As filed with the Securities and Exchange Commission on November 12, 1998
REGISTRATION NO. 333-62881
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NORTH EAST INSURANCE COMPANY
(Name of small business issuer in its charter)
MAINE 6331 01-0278387
(State of (Primary Standard Industrial (IRS Employer
Incorporation) Classification Code Number) I.D. Number)
482 PAYNE ROAD
SCARBOROUGH, MAINE 04074
(207) 883-2232
(Address and Telephone Number of Principal Executive Office
and Principal Place of Business)
ROBERT G. SCHATZ
PRESIDENT AND CHIEF EXECUTIVE OFFICER
482 PAYNE ROAD
SCARBOROUGH, MAINE 04074
(207) 883-2232
(Name, Address and Telephone Number of Agent for Service)
Copies to:
GREGORY S. FRYER, ESQ.
VERRILL & DANA, LLP
ONE PORTLAND SQUARE
PORTLAND, MAINE 04112-0586
(207) 774-4000
<PAGE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
==============================================================================
<PAGE>
[LOGO] NORTH EAST INSURANCE COMPANY
RIGHTS OFFERING PROSPECTUS
North East Insurance Company ("NEIC" or the "Company") is offering
3,049,089 shares of its Common Stock to qualified shareholders. To be a
qualified shareholder, you must have owned NEIC Common Stock on November 9,
1998. If you are a qualified shareholder, you may buy one share of Common
Stock at a price of $2.25 per share for every share of Common Stock you owned
on that date. This right is called the "Basic Subscription Privilege."
Subject to certain other conditions, you also may offer to buy additional
Common Stock at that same price. This right is called the "Oversubscription
Privilege."
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Offering Price Per Share . . . . . . . . . . . . . . . . $ 2.25
Total Proceeds to NEIC (if all shares are sold) . . . . $6,860,450.25
</TABLE>
Trading prices of the Common Stock are quoted on the NASDAQ SmallCap
Market under the symbol "NEIC." On November 10, 1998, the last reported
sales price for the Common Stock was $2.0625 per share.
THIS RIGHTS OFFERING WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON
DECEMBER 21, 1998. IF YOU WANT TO PARTICIPATE IN THIS RIGHTS OFFERING,
WE RECOMMEND THAT YOU SUBMIT, OR INSTRUCT YOUR BROKER OR BANK TO SUBMIT
ON YOUR BEHALF, SUBSCRIPTION DOCUMENTS AT LEAST 10 DAYS BEFORE THAT
DEADLINE. See page 8 of this Prospectus for further instructions on
submitting subscriptions. All subscriptions will be held in escrow by our
Subscription Agent (American Stock Transfer & Trust Company) through the
Expiration Date of the Rights Offering. We reserve the right to extend the
Expiration Date. We also reserve the right to cancel the offering at any time
before the Expiration Date.
We are conducting this Rights Offering in order to raise more capital
for NEIC. While we expect to close on the offering only if the total
proceeds will be at least $3,000,000, there is no minimum number of shares
that we must sell in order to complete the offering and we reserve the right
to close on the offering regardless of the actual number of shares
subscribed for. Shareholders who do not participate in the Rights Offering
will continue to own their same number of shares, but will own a smaller
percentage of the total shares outstanding. The purchase rights themselves
are not transferable.
SEE "RISK FACTORS" ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS THAT
YOU SHOULD CONSIDER IN CONNECTION WITH THIS RIGHTS OFFERING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SHARES (NOR DOES IT
SOLICIT ANY OFFERS TO BUY THE SHARES) IN ANY STATE WHERE THIS OFFER OR SALE IS
PROHIBITED.
The date of this Prospectus is November 12, 1998.
<PAGE>
TABLE OF CONTENTS
Page
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Summary 1
Risk Factors 4
Competition
Loss Reserves
Insurance Pricing and Profitability
Cyclical Nature of Industry
Geographic Concentration
Reinsurance
Regulation
Factors Affecting Change of Control
Dependence on Key Personnel
Volatility of Stock Price
Irrevocability of Subscriptions
Determination of Offering Price
Use of Proceeds 5
Terms of the Rights Offering 6
Determination of Offering Price 8
Subscription Procedures 9
Certain Ownership Limits and Reporting Requirements 9
State and Foreign Securities Laws 10
No Board Recommendation 10
Federal Income Tax Consequences 10
Description of Business 15
Management's Discussion and Analysis 22
Interim Periods 22
Forward-Looking Information 23
Management 25
Certain Relationships and Related-Party Transactions 26
Principal Shareholders 26
Description of Capital Stock 27
Legal Matters 29
Experts 29
Financial Statements 30
Appendix A-Interim Financial Information
Appendix B-Form of Representation Letter
AVAILABLE INFORMATION
NEIC is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and files periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). Reports, proxy statements and other information
concerning NEIC may be inspected and copied at the Commission's Public
Reference Section, Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, where copies may be obtained at prescribed rates, as
well as at the following regional offices: Northeast Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048; and Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. The Commission maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements, and other information
regarding NEIC. The NEIC Common Stock is listed on The Nasdaq SmallCap
Market. Copies of reports, proxy statements and other information
concerning NEIC may also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington,
D.C. 20006.
<PAGE>
NEIC has filed a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, with the Commission covering the shares
of NEIC Common Stock to be issued. You should refer to the Registration
Statement for further information with respect to NEIC and the NEIC Common
Stock
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All reports and other documents filed by NEIC after the date of this
Prospectus pursuant to the Securities Exchange Act and prior to the
termination of this offering shall be incorporated by reference herein and
be a part hereof from the dates of filing of such reports or documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be modified or superseded to the
extent that a statement contained herein or in another document which also
is incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not, except as so modified or
superseded, constitute a part of this Prospectus.
This prospectus incorporates documents by reference which are not
presented herein or delivered herewith. These documents (other than
exhibits to such documents) are available without charge upon request to:
North East Insurance Company, 482 Payne Road, P.O. Box 1418, Scarborough,
Me 04074-1418, Attention: Treasurer, Telephone: (207) 883-2232.
<PAGE>
NORTH EAST INSURANCE COMPANY
482 Payne Road, 4th Floor
P.O. Box 1418
Scarborough, Maine 04074-1418
Telephone: 207-883-2232
SUMMARY
This summary highlights some information from this Prospectus. We
recommend that you read the entire Prospectus carefully.
The Company
North East Insurance Company ("NEIC" or the "Company") has been writing
property and casualty insurance in Maine since 1966. NEIC has a wholly-owned
insurance company subsidiary, American Colonial Insurance Company ("ACIC"),
which formerly wrote insurance in New York State.
Our principal products are personal and commercial automobile insurance,
including both automobile liability and automobile physical damage. We also
offer other types of insurance, such as general liability, commercial multi-
peril, inland marine and fire. We no longer write homeowners insurance,
having withdrawn from this market in 1995.
Reasons for the Rights Offering
Through the Rights Offering, we are seeking additional capital to
support future growth of NEIC. The desire for more capital is due both to
regulatory and business reasons.
Capital Requirements. State law requires insurers to maintain certain
amounts of capital in relation to the net amount of insurance premiums
written. Under guidelines of the National Association of Insurance
Commissioners, the ratio of net premiums written to statutory surplus
should not exceed 3 to 1. Our net premiums written for 1997
($14,225,224) were 2.24 times our statutory surplus ($6,358,763) at the
end of that year -- well within the guidelines. Thus, our surplus is
sufficient to permit growth in the business. By raising additional
capital now, however, we would have even greater leeway to increase our
premium revenues in the future.
Insurance Rating. In early 1997 A.M. Best (a prominent rating agency
for insurance companies) upgraded NEIC's rating five levels, from a
D+ to a B-. We are now seeking a further increase in our Best rating,
based on continued strengthening of NEIC's financial position. Our
management believes that the addition of new capital through a
successful stock offering may increase the likelihood of an increase in
this rating. A further improvement in the Best rating could strengthen
NEIC's competitive position in the marketplace.
Agency Relationships. NEIC distributes its insurance products through
a network of independent agents. Our management believes that the
addition of new capital through a successful stock offering and the
resulting increase in the Company's financial resources may make
NEIC's product line more appealing to agents, even before any increase
in our Best rating.
Available Resources. If the Rights Offering succeeds, our management
intends to accelerate its plans for seeking growth in the business.
Given the right opportunities, we might also use the proceeds to
expand our business outside Maine, perhaps by purchasing insurers or
insurance agencies in other states. Such a program of growth and
expansion, if successful, would require the hiring of additional
support personnel and the purchase of additional equipment and
software. There is no assurance that this strategy would be
successful.
<PAGE> 1
Dilution
Through the Rights Offering, we are offering Common Stock at a price
determined by the Board of Directors. This price is less than NEIC's book value
per share, and therefore the sale of the stock will immediately reduce the
book value per share. Also, if all of the offered shares are sold, the number
of outstanding shares will double, and therefore a nonsubscribing shareholder's
percentage ownership will be one-half of his or her former percentage
ownership. Shareholders who exercise their Basic Subscription Privilege in
full will not incur a decline in percentage ownership.
Risk Factors
An investment in NEIC Common Stock involves substantial risks that each
prospective purchaser should consider. See RISK FACTORS at page 4 below.
Terms of the Rights Offering
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Eligible Shareholders................ You will not be eligible to purchase stock through this Rights
Offering unless you already owned NEIC Common Stock on
November 9,1998.
Subscription Rights.................. If you are an eligible shareholder, you will have two different
subscription rights:
Basic Subscription Privilege. First, you will have the right
to purchase one share of Common Stock for each share you owned
as of November 9, 1998. You may also purchase a smaller number
of shares through the Rights Offering, if you wish. The
offering price is $2.25 per share.
Oversubscription Privilege. If you exercise your Basic
Subscription Privilege in full, you also may offer to buy
additional shares. In exercising this right, you will specify
the maximum number of shares that you are willing to buy from
NEIC at $2.25 per share.
Ownership Limits..................... Maine and New York insurance laws prohibit any person or
group from acquiring 10% or more of the outstanding stock
of any insurer, unless that person or group first obtains
permission from state insurance regulators.
As a condition of the Rights Offering, we are limiting each
subscriber to an ownership position of no more than 9.9% of the
total outstanding shares. Subscribers who are purchasing more
than 200,000 shares (except a broker or other person holding
shares for the benefit of others, none of whom is purchasing
more than 200,000 shares) must provide us with information on
the shares owned and the nature of such ownership and must agree
not to acquire NEIC Common Stock in violation of the ownership
limits under Maine and New York insurance laws. We reserve the
right to limit purchases pursuant to the Rights Offering to the
extent necessary to keep a subscriber's percentage ownership from
exceeding 9.9% of the outstanding total number of shares of Common
Stock.
Allocation of Shares................. If we receive proper subscriptions for more shares than are
being offered, we will first fill all exercises of the Basic
Subscription Privilege. We will then allocate the remaining
shares among those who exercise the Oversubscription Privilege,
in proportion to the maximum number of shares that each offers
to purchase within the permitted limit.
<PAGE> 2
Nontransferability of Rights......... The subscription rights may only be exercised by persons
who owned NEIC stock on November 9, 1998 and are
nontransferable to others.
Expiration Date...................... December 21, 1998, at 5:00 p.m., Eastern time, unless extended.
Subscription Procedures.............. To subscribe for shares, you should carefully complete and
sign the Subscription Certificate for this Rights Offering and
forward it to our Subscription Agent (American Stock Transfer &
Trust Company). You must submit a check, money order or wire
transfer for the full amount of your subscription price payable
to the Subscription Agent. If your subscription is accepted in
part and rejected in part (for example, due to oversubscription),
the Subscription Agent will send you a check for the difference. No
interest will be paid on subscription funds. Except with the
consent of the Company once a holder has submitted subscription
documents, his or her exercise of subscription right may not be
revoked.
Persons Wishing to Exercise
Rights for the Benefit of Others..... Brokers, banks, trustees, and other individuals or entities
that hold NEIC Common Stock for the account of others may,
if authorized by the beneficial owner, complete the Subscription
Certificate and submit it to the Subscription Agent with the proper
payment.
Completion of the Offering........... Certificates representing shares of the Common Stock will be
delivered to subscribers as soon as practicable after the
Expiration Date of the Rights Offering. We may delay the
delivery of stock certificates to shareholders purchasing
more than 200,000 shares while we confirm compliance with
stock ownership limits.
Subscription Agent................... Subscription Certificates may be delivered to American
Stock Transfer & Trust Company as follows:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Reorganization Department
Questions ?.......................... If you have any question about this Rights Offering (including
questions about subscription procedures and requests for
additional copies of this Prospectus or other documents), please
contact Robert G. Schatz (President and Chief Executive Officer)
or Linda Hatt (Shareholder Relations). Either of them may be
reached by telephone at 207-883-2232, or by fax at 207-883-1523.
</TABLE>
Amendment, Extension and Termination
We reserve the right to amend or extend the Rights Offering at any time
prior to the Expiration Date. If we make an important change in the terms of
the Rights Offering, we will attempt to notify all shareholders in writing.
Following any important change in terms by us, anyone who had previously
subscribed for shares will have the right to withdraw or modify the prior
subscription. This revocation right will expire 10 business days after
mailing of the notice of the change in terms.
<PAGE> 3
RISK FACTORS
An investment in the Common Stock involves substantial risks.
Prospective purchasers should carefully consider the following risk factors.
Competition. The property and casualty insurance industry is intensely
competitive including in all lines of the Company's business. The
competitive nature of the industry extends to non-standard automobile
insurance, NEIC's largest source of revenues. NEIC competes with
many regional and national insurers (including direct sellers of insurance
products, insurers having their own agency organizations and other insurers
represented by independent agents), many of which have greater financial
resources than NEIC. NEIC depends on independent agents to generate premium
income and competes with other insurance companies for the services of and
the business placed by such independent agents. This competition includes
pricing pressures and one-time agent incentives.
Insurance Pricing and Profitability. The pricing of insurance policies is
determined by an insurer on the basis of projected future claims and
expenses. The actual losses and expenses experienced on such policies may
exceed the costs anticipated. Changes in statutory law and case law can also
dramatically affect the liabilities associated with insurance policies that
have already been sold. Competitive factors, as well as regulatory
constraints, may limit the insurer's ability to increase prices in response
to declines in profitability.
Loss Reserves. The profit and loss reported by a property and casualty
insurer is determined, in part, by setting and adjusting reserves to reflect
management's estimates of ultimate claim cost for claims occurring
(reported and unreported) through the financial statement date. The actual
liability of the insurer for such policies will likely be greater or less
than these estimates. An underestimate of these costs will cause lower
profitability in future periods. Conversely, an overestimate of these
costs will cause greater profitability in future periods.
Cyclical Nature of the Industry. The property and casualty insurance industry
is affected by many factors that cause fluctuations in revenues and profit.
Prices for insurance coverage may vary according to the level of surplus in
the industry. Increases in surplus have generally been accompanied by lower
prices among competing property and casualty insurers. Profitability may
depend on unpredictable factors such as natural disasters (such as storms,
floods and fires), fluctuating interest rates and other changes affecting
insurance companies' investments and the income from those investments,
inflationary pressures affecting the size of losses, and judicial decisions
affecting the scope of insurers' liabilities.
Geographic Concentration. For several years, neither NEIC nor ACIC has
written any insurance business outside Maine. Our results of operations may
therefore be adversely affected by any catastrophic occurrence, destructive
weather pattern, general economic trend or other condition that
disproportionately affects losses or business conditions in Maine.
Reinsurance. NEIC relies upon reinsurance treaties to limit its maximum net
loss from large single risks or risks in concentrated areas, and to increase
its capacity to write insurance. Reinsurance does not relieve NEIC from
liability to its policyholders. If the reinsurer is unable to pay its
share of losses under the reinsurance agreement, NEIC must still honor all
obligations under its insurance policies.
Regulation. The administration of state insurance regulations is vested in
state agencies that have broad discretionary powers and that are concerned
primarily with the protection of policyholders, not shareholders. NEIC and
ACIC are subject to regulation under Maine and New York law. These laws and
regulations cover many aspects of our business, including the pricing of our
insurance policies, the volume of business we may write, the manner in which
we settle claims, mandatory participation in risk pools, the composition of
our investment portfolio, payment of dividends to shareholders, and the
ownership and exercise of control over the corporation. Future changes in
such laws and regulations could have a material adverse effect on the
operations of insurance companies, including NEIC and ACIC.
<PAGE> 4
Factors Affecting Change of Control. Certain factors could delay or impede
the removal of incumbent directors and could make more difficult a merger,
tender offer or proxy contest involving NEIC, even if these steps would
otherwise be beneficial to shareholders. Maine and New York insurance laws
and regulations generally prohibit any person from acquiring 10% or more of
the voting stock of a domestic insurance company without the prior approval of
insurance regulators in those states. The Maine Business Corporation Act
contains certain provisions that restrict business combination transactions
under certain circumstances. The Articles of Incorporation require
supermajority shareholder approval of certain business combinations and other
related-party transactions. NEIC has entered into agreements that would
provide certain key executives with additional severance compensation if their
employment were terminated or materially altered after a change in control.
Dependence on Key Personnel. NEIC relies upon the personal efforts and
abilities of its principal executives, particularly Robert G. Schatz,
President and Chief Executive Officer, and Ronald A. Libby, Chief Operating
Officer. NEIC has entered into employment and option arrangements that
provide these executives with incentives to remain in NEIC's employ. There is
no assurance that these executives will remain with NEIC or that the business
strategies pursued by them will succeed.
Volatility of Stock Price. The market for NEIC Common Stock is thinly traded,
and we expect it to remain so even after completion of the Rights Offering.
Due in part to this limited liquidity, the trading price of the stock tends to
be quite volatile. Factors such as quarterly variations in NEIC's results of
operations and changes in general market conditions could cause the market
price of NEIC's Common Stock to fluctuate significantly. There is no
assurance that the trading price of the Common Stock will remain stable during
the subscription period or that, after completion of the Rights Offering, a
subscribing shareholder will be able to sell the purchased shares at a price
equal to or greater than the offering price.
Irrevocability of Subscriptions. Subscriptions for shares in the Rights
Offering will be irrevocable, except in limited circumstances. Subscribers
will not receive interest on their subscription funds.
Determination of Offering Price. The offering price was determined by NEIC's
Board of Directors without any independent appraisal of value of the Common
Stock. The offering price does not necessarily bear any relationship to the
book value of NEIC's assets, past operations, cash flow, earnings, financial
condition or any other established criteria for value and should not be
considered an indication of the underlying values of NEIC.
USE OF PROCEEDS
If the Rights Offering is fully subscribed, the net proceeds to NEIC are
expected to be approximately $6.8 million, after payment of related fees and
expenses.
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Maximum number of shares offered 3,049,089 shares
Offering price $ 2.25 per share
Gross proceeds $6,860,450
Estimated costs of the offering $ 85,000
Estimated maximum net proceeds $6,775,450
</TABLE>
Initially, the remaining proceeds will be invested as part of NEIC's
portfolio of bonds and stocks. The increase in working capital would allow
us to accelerate somewhat our existing plans for growth of the business in
Maine. The increased capital would also allow us to pursue expansion of our
operations outside Maine, perhaps through acquisitions of insurers or
insurance agencies in other states. Presently, we have no specific plans for
such an acquisition. Any growth in the Company's business would require
additional investment in software, new equipment and additional
personnel.
<PAGE> 5
The increase in our capital will provide us with further leeway to write
more insurance business, while maintaining compliance with applicable capital
requirements.
TERMS OF THE RIGHTS OFFERING
General
Through the Rights Offering, NEIC is offering Common Stock at $2.25
per share. The offer is open only to those who owned NEIC Common Stock on
November 9, 1998. The offer is not open to persons who did not own Common
Stock on that date.
We are offering NEIC shareholders the opportunity to purchase 3,049,089
shares of NEIC Common Stock, which equals the same number of shares as are
presently outstanding. If all the offered shares are purchased, the total
number of outstanding shares will therefore double.
The purchase rights offered to shareholders are of two types:
Basic Subscription Privilege. Each qualified shareholder has the right
to purchase one share of Common Stock for each share he or she owned at
the close of business on November 9, 1998.
Oversubscription Privilege. Any qualified shareholder who fully
exercises the Basic Subscription Privilege may subscribe for additional
shares of NEIC Common Stock. In doing so, the holder will specify the
maximum number of shares he or she is willing to purchase at the offering
price, and will submit a check or money order for the full subscription
price. The Oversubscription Privilege is subject to a 9.9% limitation,
described below.
If NEIC receives subscriptions for more than 3,049,089 shares, we
will allocate the available shares as follows: first, to subscribing
shareholders according to their exercises of the Basic Subscription Privilege;
and second to subscribing shareholders in proportion to their exercise of the
Oversubscription Privilege. Each shareholder's subscription rights will be
subject to the 9.9% limit described below.
Ownership Limits; Subscription Agreement
Maine and New York laws prohibit any person or group from acquiring 10%
or more of the outstanding stock of NEIC without first obtaining permission
from insurance regulators in those states. To avoid inadvertent violations of
these requirements, we are limiting the number of shares that anyone can
purchase through the Rights Offering. Specifically, no shareholder may
purchase shares to the extent he or she would own more than 9.9% of the
outstanding Common Stock upon completion of the Rights Offering.
