<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
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................. to ................
Commission File No. 0-11184
NORTH EAST INSURANCE COMPANY
(Name of small business issuer 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 Section 12(b) of the Exchange Act: None
Securities registered under 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 any definitive proxy or information
statement incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $7,332,235
The aggregate market value of the voting stock held by non-affiliates as of
March 10, 1997 was $7,412,113.
There were 3,002,375 common shares outstanding as of March 10, 1997.
Documents Incorporated by Reference: Portions of the Proxy Statement for 1997
Annual Meeting of Shareholders (to be filed by April 30, 1997, are incorporated
into Part III)
Transitional Small Business Disclosure Format: Yes No X
--- ---
Page 1 of 79
Exhibit index on Page 53
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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. ("NAU"), a Maine
corporation, 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 1996 and prior years are presented and discussed
elsewhere in this report. See "Consolidated Financial Statements" and
"Management's Discussion and Analysis."
At December 31, 1996 the Group employed 43 full-time employees and three
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, management made the decision to withdraw its homeowner
program from the market due to an inadequate premium base, market pressure on
homeowner pricing and the ever broadening of coverages.
North East or its subsidiary, ACIC, is licensed to write business in the states
of Louisiana, Maine, Mississippi, Nevada, New York, Rhode Island, Texas, 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").
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<TABLE>
The following is a summary of selected consolidated financial information for
each of the three years in the period ended December 31, 1996. This information
is prepared in 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.
<CAPTION>
Year Ended December 31
---------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Total Assets $32,558,905 $34,483,828 $34,335,453
Total Liabilities 23,233,944 28,062,777 31,136,581
Shareholders' Equity 9,324,961 6,421,051 3,198,872
Net Premiums Written 6,065,741 5,798,259 9,963,504
Net Premiums Earned 6,232,856 6,871,074 10,252,642
Net Investment Income 1,041,762 1,298,601 1,530,734
Realized Capital Gains (Losses) 57,617 (225,726) (473,102)
Total Revenue 7,332,235 7,943,949 11,310,274
Income (Loss) Before
Provision for Income Taxes 1,306,360 762,818 (947,957)
Provision (Benefit) for
Income Taxes (2,069,136) 14,500 0
Net Income (Loss) $3,375,496 $748,318 $(947,957)
</TABLE>
Underwriting income for the Group amounted to $206,981 in 1996 compared with
underwriting losses of $310,057 and $2,005,589 in 1995 and 1994, respectively.
UNDERWRITING
The Group experienced a loss and loss adjustment expense ratio of 56.2% and an
expense ratio of 41.6% in 1996. The combined ratio for the Group in 1996 was
97.8%, meaning that premium income exceeded loss and loss adjustment expenses
and underwriting expenses by 2.2%. This represents a significant improvement
over 1995 and 1994, which had combined ratios of 113.1% and 120.6%,
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.
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 1996. The results of North East represent ongoing operations, whereas the
ACIC book is in run-off. (For additional information see "Management's
Discussion and Analysis.")
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North East Insurance Company
- ----------------------------
<TABLE>
Net premiums written and earned by North East by line of business for 1996 and
1995 were as follows:
<CAPTION>
1996 1995
-----------------------------------------------------------
Net Net Net Net
Premiums Premiums Premiums Premiums
Written Earned Written Earned
<S> <C> <C> <C> <C>
Private Passenger Auto
Liability $3,501,049 $3,532,327 $2,871,121 $3,546,760
Physical Damage 1,425,496 1,421,256 1,196,470 1,436,793
Commercial Auto
Liability 492,574 529,764 701,487 748,526
Physical Damage 106,512 101,610 174,845 192,167
Other Liability 76,466 27,162 147,431 157,269
Inland Marine 206,858 213,115 193,691 192,103
All Other Lines 256,786 407,622 493,207 577,449
---------- ---------- ---------- ----------
Total $6,065,741 $6,232,856 $5,778,252 $6,851,067
========= ========= ========= =========
</TABLE>
The private passenger auto program represents approximately 81% of the total
premium written by North East. This book includes non-standard, standard and
preferred auto coverages as well as snowmobiles. Approximately 71% of the
private passenger written premium is for liability coverage with the remaining
29% providing physical damage protection. The private passenger auto book
produced a loss and loss adjustment expense ratio of 88.6% for calendar year
1996. The calendar year results benefited from favorable loss development for
accident years 1995 and prior in the amount of $243,456.
The commercial auto program represents approximately 10% of the total premium
written by North East. This program is focused on small, single vehicle,
commercial enterprises including logging, garages, refuse haulers and
snowplowers. Approximately 82% of the commercial auto premium pertains to
liability coverage and 18% pertains to physical damage protection. The loss and
loss expense ratio for the commercial auto program was 36.4% for calendar year
1996. The calendar year results benefited from favorable loss development for
accident years 1995 and prior in the amount of $245,534.
The balance of North East Insurance Company's book of business is composed of:
Inland marine (3.4%); general liability (1.3%); companion or adjunct commercial
coverages (4.0%). The homeowner program, discontinued in 1995, accounted for
slightly less than 0.3% of the total premium. Though the program was
discontinued in 1995, the runoff of 1995 and prior business has provided the
company with favorable loss development for calendar year 1996.
The loss and loss adjustment expense ratio for all lines of North East's
business in 1996 was 62.3% and the expense ratio was 38.4%, resulting in a
combined ratio of 100.7%. This combined ratio indicates the business produced an
underwriting loss of 0.7% of each net premium dollar for the year ended December
31, 1996.
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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 1996 amounting to $377,837. 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 seventh 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 $4,005,318 at December 31, 1996,
compared with $5,222,413 at December 31, 1995. 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. Management
continues to monitor ACIC's claim settlements closely in order to provide timely
adjustments to this reserve when appropriate.
MARKETING
The Group supports the Independent Agency System and believes the Agency System
provides the best system for its products and programs. Management believes that
the development of strong agency relationships must be instigated by the Group;
agents return on book, profit contingencies and reliable products have become
key ingredients in developing stronger ties to agents representing North East
Insurance Company. An agents advisory Board provides a forum through which the
Company can respond in an effective and timely manner to its agents' needs.
Management annually reviews the performance of its agents, utilizing
quantitative and qualitative measures. Factors in the review include written
premium volume, historical loss ratios - one and three year analysis, mix of
products, North East's rank in agent's office, other carriers represented by the
agency, professionalism of agency personnel, long term plans of agency,
geographic location and agent's plans or needs.
At year end 1996 there were 134 active authorized agents who represented North
East and have binding authority and 28 active independent brokers whose business
is subject to prior approval by North East underwriters. The agents produced
96.4% of the business written by North East in 1996, with the independent
brokers accounting for the remaining 3.6%. North East chooses to utilize both
independent agents and brokers in order to maximize its geographical service and
marketing coverage while maintaining a solid core of authorized agents who can
directly represent the Company.
Certain agents and brokers are under common ownership. Although no single agency
produced more than 5% of North East's direct premiums written in 1996, one
affiliated group of agents was responsible for 9.5%, a second group accounted
for 8.7% and a third group accounted for 4.6%. Eight agents provided North East
with direct premiums written in excess of $200,000, and 28 agents provided North
East 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.
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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 $81,571, $48,640 and $98,129 in 1996, 1995 and 1994, respectively, and are
expected 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
catastrophe 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, 1996. The Group's
maximum net retention for the period between January 1, 1996 and December 31,
1996 was $32,850.
The ceding of business to reinsurers does not discharge the Group from its
ultimate liability to the policyholder. The Group 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 obligations.
INVESTMENTS
At December 31, 1996, based on current market values, 47% of the fixed
maturities were invested in U.S. Treasuries or U.S. Government guaranteed
instruments, 7% were invested in public utilities and 46% 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 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, 1996, short-term investments amounted to
$2,868,875.
The gross average investment yield based on amortized cost of the investment
portfolio was 6.6% and 7.1% for the years ended December 31, 1996 and 1995,
respectively. The total return, including realized capital gains (losses) was
6.9% and 5.2% for the years ended December 31, 1996 and 1995, respectively.
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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.
Statutory surplus at December 31, 1996 was $6,738,116. 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 $20,214,348 of net written premiums
for its own account (by comparison, 1996 net written premiums amounted to
$6,065,741). The Group expects to remain well within the constraints of this
guideline in 1997.
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 predetermined multiples of the authorized
control level amount as determined by the formula.
Action % of Authorized Control Level Risk Based Capital
------ ------------------------------------------------
None Greater than 200%
Company Action Less than 200%, but Greater than 150%
Regulatory Action Less than 150%, but Greater than 100%
Authorized Control Less than 100%, but Greater than 70%
Mandatory Control Less than 70%
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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, 1996 was $1,304,741 and $372,456, respectively. The statutory
surplus at December 31, 1996, as reported, was $6,738,116 or 516.4% of
authorized control level risk based capital for North East Insurance Company and
$4,372,793 or 1174.0% of authorized control level risk based capital for
American Colonial Insurance Company. 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 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 a 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 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 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
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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 four 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. These settlement arrangements had also
received approval from another court in a pending criminal case entitled UNITED
STATES V. BERNARD GERSHUNY (U.S. District Court for the Southern District of New
York, 1992). Proceeds from the sale of Mr. Gershuny's shares were to be applied,
first, to pay $500,000 toward a restitution fund established in connection with
the criminal case; next, to pay $70,000 in legal fees of Mr. Gershuny's former
counsel; and then any remaining funds would be paid to the Creditors Committee
in the AMC litigation.
In May 1996 Mr. Gershuny entered into a Purchase Agreement to sell his shares to
an investor group acting through Ballantrae Partners, L.L.C., a Delaware limited
liability company. The Purchase Agreement was subject to numerous conditions,
including a requirement that Ballantrae obtain requisite regulatory approvals
from Maine and New York insurance regulators. In January 1997 Mr. Gershuny
consummated the sale of his shares to Ballantrae. The proceeds from this sale
(net of certain expenses withheld by the purchaser) amounted to $568,750, which
amount was placed in escrow. These funds (together with any interest earned
thereon) were recently distributed from escrow, pursuant to orders dated March
11 and 21, 1997 of the court in the criminal case. The Committee received
approximately $50,000 of proceeds. Such amount is far less than the claims
against Mr. Gershuny in the AMC litigation, and to the Company's knowledge that
case remains open.
In connection with the closing of its purchase of Mr. Gershuny's shares,
Ballantrae agreed to indemnify the Company and its transfer agent against any
liability, expense, or claim arising in connection with a certain prior lien
against the shares. This lien was previously assigned to the Committee, and
appears to have been waived or become moot.
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.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth quarter of 1996.
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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 51, 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 53, 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 56, 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 51, has been Treasurer and Chief Financial Officer of the
Company since 1987.
REBECCA J. CERNY, age 44, has held the position of Vice President of the Company
since 1989. From 1986 to 1995 she also served as a Director of the Company.
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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 10, 1997, there were 190 holders of record of North East's common
shares.
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:
1996 1995
---- ----
HIGH LOW HIGH LOW
First Quarter $1.81 $1.00 $1.75 $1.25
Second Quarter 2.00 1.25 1.38 0.69
Third Quarter 2.13 1.50 1.75 1.13
Fourth Quarter 2.25 1.50 2.13 1.00
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 statutory 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 would result in a reduction in the capacity to write
new premiums since the volume of insurance that can be written is determined by
the available statutory surplus of North East.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Refer to Item 1 "Description of Business" for additional information on the
operations of the Group.
GENERAL DISCUSSION
North East continues to be in a transitionary state which commenced in 1994.
Management continues to work towards stabilizing its operating results through a
blending of premium volume, product development, rate adequacy, loss prevention,
agency relationships, information systems efficiency and reinsurance support.
Management has also had discussions and meetings with A.M. Best (an insurance
company rating agency) and believes an upgrading of the Company will occur in
1997.
Operating results for 1996 and 1995 have provided the Company with a
significantly increased capital base. The capital base at year end 1996 will
sufficiently augment management's cautious and patient approach to facilitate
premium growth with programs and products characterized by consistency,
flexibility and sound pricing. Operating results in calendar years 1996 and 1995
benefited from favorable loss and loss adjustment expense reserve development.
This development may not continue in 1997.
In addition, during 1996, management determined that based on the Company's
performance in 1996 and 1995, and the future operating plans of the Company, a
portion of the valuation allowance previously established against the deferred
tax asset was no longer required. Accordingly, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), the change in the valuation allowance has been included in net income for
the year ended December 31, 1996.
RESULTS OF OPERATIONS IN 1996
COMPARED WITH 1995 AND 1995 COMPARED WITH 1994
The Company's operations for the each of three years ended December 31, 1996
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 quota share
reinsurance in which the reinsurer assumes a contractually agreed percentage
share or limit of each risk insured by the Company, after all other reinsurance.
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Direct
- ------
<TABLE>
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, 1996:
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums Written $11,193,557 $11,250,681 $ 13,273,333
=========== =========== ============
Premiums Earned $11,536,429 $11,876,468 $ 13,114,948
Losses and Loss Adjustment
Expenses Incurred 5,775,929 6,855,949 11,411,107
Underwriting Expenses Incurred 4,917,272 5,006,545 4,472,133
----------- ----------- ------------
Underwriting Income (Loss) $843,228 $13,974 $ (2,768,292)
=========== =========== ============
Loss Ratio 50.1% 57.7% 87.0%
Expense Ratio 43.9 44.5 33.7
----------- ----------- ------------
Combined Ratio 94.0% 102.2% 120.7%
=========== =========== ============
</TABLE>
Direct premiums written and earned in 1996 were marginally less than those
reported in 1995. Direct premiums written and earned in 1995 were $2,022,652 and
$1,238,480, less than those reported in 1994, respectively. The lack of growth
experienced in 1996 reflects the Company's decision not to sacrifice
underwriting standards for the sake of premium volume. The premium decline in
1995 was attributable to the cancellation of approximately 40 agency
relationships and tighter underwriting standards with regard to risk
acceptability.
