<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of report: July 8, 1996
(Date of earliest event reported)
NORTH EAST INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Maine 0-11184 01-0278387
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File No.) Identification No.)
482 Payne Road, Scarborough, Maine 04074
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (207) 883-2232
<PAGE> 2
Item 5. Other Events.
As previously reported, the Registrant on July 2, 1996 commenced a private
placement of up to 1,500,000 shares of its Common Stock, at an offering price
of $1.20 per share. On July 8, 1996, the Registrant decided to increase the
offering price to $1.25 per share, due in part to an increase in the prevailing
trading price of the Registrant's Common Stock, as reported on NASDAQ.
The Registrant has received two letters from Ballantrae Partners, L.L.C.
objecting to the private placement. Ballantrae entered into a Purchase Agreement
dated as of May 14, 1996 to purchase 810,000 shares of the Registrant's Common
Stock from Bernard D. Gershuny. That purchase is subject to various conditions
that have not yet been satisfied, including a requirement under applicable law
to obtain prior regulatory approval from the Maine Bureau of Insurance and the
New York Insurance Department.
Enclosed herewith are copies of Ballantrae's letters and a response from Robert
G. Schatz, President of the Registrant.
Item 7. Financial Statements and Exhibits.
(a), (b) Not applicable.
(c) The following are filed as exhibits to this report.
99.1. Letter dated July 2, 1996 of Murry N. Gunty to Robert G. Schatz.
99.2. Letter dated July 8, 1996 of Murry N. Gunty to Robert G. Schatz.
99.3. Letter dated July 9, 1996 of Robert G. Schatz to Murry N. Gunty.
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
NORTH EAST INSURANCE COMPANY
Date: July 9, 1996 By: /s/ Graham S. Payne
Graham S. Payne
Treasurer and Chief
Financial Officer
<PAGE> 4
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit
Number Description Page
- ------- --------------------------------------- ----
<S> <C>
99.1 Letter dated July 2, 1996 of Murry N.
Gunty to Robert G. Schatz
99.2 Letter dated July 8, 1996 of Murry N.
Gunty to Robert G. Schatz
99.3 Letter dated July 9, 1996 of Robert G.
Schatz to Murry N. Gunty
</TABLE>
<PAGE> 1
BALLANTRAE PARTNERS, L.L.C. CONFIDENTIAL
75 WEST END AVENUE R-12E
NEW YORK, NY 10023
TELEPHONE (212) 957-1337
July 2, 1996
Mr. Robert G. Schatz
Chairman of the Board
North East Insurance Company
482 Payne Road
Scarborough, ME 04074
Dear Bob:
We have been informed that NEIC is actively pursuing an offering of
approximately 1.5 million shares of its Common Stock at a price of approximately
$1.20-1.30 per share, a price which is substantially below both market value and
book value. We believe that the timing and pricing of the proposed offering is
detrimental to the shareholders of NEIC (and its future shareholders), and
therefore inconsistent with the Board's fiduciary duties. We are writing this
letter to request that the Board of Directors immediately reconsider this
offering.
As you know, we are in the process of purchasing the Trust Certificate and the
underlying 810,000 shares held in the Non-Voting Trust which represent
approximately 27% of NEIC's outstanding Common Stock. We believe that upon
consummation of this transaction, the share price of NEIC's Common stock will
rise significantly due to the elimination of the Non-Voting Trust -- a long
standing cloud on the Company. As a result, we believe that if NEIC delays its
offering plans for a short period of time, the Company will be able to raise
capital at a price which is much higher (and less dilutive) than $1.20-1.30 or
even existing market value. In view of this, the current offering is extremely
untimely and would cause the shareholders of the Company to experience
significant and unnecessary dilution of their investment in NEIC.
Regardless whether you agree with our assumptions, we do not understand the
business reasons for the timing of the offering. We understand that the Company
has shown an operating profit for the past 5 quarters. However, the surplus of
the Company has dramatically improved over the past 24 months, and we do not see
the urgency for raising additional capital at this time.
More importantly, though, the proposed offering contemplates the Company selling
stock substantially below book value (approximately $2 per share) and/or the
market value ($1.50-1.75 per share). Selling stock at below either book or
market creates unnecessary dilution to all shareholders. Given that there is no
urgency for NEIC to raise capital during this quarter, and given that our Form A
process should be resolved within the next 30-60 days, we believe that this
course of action is ill-advised and not in the best interests of shareholders.