The Subscription Certificate for the Rights Offering contains certain
provisions designed to enforce the terms of the offering and to prevent
inadvertent violations of the ownership limit. Each subscriber who is
purchasing more than 200,000 shares must (i) certify that the subscriber is
a broker, custodian, trustee, bank or other intermediary holding Common
Stock for the benefit of others, none of whom is purchasing more than
200,000 shares of Common Stock or (ii) provide a Representation Letter in
the form attached to this Prospectus as Appendix B (the "Representation
Letter"). In the Representation Letter, subscribers for more than 200,000
shares of Common Stock will be required to provide information with respect
to the shares of Common Stock owned and the nature of such ownership and to
agree not to acquire shares of Common Stock through or in connection with
the Rights Offering in violation of ownership limits under Maine and New York
insurance laws. Each subscriber for more than 200,000 shares of Common Stock
also must agree to provide NEIC (if so requested within 60 days after the
Expiration Date) reasonable evidence of his or her total share ownership.
NEIC reserves the right to reject any Representation Letter which in
its judgment is incomplete and to limit purchases pursuant to the Rights
Offering to the extent necessary to keep a subscriber's percentage ownership
from
<PAGE> 6
exceeding 9.9% of the outstanding total number of shares of Common Stock,
after giving effect to the issuance of shares pursuant to the offering.
Plan of Distribution
In order to reduce costs, NEIC is making this offering directly to
shareholders. We have not hired an underwriter to conduct this offering for
us, and we will not be paying any commissions or finders fees. However, where
shares are held indirectly through a broker, bank, or other institution, we
will reimburse the institution's reasonable out-of-pocket costs in
distributing this Prospectus and other materials to beneficial owners of the
stock.
We have retained NEIC's transfer agent (American Stock Transfer & Trust
Company) to assist with the offering in the role of Subscription Agent. The
Subscription Agent will hold all subscriptions received from shareholders, and
will be responsible for delivering stock certificates and refunds (in case of
oversubscription or cancellation of the offering) to shareholders. NEIC will
pay all fees and expenses of the Subscription Agent.
Expiration Date; Extension
The Rights Offering will expire at 5:00 p.m., Eastern Time, on
December 21, 1998, unless extended. After the Expiration Date, all
unexercised subscription rights will be null and void. The Company will
notify shareholders of any extension of the Expiration Date, by issuing a
press release indicating such extension and by amending its Registration
Statement that is on file with the Securities and Exchange Commission.
NEIC may reject any subscription documents that the Subscription Agent
receives after 5:00 p.m. on the Expiration Date, regardless of when the
documents were originally mailed. We recommend that shareholders submit, or
instruct their broker or bank to submit on their behalf, all subscription
documents at least 10 days before the scheduled Expiration Date, to allow
sufficient time for the subscription materials to reach the Subscription
Agent.
While we expect to close on the offering only if the total proceeds will
be at least $3,000,000, the Rights Offering is not conditioned upon our
receipt of subscriptions for any minimum number of shares and we reserve the
right to close on the offering regardless of the actual number of shares
subscribed for.
Subscription Payments
Each Subscription Certificate must be accompanied by the full amount of
the purchase price for the shares. If a subscriber submits less than the full
purchase price, we will limit his or her maximum subscription to the number of
shares purchasable with those funds (rounded down to the nearest whole number
of shares).
If a subscription is rejected in whole or in part, the Subscription
Agent will promptly refund payment for any unpurchased shares. No interest
will be paid on any subscription funds.
Delivery of Certificates
The Subscription Agent will mail certificates for Common Stock as soon
as practicable after the Expiration Date. This may take two weeks or longer
if we need to confirm compliance with stock ownership limits.
NEIC will not permit the purchase of fractional shares.
Amendment, Extension and Termination
We reserve the right to amend the terms and conditions of the Rights
Offering. If we make an amendment that we consider significant, NEIC will (i)
mail notice of the amendment to all shareholders of record, (ii) extend the
Expiration Date by at least 14 days and (iii) offer all subscribers not less
than 10 days to revoke any prior subscriptions, in whole or in part. In all
other cases, subscriptions will be irrevocable.
We also reserve the right to extend the Expiration Date, in our
discretion, although we presently do not intend to do so. An extension of the
Expiration Date will not, in and of itself, be treated as a significant
amendment for purposes of the preceding paragraph.
<PAGE> 7
We also reserve the right to terminate the Rights Offering at any time,
in our discretion, in which case all subscriptions will be cancelled and all
subscription payments will be returned to subscribers.
Upon the occurrence of any change in or cancellation of the Rights
Offering, or any extension of the Expiration Date, we will issue a press
release to that effect and will file a post-effective amendment to the
Registration Statement covering this Prospectus.
DETERMINATION OF OFFERING PRICE
NEIC's Board of Directors set the offering price at a level that it
judged to be fair to NEIC and its shareholders. In doing so, the Board's
objective was to raise the targeted proceeds, and provide all NEIC
shareholders with an opportunity to make an additional investment in NEIC and
minimize the involuntary dilution of their ownership and voting percentage in
NEIC.
In approving the offering price, the Board of Directors considered
such factors as the trading price of the Common Stock in recent months,
alternatives available to NEIC for raising capital, the pro rata nature of
the offering, the business prospects for NEIC and the general condition of
the securities markets. The Board chose not to obtain an independent
appraisal of value of the Common Stock to be issued pursuant to this
offering.
SUBSCRIPTION PROCEDURES
To participate in the Rights Offering, a shareholder must submit a
properly completed Subscription Certificate, together with full payment of the
offering price for all shares subscribed for. Those who hold NEIC Common
Stock for the account of others (such as brokers, banks, trustees or
depositories) should notify the beneficial owners of such shares as soon as
possible to ascertain the beneficial owners' intentions and to obtain
instructions with respect to the Rights Offering.
The Subscription Certificate and payment must be received by the
Subscription Agent before 5:00 p.m. on the Expiration Date. Payment of the
offering price must be made:
(1) by check or bank draft drawn upon a U.S. bank or postal,
telegraphic, or express money order payable to "American Stock Transfer
& Trust Company, as Subscription Agent," or
(2) by wire transfer of same day funds to the account maintained
by American Stock Transfer & Trust Company for such purpose at
The Chase Manhattan Bank, Account No. 323-005225, ABA No. 021000021.
Payment of the offering price will be deemed made only upon (i) the
Subscription Agent's receipt of a certified check or bank draft drawn upon a
U.S. bank or any postal, telegraphic or express money order, (ii) the
clearance of any uncertified check, or (iii) the receipt of good funds in the
wire transfer account designated above. Holders who wish to pay by
uncertified personal check should note that such a check may take five
business days or more to clear and should therefore make payment sufficiently
in advance of the Expiration Date to ensure that payment is received and
clears by such date.
Subscription Certificates and any checks in payment of the subscription
price should be delivered (whether by mail, hand delivery, or overnight
courier) to:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Reorganization Department
<PAGE> 8
Do not send subscription documents or payments to NEIC.
If an exercising holder does not indicate the number of shares to be
purchased or does not forward full payment of the subscription price, then the
Holder will be deemed to have exercised the Basic Subscription Privilege to
the full extent of the payment received and, if any funds remain, will be
deemed to have exercised the Oversubscription Privilege to the extent of the
remaining funds. In each case, share amounts will be rounded down to the
nearest whole number.
The method of delivery of subscription documents and payment of the
subscription price will be at the election and risk of holders. If sent by
mail, it is recommended that such subscription documents and payments be sent
by registered mail, properly insured, with return receipt requested, and that
a sufficient number of days be allowed to ensure delivery to the Subscription
Agent and clearance of payment prior to the Expiration Date. Because
uncertified personal checks may take at least five business days to clear,
holders are urged to arrange for payment by certified or cashier's check,
money order or wire transfer of funds.
All questions concerning the timeliness, validity, form and eligibility
of any subscription will be determined by NEIC, which determinations will be
final and binding. NEIC may, in its sole discretion, waive any defect or
irregularity, permit a defect or irregularity to be corrected within such time
as it may determine, or reject the purported exercise of any right.
Subscriptions will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as NEIC determines
in its sole discretion. Neither NEIC nor the Subscription Agent will be under
any duty to give notification of any defect or irregularity in connection with
the submission of Subscription Certificates or incur any liability for failure
to give notification.
If you have any questions concerning the Rights Offering or these
subscription procedures, or if you would like additional copies this
Prospectus or other documents, please contact Robert G. Schatz (President and
Chief Executive Officer) or Linda Hatt (Shareholder Relations). Either
of them may be reached by telephone at 207-883-2232, or by fax at 207-883-
1523.
CERTAIN OWNERSHIP LIMITS
AND REPORTING REQUIREMENTS
Any person or group that acquires direct or indirect beneficial
ownership of more than 5% of the outstanding shares of NEIC will be subject to
special reporting requirements under Section 13(d) or 13(g) of the Securities
Exchange Act of 1934. Any person or group that acquires direct or indirect
beneficial ownership of more than 10% of the outstanding NEIC shares will be
subject to special reporting requirements under Section 16(a) of that Act and
may become liable under Section 16(b) of the Act for reimbursement of any
"short-swing profits."
The Maine Insurance Code and the New York Insurance Law generally
prohibit any person or group from acquiring direct or indirect ownership of
10% or more of the outstanding shares of NEIC, except with prior permission
from the Maine Bureau of Insurance and the New York Insurance Department.
FAILURE TO COMPLY WITH THESE PROVISIONS OF FEDERAL OR STATE LAW MAY
CONSTITUTE A CRIMINAL OFFENSE OR OTHERWISE SUBJECT THE RELEVANT PERSON OR
GROUP (AND THEIR CONTROLLING PERSONS) TO SUBSTANTIAL LIABILITY.
STATE AND FOREIGN SECURITIES LAWS
The Rights Offering is being made in reliance on securities registration
exemptions in various states for offers and sales of securities to existing
security holders.
The Rights Offering is not being made in any state or foreign country in
which it is unlawful to do so, nor will NEIC accept subscriptions from holders
who are residents of any such state or country.
<PAGE> 9
NO BOARD RECOMMENDATION
An investment in the Common Stock must be made pursuant to each
shareholder's evaluation of his or her best interests. The NEIC Board of
Directors makes no recommendation to any shareholder on whether to exercise
the subscription rights.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of federal income tax consequences is for general
information only and is based upon the Internal Revenue Code as amended to
date, the regulations promulgated or proposed thereunder, positions of the
Internal Revenue Service set forth in published revenue rulings, revenue
procedures and other announcements, and court decisions as in effect on the
date of this Prospectus. Future legislative or administrative actions or
decisions could significantly affect the following discussion. This summary
does not discuss all aspects of federal income taxation that may be relevant
to a particular investor or to certain types of investors subject to special
treatment under the federal income tax laws (for example, banks, securities
dealers, life insurance companies, tax exempt organizations and foreign
taxpayers), and does not discuss any aspect of state, local or foreign tax
laws. The following discussion is limited to holders who intend to acquire
and hold Common Stock as capital assets (i.e., generally, for investment).
Receipt or Lapse of Rights. A holder should not recognize income for
federal income tax purposes by reason of (i) the receipt of subscription
rights or (ii) the lapse of such rights.
Exercise of Rights. Holders will not recognize any gain or loss upon the
exercise of subscription rights. The basis of the shares of the Common Stock
acquired through exercise of these rights generally will be equal to the
subscription price paid therefor. The holding period for the shares of
the Common Stock acquired through exercise of the rights will begin on the
date Subscription payments are accepted by the Company, which will be the
Expiration Date if the Company determines to close on the offering.
Disposition of Common Stock. The sale or other disposition of the Common
Stock acquired on exercise of these rights will result in the recognition of
capital gain or loss by the holder in an amount equal to the difference
between the amount realized and the holder's basis in such shares.
Capital gain recognized by a noncorporate holder will be subject to a reduced
rate of tax if the holding period of the shares sold or disposed of is
greater than 12 months and will be subject to a further reduced rate of tax if
the holding period for such Common Stock is greater than 18 months. Capital
gains recognized by corporations currently are subject to tax at the same rate
as ordinary income.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
INCLUDED FOR GENERAL INFORMATION ONLY. ACCORDINGLY, EACH SHAREHOLDER SHOULD
CONSULT HIS, HER OR ITS OWN TAX ADVISOR ON THE TAX CONSEQUENCES OF THE
RIGHTS OFFERING, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL
AND FOREIGN INCOME TAX LAWS.
DESCRIPTION OF BUSINESS
General
North East Insurance Company was organized as a Maine corporation on
August 9, 1965 and began writing insurance in 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 dormant Maine
corporation, originally intended to assist North East in marketing its
insurance products to independent brokers. The consolidated financial results
of North East and its subsidiaries (the "Group") for 1997 and prior years and
for the nine month and three month periods ending September 30, 1998 are
presented and discussed elsewhere in this Prospectus. See "Consolidated
Financial Statements"; "Management's Discussion and Analysis" and Appendix A.
<PAGE> 10
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. Under an agreement with the Insurance Department of the State of
New York, ACIC has not written any new or renewed any existing business since
March, 1990.
The following is a summary of selected consolidated financial
information for each of the three years in the period ended December 31, 1997.
This information should be read in conjunction with the Consolidated Financial
Statements and the Notes presented elsewhere in this report.
<TABLE>
<CAPTION>
As of and for the
Year Ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Total Assets $32,811,570 $32,558,905 $34,483,828
Total Liabilities 22,825,916 23,233,944 28,062,777
Shareholders' Equity 9,985,654 9,324,961 6,421,051
Net Premiums Written 14,225,224 6,065,741 5,798,259
Net Premiums Earned 11,493,483 6,232,856 6,871,074
Net Investment Income 763,438 1,041,762 1,298,601
Realized Capital
Gains (Losses) 35,321 57,617 (225,726)
Total Revenue 12,292,242 7,332,235 7,943,949
Underwriting Gain (Loss) (332,753) 206,981 (310,057)
Income Before Provision
for Income Taxes 466,006 1,306,360 762,818
Provision (Benefit) for
Income Taxes 177,326 (2,069,136) 14,500
Net Income 288,680 3,375,496 748,318
</TABLE>
Underwriting
The Group experienced a net loss and loss adjustment expense ratio of
59.2% and an expense ratio of 35.3% in 1997. The combined ratio for the Group
in 1997 was 94.5%, meaning that premium income exceeded loss and loss
adjustment expenses and underwriting expenses by 5.5%. The combined ratios
for 1996 and 1995 were 97.8% and
<PAGE> 11
113.1%, 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 net losses and loss adjustment
expenses to net premiums earned and the ratio of underwriting expenses
incurred to net premiums written. For further information on computation of
the combined ratio and the effect of recent changes in the Group's reinsurance
arrangements, see "MANAGEMENT'S DISCUSSION AND ANALYSIS."
Net premiums written and earned by the Group by line of business for
fiscal 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ------------------------
Net Net Net Net
Premiums Premiums Premiums Premiums
Written Earned Written Earned
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Auto Liability
Private Passenger $ 7,307,788 $ 5,851,371 $3,501,049 $3,532,327
Commercial 1,587,390 1,260,032 492,574 529,764
Auto Physical Damage 3,710,398 3,029,121 1,532,008 1,522,866
Other Liability 538,385 421,860 76,466 27,162
Inland Marine 377,569 311,688 206,858 213,115
All Other Lines 703,694 619,411 256,786 407,622
-------------------------------------------------------
Total $14,225,224 $11,493,483 $6,065,741 $6,232,856
=======================================================
</TABLE>
During 1997, the auto programs represented approximately 88.6% of the
total premiums written by the Group. This book includes private passenger
and commercial policies. The private passenger products include non-standard,
standard and preferred auto coverages as well as snowmobiles. The commercial
product is focused on small, single vehicle, commercial enterprises including
logging, garages, refuse haulers and snow plowers. Approximately 71% of the
auto written premium was for liability coverage, with the remaining 29%
providing physical damage protection.
During 1997, the balance of the Group's book of business was composed of
inland marine (2.7%); other liability (3.8%); companion or adjunct commercial
coverages (4.8%). The homeowner program, discontinued in 1995, accounted for
slightly more than 0.1% of the total premium.
Marketing
The Group markets its insurance products through a network of
independent insurance agents. The Company believes the agency system provides
the best system for its products and programs and is an important part of the
Company's business strategy. The use of independent agents allows North East
to obtain high quality marketing coverage over a broader geographic area in
Maine than could be accomplished by other means. Agents' return on book,
profit contingencies and reliable products have become key ingredients in
developing stronger ties to agents representing NEIC. An agents advisory
board provides a forum through which the Group 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, geographic location, mix of products,
North East's rank in the agent's office, other carriers represented by the
agency, and the agent's plans and needs.
At year end 1997 there were 163 active agents who represented North
East. Certain agents and brokers are under common ownership. Although no
single agency produced more than 5% of North East's direct premiums written in
1997, one affiliated group of agents was responsible for 11.4%, a second group
accounted for 9.2% and a third group accounted for 5.0%. Twenty-three agents
provided North East with direct premiums written in excess of $200,000, and
nine 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 North East's business, management believes it has a good
relationship with its existing agents.
<PAGE> 12
In recognition of the agents' key role in selecting profitable business,
NEIC compensates its agents with both commissions and a profit sharing plan.
The profit sharing plan formula considers a combination of volume and
profitability in determining the amount of additional compensation. Certain
minimum targets, in both categories, must be reached in order to qualify for
profit sharing under the formula. The amount of profit sharing is dependent
on the degree each component betters the minimum target. Profit sharing
expense amounted to $85,000, $81,571 and $48,640 in 1997, 1996 and 1995,
respectively, and is 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. A key aspect of this approach is that the Group seeks
to establish stable, long-term arrangements with high quality reinsurers who
meet the Group's criteria for financial integrity. 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's current reinsurance is placed
through MIC Reinsurance Corporation, rated "A" by A.M. Best.
The Group manages its risk exposure through individual and aggregate
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 utilized quota share reinsurance until September 30, 1997.
The maximum gross policy limits offered by NEIC during 1997, 1996 and
1995 were $1,000,000. The Company's maximum net retention was $65,000 for the
period covering January 1, 1995 through December 1, 1995, $32,850 for the
period covering December 1, 1995 through December 31, 1996 and $50,000 for the
period covering January 1, 1997 through December 31, 1997.
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 NEIC 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 insured 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.
The 35% quota share treaty in effect for 1996 and 1995 was cancelled on a
runoff basis effective January 1, 1997 and subsequently commuted on September
30, 1997.
Investments
At December 31, 1997, based on current market values, 41% of the fixed
maturities were invested in U.S. Treasuries or U.S. Government guaranteed
instruments, 8% were invested in public utilities and 51% 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 expected settlement 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, 1997, short-term
investments amounted to $3,397,581.
The gross average investment yield based on amortized cost of the
investment portfolio was 5.9% and 6.6% for the years ended December 31, 1997
and 1996, respectively. The total return, including realized capital gains
(losses) was 6.1% and 6.9% for the years ended December 31, 1997 and 1996,
respectively. Realized gains (losses) for the year ended 1997 included a loss
of $62,705 pertaining to the write down of NEIC's investment in Memorex which
NEIC considered fully impaired.
<PAGE> 13
The table below summarizes the credit quality of fixed maturities, based
on Standard and Poor's rating system, as of December 31, 1997:
<TABLE>
<CAPTION>
Bond Credit Quality Rating
--------------------------
<S> <C>
AAA 41.0%
AA 1.9
A 45.6
BAA 11.5
-----
100.0%
=====
</TABLE>
Bond credit quality ratings are based on the capacity of the borrower to
meet interest and principal payments as they become due. Capacity is
considered extremely strong for AAA rated issues; very strong for AA rated
issues; strong for A rated issues; and adequate for BAA rated issues. At
December 31, 1997 the Group did not hold any fixed maturities considered to be
below investment grade (rated below BAA).
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. Management
continues to believe, however, NEIC's products are best marketed through a
network of independent agents.
The Company also faces competition from certain insurers that focus on
non-standard markets, particularly with regard to automobile insurance. This
competition includes pricing pressures and one-time agent incentives.
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, 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, after audit adjustments, at December 31, 1997 was
$6,358,763. 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 $19,076,289 of net written premiums for its own account (by
comparison, 1997 net written premiums amounted to $14,225,224). The Group
expects to remain well within the constraints of this guideline in 1998.
The National Association of Insurance Commissioners requires 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 a
flexible 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.
<PAGE> 14
* 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 actions
could result should a company's surplus level be less than predetermined
multiples of the authorized control level amount as determined by the formula.
<TABLE>
<CAPTION>
Action % of Authorized Control Level Risk Based Capital
------ ------------------------------------------------
<S> <C>
None Greater than 200%
Company Action 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%
</TABLE>
Under the risk based capital formula, the authorized control level risk
based capital for North East Insurance Company and American Colonial Insurance
Company at December 31, 1997 was $2,008,187 and $271,124, respectively. The
statutory surplus at December 31, 1997, after audit adjustments, was
$6,358,763 or 316.6% of authorized control level risk based capital for North
East Insurance Company and $5,168,970 or 1906.5% 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.
Employees
At December 31, 1997 the Group employed forty full-time employees and
two part-time employees. The Company believes that its employee relations are
good. The Company also has engaged the services of consultants when
appropriate.
Description of Property
The Company 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.