Direct losses and loss adjustment expenses declined in 1996 compared with 1995
and in 1995 compared with 1994 as a result of favorable loss development and
tighter underwriting standards. The results for 1996 include higher than normal
loss experience for auto physical damage during the first quarter due to the
severe winter storms. However, the Company averted the disaster which confronted
most insurers from the flooding and heavy winds from the severe storm which
occurred in October 1996 (the Company withdrew from all homeowner lines in
1995).
Underwriting expenses decreased $89,273 or 1.8% in 1996 compared with 1995,
whereas 1995 expenses exceeded 1994 expenses by $534,412 or 11.9%. The 1995
increase was primarily attributable to legal costs associated with a planned
merger (since terminated), and costs associated with updating our computer
processing capabilities.
13
<PAGE> 14
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, 1996:
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums Written $5,127,816 $5,452,422 $3,309,829
========== ========== ==========
Premiums Earned $5,303,573 $5,005,394 $2,862,306
Losses and Loss Adjustment
Expenses Incurred 2,270,542 2,868,984 3,038,217
Underwriting Expenses Incurred 2,396,784 1,812,379 586,792
---------- ---------- ----------
Underwriting Income (Loss) $ 636,247 $ 324,031 $ (762,703)
========== ========== ==========
Loss Ratio 42.8% 57.3% 106.2%
Expense Ratio 46.7 33.3 17.7
---------- ---------- ----------
Combined Ratio 89.5% 90.6% 123.9%
========== ========== ==========
</TABLE>
The Group manages its risk exposure through individual risk excess of loss
reinsurance arrangements (treaties), casualty clash excess of loss treaties and
property catastrophe 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 1996, 1995 and
1994 were $1,000,000. The Company's maximum net retention was $100,000 for the
period of 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, 1996.
Effective January 1, 1995 the Company modified the terms of its excess of loss
reinsurance treaties to include a ceding commission. This modification provides
a more appropriate matching of premium revenues and incurred expenses. Expenses
recovered from reinsurers amounted to $2,396,784 in 1996 compared with
$1,812,379 in 1995 and $586,792 in 1994.
Current reinsurance protection is provided through two layers of excess of loss
reinsurance. The first layer, considered to be the working layer, assumes
$150,000 of coverage beyond the first $50,000. The second layer, allows the
Company to offer policy limits up to $1,000,000 by assuming $800,000 of coverage
beyond the first $200,000. The casualty clash excess of loss treaty provides
coverage for $1,000,000 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
$1,500,000 of coverage in excess of $500,000 in the event of a catastrophe. For
further information, see "Description of Business - Reinsurance".
Reflective of a more clearly defined underwriting and market focus, the loss
ratio for 1996 was 42.8%; this compares to a loss ratio of 57.3% for 1995 and
106.2% for 1994. The 1994 ratio was significantly impacted by severe (or
"shock") losses, including a commercial fire claim settlement which approached
policy limits.
14
<PAGE> 15
The Company continually reviews its reinsurance arrangements relative to its
direct results to ensure that its reinsurance programs are appropriate for its
corporate goals.
Net
- ---
<TABLE>
The following comparative table illustrates the components of net business
written by the Group for each of the three years ended December 31, 1996:
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Premiums Written $6,065,741 $5,798,259 $ 9,963,504
========== ========== ===========
Premiums Earned $6,232,856 $6,871,074 $10,252,642
Losses and Loss Adjustment
Expenses Incurred 3,505,387 3,986,965 8,372,890
Underwriting Expenses Incurred 2,520,488 3,194,166 3,885,341
---------- ---------- -----------
Underwriting Income (Loss) $ 206,981 $ (310,057) $(2,005,589)
========== ========== ===========
Loss Ratio 56.2% 58.0% 81.7%
Expense Ratio 41.6 55.1 39.0
---------- ---------- -----------
Combined Ratio 97.8% 113.1% 120.7%
========== ========== ===========
</TABLE>
Underwriting activities for 1996 generated a profit in the amount of $206,981.
This compares to underwriting losses in 1995 of $310,057 and 1994 of $2,005,589.
For the three year period losses and loss adjustment expense represented 56.2%
(1996), 58.0% (1995) and 81.7% (1994) of net earned premium. The ratios, for the
periods represented, include the favorable development which is not likely to
occur in 1997.
Underwriting expenses incurred decreased from $3,885,341 in 1994 to $3,194,166
in 1995 and to $2,520,488 in 1996. The decline is attributable to a significant
restructuring of our reinsurance treaties to include commission offsets.
15
<PAGE> 16
<TABLE>
Underwriting profit (loss) by major category for each of the years ended
December 31, 1996, 1995 and 1994 were as follows:
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Auto Liability $ (151,833) $ 212,021 $ (549,465)
Auto Physical Damage (1,094,897) (318,783) (492,364)
Commercial Multi Peril 680,289 169,229 (778,259)
Other Liability 625,140 (61,280) 394,549
All Other 148,282 (311,244) (580,050)
----------- --------- -----------
Underwriting Income (Loss) $ 206,981 $(310,057) $(2,005,589)
=========== ========= ===========
</TABLE>
The underwriting loss for auto physical damage in 1996 is directly related to
the severe winter experience in the first quarter. Underwriting income (loss) in
the all other category includes experience for the Company's homeowner product
which was discontinued in 1995. Homeowners business produced a net underwriting
gain in 1996 of $50,958 compared with losses of $245,525 in 1995 and $522,724 in
1994. Underwriting loss for 1994 reflected an adverse winter season and an
abnormal frequency of severity on certain lines of business with relatively
small premium writings.
INVESTMENT RESULTS
Net investment income was $1,041,762 for 1996 compared with $1,298,601 in 1995
and $1,530,734 in 1994. The gross average yield of the investment portfolio was
6.6%, 7.1% and 6.8% for 1996, 1995 and 1994, respectively. The Company realized
investment gains of $57,617 for 1996 compared with investment losses of $225,726
and $473,102 in 1995 and 1994, respectively. Total return from investment
activities (including realized gains or losses) was 6.9%, 5.2% and 4.9% for
1996, 1995, and 1994, respectively.
NET INCOME AND NET INCOME PER SHARE
Net income before the provision for federal income taxes was $1,306,360 and
$762,818 in 1996 and 1995, respectively, compared with a net loss of $947,957 in
1994.
The provision for income taxes includes the effect of a reassessment of the
Company's position relative to the Company's ability to utilize the value of its
loss carryforwards based on the future income of the Company. In accordance with
FAS 109 (see discussion above), a portion of the change in the valuation
allowance has been included in net income for the year ended December 31, 1996
and a deferred tax asset has been reported in the Company's balance sheet. At
December 31, 1996 the Company has a valuation allowance of $220,515, relating to
capital losses which management currently believes will expire unused.
16
<PAGE> 17
<TABLE>
The effect of the change in the valuation allowance on 1996 net income and net
income per share is as follows:
<CAPTION>
Before Valuation After Valuation
Allowance Adjustment Allowance Adjustment
<S> <C> <C>
NET INCOME
- ----------
Income before provision
for income taxes $1,306,360 $ 1,306,360
Provision (benefit)
for income taxes 26,100 (2,069,136)
---------- -----------
Net Income $1,280,260 $ 3,375,496
========== ===========
</TABLE>
Net income after the provision for income taxes was $3,375,496 or $1.13 per
share in 1996, compared with $748,318 or $0.25 per share in 1995 and a net loss
of $947,957 or $0.32 per share in 1994.
BOOK VALUE PER SHARE
<TABLE>
Book value per share amounted to $3.11 at December 31, 1996 compared with $2.15
at December 31, 1995 and $1.07 at December 31, 1994. The following table
reconciles book value per share for the years ended December 31, 1996 and 1995:
<CAPTION>
Year Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Beginning of year $ 2.15 $1.07
Net income 1.13 0.25
Change in unrealized appreciation (depreciation) (0.17) 0.83
------ ----
End of year $ 3.11 $2.15
====== =====
</TABLE>
NEW ACCOUNTING POLICIES
In October 1995 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 123 ("Accounting for
Stock-Based Compensation") which requires employers to account for an employee
stock option or similar equity instrument based on the fair value of the
consideration received or the fair value of the equity instrument issued. The
Statement is effective for financial statements for fiscal years beginning after
December 15, 1995. The Company did not have any stock-based compensation plans
in effect for the year ended December 31, 1996.
In June 1996 the FASB issued FAS No.125 ("Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities") which provides
standards whereby an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, de-recognizes financial assets
when control has been surrendered, and de-recognizes liabilities when
extinguished. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. The effect of adopting the provisions of FAS No. 125 is not expected to
have a material effect on the Company's consolidated results of operations or
financial position.
17
<PAGE> 18
In March 1997 the FASB issued FAS No. 128 ("Earnings Per Share") which provides
for a "basic" earnings per share computation based upon the weighted-average
shares outstanding. The new standard requires a dual presentation of basic and
diluted earnings per share. The effect of adopting the provisions of FAS No. 128
is not expected to have a material effect on the Company's per share earnings.
In March 1997 the FASB also issued FAS No. 129 ("Disclosures of Information
About Capital Structure".) The effect of adopting the provision of FAS No. 129
is not expected to result in significant disclosure due in part to the
simplified nature of the Company's capital structure.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the years ended December 31, 1996 and 1995
amounted to $2,470,856 and $2,199,403, respectively. Cash provided from
investing activities amounted to $3,593,622 for the year ended December 31, 1996
compared with $3,077,348 for the year ended December 31, 1995.
The Company's investment portfolio, carried at fair value, was $111,477 lower
than amortized acquisition cost. Federal Reserve interest rate adjustments have
a significant impact on the fair value of fixed maturity investments. In order
to reduce its exposure to interest rate fluctuations, management and the board
of directors have reduced the average maturity of securities in its investment
portfolio. The Company's investment policy is to invest in investment grade
securities only and does not allow the Company to participate in the derivatives
market. The Company believes that the current level of short-term investments is
adequate to meet any shortfall resulting from its immediate operating
activities.
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 adjusters'
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 consolidated statement of
operations.
In the determination of ultimate losses and loss adjustment expense, the Company
utilizes historic paid and incurred loss patterns. Over the most recent three
year period, these patterns have indicated changes which are characterized by a
shortened loss tail; this is in contrast to the Company's prior experience. The
change in the character was not recognized by the Company in the projection of
ultimate losses until there was ample evidence that a trend had been
established. Reliable evidence of this change was recognized in the favorable
development commencing with accident year 1994.
18
<PAGE> 19
<TABLE>
The following table provides a reconciliation of the changes in loss and LAE
reserves, after deducting amounts recoverable from reinsurers for 1996 and 1995.
Reconciliation of Liability for Losses and
Loss Adjustment Expenses
------------------------
1996 1995
---- ----
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $19,006,725 $21,517,289
Amounts recoverable from reinsurers
on unpaid losses 4,703,238 4,045,132
----------- -----------
Beginning of year, net 14,303,487 17,472,157
Add:
Provision for losses and LAE for claims arising in:
Current year 5,823,867 6,119,285
Prior years (2,318,480) (2,132,320)
Less:
Losses and LAE paid on claims arising in:
Current year 3,826,876 3,312,336
Prior years 3,605,175 3,843,299
----------- -----------
End of year, net 10,376,823 14,303,487
Amounts recoverable from reinsurers
on unpaid losses 4,828,760 4,703,238
----------- -----------
Losses and loss adjustment expenses
per Consolidated Balance Sheet $15,205,583 $19,006,725
=========== ===========
</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.
19
<PAGE> 20
<TABLE>
Analysis of Losses and Loss Adjustment Expenses Development
(in Thousands)
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Liability for unpaid claims
and claim adjustment expenses $21,507 $21,749 $24,062 $20,085 $18,342 $18,661 $18,705 $17,472 $14,303 $10,377
Cumulative amount paid
- ----------------------
One year later 6,009 7,402 7,521 5,048 4,619 3,899 5,019 3,843 3,605
Two years later 10,587 11,515 11,212 8,503 7,004 7,460 7,595 6,625
Three years later 12,914 13,479 14,039 10,212 9,931 9,590 9,516
Four years later 13,753 15,147 15,373 12,718 11,685 11,131
Five years later 14,969 15,363 16,995 14,254 12,833
Six years later 14,837 16,559 18,483 15,278
Seven years later 15,782 17,764 19,356
Eight years later 16,860 18,365
Nine years later 17,078
Net reserves reestimated as of
- ------------------------------
end of year
-----------
One year later $21,073 $22,310 $24,653 $20,605 $18,329 $17,974 $17,685 $15,340 $11,985
Two years later 20,148 22,193 24,743 20,676 18,823 18,087 16,829 13,748
Three years later 19,864 22,103 24,316 21,009 19,022 17,457 15,318
Four years later 20,144 21,882 25,108 21,247 18,675 16,463
Five years later 19,660 22,379 24,624 20,902 17,848
Six years later 20,038 22,012 24,581 20,205
Seven years later 19,721 22,147 23,971
Eight years later 19,934 21,864
Nine years later 19,734
Redundancy (deficiency) $ 1,773 $ (115) $ 91 $ (120) $ 494 $ 2,198 $ 3,387 $ 3,724 $ 2,318
Gross Reserves
1994 1995 1996
---- ---- ----
Gross Liability for
unpaid claims
and claim adjustment $21,517 $19,007 $15,206
expenses
Cumulative Amount Paid
- ----------------------
One Year Later 4,766 5,077
Two Years Later 8,625
Gross Reserves
reestimated as
of
One Year Later 19,618 16,995
Two Years Later 18,181
Redundancy (Deficiency) $ 3,336 $ 2,012
</TABLE>
20
<PAGE> 21
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 redundancy (deficiency) represents the total change in initial
estimates over all subsequent calendar years. For example, the 1987 net reserve
developed a redundancy of $1,773,000 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 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 1996, but incurred in 1987, will be included in the cumulative
deficiency amounts for 1987 through 1996. 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, 1996 and 1995, 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).