Our lawyers tell us that this offering may be some attempt by management to
place shares of Common Stock at any price in the hands of individuals who are
under the control of management at the expense of the existing shareholders (and
Ballantrae as a future shareholder). We do not understand why the Board would
react so extremely to our proposed purchase of the Trust Certificate and the
underlying shares -- an event which we believe is essential to the future
viability and growth of NEIC. We are even further confounded by this because we
understand that if the offering is found to be in breach of the Board's
<PAGE> 2
Letter to Mr. Robert G. Schatz
July 2, 1996
Page 2
fiduciary duties to shareholders, the individual directors of NEIC may have
personal liability to the shareholders of NEIC.
We believe it is important for the Board (consistent with its fiduciary duties
to shareholders and the insureds) to explore all viable avenues in raising
capital to obtain the best possible price for its Common Stock. As I have
indicated in the past, if there is a pronounced need or business purpose for
raising capital at this time, we urge you to consult with us on this matter, the
members of Ballantrae have substantial experience in raising billions of dollars
of capital. As our filings have indicated, we welcome the opportunity to raise
or invest additional capital in NEIC in a manner both fair and non-dilutive to
all shareholders of NEIC. We believe that the pricing of such capital would be
at a premium to the pricing of the offering you are contemplating with less of
the proceeds going to underwriters and lawyers.
Finally, should you elect to raise capital at this time (out of necessity) for
NEIC at a price below book and/or market values, simple fairness dictates that
ALL shareholders be given a pro-rata right to participate in such an offering.
We also assume, to the extent that your offering contemplates placing a
significant number of shares to a group of related parties, that such persons
intend to comply with the Maine and New York Form A processes and the federal
securities laws.
We hope that the Board will immediately reconsider the proposed offering and
determine, as we have, that it is a hasty, ill-advised course of action that is
injurious to existing shareholders and the insureds.
Sincerely,
Murry N. Gunty
Managing Director
Ballantrae Partners
cc: Tom Record, Maine Bureau of Insurance
Edward B. Batal, Director - North East Insurance Company
David D. Chase, Director - North East Insurance Company
Terrence P. Cummings, Director - North East Insurance Company
Edward L. Dilworth, Jr., Director - North East Insurance Company
Andrew Greenbaum, Director - North East Insurance Company
Robert A. Hancock, Director - North East Insurance Company
Wilson G. Hess, Director - North East Insurance Company
Joseph M. Hochadel, Director - North East Insurance Company
Bruce H. Suter, Director - North East Insurance Company
Jonathan S. Kern, Managing Director - Ballantrae Partners
Deborah L. Harmon, Managing Director - Ballantrae Partners
Lawrence T. Yanowitch, Tucker, Flyer & Lewis
Michael High, Drummond, Woodsum & MacMahon
<PAGE> 1
BALLANTRAE PARTNERS, L.L.C.
75 WEST END AVENUE R-12E
NEW YORK, NY 10023
TELEPHONE (212) 957-1337
July 8, 1996
Mr. Robert G. Schatz
Chairman of the Board
North East Insurance Company
482 Payne Road
Scarborough, ME 04074
Dear Bob:
Thank you for your cooperation in permitting us to obtain a copy of the
offering package for your proposed private placement.
We are disappointed that we have not been given a response to our letter
dated July 2, which requested that the Board reconsider this offering. It is
clear from the offering materials that our July 2 letter was accurate, and that
NEIC is in the process of massive and unprecedented stock offering at a fire
sale price and in a manner that disadvantages the shareholders of NEIC (and
therefore Ballantrae Partners as a future shareholder of NEIC).
As our filings indicate, we would like to support you and your team in the
management of NEIC. Our only concern is that you raise capital at the highest
price in a manner fair to all shareholders. The proposed offering, however, is
not fair to any shareholders. In particular, we have concerns about the timing
of the offering, the price of the offering and the manner in which you are
executing the offering.
TIMING
We do not understand your urgent need to raise capital through the issuance
of unregistered, illiquid securities in the midst of our acquiring a 27%
interest in the Company. Using registered securities would involve a longer
period of time, but would in all likelihood allow the Company to raise capital
at a fair market value. It would seem to be a lot easier (and therefore less
costly) to raise this money once there is resolution to our Form A process and
the underlying value of the Shares is unleashed. More importantly, though, there
has been no indication in your public filings (your l995 10-KSB and March 1996
lO-QSB) or at your annual meeting which occurred 14 days prior to the date of
the offering, that there is an urgent need for capital. Nor does the PPM
indicate any urgency to raise capital at a seriously dilutive price. For a
Company that has not raised capital in the past 15 years, the timing of this
offering could be reasonably seen as an attempt to dilute our future position.