Legal Proceedings
The Company has no pending legal proceedings other than ordinary routine
litigation incidental to the business, for which (in the opinion of
management) adequate reserves have been taken.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This section reviews the consolidated financial condition of the Group
at December 31, 1997 and 1996, the consolidated results of operations for the
past three years and, where appropriate, factors that may affect future
financial performance. Appendix A contains a discussion of the Group's
financial condition at September 30, 1998 and results of operations for
the nine month and three month periods ended on such date. These discussions
should be read in conjunction with the year-end Financial Statements (which
appear at pages 30-52 below) and the Interim Financial Statements in
Appendix A.
<PAGE> 15
General Discussion - 1997
North East continues to pursue a course of action set into motion in
1994 under which it has produced consistent gross written premium. For the
second consecutive year NEIC's combined ratio has been below 100% (94.5% and
97.8% in 1997 and 1996, respectively). The blending of premium volume,
product development, consistent and focused risk selection philosophy and
refining agency relationships contributed to the progress. In early 1997,
after several discussions and meetings with AM Best, NEIC's rating was
upgraded five levels to a B-, thus according it new stature with its agents
and credibility from regulators and reinsurers. During 1997, NEIC appointed
five new agencies representing an expanded geographic base in Maine, east and
west of the Interstate 95, in areas lacking in representation in prior years.
In addition NEIC introduced several enhancements to current programs while
marking significant progress in the final development of its totally revised
auto product scheduled for introduction in the first half of 1998.
Operating results for 1997 fell short of expectations due to higher than
expected frequency of losses in the first and fourth quarters specifically
related to poor weather conditions. The early onset of storms in November and
December 1997 carried a significant negative impact of claims activity from
both frequency and severity perspectives.
In the fall of 1997 it became apparent to both NEIC and it's reinsurer
that the treaties negotiated in early 1997 were not providing the loss relief
commensurate with the premium charge. Through collective negotiations the
treaty terms were amended to provide a more timely matching of reinsurance
premium, expense and loss recovery under the treaty terms. Further, the first
excess of loss treaty was endorsed to provide for experience rated premium
adjustments. The process is reflective of the relationship NEIC has with its
reinsurer and the result is indicative of the support afforded to it.
Results of Operations in 1997 Compared
With 1996, and 1996 Compared with 1995
The Group's operations for the each of three years ended December 31,
1997 comprise two major components. Direct business represents insurance
income and expenses associated with policies issued directly by the Group to
its policyholders. Ceded business, commonly referred to as reinsurance,
includes excess of loss, catastrophe and clash reinsurance arrangements which
provide the Group 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 Group, after all other
reinsurance.
Direct. The following comparative table illustrates the components of
direct business (including assumed business) written by the Group for each of
the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Premiums Written $12,314,676 $11,193,557 $11,250,681
===========================================
Premiums Earned $11,759,548 $11,536,429 $11,876,468
Losses and Loss Adjustment
Expenses Incurred 8,358,886 5,775,929 6,855,949
Underwriting Expenses Incurred 4,907,733 4,997,272 4,536,420
-------------------------------------------
Underwriting (Loss) Income $(1,507,071) $ 763,228 $ 484,099
===========================================
Loss Ratio 71.1% 50.1% 57.7%
Expense Ratio 39.8 44.6 40.3
-------------------------------------------
Combined Ratio 110.9% 94.7% 98.0%
===========================================
</TABLE>
Direct premiums written in 1997 increased 10% compared with 1996.
Direct earned premiums increased approximately 2% over 1996 indicating direct
written premium growth occurred in the latter half of 1997. Direct premiums
written and earned in 1996 were marginally less than those reported in 1995.
Increased market presence
<PAGE> 16
resulting in written premium growth, experienced in latter half of 1997, is
encouraging in a market which has been experiencing substantial price
competition and agent volume incentives.
Direct losses and loss adjustment expenses incurred increased
substantially in 1997 to $8,358,886 compared with $5,775,929 incurred in 1996
and $6,855,949 incurred in 1995. Direct losses and loss adjustment expenses
for the years 1997, 1996 and 1995 include $638,000, $2,012,000 and $1,899,000
of favorable loss development, respectively (refer to "Loss and Loss
Adjustment Expense Reserves" - this section). Without this development the
loss ratios would approximate 77%, 68%, and 74% for 1997, 1996 and 1995,
respectively. The 1997 results included weather-related loss frequency in
both the first and fourth quarters and 1996 includes adverse loss experience
for auto physical damage during the first quarter due to the severe winter
storms.
Underwriting expenses decreased $89,539 or 1.8% in 1997 compared with
1996, whereas 1996 expenses increased by $460,852 or 10.2% compared with 1995.
Expenses for 1996 included higher data processing costs associated with our
new information system and employee incentive awards not present in either
1997 or 1995.
Ceded. The following comparative table illustrates the components of
ceded business written by the Group for each of the three years ended December
31, 1997:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Premiums Written $(1,910,548) $5,127,816 $5,452,422
==========================================
Premiums Earned $ 266,065 $5,303,573 $5,005,394
Losses and Loss Adjustment
Expenses Incurred 1,558,084 2,270,542 2,868,984
Underwriting Expenses
(Credit) Incurred (117,701) 2,476,784 1,342,254
------------------------------------------
Underwriting (Loss) Income $(1,174,318) $ 556,247 $ 794,156
==========================================
Loss Ratio n/m% 42.8% 57.3%
Expense Ratio n/m 48.3 24.6
------------------------------------------
Combined Ratio n/m% 91.1% 81.9%
==========================================
</TABLE>
<n/m> - not meaningful
The Group manages its risk exposure through individual and aggregate
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 utilized quota share reinsurance until September 30, 1997.
The maximum gross policy limits offered by NEIC during 1997, 1996 and
1995 were $1,000,000. The Company's maximum net retention was $65,000 for the
period covering January 1, 1995 through December 1, 1995, $32,850 for the
period covering December 1, 1995 through December 31, 1996 and $50,000 for the
period covering January 1, 1997 through December 31, 1997.
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 NEIC 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 insured 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.
The 35% quota share treaty in effect for 1996 and 1995 was cancelled on a
runoff basis effective January 1, 1997 and subsequently commuted on September
30, 1997. For further information, see "DESCRIPTION OF BUSINESS."
<PAGE> 17
During the third quarter of 1997 management determined that NEIC's
reinsurance program was not performing as originally intended. A review of
the underwriting results indicated that the terms of the first layer excess of
loss treaty required revision, either through a rate reduction or lower
retention, in order to achieve timely matching of premiums and losses (the
original treaty included a profit sharing formula under which NEIC would
participate in any excess profits, the recording of which would occur in years
subsequent to 1997). In meetings with its reinsurer an agreement was reached
to revise the premium rate and eliminate the profit sharing. In addition, the
treaty was further endorsed to provide an experience rated premium adjustment
in the event the North East's direct loss and loss expense ratio exceeded 57%
for the 1997 accident year.
As a result of these changes, ceded values for 1997 are distorted
compared with prior years. Ceded premiums written include the effect of the
rate reduction and the experience rated premium adjustment under the excess of
loss treaty. In addition to the above changes for ceded written premium,
ceded earned premium includes the runoff of earned premium for the 35% quota
share treaty through September 30, 1997. Losses and loss expenses incurred
for 1997 consist primarily of claims associated with the runoff of the quota
share treaty through September 30, 1997.
Net. The following comparative table illustrates the components of net
business written by the Group for each of the three years ended December 31,
1997:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Premiums Written $14,225,224 $6,065,741 $5,798,259
=========================================
Premiums Earned $11,493,483 $6,232,856 $6,871,074
Losses and Loss Adjustment
Expenses Incurred 6,800,802 3,505,387 3,986,965
Underwriting Expenses Incurred 5,025,434 2,520,488 3,194,166
-----------------------------------------
Underwriting Income (Loss) $ (332,753) $ 206,981 $ (310,057)
=========================================
Loss Ratio 59.2% 56.2% 58.0%
Expense Ratio 35.3 41.6 55.1
-----------------------------------------
Combined Ratio 94.5% 97.8% 113.1%
=========================================
</TABLE>
Underwriting activities for 1997 generated a loss of $332,753. This
compares to underwriting profit in 1996 of $206,981 and a underwriting loss of
$310,057 in 1995. For the three year period losses and loss adjustment
expense represented 59.2% (1997), 56.2% (1996) and 58.0% (1995) of net earned
premium. The ratios, for the periods represented, include the favorable
development which is not likely to occur in 1998 (refer to "Loss and Loss
Adjustment Expense Reserves"). Without this favorable development the three
year period losses and loss adjustment expense represented 69.1% (1997), 93.4%
(1996) and 89.1% (1995) of net earned premium. Earned premium for 1997 also
includes the benefit derived from the endorsements to the excess of loss
treaty not in effect for either 1996 or 1995 and the termination of the quota
share treaty in 1997.
Underwriting expenses incurred amounted to $5,025,434 in 1997,
$2,520,488 in 1996 and $3,194,166 in 1995. The higher expenses in 1997 is
primarily attributable to the significant restructuring of our reinsurance
treaties leading to lower reinsurance commission offsets. Underwriting profit
(loss) by major category for each of the years ended December 31, 1997, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Auto Liability $(284,099) $ (151,833) $ 212,021
Auto Physical Damage (775,261) (1,094,897) (318,783)
Commercial Multi Peril 377,315 680,289 169,229
Other Liability 227,023 625,140 (61,280)
All Other 122,269 148,282 (311,244)
-----------------------------------------
Underwriting (Loss) Income $(332,753) $ 206,981 $(310,057)
=========================================
</TABLE>
<PAGE> 18
The underwriting loss for auto physical damage in 1997 is directly
related to the severe winter experience in the first and fourth quarters.
Underwriting income (loss) in the all other category includes experience for
NEIC's homeowner product which was discontinued in 1995. Homeowners business
produced a net underwriting gain in 1997 and 1996 of $25,353 and $50,958,
respectively compared with a net underwriting loss of $245,525 in 1995.
Investment Results. Net investment income was $763,438 for 1997
compared with $1,041,762 in 1996 and $1,298,601 in 1995. The gross average
yield of the investment portfolio was 5.9%, 6.6% and 7.1% for 1997, 1996 and
1995, respectively. The Company realized investment gains of $35,321 and
$57,617 for 1997 and 1996, respectively compared with realized investment
losses of $225,726 in 1995. Total return from investment activities
(including realized gains or losses) was 6.1%, 6.9% and 5.2% for 1997, 1996,
and 1995, respectively.
Net Income. Net income before the provision for federal income taxes
was $466,006, $1,306,360 and $762,818 in 1997, 1996 and 1995, respectively.
The provision for income taxes includes the effect of a reassessment in
1996 of NEIC's position relative to NEIC's ability to utilize the value of its
loss carry forwards based on the future income and capital gains of NEIC. In
accordance with FAS 109 ("Accounting for Income Taxes"), a portion of the
change in the valuation allowance has been included in net income for the year
ended December 31, 1997 and 1996 and a deferred tax asset has been reported in
NEIC's balance sheet. The 1996 provision for income taxes included a benefit
of approximately $2,500,000 resulting from this reassessment.
Net income after the provision for income taxes was $288,680 in 1997,
compared with $3,375,496 in 1996 and $748,318 in 1995.
Liquidity and Capital Resources - 1997
Cash used in operating activities for the years ended December 31, 1997
and 1996 amounted to $1,469,805 and $2,470,856, respectively. Cash provided
from investing activities amounted to $1,883,561 for the year ended December
31, 1997 compared with $3,593,622 for the year ended December 31, 1996.
The Company's investment portfolio, carried at fair value, was $243,162
higher 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 believes that the current
level of short-term investments is adequate to meet any shortfall resulting
from its immediate operating activities.
The Company's investment policy is to invest in investment grade
securities only and does not permit NEIC to participate in the derivatives
market for either hedging or speculative purposes. This policy has been
adhered to for the year ended December 31, 1997. The Company has no open
derivative financial instrument position as of the balance sheet date.
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.
<PAGE> 19
In the determination of ultimate losses and loss adjustment expense,
NEIC 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 NEIC's prior
experience. The change in the character was not recognized by NEIC 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.
The following table provides a reconciliation of the changes in loss and
LAE reserves, after deducting amounts recoverable from reinsurers for 1997 and
1996.
Reconciliation of Liability for Losses and
Loss Adjustment Expenses
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $15,205,583 $19,006,725
Amounts recoverable from reinsurers
on unpaid losses 4,828,760 4,703,238
---------------------------
Beginning of year, net 10,376,823 14,303,487
Add:
Provision for losses and LAE for
claims arising in:
Current year 7,909,126 5,823,867
Prior years (1,108,324) (2,318,480)
Less:
Losses and LAE paid on claims arising in:
Current year 4,555,270 3,826,876
Prior years 1,633,475 3,605,175
---------------------------
End of year, net 10,988,880 10,376,823
Amounts recoverable from reinsurers
on unpaid losses 3,668,346 4,828,760
- ---------------------------
Losses and loss adjustment expenses
per Consolidated Balance Sheet $14,657,226 $15,205,583
===========================
</TABLE>
The following table 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.
Analysis of Ultimate Losses and Loss Adjustment Expenses Development
(in Thousands)
<TABLE>
<CAPTION>
Net Reserves
-----------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ultimate Net Liability for unpaid claims
and claim adjustment expenses $21,749 $24,062 $20,085 $18,342 $18,661 $18,705 $17,472 $14,303 $10,377 $10,989
Cumulative amount paid
- - ----------------------
One year later 7,402 7,521 5,048 4,619 3,899 5,019 3,843 3,605 1,633
Two years later 11,515 11,212 8,503 7,004 7,460 7,595 6,625 5,769
Three years later 13,479 14,039 10,212 9,931 9,590 9,516 8,287
Four years later 15,147 15,373 12,718 11,685 11,131 10,756
Five years later 15,363 16,995 14,254 12,833 12,213
Six years later 16,559 18,483 15,278 13,835
Seven years later 17,764 19,356 16,195
Eight years later 18,365 20,177
Nine years later 18,956
<PAGE> 20
<CAPTION>
Ultimate Net reserves reestimated as of
end of year
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One year later $22,310 $24,653 $20,605 $18,329 $17,974 $17,685 $15,340 $11,985 $ 9,268
Two years later 22,193 24,743 20,676 18,823 18,087 16,829 13,748 11,825
Three years later 22,103 24,316 21,009 19,022 17,457 15,318 13,469
Four years later 21,882 25,108 21,247 18,675 16,463 14,986
Five years later 22,379 24,624 20,902 17,848 16,063
Six years later 22,012 24,581 20,205 17,417
Seven years later 22,147 23,971 19,731
Eight years later 21,864 21,538
Nine years later 21,552
Redundancy (deficiency) $ 197 $ 2,524 $ 354 $ 925 $ 2,598 $ 3,719 $ 4,003 $ 2,478 $ 1,109
</TABLE>
<TABLE>
<CAPTION>
Gross Reserves
----------------------------------------
1994 1995 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Ultimate gross liability for unpaid
claims and claim adjustment expenses $21,517 $19,007 $15,206 $14,657
<CAPTION>
Cumulative Amount Paid
- ----------------------
One Year Later 4,766 5,077 3,716
Two Years Later 8,625 7,836
Three Years Later 10,338
<CAPTION>
Ultimate Gross Reserves reestimated as of
- -----------------------------------------
One Year Later 19,618 16,995 14,568
Two Years Later 18,181 16,469
Three Years Later 17,499
Redundancy (Deficiency) $ 4,018 $ 2,538 $ 638
</TABLE>
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 1988
net reserve developed a redundancy of approximately $197,000 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 1997, but incurred in 1988, will be included in
the cumulative deficiency amounts for 1988 through 1997. 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, 1997 and 1996, the loss and loss adjustment expense
reserves as reported under generally accepted accounting principles (GAAP)
were identical to those reported under statutory accounting principles.
<PAGE> 21
INTERIM PERIODS
See "Appendix A" for a discussion of the Group's consolidated financial
condition at September 30, 1998, its results of operations for the nine and
three month periods ended on such date and, where appropriate, factors that
may affect future financial performance. This discussion should be read
in conjunction with the year end financial statements included herein and
the interim financial statements included in Appendix A.
Year 2000
The year 2000 issue relates to whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. North
East will be required to modify certain portions of its software so its
computer systems will properly function using dates beyond December 31,
1999. For a more complete description of how this issue affects North East,
see "Appendix A-Interim Financial Statements."
FORWARD-LOOKING INFORMATION
From time to time, NEIC publishes information that includes forward-
looking statements, as defined in Section 21E of the Securities Exchange Act
of 1934. The "Management's Discussion and Analysis" section and "Description
of Business" section of this Prospectus contain forward-looking statements,
such as those concerning estimated future costs of agency profit-sharing and
Year 2000 issues. In addition, many of the items reflected in the Group's
financial statements are based in large part on estimates of future revenues
and losses.
The Company cautions readers that numerous factors could cause actual
results and business conditions to differ materially from those reflected in
North East's forward-looking statements, including changes in interest rates
and the performance of financial markets, changes in laws, regulations and
taxes, competition, industry consolidation, competitor demutualization, credit
risks and other factors. Insurance loss reserve liabilities can fluctuate as
a result of changes in numerous factors, and such fluctuations can have a
material positive or negative effect on the net result. The factors include,
but are not limited to, claim frequency and severity rates. These rates may
be influenced by many factors, including but not limited to, climate, new
trends and developments in technology, general economic and societal
conditions of the insurance market in which North East has exposure.
MANAGEMENT
Under NEIC'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 NEIC, nor were there
any special arrangements by which any of them was elected to his or her
position.
Robert G. Schatz, age 53, has served as President and Chief Executive
Officer of NEIC since March 1988. He was elected as a Director in December
1987.
Ronald A. Libby, age 55, joined NEIC 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 57, is Senior Vice President and Secretary of
NEIC. He joined NEIC in 1977 and has been an Officer since 1978.
Graham S. Payne, age 53, has been Treasurer and Chief Financial Officer
of NEIC since 1987.
Rebecca J. Cerny, age 45, has held the position of Vice President of
NEIC since 1989. From 1986 to 1995 she also served as a Director of NEIC.
<PAGE> 22
Executive Compensation
Set forth below is certain information concerning the compensation of
Robert G. Schatz, the President and Chief Executive Officer of NEIC, and each
other executive officer of NEIC who received more than $100,000 of salary and
bonus compensation for the prior fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
Name and ---------------------------- All Other
Principal Position Year Salary Bonus Compensation(1)
- ------------------ ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Robert G. Schatz 1997 $175,012 $28,276 $ 7,505
President and Chief 1996 $155,289 $96,216 $73,960
Executive Officer 1995 $150,000 $30,000 $ 3,982
Ronald A. Libby 1997 $110,319 $25,293 $ 3,116
Chief Operating 1996 $101,173 $36,707 $ 7,740
Officer 1995 $ 90,346 $ -0- $ 3,557
Samuel M. Koren 1997 $ 82,351 $33,442 $ 2,680
Sr. Vice President, 1996 $ 82,351 $22,361 $ 6,937
Secretary, and Clerk 1995 $ 82,351 $ -0- $ 3,847
- --------------------
<F1> For Mr. Schatz, other compensation in 1997 consists of $3,365 in
retroactive salary adjustments, $2,540 for Company-paid insurance
premiums, and $1,600 of matching contributions under the 401(k) Plan;
other compensation in 1996 consists of a $60,000 special bonus in lieu
of prior year payments, $9,590 of vacation pay, $2,540 for Company-paid
insurance premiums, and $1,830 of matching contributions under the
401(k) Plan; and other compensation in 1995 consists of $2,540 for
Company-paid insurance premiums and $1,442 of matching contributions
under the 401(k) Plan. For Mr. Libby, other compensation in 1997
consists of $2,116 of vacation pay and $1,200 of matching contributions
under the 401(k) Plan; other compensation in 1996 consists of $7,740 of
vacation pay; other compensation in 1995 consists of $3,357 of vacation
pay. For Mr. Koren, other compensation in 1997 consists of $1,584 of
vacation pay and $1,096 of matching contributions under the 401(k) Plan;
other compensation in 1996 consists of $5,845 of vacation pay and $1,092
of matching contributions under the 401(k) Plan; other compensation in
1995 consists of $2,833 of vacation pay and $1,014 of matching
contributions under the 401(k) Plan.
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Percent of
Total Options
-------------------------
Number of Securities Granted to Exercise
Underlying Options Employees in or Base Expiration
Granted Fiscal Year Price($/SH) Date
-------------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Robert G. Schatz 0 0% - -
Ronald A. Libby 100,000(1) 100% $2.375 6/10/07
Samuel M. Koren 0 0% - -
Graham S. Payne 0 0% - -
- -------------------
<F1> Mr. Libby's option is subject to vesting requirements and becomes
exercisable in five equal installments of 20,000 shares each on the
grant date (June 10, 1997) and the next four anniversary dates
thereafter. Upon termination of employment, the unvested portion of the
option will expire unless termination results from death or disability
or (under certain circumstances) occurs within one year after a Change
in Control (as defined).
</TABLE>
<PAGE> 23
Schatz Employment Agreement
The Company is a party to a new Employment Agreement with Mr. Schatz
that became effective January 1, 1998. The Agreement provides for (i) a base
salary of $175,000 per annum (subject to annual adjustments based on increases
in the Consumer Price Index) and (ii) a three-year profit sharing bonus
calculated on After-Tax Profit, as described below.
