through fifteen years 1,738,646
1,763,123
After fifteen years 5,479,210 5,616,969
----------- -----------
$18,122,444 $18,549,712
=========== ===========
</TABLE>
Proceeds from sales and maturities of investments in fixed maturities during
1995 and 1994 were $3,448,993 and $5,287,269, respectively. Gross gains of
$12,246 and $31,112 and gross losses of $162,888 and $511,582 were realized on
those sales in 1995 and 1994, respectively.
The Company maintains deposits with various states in which the Company is
licensed. These deposits are subject to certain regulatory restrictions. The
aggregate amortized cost of such investments was $3,777,894 at December 31,
1995.
The estimated fair value of the Company's investment portfolio is based on
market values as at the balance sheet date. The majority of the Company's
investment portfolio is sensitive to movement in the interest rate regulated by
the Federal Reserve. Generally, an increase in the interest rate by the Federal
Reserve would result in a lower market value and a decline in the rate should
result in a higher market value for the Company's investment portfolio. The
value of these assets is adjusted according to the market condition as of the
balance sheet date.
43
<PAGE> 44
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
G. Investments, continued:
----------------------
<TABLE>
(b) Income from Investments:
Realized capital gains (losses) for the years ended December 31, 1995 and 1994
consisted of the following:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Fixed maturities $(150,642) $(480,470)
Write down value of mortgage note
receivable, net to fair value of collateral (67,214) 0
Other (7,870) 7,368
--------- ---------
Total $(225,726) $(473,102)
========= =========
</TABLE>
<TABLE>
The (increase) decrease in unrealized appreciation (depreciation) on fixed
maturities and equity securities was as follows:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Fixed maturities $ 2,463,527 $(1,648,869)
Equity securities 10,334 (50,929)
----------- -----------
Total $ 2,473,861 $(1,699,798)
=========== ===========
</TABLE>
<TABLE>
Net investment income for the years ended December 31, 1995 and 1994 consisted
of the following:
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Interest on fixed maturities $1,439,014 $1,605,974
Interest on short-term investments 76,235 73,402
Interest on mortgage note receivable 5,133 56,463
Rental income, investment property 24,600 23,899
Dividends on equity securities 451 451
Amortization of bond premium, net (77,579) (72,945)
Miscellaneous 11,804 0
---------- ----------
Total investment income 1,479,658 1,687,244
Investment expenses 181,057 156,510
---------- ----------
Net investment income $1,298,601 $1,530,734
========== ==========
</TABLE>
Investment expense in 1995 and 1994 includes $10,676 and $14,008, respectively,
of interest expense due reinsurers on funds withheld.
44
<PAGE> 45
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
H. Mortgage Note Receivable:
------------------------
On December 8, 1989, the Company sold its home office land and building to an
unrelated party and relocated to its present location. The consideration
received, prior to applicable brokerage fees, was $750,000 in the form of
$75,000 in cash and a $675,000 collateral dependent mortgage note, due in full
on December 8, 1999, bearing 10 3/4% interest secured by a first mortgage on
the property sold. Due to certain specifics of the transaction, primarily its
highly leveraged nature, the $227,786 gain on the sale was deferred until the
settlement date of the note.
The mortgagee defaulted on the promissory note in 1995. No payments for
interest or principle were received during the year. In accordance with the
provisions of FAS 114 and FAS 118, the Company wrote the value of the note, net
of the deferred gain, to the fair value of its collateral of $380,000. The
resulting loss of $67,214 was charged to realized investment losses and
included in net income for the year. On January 31, 1996 the note was settled
in the amount of $459,140. The resulting gain will be reflected in the
financial statements of the Company in 1996.
I. Property and Equipment:
----------------------
<TABLE>
Property and equipment, which are stated at cost, consist of the following at
December 31,1995:
<CAPTION>
Estimated
Useful
Amount Life
------ ----
<S> <C> <C>
Leasehold Improvements $ 70,903 10 years
Equipment, furniture and
fixtures and automobiles 377,817 5 years
Computer software & hardware 560,087 3-5 years
----------
1,008,807
Less accumulated
depreciation and amortization 459,936
----------
$ 548,871
==========
</TABLE>
45
<PAGE> 46
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
I. Property and Equipment, Continued:
---------------------------------
Depreciation and amortization expense for the years ended December 31, 1995 and
1994 was $123,745 and $161,310, respectively
The unamortized value of computer software was $107,300 and $105,215 for the
years ended December 31, 1995 and 1994, respectively.
J. Reserve for losses and loss adjustment expenses:
-----------------------------------------------
<TABLE>
The following table provides a reconciliation of the changes in loss and LAE
reserves, after deducting amounts recoverable from reinsurers for 1995 and
1994.
Reconciliation of Liability for Losses and
Loss Adjustment Expenses
------------------------
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $21,517,289 $21,623,131
Amounts recoverable from reinsurers
on unpaid losses 4,045,132 2,918,501
----------- -----------
Beginning of year, net 17,472,157 18,704,630
Add - Provision for losses and LAE for claims arising in:
Current year 6,119,285 9,392,203
Prior years (2,132,320) (1,019,313)
Deduct - Losses and LAE paid on claims arising in:
Current year 3,312,336 4,585,965
Prior years 3,843,299 5,019,398
----------- -----------
End of year, net 14,303,487 17,472,157
Amounts recoverable from reinsurers
on unpaid losses 4,703,238 4,045,132
----------- -----------
Losses and loss adjustment expenses
per Consolidated Balance Sheet $19,006,725 $21,517,289
=========== ===========
</TABLE>
Reserves for losses and loss adjustment expenses represent estimates of the
ultimate cost of all unpaid losses and loss adjustment expenses incurred
through the balance sheet date. These estimates are reviewed on a quarterly
basis and as experience develops and new information becomes known, they are
adjusted as necessary and are reflected in current operating results.
46
<PAGE> 47
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
J. Reserve for losses and loss adjustment expenses, Continued:
----------------------------------------------------------
For the years ending December 31, 1995 and 1994 the actuarial estimate
indicated that the net reserve for losses and loss adjustment expenses at the
beginning of each respective year were redundant by $2,132,320 and $1,019,313,
respectively.
The development in 1995 totaling $2,132,320 redundancy includes approximately
$1,300,000 of favorable development pertaining to the 1994 accident year.
Approximately 70% of the 1994 accident year development relates to the personal
and commercial auto lines of business. In determining ultimate losses and loss
adjustment expenses the Company utilizes historic payment and incurred loss
patterns to project its ultimate loss exposure. In the last three years, these
patterns have indicated a change has occurred in which the loss tail has
shortened compared to the Company's previous experience. Recognition of the
shorter loss tail was not acknowledged in the projection of ultimate losses and
loss adjustment expenses until such time that it was evident that a trend had
been established. The 1994 accident year redundancy in 1995 recognizes this
change.
K. Dividend Restriction:
--------------------
Under Maine Law, dividends may only be paid from available and accumulated
surplus funds which have been derived from net operating income and net
realized capital gains. At the present time the Company has a deficit in
accumulated surplus and does not expect to be in a position to pay dividends in
the foreseeable future. The Company has never paid a dividend.
L. Legal Proceedings:
-----------------
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF AMERICAN MOTOR CLUB, INC. V.
BERNARD GERSHUNY, ET AL. (U.S. District Court for the Eastern District of New
York, 1992). This is an action brought by a committee of unsecured creditors
(the "Committee") previously appointed in the Chapter 11 bankruptcy proceeding
of American Motor Club, Inc. ("AMC"). The Committee alleges that Bernard
Gershuny, First National Life and Casualty, Nicholas Neu, and others improperly
used AMC's funds to acquire the Company's stock. (Mr. Gershuny is the subject
of a 1987 order of the Maine Bureau of Insurance prohibiting him from
exercising voting control over 810,000 shares of common stock owned by him, and
requiring him to hold the shares in a non-voting trust. First National Life
and Casualty was the record owner of an additional 215,000 shares of the
Company's common stock.) The Committee seeks recovery of the value of the
allegedly diverted funds and/or to impose a constructive trust on the relevant
North East shares. The complaint states that North East
47
<PAGE> 48
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
L. Legal Proceedings, continued:
----------------------------
and the trustee of the Gershuny non-voting trust are "nominal" defendants to
the action. The Committee does not seek any monetary damages from the Company.
Mr. Gershuny, Mr. Neu, and other defendants have asserted various cross-claims
in connection with this action. With respect to North East, these include a
claim that the Company breached contractual commitments to provide automobile
insurance coverage to certain AMC members. The claimants seek an unspecified
amount of damages from North East, believed to exceed $1 million; the claimants
also seek recovery of $100,000 allegedly paid by AMC to North East. The
Company has denied these claims and believes that it has valid defenses to
these claims. An additional defendant (Mr. Ford) has alleged that various
persons, including the Company and Mr. Gershuny's counsel, have committed abuse
of process, the "tort of outrage," and violations of the Federal Racketeer
Influenced and Corrupt Organizations Act. Mr. Ford is a convicted felon who
filed this pleading from prison on a pro se basis. The Company believes Mr.
Ford's claims to be frivolous. Over the past three years, certain settlement
arrangements have been tentatively entered into, with approval from the court.