21
<PAGE> 22
ITEM 7 - CONSOLIDATED FINANCIAL STATEMENTS
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
-------
Report of Independent Accountants 23
Financial Statements:
Consolidated Balance Sheet as of December 31, 1996 24
Consolidated Statements of Operations for the years
ended December 31, 1996 and 1995 25
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996 and 1995 26
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 and 1995 27
Notes to Consolidated Financial Statements 29
22
<PAGE> 23
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, 1996 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, 1996. 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, 1996 and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/S/ Coopers & Lybrand L.L.P.
Portland, Maine
March 19, 1997
23
<PAGE> 24
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of December 31, 1996
<CAPTION>
ASSETS 1996
- ------ ----
<S> <C>
Investments (Note F):
Fixed maturities available for sale, at fair value
(amortized cost $14,504,324) $14,451,607
Investment property, at cost, less accumulated
depreciation of $44,916 65,084
Equity securities available for sale, at fair value
(cost $71,394) 12,634
Short-term investments, at fair value 2,868,875
-----------
Total investments 17,398,200
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables (Note D)) 4,908,032
Premium balances receivable 3,971,493
Deferred policy acquisition costs (Note B) 398,595
Prepaid reinsurance premiums (ceded unearned premium (Note D)) 2,549,932
Investment income due and accrued 284,351
Property and equipment, net of accumulated depreciation (Note G) 473,005
Deferred tax asset (Note C) 2,050,394
Prepaid federal income tax 9,242
Receivable due from investment broker 400,000
Other assets 115,661
-----------
Total Assets $32,558,905
===========
LIABILITIES
- -----------
Losses and loss adjustment expenses (Note D and H) $15,205,583
Unearned premiums 5,717,002
Ceded reinsurance balances payable (Note D) 1,244,975
Reserve for unpaid expenses and other liabilities 912,547
Book overdraft, net 7,065
Other liabilities 146,772
-----------
Total Liabilities 23,233,944
Commitments and contingent liabilities (Notes D and J) ===========
SHAREHOLDERS' EQUITY (Note E)
- -----------------------------
Common stock $1.00 par value, authorized 6,000,000 shares, issued
and outstanding 3,002,375 shares 3,002,375
Additional paid-in capital 6,348,039
Unrealized appreciation of investments (111,477)
Accumulated retained earnings 86,024
-----------
Total Shareholders' Equity 9,324,961
-----------
Total Liabilities and Shareholders' Equity $32,558,905
===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
24
<PAGE> 25
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996 and 1995
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Premiums earned $11,536,429 $11,876,468
Premiums ceded (Note D) (5,303,573) (5,005,394)
----------- -----------
Net premiums earned 6,232,856 6,871,074
Net investment income (Note F) 1,041,762 1,298,601
Realized capital gains (losses) (Note F) 57,617 (225,726)
----------- -----------
Total revenues 7,332,235 7,943,949
Expenses:
Losses and loss adjustment expenses 5,775,929 6,855,949
Reinsurance recoveries (Note D) (2,270,542) (2,868,984)
------------ -----------
Net losses and loss adjustment expenses 3,505,387 3,986,965
Underwriting expenses incurred (Note B) 2,520,488 3,194,166
----------- -----------
Total expenses 6,025,875 7,181,131
----------- -----------
Income before provision for income taxes 1,306,360 762,818
Provision (benefit) for income taxes (Note C) (2,069,136) 14,500
----------- -----------
Net income (Note E) $ 3,375,496 $ 748,318
=========== ===========
Earnings per common share:
Net income $ 1.13 $ 0.25
========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
25
<PAGE> 26
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1996 and 1995
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Common stock, par value:
Balance at beginning of year $ 2,992,314 $ 2,992,314
Change during year 10,061 0
----------- -----------
Balance at end of year 3,002,375 2,992,314
----------- -----------
Additional paid-in capital:
Balance at beginning of year 6,346,156 6,346,156
Change during year 1,883 0
----------- -----------
Balance at end of year 6,348,039 6,346,156
----------- -----------
Unrealized appreciation (depreciation):
Balance at beginning of year 377,053 (2,096,808)
Change during year (488,530) 2,473,861
----------- -----------
Balance at end of year (111,477) 377,053
----------- -----------
Accumulated retained earnings (deficit):
Balance at beginning of year (3,289,472) (4,037,790)
Net income 3,375,496 748,318
----------- -----------
Balance at end of year 86,024 (3,289,472)
----------- -----------
Treasury stock, at cost:
Balance at beginning of year (5,000) (5,000)
Change during year 5,000 0
----------- -----------
Balance at end of year 0 (5,000)
----------- -----------
Total shareholders' equity at end of year $ 9,324,961 $ 6,421,051
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
26
<PAGE> 27
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Insurance premiums received $ 5,542,279 $ 6,656,160
Loss and loss adjustment expenses paid (7,132,600) (7,212,545)
Operating expenses paid (1,961,730) (3,023,383)
Investment income received 1,086,195 1,380,365
Federal income taxes paid 5,000 0
----------- -----------
Net cash used in operating activities (2,470,856) (2,199,403)
----------- -----------
Cash flows from investing activities:
Fixed maturities - sold 7,514,127 3,448,993
Fixed maturities - matured 1,200,000 0
Fixed maturities - purchased (5,597,243) (312,258)
Purchase of property and equipment (129,234) (60,537)
Mortgage note repaid 459,139 0
Investment property sold 120,000 0
Sale of property and equipment 26,833 1,150
----------- -----------
Net cash provided by
investing activities 3,593,622 3,077,348
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of
common shares 16,944 0
----------- -----------
Net cash provided from financing activities 16,944 0
----------- -----------
Net increase in cash, book overdraft
and short-term investments 1,139,710 877,945
Cash, book overdraft and short-term
investments at beginning of year 1,722,100 844,155
----------- -----------
Cash, book overdraft and short-term
investments at end of year $ 2,861,810 $ 1,722,100
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(Continued)
27
<PAGE> 28
<TABLE>
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF CASH USED IN
OPERATING ACTIVITIES TO NET INCOME
for the years ended December 31, 1996 and 1995
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income $ 3,375,496 $ 748,318
Decrease in loss and loss adjustment expense reserve (3,801,142) (2,510,564)
Decrease in unearned premium reserve, net (167,115) (1,072,815)
Increase (decrease) in expense accruals and other liabilities 375,666 (138,618)
Loss on investment activities 20,399 158,512
Decrease (increase) in deferred policy acquisition costs (86,372) 146,184
Depreciation and amortization expense 190,489 123,745
Decrease (increase) in net premium and ceded
reinsurance balances (249,533) 287,885
Decrease in allowance for doubtful accounts (100,000) (145,000)
Decrease in investment income due and accrued 44,433 81,764
Amortization of bond premium, net 80,491 77,576
Loss (gain) on mortgage note in default (79,139) 67,214
Loss on sale of real estate 1,123 0
Increase in other assets (1,516) (38,104)
Increase (decrease) in federal income tax payable (14,500) 14,500
Decrease (increase) in prepaid federal income tax (9,242) 0
Decrease (increase) in deferred tax asset (2,050,394) 0
------------ -----------
Net cash used in operating activities $(2,470,856) $(2,199,403)
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
28
<PAGE> 29
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, 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.
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 $3,380,381 for
amounts not yet due at December 31, 1996. The allowance for doubtful accounts at
December 31, 1996 was $30,000.
29
<PAGE> 30
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 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.
30
<PAGE> 31
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 maintains 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, 1996 and
1995, the Company contributed $7,652 and $9,871, respectively, pursuant to the
matching formula. The Company contributed $9,820 and $0 under the profitability
formula as of December 31, 1996 and 1995, respectively.
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.
31
<PAGE> 32
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 values 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 values for equity
securities available for sale are based on quoted market prices.
* Short-term Investments: Fair values for these instruments the amounts
reported in the Consolidated Balance Sheet.
* Investment Property: Fair value of investment property is cost less
accumulated depreciation which approximates market value.
32
<PAGE> 33
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
A. Summary of Significant Accounting Policies, Continued:
-----------------------------------------------------
Earnings per Common Share
- -------------------------
Earnings per common share are calculated using the weighted average method. For
the years ended December 31, 1996 and 1995 the weighted average number of shares
used in the calculation was 2,994,265 and 2,992,314, 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.
New Accounting Pronouncements
- -----------------------------
In October 1995 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 123 ("Accounting for
Stock-Based Compensation") which requires employers to account for an employee
stock option or similar equity instrument based on the fair value of the
consideration received or the fair value of the equity instrument issued. The
Statement is effective for financial statements for fiscal years beginning after
December 15, 1995. The Company did not have any stock-based compensation plans
in effect for the year ended December 31, 1996.
In June 1996 the FASB issued FAS No. 125 ("Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities") which
provides standards whereby an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, de-recognizes financial
assets when control has been surrendered, and de-recognizes liabilities when
extinguished. The Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. The effect of adopting the provisions of FAS No. 125 is not expected to
have a material effect on the Company's consolidated results of operations or
financial position.
In March 1997 the FASB issued FAS No. 128 ("Earnings Per Share") which provides
for a "basic" earnings per share computation based upon the weighted-average
shares outstanding. The new standard requires a dual presentation of basic and
diluted earnings per share. The effect of adopting the provisions of FAS No. 128
is not expected to have a material effect on the Company's per share earnings.
In March 1997 the FASB also issued FAS No. 129 ("Disclosures of Information
About Capital Structure"). The effect of adopting the provision of FAS No. 129
is not expected to result in significant disclosure due in part to the
simplified nature of the Company's capital structure.
33
<PAGE> 34
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
B. Deferred Policy Acquisition Costs:
---------------------------------
Deferred policy acquisition costs ($398,595 at December 31,1996) represent the
Company's best estimate of amounts expected to be recovered against future
earned premium from policies currently in force 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.
<TABLE>
The following table reconciles the change in deferred policy acquisition costs
for the years ended December 31, 1996 and 1995:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of year $ 312,223 $ 458,407
Deferral of policy acquisition costs
during year 2,606,860 3,047,982
Amortization of deferred policy
acquisition costs during year (2,520,488) (3,194,166)
----------- -----------
Balance, end of year $ 398,595 $ 312,223
=========== ===========
</TABLE>
34
<PAGE> 35
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
C. Federal Income Taxes:
--------------------
<TABLE>
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the benefit for income taxes for the year
ended December 31, 1996 is as follows:
<S> <C>
Tax at federal statutory rate of 34% $ 444,162
Utilization of net operating loss carryforwards (467,357)
Permanent differences between GAAP basis
income and tax basis income 4,453
Change in valuation allowance (2,050,394)
-----------
Provision (benefit) for income taxes $(2,069,136)
===========
</TABLE>
During 1996, management determined that based on the Company's performance in
1996 and 1995, and the future operating plans of the Company, a portion of the
valuation allowance previously established against the deferred tax asset was no
longer required. Accordingly, in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), the
change in the valuation allowance has been included in net income for the year
ended December 31, 1996.
<TABLE>
Details of the components of the deferred tax asset and liabilities and the
valuation allowance at December 31, 1996 are as follows:
<S> <C>
Deferred Tax Assets
Tax based on net operating loss carryforward $1,343,092
Loss reserve adjustments 481,457
Unearned premium adjustments 215,361
Capital loss carryforward 220,515
Other 146,006
----------
Gross deferred tax assets 2,406,431
Less Valuation allowance (220,515)
----------
Net deferred tax asset 2,185,916
----------
Deferred Tax Liabilities
Deferred policy acquisition costs (135,522)
----------
Net deferred tax asset $2,050,394
==========
</TABLE>
A full valuation allowance was recorded against the deferred tax asset arising
from unrealized depreciation of securities due to the uncertainty with regard to
its future recovery.
The income tax provision for 1995 of $14,500 was calculated based on the
alternative minimum tax methodology and utilized approximately $685,000 of loss
carryforwards.
35
<PAGE> 36
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
C. Federal Income Taxes, Continued:
-------------------------------
The Company's unused net operating loss carryforwards expire in varying amounts
between 2001 and 2011. The Company also has unused capital loss carryforwards of
approximately $ 298,000 expiring by 2001.
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 payable include $248,000 and $121,000 payable to two
reinsurers whose balances account for 40.6% and 19.8% of the total unpaid ceded
premiums. No other reinsurer accounts for more than 10% of the total balances at
December 31, 1996.
Reinsurance balances payable represent unpaid ceded premiums of $611,172 and
funds held under reinsurance contracts of $633,803 at December 31,1996. Paid
loss and loss adjustment expenses recoverable from reinsurers at December 31,
1996 amounted to $239,272. The allowance for uncollectible reinsurance balances
at December 31, 1996 was $160,000.
36
<PAGE> 37
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.
<TABLE>
Written premium amounts reflected in the financial statements are as follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Direct Written Premiums $11,126,794 $11,212,664
Assumed Written Premiums 66,763 38,017
Ceded Written Premiums 5,127,816 5,452,422
----------- -----------
Net Written Premiums $ 6,065,741 $ 5,798,259
-========== ===========
</TABLE>
<TABLE>
Earned premium amounts reflected in the financial statements are as follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Direct Earned Premiums $11,442,307 $11,855,001
Assumed Earned Premiums 94,122 21,467
Ceded Earned Premiums 5,303,573 5,005,394
----------- -----------
Net Earned Premiums $ 6,232,856 $ 6,871,074
=========== ===========
</TABLE>
<TABLE>
Other ceded reinsurance amounts reflected in the financial statements are as
follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Reinsurance commission $2,890,101 $1,794,336
Loss and loss adjustment expense reserves 4,828,761 4,703,238
Prepaid reinsurance premiums (ceded
unearned premium) $2,549,932 $2,725,689
</TABLE>
37
<PAGE> 38
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
D. Commitments and Contingent Liabilities, continued:
-------------------------------------------------
Other
- -----
The Company has an Employment Agreement with Mr. Schatz, dated March 26, 1991.