PRICING
We recognize that NEIC could use more capital at some point in time. In
fact, we would like to support your efforts to raise capital. However, we would
propose to do so only at a fair price. We believe NEIC's plan to issue stock at
a price below market and book value is extremely unfair and damaging
<PAGE> 2
Mr. Robert G. Schatz
July 8, 1996
Page 2
for the Company's shareholders.(1) Ballantrae is disturbed that such a punitive
offering is being intentionally effectuated without even offering the right to
all shareholders to participate in the offering pro-rata according to their
current ownership position. The timing, price and structure of the offering all
indicate a desire to dilute the existing shareholders. As we have told you
several times in the past, we would be willing to invest substantial capital
directly into NEIC at a fair price to shareholders.
OFFERING METHOD
You are proposing to increase the number of outstanding shares of NEIC by
50% by issuing unregistered stock that cannot be traded for a number of years.
The Company has long suffered from having illiquid stock by virtue of the
Gershuny shares and we have all seen how this illiquidity has depressed the
value of the stock. We cannot understand why you would choose to offer more
illiquid stock in a way which is clearly not as helpful to the Company as having
all registered, tradable securities outstanding, unless there are other
motivations you have not described in the offering materials.(2)
ALTERNATIVE PROPOSAL TO RAISE CAPITAL
As we have mentioned in the past, we are prepared to invest additional
capital in NEIC. We would like to discuss with you the following proposal:
1. NEIC would initiate a rights offering of 800,000 registered shares at $2.00
per share open to all existing shareholders pro-rata to their current ownership.
Ballantrae would invest a minimum of its pro-rata share of 27% of all shares so
issued and would consider purchasing all 800,000 shares ($1.6 million) to the
extent that no other shareholders wish to participate in the offering. This
transaction would be subject to approval of our current Form A application
process with the State of Maine and the State of New York, but we anticipate
filing our Form A's with both states this week, and we have been told that we
will have resolution to this process within 30-60 days (roughly the same as the
August 15, 1996 termination date of the offering).
2. To the extent that you require a portion of the $1.6 million immediately
(before we finalize the Form A process), we would consider making a bridge loan
to NEIC. We understand that these funds would not be admitted as
______________________
1 The dilution cost of this transaction to shareholders of NEIC is
$900,000, or 15% of the existing surplus and capital of NEIC. Ballantrae's share
of this dilution is $243,000 which represents 27% of the total. Derived as
follows: existing book value of approximately $5.9 million. Additional capital
raised equals $1.6 million based on 1.5 million shares at $1.20 per share,
$150,000 in underwriting expenses and $40,000 in legal fees. Total book value
will now equal approximately $7.6 million with 4.5 million shares outstanding
for a new book value per share of $1.69 per share vs the existing book value of
$1.98 per share at 3/31/96. This dilution of $.30 per share on the approximately
3 million shares equals $900,000.
2 We also have concerns that the Private Placement Memorandum contains
an inadequate level of disclosure. We believe that this exposes NEIC and its
directors to unnecessary securities law liability. We believe it would be a
large mistake to consummate the offering based upon the limited disclosure
provided in the PPM.
<PAGE> 3
Mr. Robert G. Schatz
July 8, 1996
Page 3
surplus, but if you have some undisclosed urgency that cannot wait for 30-60
days, we want to be responsive. We note that the Company has not disclosed in
its public filings that it is having immediate liquidity problems.
Bob, we believe the foregoing is beneficial to NEIC because it (1) eliminates
costly underwriting commissions of $125,000-150,000 (10%), (2) is non-dilutive
to existing shareholders, and (3) represents a fair price for the securities of
NEIC. Obviously, to the extent that NEIC cooperates with Ballantrae in the Form
A proceedings, we could expedite the timing for our investing additional
capital.
We are also willing to discuss with you and assist NEIC with any other
reasonable financing transaction. What is most confusing to us is your
unwillingness to work with us. We would think the Board (consistent with its
fiduciary duties) would want to raise capital at the highest price possible.
Since we have offered to invest substantial capital directly into the Company,
and would like to do so at a price higher than your existing alternatives, we
would think that you would be motivated to cooperate with our Form A process.