If the Company's After-Tax Profit (as defined) over a three-year period
exceeds a threshold amount of After-Tax Profit, then Mr. Schatz will be
entitled to a bonus under the Agreement. Specifically, if After-Tax Profit
over the three-year period exceeds approximately $3.3 million, then the bonus
will equal 5% of the excess over such target; to the extent that After-Tax
Profit exceeds approximately $5.2 million, he will be entitled to a bonus of
approximately $94,800 plus 10% of the excess over such higher threshold. (The
lower and higher thresholds represent a 10% and 15% compounded growth rate,
respectively, in shareholders equity over the three-year period.) The
targeted growth rates are subject to change, to account for capital influxes
into the Company or to account for dividends or distributions of capital to
shareholders.
In October 1996, the Board of Directors had awarded Mr. Schatz a stock
option for 200,000 shares of Common Stock, at the then prevailing market price
per share, subject to shareholder approval of a contemplated Stock Option
Plan. The Stock Option Plan was approved by shareholders in June 1997.
The Employment Agreement provides Mr. Schatz with a lump-sum severance
payment of $175,000, in the event that the Company terminates his employment
"without cause" or Mr. Schatz terminates his employment "for good reason" (as
such terms are defined in the Agreement). Furthermore, if Mr. Schatz complies
with a non-competition covenant for one year from the date of termination of
his employment, he will be entitled to additional severance payments totaling
$175,000 plus interest at the federal long-term rate (as defined), which
amount payable in 108 monthly installments commencing one year after
termination of employment. These payments were previously negotiated with Mr.
Schatz in 1996, in settlement of his claims for unpaid bonuses and options
under his 1991 Employment Agreement.
Employment Continuity Agreements
In October 1996 the Board approved Employment Continuity Agreements with
Messrs. Libby and Koren. Under these Agreements, if the executive's employment
is terminated within twelve months after the occurrence of a Change in Control
Event (as defined), then NEIC agrees to provide the executive with special
severance compensation equal to 200% of the sum of his current annual base
salary plus any profit sharing award for the prior year, provided that the
payment will be reduced if and to the extent necessary to keep the payment from
becoming non-deductible under Section 280G of the Internal Revenue Code. This
same benefit accrues if the executive terminates his employment for "good
reason," which is defined to include a reduction in his responsibilities or
certain other events. The Employment Continuity Agreement also provides for
a stay-on bonus equal to 100% of his annual base salary if the executive
remains employed for six months after the Change in Control Event, subject to
the condition that he not compete with NEIC for the following six months.
These special severance benefits do not apply if NEIC terminates the
executive's employment for "good cause," including a substantial neglect of
duties after written notice and an opportunity to correct.
In October 1996 the Board also approved an Employment Continuity
Agreement with Mr. Schatz. This Agreement becomes effective only once the
1991 Employment Agreement (which contains Change of Control provisions, as
described above) is no longer in effect. The Employment Continuity Agreement
with Mr. Schatz has terms equivalent to those for Mr. Libby and the other
executive officer, except that his special severance compensation equals 300%
of the sum of his current annual base salary plus any profit sharing award for
the prior year (subject, however, to the Section 280G limitation).
<PAGE> 24
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
In January 1997, following receipt of regulatory approval in Maine and
New York, Ballantrae Partners, L.L.C. purchased 810,000 shares of NEIC Common
Stock, representing more than 27% of the shares then outstanding. In
connection with such purchase, Ballantrae entered into a Standstill Agreement
with NEIC governing certain matters relating to control of the Company. In
July 1998, Ballantrae sold its shares to four purchasers, each of which
thereby acquired an ownership position of less than 10% of the outstanding
NEIC shares. In connection with that sale, Ballantrae gave notice of
termination of the Standstill Agreement. Following the sale, the three
principals of Ballantrae resigned from the NEIC Board of Directors.
The firm of Monaghan, Leahy, Hochadel & Libby provides legal services to
NEIC. Mr. Hochadel, a Director of NEIC, is a partner in that firm. Fees paid
to that firm in 1997 and 1996 were approximately $135,000 and $165,000,
respectively.
The Company received legal services in 1997 and 1996 from two firms in
which Mr. Cummings was or is now a Partner. Fees paid to such firms by NEIC
did not exceed $60,000 in either 1997 or 1996.
During each of the past two years, Batal Agency has been an independent
insurance agent for NEIC. Mr. Batal, a Director of NEIC, is President of
that agency. Commissions paid to the agency were based on NEIC's standard
rates and did not exceed $60,000 in either 1997 or 1996.
PRINCIPAL SHAREHOLDERS
As of the date of this Prospectus, a total of 3,049,089 shares of NEIC's
Common Stock are outstanding. The Common Stock is entitled to one vote per
share and is the only class of NEIC stock outstanding. Set forth below, as of
the record date, is information concerning the only persons known to NEIC to
beneficially own more than five percent of the outstanding shares.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name and Address Beneficially Owned Outstanding
- ---------------- ------------------ -----------
<S> <C> <C>
The Foothold Fund, L.P. 299,000 9.8%
c/o Fairholme Capital Management
51 JFK Parkway
Short Hills, NJ 07078
Richard H. Konrad 299,000 9.8%
c/o Lincluden Management Limited
1275 North Service Road West, Suite 607
Oakville, Ontario, Canada L6M 3G4
Capitol Indemnity Corporation 299,000 9.8%
4610 University Ave.
Madison, WI 53705
Everest Partners, L.P. 154,000 5.1%
Job's Peak Ranch
P.O. Box 3178
Gardnerville, Nevada 89410
- --------------------
<F1> Information regarding the stock ownership of The Foothold Fund, L.P. is
given on the basis of its Schedule 13D report, filed August 6, 1997 and
most recently amended July 7, 1998. Foothold's sole general partner is
The Foothold Management Corp. Peter A. Russ is the President, sole
director and sole shareholder of Foothold Management. Foothold's
Schedule 13D report states that it was purchasing the Common Shares for
investment purposes and not for the purpose of acquiring control of
North East.
<PAGE> 25
<F2> Information regarding the stock ownership of Mr. Konrad is given on the
basis of his Schedule 13G report filed on July 2, 1998. The Schedule
13G report states that the NEIC shares were not acquired and are not
held for the purpose of or with the effect of changing or influencing
the control of North East and were not acquired and are not held in
connection with or as a participant in any transaction having that
purpose or effect.
<F3> Information regarding the stock ownership of Capitol Indemnity
Corporation is given on the basis of a partial Schedule 13D report filed
on July 16, 1998. Capitol Indemnity is an insurer and surety company
located in Madison, Wisconsin. It is a wholly-owned subsidiary of
Capitol Transamerica Corporation, a publicly traded company of which
George A. Fait is President and Chairman of the Board.
<F4> Information regarding the stock ownership of Everest Partners, L.P. is
given on the basis of its Schedule 13G report filed on July 13, 1998.
The general partner of Everest Partners is Everest Partners, Inc. The
manager of Everest Partners is Everest Managers, L.L.C. David M.W.
Harvey is the sole principal of the general partner and the manager.
The Schedule 13G report states that the NEIC shares were not acquired
and are not held for the purpose of or with the effect of changing or
influencing the control of North East and were not acquired and are not
held in connection with or as a participant in any transaction having
that purpose or effect.
</TABLE>
The following table shows, as of the record date, the number of shares
of NEIC Common Stock which, to NEIC's knowledge, were beneficially owned by
the directors and certain executive officers of NEIC, and by each other
nominee for election as a director. Except as otherwise indicated, each
person named owned less than one percent of the outstanding Common Stock of
NEIC.
<TABLE>
<CAPTION>
Number of Shares Percent of
Name Beneficially Owned(1) Outstanding
---- --------------------- -----------
<S> <C> <C>
Robert G. Schatz 295,859 9.1%
Ronald A. Libby 40,063 1.5%
Samuel M. Koren 9,500
Edward B. Batal 6,500
Terence P. Cummings 0
Robert A. Hancock 2,500
Wilson G. Hess 0
Joseph M. Hochadel 0
Bruce H. Suter 500
Peter A. Russ 299,000 9.8%
All directors and executive
officers as a group 653,922 21.4%
- --------------------
<F1> Includes shares owned by spouses or other relatives residing in the same
household, and by entities owned or controlled by the person named.
Also includes the following shares purchasable within the next 60 days
under outstanding stock options: Mr. Schatz, 200,000; Mr. Libby, 40,000.
</TABLE>
THE BOARD OF DIRECTORS
The Company's bylaws currently provide that all directors of the Company
are to be elected each year at an annual meeting of shareholders. Set forth
below is a description of the current NEIC directors.
Name Age Position
---- --- --------
Robert G. Schatz 53 President, Chairman of the Board,
Chief Executive Officer and Director
Edward B. Batal 57 Director
Terence P. Cummings 43 Director
Robert A. Hancock 45 Director
Wilson G. Hess 46 Director
Joseph M. Hochadel 50 Director
Bruce H. Suter 77 Director
Peter A. Russ 53 Director
<PAGE> 26
ROBERT G. SCHATZ was elected as a Director in December 1987. He was elected
President and Chief Executive Officer in March, 1988. Mr. Schatz also serves
on the Board of Trustees of Unity College, in Unity, Maine.
EDWARD B. BATAL is President of Batal Agency, an insurance agency and real
estate broker in Sanford, Maine. He has been President of the agency since
1964. Mr. Batal was elected a Director of NEIC in November, 1995.
TERENCE P. CUMMINGS is a Partner with Clausen Miller P.C., a law firm in New
York City. He has been a practicing attorney in New York since 1982, and was
affiliated with Ohrenstein & Brown from 1985 to 1997. Mr. Cummings was elected
a Director of NEIC in November, 1995. Mr. Cummings also serves as a Director
of First United American Life Insurance Company, a subsidiary of Torchmark
Corporation.
ROBERT A. HANCOCK is a Principal of Mann, Frankfort, Stein & Lipp, an
accounting firm in Houston, Texas. Mr. Hancock was an auditor with Ernst &
Ernst in Houston from 1975 to 1978, and was President of Hancock, Carameros &
Rawls, P.C. from 1978 to 1996. Mr. Hancock was elected a Director of NEIC in
November, 1995.
WILSON G. HESS has served as President of Unity College in Unity, Maine since
1990. After starting as a professor at the college in 1977, he later became
Department Chairman (1985-88) and then Dean of Academic Affairs (1988-89).
From 1989 to 1990 he served as Dean of Sterling College in Craftsbury,
Vermont. Mr. Hess was elected a Director of NEIC in November, 1995.
JOSEPH M. HOCHADEL has served as a Director since 1990, and previously had
served as a Director from 1981 to 1986. Since 1981 he has been a Partner with
Monaghan, Leahy, Hochadel & Libby, a Portland, Maine law firm.
BRUCE H. SUTER was first elected as a Director of NEIC in 1990. Mr. Suter was
a Vice President of Stone & Webster Management Consultants, a management
consulting firm, from 1985 until his retirement in December, 1993. Prior to
joining Stone & Webster, Mr. Suter was President and Chief Executive Officer
of Ebasco Risk Management Consultants, Inc. and Associated Consulting
Management of Ebasco, Ltd.
PETER A. RUSS became a director of NEIC on May 6, 1998. Since 1990 Mr. Russ has
been the President, sole director, and sole shareholder of Foothold Management
Corp., which in turn is the sole general partner of The Foothold Fund, L.P. As
noted above, The Foothold Fund owns approximately 9.8% of the outstanding
common stock of NEIC. From 1993 to October, 1997, Mr. Russ was an investment
analyst with Shelby Cullom Davis & Co, L.P., a securities broker-dealer. In
October, 1997 he became a Managing Director of Laidlaw Global Securities, a
securities broker-dealer.
Directors who are not employees of the Company receive directors' fees at the
rate of $3,000 per annum, plus $250 for each Board meeting attended. Directors
also receive $100 for each Committee meeting attended, except that the
Committee chairman receives $150 for each such meeting. The Board recently
approved a program by which the Company will award stock options on a
quarterly basis to each non-employee director. As of the last day of the
calendar quarter, each such director is to receive a fully vested option to
purchase 1,000 shares of NEIC common stock at an exercise price equal to the
market price of the stock on such date. Pursuant to the NEIC Stock Option
Plan, the non-employee directors on April 10, 1998 were granted stock options
at an exercise price of $2.8125 per share (the closing price of the stock on
that date). Each of Messrs. Batal, Cummings, Hancock, Hess, Hochadel and Suter
received options for 10,000 shares each.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 12,000,000 shares of Common Stock,
the only authorized class of capital stock. As of the date of this
Prospectus, a total of 3,049,089 shares of Common Stock were outstanding. In
addition, 600,000 shares of Common Stock were reserved for issuance upon the
exercise of outstanding warrants and options.
Each outstanding share of Common Stock entitles the holder to one vote
on all matters requiring a vote of shareholders. Since the Common Stock does
not have cumulative voting rights, the holders of shares having more
<PAGE> 27
than 50% of the voting power, if they choose to do so, may elect all the
directors of NEIC and the holders of the remaining shares would not be able
to elect any directors.
Subject to the rights of holders of any series of preferred stock that
may be issued in the future, the holders of the Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor. See "Price Range of Common Stock and
Dividend Policy." In the event of a voluntary or involuntary liquidation of
NEIC, all shareholders are entitled to a pro rata distribution of the assets
of NEIC remaining after payment of claims of creditors and liquidation
preferences of any preferred stock. Holders of the Common Stock have no
conversion, redemption, sinking fund or preemptive rights.
Additionally, certain provisions of NEIC's Articles of Incorporation and
Bylaws could delay or impede the removal of incumbent directors and could make
more difficult a merger, tender or proxy contest involving NEIC, even if such
events would be beneficial to the interests of the shareholders, or could
discourage a third party from attempting to acquire control of NEIC. In
particular, NEIC's Articles of Incorporation requires supermajority
shareholder approval of certain business combinations and other related-party
transactions.
Transfer Agent
The transfer agent for the Common Stock is American Stock Transfer &
Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005. This
firm will be acting as our Subscription Agent for purposes of the Rights
Offering.
Price Range of Common Stock; Dividend Policy
The Common Stock common shares are traded over the Nasdaq SmallCap
Market under the symbol "NEIC." As of November 10, 1998, there were 196
registered holders of record of NEIC's Common Stock. The high and low
closing bid prices (as quoted by Nasdaq) for the Common Stock for each
quarterly period for the two most recent fiscal years and the first three
quarters of 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- --------------- --------------
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $2.88 $2.44 $2.94 $2.00 $1.81 $1.00
Second Quarter 3.13 2.63 2.81 1.94 2.00 1.25
Third Quarter 2.94 1.75 3.50 2.06 2.13 1.50
Fourth Quarter 3.19 2.00 2.25 1.50
</TABLE>
These figures reflect prices without retail mark-up, mark-down or
commission and may not represent actual transactions.
The Company has never paid and does not anticipate paying dividends in
the foreseeable future.
Based on its current accumulated statutory unassigned deficit, NEIC
currently is prohibited from paying dividends. Under Maine insurance laws,
cash dividends may only be paid out of that part of the available accumulated
statutory unassigned deficit which is derived from realized net operating
profits on NEIC's insurance business and from net realized capital gains. In
addition to other statutory restrictions, 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,
NEIC 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 NEIC's surplus to policyholders or (ii) NEIC's net
investment income, in either case, as of the preceding year end) unless the
Maine Superintendent of Insurance 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 reduce NEIC's capacity to write new premiums, since
the volume of insurance that can be written is determined by the available
statutory surplus.
<PAGE> 28
COMMISSION POSITION ON INDEMNIFICATION
OF CERTAIN LIABILITIES
Under its Bylaws and separate indemnity agreements, NEIC has agreed to
indemnify its directors and officers against liabilities and expenses arising
in connection with their activities on behalf of North East. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors and officers of North East pursuant to such
provisions, or otherwise, North East has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in such Act and is, therefore, unenforceable.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed
upon for NEIC by Verrill & Dana LLP, Portland, Maine.
EXPERTS
The consolidated financial statements and the related financial
statement schedule included in this Prospectus for the year ended December
31, 1997, and for each of the years in the two year period ended December
31, 1997, have been audited by PricewaterhouseCoopers LLP, independent
auditors, as stated in their report, which is included therein, and has been
so included in reliance upon such report of such firm given upon their
authority as experts in accounting and auditing.
<PAGE> 29
FINANCIAL STATEMENTS
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants 31
Financial Statements:
Consolidated Balance Sheet as of December 31, 1997 32
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 33
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997 and 1996 34
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 35
Consolidated Reconciliation of Cash used in Operating Activities
to net income for the years ended December 31, 1997 and 1996 36
Notes to Consolidated Financial Statements 37
</TABLE>
<PAGE> 30
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, 1997 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, 1997. 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, 1997 and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/S/ Coopers & Lybrand L.L.P.
Portland, Maine
March 31, 1998
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International,
a limited liability association incorporated in Switzerland.
<PAGE> 31
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
as of December 31, 1997
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
ASSETS
- ------
Investments (Note F):
Fixed maturities available for sale, at fair value (amortized cost
$12,817,492) $13,060,654
Equity securities available for sale, at fair value (cost $92,263) 92,263
Short-term investments, at fair value 3,397,581
-----------
Total investments 16,550,498
Reinsurance (loss and loss adjustment expense reserves and paid
recoverables (Note D)) 5,226,919
Premium balances receivable 4,478,724
Reinsurance premium balances receivable 2,139,973
Deferred policy acquisition costs (Note B) 1,029,488
Prepaid reinsurance premiums (ceded unearned premium (Note D)) 373,319
Cash on hand 375,157
Investment income due and accrued 209,904
Property and equipment, net of accumulated depreciation (Note G) 425,429
Deferred tax asset (Note C) 1,790,393
Prepaid expenses 11,487
Prepaid federal income tax 9,242
Other assets 191,037
-----------
Total Assets $32,811,570
===========
LIABILITIES
- -----------
Losses and loss adjustment expenses (Note D and H) $14,657,226
Unearned premiums 6,272,130
Reinsurance balances payable 790,456
Reserve for unpaid expenses and other liabilities 608,287
Book overdraft, net 397,123
Other liabilities 100,694
-----------
Total Liabilities 22,825,916
-----------
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 3,046,842 shares 3,046,842
Additional paid-in capital 6,403,621
Unrealized appreciation of investments 160,487
Accumulated retained earnings 374,704
-----------
Total Shareholders' Equity 9,985,654
-----------
Total Liabilities and Shareholders' Equity $32,811,570
===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE> 32
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Premiums earned $11,759,548 $11,536,429
Premiums ceded (Note D) (266,065) (5,303,573)
---------------------------
Net premiums earned 11,493,483 6,232,856
Net investment income (Note F) 763,438 1,041,762
Realized capital gains (losses) (Note F) 35,321 57,617
---------------------------
Total revenues 12,292,242 7,332,235
Expenses:
Losses and loss adjustment expenses 8,358,886 5,775,929
Reinsurance recoveries (Note D) (1,558,084) (2,270,542)
---------------------------
Net losses and loss adjustment expenses 6,800,802 3,505,387
Underwriting expenses incurred 5,025,434 2,520,488
---------------------------
Total expenses 11,826,236 6,025,875
---------------------------
Income before provision for income taxes 466,006 1,306,360
Provision (benefit) for income taxes (Note C) 177,326 (2,069,136)
---------------------------
Net income $ 288,680 $ 3,375,496
===========================
Net income per common share:
Basic $0.10 $1.13
===========================
Diluted $0.09 $1.13
===========================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE> 33
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Common stock, par value:
Balance at beginning of year $ 3,002,375 $ 2,992,314
Change during year 44,467 10,061
---------------------------
Balance at end of year 3,046,842 3,002,375
---------------------------
Additional paid-in capital:
Balance at beginning of year 6,348,039 6,346,156
Change during year 55,582 1,883
---------------------------
Balance at end of year 6,403,621 6,348,039
---------------------------
Unrealized appreciation (depreciation):
Balance at beginning of year (111,477) 377,053
Change during year, net 271,964 (488,530)
---------------------------
Balance at end of year 160,487 (111,477)
---------------------------
Accumulated retained earnings (deficit):
Balance at beginning of year 86,024 (3,289,472)
Net income 288,680 3,375,496
---------------------------
Balance at end of year 374,704 86,024
---------------------------
Treasury stock, at cost:
Balance at beginning of year 0 (5,000)
Change during year 0 5,000
---------------------------
Balance at end of year 0 0
---------------------------
Total shareholders' equity at end of year $ 9,985,654 $ 9,324,961
===========================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE> 34
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Insurance premiums received $11,123,501 $ 5,542,279
Loss and loss adjustment expenses paid (7,668,046) (7,132,600)
Operating expenses paid (5,763,145) (1,961,730)
Investment income received 837,885 1,086,195
Federal income taxes paid 0 (5,000)
---------------------------
Net cash used in operating activities (1,469,805) (2,470,856)
---------------------------
Cash flows from investing activities:
Fixed maturities - sold 3,863,582 7,514,127
Fixed maturities - matured 0 1,200,000
Fixed maturities - purchased (1,850,675) (5,597,243)
Purchase of property and equipment (223,730) (129,234)
Mortgage note repaid 0 459,139
Investment property sold 76,160 120,000
Sale of property and equipment 18,224 26,833
---------------------------
Net cash provided by investing activities 1,883,561 3,593,622
---------------------------
Cash flows from financing activities:
Proceeds from issuance of common shares 100,049 16,944
Increase (decrease) in book overdraft 390,058 (139,093)
---------------------------
Net cash provided (used) by financing activities 490,107 (122,149)
---------------------------
Net increase in cash and short-term investments 903,863 1,000,617
Cash and short-term investments at beginning of year 2,868,875 1,868,258
---------------------------
Cash and short-term investments at end of year $ 3,772,738 $ 2,868,875
===========================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE> 35
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF CASH USED IN
OPERATING ACTIVITIES TO NET INCOME
for the years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income $ 288,680 $ 3,375,496
Decrease in loss and loss adjustment expense reserve (548,357) (3,801,142)
Increase (decrease) in unearned premium reserve, net 2,731,741 (167,115)
Increase (decrease) in expense accruals and other liabilities (350,338) 375,666
Loss on disposal of property and equipment 63,238 0
Loss (gain) on investment activities (18,974) 20,399
Decrease (increase) in deferred policy acquisition costs (630,893) (86,372)
Depreciation and amortization expense 195,115 190,489
Increase in net premium and ceded reinsurance balances (3,405,610) (249,533)
Decrease in allowance for doubtful accounts (15,000) (100,000)
Decrease in investment income due and accrued 74,447 44,433
Amortization of bond premium, net 72,030 80,491
Loss (gain) on mortgage note in default 0 (79,139)
Loss (gain) on sale of real estate (16,347) 1,123
Increase in other assets (86,863) (1,516)
Increase (decrease) in federal income tax payable 0 (14,500)
Decrease (increase) in prepaid federal income tax 0 (9,242)
Decrease (increase) in deferred tax asset 177,326 (2,050,394)
---------------------------
Net cash used in operating activities $(1,469,805) $(2,470,856)
===========================
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE> 36
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). 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. ACIC, licensed to write property and casualty
insurance risks in the states of New York and Texas, has not written or renewed
any insurance risks since March 1990 and is in runoff. NAU, a Maine domiciled
brokerage company, is dormant.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements, and the reported revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain 1996 amounts have been reclassified in 1997 for comparative purposes.