The Agreement was recently renewed and will expire on February 28, 1998 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.
As of October 28, 1996 the Company entered into a letter agreement with Mr.
Schatz, in which it agreed to pay him a special cash bonus of $60,000 in 1996,
and cash bonuses of $33,997 per year in 1997 through 2006 (totaling $339,970).
These annual cash bonuses will terminate if Mr. Schatz voluntarily terminates
his employment other than for "Good Reason" as defined in his Employment
Continuity Agreement (described below), or if the Company terminates his
employment for "Good Cause" as defined in the Employment Continuity Agreement.
In exchange for these payments, Mr. Schatz has agreed to release any and all
claims he may have had for non-payments under his Employment Agreement for 1991
through October 1996. These arrangements are contingent on receipt during 1997
of shareholder approval for a nonstatutory stock option awarded to Mr. Schatz on
October 28, 1996 for the purchase of up to 200,000 shares of NEIC Common Stock,
at an exercise price equal to 100% of fair market value of the Common Stock as
of such date of grant. At December 31, 1996 the Company has accrued $18,871
pursuant to the future cash bonus awards.
As of October 28, 1996 the Company entered into letter agreements with two other
senior executives, Messrs. Libby and Koren. Among other things, these agreements
provide for special one-time cash bonuses if Mr. Libby or Koren remain employed
with the Company through September 30, 1997 or 1998, respectively, or if he
terminates his employment for "Good Reason" prior to such date. At December 31,
1996 the Company has accrued $12,067 pursuant to the special one-time bonuses.
38
<PAGE> 39
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
D. Commitments and Contingent Liabilities, continued:
-------------------------------------------------
As of October 28, 1996 the Company entered into Employment Continuity Agreements
with each of Messrs. Schatz, Libby, and Koren. These Agreements provide for
special severance compensation if, within 12 months after a "Change in Control
Event," the executive's employment terminates at the instigation of the Company
(other than for "Good Cause") or at the instigation of the executive for "Good
Reason." The maximum benefit payable under these Agreements is 300% (for Mr.
Schatz) or 200% (for Mr. Libby or Koren) of the executive's annual base salary
then in effect plus profit-sharing award for the prior year, subject however to
a cap of 299% of the executive's "Base Amount" as defined in Section 280G of the
Internal Revenue Code.
E. Statutory Surplus and Statutory Net Income:
------------------------------------------
<TABLE>
The following tables reconcile statutory surplus and net income amounts reported
under statutory accounting principles to those reported herein under GAAP at
December 31, 1996 and 1995 and for the years then ended.
<CAPTION>
As of December 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Statutory surplus,
as reported by the Company $6,738,116 $5,170,158
Reconciliation to GAAP basis:
Deferred policy acquisition costs 398,595 312,223
Provision for unauthorized reinsurance 128,600 96,800
Deferred tax asset 2,050,394 0
Excess of statutory reserve over
statement reserves 46,600 56,600
Other non-admitted assets
Data processing equipment 95,715 145,072
Other 308,031 304,267
Premiums receivable 849 185,928
Adjustment for difference in
valuation method for certain
fixed maturities (52,717) 465,003
GAAP basis reserves in lieu of
provision for unauthorized
and other statutorily non-
admitted assets (389,222) (315,000)
---------- ----------
GAAP basis, surplus $9,324,961 $6,421,051
========== ==========
</TABLE>
39
<PAGE> 40
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
<TABLE>
E. Statutory Surplus and Statutory Net Income, Continued:
-----------------------------------------------------
<CAPTION>
year ended December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Statutory net income $ 669,006 $ 593,805
Reconciliation to GAAP basis:
Change in deferred policy acquisition costs 86,372 (146,184)
Equity in loss on non insurance
subsidiary (8,540) (5,313)
GAAP basis reserves in lieu of
provision for unauthorized
and other statutorily
non-admitted assets
Statutory write down of uncollectible
agent receivable written down
in 1990 on a GAAP basis 652,484 0
Other (115,017) (45,000)
Federal income tax adjustment 40,797 0
Deferred tax credit 2,050,394 0
Write down of fixed maturity to
realizable value on conversion to
an equity security 0 351,010
---------- ---------
GAAP basis, net income $3,375,496 $ 748,318
========== =========
</TABLE>
40
<PAGE> 41
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
F. Investments:
-----------
<TABLE>
The amortized cost and fair value of investments in fixed maturities available
for sale at December 31, 1996 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 $ 6,762,224 $127,995 $ 65,249 $ 6,824,970
Public Utilities 1,002,087 0 32,087 970,000
Corporate Securities 6,740,013 4,253 87,629 6,656,637
----------- -------- -------- -----------
Total Fixed Maturities $14,504,324 $132,248 $184,965 $14,451,607
=========== ======== ======== ===========
</TABLE>
At December 31, 1996, equity securities available for sale had gross unrealized
gains of $0 and gross unrealized losses of $58,760.
<TABLE>
The investment concentration of corporate fixed maturities for each investment
category which in the aggregate exceeds 10% of shareholders' equity at December
31,1996 is as follows:
<CAPTION>
Estimated
Fair
Value %
----- -
<S> <C> <C>
Category:
- --------
Bank & Finance $3,317,030 49.8
Retail & Consumer 1,794,607 27.0
Industrial 1,545,000 23.2
---------- -----
$6,656,637 100.0
========== =====
</TABLE>
41
<PAGE> 42
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
F. Investments, Continued:
----------------------
<TABLE>
The amortized cost and estimated fair value of all fixed maturities available
for sale at December 31, 1996 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.
Amortized Estimated
Cost Fair Value
---- ----------
Due to Mature:
- --------------
<S> <C> <C>
After one year through five years $ 8,918,898 $ 8,906,796
After five years through ten years 1,378,111 1,342,644
After ten years through fifteen years 1,236,423 1,187,500
After fifteen years 2,970,892 3,014,667
----------- -----------
$14,504,324 $14,451,607
=========== ===========
</TABLE>
Proceeds from sales of investments in fixed maturities during 1996 and 1995 were
$7,514,127 and $3,448,993, respectively. During 1996 fixed maturities with par
value of $1,200,000 matured. There were no maturities of fixed maturities in
1995. Gross gains of $70,066 and $12,246 and gross losses of $ 90,815 and
$162,888 were realized on those sales in 1996 and 1995, 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 $3,777,375 at December 31,
1996.
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 conditions as of the
balance sheet date.
42
<PAGE> 43
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
F. Investments, Continued:
----------------------
<TABLE>
Realized capital gains (losses) for the years ended December 31, 1996 and 1995
consisted of the following:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Fixed maturities $(20,749) $(150,642)
Write down value of mortgage note
receivable, net to fair value of collateral 0 (67,214)
Gain on mortgage note repayment 78,015
Other 351 (7,870)
-------- ---------
Total $ 57,617 $(225,726)
======== =========
</TABLE>
<TABLE>
The change in unrealized appreciation (depreciation) on fixed maturities and
equity securities was as follows:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Fixed maturities $(479,985) $2,463,527
Equity securities (8,545) 10,334
--------- ----------
Total $(488,530) $2,473,861
========= ==========
</TABLE>
<TABLE>
Net investment income for the years ended December 31, 1996 and 1995 consisted
of the following:
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest on fixed maturities $1,175,135 $1,439,014
Interest on short-term investments 124,679 76,235
Interest on mortgage note receivable 0 5,133
Interest on agency loan 7,085 0
Rental income, investment property 17,850 24,600
Dividends on equity securities 451 451
Amortization of bond premium, net (80,491) (77,576)
Miscellaneous 666 11,801
---------- ----------
Total investment income 1,245,375 1,479,658
Investment expenses 203,613 181,057
---------- ----------
Net investment income $1,041,762 $1,298,601
========== ==========
</TABLE>
Investment expense in 1996 and 1995 includes $2,371 and $10,676, respectively,
of interest expense due reinsurers on funds withheld.
43
<PAGE> 44
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
G. Property and Equipment:
----------------------
<TABLE>
Property and equipment, which are stated at cost, consist of the following as of
December 31, 1996:
<CAPTION>
Estimated
Useful
Amount Life
------ ----
<S> <C> <C>
Leasehold Improvements $ 92,283 10 years
Equipment, furniture and
fixtures and automobiles 379,914 5 years
Computer software & hardware 614,917 3-5 years
----------
1,087,114
Less accumulated
depreciation and amortization 614,109
----------
$ 473,005
==========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1996 and
1995 was $190,489 and $123,745, respectively.
The unamortized value of computer software was $108,690 and $110,679 for the
years ended December 31, 1996 and 1995, respectively. Depreciation expense of
computer software was $35,948 and $820 for the years ended December 31, 1996 and
1995, respectively. During 1996, $1,989 of previously capitalized software was
written off.
44
<PAGE> 45
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
--------------------
H. Reserve for losses and loss adjustment expenses:
------------------------------------------------
<TABLE>
The following table provides a reconciliation of the changes in loss and loss
adjustment expense reserves, after deducting amounts recoverable from reinsurers
for 1996 and 1995.
Reconciliation of Liability for Losses and
Loss Adjustment Expenses
------------------------
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $19,006,725 $21,517,289
Amounts recoverable from reinsurers
on unpaid losses 4,703,238 4,045,132
----------- -----------
Beginning of year, net 14,303,487 17,472,157
Add:
Provision for losses and LAE for claims arising in:
Current year 5,823,867 6,119,285
Prior years (2,318,480) (2,132,320)
Less:
Losses and LAE paid on claims arising in:
Current year 3,826,876 3,312,336
Prior years 3,605,175 3,843,299
----------- -----------
End of year, net 10,376,823 14,303,487
Amounts recoverable from reinsurers
on unpaid losses 4,828,760 4,703,238
----------- -----------
Losses and loss adjustment expenses
per Consolidated Balance Sheet $15,205,583 $19,006,725
=========== ===========
</TABLE>
Reserves for losses and loss adjustment expenses represent estimates of the
ultimate cost of all unpaid losses and loss adjustment expenses incurred through
to 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.
45
<PAGE> 46
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------------------
H. Reserve for losses and loss adjustment expenses, Continued:
-----------------------------------------------------------
For the years ending December 31, 1996 and 1995 the actuarial estimate indicated
that the prior year reserve for losses and loss adjustment expenses were
redundant by $2,318,480 and $2,132,320 respectively.
I. 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.
J. 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 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
46
<PAGE> 47
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------------------
J. Legal Proceedings, Continued:
-----------------------------
to be frivolous. Over the past four 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. These settlement arrangements had also received
approval from another court in a pending criminal case entitled UNITED STATES V.
BERNARD GERSHUNY (U.S. District Court for the Southern District of New York,
1992). Proceeds from the sale of Mr. Gershuny's shares were to be applied,
first, to pay $500,000 toward a restitution fund established in connection with
the criminal case; next, to pay $70,000 in legal fees of Mr. Gershuny's former
counsel; and then any remaining funds would be paid to the Creditors Committee
in the AMC litigation.
In May 1996 Mr. Gershuny entered into a Purchase Agreement to sell his shares to
an investor group acting through Ballantrae Partners, L.L.C., a Delaware limited
liability company. The Purchase Agreement was subject to numerous conditions,
including a requirement that Ballantrae obtain requisite regulatory approvals
from Maine and New York insurance regulators. In January 1997 Mr. Gershuny
consummated the sale of his shares to Ballantrae. The proceeds from this sale
(net of certain expenses withheld by the purchaser) amounted to $568,750, which
amount was placed in escrow. These funds (together with any interest earned
thereon) were recently distributed from escrow, pursuant to orders dated March
11 and 21, 1997 of the court in the criminal case. The Committee received
approximately $50,000 of proceeds. Such amount is far less than the claims
against Mr. Gershuny in the AMC litigation, and to the Company's knowledge that
case remains open.
In connection with the closing of its purchase of Mr. Gershuny's shares,
Ballantrae agreed to indemnify the Company and its transfer agent against any
liability, expense, or claim arising in connection with a certain prior lien
against the shares. This lien was previously assigned to the Committee, and
appears to have been waived or become moot.
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.
47
<PAGE> 48
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------------------
K. 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 $131,203 for 1996, increasing
gradually to $144,823 for the year ending December 31, 2000. The expense
incurred for rent and rent related items for the years ended December 31, 1996
and 1995 was $186,112 and $176,920, respectively.
<TABLE>
The following table is a schedule of future minimum lease payments:
<CAPTION>
Lease Payment
-------------
<S> <C>
Year 1997 $134,483
Year 1998 137,845
Year 1999 141,291
Year 2000 144,823
</TABLE>
48
<PAGE> 49
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 in June 1997.
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 in June 1997.
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 in June 1997.
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 in June 1997.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(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, incorporated herein by
reference to Exhibit 3.2 to NEIC's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1995.
4.1 Instruments Defining the Rights of Security Holders: see Exhibits 3.1
and 3.2 hereof.
49
<PAGE> 50
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.
10.2 Standstill Agreement, dated August 22, 1996, between the Company and
Ballantrae Partners, L.L.C., incorporated herein by reference to
Exhibit 99.1 to NEIC's Form 8-K report filed August 28, 1996.
NOTE: Compensatory plans and arrangements and management contracts are
filed as Exhibits 10.3 through 10.9 below.
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.
10.4 Letter Agreement dated October 28, 1996 between the Company and Robert
G. Schatz, regarding bonus compensation arrangements.
10.5 Letter Agreement dated October 28, 1996 between the Company and Ronald
A. Libby, regarding terms of employment.
10.6 Letter Agreement dated October 28, 1996 between the Company and Samuel
M. Koren, regarding terms of employment.
10.7 Employment Continuity Agreement dated as of October 28, 1996 between
the Company and Robert G. Schatz.
10.8 Employment Continuity Agreement dated as of October 28, 1996 between
the Company and Ronald A. Libby
10.9 Employment Continuity Agreement dated as of October 28, 1996 between
the Company and Samuel M. Koren.
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.