FURTHER ACTIONS
It has now been almost a week since we sent you our July 2 letter. In
addition to the letter I sent to you, I attempted to contact two of your
directors on June 28, Joe Hochadel (at work) and Ed Dilworth (at home) and
neither has responded. Under normal circumstances, I would find these lack of
responses peculiar given the size of our proposed investment. Under the current
circumstances, it is tantamount to a complete disregard for interests of the
shareholders of NEIC.(3) We believe that the proposed transaction would be a
serious breach of fiduciary duty by the Directors of NEIC and will likely
subject the Directors to personal liability. If the Company insists on ignoring
us, we are fully prepared to undertake all options available to us to protect
our investment.
Bob, we are disappointed with the way our relationship has transpired. From
the very beginning of our conversations we have expressed our desire to work
with you, the Directors and Management to build a better North East Insurance
Company. I spent almost 20 years of my life in Maine and personally would like
nothing more than to be able to bring capital and jobs to Maine companies. Our
group is motivated to help create a company that is safe for the insureds of
NEIC, profitable for its shareholders and a rewarding place to work. We continue
to hope these goals can be achieved with you and your team in place, and would
like to work with you toward that end.
We are prepared to meet with you and your representatives (or have a
conference call) as soon as tomorrow morning to discuss the offering and our
proposals further. If we do not hear from you by the close of business on
Wednesday, we will assume that NEIC has chosen to continue to ignore our
concerns.
______________________
3 We note that senior management and the members of the Board hardly
own any shares of Common Stock and will therefore not be harmed by the offering.
<PAGE> 4
Mr. Robert G. Schatz
July 8, 1996
Page 4
Sincerely,
Murry N. Gunty
Managing Director
Ballantrae Partners
cc: Tom Record, Maine Bureau of Insurance
Edward B. Batal, Director - North East Insurance Company
David D. Chase, Director - North East Insurance Company
Terrance P. Cummings, Director - North East Insurance Company
Edward L. Dilworth, Jr., Director - North East Insurance Company
Andrew Greenbaum, Director - North East Insurance Company
Robert A. Hancock, Director - North East Insurance Company
Wilson G. Hess, Director - North East Insurance Company
Joseph M. Hochadel, Director - North East Insurance Company
Bruce H. Suter, Director - North East Insurance Company
Jonathan S. Kern, Managing Director - Ballantrae Partners
Deborah L. Harmon, Managing Director - Ballantrae Partners
Lawrence T. Yanowitch, Tucker, Flyer & Lewis
Michae1 High, Drummond, Woodsum & MacMahon
Cynthia Shenker, Wilson, Elser, Moskowitz
Alex Clark, Advest Inc.
Gregory Fryer, Verrill and Dana
<PAGE> 1
NORTH EAST INSURANCE COMPANY
482 Payne Road - 4th Floor, Scarborough, ME 04074-8929
Box 1418, Scarborough, ME 04070-1418
Phone: 207-883-2232 Fax: 207-883-1564
July 9, 1996
VIA FAX AND FEDERAL EXPRESS
- ---------------------------
Mr. Murry N. Gunty
c/o Lawrence T. Yanowitch, Esq.
Tucker, Flyer & Lewis
1615 L Street, N.W., Suite 400
Washington, DC 20036-5610
Dear Mr. Gunty:
My fellow Board members and I have received your letter of July 2,
which requests that the Board "immediately reconsider the proposed offering and
determine as we [Ballantrae?] have, that it is a hasty, ill-advised course of
action that is injurious to existing shareholders and the insureds." We have
since received your letter of July 8, which criticizes North East for not having
yet responded to the July 2 letter, objects to the Company's private placement,
proposes a $2.00 per share rights offering (contingent on your receipt of
regulatory approval), and contains a thinly veiled threat of legal action
against the Company.
INTERFERENCE IN NORTH EAST'S AFFAIRS. I must tell you that North East
objects in the strongest possible terms to your attempt to insert yourselves
into the legitimate business decisions of North East.
It is bad enough that you purport to speak on behalf of the
shareholders and insureds of North East at a time when (to our knowledge) you
are neither a shareholder nor an insured of the Company. It is simply untenable,
however, that you do so at a time when you have not obtained -- or even applied
for -- the regulatory approvals required for you to become a controlling person
of North East.
The shares that you are attempting to purchase from Mr. Gershuny are
subject to an Order of the Maine Insurance Bureau that prohibits the current
owner from exerting any influence or control over the conduct of the business
affairs of North East. We do not believe that your purchase contract with Mr.
Gershuny gives you a legal basis for exercising powers that Mr. Gershuny is
expressly forbidden to possess.