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 $3,712,405 for amounts not yet due at December 31, 1997. The allowance
for doubtful accounts at December 31, 1997 was $15,000.
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.
<PAGE> 37
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.
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, 1997 and 1996, the Company contributed $9,401 and $7,652,
respectively, pursuant to the matching formula. The Company contributed $0 and
$9,820 under the profitability formula as of December 31, 1997 and 1996,
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.
<PAGE> 38
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 are the
amounts reported in the Consolidated Balance Sheet.
Capital Structure
- -----------------
The Company's capital consists of 6,000,000 authorized common shares, par value
$1.00, of which 3,046,842 are issued and outstanding.
Earnings per Share
- ------------------
Effective December 31, 1997, North East adopted Financial Accounting Standards
("FAS") No. 128, "Earnings Per Share" which requires dual presentation of basic
and diluted earnings per share ("EPS") . Basic EPS is computed by dividing net
income available to common stockholders by the weighted average number of
common shares outstanding. The weighted average number of shares outstanding
used to calculate basic EPS was 3,022,898 and 2,994,265 in 1997 and 1996,
respectively. The weighted average number of shares outstanding used to
calculate diluted EPS was 3,098,235 and 2,994,265 in 1997 and 1996,
respectively. Diluted EPS is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
while giving effect to all dilutive potential common shares outstanding.
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 and short-term (highly liquid) investments with original
maturities less than three months
<PAGE> 39
Accounting Pronouncements Adopted
- ---------------------------------
Effective December 31, 1997 the Company adopted FAS No. 128 which changed the
computation of EPS and requires dual presentation of "basic" and "diluted" EPS.
FAS 128 supersedes Accounting Principles Board ("APB") Opinion No. 15,
"Earnings Per Share".
Effective December 31, 1997 the Company adopted FAS No. 129, "Disclosures of
Information About Capital Structure", which consolidates disclosure
requirements related to the type and nature of securities contained in an
entity's capital structure. FAS 129 does not add or change any of North East's
disclosures.
Effective January 1, 1997 the Company adopted FAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", which established accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. The statement provides guidance for recognition or
derecognition of assets and liabilities, focusing on the concepts of control
and extinguishment. The adoption of FAS 125 did not have a material effect on
North East's results of operations or financial position.
New Accounting Pronouncements
- -----------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS No.
130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a financial
statement with the same prominence as other financial statements. Comprehensive
income is defined as net income adjusted for changes in stockholders' equity
resulting from events other than net income or transactions related to an
entity's capital instruments. North East is required to adopt FAS 130 effective
January 1, 1998, with reclassification of financial statements for earlier
years required.
In June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which establishes standards for reporting
information about operating segments. Generally, FAS 131 requires that
financial information be reported on the basis that is used internally for
evaluating performance. The Company is required to adopt FAS 131 effective
January 1, 1998 and comparative information for earlier years must be restated.
This statement does not need to be applied to interim financial statements in
the initial year of application. The Company is currently considering what
impact, if any, FAS 131 will have on its current reporting format.
In February 1998, the FASB issued FAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits", which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS 132 does
not change the measurement or recognition of pension or other postretirement
benefit plans. The Company is required to adopt FAS 132 effective January 1,
1998, with restatement of disclosure for earlier years required.
In December 1997, the Accounting Standards Executive Committee issued Statement
of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments", which provides guidance on accounting for
insurance-related assessments. North East is required to adopt SOP 97-3
effective January 1, 1998. Previously issued financial statements should not be
restated unless the SOP is adopted prior to the effective date and during an
interim period. The adoption of SOP 97-3 is not expected to have a material
impact on North East's results of operation, liquidity or financial position.
<PAGE> 40
B. Deferred Policy Acquisition Costs:
- --------------------------------------
Deferred policy acquisition costs ($1,029,488 at December 31, 1997) represent
the Company's best estimate of amounts expected to be recovered against future
earned premium from policies currently inforce and anticipated investment
income. The estimates take into account an estimate for anticipated future loss
experience of these policies. While the Company believes that the recovery of
this asset is likely, it is remotely possible that the assumptions used will
prove inappropriate and the Company's estimate that it will recover the
carrying amount of this asset could change.
The following table reconciles the change in deferred policy acquisition costs
for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Balance, beginning of year $ 398,595 $ 312,223
Deferral of policy acquisition costs during year 3,570,811 733,051
Amortization of deferred policy acquisition costs
during year (2,939,918) (646,679)
------------------------
Balance, end of year $1,029,488 $ 398,595
========================
</TABLE>
C. Federal Income Taxes:
- -------------------------
A reconciliation of income taxes computed by applying the federal income tax
rate to income before income taxes and the provision (benefit) for income
taxes for the year ended December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -----------
<S> <C> <C>
Tax at federal statutory rate of 34% $158,442 $ 444,162
Utilization of net operating loss carryforwards (106,938) (467,357)
Timing differences between GAAP basis income
and tax basis income 116,320 4,453
Change in valuation allowance 9,492 (2,050,394)
------------------------
Provision (benefit) for income taxes $177,326 $(2,069,136)
========================
</TABLE>
<PAGE> 41
Details of the components of the deferred tax asset and liabilities and the
valuation allowance at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Deferred Tax Assets
- -------------------
Tax based on net operating loss carryforward $1,236,164
Loss reserve adjustments 509,855
Unearned premium adjustments 401,119
Capital loss carryforward 230,007
Other 75,956
----------
Gross deferred tax assets 2,453,101
Less Valuation allowance (230,007)
----------
Gross deferred tax asset after valuation allowance 2,223,094
----------
Deferred Tax Liabilities
- ------------------------
Deferred policy acquisition costs 350,026
Unrealized appreciation of investments 82,675
----------
Gross deferred tax liabilities 432,701
----------
Net deferred tax asset $1,790,393
==========
</TABLE>
The Company's unused net operating loss carryforwards of $3,635,777 expire in
varying amounts between 2001 and 2011. The Company also has unused capital loss
carryforwards of approximately $264,000 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.
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. The
first layer excess of loss treaty was endorsed in 1997 to revise the premium
rate, eliminate the profit sharing and provide a experience rated premium
adjustment in the event the North East's direct loss and loss expense ratio
exceeded 57% for the 1997 accident year. The 35% quota share treaty in effect
for 1996 and 1995 was cancelled on a runoff basis effective January 1, 1997
and subsequently commuted on September 30, 1997.
The reinsurance balances receivable include $2,208,756 from Motors Insurance
Corporation on behalf of a wholly owned subsidiary, MIC Reinsurance
Corporation. No other reinsurer accounts for more than 10% of the total balance
at December 31, 1997.
<PAGE> 42
Reinsurance balances payable represent unpaid ceded premiums of $182,811 and
funds held under reinsurance contracts of $607,645 at December 31, 1997. Paid
loss and loss adjustment expenses recoverable from reinsurers at December 31,
1997 amounted to $1,694,573. The allowance for uncollectible reinsurance
balances at December 31, 1997 was $136,000.
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 ceded reserves are
determined using statistical projections based on 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 ceded reserves as of the balance sheet date; however, management is also
cognizant that the final ultimate ceded reserves may yield a different result.
Management will continue to monitor the Company's claim settlements closely in
order to provide timely adjustments to this ceded reserve when appropriate.
Written premium amounts reflected in the financial statements are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Direct Written Premiums $12,304,640 $11,126,794
Assumed Written Premiums 10,036 66,763
Ceded Return (Written) Premiums 1,910,548 (5,127,816)
---------------------------
Net Written Premiums $14,225,224 $ 6,065,741
===========================
</TABLE>
Ceded return (written) premiums for the year ended December 31, 1997 includes
$793,697 in return premium due to retroactive rate adjustments to the Company's
first layer excess of loss treaty currently in force, $175,503 of return
premium due to experience rating adjustments for various treaties now in runoff
and $71,005 in return premium due rate adjustments to the Company's second
layer excess of loss treaty currently inforce. In addition, the aggregate limit
excess endorsement to the first layer excess of loss treaty provided $1,800,000
in ceded return adjustment premium. Without these adjustments, ceded written
premium for the year ended December 31, 1997 was $929,657.
Earned premium amounts reflected in the financial statements are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Direct Earned Premiums $11,742,870 $11,442,307
Assumed Earned Premiums 16,678 94,122
Ceded Earned Premiums (266,065) (5,303,573)
---------------------------
Net Earned Premiums $11,493,483 $ 6,232,856
===========================
</TABLE>
Other ceded reinsurance amounts reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Reinsurance commission recovered (returned) $(1,194,463) $2,890,101
Loss and loss adjustment expense reserves 3,668,346 4,828,761
Prepaid reinsurance premiums (ceded unearned premium) $ 373,319 $2,549,932
</TABLE>
<PAGE> 43
Reinsurance commission returned to the reinsurer in 1997 includes commission on
the returned written premium, mentioned above, and a commission adjustment
pursuant to the quota share treaty commuted September 30, 1997 wherein the
deductible was reduced from $1,000 to $100 increasing loss recoveries and
reducing expense recoveries by approximately $900,000.
Other
- -----
The Company has an Employment Agreement with Mr. Schatz, dated December 1, 1997
commencing January 1, 1998 and expiring December 31, 2000. The agreement
provides for a base salary of $175,000 per annum commencing in 1998 (subject to
annual adjustments based on increases in the Consumer Price Index). The
agreement also entitles Mr. Schatz to a bonus in the event aggregate after tax
net profit exceeds targeted growth expectations as determined by the Board of
Directors. The agreement contains certain non-renewal and termination clauses
which if triggered could result in compensation awards ranging from $175,000 to
$350,000 depending on the circumstances. The Company has accrued a 1997 bonus
award of $10,500 pursuant to Mr. Schatz's prior Employment Agreement.
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.
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 either person terminates his employment for "Good Reason"
prior to such date. The Company paid $48,088 pursuant to these agreements in
1997 and at December 31, 1997 the Company has accrued $17,715 relating to its
remaining obligation.
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 Messrs. 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.
<PAGE> 44
E. Statutory Surplus and Statutory Net Income
The following tables reconcile statutory surplus and net income amounts
reported under statutory accounting principles to those reported herein under
GAAP at December 31, 1997 and 1996 and for the years then ended.
<TABLE>
<CAPTION>
As of December 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
Statutory surplus, as reported by the Company $ 6,457,206 $6,738,116
Statutory basis adjustments (98,443) 0
--------------------------
Statutory surplus, as adjusted herein 6,358,763 6,738,116
Reconciliation to GAAP basis:
Deferred policy acquisition costs 1,029,488 398,595
Provision for unauthorized reinsurance 126,600 128,600
Deferred tax asset 1,790,393 2,050,394
Excess of statutory reserve over statement reserves 145,400 46,600
Other non-admitted assets
Data processing equipment 62,500 95,715
Other 380,115 308,031
Premiums receivable 233 849
Adjustment for difference in valuation method for
certain fixed maturities 243,162 (52,717)
GAAP basis reserves in lieu of provision for unauthorized
and other statutorily non-admitted assets (151,000) (389,222)
--------------------------
GAAP basis, surplus $ 9,985,654 $9,324,961
==========================
Year ended December 31,
--------------------------
1997 1998
----------- ----------
Statutory net income (loss), as reported $ (266,788) $ 669,006
Statutory basis adjustments (161,148) 0
--------------------------
As adjusted herein (427,936) 669,006
Reconciliation to GAAP basis:
Change in deferred policy acquisition costs 630,893 86,372
Equity in net income (loss) on non insurance subsidiary 13,339 (8,540)
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 0 652,484
Other 290,507 (115,017)
Federal income tax adjustment (40,797) 40,797
Deferred tax credit (expense) (177,326) 2,050,394
--------------------------
GAAP basis, net income $ 288,680 $3,375,496
==========================
</TABLE>
<PAGE> 45
F. Investments:
- ----------------
The amortized cost and fair value of investments in fixed maturities available
for sale at December 31, 1997 were as follows:
<TABLE>
<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 $ 5,145,550 $213,462 $ 6,443 $ 5,352,569
Public Utilities 1,001,918 13,082 0 1,015,000
Corporate Securities 6,670,024 30,610 7,549 6,693,085
---------------------------------------------------------
Total Fixed Maturities $12,817,492 $257,154 $13,992 $13,060,654
=========================================================
</TABLE>
During 1997 the Company determined that the diminution in value of its
investment in Memorex common stock was more permanent than temporary.
Accordingly the Company wrote down this equity security investment through a
charge to realized losses of $62,705. At December 31, 1997, the cost of equity
securities available for sale approximated the fair value of $92,263.
The investment concentration of corporate fixed maturities for each investment
category which in the aggregate exceeds 10% of shareholders' equity at December
31, 1997 is as follows:
<TABLE>
<CAPTION>
Estimated
Fair
Value %
---------- -----
<S> <C> <C>
Category:
- ---------
Bank & Finance $3,112,287 46.5
Retail & Consumer 1,535,798 22.9
Industrial 2,045,000 30.6
--------------------
$6,693,085 100.0
====================
</TABLE>
The amortized cost and estimated fair value of all fixed maturities available
for sale at December 31, 1997 are shown below by contractual maturity. Actual
dates for realization of such proceeds will differ from the contractual
maturity date because the borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
----------- ------------
<S> <C> <C>
Due to Mature:
- --------------
Within one year $ 754,398 $ 757,493
After one year through five years 7,619,406 7,710,698
After five years through ten years 1,215,729 1,217,365
After ten years through fifteen years 1,237,556 1,245,000
After fifteen years 1,990,403 2,130,098
----------------------------
$12,817,492 $13,060,654
============================
</TABLE>
<PAGE> 46
Proceeds from sales of investments in fixed maturities available for sale
during 1997 and 1996 were $3,863,582 and $7,514,127, respectively. There were
no maturities of fixed maturities available for sale in 1997. During 1996,
fixed maturities with par value of $1,200,000 matured. Gross gains of $3,320
and $70,066 and gross losses of $4,849 and $90,815 were realized on sales of
fixed maturities in 1997 and 1996, 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 $2,860,716 at December 31,
1997.
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.
Realized capital gains (losses) for the years ended December 31, 1997 and 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Fixed maturities $(1,529) $(20,749)
Gain on sale of real estate 16,347 0
Gain from equity securities 20,870 0
Gain on mortgage note repayment 0 78,015
Other (367) 351
----------------------
Total gain (loss) $35,321 $57,617
======================
</TABLE>
The change in unrealized appreciation (depreciation), before provision for
income taxes, on fixed maturities available for sale and equity securities
was as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Fixed maturities $295,880 $(479,985)
Equity securities 58,759 (8,545)
----------------------
Total $354,639 $(488,530)
======================
</TABLE>
<PAGE> 47
Net investment income for the years ended December 31, 1997 and 1996 consisted
of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Interest on fixed maturities $943,477 $1,175,135
Interest on short-term investments 105,330 124,679
Rental income, investment property 7,250 17,850
Dividends on equity securities 451 451
Amortization of bond premium, net (70,537) (80,491)
Other 9,575 7,751
-----------------------
Total investment income 995,546 1,245,375
Investment expenses 232,108 203,613
-----------------------
Net investment income $763,438 $1,041,762
=======================
</TABLE>
Investment expense in 1997 and 1996 includes $12,296 and $2,371, respectively,
of interest expense due reinsurers on funds withheld.
G. Property and Equipment:
- ---------------------------
Property and equipment, which are stated at cost, consist of the following as
of December 31, 1997:
<TABLE>
<CAPTION>
Estimated
Amount Useful Life
---------- --------------------
<S> <C> <C>
Leasehold Improvements $ 74,104 lease term - expires
year 2000
Equipment, furniture and fixtures and automobiles 242,814 3-5 years
Computer software & hardware 699,903 3-10 years
----------
1,016,821
Less accumulated depreciation and amortization 591,392
----------
$ 425,429
==========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997 and
1996 was $195,115 and $190,489, respectively.
The unamortized value of computer software was $123,931 and $108,690 for the
years ended December 31, 1997 and 1996, respectively. Depreciation expense of
computer software was $38,213 and $35,948 for the years ended December 31, 1997
and 1996, respectively. During 1996, $1,989 of previously capitalized software
was written off.
<PAGE> 48
H. Reserve for loss and loss adjustment expenses:
- --------------------------------------------------
The following table provides a reconciliation of the changes in loss and loss
adjustment expense reserves, after deducting amounts recoverable from
reinsurers for 1997 and 1996.
Reconciliation of Liability for Loss and
Loss Adjustment Expenses (LAE)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Reserves for losses and LAE:
Beginning of year $15,205,583 $19,006,725
Amounts recoverable from reinsurers on unpaid losses 4,828,760 4,703,238
----------------------------
Beginning of year, net 10,376,823 14,303,487
Add:
Provision for losses and LAE for claims arising in:
Current year 7,909,126 5,823,867
Prior years (1,108,324) (2,318,480)
Less:
Losses and LAE paid on claims arising in:
Current year 4,555,270 3,826,876
Prior years 1,633,475 3,605,175
----------------------------
End of year, net 10,988,880 10,376,823
Amounts recoverable from reinsurers on unpaid losses 3,668,346 4,828,760
----------------------------
Losses and loss adjustment expenses per Consolidated
Balance Sheet $14,657,226 $15,205,583
============================
</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.
For the years ending December 31, 1997 and 1996 the actuarial estimate
indicated that the prior year reserve for losses and loss adjustment expenses
were redundant by $1,108,324 and $2,318,480 respectively.
I. Stock Options:
- ------------------
At the Annual Shareholders Meeting, June 10, 1997, shareholders approved the
North East Insurance Company Stock Option Plan. The Plan provides for awards of
Incentive Stock Options (ISOs), nonqualified Stock Options (NSOs), and Stock
Appreciation Rights (SARs). ISOs and NSOs represent the right to purchase
North East common stock at a designated option price per share. SARs represent
the right to receive a future payment in an amount which is determined by
reference to the value of a share of common stock. Common stock issuable under
the Plan is limited to 600,000 shares in the aggregate. The Plan is
administered by a committee of two or more non-employee directors appointed by
the Board of Directors.
Employees may be awarded either ISOs or NSOs, in each case carrying an option
price of not less than 100% of the fair market value per share on the date of
grant. No ISO may be exercised more than ten years after the date of grant, and
no ISO may be granted to any employee who, at the time of grant, owns more than
10% of the outstanding voting stock of the Company.
<PAGE> 49
On October 28, 1996 the Board of Directors granted Robert G. Schatz a
Nonstatutory Stock Option for 200,000 shares of common stock, at an exercise
price of $1.625 per share. The option was subject to shareholder approval of
the Plan at the Annual Shareholders Meeting, June 10, 1997. These options are
fully exercisable.
On June 10, 1997 the Board of Directors granted Ronald A. Libby a Incentive
Stock Option for 100,000 shares of common stock, at an exercise price of $2.375
per share. Under the option 20 percent become exercisable on the date of grant
and on the anniversary date of each of the four years following the date of
grant.
Options granted and remaining unexercised at December 31, 1997 represented
300,000 shares of common stock at a weighted average price of $2.42 per share.
Options exercisable at December 31, 1997 represented 220,000 shares of common
stock at a weighted average price of $1.69 per share.
All options expire ten years from the date of grant. No options were exercised,
forfeited or expired in 1997.