(b) Reports on Form 8-K -The Company filed a report on Form 8-K on October
23, 1996, announcing its decision to terminate a previously announced
private placement of Common Stock. The Company also filed a report on
Form 8-K on January 22, 1997 (and an amendment thereto on the
following day), announcing consummation by Ballantrae Partners, L.L.C.
of the purchase of a block of stock from Bernard D. Gershuny,
representing approximately 27% of the Company's outstanding Common
Stock.
50
<PAGE> 51
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 24, 1997 NORTH EAST INSURANCE COMPANY
By: /s/ Robert G. Schatz
-------------------------------
Robert G. Schatz, President
51
<PAGE> 52
<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>
President, Chief Executive
/s/ Robert G. Schatz Officer and Director March 24, 1997
- ---------------------------------
Robert G. Schatz
Treasurer and Chief
/s/ Graham S. Payne Financial Officer March 24, 1997
- ---------------------------------
Graham S. Payne
/s/ Edward B. Batal Director March 27, 1997
- ---------------------------------
Edward B. Batal
/s/ David D. Chase Director March 21, 1997
- ---------------------------------
David D. Chase
/s/ Terence P. Cummings Director March 26, 1997
- ---------------------------------
Terence P. Cummings
/s/ Edward L. Dilworth, Jr. Director March 21, 1997
- ---------------------------------
Edward L. Dilworth, Jr.
/s/ Andrew Greenbaum Director March 21, 1997
- ---------------------------------
Andrew "NMN" Greenbaum
/s/ Robert A. Hancock Director March 24, 1997
- ---------------------------------
Robert A. Hancock
/s/ Deborah L. Harmon Director March 26, 1997
- ---------------------------------
Deborah L. Harmon
/s/ Wilson G. Hess Director March 21, 1997
- ---------------------------------
Wilson G. Hess
/s/ Joseph M. Hochadel Director March 23, 1997
- ---------------------------------
Joseph M. Hochadel
/s/ Jonathan S. Kern Director March 21, 1997
- ---------------------------------
Jonathan S. Kern
/s/ Bruce H. Suter Director March 21, 1997
- ---------------------------------
Bruce H. Suter
</TABLE>
52
<PAGE> 53
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
<TABLE>
INDEX TO CONSOLIDATED EXHIBITS
<CAPTION>
PAGE(S)
-------
Exhibit No.
- -----------
<S> <C> <C>
10.4 Letter Agreement dated October 28, 1996 between the Company
and Robert G. Schatz, regarding bonus compensation arrangements. 54
10.5 Letter Agreement dated October 28, 1996 between the Company
and Ronald A. Libby, regarding terms of employment. 56
10.6 Letter Agreement dated October 28, 1996 between the Company
and Samuel M. Koren, regarding terms of employment. 58
10.7 Employment Continuity Agreement dated as of October 28, 1996
between the Company and Robert G. Schatz 60
10.8 Employment Continuity Agreement dated as of October 28, 1996
between the Company and Ronald A. Libby 66
10.9 Employment Continuity Agreement dated as of October 28, 1996
between the Company and Samuel M. Koren. 71
27 Financial Data Schedule 76
</TABLE>
53
<PAGE> 1
EXHIBIT 10.4
October 28, 1996
Mr. Robert G. Schatz
North East Insurance Company
P.O. Box 1418
Scarborough, Maine 04070-1418
Re: Special Payments
- --------------------------------------------------------------------------------
Dear Bob,
This letter memorializes the actions taken by the Board of Directors of North
East Insurance Company (the "Board" of the "Company") on October 28, 1996, to
resolve any and all questions over your entitlements for services to date under
your Employment Agreement dated March 26, 1991 (the "Employment Agreement"), and
to secure your future services to the Company. When countersigned by you, this
letter will constitute an agreement between you and the Company whereby the
Company agrees to provide you with certain compensation (the "Compensation")
described below. In return, you agree to release the Board, the Company, its
agents and employees from any and all claims for relief or damages of any kind
that you may have against them to date under the scope and terms of the
Employment Agreement.
The Compensation shall be as follows:
(1) The Company shall make a lump sum cash payment to you in the amount of
$60,000 on or before December 31, 1996.
(2) For each of the ten calendar years commencing in 1997 and ending in
2006, the Company will make a special bonus payment to you, on or
before the last day of each such year. Each special bonus shall be in
the amount of $33,996.85. If your employment termination is the result
of (a) a voluntary termination by you, other than a termination for
"Good Reason" as defined in Section 4 of the Employment Continuity
Agreement executed between the Company and you on December 11, 1996
(the "ECA"), or (b) a termination by the Company for "Good Cause" as
defined in Section 6 of the ECA, you shall forfeit any rights to any
remaining unpaid special bonuses.
54
<PAGE> 2
Mr. Robert G. Schatz
October 28, 1996
Page 2
(3) You have been awarded an option to purchase up to 200,000 shares of
the common stock of the Company at an exercise price of $1.6875. If
the Company's Shareholders fail to approve this Option on or before
the next annual meeting of the Shareholders, the Option and this
Agreement shall terminate, and your release of claims as described
above shall have no effect, provided you agree that any compensation
actually paid hereunder shall be offset against any such claims.
If you agree to the terms of this letter, please indicate your agreement by
writing the date and your signature on the lines provided below.
Sincerely yours,
NORTH EAST INSURANCE COMPANY
By: /s/ Samuel Koren
-------------------------------
Samuel M. Koren, Secretary
By: /s/ Wilson G. Hess
-------------------------------
Wilson G. Hess
Executive Committee Member
/s/ Robert G. Schatz
-------------------------------
Robert G. Schatz, President
December 11, 1996
-------------------------------
Date
55
<PAGE> 1
EXHIBIT 10.5
Mr. Ronald A. Libby
North East Insurance Company
482 Payne Road, P.O. Box 1418
Scarborough, ME 04074-1418
RE: EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
Dear Ron:
This letter serves as an interim Employment Agreement under which North
East Insurance Company ("NEIC" or the "Company") will continue to employ you as
its Chief Operating Officer. In the meantime, the Company has retained the firm
of Moon, Moss, McGill & Bachelder for the purpose of, among other things,
devising an appropriate longer term employment agreement that offers appropriate
management incentive compensation arrangements. The Board of Directors has
assigned a very high priority to this arrangement, and we presently anticipate
that the Board will be addressing the matter this Fall.
The Company is of the view that certain key executives (including yourself)
should be provided with greater certainty in respect of future changes in
control of the Company. As a result, the Board of Directors has approved for you
an Employment Continuity Agreement in the form attached. Under the Employment
Continuity Agreement, you would be entitled to certain severance benefits upon
the occurrence of a "Change in Control," as defined in that agreement.
The Board of Directors also believes that it is appropriate that,
commencing immediately, you be provided with appropriate compensation and
protections that will encourage you to stay on in your present capacity with
NEIC. I am therefore pleased to outline the following arrangements which have
been approved by the Board of Directors with regard to your continued
employment:
1. Effective as of September 23, 1996, your salary shall be $110,000.00
per year, payable in installments as per the Company's existing
payroll practices, as now in effect.
2. You shall be entitled to participate in all employee welfare and
benefit plans of the Company that from time to time are in effect for
NEIC employees generally. If the Company in the future eliminates or
reduces benefits generally available to employees under its welfare
and benefit plans, the Company will provide you with such supplemental
benefits as may be necessary to assure that the level of your benefits
are not decreased to a level below the level in effect for you today.
3. If you remain in employment with the Company through September 30,
1997, the Company shall pay you a cash bonus of $27,500.00. Such bonus
shall accrue as of September 30, 1997, and shall be paid within thirty
(30) days after such date.
4. If between now and September 30, 1997, the Company terminates your
employment other than for good cause, the Company shall provide you
with: (1) severance payments of $165,500.00 (representing 1.5 times
the salary level provided in this letter), and (2) the cash bonus set
forth in paragraph 3. The severance payments shall be made in four (4)
equal increments of $41,250.00, payable within ten (10) days after the
date of termination and each three (3) months thereafter. The cash
bonus shall be paid at the time provided in Section 3. For purposes of
this letter, termination for "good cause" shall have the same meaning
as set forth in your Employment Continuity Agreement. Additional or
substitute termination severance provisions shall be provided pursuant
to the anticipated employment agreements noted above.
56
<PAGE> 2
5. For purposes of this letter, a substantial adverse change in your
duties or title, or the occurrence of other events constituting "Good
Reason" under your Employment Continuity Agreement, will be deemed to
be a constructive termination of your employment for purposes of the
severance arrangements set forth in paragraph 4.
6. If at the time of termination of employment you are entitled to
payments under both Section 4 of this letter and your Employment
Continuity Agreement, you shall be entitled only to the level of
benefits available under whichever one of these agreements you elect.
Such election shall be made by written notice to the Company within
ten (10) days after termination of your employment and shall be
binding upon you and the Company; you shall not be entitled to collect
severance payments under both agreements. This provision applies only
to payments specifically described in Section 4.
Sincerely yours,
/s/ Robert G. Schatz
Robert G. Schatz
57
<PAGE> 1
EXHIBIT 10.6
October 28, 1996
Mr. Samuel M. Koren
North East Insurance Company
482 Payne Road, P.O. Box 1418
Scarborough, ME 04074-1418
RE: EMPLOYMENT AGREEMENT
- --------------------------------------------------------------------------------
Dear Sam:
This letter serves as an interim Employment Agreement under which North
East Insurance Company ("NEIC" or the "Company") will continue to employ you as
its Senior Vice President. In the meantime, the Company has retained the firm of
Moon, Moss, McGill & Bachelder for the purpose of, among other things, devising
an appropriate longer term employment agreement that offers appropriate
management incentive compensation arrangements. The Board of Directors has
assigned a very high priority to this arrangement, and we presently anticipate
that the Board will be addressing the matter this Fall.
The Company is of the view that certain key executives (including yourself)
should be provided with greater certainty in respect of future changes in
control of the Company. As a result, the Board of Directors has approved for you
an Employment Continuity Agreement in the form attached. Under the Employment
Continuity Agreement, you would be entitled to certain severance benefits upon
the occurrence of a "Change in Control," as defined in that agreement.
The Board of Directors also believes that it is appropriate that,
commencing immediately, you be provided with appropriate compensation and
protections that will encourage you to stay on in your present capacity with
NEIC. I am therefore pleased to outline the following arrangements which have
been approved by the Board of Directors with regard to your continued
employment:
1. Effective as of September 23, 1996, your salary shall be $82,350.00
per year, payable in installments as per the Company's existing
payroll practices, as now in effect.
2. You shall be entitled to participate in all employee welfare and
benefit plans of the Company that from time to time are in effect for
NEIC employees generally. If the Company in the future eliminates or
reduces benefits generally available to employees under its welfare
and benefit plans, the Company will provide you with such supplemental
benefits as may be necessary to assure that the level of your benefits
are not decreased to a level below the level in effect for you today.
3. If you remain in employment with the Company through September 30,
1998, the Company shall pay you a cash bonus of $41,175.00. Such bonus
shall accrue as of September 30, 1998, and shall be paid within thirty
(30) days after such date.
4. If between now and September 30, 1998, the Company terminates your
employment other than for good cause, the Company shall provide you
with: (1) severance payments of $82,350.00 (representing one times the
salary level provided in this letter), and (2) the cash bonus set
forth in paragraph 3. The severance payments shall be made in four (4)
equal increments of $20,587.50, payable within ten (10) days after the
date of termination and each three (3) months thereafter. The cash
bonus shall be paid at the time provided in Section 3. For purposes of
this letter, termination for "good cause" shall have the same meaning
as set forth in your Employment Continuity Agreement. Additional or
substitute termination severance provisions shall be provided pursuant
to the anticipated employment agreements noted above.
58
<PAGE> 2
5. For purposes of this letter, a substantial adverse change in your
duties or title, or the occurrence of other events constituting "Good
Reason" under your Employment Continuity Agreement, will be deemed to
be a constructive termination of your employment for purposes of the
severance arrangements set forth in paragraph 4.
6. If at the time of termination of employment you are entitled to
payments under both Section 4 of this letter and your Employment
Continuity Agreement, you shall be entitled only to the level of
benefits available under whichever one of these agreements you elect.
Such election shall be made by written notice to the Company within
ten (10) days after termination of your employment and shall be
binding upon you and the Company; you shall not be entitled to collect
severance payments under both agreements. This provision applies only
to payments specifically described in Section 4.
Sincerely yours,
/s/ Robert G. Schatz
Robert G. Schatz
59
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT CONTINUITY AGREEMENT
This Agreement made as of October 28, 1996, by and between NORTH EAST
INSURANCE COMPANY, a Maine corporation with its principal place of business in
Scarborough, Maine (the "Company"), and Robert G. Schatz ("Officer"), of Cape
Elizabeth, Maine.
WHEREAS, the Officer has been employed by the Company since March 29, 1988
and is presently serving in the capacity of President and Chief Executive
Officer; and
WHEREAS, the Company desires to assure itself of the continued employment
and sound judgment of the Officer in the event of any potential change in
control of the Company;
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained and for other good and valuable consideration, the receipt and
adequacy of which is acknowledged by each of the parties, the Officer and the
Company agree as follows:
1. GENERAL.
a. TERM OF THE AGREEMENT AND RENEWAL. The term of this Agreement
shall be for a period beginning on the date hereof and continuing
through the sixth anniversary thereof, provided that, if a Change
in Control Event (as defined below) occurs during the term, the
term shall extend through the later of (i) the date the term is
otherwise scheduled to end or (ii) three years following the date
of the Change in Control Event. Notwithstanding any provision
above, this Agreement shall remain effective for so long as
necessary to enforce all rights accrued and obligations arising
prior to the end of the Term.
b. EFFECT ON EMPLOYMENT AGREEMENT. The Officer is currently employed
pursuant to an Employment Agreement entered into March 26, 1991,
effective January 1, 1991 (the "Employment Agreement"). This
Agreement does not supersede the Employment Agreement, which
remains in full force and effect except as specifically amended
herein.
c. CHANGES TO EMPLOYMENT AGREEMENT. The Employment Agreement is
hereby amended effective immediately as follows: the terms
"Change in Control," "Cause" and "Good Reason" wherever they
appear in the Employment Agreement are amended to refer to
"Change in Control Event", "Good Cause" and "Good Reason"
respectively as those terms are as defined in this Agreement. The
terms "Officer" and "the Executive" shall be used
interchangeably.
