U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-KSB/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................. to ................
Commission File No. 0-11184
NORTH EAST INSURANCE COMPANY
(Name of small business issuer in its charter)
Maine 01-0278387
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
482 Payne Road, Scarborough, Maine 04074
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (207) 883-2232
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $1.00
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in any definitive proxy or information
statement incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year: $12,292,242
The aggregate market value of the voting stock held by non-affiliates as of
March 10, 1998 was $7,713,080.
There were 3,046,842 common shares outstanding as of March 10, 1998.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
The issuer ("NEIC" or the "Company") hereby amends Items 9, 10, 11, and 12 of
Part III of its Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
Part III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below is information concerning the current executive officers and
directors of NEIC.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <S>
Robert G. Schatz 52 President, Chairman of the
Board, Chief Executive Officer
and Director
Ronald A. Libby 54 Chief Operating Officer
Samuel M. Koren 57 Senior Vice President, Secretary
Graham S. Payne 52 Treasurer, Chief Financial Officer
Rebecca J. Cerny 45 Vice President
Edward B. Batal 57 Director
Terence P. Cummings 43 Director
Robert A. Hancock 45 Director
Wilson G. Hess 45 Director
Joseph M. Hochadel 50 Director
Jonathan S. Kern 36 Director
Bruce H. Suter 77 Director
</TABLE>
ROBERT G. SCHATZ has served as President and Chief Executive Officer
of the Company since March 1988. He was first elected as a Director in
December 1987. Mr. Schatz also serves on the Board of Trustees of Unity
College, in Unity, Maine.
RONALD A. LIBBY joined the Company in December 1994 and serves as its
Chief Operating Officer. From 1987 to 1994 he was President of Maine Mutual
Fire Insurance Company.
SAMUEL M. KOREN is Senior Vice President and Secretary of NEIC. He
joined the Company in 1977 and has been an Officer since 1978.
GRAHAM S. PAYNE has been Treasurer and Chief Financial Officer of the
Company since 1987.
REBECCA J. CERNY has held the position of Vice President of the
Company since 1989. From 1986 to 1995 she also served as a Director of the
Company.
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.
DEBORAH L. HARMON was first elected as a Director in February 1997. Ms.
Harmon is an Executive Vice President at the J.E. Robert Companies (JER). JER
is a nationally prominent real estate firm that specializes in the investment,
management, and capital recovery of troubled real estate properties and under-
performing real estate loans. Ms. Harmon is one of three members of
Ballantrae Partners, formed in 1996 to invest in NEIC stock. In January 1997,
Ballantrae consummated its purchase of 810,000 shares of NEIC stock formerly
held by Bernard D. Gershuny. In August 1996, Ballantrae and NEIC entered into
a standstill agreement, described in Item 12 below. Under the
standstill agreement, Ballantrae has the right to nominate three members of
the NEIC Board of Directors.
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.
JONATHAN S. KERN was first elected as a Director in February 1997. Mr. Kern
is Executive Vice President and Chairman of the Operating Committee at the
J.E. Robert Companies (JER), described above. Mr. Kern is one of three
members of Ballantrae Partners, which (as noted above) has the right to
nominate three members of the NEIC Board of Directors.
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.
Under the Company's bylaws, officers are elected annually by the Board of
Directors and serve at the pleasure of the Board. The Company's bylaws
currently provide that all directors of the Company are to be elected each
year at an annual meeting of shareholders.
There are no family relationships between any of the executive officers
or directors of the Company, nor were there any special arrangements by which
any of them was elected to his or her position.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, certain
persons associated with the Company (directors, executive officers and
beneficial owners of more than 10% of the outstanding Common Stock) are
required to file with the Securities and Exchange Commission and the Company
various reports disclosing their ownership of Company securities and changes
in such ownership. To the Company's knowledge, all requisite reports for 1997
were filed in a timely manner except that Messrs. Batal, Koren, and Suter
each had one purchase transaction that was not timely reported on Form 4.