All such arrangements have been contingent, however, on the sale of the
Company's stock by the Gershuny non-voting trust, with the proceeds to be
allocated as set forth in a settlement order of the court. Since 1994 two
different prospective purchasers (the Tanner/Chesapeake Group and the Nichols
Group) have filed Form A applications with the Maine Bureau of Insurance,
seeking to obtain requisite regulatory approvals for the purchase of these and
other shares. In each case, the applications have been withdrawn and the
proposed purchases terminated. As a result, the relevant shares remain unsold,
thereby preventing consummation of the proposed settlement.
Except for the foregoing matter, and other than ordinary routine litigation
incidental to the business, there are no material legal proceedings pending
with regard to the Company or its wholly-owned subsidiary ACIC.
48
<PAGE> 49
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
M. Leases:
------
The Company has various operating leases, including the lease of its home
office building, required in the day to day operations of the Company. Lease
payments under these agreements were not material, except for the home office
lease which expires December 31, 2000 at an annual cost of $128,003 for 1995
increasing gradually to $144,823 for the year ending December 31, 2000.
Expense incurred for rent and rent related items for the years ended December
31, 1995 and 1994 was $178,227 and $176,920, respectively.
<TABLE>
The following table is a schedule of future minimum lease payments:
<CAPTION>
Lease Payment
-------------
<S> <C>
Year 1996 131,203
Year 1997 134,483
Year 1998 137,845
Year 1999 141,291
Year 2000 144,823
</TABLE>
49
<PAGE> 50
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
Part III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
This item, except for certain information pertaining to executive officers
included in Part I, is incorporated by reference to the Registrant's definitive
proxy statement for the Annual Meeting of Shareholders to be held June 1996.
ITEM 10 - EXECUTIVE COMPENSATION
This item is incorporated by reference to the Registrant's definitive proxy
statement for the Annual Meeting of Shareholders to be held June 1996.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND CHANGES IN CONTROL
This item is incorporated by reference to the Registrant's definitive proxy
statement for the Annual Meeting of Shareholders to be held June 1996.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference to the Registrant's definitive proxy
statement for the Annual Meeting of Shareholders to be held June 1996.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits
3.1 Certificate of Organization, as amended to date, is
incorporated herein by reference to Exhibits 3.1 through 3.13
to NEIC's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1993.
3.2 Bylaws of North East Insurance Company.
4.1 Instruments Defining the Rights of Security Holders: see
Exhibits 3.1 and 3.2 hereof.
</TABLE>
50
<PAGE> 51
<TABLE>
<S> <C>
4.2 Non-Voting Trust Indenture, dated as of February 3, 1987,
setting forth restrictions on the voting rights and certain
other rights pertaining to shares of Common Stock beneficially
owned by Bernard D. Gershuny, filed herewith.
9.1 Voting Trust Agreements and Amendments: see Exhibit 4.2
10.1 Lease, dated August 14, 1990, of North East's home office,
incorporated herein by reference to Exhibit 10.1 to NEIC's
Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994.
10.3 Employment Agreement dated March 26, 1991 between North East
and Robert G. Schatz, incorporated herein by reference to
Exhibit 10.3 to NEIC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.
21 A list of subsidiaries of North East is incorporated by
reference to Exhibit 21 to NEIC's Annual Report on Form 10-
KSB for the fiscal year ended December 31, 1993.
27 Financial Data Schedule
28 Information from Reports Furnished to State Insurance
Regulatory Authorities: Schedule P for NEIC and its subsidiary
American Colonial Insurance Company are filed herewith under
cover of Form SE.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company in the fourth
quarter of 1995.
51
<PAGE> 52
SIGNATURES
In accordance with Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: March 25, 1996 NORTH EAST INSURANCE COMPANY
By: /S/ Robert G. Schatz
---------------------
Robert G. Schatz, President
52
<PAGE> 53
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ Robert G. Schatz President, Chief Executive March 25, 1996
- --------------------------------
Officer and Director
Robert G. Schatz
/S/ Graham S. Payne Treasurer and Chief March 25, 1996
- -------------------------------- Financial Officer
Graham S. Payne
/S/ Andrew Greenbaum Director March 20, 1996
- --------------------------------
Andrew Greenbaum
/S/ Edward L. Dilworth, Jr. Director March 20, 1996
- --------------------------------
Edward L. Dilworth, Jr.
/S/ Bruce H. Suter Director March 20, 1996
- --------------------------------
Bruce H. Suter
/S/ Joseph M. Hochadel
- -------------------------------- Director March 19, 1996
Joseph M. Hochadel
/S/ Edward B. Batal Director March 22, 1996
- --------------------------------
Edward B. Batal
/S/ David D. Chase Director March 19, 1996
- --------------------------------
David D. Chase
</TABLE>
53
<PAGE> 54
<TABLE>
<S> <C> <C>
/S/ Terence P. Cummings Director March 21, 1996
- --------------------------------
Terence P. Cummings
/S/ Robert A. Hancock Director March 20, 1996
- --------------------------------
Robert A. Hancock
/S/ Wilson G. Hess Director March 19, 1996
- --------------------------------
Wilson G. Hess
</TABLE>
54
<PAGE> 55
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
INDEX TO CONSOLIDATED EXHIBITS
<CAPTION>
PAGE(S)
-------
Exhibit No.
-----------
<S> <C> <C>
3.2 Bylaws of North East Insurance Company 56
4.2 Non-Voting Trust Indenture, dated as of February 3, 1987,
setting forth restrictions on the voting rights and certain
other rights pertaining to shares of Common Stock beneficially
owned by Bernard D. Gershuny. 79
27 Financial Data Schedule 88
</TABLE>
55
<PAGE> 56
Exhibit 3.2
- --------------------------------------------------------------------------------
BYLAWS
OF
NORTH EAST INSURANCE COMPANY
(a quasi-legal corporation)
Adopted: March 6, 1979
As Amended February 13, 1981
As Amended September 22, 1989
As Amended November 29, 1990
As Amended November 15, 1995
- --------------------------------------------------------------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. Articles of Incorporation. Office, Location, Seal
and Section Headings 1
Section 1. Articles of Incorporation 1
Section 2. Office and Location 1
Section 3. Seal 1
Section 4. Section Headings 2
ARTICLE II. Annual Meetings of Shareholders 2
Section 1. Place 2
Section 2. Date 2
Section 3. Notice 3
ARTICLE III. Special Meetings of Shareholders 3
Section 1. Place and Date 3
Section 2. Call 3
Section 3. Notice 3
ARTICLE IV. Quorum and Voting of Shares 4
Section 1. Quorum 4
Section 2. Voting Rights 4
Section 3. Action by Consent 4
ARTICLE V. Directors 5
Section 1. Number, Qualification and Term 5
Section 2. Vacancies, Resignation and Removal 5
Section 3. Powers 5
Section 4. Compensation 6
ARTICLE VI. Meetings of the Board of Directors 6
Section 1. Annual Meeting 6
Section 2. Regular Meetings 6
Section 3. Special Meetings 7
Section 4. Attendance as Waiver of Notice 7
Section 5. Quorum and Vote Required 7
Section 6. Action by Consent 8
Section 7. Telephone Meetings 8
ARTICLE VII. Executive Committee 9
Section 1. Executive Committee 9
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE VIII. Officers 10
Section 1. Number 10
Section 2. When Chosen 10
Section 3. Additional Officers 10
Section 4. Compensation of Officers 10
Section 5. Vacancies, Term and Removal 10
Section 6. President 11
Section 7. Vice-Presidents 11
Section 8. Clerk 11
Section 9. Secretary 11
Section 10. Assistant Secretaries 12
Section 11. Treasurer 12
Section 12. Assistant Treasurers 13
ARTICLE IX. Voting Shares of Other Corporations 13
Section 1. Voting Shares of Other Corporations 13
ARTICLE X. Lost Certificates 13
Section 1. Lost Certificates 13
ARTICLE XI. Transfers and Registration of Shares 14
Section 1. Transfers of Shares 14
Section 2. Registered Shareholders 14
ARTICLE XII. Indemnification of Officers, Directors, Employees
& Agents; Insurance 14
Section 1. General 14
Section 2. Derivative Actions 16
Section 3. Special Right to Indemnification in Certain Cases 16
Section 4. Mandatory Indemnification for Directors;
Determinations in Specific Cases for Others 16
Section 5. Advancement of Expenses 17
Section 6. Bylaw Indemnification Rights Not Exclusive;
Enforceable by Separate Action 19
Section 7. Insurance 19
Section 8. Miscellaneous 19
Section 9. Amendment 20
ARTICLE XIII. Fiscal year 20
Section 1. Fiscal Year 20
ARTICLE XIV. Execution of Documents 21
Section 1. Execution of Documents 21
ARTICLE XV. Conflicts of Interest 21
Section 1. Policy 21
Section 2. Implementation of Policy 22
ARTICLE XVI. Amendments 22
Section 1. Amendments 22
Section 2. Severability 23
ARTICLE XVII. (Opt Out of Section 910) 23
</TABLE>
57
<PAGE> 58
BYLAWS
OF
NORTH EAST INSURANCE COMPANY
----------------------------
---------
ARTICLE I
---------
ARTICLES OF INCORPORATION, OFFICE, LOCATION,
--------------------------------------------
SEAL AND SECTION HEADINGS
-------------------------
SECTION 1. ARTICLES OF INCORPORATION. References in these bylaws to the
Articles of Incorporation shall have the meaning set forth in Section 102(1) of
the Maine Business Corporation Act. The name of this corporation shall be as set
forth in the Articles of Incorporation (Certificate of Organization of a
Corporation under the General Law filed with the Office of the Secretary of
State on August 9, 1965). References in these bylaws to the Maine Business
Corporation Act and to particular sections of that Act are to that Act and the
sections as from time to time in effect.