The Company uses Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", to recognize compensation cost. If the Company had
adopted the provisions of FAS No. 123, "Accounting for Stock Based
Compensation", net income and earnings per share for 1997 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net income (Loss)
-----------------
As reported $288,680
Pro forma (4,848)
Earnings per common share:
--------------------------
As reported
Basic $0.10
Diluted $0.09
Pro forma
Basic $0.00
Diluted 0.00
</TABLE>
The fair value of each option granted is estimated on the effective date of
grant using a Black-Scholes option-pricing model assuming a seven year life
expectancy, a stock price volatility of 80%, a dividend yield of 0% and a
risk-free interest rate of 6.56%.
J. Dividend Restriction:
- -------------------------
Under Maine Law, dividends may only be paid from available and accumulated
statutory surplus funds which have been derived from net operating income and
net realized capital gains. At the present time the Company has an accumulated
statutory unassigned deficit and does not expect to be in a position to pay
dividends in the near future. The Company has never paid a dividend.
<PAGE> 50
K. Legal Proceedings:
- ----------------------
The Company for many years has been a party-in-interest in The Official
Committee of Unsecured Creditors of American Motor Club, Inc v. Bernard D.
Gershuny, et al (U.S. District Court for the Eastern District of New York,
1992). Certain defendants in this action had brought third-party claims against
NEIC. During 1997 two large sales of NEIC common stock were consummated on
behalf of Mr. Gershuny and First National Life & Casualty Assurance Company,
pursuant to prior settlement arrangements. Net proceeds of these sales were
paid to the Creditors Committee and certain others. The proceeds to the
Creditors Committee were less than the full settlement amount, and the
Committee takes the position that it is free to pursue the defendants for the
remaining deficiency. Despite the potential continuation of this action and
related claims, Management of the Company believes that sufficient payment has
been received by the Committee to effect a release of counterclaims and
third-party claims by the defendants. Management therefore considers all claims
against NEIC to have been resolved without liability to the Company.
Other than ordinary routine litigation incidental to the business, there are
no other material legal proceedings pending with regard to NEIC or its
wholly-owned subsidiary ACIC.
L. 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 $134,483 for 1997,
increasing gradually to $144,823 for the year ending December 31, 2000. The
expense incurred for lease and lease related items for the years ended December
31, 1997 and 1996 was $210,934 and $186,112, respectively.
The following table is a schedule of future minimum lease payments:
<TABLE>
<CAPTION>
Lease Payment
-------------
<S> <C>
Year 1998 137,845
Year 1999 141,291
Year 2000 144,823
</TABLE>
M. Adjustments Made in the Fourth Quarter
- ------------------------------------------
As discussed below, the Company made certain pre-tax adjustments in the fourth
quarter of 1997, which have been included in the December 31, 1997 financial
statements.
(a) Investments
A review was completed of investment assets for permanent impairment, in
connection with the fair valuation of investments as of December 31, 1997. As a
result of this review, an equity security was written down to a fair value of
$0, realizing a loss of $62,705.
(b) Reinsurance
The Company made significant revisions to its various reinsurance contracts
throughout 1997. The impact of these revisions were to; (1) charge off
reinsurance profit sharing commission receivable of $121,352; (2) charge off
ceding commission receivable of $66,141, associated with the commutation of the
Company's quota share treaty effective September 30, 1997; and (3) increase the
allowance for doubtful reinsurance recoverables by $36,000.
<PAGE> 51
(c) Reserve for Unpaid Expenses and Other Liabilities
A detailed assessment was completed in 1998 of liabilities for general
administrative and salary-related expenses existing as of December 31, 1997. A
net adjustment to reduce the Reserve for Unpaid expenses and Other Liabilities
in the financial statements for the year ending December 31, 1997, was $64,069.
(d) Property and Equipment
The Company continued to implement its new computer system throughout 1997. The
policy processing component was installed in late 1995 for policies effective
January 1996 and the loss processing component was activated in May 1997. As a
result of this ongoing implementation, certain computer hardware and software
became obsolete. A review of its computer-related assets in 1998 and
determined that as of December 31, 1997, assets costing $25,100, with
accumulated depreciation of $18,829, had no ongoing useful economic life. A net
charge to earnings of $6,271 was taken in the financial statements for the year
ending December 31, 1997 to reduce property and equipment asset values to that
reflecting their future economic value to the Company.
<PAGE> 52
Appendix A
NORTH EAST INSURANCE COMPANY
INTERIM FINANCIAL INFORMATION
INDEX
Management's Discussion and Analysis A-2
Consolidated Balance Sheet as of September 30, 1998 A-6
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Nine Months Ended September 30, 1998 and 1997 A-7
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the Three Months Ended September 30, 1998 and 1997 A-8
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 A-9
Consolidated Reconciliation of Cash Used in Operating Activities
to Net Income (Loss) for the Nine Months Ended
September 30, 1998 and 1997 A-10
Notes to Consolidated Financial Statements A-11
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Months Ended September 30, 1998
- -------------------------------------
Operating results for the third quarter have been significantly affected by
a rapid increase in premiums from a new personal automobile insurance
program ("Auto"Matic). In late May 1998 the Company introduced AutoMatic to
replace both its existing non-standard and standard/preferred personal
automobile insurance programs. Policies issued under the previous non-
standard and standard/preferred programs are being renewed under the new
"Auto"Matic program. Key features of the new program include assignment of
drivers to specific vehicles and automatic mid-term premium credits at
predefined eligibility dates instead of at the policy renewal date.
Gross premiums written for the three months ended September 30, 1998
amounted to $5,061,168, representing a growth of 61.6% over the $3,131,117
recorded for the comparable three months in 1997. Gross premiums earned for
the three months ended September 30, 1998 amounted to $3,660,219,
representing a growth of 21.2% over the $3,020,178 recorded in the
comparable period in 1997. Net premiums written and net premiums earned
amounted to $4,661,958 and $3,383,332 for the three months ended September
30, 1998, respectively, versus $3,230,472 and $2,761,181 for the comparable
period in 1997. Management believes comparisons between 1998 and 1997 net
premium are not meaningful, due to substantial changes in reinsurance
arrangements, as further described below.
The recent dramatic growth in premium volume has resulted primarily from the
substantial increase in the number of auto policies written. In addition,
the average premium per policy written has increased, due to recent changes
in coverage requirements. Effective July 1, 1998, the State of Maine increased
by 150% the mandatory statutory liability limits for personal auto coverage.
Increased coverage limits can be expected to result in higher claims expense
in the future. The Company has attempted to adopt a rate structure for
"Auto"Matic that will compensate NEIC for the increased risks being assumed,
and yet that will remain competitive with auto policies from other insurers.
Although pleased by the sudden popularity of "Auto"Matic with agents and
customers, management believes that the dramatic 61.6% growth in premiums
written is partially attributable to nonrecurring factors. Management has
instead budgeted for 15%-20% increases per year in the volume of premiums
written. The auto insurance market is highly competitive, however, and there
is no assurance that revenue growth at that rate can be sustained over time.
Loss and loss adjustment expense represented 62.0% and 47.4% of net earned
premium for the three months ended September 30, 1998 and 1997,
respectively. Underwriting expenses incurred amounted to $1,180,246 and
$1,869,779 or 25.3% and 57.9% of net written premium for the three months
ended September 30, 1998 and 1997, respectively. The combined ratio for the
three months ended September 30, 1998 and 1997 was 87.3% and 105.3%.
The Company substantially altered its reinsurance treaties during 1997. The
35% quota share treaty in effect for 1996 and 1995 was canceled on a runoff
basis effective January 1, 1997 and was subsequently commuted on September
30, 1997. Additionally, during the third quarter of 1997 the Company
negotiated a modification to the quota share program, reducing the per
occurrence deductible from $1,000 to $100, and a significant rate reduction
to its first excess of loss treaty. Reinsurance treaties for 1998 remain
unchanged from those in effect at December 31, 1997. The current
arrangements include an endorsement to the first layer excess of loss
treaty, to provide an experience rated premium adjustment in the event
NEIC's direct loss and loss expense exceeds 57% for 1997 and 68% for 1998.
This endorsement gives rise to additional net premium cost which was not
present in 1997.
Investment income, including realized gains, amounted to $217,725 for the
three months ended September 30, 1998, compared with $134,291 for the three
months ended September 30, 1997.
Net income for the three months ended September 30, 1998 amounted to
$214,248 or $0.07 per share compared with a net loss of $198,044 or $0.07
per share for the three months ended September 30, 1997.
Shareholders' equity at September 30, 1998 amounted to $10,107,986 or $3.32
per share compared with $9,731,199 or $3.19 per share at June 30, 1998.
Nine Months Ended September 30, 1998
- ------------------------------------
Gross premiums written for the nine months ended September 30, 1998 amounted
to $12,442,100, representing a growth of 32.9% over the $9,360,632 recorded
for the comparable period in 1997. Gross premiums earned for the nine months
ended September 30, 1998 amounted to $9,934,435, representing a growth of
14.3% over the $8,688,774 recorded for the comparable period in 1997. The
significant increase in premium values is directly related to the
introduction of "Auto"Matic in late May 1998 (see "Three Months Ended
September 30, 1998"). Net premiums written amounted to $10,770,527 for the
nine months ended September 30, 1998, compared with $9,432,763 for the
comparable period in 1997. Net premiums earned amounted to $8,719,965 for
the nine months ended September 30, 1998, compared with $6,588,965 for the
comparable period in 1997. As noted above, management believes comparisons
between 1998 and 1997 net premium are not meaningful, due to substantial
changes in reinsurance arrangements.
Loss and loss adjustment expense represented 70.5% and 65.6% of net earned
premium for the nine months ended September 30, 1998 and 1997, respectively.
Both of these ratios show continued improvement from the 75.9% and 78.7%
reported for the six month periods ending June 30, 1998 and 1997,
respectively. The improvement primarily reflects the seasonality of the
business, in that loss frequency is higher during the winter months.
Underwriting expenses incurred represented 31.2% and 32.4% of net premiums
written for the nine months ended September 30, 1998 and 1997, respectively.
The lower expense ratio for 1998 was directly attributable to stable fixed
overhead expenses even though premium volume increased substantially.
Expenses incurred in the nine months ended September 30, 1998 included
certain one-time expenses associated with the rights offering scheduled to
take place in the fourth quarter of 1998.
Investment income, including realized gains, amounted to $699,458 for the
nine months ended September 30, 1998, compared with $595,137 for the
comparable period in 1997. The return on invested assets, based on amortized
cost, net of allocated expenses, was 5.4% for the nine months ended
September 30, 1998, compared with 4.9% for the comparable period in 1997.
Net loss for the nine months ended September 30, 1998 amounted to $54,125 or
$0.02 per share compared with a loss of $120,370 or $0.04 per share for the
comparable period in 1997.
Shareholders' equity at September 30, 1998 amounted to $10,107,986 or $3.32
per share, compared with $9,985,654 or $3.28 per share at December 31, 1997.
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities amounted to $1,960,771 for the nine
months ended September 30, 1998, compared with cash used by operating
activities of $1,301,407 for the comparable period in 1997. Cash flow for
the nine months ended September 30, 1998 included receipt of approximately
$2.8 million due the Company under its reinsurance treaties. Cash used in
investing activities amounted to $3,550,580 for the nine months ended
September 30, 1998, compared with cash provided by investing activities of
$1,831,330 for the comparable period in 1997.
The fair value of the Company's fixed maturities available for sale was
$590,138 more than amortized cost at September 30, 1998, compared with
$243,162 more than amortized cost at December 31, 1997. During the nine
months ended September 30, 1998 the Company used $293,506 for the purchase
of equity securities. At September 30, 1998 the fair value of equity
securities available for sale was $88,340 less than original acquisition
cost.
The Company maintains short-term investments to provide a cash resource
should the demands from operations exceed incoming cash flow. Short-term
investments amounted to $1,375,111 at September 30, 1998, compared with
$3,397,581 at December 31, 1997. The Company believes that the level of
short-term investments is adequate to meet any shortfall resulting from its
immediate operating activities.
The Company plans to conduct a rights offering of up to 3,049,089 shares of
its Common Stock to existing shareholders. If successful, such offering
would raise between $3 million and $6.8 million of new capital. The rights
offering is the subject of a Registration Statement filed with the
Securities and Exchange Commission.
Year 2000 Issues
- ----------------
Year 2000 ("Y2K") issues arise from the inability of some computer-based
systems to properly recognize and handle dates after December 31, 1999. Like
other insurers, NEIC relies on time-sensitive calculations in the
determining sales revenues (premiums) and, in the case of a claim, verifying
coverage at the time of the claim. Other time-sensitive calculations
include, but are not limited to, installment billing, credit or debit
surcharges, reinsurance protection, authority of authorized agents and
agents' commissions.
Beginning in 1995, the Company replaced its accounting, billing,
underwriting, and claims processing software and hardware. This upgrade was
motivated by factors other than Y2K issues, but was conducted with a view
toward avoiding Y2K problems. Since June 1997, NEIC has been reviewing Y2K
issues as they pertain to the new system. Program code has been searched in
order to identify any commands that include a two-digit year reference, and
modifications to a four-digit year have been made or are scheduled to be
made no later than June 30, 1999. As modified, the software will reject
attempts to input year codes having fewer than four digits. All of the new
hardware has since been upgraded or checked for Y2K compliance.
Although NEIC believes it has identified its internal Y2K issues, no
assurance can be given that it has identified all such problems.
Accordingly, the Company continues to perform information systems tests to
further evaluate its posture relative to Y2K.
Failure of the policy issuance, premium collection or premium billing
systems as a result of any corrupt data or unclear program code, including
those issues associated with Y2K, for any significant length of time could
result in complete loss of revenue for the Company. Accordingly, the Company
has placed great emphasis on these systems to correct Y2K issues of which it
is aware. In the event any of these systems fail to perform, the Company
would depend upon its information system staff and outside consultants to
identify the source of the failure and rectify the problem.
In November 1998 the Company will begin issuing insurance policies having
terms that expire in the year 2000. Subsequent to November 1998 endorsement
processing may occur for policies with year 2000 expiration dates. In
November 1999 the Company will issue its first policy with a year 2000
effective date and a year 2001 expiration date. Each phase of this process
will be closely monitored.
Systems failure of the claims processing system would receive similar
attention, although manual intervention is an alternative. Should manual
intervention be necessary, the Company would utilize its existing staff on
an overtime basis and, if necessary, hire additional part-time staff.
The Company relies on the independent agents to market and sell its
insurance products. NEIC will be sending letters to agents who represent the
Company, to ascertain whether their systems will be Y2K compliant, whether
new business submissions will be affected by noncompliance with Y2K and what
steps are being taken to rectify areas known to be Y2K noncompliant.
NEIC uses outside vendors to verify information provided by its insureds and
to determine credits or surcharges in calculating the amount of insurance
premium charged for the risk assumed. This data is provided through
electronic media. The Company also uses outside vendors for various
electronic financial statement preparation processes. NEIC is in the process
of contacting these vendors to ascertain their status relative to Y2K
issues.
The Company is reviewing its non-financial software (security, mail
processing equipment, telephone, etc.) to assess the effect Y2K noncompliance
could have on the operations of the Company. Since the Company is in the
information gathering phase, it does not yet have a contingency plan for
Y2K-related disruptions in these systems.
The Company estimates that the cost of upgrading its information processing
systems (over and above normal systems maintenance costs) did not exceed
$1,000,000 from 1995 through the date of substantial completion of the
upgrade. As noted above, this upgrade was motivated primarily by factors
other than Y2K compliance. The Company estimates its additional expenditures
for Y2K compliance will not exceed $100,000.
No assurance can be given that the Company will be fully Y2K compliant by
the dates required. However, based on current information, the Company
believes that the effects of any noncompliance will not be material to the
overall operations of the Company.
Forward-Looking Information
- ---------------------------
From time to time, NEIC publishes information that includes forward-looking
statements, as defined in Section 21E of the Securities Exchange Act of
1934. This "Management's Discussion and Analysis" section contains
forward-looking statements, such as estimates of future revenue growth and
estimates of costs and implementation dates associated with Y2K
compliance efforts.
The Company cautions readers that numerous factors beyond NEIC's control
could cause projected revenue growth to differ materially from the levels
reflected in these forward-looking statements, including changes in the
changes in the pricing of competing policies, consolidation among insurance
agents, and changes in consumer preferences. Factors that could cause Y2K-
related costs to exceed expectations include the failure of agents and
outside vendors to cooperate with NEIC compliance efforts and unanticipated
problems with systems believed to be Y2K compliant.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 1998
<TABLE>
<CAPTION>
1998
----
<S> <C>
ASSETS
Investments:
Fixed maturities available for sale, at
fair value (amortized cost $16,032,244) $16,622,382
Equity securities available for sale,
at fair value (cost $385,769) 297,429
Short-term investments 1,375,111
-----------
Total investments 18,294,922
Reinsurance (loss and loss adjustment expense
reserves and paid recoverables) 2,769,601
Premium balances receivable 6,811,635
Deferred policy acquisition costs 1,418,962
Cash 689,630
Prepaid reinsurance premiums (ceded unearned premium) 830,423
Investment income due and accrued 273,890
Property and equipment, net of accumulated depreciation 304,859
Deferred tax asset 1,747,467
Prepaid federal income tax 9,242
Other assets 134,398
-----------
Total Assets $33,285,029
===========
LIABILITIES
Losses and loss adjustment expenses $12,762,648
Unearned premiums 8,779,796
Ceded reinsurance balances payable 405,340
Reserve for unpaid expenses 898,175
Book overdraft 273,177
Other liabilities 57,907
-----------
Total Liabilities 23,177,043
SHAREHOLDERS' EQUITY
Common stock $1.00 par value,
authorized 12,000,000 shares, issued
and outstanding 3,049,089 shares 3,049,089
Additional paid-in capital 6,407,132
Unrealized appreciation of investments 331,186
Accumulated retained earnings 320,579
-----------
Total Shareholders' Equity 10,107,986
-----------
Total Liabilities and Shareholders' Equity $33,285,029
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
for the Nine Months ended September 30,
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
1998 1997
---- ----
<S> <C> <C>
Revenues:
Premiums earned $9,934,435 $ 8,688,774
Premiums ceded 1,214,470 2,099,809
--------------------------
Net premiums earned 8,719,965 6,588,965
Net investment income 666,211 569,086
Realized capital gains 33,247 26,051
--------------------------
Total revenues 9,419,423 7,184,102
Expenses:
Losses and loss adjustment expenses 5,844,775 5,824,082
Reinsurance expense (recoveries) 304,182 (1,501,979)
--------------------------
Net losses and loss adjustment
expenses 6,148,957 4,322,103
Underwriting expenses incurred 3,369,601 3,052,900
--------------------------
Total expenses 9,518,558 7,375,003
--------------------------
Income (loss) before provision for
income taxes (99,135) (190,901)
Provision (credit) for income taxes (45,010) (70,531)
--------------------------
Net income (loss) $ (54,125) $ (120,370)
==========================
Net income (loss) per common share:
Basic $ (0.02) $ (0.04)
==========================
Diluted $ (0.02) $ (0.04)
==========================
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ (54,125) $ (120,370)
Other comprehensive income (loss):
Change in unrealized appreciation (depreciation)
of securities (provision for income taxes
1998-$87,936; 1997-$0) 170,699 170,193
--------------------------
Comprehensive income (loss) $ 116,574 $ 49,823
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
for the Three Months ended September 30,
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
1998 1997
---- ----
<S> <C> <C>
Revenues:
Premiums earned $3,660,219 $ 3,020,178
Premiums ceded 276,887 258,997
--------------------------
Net premiums earned 3,383,332 2,761,181
Net investment income 217,794 187,552
Realized capital gains (losses) (69) (53,261)
--------------------------
Total revenues 3,601,057 2,895,472
Expenses:
Losses and loss adjustment expenses 1,468,825 1,829,574
Reinsurance expense (recoveries) 627,332 (521,238)
--------------------------
Net losses and loss adjustment
expenses 2,096,157 1,308,336
Underwriting expenses incurred 1,180,246 1,869,979
--------------------------
Total expenses 3,276,403 3,178,315
--------------------------
Income (loss) before provision for
income taxes 324,654 (282,843)
Provision (credit) for income taxes 110,406 (84,799)
--------------------------
Net income (loss) $ 214,248 $ (198,044)
==========================
Net income (loss) per common share:
Basic $ 0.07 $ (0.07)
==========================
Diluted $ 0.07 $ (0.07)
==========================
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ 214,248 $ (198,044)
Other comprehensive income:
Change in unrealized appreciation (depreciation)
of securities (provision for income taxes
1998-$83,732; 1997-$0) 162,539 231,733
--------------------------
Comprehensive income $ 376,787 $ 33,689
==========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months ended September 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flow from operating activities:
Insurance premium received $10,192,473 $ 8,153,167
Loss and loss adjustment expenses paid (5,586,217) (5,777,905)
Operating expenses paid (3,247,710) (4,298,216)
Investment income received 602,225 621,547
---------------------------
Net cash provided by
(used in) operating activities 1,960,771 (1,301,407)
---------------------------
Cash flows from investing activities:
Fixed maturities available for sale, sold 2,865,829 3,817,112
Fixed maturities available for sale, purchased (6,097,234) (1,850,675)
Equity securities available for sale, purchased (293,506) 0
Sale of furniture, fixtures and equipment 17,523 17,269
Purchase of furniture, fixtures and
equipment (43,192) (152,376)
---------------------------
Net cash provided by (used in)
investing activities (3,550,580) 1,831,330
---------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 5,758 100,049
Increase (decrease) in book overdraft (123,946) 748,024
---------------------------
Net cash provided by
(used in) financing activities (118,188) 848,073
---------------------------
Net increase (decrease) in cash,
and short-term investments (1,707,997) 1,377,996
Cash and short-term
investments at beginning of year 3,772,738 2,868,875
---------------------------
Cash and short-term
investments at end of period $ 2,064,741 $ 4,246,871
===========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED RECONCILIATION OF CASH USED IN
OPERATING ACTIVITIES TO NET INCOME (LOSS)
for the Nine Months ended September 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income (loss) $ (54,125) $ (120,370)
Decrease (increase) in net premium and ceded
reinsurance balances (578,054) (1,568,826)
Increase in unearned
premium reserve 2,050,562 2,843,798
Increase (decrease) in net loss and loss
adjustment expense reserve 562,740 (1,166,572)
Decrease (increase) in investment income
due and accrued (63,986) 52,461
Decrease (increase) in deferred tax asset (45,010) (70,531)
Increase in deferred policy
acquisition costs (389,474) (980,638)
Increase (decrease) in expense accruals 315,227 (467,119)
Amortization of bond premium, net 50,895 56,937
Depreciation and amortization expense 146,239 145,871
Gain on investment activities (34,243) (26,418)
---------------------------
Net cash provided by
(used in) operating activities $1,960,771 $(1,301,407)
===========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NORTH EAST INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosure normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes
that the disclosures which are made are adequate to make the information
presented not misleading, particularly when read in conjunction with the
financial statements and the notes thereto included in the Company's
latest year-end financial statements. In Management's opinion, the attached
interim financial statements reflect all adjustments which are necessary for
a fair statement of the results for the periods presented.