In addition, the Company agrees that prior to December 1, 1998 it
shall not exercise its authority under Section 1 of the
Employment Agreement to give written notice that the Term of the
Employment Agreement shall not be extended, so that, in all
events, the Term shall extend at least through March 1, 1999.
2. "CHANGE IN CONTROL EVENT." Any one of the following events shall constitute
a "Change in Control Event" for purposes of this Agreement:
a. Any person acquires or holds beneficial ownership of stock
representing twenty percent (20%) or more of the combined voting
power of the Company's then outstanding stock. Notwithstanding
the above, if any person, prior to attaining beneficial ownership
equaling or exceeding such level, has entered into an agreement
approved by the affirmative vote of at least two-thirds of the
Directors then in office and providing for restrictions on such
person's acquisition of Company stock and other matters involving
control of the Company (a "Standstill Agreement"), then, so long
as such Standstill Agreement is in effect and has not been
breached by such person, neither such person's beneficial
ownership of Company stock nor that of any affiliate of such
person shall constitute a Change in Control.
60
<PAGE> 2
For purposes of this Agreement, "beneficial ownership" shall
be determined in accordance with Regulation 13D under the
Securities Exchange Act of 1934, or any similar successor
regulation or rule; the term "person" shall include, without
limitation, any individual, corporation, limited liability
company, partnership, trust or association, or any group or
combination thereof; and the term "affiliate" shall have the
meaning set forth in Rule 12b-2 under the Securities and Exchange
Act of 1934, or any similar successor statutes or rule or
regulation.
b. Within any twenty-five (25) month period, individuals who were
Outside Directors at the beginning of such period, together with
any other Outside Directors serving as directors of the Company
pursuant to nominations approved or ratified by a majority of the
Outside Directors in office immediately prior to such respective
elections, cease to constitute a majority of the Board of
Directors of the Company.
For purposes of this Agreement, an "Outside Director" as of a
given date shall mean a member of the Company's Board of
Directors who (x) is not then a beneficial owner of stock
representing twenty percent (20%) or more of the combined voting
power of the then outstanding stock of the Company and not an
officer, director or affiliate of any such owner, (y) has been a
director of the Company throughout the six (6) month period prior
to such date and (z) has not been an employee of the Company at
any time during the six (6) month period prior to such date.
c. The Company ceases to be a reporting company pursuant to Section
13(a) of the Securities Exchange Act of 1934 or any similar
successor provision.
d. The Company's shareholders approve:
i. Any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation
or pursuant to which shares of Company common stock
would be converted into cash, securities or other
property, other than a merger or consolidation of the
Company in which the holders of the Company's common
stock immediately prior to the merger or consolidation
own, directly or indirectly, in the aggregate a
majority of each class of stock entitled to vote for
the election of directors of the surviving corporation
(or the equivalent controlling interest in any
surviving entity other than a corporation) immediately
after the merger or consolidation; or
ii. Any sale, lease, exchange, liquidation or other
transfer (in one transaction or a series of
transactions) of all or substantially all of the assets
of the Company.
3. RIGHTS UPON INVOLUNTARY TERMINATION OF EMPLOYMENT. If, within twelve (12)
months after the occurrence of a Change in Control Event, the Company terminates
the Officer's employment for any reason other than Good Cause as defined in
Paragraph 6, or if the Officer voluntarily terminates employment for Good Reason
as defined in Paragraph 4, then (i) if the Employment Agreement is then in
effect, Section 8.6 of the Employment Agreement shall apply in lieu of this
Agreement and this Agreement shall forthwith terminate, or (ii) if the
Employment Agreement is not then in effect the Company shall provide the Officer
with the following:
a. Within thirty (30) days of such termination, a lump sum cash
payment in an amount equal to three hundred percent (300%) of the
sum of (i) the Officer's annual base salary in effect upon the
date of the Change in Control Event plus (ii) any profit-sharing
award made to the Officer in respect to the most recently
completed calendar year; and
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b. The continuation of the Officer's participation and the
participation of his dependents (to the extent they were
participating prior to this termination of employment) in the
Company's health, life, disability and other employee benefit
plans, programs and arrangements as applicable to the Officer on
the date of the Change in Control Event (excluding any Retirement
Plan or 401(k) Plan) for a period of thirty-six (36) months after
such termination as if he were still employed during such period;
provided, however, if such participation in any such plan,
program or arrangement is specifically prohibited by the terms
thereof, the Company shall provide the Officer (and his
dependents) with benefits substantially similar to those which he
was entitled to receive under such plan, program or arrangement
immediately prior to his termination of employment. For purposes
of this Paragraph 3(b), any employee benefit determined with
reference to the Officer's compensation or earnings shall be
based on his annual base salary in effect upon the date of the
Change in Control Event unless otherwise provided under the terms
of the applicable employee benefit plan, program or arrangement.
4. DEFINITION OF TERMINATION BY THE OFFICER FOR GOOD REASON. For purposes of
this Agreement, termination by the Officer of his employment for "Good Reason,"
except upon the Officer's express written consent otherwise, shall mean:
a. The assignment of duties to the Officer which result in his
having less authority or responsibility than he had prior to the
Change in Control Event; or
b. The Officer's removal from, or any failure to re-elect him to,
any position he held immediately prior to the Change in Control
Event with either the Company or any majority-owned subsidiary;
or
c. A reduction of the Officer's annual base salary or benefits in
effect on the date of the Change in Control Event or as the same
may be increased from time to time thereafter; or
d. The relocation of the Company's principal executive offices to a
place outside of the greater Portland, Maine, area, or the
Company's transferring or assigning the Officer to a place of
employment other than its principal executive offices, except for
required business travel to an extent substantially consistent
with his business travel obligations immediately prior to the
Change in Control Event; or
e. The Company's failure to provide the Officer with substantially
the same health, life and other employee benefit plans, programs
and arrangements (specifically including the Company's stock
plans and compensation and incentive plans, as the same may be
amended in the future), and substantially the same perquisites of
employment, as provided to him immediately prior to the Change in
Control Event or as the same may be increased thereafter; or
f. The Company's failure to provide the Officer with substantially
the same support staff as provided to him immediately prior to
the Change in Control Event; or
g. The Company's failure to obtain from any successor a satisfactory
agreement to assume and perform the terms of this Agreement; or
h. Breach of the Employment Agreement or the Employment Continuity
Agreement by the Company; or
i. Due to a change in the Company's structure or ownership, the
Officer no longer has the authority of a chief executive officer
of an independent company of the same size and nature as the
Company (determined immediately prior to the Change in Control
Event).
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5. RIGHTS UPON A VOLUNTARY TERMINATION OF EMPLOYMENT.
a. If the Officer remains in active employment through the last day
of the sixth full calendar month following the occurrence of a
Change in Control Event (the Stay On Date), but then voluntarily
terminates his employment, other than for Good Reason as defined
in Paragraph 4, within 90 days after the Stay On Date, then the
Officer may elect, in written form reasonably acceptable to the
Company, to waive all rights under the Employment Agreement and
substitute therefor his rights under this Agreement, in which
case the Company shall, subject to the provisions of Paragraph
5(b) below, provide the Officer with the following:
(i) Within thirty (30) days of such termination of
employment, a lump sum cash payment in an amount equal
to fifty percent (50%) of the Officer's annual base
salary in effect upon the date of the Change in Control
Event.
(ii) No later than the end of the sixth full calendar month
following such termination of employment, a second lump
sum cash payment in an amount equal to fifty percent
(50%) of the Officer's annual base salary in effect
upon the date of the Change in Control Event.
(iii) Continuation of benefits and rights as described in
Paragraph 3(b) above, except that the period described in
Paragraph 3(b) shall be twelve (12) months.
b. If the Officer terminates employment under this Paragraph 5, and
elects to be paid as provided in Paragraph 5(a) above, then, in
return for his rights hereunder, he agrees that for the period
extending through the sixth full calendar month following his
termination of employment (the "Restricted Period"), the Officer
shall not, (i) directly or indirectly, for his own account or for
the account of others, as an officer, director, stockholder,
owner, partner, employee, promoter, consultant, manager or
otherwise, participate in the promotion, financing, ownership,
operation, or management of, or assist in or carry on through a
proprietorship, corporation, partnership or other form of
business entity or otherwise, the business of property and
casualty insurance (the "Business"), in any place in which the
Company is conducting or is actively planning to conduct Business
as of the date of such termination, (ii) solicit or contact in an
effort to do business with any person who was a customer of the
Company during the term of this Agreement, or any affiliate of
any such person, if such solicitation or contact is in
competition with the Company, or (iii) whether for his own
account or for the account of any other person (excluding the
Company), solicit or induce any of the Company's employees to
leave their employment with the Company or accept employment with
anyone else or hire any such employees. A breach of any of the
covenants contained in this Paragraph 5(b) may result in
material, irreparable injury to the Company for which there is no
adequate remedy at law, such that it will not be possible to
measure damages for such injuries precisely, therefore , in the
event of such a breach, any rights to compensation hereunder
shall be forfeited and the Company shall be entitled to
injunctive relief.
6. TERMINATION FOR GOOD CAUSE. Notwithstanding the provisions of Paragraph 5
above, the Company retains the right to terminate the Officer for "Good Cause,"
in which event he shall not be entitled to receive any payment or benefits
pursuant to this Agreement. "Good Cause" shall mean:
a. The Officer's conviction, by a court of competent jurisdiction,
of or the Officer's plea of nolo contendere to a crime adversely
reflecting on his honesty, trustworthiness or fitness to carry
out the responsibilities of his position with the Company in
other respects;
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<PAGE> 5
b. A willful breach by him of any material duty or obligation
imposed upon him under the terms of his employment, as those
terms existed immediately prior to any Change in Control Event,
and his failure to cure such breach within thirty (30) days after
receiving written notice thereof from the Company; or
c. The Officer's continued substantial neglect of duties, after
written notice from the Board and an opportunity to correct.
7. NOTICES. Any and all notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given when deposited in the
United States mails, certified or registered mail, postage prepaid and addressed
as follows:
To the Officer: Robert G. Schatz
PO Box 218
Cape Cottage Branch
Cape Elizabeth, ME 04107
To the Company: North East Insurance Company
482 Payne Road
Scarborough, ME 04074
Either party may change, by notice to the other, the address to which notices to
it are to be addressed.
8. APPLICABLE LAW, TAXES, BINDING AGREEMENT, SEVERABILITY, CONSTRUCTION.
a. This Agreement shall be governed by and construed in accordance
with the laws of the State of Maine, except as to any matter
which is preempted by federal law.
b. Notwithstanding anything to the contrary herein contained, the
Company may withhold from any amounts payable under this
Agreement all federal, state or other taxes or assessments which
may be required by applicable statute or regulation to be
withheld.
c. This Agreement shall be binding upon and inure to the benefit of
the Officer, his heirs, assigns, executors and legal
representatives; and the Company, its successors and assigns.
d. If any provision of this Agreement shall be held invalid or
unenforceable by a court of competent jurisdiction, the remainder
of this Agreement shall not be affected thereby.
e. The Outside Directors shall have the authority to construe and
interpret this Agreement on behalf of the Company, and any such
determination by the Outside Directors shall be conclusive on the
Company.
9. LIMITATIONS ON AMOUNTS TO BE RECEIVED. If it is determined that part or all
of the compensation and benefits to be paid to the Officer under this Agreement
will result in a loss of deduction to the Company under Section 280G of the
Internal Revenue Code of 1986 as amended (the "Code"), the following limitation
shall apply:
If the aggregate present value of such parachute payments (the "Parachute
Amount") equals or exceeds 2.99 times the Officer's "Base Amount" as defined in
Section 280G of the Code, then the amounts otherwise payable to or for the
benefit of the Officer pursuant to this Agreement, and taken into account in
calculating the Parachute Amount (the "Termination Payments"), shall be reduced,
to the extent necessary so that the Parachute Amount is equal to 2.99 times the
Officer's "Base Amount." The Company shall retain a qualified independent
advisor in order to make any determination or calculations necessary in applying
the above-described limitations.
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<PAGE> 6
10. EXECUTION OF FURTHER DOCUMENTS. In the event the Officer receives payments
or benefits pursuant to the terms hereof and the Company's independent counsel
deems it necessary for the Company to receive a release or other acknowledgment,
the Officer agrees to execute any such document, as may be reasonably required
as a condition of his receipt of such payment or benefits.
11. AMENDMENT AND WAIVER. This Agreement may be amended only in writing, by the
parties hereto, and no condition or provision of this Agreement may be waived
except in writing. Waiver by either party at any time of the other party's
breach of, or failure to comply with, any condition or provision of this
Agreement to be performed by such other party shall not be deemed a waiver of
any other provision or condition at the same time or of any provision or
condition at any prior or subsequent time, unless specifically stated therein.
12. FUNDING. This Agreement shall not be construed to create or require the
Company to create a Trust or to otherwise act to fund the amounts payable
hereunder.
13. ASSIGNMENT. Except as required by law, the right to receive payments
hereunder shall not be subject to alienation, assignment, garnishment,
attachment, execution or levy of any kind, and any attempt to cause such
payments to be so subject shall not be recognized by the Company.