SECTION 2. OFFICE AND LOCATION. This corporation is located in the
State of Maine and the registered office is at 482 Payne Road, 4th Floor,
Scarborough, Maine 04074. The principal office and place of business of this
corporation shall be at such place as the Board of Directors shall fix, and the
corporation may have such other offices and places of business, both within and
without the State of Maine, as the Board of Directors may from time to time fix,
or as the business of the corporation may from time to time require.
SECTION 3. SEAL. The seal of this corporation shall be circular in form
with the name of the corporation, the word "Maine" and the year of its
incorporation so engraved on its face that it may be embossed on paper by
pressure, provided that the Board of Directors may adopt a wafer seal in any
form in respect of any particular document or instrument, in which case such
wafer seal affixed to such document or instrument shall be the corporate seal of
this corporation thereon for all purposes provided by law.
58
<PAGE> 59
SECTION 4. SECTION HEADINGS. The headings of Articles and Sections in
these bylaws are for convenience only, and shall not be taken into account in
construing these bylaws.
----------
ARTICLE II
----------
ANNUAL MEETING OF SHAREHOLDERS
------------------------------
SECTION 1. PLACE. All meetings of shareholders for the election of
Directors shall be held at the registered office of the corporation unless the
Board of Directors shall fix some other place within the State of Maine (or
outside of the State of Maine if permitted by the Articles of Incorporation) for
such meetings.
SECTION 2. DATE. Annual meetings of shareholders shall be held on the
last Monday of May in each year if not a legal holiday and if a legal holiday,
then on the next business day following at such hour as may be fixed by the
President or Board of Directors at which the shareholders shall elect a Board of
Directors and transact such other business as may be brought before the meeting.
For good reason, the annual meeting may be held within thirty (30) days of the
last Monday of May in each year. If for any reason such annual meeting is not
held on the date specified herein, or within thirty (30) days thereafter, a
substitute annual meeting may be held at any time following such date in lieu
thereof, and any business transacted or elections held at such substitute annual
meeting shall be as valid as if transacted or held at the annual meeting. Such
substitute annual meeting may be called in the same manner and by the person or
persons prescribed for calling special meetings of shareholders.
SECTION 3. NOTICE. Unless waived in the manner prescribed by the Maine
Business Corporation Act, written notice of the annual meeting or substitute
annual meeting stating the place, day and hour thereof, shall be given in the
manner prescribed by the Maine Business Corporation Act, including without
limitation Section 604 thereof.
59
<PAGE> 60
-----------
ARTICLE III
-----------
SPECIAL MEETINGS OF SHAREHOLDERS
--------------------------------
SECTION 1. PLACE AND DATE. Special meetings of shareholders for any
purpose or purposes may be held at such time and place, within the State of
Maine (or outside the State of Main if permitted by the Articles of
Incorporation), as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
SECTION 2. CALL. Special meetings of the shareholders, for any purpose
or purposes may be called by the Clerk or such other officer or officers,
Directors or shareholders who by Section 603 of the Maine Business Corporation
Act are empowered to call special meetings of shareholders.
SECTION 3. NOTICE. Unless waived in the manner prescribed by the Maine
Business Corporation Act, written notice of a special meeting of shareholders
stating the place, day and hour thereof, and the purpose or purposes for which
the meeting is called, shall be delivered in the manner prescribed by the Maine
Business Act, including without limitation Sections 404, 805, 902 and 1003
thereof.
-----------
ARTICLE IV.
-----------
QUORUM AND VOTING OF SHARES
---------------------------
SECTION 1. QUORUM. The holders of one-third of the shares of stock
issued and outstanding and entitled to vote, represented in person or by proxy,
shall constitute a quorum at all meetings of the shareholders for the
transaction of business except as otherwise provided by Maine Business
Corporation Act. If, however, such quorum shall not be present or represented at
any meeting of the shareholders, the shareholders present in person or
represented by proxy shall have the power to adjourn the meeting from time to
time, without notice (except as otherwise provided by the Maine Business
Corporation Act) other than announcement at the meeting, until a quorum shall be
present or represented any
60
<PAGE> 61
business may be transacted which might have been transacted at the meeting as
originally notified.
SECTION 2. VOTING RIGHTS. Each outstanding share of stock, having
voting power, shall be entitled to one vote on each matter submitted to a vote
at a meeting of shareholders. A shareholder may vote either in person or by
proxy executed in the manner prescribed by the Maine Business Corporation Act,
including without limitation Sections 613, 614 and 615 thereof.
SECTION 3. ACTION BY CONSENT. Any action required or permitted by law
to be taken at any annual of special meeting of shareholders may be taken
without a meeting if written consents, setting forth the action so taken, are
signed by the holders of all outstanding shares entitled to vote on such action
and are filed with the Clerk of the corporation as part of the corporate
records. Such written consents may contain statements in the form of, and in any
case shall have the same effect as unanimous vote or votes of the shareholders
and may be stated as such in any certificate or document required or permitted
to be filed with the Secretary of the State of Maine, and in any certificate or
document prepared or certified by any officer of the corporation for any
purpose.
----------
ARTICLE V.
----------
DIRECTORS
---------
SECTION 1. NUMBER, QUALIFICATION AND TERM. The maximum number of
Directors shall be 21 and the minimum number of Directors shall be 7. the Board
of Directors is authorized by resolution to increase and decrease the number of
Directors within that range, but no reduction in the number of directors shall
shorten the term of any incumbent director. Directors need not be residents of
the State of Maine nor shareholders of the corporation. The Directors shall be
elected a t the annual meeting of the shareholders, and each Director elected
shall serve until the next succeeding annual meeting and until his successor
shall have been elected and qualified.
61
<PAGE> 62
SECTION 2. VACANCIES, RESIGNATION AND REMOVAL. Any vacancy in the Board
of Directors, including newly created directorships created by increase in the
number of Directors, may be filled by a majority of the remaining Directors. Any
Director may resign his office by delivering a written resignation to the
President or Clerk. Directors may be removed from office in the manner
prescribed by the Maine Business Corporation Act, including without limitation
Section 707 thereof.
SECTION 3. POWERS. The Board of Directors shall manage and control the
business, property and affairs of the corporation. In the management and control
of the business, property and affairs of the corporation, the Board of Directors
is hereby vested with all of the powers and authority of the corporation itself,
so far as not inconsistent with the Maine Business Corporation Act or other laws
of the State of Maine, the Articles of Incorporation or these bylaws.
SECTION 4. COMPENSATION. The Board of Directors, by the affirmative
vote of a majority of the Directors then in office, and irrespective of any
personal interest of any of its members, shall have authority to establish
reasonable compensation of all Directors for services to the corporation as
Directors, officers, or otherwise.
----------
ARTICLE VI
----------
MEETINGS OF THE BOARD OF DIRECTORS
-----------------------------------
SECTION 1. ANNUAL MEETING. The first meeting of each newly elected
Board of Directors shall be held at such time and place as shall be fixed by the
shareholders at their meeting electing them, or if no such time and place are so
fixed, said first meeting shall be held at the place of and immediately
following such meeting of shareholders. In either event, no notice of such
meeting shall be necessary. Such meeting of the Directors may also convene at
such place and time as shall be fixed by the consent in writing of all the
Directors.
62
<PAGE> 63
SECTION 2. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held upon such notice, or without notice, and at such time and place as
shall from time to time be fixed by the Board. Unless otherwise specified by the
Board, no notice of such regular meetings shall be necessary, except as
otherwise provided by the Maine Business Corporation Act, including without
limitation Section 601 thereof.
SECTION 3. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the President, Clerk, Secretary or any other person or persons
authorized by the Maine Business Corporation Act to call such meetings. The
person or persons calling the special meeting shall fix the time and place
thereof.
Unless notice of a special meeting is waived in the manner prescribed
by the Maine Business Corporation Act, notice of each special meeting of the
Board of Directors shall be given by the Clerk, Secretary or the person or
persons calling the special meeting. It shall be sufficient notice to a
Director of a special meeting to send notice by mail at least 48 hours, or by
telegram at least 24 hours, before the meeting addressed to him at his usual or
last known business or residence address or to give notice to him in person or
by telephone at least 24 hours before the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of directors need be specified in the notice of the meeting, except as
otherwise required by the Maine Business Corporation Act, including without
limitation Section 601 thereof. The giving of notice of a special meeting of
the Board of Directors by the person or persons authorized to call the same
shall constitute the call thereof.