ITEM 10 - EXECUTIVE COMPENSATION
Set forth below is certain information concerning the compensation of
each executive officer of the Company who received more than $100,000 of
salary and bonus compensation for the prior fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND ANNUAL COMPENSATION 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 $ 3,316
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
Senior 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% $2.375 6/10/07
Samuel M. Koren 0 0% - -
____________________
<F1> Mr. Libby's option is subject to vesting requirements and becomes
exercisable in five equal installments of 20,000 shares each on the
grant date (June 10, 1997) and the next four anniversary dates
thereafter. Upon termination of employment, the unvested portion
of the option will expire unless termination results from
death or disability or (under certain circumstances) occurs within
one year after a Change in Control (as defined).
</TABLE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-BASED PLANS
NUMBER OF SHARES PERFORMANCE OR OTHER ---------------------------------
UNITS OR OTHER PERIOD UNTIL THRESHOLD TARGET MAXIMUM
RIGHTS ($) MATURATION OR PAYOUT ($) ($) (1) ($) (2)
- ---------------- -------------------- --------- -------- --------
<S> <C> <C> <C> <C>
Robert G. Schatz 1/1/98-12/31/00 0 $29,284 $94,800
plus 10%
of After-
Tax Profit
over $4.41
million
Ronald A. Libby N/A
Samuel M. Koren N/A
____________________
<F1> Subject to Note 2 below, the payout equals 5% of the amount by which
After-Tax Profit (as defined) over the three-year period exceeds
approximately $3.3 million. For illustrative purposes, the "Target"
payout shown here assumes that NEIC achieves the same level of After-
Tax Profit in 1998-2000 that was achieved in 1995-1997 (before
adjustment for the favorable impact of a $2.1 million valuation
allowance adjustment recorded by the Company in 1996).
<F2> If the Company achieves cumulative After-Tax Profit of approximately
$5.2 million for the three-year period, the payout increases to 10% of
the excess over that higher threshold, plus $94,800 calculated on the
After-Tax Profit between the lower and higher threshold. There is no
stated maximum payout.
</TABLE>
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
Mr. Libby and Mr. 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 the Company 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 the Company
for the following six months. These special severance benefits do not apply
if the Company terminates the executive's employment for "good cause,"
including a substantial neglect of duties after written notice and an
opportunity to correct.
DIRECTOR COMPENSATION
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.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
CHANGES IN CONTROL
As of April 15, 1998, a total of 3,046,842 shares of North East Insurance
Company common stock were 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 such date, is information concerning the only persons known to
the Company 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>
Ballantrae Partners, L.L.C. 810,000 (1) 26.6%
300 East 56th Street
Suite 20-A
New York, NY 10022
The Foothold Fund, L.P. 215,000 (2) 7.1%
408 Route 22, Unit 2
North Salem, New York 10560
____________________
<F1> Information regarding the stock ownership of Ballantrae Partners,
L.L.C. is given on the basis of its latest amended Schedule 13D report,
filed on or about January 10, 1997. The members of Ballantrae are Murry
N. Gunty, Deborah L. Harmon, and Jonathan S. Kern.
<F2> Information regarding the stock ownership of The Foothold Fund, L.P. is
given on the basis of its latest Schedule 13D report, filed on or about
August 6, 1997. Foothold is a New York limited partnership. Its sole
general partner of Foothold is The Foothold Management Corp., a New York
corporation. 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.
</TABLE>
The following table shows, as of April 15, 1998, the number of shares of
NEIC common stock which, to the Company's knowledge, were beneficially owned
by each director and each "named executive officer" of the Company, and by the
directors and executive officers as a group. Except as otherwise indicated,
each person named owned less than one percent of the outstanding common stock
of the Company.