14. NO ADDITIONAL EFFECT. Except as expressly provided herein, nothing
contained herein shall be construed to provide the Officer with any specific
period of employment, right to be retained in the service of the Company or
other rights, nor shall this Agreement be construed to otherwise limit the
rights of the Company to discharge or take other action with respect to the
Officer.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
NORTH EAST INSURANCE COMPANY
By: /s/ Samuel Koren
------------------------------
Its Secretary
/s/ Robert G. Schatz
------------------------------
Officer: Robert G. Schatz
65
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EXHIBIT 10.8
EMPLOYMENT CONTINUITY AGREEMENT
This Agreement made as of October 28, 1996, by and between NORTH EAST
INSURANCE COMPANY, a Maine corporation with its principal place of business in
Scarborough, Maine (the "Company"), and Ronald A. Libby ("Officer"), of Gorham,
Maine.
WHEREAS, the Officer has been employed by the Company since December 5,
1994 and is presently serving in the capacity of Chief Operating Officer; and
WHEREAS, the Company desires to assure itself of the continued employment
and sound judgment of the Officer in the event of any potential change in
control of the Company;
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained and for other good and valuable consideration, the receipt and
adequacy of which is acknowledged by each of the parties, the Officer and the
Company agree as follows:
1. TERM OF THE AGREEMENT AND RENEWAL. The term of this Agreement shall be for
a period beginning on the date hereof and ending December 31, 1999, provided
that on January 1, 2000, and on each anniversary thereof (a "Renewal Date"),
this term shall automatically be extended for one year unless at least one (1)
year prior to any such Renewal Date, either party shall have given written
notice to the other that such renewal shall not take place. Such notice may be
given by the Company only upon the affirmative vote of the Board of Directors or
a duly authorized committee thereof. Notwithstanding any provision above, this
Agreement shall remain effective for so long as necessary to enforce all rights
accrued and obligations arising prior to the end of the Term.
2. "CHANGE IN CONTROL EVENT." Each of the following events shall constitute a
"Change in Control Event" for purposes of this Agreement:
a. Any person acquires or holds beneficial ownership of stock
representing twenty percent (20%) or more of the combined voting power
of the Company's then outstanding stock. Notwithstanding the above, if
any person, prior to attaining beneficial ownership equaling or
exceeding such level, has entered into an agreement approved by the
affirmative vote of at least two-thirds of the Directors then in
office and providing for restrictions on such person's acquisition of
Company stock and other matters involving control of the Company (a
"Standstill Agreement"), then, so long as such Standstill Agreement is
in effect and has not been breached by such person, neither such
person's beneficial ownership of Company stock nor that of any
affiliate of such person shall constitute a Change in Control.
For purposes of this Agreement, "beneficial ownership" shall be
determined in accordance with Regulation 13D under the Securities
Exchange Act of 1934, or any similar successor regulation or rule; and
the term "person" shall include, without limitation, any individual,
corporation, limited liability company, partnership, trust or
association, or any group or combination thereof.
b. Within any twenty-five (25) month period, individuals who were Outside
Directors at the beginning of such period, together with any other
Outside Directors serving as directors of the Company pursuant to
nominations approved or ratified by a majority of the Outside
Directors in office immediately prior to such respective elections,
cease to constitute a majority of the board of directors of the
Company.
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<PAGE> 2
For purposes of this Agreement, an "Outside Director" as of a
given date shall mean a member of the Company's board of directors who
(x) is not then a beneficial owner of stock representing twenty
percent (20%) or more of the combined voting power of the then
outstanding stock of the Company and not an officer, director or
affiliate of any such owner, (y) has been a director of the Company
throughout the six (6) month period prior to such date and (z) has not
been an employee of the Company at any time during the six (6) month
period prior to such date.
c. The Company ceases to be a reporting company pursuant to Section 13(a)
of the Securities Exchange Act of 1934 or any similar successor
provision.
d. The Company's shareholders approve:
(i) Any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or
pursuant to which shares of Company common stock would be
converted into cash, securities or other property, other than a
merger or consolidation of the Company in which the holders of
the Company's common stock immediately prior to the merger or
consolidation own, directly or indirectly, in the aggregate a
majority of each class of stock entitled to vote for the election
of directors of the surviving corporation (or the equivalent
controlling interest in any surviving entity other than a
corporation) immediately after the merger or consolidation; or
(ii) Any sale, lease, exchange, liquidation or other transfer (in
one transaction or a series of transactions) of all or
substantially all of the assets of the Company.
3. RIGHTS UPON INVOLUNTARY TERMINATION OF EMPLOYMENT. If, within twelve (12)
months after the occurrence of a Change in Control Event, the Company terminates
the Officer's employment for any reason other than Good Cause as defined in
Paragraph 6, or if the Officer voluntarily terminates employment for Good Reason
as defined in Paragraph 4, the Company shall provide the Officer with the
following:
a. Within thirty (30) days of such termination, a lump sum cash payment
in an amount equal to two hundred percent (200%) of the Officer's
annual base salary in effect upon the date of the Change in Control
Event plus any profit-sharing award made to the Officer in respect to
the most recently completed calendar year.
b. The continuation of the Officer's participation and the participation
of his dependents (to the extent they were participating prior to this
termination of employment) in the Company's health, life, disability
and other employee benefit plans, programs and arrangements as
applicable to the Officer on the date of the Change in Control Event
(excluding any Retirement Plan or 401(k) Plan) for a period of
twenty-four (24) months after such termination as if he were still
employed during such period; provided, however, if such participation
in any such plan, program or arrangement is specifically prohibited by
the terms thereof, the Company shall provide the Officer (and his
dependents) with benefits substantially similar to those which he was
entitled to receive under such plan, program or arrangement
immediately prior to his termination of employment. For purposes of
this Paragraph 3(b), any employee benefit determined with reference to
the Officer's compensation or earnings shall be based on his annual
base salary in effect upon the date of the Change in Control Event
unless otherwise provided under the terms of the applicable employee
benefit plan, program or arrangement.
4. DEFINITION OF TERMINATION BY THE OFFICER FOR GOOD REASON. For purposes of
this Agreement, termination by the Officer of his employment for "Good Reason,"
except upon the Officer's express written consent otherwise, shall mean:
a. The assignment of duties to the Officer which result in his having
significantly less authority or responsibility than he had prior to
the Change in Control Event; or
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<PAGE> 3
b. The Officer's removal from, or any failure to re-elect him to, any
position he held immediately prior to the Change in Control Event with
either the Company or any majority-owned subsidiary; or
c. A reduction of the Officer's annual base salary or benefits in effect
on the date of the Change in Control Event or as the same may be
increased from time to time thereafter; or
d. The relocation of the Company's principal executive offices to a place
outside of the greater Portland, Maine, area, or the Company's
transferring or assigning the Officer to a place of employment other
than its principal executive offices, except for required business
travel to an extent substantially consistent with his business travel
obligations immediately prior to the Change in Control Event; or
e. The company's failure to provide the Officer with substantially the
same health, life and other employee benefit plans, programs and
arrangements (specifically including the Company's stock plans and
compensation and incentive plans, as the same may be amended in the
future), and substantially the same perquisites of employment, as
provided to him immediately prior to the Change in Control Event or as
the same may be increased thereafter; or
f. The Company's failure to provide the Officer with substantially the
same support staff as provided to him immediately prior to the Change
in Control Event; or
g. The Company's failure to obtain from any successor a satisfactory
agreement to assume and perform the terms of this Agreement.; or
h. Breach of this Employment Continuity Agreement or any Employment
Agreement between the Officer and the Company by the Company.
5. RIGHTS UPON A VOLUNTARY TERMINATION OF EMPLOYMENT.
a. If the Officer remains in active employment through the last day of
the sixth full calendar month following the occurrence of a Change in
Control Event (the Stay On Date), but then voluntarily terminates his
employment, other than for Good Reason as defined in Paragraph 4,
within 90 days after the Stay On Date, the Company shall, subject to
the provisions of Paragraph 5(b) below, provide the Officer with the
following:
(i) Within thirty (30) days of such termination of
employment, a lump sum cash payment in an amount equal to fifty
percent (50%) of the Officer's annual base salary in effect upon
the date of the Change in Control Event.
(ii) No later than the end of the sixth full calendar month
following such termination of employment, a second lump sum cash
payment in an amount equal to fifty percent (50%) of the
Officer's annual base salary in effect upon the date of the
Change in Control Event.
(iii) Continuation of benefits and rights as described in
Paragraph 3(b) above, except that the period described in
Paragraph 3(b) shall be twelve (12) months.
b. If the Officer terminates employment under this Paragraph 5, then, in
return for his rights hereunder, he agrees that for the period
extending through the sixth full calendar month following his
termination of employment (the "Restricted Period"), the Officer shall
not, (i) directly or indirectly, for his own account or for the
account of others, as an officer, director, stockholder, owner,
partner, employee, promoter, consultant, manager or otherwise,
participate in the promotion, financing, ownership, operation, or
management of, or assist in or carry on through a proprietorship,
corporation, partnership or other form of business
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<PAGE> 4
entity or otherwise, the business of property and casualty insurance
(the "Business"), in any place in which the Company is conducting or
is actively planning to conduct Business as of the date of such
termination, (ii) solicit or contact in an effort to do business with
any person who was a customer of the Company during the term of this
Agreement, or any affiliate of any such person, if such solicitation
or contact is in competition with the Company, or (ii) whether for his
own account or for the account of any other person (excluding the
Company), solicit or induce any of the Company's employees to leave
their employment with the Company or accept employment with anyone
else or hire any such employees. A breach of any of the covenants
contained in this Paragraph 5(b) may result in material, irreparable
injury to the Company for which there is no adequate remedy at law,
that it will not be possible to measure damages for such injuries
precisely and that, in the event of such a breach, any rights to
compensation hereunder shall be forfeited and the Company shall be
entitled to injunctive relief.
6. TERMINATION FOR GOOD CAUSE. Notwithstanding the provisions of Paragraph 5
hereof, the Company retains the right to terminate the Officer for "Good Cause,"
in which event he shall not be entitled to receive any payment or benefits
pursuant to this Agreement. "Good Cause" shall mean:
a. The Officer's conviction, by a court of competent jurisdiction, of or
the Officer's plea of nolo contendere to a crime adversely reflecting
on his honesty, trustworthiness or fitness to carry out the
responsibilities of his position with the Company in other respects;
b. A willful breach by him of any material duty or obligation imposed
upon him under the terms of his employment, as those terms existed
immediately prior to any Change in Control Event, and his failure to
cure such breach within thirty (30) days after receiving written
notice thereof from the Company; or
c. The Officer's continued substantial neglect of duties, after written
notice from the Board and an opportunity to correct.
7. NOTICES. Any and all notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given when deposited in the
United States mails, certified or registered mail, postage prepaid and addressed
as follows:
To the Officer: Ronald A. Libby
12 Ledge Hill Rd.
Gorham, ME 04038
To the Company: North East Insurance Company
482 Payne Road
Scarborough, ME 04074
Either party may change, by notice to the other, the address to which notices to
it are to be addressed.
8. APPLICABLE LAW, TAXES, BINDING AGREEMENT, SEVERABILITY, CONSTRUCTION. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Maine, except as to any matter which is preempted by federal law.
Notwithstanding anything to the contrary herein contained, the Company may
withhold from any amounts payable under this Agreement all federal, state or
other taxes or assessments which may be required by applicable statute or
regulation to be withheld. This Agreement shall be binding upon and inure to the
benefit of the Officer, his heirs, assigns, executors and legal representatives;
and the Company, its successors and assigns.
If any provision of this Agreement shall be held invalid or unenforceable
by a court of competent jurisdiction, the remainder of this Agreement shall not
be affected thereby.
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<PAGE> 5
The Outside Directors shall have the authority to construe and interpret
this Agreement on behalf of the Company, and any such determination by the
Outside Directors shall be conclusive on the Company.
9. LIMITATIONS ON AMOUNTS TO BE RECEIVED. If it is determined that part or all
of the compensation and benefits to be paid to the Officer under this Agreement
will result in a loss of deduction to the Company under Section 280G of the
Internal Revenue Code of 1986 as amended (the "Code"), the following limitation
shall apply:
If the aggregate present value of such parachute payments (the "Parachute
Amount") equals or exceeds 2.99 times the Officer's "Base Amount" as defined in
Section 280G of the Code, then the amounts otherwise payable to or for the
benefit of the Officer pursuant to this Agreement, and taken into account in
calculating the Parachute Amount (the "Termination Payments"), shall be reduced,
to the extent necessary so that the Parachute Amount is equal to 2.99 times the
Officer's "Base Amount." The Company shall retain a qualified independent
advisor in order to make any determination or calculations necessary in applying
the above-described limitations.
10. EXECUTION OF FURTHER DOCUMENTS. In the event the Officer receives payments
or benefits pursuant to the terms hereof and the Company's independent counsel
deems it necessary for the Company to receive a release or other acknowledgment,
the Officer agrees to execute any such document, as may be reasonably required
as a condition of his receipt of such payment or benefits.
11. AMENDMENT AND WAIVER. This Agreement may be amended only in writing, by the
parties hereto, and no condition or provision of this Agreement may be waived
except in writing. Waiver by either party at any time of the other party's
breach of, or failure to comply with, any condition or provision of this
Agreement to be performed by such other party shall not be deemed a waiver of
any other provision or condition at the same time or of any provision or
condition at any prior or subsequent time, unless specifically stated therein.
12. FUNDING. This Agreement shall not be construed to create or require the
Company to create a Trust or to otherwise act to fund the amounts payable
hereunder.
13. ASSIGNMENT. Except as required by law, the right to receive payments
hereunder shall not be subject to alienation, assignment, garnishment,
attachment, execution or levy of any kind, and any attempt to cause such
payments to be so subject shall not be recognized by the Company.
14. NO ADDITIONAL EFFECT. Except as expressly provided herein, nothing
contained herein shall be construed to provide the Officer with any specific
period of employment, right to be retained in the service of the Company or
other rights, nor shall this Agreement be construed to otherwise limit the
rights of the Company to discharge or take other action with respect to the
Officer.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
NORTH EAST INSURANCE COMPANY
By: /s/ Robert G. Schatz
-------------------------------
Its President
/s/ Ronald A. Libby
-------------------------------
Officer: Ronald A. Libby
70
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EXHIBIT 10.9
EMPLOYMENT CONTINUITY AGREEMENT
This Agreement made as of October 28, 1996, by and between NORTH EAST
INSURANCE COMPANY, a Maine corporation with its principal place of business in
Scarborough, Maine (the "Company"), and Samuel M. Koren ("Officer"), of
Portland, Maine.