SECTION 4. ATTENDANCE AS WAIVER OF NOTICE. Attendance of a Director at
any meeting shall constitute a waiver of notice of such meeting, except where a
Director attends for the express purpose, stated at the commencement of the
63
<PAGE> 64
meeting, of objecting to the transaction of any business because the meeting is
not lawfully called, noticed, or convened.
SECTION 5. QUORUM AND VOTE REQUIRED. At any meeting of the Directors, a
majority of the Directors then in office shall constitute a quorum for the
transaction of business. The Directors present at a duly called or held meting
at which a quorum was once present may continue to do business and take action
at the meeting notwithstanding the withdrawal of enough Directors to leave less
than a quorum. Any meeting may be adjourned from time to time by a majority of
the votes cast upon the question, whether or not a quorum is present, and the
meeting may be held as adjourned without further notice if the time and place to
which it is adjourned is fixed and announced at such meeting. The vote of a
majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors unless the vote of a greater number
is required by these bylaws or the Maine Business Corporation Act.
SECTION 6. ACTION BY CONSENT. Any action required or permitted to be
taken at a meeting of the Directors, or of a committee of the Directors, may be
taken without a meeting if all of the Directors, or all of the members of the
committee, as the case may be, sign written consents setting forth the action
taken or to be taken, at any time before or after the intended effective date of
such action. Such consents shall be filed with the minutes of the Directors'
meetings or committee meetings, as the case may be, and shall have, and may be
stated by any officer of the corporation to have, the same effect as a unanimous
vote or resolution of the Board of Directors at a legal meeting thereof. Any
such action taken by unanimous written consents may, but need not be, set forth
in such consents in the form of resolutions or votes.
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SECTION 7. TELEPHONE MEETINGS. Members of the Board of Directors or of
any committee designated thereby may participate in a meeting of the Board or of
such committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participating in a meeting in such manner by any member who does
not object at the beginning of such meting to the holding thereof in such manner
shall constitute presence in person at such meeting.
-----------
ARTICLE VII
-----------
EXECUTIVE COMMITTEE
-------------------
SECTION 1. BOARD COMMITTEES. By resolution adopted by a majority of
Directors then in office, the Board of Directors may designate from among its
members an executive committee and other committees, each consisting of two or
more Directors. The Board may delegate to any such committee all or any portion
of the authority of the Board, except that no committee shall (a) amend the
Articles of Incorporation of the Company; (b) adopt a plan of merger or
consolidation; (c) recommend to the shareholders the sale or disposition of all
or substantially all of the property and assets of the Corporation other than in
the usual course of its business; (d) recommend to the shareholders a voluntary
dissolution of the Corporation or revocation of such dissolution; (e) declare
corporate distributions other than dividends from earned surplus or from net
earnings; (f) amend these bylaws; or (g) take any action that is otherwise
prohibited by law. The Board may designate from among its members one or more
alternate members of such committee, who may replace any absent member at any
meeting of such committee. The Board or the committee may also designate
non-Director members of management to serve as liaisons the committee; provided
that only Directors shall have authority to vote or otherwise approve any
action by the committee. A majority of the members of each committee may
determine its actions and may fix the place, date, and hour of its meetings,
unless otherwise
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provided by the Board. Except as otherwise provided by the committee or the
Board, the provisions of these bylaws for the calling, noticing and conduct of
Board meetings shall govern the calling, noticing and conduct of committee
meetings. Each committee shall keep regular minutes of its minutes of its
meetings and shall report its actions to the Board when so requested. Each
member of any committee serves at the pleasure of the Board, and may be removed
from such committee at any time, with or without cause, by resolution adopted by
a majority of the Directors then in office.
------------
ARTICLE VIII
------------
OFFICERS
--------
SECTION 1. NUMBER. The officers of the corporation shall be chosen by
the Board of Directors and shall be a President, a Treasurer, a Clerk who shall
be a resident of Maine, and a Secretary. The office of Clerk and Secretary may
be combined. The Board of Directors may also elect one or more Vice-Presidents,
(one of whom may be designated by the Board of Directors as the Executive
Vice-President), and one or more Assistant Secretaries and Assistant Treasurers.
SECTION 2. WHEN CHOSEN. The Board of Directors at its initial meeting
after the incorporation of the corporation and at each regular meeting held
after each annual meeting of shareholders shall choose such officers, none of
whom need be a member of the Board; but the Clerk need not be elected annually
and shall hold office until the corporation changes its Clerk in the manner
provided by the Maine Business Corporation Act.
SECTION 3. ADDITIONAL OFFICERS. The Board of Directors may appoint such
other officers and agents as it shall deem necessary who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.
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SECTION 4. COMPENSATION OF OFFICERS. The salaries of all officers of
the corporation shall be fixed by the Board of Directors.
SECTION 5. VACANCIES, TERM AND REMOVAL. The officers of the corporation
shall hold office until their successors are chosen and qualify. Any officer
elected or appointed by the Board of Directors may be removed at any time by the
Board of Directors, with or without cause. Any vacancy occurring in any office
of the corporation may be filled by the Board of Directors.
SECTION 6. PRESIDENT. The President shall be the chief executive
officer of the corporation, shall preside at all meetings of the shareholders
and of the Board of Directors, shall have the general and active management of
the business of the corporation and shall see that all orders and resolutions of
the Board of Directors are carried into effect.
SECTION 7. VICE-PRESIDENT. The Vice-President, if any, or if there
shall be more than one, the Vice-Presidents in the order determined by the Board
of Directors, shall, in the absence of or in the case of the disability of the
President, perform the duties and exercise the powers of the President and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe. If the Board of Directors shall appoint or
elect an Executive Vice-President, it shall be presumed that he is the
Vice-President determined by the Board of directors to act in case of the
absence or disability of the President.
SECTION 8. CLERK. The Clerk shall keep, in a book kept for such
purpose, the records of all shareholders' meetings, and shall perform such
duties and have such powers as are prescribed by the Maine Business Corporation
Act, including without limitation, Sub-section 11 of Section 714 thereof. The
Clerk shall have custody of the corporate seal and may affix the same to
documents requiring it, and attest the same. The Clerk may permit the President
or Secretary to keep a duplicate of the corporate seal.
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SECTION 9. SECRETARY. The Secretary or the Clark shall attend all
meetings of the Board of Directors and record all the proceedings of the Board
of Directors in a book kept for that purpose, and shall give notice of special
meetings of the Board of Directors, and shall perform like duties for the
executive committee. The Secretary shall perform such other duties as may be
prescribed by the Board of Directors or President, under whose supervision he
shall be. He, or an Assistant Secretary, shall have authority to affix the
corporate seal to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such Assistant Secretary or by
the Clerk. The Board of Directors may give general authority to any other
officer to affix the seal of the corporation and to attest the same. The
Secretary shall have such other powers and duties as are prescribed by law or by
the Board of directors. In case of the absence of or disability of the
Secretary, or if the corporation shall have no Secretary, all the powers of the
Secretary may be exercised by the Clerk.
SECTION 10. ASSISTANT SECRETARIES. The Assistant Secretary, or if
there be more than one, the Assistant Secretaries, in the order determined by
the Board of Directors, shall, in case of the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
SECTION 11. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the corporation as may be ordered by
the Board of Directors, at its regular meetings, or when the Board of Directors
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so requires, an account of all his transactions as Treasurer and of the
financial condition of the corporation.
SECTION 12. ASSISTANT TREASURERS. The Assistant Treasurer, or, if
there shall be more than one, the Assistant Treasurers, in the order determined
by the Board of Directors, shall, in the absence of or in the case of the
disability of the Treasurer, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
----------
ARTICLE IX
----------
VOTING SHARES OF OTHER CORPORATIONS
-----------------------------------
SECTION 1. VOTING SHARES OF OTHER CORPORATIONS. The chairman of the
board, if any, President, and Vice-President, if any, Secretary and Treasurer of
this corporation, in that order, shall have authority to vote shares of other
corporations standing in the name of this corporation, and the President,
Secretary or Clerk is authorized to execute in the name and on behalf of this
corporation proxies appointing any one or more of the officers first above
named, in the order above named, as proxy agents.
---------
ARTICLE X
---------
LOST CERTIFICATES
-----------------
SECTION 1. LOST CERTIFICATES. The Board of Directors may direct a
replacement or duplicate certificate for shares of this corporation to be issued
in place of any certificate theretofore issued by the corporation alleged to
have been lost, destroyed or mutilated. When authorizing such issue of a new
certificate, the Board of Directors, in its discretion and as a condition
precedent to the issuance thereof, may prescribe such terms and conditions as it
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deems expedient, and may require such indemnities as it deems adequate, to
protect the corporation and its officers and agents from any claim that may be
made against it with respect to any such certificate alleged to have been lost,
destroyed or mutilated. The powers and duties of the Board prescribed in this
ARTICLE X may be delegated in whole or in part to any registrar or transfer
agent.
----------
ARTICLE XI
----------
TRANSFERS AND REGISTRATION OF SHARES
------------------------------------
SECTION 1. TRANSFERS OF SHARES. Upon surrender to the corporation or
the transfer agent of the corporation of a certificate representing shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, a new certificate shall be issued to the person entitled
thereto, and the old certificate cancelled and the transaction recorded upon the
books of the corporation, provided that the provisions of these bylaws, if any,
respecting restrictions on sales or transfers of shares have been complied with.