2. In June 1997, the Financial Accounting Standards Board ("FASB") issued
FAS No. 130, "Reporting Comprehensive Income", which establishes standards
for reporting and display of comprehensive income and its components in a
financial statement with the same prominence as other financial statements.
Comprehensive income is defined as net income adjusted for changes in
shareholders' equity resulting from events other than net income or
transactions related to an entity's capital instruments. North East adopted
the provisions of FAS 130 effective January 1, 1998.
In June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which establishes standards for
reporting information about operating segments. Generally, FAS 131 requires
that financial information be reported on the basis that is used internally
for evaluating performance. The Company is required to adopt FAS 131
effective January 1, 1998 and comparative information for earlier years must
be restated. This statement does not need to be applied to interim financial
statements in the initial year of application. The Company is currently
considering what impact, if any, FAS 131 will have on its year end reporting
format.
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities.
Generally, FAS 133 requires recognition of all derivatives, at fair value,
as either assets or liabilities in the statement of financial position. The
Company is required to adopt the provisions of FAS 133 effective January 1,
2000. Adoption of FAS 133 is not expected to have a material effect on the
Company's consolidated results of operations or financial position as the
Company presently does not hold any derivative instruments nor does it
participate in any hedging transactions.
3. North East Insurance Company owns 100% of American Colonial Insurance
Company and North Atlantic Underwriters, Inc. whose results are consolidated
herein.
4. Earnings per share are computed in accordance with the provisions of FAS
No. 128 "Earnings Per Share" which requires the dual presentation of basic
and diluted earnings per share. The weighted average number of shares
outstanding used to calculate basic earnings per share was 3,047,591 and
3,017,197 for the nine months ended September 30, 1998 and 1997,
respectively. The weighted average number of shares outstanding used to
calculate diluted earnings per share was 3,133,158 and 3,085,382 for the
nine months ended September 30, 1998 and 1997, respectively.
Appendix B
NORTH EAST INSURANCE COMPANY
RIGHTS OFFERING OF COMMON STOCK
REPRESENTATION LETTER
To: North East Insurance Company
c/o American Stock Transfer & Trust Company,
as Subscription Agent
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Reorganization Department
The undersigned shareholder ("Subscriber") of North East Insurance
Company, a Maine corporation ("NEIC"), intends to purchase shares of NEIC's
Common Stock, $1 par value ("Common Stock") on the terms set forth in the
NEIC Prospectus dated November 12, 1998 (the "Prospectus"). Subscriber
hereby represents, warrants, agrees and acknowledges as follows:
Existing Ownership:
As of November 9, 1998 (the "Record Date"), Subscriber owned shares of
Common Stock as follows (mark all that apply):
[ ] Indirectly, through the following broker or bank: _______________
_________________________ located in ___________________ (city),
___________________________ (state).
[ ] Directly, through ownership of an NEIC stock certificate in the
name of Subscriber.
[ ] Other (please describe): ________________________________________
______________________________________________________.
The total number of shares of Common Stock owned by Subscriber on the
Record Date was ______________________ shares. For these purposes, a person
is considered to "own" shares of Common Stock if (i) he or she has the right
to vote the shares or otherwise control the voting of the shares or (ii) he
or she has the right to sell the shares or otherwise order a sale or other
transfer of the shares. If two or more persons jointly hold the power to
vote or sell any shares of Common Stock (or have otherwise agreed to act in
concert for purposes of voting or disposing of the shares), then each will
be considered to own all of those shares.
Shares Subscribed for:
The total number of shares of Common Stock subscribed for, including
pursuant to both the primary subscription right and oversubscription
privilege, by the undersigned subscriber is _______________.
Other Representations and Agreements by Subscriber:
Subscriber hereby represents to NEIC that he or she understands that
Maine and New York insurance laws generally prohibit any person from
acquiring beneficial ownership of 10% or more of the outstanding voting
stock of NEIC, unless that person or group first obtains permission from
state insurance regulators. Subscriber agrees not to acquire NEIC shares
through or in connection with the Rights Offering in violation of those
prohibitions. Subscriber agrees (if NEIC so requests within 60 days of
expiration of the Rights Offering) to provide reasonable evidence of the
total number of shares beneficially owned by him or her and those on whose
behalf Subscriber holds shares. Subscriber agrees that, until the date he
or she receives a stock certificate from NEIC for the shares subscribed for
in this Subscription Agreement, Subscriber will promptly inform NEIC if any
of the representations in this Agreement become untrue.
Subscriber's principal residence address (or business address if
Subscriber is an entity) is as follows:
____________________________________________________________
____________________________________________________________
____________________________________________________________
____________________________________________________________
* * *
EXECUTED BY SUBSCRIBER on the ______ day of _________________________, 1998,
at ____________, ___________________ [city, state].
NAME OF SUBSCRIBER: ___________________________
(Joint owners: all Signature ___________________________
owners must sign) Title ___________________________
(Entities: specify
titles of signing Signature ___________________________
officers) Title ___________________________
Please be sure that all necessary information has been provided. NEIC
reserves the right to reject any Representation Letter which in its judgment
is incomplete.
NORTH EAST INSURANCE COMPANY
RIGHTS OFFERING PROSPECTUS
November 12, 1998
UNDER THE SECURITIES EXCHANGE ACT OF 1934, WE MUST FILE REPORTS, PROXY
STATEMENTS AND OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE COMMISSION
("SEC"). YOU MAY OBTAIN COPIES OF OUR RECENT REPORTS AND PROXY STATEMENTS IN
THE FOLLOWING WAYS: (1) BY WRITING US AT NORTH EAST INSURANCE COMPANY, P.O.
BOX 1418, SCARBOROUGH, ME 04070-1418; (2) THROUGH THE EDGAR DATABASE ON THE
SEC'S WEBSITE ON THE INTERNET (HTTP://WWW.SEC.GOV); (3) BY INSPECTION OR
COPYING AT PUBLIC REFERENCE ROOMS AT THE SEC'S PRINCIPAL OFFICE AT JUDICIARY
PLAZA BUILDING, 450 FIFTH STREET, N.W., WASHINGTON, DC 20549, OR AT ITS
REGIONAL OFFICES AT NORTHWESTERN ATRIUM CENTER, 500 WEST MADISON STREET, SUITE
1400, CHICAGO, ILLINOIS 60661 OR 7 WORLD TRADE CENTER, 13TH FLOOR, NEW YORK,
NEW YORK 10048, OR (4) BY WRITTEN REQUEST TO THE PUBLIC REFERENCE SECTION OF
THE COMMISSION AT JUDICIARY PLAZA, 450 FIFTH STREET, N.W., WASHINGTON, D.C.
20549, AT PRESCRIBED RATES.
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT ON FORM SB-2, WHICH
WE HAVE FILED AS REQUIRED BY THE SECURITIES ACT OF 1933. THE REGISTRATION
STATEMENT CONTAINS CERTAIN INFORMATION AND EXHIBITS THAT DO NOT APPEAR IN THE
PROSPECTUS ITSELF. YOU MAY OBTAIN A COPY OF THE REGISTRATION STATEMENT
(INCLUDING EXHIBITS) BY WRITING US AT THE ADDRESS SET FORTH ABOVE, OR FROM THE
SEC THROUGH ITS WEBSITE OR AT THE ADDRESSES SET FORTH ABOVE.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR
THAT WE HAVE REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT DIFFERS FROM THAT IN THE PROSPECTUS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 719 of the Maine Business Corporation Act (the "MBCA") grants
the Registrant broad powers to indemnify and insure its directors and officers
against liabilities they may incur in such capacities. In accordance
therewith, the Registrant's By-Laws generally provide for the fullest
indemnification of an officer or director of the Registrant permitted under
the MBCA.
The Registrant has entered into agreements with its directors and
certain of its officers that require the Registrant to indemnify such persons
against expenses, including attorneys' fees, judgments, fines, settlements and
other amounts incurred directly or indirectly in connection with any
proceeding, whether actual or threatened, to which any such person may be made
a party by reason of the fact that such person served as a director or officer
of the Registrant or any of its affiliated enterprises, provided that such
indemnification is consistent with applicable law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses incurred by the Registrant in connection with the Rights Offering
are:
<TABLE>
<S> <C>
SEC registration fee......................................... $ 2,249
Accounting fees and expenses*................................ $12,000
Legal fees and expenses*..................................... $40,000
NASD Listing Fee............................................. $ 7,500
Subscription Agent fees*..................................... $ 7,500
Printing costs*.............................................. $14,000
Miscellaneous*............................................... $ 1,751
-------
Total........................................................ $85,000
</TABLE>
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has not made any sale of unregistered securities during
the past three years.
ITEM 27. EXHIBITS.
<PAGE> II-1
A list of the exhibits included as part of this Registration Statement
is set forth in the Exhibit Index that immediately precedes such exhibits and
is incorporated herein by reference.
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions of its bylaws or any
indemnification agreement, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
<PAGE> II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
Amendment No 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Portland, State of
Maine on this 12th day of November, 1998.
NORTH EAST INSURANCE COMPANY
By: /s/ Robert G. Schatz
Robert G. Schatz
President and Chief Executive Officer
Signature Title Date
- --------- ----- ----
/s/ Robert G. Schatz President, Chief Executive November 12, 1998
- -----------------------
Robert G. Schatz Officer and Director
/s/ Ronald A. Libby Chief Operating Officer November 12, 1998
- -----------------------
Ronald A. Libby
/s/ Graham S. Payne Treasurer, Chief Financial Officer November 12, 1998
- -----------------------
Graham S. Payne [principal accounting officer]
Director
- -----------------------
Edward B. Batal
/s/ Terence C. Cummings* Director November 12, 1998
- -----------------------
Terence C. Cummings
Director
- -----------------------
Robert A. Hancock
/s/ Wilson G. Hess* Director November 12, 1998
- -----------------------
Wilson G. Hess
/s/ Joseph M. Hochadel* Director November 12, 1998
- -----------------------
Joseph M. Hochadel
/s/ Peter A. Russ* Director November 12, 1998
- -----------------------
Peter A. Russ
/s/ Bruce H. Suter* Director November 12, 1998
- -----------------------
Bruce H. Suter
* By: /s/ Robert G. Schatz
----------------------------------
Robert G. Schatz, Attorney in Fact
<PAGE> II-3
EXHIBIT INDEX
3.1 Conformed Copy of Articles of Incorporation, as amended to date.
3.2 Bylaws of North East Insurance Company, as amended to date, is
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
5.1 Opinion of Verrill & Dana, LLP
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 Employment Agreement dated December 1, 1997 between North East
and Robert G. Schatz is incorporated herein by reference to Exhibit
10.3 to NEIC's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997
10.3 Letter Agreement dated October 28, 1996 between the Company and
Robert G. Schatz, regarding bonus compensation arrangements is
incorporated herein by reference to Exhibit 10.4 to NEIC's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996
10.4 Letter Agreement dated October 28, 1996 between the Company and
Ronald A. Libby, regarding terms of employment is incorporated
herein by reference to Exhibit 10.5 to NEIC's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996
10.5 Letter Agreement dated October 28, 1996 between the Company and
Samuel M. Koren, regarding terms of employment is incorporated
herein by reference to Exhibit 10.6 to NEIC's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996
10.6 Employment Continuity Agreement dated as of October 28, 1996
between the Company and Robert G. Schatz is incorporated herein by
reference to Exhibit 10.7 to NEIC's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996
10.7 Employment Continuity Agreement dated as of October 28, 1996
between the Company and Ronald A. Libby Schatz is incorporated
herein by reference to Exhibit 10.8 to NEIC's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1996
10.8 Employment Continuity Agreement dated as of October 28, 1996
between the Company and Samuel M. Koren is incorporated herein by
reference to Exhibit 10.9 to NEIC's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996
<PAGE> II-4
10.9 North East Insurance Company Stock Option Plan is incorporated herein
by reference to Exhibit 10.10 to NEIC's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997
21 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.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Verrill & Dana, LLP (included in its opinion filed as
Exhibit 5.1 hereto)
24.1 Form of power of Attorney as executed by Terence C. Cummings,
Wilson G. Hess, Joseph M. Hochadel, Peter A. Russ, and
Bruce H. Suter
99.1 Form of Subscription Agreement
99.2 Instructions for use of Subscription Agreement
99.3 President's Letter to Shareholders
<PAGE> II-5
EXHIBIT 3.1
NORTH EAST INSURANCE COMPANY
(a quasi-public corporation)
CONFORMED ARTICLES OF INCORPORATION
FIRST: The name of the corporation is NORTH EAST INSURANCE COMPANY.
SECOND: The name of its clerk and the registered office shall be:
Samuel M. Koren
P.O. Box 1418
482 Payne Road
Scarborough, ME 04070-1418
THIRD: The maximum number of authorized shares of the capital stock of
the Corporation shall be 12,000,000 shares of capital stock
consisting of 12,000,000 shares of Common Stock of par value of
$1.00 per share. The aggregate par value of all shares which the
Corporation shall have authority to issue is $12,000,000.
There are no pre-emptive rights.
FOURTH: The maximum number of directors shall be 21 and the minimum number
of directors shall be 7. The Board of Directors is authorized by
resolution to increase and decrease the number of directors within
that range, but no reduction in the number of directors shall
shorten the term of any incumbent director.
- --------------------
(1) These conformed Articles of Incorporation have been prepared based on
the Certificate of Organization of North East Insurance Company and
all amendments thereto filed with the Maine Secretary of State, to
which reference is made for the complete text of North East Insurance
Company's Articles of Incorporation.
FIFTH: The purposes of the corporation are:
1. To insure against loss or damage to property and loss of use and
occupancy by fire; explosion, fire ensuing; explosion, no fire
ensuing, except explosion of steam boilers and fly wheels;
lightning or tempest and tornadoes on land; by water and
breakage or leakage of sprinklers, pumps or other apparatus
erected for extinguishing fires, and of water pipes or against
accidental injury to such sprinklers, pumps or other apparatus.
2. To insure against loss or damage to property of the assured, or
loss or damage to the life, person or property of another for
which the assured is liable, caused by the explosion of steam
boilers or their connections or by the breakage or rupture of
machinery or fly wheels; and against loss of use and occupancy
caused thereby.
3. To insure any person against bodily injury or death by accident,
or any person, firm or corporation against loss or damage on
account of the bodily injury or death by accident of any person,
for which loss or damage said person, firm or corporation is
responsible and to make insurance upon the health of
individuals.
4. To insure against breakage or damage to glass, local or in
transit.
5. To insure the owners of domestic animals against loss resulting
from death or injury to the animals insured and to furnish
veterinary's services.
6. To insure against loss or damage by burglary, theft or
housebreaking.
7. To examine titles of real estate and personal property, furnish
information relative thereto and insure owners and others
interested therein against loss by reason of encumbrances or
defective titles.
8. To insure against loss or damage to automobiles, except loss or
damage by fire or while being transported in any conveyance,
either by land or water; including loss by legal liability for
damage to property resulting from the maintenance and use of
automobiles.
9. To insure any goods or premises against loss or damage by water,
caused by the breakage or leakage of sprinklers, pumps, water
pipes or plumbing and its fixtures and against accidental injury
from other cause than fire or lightning to such sprinklers,
pumps, water pipes, plumbing and fixtures.
10. To insure against loss or damage to property arising from
accidents to elevators, bicycles and vehicles, except rolling
stock of railroads, from other causes than fire or lightning.
11. To insure against loss or damage to property, including loss of
use and occupancy of tractors, vehicles, smoke and smudge,
earthquake, hail, frost or snow, weather or climatic conditions,
including excess or deficiency of moisture, flood, rain or
drought.
12. Also to insure against loss or damage by insects or disease to
domestic animals and to farm crops or products and loss of
rental value of land used in producing such crops or products.
13. Also to insure against loss or damage, including loss of use or
occupancy by water entering through leaks or openings in
buildings.
14. Also to insure against loss or damage to aircraft, whether
stationary or in motion, which shall include all or any of the
hazards of fire, explosion, transportation or collision.
15. Also to insure against loss by legal liability for damage to
property or for bodily injury or death resulting from the
maintenance and use of motor vehicles or aircraft or any object
falling therefrom excepting explosives or missiles in time of
war, insurrection or civil strife.
16. Also to insure against loss by vandalism, sabotage or malicious
mischief to any and all kinds of property, or the wrongful
conversion, disposal or concealment of motor vehicles or
aircraft.
17. Any policy insuring against liability resulting from or incident
to the ownership, maintenance or use of a vehicle or aircraft
may contain a provision for payment on behalf of the injured
party or for reimbursement of the insured for payment,
irrespective of legal liability of the insured, of medical,
hospital, surgical and disability benefits to persons injured
and funeral and death benefits to dependents, beneficiaries or
personal representatives of persons who are killed as the result
of an automobile accident, and such provision shall not be
deemed to be an accident insurance policy within the life,
personal accident or health insurance provisions of the Revised
Statutes.
18. To reinsure on a concurrent, excess, or other basis, insurance
and/or guarantees of the aforementioned kinds or classes insured
by any other company, domestic or foreign, and to reinsure or
cede reinsurance on concurrent, excess or other basis, insurance
and/or guarantees of any of the aforementioned kinds or classes
issued by this company.
19. To issue insurance or guarantees of each or any of the foregoing
kinds or classes on a participating or a non-participating plan
or basis.
19-A. To guaranty the fidelity of persons in possession of trust,
private or public, and to act as surety on official bonds for
the performance of other obligations.
20. To subscribe for, purchase, or otherwise acquire, own, hold,
invest in, use, sell, or assign, transfer, exchange, pledge,
mortgage, or otherwise, deal in or with shares of stock, bonds,
coupons, promissory notes, pledges, obligations of corporations
or associations, domestic or foreign, governmental or otherwise,
and be a stockholder in any such company, corporation or
association.
21. To receive, collect, hold or dispose of interest, dividends and
income upon, of and from any of the shares of stock, bonds,
coupons, promissory notes, pledges, obligations, contracts,
evidences of debt, securities, or other property held or owned
by it, and to exercise in respect thereof any and all rights,
powers and privileges of individual ownership, including the
right to vote thereon, and to do any and all acts and things
tending to increase the value of the property at any time, held
by it.
22. To purchase, lease, or otherwise acquire, hold, own, use,
manage, sell, convey, mortgage, lease, or otherwise dispose of
and deal in, both within and without the State of Maine, real
and personal property of every kind and description necessary,
convenient or proper for the purposes of the company.
23. To purchase, hold, sell, transfer, the shares of its own capital
stock, provided it shall not use its funds or property for the
purchase of its own shares of capital stock when such use would
cause any impairment of its capital; provided further that
shares of its own capital stock belonging to it shall not be
voted upon directly or indirectly.
24. To have one or more offices, to carry on all or any of its
operations and business in any of the States, Districts, and
Territories of the United States, and in any and all foreign
countries subject, however, to the laws of such States,
Districts, Territories, and foreign countries.
25. To do all and everything necessary, suitable, convenient or
proper for the accomplishment of any of the purposes or the
attainment of any one or more of the objects herein enumerated,
or incidental to the powers herein named, which shall at any
time appear conducive or expedient for the benefit or protection
of the corporation, to the same extent or as fully as natural
persons might or could do, with all the powers now or hereafter
conferred by the laws of the State of Maine.
26. The foregoing clauses shall be construed both as objects and
powers, and it is expressly provided that the foregoing
enumeration of specific powers shall not be held to limit or
restrict in any manner the powers of this corporation.