<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
Jonathan S. Kern (2) 810,000 26.6%
Deborah L. Harmon (2) 810,000 26.6%
All directors and executive
officers as a group 1,179,210 35.9%
____________________
<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.
<F2> Mr. Kern and Ms. Harmon are members of Ballantrae Partners, L.L.C., and
thereby have shared beneficial ownership of the NEIC stock owned by
Ballantrae.
</TABLE>
For a description of an existing arrangement that may affect future
control of NEIC, see "Agreement with Ballantrae" in Item 12 below.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENT WITH BALLANTRAE
In May 1996, Ballantrae Partners, L.L.C. entered into a contract to
purchase 810,00 shares of NEIC Common Stock beneficially owned by Bernard D.
Gershuny. That stock represents approximately 27% of the total outstanding
stock of NEIC. The contract was subject to a number of conditions, including
requirements to obtain necessary regulatory approvals from the Maine Bureau of
Insurance and the New York Insurance Department. Following extensive
discussions, the Company and Ballantrae in August 1996 entered into an
agreement (the "Standstill Agreement") governing certain matters relating to
control of NEIC. On the basis of this Agreement and other factors, Board of
Directors voted to endorse Ballantrae's applications for regulatory approval.
Ballantrae ultimately succeeded in obtaining regulatory approval in Maine and
New York, and consummated its purchase of Mr. Gershuny's shares in January
1997. The following is a summary of selected provisions of the Standstill
Agreement.
Under the Standstill Agreement, the Company has agreed to limit the size
of its Board and to allow Ballantrae to nominate up to three of the Directors.
In general, Ballantrae has agreed not to initiate, participate in, or assist
any proxy solicitation over election of a competing slate of Directors or over
shareholder approval of other significant matters. These restrictions will
not be applicable in certain cases, such as if the Company seeks to enter into
a major restructuring transaction opposed by Ballantrae. These restrictions
will also not prevent Ballantrae from voting its Common Stock as it sees fit.
The Company has agreed not to make any changes in its Articles of
Incorporation or Bylaws during the term of the Standstill Agreement (other
than to implement a staggered Board of Directors, as noted above), and has
also agreed not to adopt certain antitakeover defenses for specified periods
following termination of the Agreement.
Ballantrae has agreed to limit its maximum ownership percentage of NEIC
stock as follows: 32.5% starting January 1, 1997; 35% starting July 1, 1997;
37.5% starting January 1, 1998; and 40% from July 1, 1998 through the
termination date of the Standstill Agreement. Ballantrae must provide prior
notice of its intended purchases or sales of Common Stock. Large purchases or
dispositions of NEIC stock by Ballantrae may involve other substantive or
procedural restrictions. The Company has agreed that, upon any future
issuance of Common Stock during the term of the Standstill Agreement (other
than pursuant to employee/director compensation plans), NEIC will offer
Ballantrae sufficient shares to protect against dilution in Ballantrae's then
existing percentage ownership. Any such sale to Ballantrae would be on terms
equivalent to the sale to third parties. The Company has also agreed to grant
Ballantrae certain rights to require NEIC to register future resales of Common
Stock by Ballantrae. These registration rights would facilitate large
dispositions of Common Stock by Ballantrae, and expire ten years after the
date of the Agreement.
The Standstill Agreement will expire on or around May 30, 1999. The
Agreement may be terminated at any time by either party upon the occurrence of
certain specified events, including for example a third party's commencement
of a tender offer for the outstanding NEIC stock.
OTHER RELATED PARTY TRANSACTIONS
The firm of Monaghan, Leahy, Hochadel & Libby provides legal services to
the Company. 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 1996 and 1997 from two firms in
which Mr. Cummings was or is now a Partner. Fees paid to such firms by the
Company 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.
SIGNATURE
In accordance with Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: April 30, 1998 NORTH EAST INSURANCE COMPANY
By: /s/ Graham S. Payne
--------------------------------
Graham S. Payne, Treasurer,
Chief Financial Officer