SECTION 2. REGISTERED SHAREHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such shares on the part of any other person, whether or not it
shall have express or other notice thereof.
-----------
ARTICLE XII
-----------
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES
-------------------------------------------------
AND AGENTS; INSURANCE
---------------------
SECTION 1. GENERAL. The corporation shall in all cases indemnify any
person who is or was a director of the corporation on or after May 1, 1990 and
may (subject to Section 4 of this Article) indemnify any other person, employee
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or agent of the corporation, as provided in Section 4 of this Article, who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, trustee, partner, fiduciary, employee
or agent of another corporation, partnership, joint venture, trust, pension or
other employee benefit plan or other enterprise, against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement to the extent
actually and reasonably incurred by that person in connection with such action,
suit or proceeding; provided that no indemnification may be provided by any
person with respect to any matter as to which that person shall have been
finally adjudicated:
A. Not to have acted honestly or in the reasonable belief that that
person's action was in or not opposed to the best interests of the corporation
or its shareholders or, in the case of a person serving as a fiduciary of an
employee benefit plan or trust, in or not opposed to the best interests of that
plan or trust, or its participants or beneficiaries; or
B. With respect to any criminal action or proceeding, to have had
reasonable cause to believe that that person's conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order or conviction
adverse to that person, or by settlement or plea of nolo contendere or its
equivalent, shall not of itself create a presumption that that person did not
act honestly or in the reasonable belief that that person's action was in or
not opposed to the best interests of the corporation or its shareholders, or,
in the case of a person serving as a fiduciary of an employee benefit plan or
trust, in or not opposed to the best interests of that plan or trust or its
participants or beneficiaries and, with respect to any criminal action or
proceeding, had reasonable cause to believe that that person's conduct was
unlawful.
SECTION 2. DERIVATIVE ACTIONS. Notwithstanding any provision of Section
1 or 4, the corporation shall not indemnify any person with respect to any
claim,
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issue or matter asserted by or in the right of the corporation as to which that
person is finally adjudicated to be liable to the corporation unless the court
in which the action, suit or proceeding was brought shall determine that, in
view of all the circumstances of the case, that person is fairly and reasonably
entitled to indemnity for such amounts as the court shall deem reasonable.
SECTION 3. SPECIAL RIGHT TO INDEMNIFICATION IN CERTAIN CASES. Any
provisions of Sections 1, 2 or 4 to the contrary notwithstanding, to the extent
that a director, officer, employee or agent of the corporation or any other
person whom the corporation has authority to indemnify under Section 1, has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1 or 2, or in defense of any claim, issue or
matter therein, that person shall be indemnified against expenses, including
attorneys' fees, actually and reasonably incurred in connection therewith. The
right to indemnification granted by this Subsection may be enforced by a
separate action against the corporation, if an order for indemnification is not
entered by a court in the action, suit or proceeding wherein that director,
officer, employee or agent was successful on the merits or otherwise.
SECTION 4. MANDATORY INDEMNIFICATION FOR DIRECTORS; DETERMINATIONS IN
SPECIFIC CASES FOR OTHERS. Any indemnification under Section 1, unless ordered
by a court or required by these bylaws, shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of any
director, officer, employee or agent is proper in the circumstances and in the
best interests of the corporation; provided that no such determination shall be
required with respect to any person who is or was a director of the corporation
on or after May 1, 1990 and indemnification of any such person under Section 1
shall be required in all cases, regardless of the capacity in which such
director is or was made or threatened to be made a party to the action, suit or
proceeding. Where such a case specific determination is required, that
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determination shall be made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to that action, suit or
proceeding, or if such a quorum is not obtainable, or even if obtainable, if a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or by the shareholders. Such a determination once made may
not be revoked and, upon the making of that determination, the director,
officer, employee or agent may enforce the indemnification against the
corporation by a separate action notwithstanding any attempt or actual
subsequent action by the Board of Directors.
SECTION 5. ADVANCEMENT OF EXPENSES. Except in the case of any person
who is or was a director of the corporation on or after May 1, 1990 expenses
incurred in defending a civil, criminal, administrative or investigative action,
suit or proceeding may be authorized and paid by the corporation in advance of
the final disposition of that action, suit or proceeding upon a determination
made in accordance with the procedure established in Section 4 that, based
solely on the facts then known to those making the determination and without
further investigation, the person seeking indemnification satisfied the standard
of conduct prescribed by Section 1 (except that with respect to any person who
is or was a director of the corporation on or after May 1, 1990, these expenses
shall in all cases be paid by the corporation in advance of the final
disposition of that action, suit or proceeding), and upon receipt by the
corporation of:
A. A written undertaking by or on behalf of the person seeking
indemnification to repay that amount if that person is finally adjudicated:
(1) Not to have acted honestly or in the reasonable belief that that
person's action was in or not opposed to the best interests of the
corporation or its shareholders or, in the case of a person serving as
a fiduciary of an employee benefit plan or trust, in or not opposed to
the best interest of such plan or trust or its participants or
beneficiaries;
(2) With respect to any criminal action or proceeding, to have had
reasonable cause to believe that the person's conduct was unlawful; or
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(3) With respect to any claim, issue or matter asserted in any
action, suit or proceeding brought by or in the right of the
corporation, to be liable to the corporation, unless the court in
which that action, suit or proceeding was brought permits
indemnification in accordance with Subsection 2; and
B. A written affirmation by the person seeking indemnification that
the person has met the standard of conduct necessary for indemnification by the
corporation as authorized in this section.
The undertaking required by Paragraph A shall be an unlimited general
obligation of the person seeking the advance, but need not be secured and may
be accepted without reference to financial ability to make the repayment. With
respect to any person who is or was a director of the corporation on or after
May 1, 1990, such expenses shall in all cases be advanced by the corporation,
as reasonably requested from time to time, upon receipt by the corporation, at
the time of the initial advance, of the undertaking described in clause (A) or
the affirmation described in clause (B).
SECTION 6. BYLAW INDEMNIFICATION RIGHTS NOT EXCLUSIVE; ENFORCEABLE BY
SEPARATE ACTION. The indemnification and entitlement to advances of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which those indemnified may be entitled under any agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in that
person's official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee, agent, trustee, partner or fiduciary and shall inure to the
benefit of the heirs, executors and administrators of such a person. A right to
indemnification required by this Article may be enforced by a separate action
against the corporation, if an order for indemnification has not been entered by
a court in any action, suit or proceeding in respect to which indemnification is
sought.
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SECTION 7. INSURANCE. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, trustee, partner, fiduciary, employee or
agent of another corporation, partnership, joint venture, trust, pension or
other employee benefit plan or other enterprise against any liability asserted
against that person and incurred by that person in any such capacity, or arising
out of that person's status as such, whether or not the corporation would have
the power to indemnify that person against such liability under this section.
SECTION 8. MISCELLANEOUS. For purposes of this Article, references to
the "corporation" shall include, in addition to the surviving corporation or new
corporation, any participating corporation in a consolidation or merger. For
purposes of this Article, the corporation shall be deemed to have requested a
person to serve an employee benefit plan whenever the performance by him of his
duties to the corporation also imposes duties on, or otherwise involves services
by, him to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person seeking indemnification with respect to an employee benefit
plan pursuant to applicable law shall be deemed "fines"; and action taken or
omitted by him with respect to an employee benefit plan in the performance of
his duties for a purpose reasonably believed by him to be in the interests of
the participants or beneficiaries of the plan shall be deemed to be for a
purpose which is in the best interests of the corporation.
SECTION 9. AMENDMENT. Any amendment, modification or repeal of this
Article XII shall not deny, diminish or otherwise limit the rights of any person
to indemnification or advance hereunder with respect to any action, suit or
proceeding arising out of any conduct, act or omission occurring or allegedly
occurring at any time prior to the date of such amendment, modification or
repeal. This Article XII may be amended, modified or repealed by the affirmative
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vote of a majority of the directors of the corporation present and voting at a
meeting of the board of directors of the corporation which has been duly called
and held.
------------
ARTICLE XIII
------------
FISCAL YEAR
-----------
SECTION 1. FISCAL YEAR. This fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.
-----------
ARTICLE XIV
-----------
EXECUTION OF DOCUMENTS
----------------------
SECTION 1. EXECUTION OF DOCUMENTS. Unless the Board of Directors,
executive committee or shareholders shall otherwise generally or in any specific
instance provide: (a) any bill, note, check, or negotiable instrument may be
executed or endorsed in the name and on behalf of the corporation by the
President or Treasurer, acting singly, and (b) any other instruments, documents,
deeds, bills of sale or other writings of whatever nature shall be executed in
the name and on behalf of the corporation by the President or the Treasurer,
acting singly, and either officer may seal, acknowledge and deliver the same.