YOUR "ALTERNATIVE PROPOSAL". Your July 8 letter suggests that North
East terminate its private placement and instead commence a rights offering
allowing all shareholders to purchase registered North East common stock at
$2.00 per share. You say that Ballantrae will commit to purchasing at least 27%
of the shares issued through such an offering. As your letter indicates,
however,
"This transaction would be subject to approval of our current Form A
application process with the State of Maine and the State of New York, but
we anticipate filing our Form A's with both states this week, and we have
been told that we will have resolution to this process within 30-60 days
(roughly the same [sic] as the August 15, 1996 termination date of the
offering)."
<PAGE> 2
Mr. Murry N. Gunty
July 9, 1996
Page 2
In the meantime, you say Ballantrae would "consider" making a bridge loan to
North East for "a portion of the $1.6 million" immediately, before you "finalize
the Form A process."
You seem to assume that North East will welcome your Form A application
with open arms and that the Form A process will be wrapped up shortly. This
is, at best, an optimistic assessment on your part.
First, it has been eight weeks since you entered into your May 14
contract to purchase the Gershuny shares, and our Board of Directors has still
not seen any Form A application, or even a description of your plans for the
Company. Second, you have declined our offer to provide you with a copy of North
East's current business plan, and our invitation to meet with the Board
following our recent Annual Meeting of Shareholders on June 18. It is difficult
to see why our Board should assume -- sight unseen -- that your business plan
for North East will be consistent with the plan endorsed earlier this year by
the Board. Third, you earlier invited me personally to join in Ballantrae's
application at a time when you should have known that this would pose a direct
conflict of interest for me, and at the same time threatened to remove
management if we did not assist you in your Form A application. Fourth, you have
now threatened to sue North East over its decision to pursue capital on a basis
independent of your unannounced plans for the Company. Fifth, you know as well
as I do that the 30-60 day time frame you cite for obtaining Form A approval is
completely unrealistic, particularly if North East fails to endorse your
application.
Based on our prior experience and consultations with regulators, it is
apparent that the Form A process would likely entail at least three to four
months from the date of your application, even assuming it is ultimately deemed
to be "complete" at the time of filing and even assuming no significant
opposition from regulators, the Company or another interested party.
I do not know whether our Board of Directors will endorse or reject
your Form A application. We cannot form any final conclusions before seeing the
application and having an opportunity to weigh the facts. Neither are we under
an obligation, however, to sit around and wait for your application or to assume
that it will prove to be in the best interests of the Company and its
shareholders. Given all that has transpired to date, we have reason to be
skeptical of your assurances that you have the best interests of the other
shareholders at heart.
BASIS FOR OUR PRIVATE PLACEMENT. Over the past few years, North East
has explored a number of different alternatives for raising additional capital.
I can assure you that North East's present course of action is neither hasty nor
ill-advised. Our Board of Directors has determined that the raising of
additional capital at this time through the private placement would be
beneficial to the Company and in the long-term interests of its shareholders and
policyholders. Moreover, should your Form A application fail or be abandoned for
any reason, this offering will provide the Company with funds to seek a purchase
of the Gershuny block of shares and, perhaps, the First National Life & Casualty
block of shares.
The Private Placement Memorandum speaks for itself. Under the
circumstances, I see no need to further justify to you the Board's business
decisions regarding this matter.
TIMING OF THIS RESPONSE. Even as the Company was preparing a response
to your July 2 letter, we received your July 8 letter complaining that we were
"ignoring" you. For the benefit of some of the 17 other people listed as
<PAGE> 3
Mr. Murry N. Gunty
July 9, 1996
Page 3
receiving cc's of your letter, I will remind you that on Wednesday, July 3 our
legal counsel advised your legal counsel, in writing (and then by telephone),
that a response would not be forthcoming until this week. Neither your July 2
letter nor your legal counsel gave us reason to suspect that this time frame was
unreasonable, particularly in light of the long holiday weekend. Yet your July 8
letter states:
"If the Company insists on ignoring us, we are fully prepared to
undertake all options available to us to protect our investment."
Then, just five sentences later, it states:
"We continue to hope these goals can be achieved with you and your team in
place, and would like to work with you toward that end."
The Company will not permit its actions to be dictated by your threats.
If you truly wish to have our support, you will have to earn it.
The Company awaits receipt of your Form A application seeking
regulatory approval to acquire Mr. Gershuny's shares.
Sincerely yours,
NORTH EAST INSURANCE COMPANY
/s/ Robert G. Schatz
Robert G. Schatz
President and Chairman of the Board
cc: Board of Directors of North East
Thomas M. Record, Esq.