SIXTH: The Corporation shall not:
(1) merge or consolidate with or into any other person; or
(2) sell, lease, exchange or otherwise dispose of (except pursuant
to a mortgage, security interest or the like) all or
substantially all of the assets of the Corporation to or with
any other person;
unless and until such transaction is authorized or approved by the
affirmative vote of the holders of at least 75% of the outstanding
stock of the Corporation entitled to vote thereon or, if no vote is
otherwise required by law, by the affirmative vote of the holders of
at least 75% of the outstanding stock of the Corporation entitled to
vote generally in the election of directors, considered for the
purposes of this provision as one class, but the foregoing requirement
shall not apply, and the applicable provisions of the laws of Maine,
if any, relating to the percentage of stockholder approval shall apply
to
(i) any merger or other transaction described in the
preceding subparagraphs (1) and (2) if the other person
party to or involved in the merger or other transaction
is a wholly-owned subsidiary of the Corporation and
engaged solely in and with assets relating only to the
insurance business; or
(ii) any merger or other transaction described in the
preceding subparagraphs (1) and (2) if such merger or
other transaction is between or otherwise involves the
Corporation and any other person which is not an
"affiliate" of the Corporation and if at any time prior
to its consummation the transaction has been approved by
a resolution adopted by not less than two-thirds of all
of the directors then in office, and remaining in effect
on the date of such consummation.
For purposes of this Article a "person" is any individual,
partnership, corporation or entity; an "affiliate" of the Corporation
is (a) any other person more than 50% of the voting securities of
which are owned directly or indirectly by the Corporation or (b) any
other person which, either itself or together with any other person
which controls, is controlled by or is under common control with,
directly or indirectly, said other person, or together with its
associates (as defined under the rules and regulations adopted under
the Securities Exchange Act of 1934 as in effect on March 1, 1981),
owns, directly or indirectly, of record or beneficially more than 20%
of any outstanding class of stock of the Corporation entitled to vote
in respect of the election of directors on the record date used to
determine the stockholders of the Corporation entitled, by law or by
this ARTICLE SIXTH, to vote with respect thereto; and "beneficially"
means shares held for the benefit of a person including shares in the
name of another from which such person obtains benefits substantially
equivalent to those of ownership by reason of ownership, control, or
by reason of any contract, relationship or other arrangement.
The foregoing provisions of this ARTICLE SIXTH shall not be modified,
revised, altered, amended, repealed or rescinded, in whole or in part,
except by the affirmative vote of the holders of at least 75% of the
outstanding stock of the Corporation entitled to vote thereon.
Exhibit 5.1
VERRILL & DANA. LLP
One Portland Square
Portland, Maine 04112-0586
207-774-4000 * Fax 207-774-7499
November 12, 1998
North East Insurance Company
482 Payne Road
Scarborough, ME 04074
Re: North East Insurance Company - Registration Statement Form SB-2
Registration No. 333-62881
---------------------------------------------------------------
Ladies and Gentlemen:
We are familiar with the proceedings taken and proposed to be taken by
North East Insurance Company, a Maine corporation (hereinafter called the
"Company"), with respect to the offer and sale by the Company to its
existing shareholders of an aggregate of up to 3,049,089 shares of Common
Stock, par value $1.00 per share, of the Company (hereinafter called the
"Shares"), as described in the Registration Statement on Form S-B2
(Registration No. 333-62881)(the "Offering").
We have examined the Articles of Incorporation and the Bylaws of the
Company and all amendments thereto. We have also examined the corporate
proceedings relating to the authorization and issuance of the Shares and
have made such further examination and inquiries as we deem necessary in
the premises.
Based upon and subject to the foregoing, we are of the opinion that
the Shares have been duly authorized and when issued and paid for in
accordance with the terms of the Offering, will be validly issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-mentioned Registration Statement, and to the use of our name under the
caption "Legal Matters" in the Prospectus forming part of such Registration
Statement. In giving this consent, we do not hereby admit that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933 or the General Rules and Regulations of the Securities
and Exchange Commission.
Very truly yours,
/s/ Verrill & Dana, LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form SB-2
(File No. 333-62881) of our report dated March 31, 1998, on our audit of
the consolidated financial statements of North East Insurance Company
and subsidiaries as of December 31, 1997, and for the two years in the period
ended December 31, 1997, which report is included in the Annual Report on Form
10-KSB. We also consent to the reference to our firm under the caption
"Experts."
Portland, Maine
November 11, 1998 /s/ PricewaterhouseCoopers LLP
NORTH EAST INSURANCE COMPANY
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that I hereby constitute and appoint Robert G.
Schatz, Graham S. Payne, and Samuel M. Koren my true and lawful attorneys-
in-fact and agents, each acting alone, with full powers of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, from time to time, to sign a registration statement on Form SB-2
relating to a rights offering of not more than 3,200,000 shares of Common
Stock of North East Insurance Company, and any amendments and supplements
thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission and state securities administrators, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as I might or could do in
person, and hereby ratifies and confirms all that said attorneys-in-fact and
agents, each acting alone, or their substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Witness my signature on the date set forth below:
Date:
Name:
EXHIBIT 99.1
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE
COMPANY'S PROSPECTUS DATED NOVEMBER 12, 1998 (THE "PROSPECTUS"), AND IS
INCORPORATED HEREIN BY REFERENCE. COPIES OF THE PROSPECTUS ARE AVAILABLE
UPON REQUEST FROM AMERICAN STOCK TRANSFER & TRUST COMPANY AS SUBSCRIPTION
AGENT.
CONTROL NUMBER NORTH EAST INSURANCE COMPANY SUBSCRIPTION CERTIFICATE
REPRESENTING
SUBSCRIPTION CERTIFICATE FOR COMMON SHARES
VOID IF NOT EXERCISED AT OR BEFORE 5:00 P.M.
(EASTERN TIME) ON DECEMBER 21, 1998, THE EXPIRATION DATE
THIS SUBSCRIPTION CERTIFICATE IS NOT TRANSFERABLE
AND MAY NOT BE COMBINED OR DIVIDED
EXPIRATION DATE: DECEMBER 21, 1998
THIS SUBSCRIPTION CERTIFICATE MAY BE USED RIGHTS
TO SUBSCRIBE FOR SHARES, BUT MAY NOT BE SUBSCRIPTION PRICE
ASSIGNED OR SOLD, FULL INSTRUCTIONS APPEAR US $2.25 PER SHARE
ON THE BACK OF THIS CERTIFICATE.
CUSIP
659164107
REGISTERED OWNER:
The registered owner of this Subscription Certificate, named above, is
entitled to the number of rights to subscribe for Common Stock, $1.00 par
value, of North East Insurance Company, shown above, in the ratio of one
share of Common Stock for each Right held, pursuant to the Basic
Subscription Privilege and upon the terms and conditions and at the price for
each share of Common Stock specified in the Prospectus dated November 12,
1998 relating thereto.
IMPORTANT: Complete form on reverse side.
Dated: November 12, 1998
NORTH EAST INSURANCE COMPANY
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
(New York, N.Y.) TRANSFER AGENT
AND REGISTRAR
By: /s/
AUTHORIZED SIGNATURE
Expiration Date: December 21, 1998
PLEASE COMPLETE ALL APPLICABLE INFORMATION AND RETURN THIS FORM TO:
American Stock Transfer
& Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Attn: Reorganization Department
PART 1: TO SUBSCRIBE: I hereby irrevocably subscribe for the number of
shares indicated upon the terms and conditions specified in the
Prospectus related hereto, receipt of which is acknowledged.
Please check [ ] below:
<TABLE>
<S> <C> <C> <C>
[ ] A. Basic Subscription Privilege: x $ 2.25 = $
--------------- -------------------- -----------------
(Full Shares of (Subscription Price) (Amount Required)
Common Stock
Requested)
[ ] B. Oversubscription Privilege: x $ 2.25 = $
--------------- -------------------- -----------------
(Full Shares of (Subscription Price) (Amount Required)
Common Stock
Requested) TOTAL = $
-----------------
</TABLE>
NOTE: NEIC reserves the right to limit your purchase if and to the extent
necessary to keep your percentage ownership from exceeding 9.9% of the
outstanding total shares.
PART 2: METHOD OF PAYMENT (CHECK ONE)
[ ] Uncertified personal check payable to American Stock Transfer & Trust
Company, as Subscription Agent. Please note that funds paid by
uncertified check may take at least five business days to
clear. Accordingly, shareholders who wish to pay the subscription
price by means of an uncertified personal check are urged to make
payment sufficiently in advance of the Expiration Date to ensure that
such payment is received and clears by such time, and are urged to
consider payment by means of certified or bank check, money order or
wire transfer of immediately available funds.
[ ] Certified check or bank check drawn on a U.S. bank, or money order,
payable to American Stock Transfer & Trust Company, as Subscription
Agent.
[ ] Wire transfer directed to the account maintained by American Stock
Transfer & Trust Company at The Chase Manhattan Bank, Account No. 323-
005225; ABA No. 021000021.
If the amount enclosed or transmitted is not sufficient to pay the
Subscription Price for all shares that are stated to be subscribed for, or
if the number of shares being subscribed for is not specified, the number of
shares subscribed for will be assumed to be the maximum number that could be
subscribed for upon payment of such amount. If the amount enclosed or
transmitted exceeds the Subscription Price for all shares that the
undersigned has the right to purchase pursuant to the Basic Subscription
Privilege and the Oversubscription Privilege (such excess amount, the
"Subscription Excess"), the Subscription Agent shall return the Subscription
Excess to the subscriber without interest or deduction.
PART 3: REPRESENTATIONS OF SUBSCRIBER. This Part need only be completed by
subscribers intending to purchase more than 200,000 shares.
Subscription for more than 200,000 shares will be rejected unless one of the
following conditions is satisfied and the corresponding box is checked:
[ ] Subscriber is a broker, custodian, trustee, bank or other intermediary
holding shares of NEIC for the benefit of others, none of whom is
purchasing more than 200,000 shares of NEIC pursuant to the
subscription offering;
[ ] Subscriber is a broker, custodian, trustee, bank or other intermediary
holding shares of NEIC for the benefit of others and has attached
hereto a completed Representation Letter in the form included in the
Prospectus as Appendix B for each beneficial owner who is purchasing
more than 200,000 shares of NEIC pursuant to the subscription
offering; or
[ ] Subscriber has attached hereto a completed Representation Letter in
the form included in the Prospectus as Appendix B.
If you have any questions regarding this Part 3, please call Linda Hatt
(Shareholder Relations) or Robert G. Schatz (Chief Executive Officer) at
NEIC, 207-883-2232.
PART 4: SIGNATURE:
Subscriber acknowledges that Maine and New York insurance laws generally
require prior approval for any person to acquire beneficial ownership of 10%
or more of the outstanding voting stock of NEIC.
EXECUTED BY SUBSCRIBER on the _________ day of ________________, 1998.
(Joint owners: all Signature ________________________________
owners must sign) Title ____________________________________
(Entities: specify Signature ________________________________
titles of signing Title ____________________________________
officers)
EXHIBIT 99.2
LETTER OF INSTRUCTIONS
NORTH EAST INSURANCE COMPANY
SHAREHOLDER'S SUBSCRIPTION RIGHTS OFFERING
To the Shareholders of North East Insurance Company:
If you owned Common Stock in North East Insurance Company ("NEIC Stock") on
November 9, 1998, you are eligible to purchase more NEIC Stock through the
Rights Offering described in the Company's Prospectus dated November 12,
1998 (the "Prospectus"). In order to purchase NEIC Stock through the Rights
Offering, please follow carefully the instructions set forth below.
Shareholders who do not wish to purchase NEIC Stock need not respond to the
Offering.
All shareholders who wish to subscribe for NEIC Stock must complete the
Subscription Form found on the reverse side of the Subscription Certificate
that accompanies the Prospectus. All documents and payments must be
received from you by the Subscription Agent no later than 5:00 p.m. Eastern
Time on Monday, December 21, 1998. The Subscription Form is divided into
four parts, as follows:
PART 1: TO SUBSCRIBE
* To exercise your Basic Subscription Privilege, you must (1) check Box
A, (2) insert the number of shares to be purchased (up to the number
shown on the face of the certificate), (3) multiply the number of
shares to be purchased by $2.25 and (4) insert the resulting purchase
price in the space indicated. If you exercise the Basic Subscription
Privilege in full, you are eligible to exercise the Oversubscription
Privilege as well.
* To exercise your Oversubscription Privilege, you must (5) check Box B,
(6) insert the number of additional shares you would like to purchase,
if available (up to the maximum number desired in addition to the
number of shares inserted in Line 1), (7) multiply that number by
$2.25 per share and (8) insert the total amount on Line 2.
After completing steps 1 - 4 and (if applicable) steps 5-8, please (9) add
the total dollar amount for the shares requested under the Basic
Subscription Privilege and Oversubscription Privilege and (10) insert the
total in the space indicated.
PART 2: METHOD OF PAYMENT
After completing step 10, you must mark the box corresponding to the method
of payment chosen. All checks must be made payable to "American Stock
Transfer & Trust Company, as Subscription Agent."
* If payment is to be made by uncertified personal check, please mark
the first box.
* If payment is to be made by certified or bank check, please mark the
second box.
* If payment is to be made by wire transfer to the account specified,
please mark the third box.
PART 3: REPRESENTATIONS
If you are offering to purchase more than 200,000 shares (at a total
purchase price of more than $450,000), you must fill out Part 3 by marking
one of the boxes in Part 3. If you are not offering to purchase more than
200,000 shares, you need not complete Part 3.
* Mark the first box if -- you are a broker, custodian, trustee, bank or
other intermediary holding shares of NEIC Stock for the benefit of
others, but none of the beneficial owners is purchasing more than
200,000 shares.
* Mark the second box if -- you are a broker, custodian, trustee, bank
or other intermediary holding shares of NEIC Stock for the benefit of
others, and at least one of the beneficial owners is offering to
purchase more than 200,000 shares. For each beneficial owner who is
offering to purchase more than 200,000 shares, you must attach a
Representation Letter in the form included in the Prospectus as
Appendix B.
* Mark the third box if -- you are purchasing 200,000 or more shares but
are not a broker, custodian, trustee, bank or other intermediary. In
this case, you must attach a Representation Letter in the form
included in the Prospectus as Appendix B.
The Representation Letter requires information on how you currently own NEIC
Stock (i.e., whether held directly or through a broker), the total number of
shares you held on November 9, 1998, the total number of shares you wish to
purchase as part of the Rights Offering and your address. In the
Representation Letter, you must also agree to comply with certain ownership
limitations under Maine and New York insurance laws.
PART 4: SIGNATURE
All shareholders who subscribe for shares must sign and date the
Subscription Form. For shares held jointly, all owners must sign. For
shares held by a corporation or other entity, the signer should specify his
or her title. Once completed, the Subscription Form and a check for payment
(unless you choose to pay for your shares by wire transfer) must be returned
to the Subscription Agent at the following address so that it is received
before 5:00 p.m. on Monday, December 21, 1998:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
Attention: Reorganization Department
Certain brokers, commercial banks and trust companies who are unable to
deliver a completed Subscription Certificate by the Expiration Date may
still participate by making payment for the shares subscribed for as
provided in Part 2 and by providing the Subscription Agent with a completed
Notice of Guaranteed Delivery in the form provided by the Subscription Agent
not later than 5:00 p.m., Eastern Time, December 21, 1998.
NOTICE OF GUARANTEED DELIVERY
for
SUBSCRIPTION CERTIFICATES
issued by
NORTH EAST INSURANCE COMPANY
This form, or one substantially equivalent hereto, must be used to
exercise Rights pursuant to the Rights Offering described in the Prospectus
dated November 12, 1998 (the "Prospectus") of North East Insurance Company,
a Maine corporation ("NEIC"), if a holder of Rights cannot deliver the
subscription certificate(s) evidencing the Rights (the "Subscription
Certificate(s)"), to the Subscription Agent listed below (the "Subscription
Agent") at or prior to 5:00 p.m., Eastern time, on December 21, 1998 (the
"Expiration Date"). Such form must be delivered by hand or sent by
facsimile transmission or mail to the Subscription Agent, and must be
received by the Subscription Agent on or prior to the Expiration Date. See
"Terms of the Rights Offering" in the Prospectus. Payment of the
Subscription Price of $2.25 per share for each share of NEIC Common Stock
subscribed for upon exercise of such Right must be received by the
Subscription Agent in the manner specified in the Prospectus at or prior to
5:00 p.m., Eastern Time, on the Expiration Date even if the Subscription
Certificate evidencing such Right is being delivered pursuant to the
procedure for guaranteed delivery thereof.
The Subscription Agent is:
American Stock Transfer & Trust Company
General Information:
1-718-921-8200
Facsimile Transmission:
1-718-234-5001
By Mail: By Hand:
American Stock Transfer & American Stock Transfer &
Trust Company Trust Company
40 Wall Street 40 Wall Street
New York, New York 10005 46th Floor
Attention: Reorganization Department New York, New York 10005
Attention: Reorganization Department
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE
DOES NOT CONSTITUTE A VALID DELIVERY.
GUARANTEE OF DELIVERY
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the
United States, guarantees that the undersigned will deliver to the
Subscription Agent the certificates representing the Rights being exercised
hereby, with any required signature and any other required documents, all
within three business days after the date hereof.
________________________________ Dated:_____________________, 1998
________________________________ _________________________________
(Name of Firm)
________________________________ _________________________________
(Address) (Authorized Signature)
____________________________________
(Area Code and Telephone Number)
The institution which completes this form must communicate the guarantee to
the Subscription Agent and must deliver the Subscription Certificate(s) to
the Subscription Agent within the time period shown herein. Failure to do
so could result in a financial loss to such institution.
Gentlemen:
The undersigned hereby represents that he or she is the holder of
Subscription Certificate(s) and that such Subscription Certificate(s) cannot
be delivered to the Subscription Agent at or before 5:00 p.m., Eastern Time,
on the Expiration Date. Upon the terms and subject to the conditions set
forth in the Prospectus, receipt of which is hereby acknowledged, the
undersigned hereby elects to exercise (i) the Basic Subscription Privilege
to subscribe for one share of NEIC Common Stock per Right with respect to
each of ______________ Rights represented by such Subscription Certificate
(ii) and the Oversubscription Privilege relating to each such Right to
subscribe, to the extent that shares of NEIC Common Stock are available for
an aggregate of up to __________ Shares of NEIC Common Stock. The
undersigned understands that payment of the Subscription Price of $2.25 per
share for each share of NEIC Common Stock subscribed for pursuant to the
Basic Subscription Privilege and Oversubscription Privilege must be received
by the Subscription Agent at or before 5:00 p.m., Eastern Time, on the
Expiration Date and represents that such payment, in the aggregate amount of
$________________, either (check appropriate box):
[ ] is being delivered to the Subscription Agent herewith
or
[ ] has been delivered separately to the Subscription Agent;
and is or was delivered in the manner set forth below (check appropriate box
and complete information relating thereto):
[ ] wire transfer of funds
- name of transferor institution .................................
- date of transfer ...............................................
- confirmation number (if available) .............................
[ ] uncertified check (Payment by uncertified check will not be deemed
to have been received by the Subscription Agent until such check
has cleared. Holders paying by such means are urged to make
payment sufficiently in advance of the Expiration Date to ensure
that such payment clears by such date.)
[ ] certified check
[ ] bank draft (cashier's check)
[ ] money order
- name of maker ..................................................
- date of check, draft or money order ............................
- check, draft or money order number .............................
- bank on which check is drawn or issuer of money order ..........
Signature(s) ................... Address .............................
................................ .....................................
Name(s) ........................ .....................................
................................ Area Code and Tel. No(s) ............
(Please type or print)
.....................................
Subscription Certificate
No(s). (if available) .....................................................
Exhibit 99.3
NORTH EAST INSURANCE GROUP
482 Payne Road-4th Floor, Scarborough Court, Scarborough, ME 04074-8929
Mailing Address: P.O. Box 1418, Scarborough, ME 04070-1418
Phone: 207-883-2232 // Fax: 207-883-1564
November 12, 1998
Dear Fellow Shareholder:
Over the past two years, the Board of Directors has examined several
alternatives for raising new capital for North East Insurance. Earlier this
year, the Board approved a Rights Offering by which all existing
shareholders will have an opportunity to purchase North East shares at a
price of $2.25 per share. Successful completion of the offering would
provide North East with additional resources to support its plans for
continued growth of the business.
The enclosed Prospectus describes the terms of our Rights Offering. We
encourage you to review the Prospectus carefully and to consider
participating through a purchase of the offered shares.
In the third quarter of 1998, we experienced a very large increase in
revenues due to the introduction of our new "Auto"Matic insurance product.
Gross premiums written for the quarter were more than 60% higher than for
the comparable period last year. The profitability of this new product will
ultimately depend on a number of factors, including future claims experience
with an expanded pool of insured customers. However, our network of
independent agents appears to be excited by this new product, and we are
very pleased with the early results. Future increased premium volume from
"Auto"Matic would be further reason for North East to seek additional
capital through the Rights Offering.
We hope you will find our Rights Offering attractive, and that you will
choose to participate. If you have any questions about the attached
material, please call feel free to call or fax Linda Hatt (Director of
Shareholder Relations) or me directly.
Thank you for your continued support.
Sincerely,
NORTH EAST INSURANCE COMPANY
/s/ Robert G. Schatz
Robert G. Schatz
Chairman and President