----------
ARTICLE XV
----------
CONFLICTS OF INTEREST
---------------------
SECTION 1. POLICY. It shall be the general policy of this corporation
that all officers and Directors of this corporation or its subsidiaries and
affiliates shall avoid any situation which does or may involve a conflict
between
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their personal or business interests and the interests of this corporation or
its subsidiaries and affiliates. The officers and Directors stand in a
fiduciary relationship to the corporation and its shareholders and its
subsidiaries and affiliates and their shareholders. Consequently such officers
and Directors owe a duty of undivided loyalty, fairness and good faith toward
the corporation, its shareholders, subsidiaries and affiliates of the
corporation and their shareholders. Each officer and Director has an
obligation to disregard his own business and personal interests as well as
those of his family or business associates in an instance where those interests
conflict with the interests of the corporation, its shareholders, its
subsidiaries and affiliates and their shareholders. Each officer and Director
must be guided by a fundamental sense of fairness and a scrupulous regard for
their primary responsibility to the corporation, its shareholders, its
subsidiaries and affiliates and their shareholders.
SECTION 2. IMPLEMENTATION OF POLICY. In addition to the duties set
forth in these bylaws for the President, he shall be charged with the specific
responsibility for implementing the general policy set forth in Section 1 of
this ARTICLE XV. The President shall confer with the Board of Directors annually
regarding any possible conflicts of interest and shall present a report to the
shareholders at their annual meeting. If deemed necessary by the President, he
shall require each officer and Director of the corporation to execute a writing
in a form approved by the Board of Directors indicating an understanding and
appreciation of the general policy set forth in Section 1 of this ARTICLE XV and
further indicating any possible conflict of interest which might result in a
violation of that policy. Such writings shall be reviewed by the President at
least annually and, if he deems it necessary, appropriate action taken in regard
thereto. Such writings shall remain in the possession of the Clerk and be
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available for inspection on written request by any shareholder of the
corporation or bay any proper agent of a governmental or regulatory agency.
-----------
ARTICLE XVI
-----------
AMENDMENTS
----------
SECTION 1. AMENDMENTS. The Board of Directors shall have the power to
alter, amend or repeal these bylaws, and to adopts new bylaws, provided that the
notice of any regular or special meeting at which such action is to be taken
shall either set out the text of the proposed new bylaws, amendment or bylaw to
be repealed, or shall summarize the changes to be effected by such adoption,
amendment or repeal, and provided further that the shareholders may amend or
repeal a bylaw provision adopted by the Board of Directors and in such case the
Board of Directors may not, for two years thereafter, amend or readopt the bylaw
provision thus amended or repealed by the shareholders.
SECTION 2. Wherever possible, each provision of these Bylaws shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provisions of these Bylaws shall be deemed to any degree prohibited
by, unenforceable or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition, unenforceability or
invalidity, and without invalidating the remainder of such provision or of the
remaining provisions of these Bylaws, and while preserving the maximum degree
of effectiveness consistent with applicable law.
------------
ARTICLE XVII
------------
Section 910 of Title 13-A M.R.S.A., as it may be amended hereafter,
shall not be applicable in any respect to the Corporation.
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Exhibit 4.2
NON-VOTING TRUST INDENTURE
Capital Stock of
North East Insurance Company
THIS INDENTURE made at Portland, Maine, as of the 3rd day of February,
1987, among North East Insurance Company, a Maine corporation, chartered as an
insurer under the laws of the State of Maine, hereinafter called the Company;
Bernard D. Gershuny, hereinafter called the Stockholder of the Company, and
Stephen F. Dubord, of 44 Elm Street, P.O. Box 708, Waterville, Maine 04901, and
his successors in trust.
W I T N E S S E T H :
WHEREAS, the parties hereto deem it necessary and advisable, for their
best interests, in order to meet, address and comply with both the spirit and
the letter of the Decision and Order of Mr. E. B. Stevens, Acting
Superintendent of Insurance, dated January 17, 1987, relating to the
application of Bernard D. Gershuny to acquire control of the Company, and at
the same time, meet the equitable interests of Mr. Gershuny, and, WHEREAS, the
Stockholder and the Company have agreed upon the person of the Trustee and upon
the form of this Agreement, and,
WHEREAS, the Trustee has consented to act under this agreement for the
purposes herein provided,
IT IS AGREED:
1. AGREEMENT. Copies of this agreement, and of every agreement
supplemental hereto or amendatory hereof, shall be filed in the principal
office of the Company in Portland, Maine, and shall be open to the inspection
of any stockholder of the Company, or any beneficiary of the trust under this
agreement, daily during business hours. All trust certificates issued as
hereinafter provided shall be issued, received, and held subject to all the
terms of this agreement. Every person, firm, trust, or corporation entitled to
receive trust certificates representing shares of capital stock, and their
transferees and assigns, upon accepting the trust certificates issued
hereunder, shall become parties to and be bound by the provisions of this
agreement with the same effect as if they had executed the agreement.
2. TRANSFER OF STOCK TO TRUSTEE. The Stockholder who has
executed this agreement shall deposit with the Trustee certificates for capital
stock of the Company as set forth after their respective signatures to this
agreement. All such stock certificates shall be made out in the name of the
Trustee, or so endorsed, or accompanied by such instruments of transfer as to
enable the Trustee to cause such certificates to be transferred into the name
of the Trustee, as hereinafter provided. On receipt by the Trustee of the
certificates for any such shares of capital stock and the transfer of the same
into the name of the Trustee, the Trustee shall hold the same subject to the
terms of this agreement,
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and shall thereupon issue and deliver to the Stockholder trust certificates for
the capital stock of the Company respectively deposited by them.
All certificates for capital stock of the Company transferred and
delivered to the Trustee pursuant to this agreement shall be surrendered by the
Trustee to the Company and cancelled, and new certificates therefor shall be
issued to and held by the Trustee in the name of "Stephen F. Dubord, as
Trustee".
3. TRUST CERTIFICATES. The trust certificates to be issued and
delivered by the Trustee in respect of the capital stock of the Company as
hereinbefore provided shall be in substantially the same form as reflected in
Exhibit A, attached hereto and made a part hereof. The sole beneficiary and
owner of the trust and the sole recipient of the trust certificates is Bernard
D. Gershuny.
4. TRANSFER OF CERTIFICATES. The trust certificates shall be
transferable at the principal office of the Trustee in Waterville, Maine (and
at such other office as the Trustee may designate by an instrument in writing
signed by them and sent by mail to the registered holders of trust
certificates), on the books of the Trustee, by the registered owner thereof,
either in person or by attorney thereto duly authorized, upon surrender
thereof, according to the rules established for that purpose by the Trustee,
and the Trustee may treat the registered holder as owner thereof for all
purposes whatsoever, but they shall not be required to deliver stock
certificates hereunder without the surrender of such trust certificates.
If a trust certificate is lost, stolen, mutilated, or destroyed, the
Trustee, in their discretion, may issue a duplicate of such certificate upon
receipt of:
(a) evidence of such fact satisfactory to them;
(b) indemnity satisfactory to them;
(c) the existing certificate, if mutilated; and
(d) their reasonable fees and expenses in connection with the
issuance of a new trust certificate.
The Trustee shall not be required to recognize any transfer of a trust
certificate not made in accordance with the provisions hereof, unless the
person claiming such ownership shall have produced indicia of title
satisfactory to the Trustee, and shall in addition deposit with the Trustee
indemnity satisfactory to them.
Bernard D. Gershuny as the sole recipient of the Trustee Certificate
and as the sole beneficiary of the Trust:
(a) represents and warrants that he is acquiring the trust
certificates for his own account for investment and not with a view toward
dividing his participation with others or with a view toward or for resale in
connection with any "distribution" (as that term is used in the Securities Act
of 1933 (herein, the "Act") and, in the rules and regulations of the Securities
and Exchange Commission promulgated thereunder) of all or any portion thereof.
(b) agrees and covenants that he will not divide his participation
in the trust certificates with others and will not offer, sell, pledge,
hypothecate or
80
<PAGE> 81
otherwise transfer or dispose of any of the Shares in the absence of
registration of such Shares under the Act or an opinion of counsel satisfactory
to North East Insurance Company to the effect that registration under the Act
is not required with respect to such transfer or disposition.
5. TERMINATION PROCEDURE. Upon the termination of this agreement
at any time, as hereinafter provided, the Trustee, at such time as they may
choose during the period commencing twenty (20) days before and ending twenty
(20) days after such termination, shall mail written notice of such termination
to the registered owners of the trust certificates, at the addresses appearing
on the transfer books of the Trustee. From the date specified in any such
notice (which date shall be fixed by the Trustee) the trust certificates shall
cease to have any effect, and the holders of such trust certificates shall have
no further rights under this agreement other than to receive certificates for
shares of stock of the Company or other property distributable under the terms
hereof and upon the surrender of such trust certificates. Within thirty (30)
days after the termination of this agreement the Trustee shall deliver, to the
registered holders of all trust certificates, certificates for the number of
shares of the capital stock of the Company represented thereby, upon the
surrender thereof properly endorsed, such delivery to be made in each case at
the office of the Trustee and after payment, if the Trustee so require, by the
persons entitled to receive such certificates, of a sum sufficient to cover any
stamp tax or governmental charge in respect of the transfer or delivery of such
certificates. At any time subsequent to thirty (30) days after the termination
of this agreement the Trustee may deposit with the Company stock certificates
representing the number of shares of capital stock represented by the trust
certificates then outstanding, with authority in writing to the Company to
deliver such stock certificates in exchange for trust certificates representing
a like number of shares of the capital stock of the Company; and upon such
deposit all further liability of the Trustee for the delivery of such stock
certificates and the delivery or payment of dividends upon surrender of the
trust certificates shall cease, and the Trustee shall not be required to take
any further action hereunder.