WHEREAS, the Officer has been employed by the Company since November 14,
1977 and is presently serving in the capacity of Senior Vice President; and
WHEREAS, the Company desires to assure itself of the continued employment
and sound judgment of the Officer in the event of any potential change in
control of the Company;
NOW, THEREFORE, in consideration of the mutual promises and undertakings
herein contained and for other good and valuable consideration, the receipt and
adequacy of which is acknowledged by each of the parties, the Officer and the
Company agree as follows:
1. TERM OF THE AGREEMENT AND RENEWAL. The term of this Agreement shall be for
a period beginning on the date hereof and ending December 31, 1999, provided
that on January 1, 2000, and on each anniversary thereof (a "Renewal Date"),
this term shall automatically be extended for one year unless at least one (1)
year prior to any such Renewal Date, either party shall have given written
notice to the other that such renewal shall not take place. Such notice may be
given by the Company only upon the affirmative vote of the Board of Directors or
a duly authorized committee thereof. Notwithstanding any provision above, this
Agreement shall remain effective for so long as necessary to enforce all rights
accrued and obligations arising prior to the end of the Term.
2. "CHANGE IN CONTROL EVENT." Each of the following events shall constitute a
"Change in Control Event" for purposes of this Agreement:
a. Any person acquires or holds beneficial ownership of stock
representing twenty percent (20%) or more of the combined voting power
of the Company's then outstanding stock. Notwithstanding the above, if
any person, prior to attaining beneficial ownership equaling or
exceeding such level, has entered into an agreement approved by the
affirmative vote of at least two-thirds of the Directors then in
office and providing for restrictions on such person's acquisition of
Company stock and other matters involving control of the Company (a
"Standstill Agreement"), then, so long as such Standstill Agreement is
in effect and has not been breached by such person, neither such
person's beneficial ownership of Company stock nor that of any
affiliate of such person shall constitute a Change in Control.
For purposes of this Agreement, "beneficial ownership" shall be
determined in accordance with Regulation 13D under the Securities
Exchange Act of 1934, or any similar successor regulation or rule; and
the term "person" shall include, without limitation, any individual,
corporation, limited liability company, partnership, trust or
association, or any group or combination thereof.
b. Within any twenty-five (25) month period, individuals who were Outside
Directors at the beginning of such period, together with any other
Outside Directors serving as directors of the Company pursuant to
nominations approved or ratified by a majority of the Outside
Directors in office immediately prior to such respective elections,
cease to constitute a majority of the board of directors of the
Company.
71
<PAGE> 2
For purposes of this Agreement, an "Outside Director" as of a
given date shall mean a member of the Company's board of directors who
(x) is not then a beneficial owner of stock representing twenty
percent (20%) or more of the combined voting power of the then
outstanding stock of the Company and not an officer, director or
affiliate of any such owner, (y) has been a director of the Company
throughout the six (6) month period prior to such date and (z) has not
been an employee of the Company at any time during the six (6) month
period prior to such date.
c. The Company ceases to be a reporting company pursuant to Section 13(a)
of the Securities Exchange Act of 1934 or any similar successor
provision.
d. The Company's shareholders approve:
(i) Any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or
pursuant to which shares of Company common stock would be
converted into cash, securities or other property, other than a
merger or consolidation of the Company in which the holders of
the Company's common stock immediately prior to the merger or
consolidation own, directly or indirectly, in the aggregate a
majority of each class of stock entitled to vote for the election
of directors of the surviving corporation (or the equivalent
controlling interest in any surviving entity other than a
corporation) immediately after the merger or consolidation; or
(ii) Any sale, lease, exchange, liquidation or other transfer (in
one transaction or a series of transactions) of all or
substantially all of the assets of the Company.
3. RIGHTS UPON INVOLUNTARY TERMINATION OF EMPLOYMENT. If, within twelve (12)
months after the occurrence of a Change in Control Event, the Company terminates
the Officer's employment for any reason other than Good Cause as defined in
Paragraph 6, or if the Officer voluntarily terminates employment for Good Reason
as defined in Paragraph 4, the Company shall provide the Officer with the
following:
a. Within thirty (30) days of such termination, a lump sum cash payment
in an amount equal to two hundred percent (200%) of the Officer's
annual base salary in effect upon the date of the Change in Control
Event plus any profit-sharing award made to the Officer in respect to
the most recently completed calendar year.
b. The continuation of the Officer's participation and the participation
of his dependents (to the extent they were participating prior to this
termination of employment) in the Company's health, life, disability
and other employee benefit plans, programs and arrangements as
applicable to the Officer on the date of the Change in Control Event
(excluding any Retirement Plan or 401(k) Plan) for a period of
twenty-four (24) months after such termination as if he were still
employed during such period; provided, however, if such participation
in any such plan, program or arrangement is specifically prohibited by
the terms thereof, the Company shall provide the Officer (and his
dependents) with benefits substantially similar to those which he was
entitled to receive under such plan, program or arrangement
immediately prior to his termination of employment. For purposes of
this Paragraph 3(b), any employee benefit determined with reference to
the Officer's compensation or earnings shall be based on his annual
base salary in effect upon the date of the Change in Control Event
unless otherwise provided under the terms of the applicable employee
benefit plan, program or arrangement.
4. DEFINITION OF TERMINATION BY THE OFFICER FOR GOOD REASON. For purposes of
this Agreement, termination by the Officer of his employment for "Good Reason,"
except upon the Officer's express written consent otherwise, shall mean:
a. The assignment of duties to the Officer which result in his having
significantly less authority or responsibility than he had prior to
the Change in Control Event; or
72
<PAGE> 3
b. The Officer's removal from, or any failure to re-elect him to, any
position he held immediately prior to the Change in Control Event with
either the Company or any majority-owned subsidiary; or
c. A reduction of the Officer's annual base salary or benefits in effect
on the date of the Change in Control Event or as the same may be
increased from time to time thereafter; or
d. The relocation of the Company's principal executive offices to a place
outside of the greater Portland, Maine, area, or the Company's
transferring or assigning the Officer to a place of employment other
than its principal executive offices, except for required business
travel to an extent substantially consistent with his business travel
obligations immediately prior to the Change in Control Event; or
e. The company's failure to provide the Officer with substantially the
same health, life and other employee benefit plans, programs and
arrangements (specifically including the Company's stock plans and
compensation and incentive plans, as the same may be amended in the
future), and substantially the same perquisites of employment, as
provided to him immediately prior to the Change in Control Event or as
the same may be increased thereafter; or
f. The Company's failure to provide the Officer with substantially the
same support staff as provided to him immediately prior to the Change
in Control Event; or
g. The Company's failure to obtain from any successor a satisfactory
agreement to assume and perform the terms of this Agreement; or
h. Breach of this Employment Continuity Agreement or any Employment
Agreement between the Officer and the Company by the Company.
5. RIGHTS UPON A VOLUNTARY TERMINATION OF EMPLOYMENT.
a. If the Officer remains in active employment through the last day of
the sixth full calendar month following the occurrence of a Change in
Control Event (the Stay On Date), but then voluntarily terminates his
employment, other than for Good Reason as defined in Paragraph 4,
within 90 days after the Stay On Date, the Company shall, subject to
the provisions of Paragraph 5(b) below, provide the Officer with the
following:
(i) Within thirty (30) days of such termination of employment, a
lump sum cash payment in an amount equal to fifty percent (50%)
of the Officer's annual base salary in effect upon the date of
the Change in Control Event.
(ii) No later than the end of the sixth full calendar month
following such termination of employment, a second lump sum cash
payment in an amount equal to fifty percent (50%) of the
Officer's annual base salary in effect upon the date of the
Change in Control Event.
(iii) Continuation of benefits and rights as described in
Paragraph 3(b) above, except that the period described in
Paragraph 3(b) shall be twelve (12) months.
b. If the Officer terminates employment under this Paragraph 5, then, in
return for his rights hereunder, he agrees that for the period
extending through the sixth full calendar month following his
termination of employment (the "Restricted Period"), the Officer shall
not, (i) directly or indirectly, for his own account or for the
account of others, as an officer, director, stockholder, owner,
partner, employee, promoter, consultant, manager or otherwise,
participate in the promotion, financing, ownership, operation, or
management of, or assist in or carry on through a proprietorship,
corporation, partnership or other form of business
73
<PAGE> 4
entity or otherwise, the business of property and casualty insurance
(the "Business"), in any place in which the Company is conducting or
is actively planning to conduct Business as of the date of such
termination, (ii) solicit or contact in an effort to do business with
any person who was a customer of the Company during the term of this
Agreement, or any affiliate of any such person, if such solicitation
or contact is in competition with the Company, or (ii) whether for his
own account or for the account of any other person (excluding the
Company), solicit or induce any of the Company's employees to leave
their employment with the Company or accept employment with anyone
else or hire any such employees. A breach of any of the covenants
contained in this Paragraph 5(b) may result in material, irreparable
injury to the Company for which there is no adequate remedy at law,
that it will not be possible to measure damages for such injuries
precisely and that, in the event of such a breach, any rights to
compensation hereunder shall be forfeited and the Company shall be
entitled to injunctive relief.
6. TERMINATION FOR GOOD CAUSE. Notwithstanding the provisions of Paragraph 5
hereof, the Company retains the right to terminate the Officer for "Good Cause,"
in which event he shall not be entitled to receive any payment or benefits
pursuant to this Agreement. "Good Cause" shall mean:
a. The Officer's conviction, by a court of competent jurisdiction, of or
the Officer's plea of nolo contendere to a crime adversely reflecting
on his honesty, trustworthiness or fitness to carry out the
responsibilities of his position with the Company in other respects;
b. A willful breach by him of any material duty or obligation imposed
upon him under the terms of his employment, as those terms existed
immediately prior to any Change in Control Event, and his failure to
cure such breach within thirty (30) days after receiving written
notice thereof from the Company; or
c. The Officer's continued substantial neglect of duties, after written
notice from the Board and an opportunity to correct.
7. NOTICES. Any and all notices required or permitted to be given hereunder
shall be in writing and shall be deemed to have been given when deposited in the
United States mails, certified or registered mail, postage prepaid and addressed
as follows:
To the Officer: Samuel M. Koren
53 Bartlett St.
Portland, ME 04103
To the Company: North East Insurance Company
482 Payne Road
Scarborough, ME 04074
Either party may change by notice to the other the address to which notices to
it are to be addressed.
8. APPLICABLE LAW, TAXES, BINDING AGREEMENT, SEVERABILITY, CONSTRUCTION. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Maine, except as to any matter which is preempted by federal law.
Notwithstanding anything to the contrary herein contained, the Company may
withhold from any amounts payable under this Agreement all federal, state or
other taxes or assessments which may be required by applicable statute or
regulation to be withheld. This Agreement shall be binding upon and inure to the
benefit of the Officer, his heirs, assigns, executors and legal representatives;
and the Company, its successors and assigns.
If any provision of this Agreement shall be held invalid or unenforceable
by a court of competent jurisdiction, the remainder of this Agreement shall not
be affected thereby.
74
<PAGE> 5
The Outside Directors shall have the authority to construe and interpret
this Agreement on behalf of the Company, and any such determination by the
Outside Directors shall be conclusive on the Company.
9. LIMITATIONS ON AMOUNTS TO BE RECEIVED. If it is determined that part or all
of the compensation and benefits to be paid to the Officer under this Agreement
will result in a loss of deduction to the Company under Section 280G of the
Internal Revenue Code of 1986 as amended (the "Code"), the following limitation
shall apply:
If the aggregate present value of such parachute payments (the "Parachute
Amount") equals or exceeds 2.99 times the Officer's "Base Amount" as defined in
Section 280G of the Code, then the amounts otherwise payable to or for the
benefit of the Officer pursuant to this Agreement, and taken into account in
calculating the Parachute Amount (the "Termination Payments"), shall be reduced,
to the extent necessary so that the Parachute Amount is equal to 2.99 times the
Officer's "Base Amount." The Company shall retain a qualified independent
advisor in order to make any determination or calculations necessary in applying
the above-described limitations.
10. EXECUTION OF FURTHER DOCUMENTS. In the event the Officer receives payments
or benefits pursuant to the terms hereof and the Company's independent counsel
deems it necessary for the Company to receive a release or other acknowledgment,
the Officer agrees to execute any such document, as may be reasonably required
as a condition of his receipt of such payment or benefits.
11. AMENDMENT AND WAIVER. This Agreement may be amended only in writing, by the
parties hereto, and no condition or provision of this Agreement may be waived
except in writing. Waiver by either party at any time of the other party's
breach of, or failure to comply with, any condition or provision of this
Agreement to be performed by such other party shall not be deemed a waiver of
any other provision or condition at the same time or of any provision or
condition at any prior or subsequent time, unless specifically stated therein.
12. FUNDING. This Agreement shall not be construed to create or require the
Company to create a Trust or to otherwise act to fund the amounts payable
hereunder.
13. ASSIGNMENT. Except as required by law, the right to receive payments
hereunder shall not be subject to alienation, assignment, garnishment,
attachment, execution or levy of any kind, and any attempt to cause such
payments to be so subject shall not be recognized by the Company.
14. NO ADDITIONAL EFFECT. Except as expressly provided herein, nothing
contained herein shall be construed to provide the Officer with any specific
period of employment, right to be retained in the service of the Company or
other rights, nor shall this Agreement be construed to otherwise limit the
rights of the Company to discharge or take other action with respect to the
Officer.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
NORTH EAST INSURANCE COMPANY
By: /s/ Robert G. Schatz
-------------------------------
Its President/CEO
/s/ Samuel Koren
------------------------------
Officer: Samuel M. Koren
75
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