6. DIVIDENDS. Prior to the termination of this agreement, the
holder of each trust certificate shall be entitled to receive payments equal to
the cash dividends, if any, received by the Trustee upon a like number and
class of shares of capital stock of the Company as is called for by each such
trust certificate. If any dividend in respect of the stock deposited with the
Trustee is paid, in whole or in part, in stock of the Company having general
voting powers, the Trustee shall likewise hold, subject to the terms of this
agreement, the certificates for stock which are received by them on account of
such dividend, and the holder of each trust certificate representing stock on
which such stock dividend has been paid shall be entitled to receive a trust
certificate issued under this agreement for the number of shares and class of
stock received as such dividend with respect to the shares represented by such
trust certificate. Holders entitled to receive the dividends discussed above
shall be those registered as such on the transfer books of the Trustee at the
close of business on the day fixed by the Company for the taking of a record to
determine those holders of its stock entitled to receive such dividends, or if
the Trustee have fixed a date, as hereinafter in this paragraph provided, for
the purpose of determining the holders of trust
81
<PAGE> 82
certificates entitled to receive such payment or distribution, then registered
as such at the close of business on the date so fixed by the Trustee. If any
dividend in respect of the stock deposited with the Trustee is paid other than
in cash or in capital stock having general voting powers, then the Trustee
shall distribute the same among the holders of trust certificates registered as
such at the close of business on the day fixed by the Trustee for taking a
record to determine the holders of trust certificates entitled to receive such
distribution. Such distribution shall be made to such holders of trust
certificates ratably, in accordance with the number of shares represented by
their respective trust certificates. The transfer books of the Trustee may be
closed temporarily by the Trustee for a period not exceeding twenty (20) days
preceding the date fixed for the payment or distribution of dividends or the
distribution of assets or rights, or at any other time in the discretion of the
Trustee. In lieu of providing for the closing of the books against the
transfer of trust certificates, the Trustee may fix a date not exceeding twenty
(20) days preceding any date fixed by the Company for the payment or
distribution of dividends, or for the distribution of assets or rights, as a
record date for the determination of the holders of trust certificates entitled
to receive such payment or distribution, and the holders of trust certificates
of record at the close of business on such date shall exclusively be entitled
to participate in such payments or distribution. In lieu of receiving cash
dividends upon the capital stock of the Company and paying the same to the
holders of trust certificates pursuant to the provisions of this agreement, the
Trustee may instruct the Company in writing to pay such dividends to the
holders of the trust certificates. Upon receipt of such written instructions,
the Company shall pay such dividends directly to the holders of the trust
certificates. The Trustee may at any time revoke such instructions and by
written notice to the Company direct it to make dividend payments to the
Trustee. Upon such instructions being given by the Trustee to the Company, and
until revoked by the Trustee, all liability of the Trustee with respect to such
dividends shall cease.
7. SUBSCRIPTION RIGHTS. In case any stock or other securities of
the Company are offered for subscription to the holders of capital stock of the
Company deposited hereunder, the Trustee, promptly upon receipt of notice of
such offer, shall mail a copy thereof to each of the holders of the trust
certificates. Upon receipt by the Trustee, at least five (5) days prior to the
last day fixed by the Company for subscription and payment, of a request from
any such registered holder of trust certificates to subscribe in his behalf,
accompanied with the sum of money required to pay for such stock or securities
(not in excess of the amount subject to subscription in respect of the shares
represented by the trust certificate held by such certificate holder), the
Trustee shall make such subscription and payment, and upon receiving from the
Company the certificates for shares or securities so subscribed for, shall
issue to such holder a trust certificate in respect thereof if the same be
stock having general voting powers, but if the same be securities other than
stock having general voting powers, the Trustee shall mail or deliver such
securities to the certificate holder in whose behalf the subscription was made,
or may instruct the Company to make delivery directly to the certificate holder
entitled thereto.
8. DISSOLUTION OF COMPANY. In the event of the dissolution of
total or partial liquidation of the Company, whether voluntary or involuntary,
the Trustee shall receive the moneys, securities, rights, or property to which
the holders of the capital stock of the Company deposited hereunder are
entitled, and shall distribute the same among the registered holders of trust
certificates in proportion to their interests, as shown by the books of the
Trustee, or the Trustees may in their discretion deposit such moneys,
securities, rights, or property with any bank or trust company doing business
in Augusta, Maine, with authority and instructions to distribute the same as
above provided, and upon such deposit, all further obligations or liabilities
of the Trustee in respect of such moneys, securities, rights, or property so
deposited shall cease, provided,
82
<PAGE> 83
however, that the Trustee's authority is subject to the provisions of 24-A
M.R.S.A. Chapter 57.
9. REORGANIZATION OF COMPANY. In case the Company is merged into
or consolidated with another corporation, or all or substantially all of the
assets of the Company are transferred to another corporation, then in
connection with such transfer, the term "Company" for all purposes of this
agreement shall be taken to include such successor corporation, and the Trustee
shall receive and hold under this agreement any stock of such successor
corporation received on account of the ownership, as Trustee hereunder, of the
stock held hereunder prior to such merger, consolidation, and transfer. Trust
certificates issued and outstanding under this agreement at the time of such
merger, consolidation, or transfer may remain outstanding, or the Trustee may,
in their discretion, substitute for such trust certificates new trust
certificates in appropriate form, and the terms "stock" and "capital stock" as
used herein shall be taken to include any stock which may be received by the
Trustee in lieu of all or any part of the capital stock of the Company.
10. RIGHTS OF TRUSTEE. Until the actual delivery to the holders
of trust certificates issued hereunder of stock certificates in exchange
therefor, and until the surrender of the trust certificates for cancellation,
the Trustee shall have the right, subject to the provisions of this paragraph
hereinafter set forth, to exercise, in person or by his nominees or proxies,
all Stockholders' rights and powers in respect of all stock deposited
hereunder, excluding the right to vote thereon. Parties agree that no person
shall have the right to vote the stock deposited with the Trustee hereunder.
Notwithstanding anything else in this trust to the contrary, nor the
foregoing provisions of this Paragraph 10, it is specially agreed that the
Trustee shall, to the extent required by the Superintendent of Insurance,
Bureau of Insurance, Department of Professional and Financial Regulation, of
the State of Maine, or those persons properly acting in his behalf, exercise
their rights hereunder in such manner as to honor the continued control of the
Company by Howard Gunty, until the maturity of the condition or conditions
subsequent which will give rise to the termination of this Trust Indenture.
11. TRUSTEE. A Trustee (and any successor trustee) may at any
time resign by mailing to the registered holders of trust certificates a
written resignation to take effect thirty (30) days thereafter or upon the
prior acceptance thereof. Upon the death or resignation of the presently named
Trustee, a successor trustee shall be selected by the company. The selection
of a successor trustee preferably shall be made from the following persons:
(a) Such attorney-at-law admitted to practice in the State of
Maine who shall be acceptable to all of Bradford Associates, Mr. Gershuny and
the Superintendent of Insurance, or his authorized delegate.
(b) Such Certified Public Accountant authorized to practice
accounting within the State of Maine who shall be acceptable to all of Bradford
Associates, Mr. Gershuny and the Superintendent of Insurance, or his authorized
delegate.
provided only that no such attorney or accountant shall be related to any of
the parties hereto, nor have a professional relationship with any of the
parties hereto, other than as may arise under the terms hereof, or as may have
arisen by virtue of such attorney or accountant's participation in matters
heard before or administered by said Bureau of Insurance for the State of
Maine.
83
<PAGE> 84
The rights, powers, and privileges of the Trustee named hereunder
shall be possessed by the successor Trustee, with the same effect as though
such successors had originally been parties to this agreement. The word
"Trustee", as used in this agreement, means the Trustee or any successor
Trustee acting hereunder, and shall include both the single and the plural
number.
12. Term. This agreement shall terminate at any time upon the
happening of the following events:
(a) A final order of the Superintendent of Insurance permitting
Mr. Gershuny to acquire a controlling interest in the
Company.
(b) The withdrawal of the application of Bernard D. Gershuny to
acquire control of North East Insurance Company accompanied by
the divestiture of his shares in the company.
(c) The execution of a Termination Agreement by the Company and
Mr. Gershuny, subject to the prior approval of the
Superintendent of Insurance.
13. COMPLIANCE AND REIMBURSEMENT OF TRUSTEE. The Trustee shall
serve upon such reasonable compensation as the circumstances and duties
undertaken equitably call for, and in furtherance thereof, the Trustee may
render statements for services monthly or at such other intervals as may be
most convenient to the parties, and the payment of the same shall be paid
equally by the Company and the Stockholder. The Trustee shall have the right
to incur and pay such reasonable expenses and charges, to employ and pay such
agents, accountants, attorneys, and counsel as they may deem necessary and
proper for carrying this agreement into effect. Any such expenses or charges
incurred by and due to the Trustee may be deducted from the dividends or other
moneys or property received by the Trustee on the stock deposited hereunder.
Nothing herein contained shall disqualify a Trustee or successor trustee, nor
incapacitate him from serving the Company or any of its subsidiaries as officer
or director, or in any other capacity, and in any such capacity receiving
compensation.
14. EXCULPATION AND EXONERATION OF TRUSTEE. The Company and the
Stockholder, jointly and severally agree to indemnify and hold the Trustee
harmless of and from any and all liability, obligation, actions, causes of
action, claims or demands for damages, costs, expenses, or any other claim
whatsoever which may be asserted, charged or claimed against the Trustee by
virtue of the service rendered by the Trustee hereunder, excepting only for
fraud and/or willful, wanton or reckless conduct. The Trustee or the successor
of the Trustee shall not be held liable for errors or mistakes of judgment made
in good faith when acting under any administrative or dispositive provision
hereof.
15. NOTICE. Unless otherwise waived or in this agreement
specifically provided, any notice to or communication with the holders of the
trust certificates hereunder shall be deemed to be sufficiently given or made
if enclosed in a postpaid envelope and addressed to such holders at their
respective addresses appearing on the transfer books of the Trustee, and
deposited in any post office or post office box. The addresses of the holders
of trust certificates, as shown on the transfer books of the Trustee, shall in
all cases be deemed to be the addresses of trust certificate holders for all
purposes under this agreement, without regard to what other or different
addresses the Trustee may have for any trust certificate holder on any other
books or records of the Trustee. Every notice so given shall be effective,
whether or not received, and
84
<PAGE> 85
the date of mailing shall be the date such notice is deemed given for all
purposes.
Any notice to the Company hereunder shall be sufficient if enclosed in
a postpaid envelope and sent by registered or certified mail to the Company
addressed as follows:
North East Insurance Company
959 Brighton Avenue
P.O. Box 776
Portland, Maine 04102
or to such other address as the Company may designate by notice in writing to
the Trustee.
All distributions of cash, securities or other property hereunder by
the Trustee to the holders of trust certificates may be made, in the discretion
of the Trustee, by mail (regular, certified or registered mail, as the Trustee
may deem advisable), in the same manner as hereinabove provided for the giving
of notices to the holders of trust certificates.
<TABLE>
IN WITNESS WHEREOF, the Company, The Stockholder and the Trustee have
signed and sealed this agreement, and the Stockholder has signed and sealed
this agreement and has stated the number of shares of capital stock of the
Company deposited by him.
<S> <C>
Attest: NORTH EAST INSURANCE COMPANY
/S/ (illegible) By: /S/ Howard Gunty
- -------------------------------- ------------------------------
Its President
/S/ Severin Beliveau /S/ Stephen F. Dubord
- -------------------------------- ------------------------------
Trustee
/S/ Severin Beliveau /S/ Bernard D. Gershuny
- -------------------------------- ------------------------------
Bernard D. Gershuny
</TABLE>
PARTICIPATING STOCKHOLDER
810,000 shares /S/ Bernard D. Gershuny
---------------------------
EXHIBIT
No. 1 810,000 shares
85
<PAGE> 86
NORTH EAST INSURANCE COMPANY
a Maine Corporation
Trust Certificate for Capital Stock
This certifies that Bernard D. Gershuny, or registered assigns, is
entitled to all the benefits arising from the deposit with the Trustee under
the Non-Voting Trust Agreement hereinafter mentioned, of certificates for
shares of the capital stock of North East Insurance Company, a Maine
corporation, hereinafter called the Company, as provided in such Trust
Agreement and subject to the terms thereof. The registered holder hereof, or
assigns, is entitled to receive by the Trustee upon the number of shares of
capital stock of the Company in respect of which this certificate is issued.
Dividends received by the Trustee in common or other stock of the Company
having general voting powers shall be payable in trust certificates, in form
similar hereto. Until the Trustee shall have delivered the stock held under
such Trust Agreement to the holders of the trust certificates, or to the
Company, as specified in such Trust Agreement, the Trustee shall possess and
shall be entitled to exercise all rights and powers of an absolute owner of
such stock, excluding the right to vote thereon, it being expressly stipulated
that no voting right passes to the owner hereof or to the Trustee, or his
assigns, under this certificate or any agreement, expressed or implied.
This certificate is issued, received, and held under, and the rights
of the owner hereof are subject to, the terms of the Trust Agreement dated
February 3, 1987, between the Company and Stephen F. Dubord, Trustee of
Waterville, Maine, and his successor in trust, and the holders of this and
similar certificates (copies of which Trust Agreement, and of every agreement
amending or supplementing the same, are on file in the principal office of the
Company in Portland, Maine, and shall be open to the inspection of any
stockholder of the Company, or any beneficiary of the trust under such
agreement, daily during business hours), to all the provisions of which Trust
Agreement the holder of this certificate, by acceptance hereof assents, and by
which he is bound with like effect as if such Trust Agreement had been signed
by him in person.
This Certificate has not been registered under the Securities Act of
1933, as amended, and may not be sold or transferred in the absence of an
effective registration statement under said act, or an available exception
thereunder.
In the event of the dissolution or total or partial liquidation of the
Company, the moneys, securities, or property received by the Trustee in respect
of the stock deposited under such Trust Agreement shall be distributed among
the registered holders of trust certificates in proportion to their interests
as shown by the books of the Trustee.
In the event that any dividend or distribution other than in cash or
stock of the corporation having general voting powers is received by the
Trustee, the Trustee shall distribute the same to the registered holders of
trust certificates, on the date of such distribution, or to the registered
certificate holders at the close of business on the date fixed by the Trustee
for taking a record to determine the certificate holders entitled to such
distribution, pursuant to the provisions of paragraph 6 of the Trust Agreement.
Such distribution shall be made to the certificate holders ratably in
accordance with the number of shares represented by their respective trust
certificates, subject to 24-A M.R.S.A. Chapter 57.
86
<PAGE> 87
Stock certificates for the number of shares of capital stock then
represented by this certificate, or the net proceeds in cash or property of
such shares, shall be due and deliverable hereunder upon the termination of
such Trust Agreement as provided therein.
The Trust Agreement shall continue in full force and effect for and
during the term set forth in the Non-Voting Trust Indenture.
Subject to the provisions of the Bylaws of the Company with respect to
restrictions on the transferability of the capital stock of the Company, which
restrictions shall be fully applicable to this certificate, and subject to any
special restrictions on transfer which may now or later be reflected herein or
hereon by stamp or otherwise, this certificate shall be transferable on the
books of the Trustee at their office in 44 Elm Street, P.O. Box 708,
Waterville, Maine 04901 (or elsewhere as designated by the Trustee) by the
holder hereof, either in person or by attorney duly authorized, in accordance
with the rules established for that purpose by the Trustee and on surrender of
this certificate properly endorsed. Title to this certificate when duly
endorsed shall, to the extent permitted bylaw or said restrictions, if any, be
transferable with the same effect as in the case of a negotiable instrument.
Each holder hereof agrees that delivery of this certificate, duly endorsed by
any holder hereof, shall vest title hereto and all rights hereunder in te
transferee; provided, however, that the Trustee may treat the registered
holdear hereof, or when presented duly endorsed in blank the bearer hereof, as
the absolute owner hereof, and of all rights and interests represented hereby,
for all purposes whatsoever, and the Trustee shall not be bound or affected by
any notice to the contrary, or by any notice of any trust, whether express or
implied or constructive, or of any charge or equity respecting the title or
ownership of this certificate, or the share of stock represented hereby,
provided, however, that no delivery of stock certificates hereunder, or the
proceeds thereof, shall be made without surrender hereof properly endorsed.
As a condition of making or permitting any transfer or delivery of
stock certificates, or trust certificates, the Trustees may require the payment
of a sum sufficient to pay, reimburse, and indemnify him for any stamp tax or
other governmental charge in connection therewith.
This certificate shall not be valid for any purpose until duly signed
by the Trustee.
The word "Trustee" as used in this certificate means the Trustee or
the successor Trustee acting under such Trust Agreement.
IN WITNESS WHEREOF, the Trustee has signed this certificate on
February 3, 1987.
/S/ Stephen F. Dubord
----------------------------------------
Trustee
87
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000352162
<NAME> NORTH EAST
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 18,549,712
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,178
<MORTGAGE> 380,000
<REAL-ESTATE> 198,084
<TOTAL-INVEST> 21,017,232
<CASH> 1,868,258
<RECOVER-REINSURE> 5,081,961
<DEFERRED-ACQUISITION> 312,223
<TOTAL-ASSETS> 34,483,828
<POLICY-LOSSES> 19,006,725
<UNEARNED-PREMIUMS> 6,059,874
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,992,314
<OTHER-SE> 3,428,737
<TOTAL-LIABILITY-AND-EQUITY> 34,483,828
6,871,074
<INVESTMENT-INCOME> 1,298,601
<INVESTMENT-GAINS> (225,726)
<OTHER-INCOME> 0
<BENEFITS> 3,986,965
<UNDERWRITING-AMORTIZATION> 3,194,166
<UNDERWRITING-OTHER> 3,194,166
<INCOME-PRETAX> 762,818
<INCOME-TAX> 14,500
<INCOME-CONTINUING> 748,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 748,318
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
