[PROXY STATEMENT]
PRELIMINARY COPY
NORTH EAST INSURANCE COMPANY
482 Payne Road, 4th Floor
P.O. Box 1418
Scarborough, Maine 04074
PROXY STATEMENT
FOR
1998 ANNUAL MEETING OF SHAREHOLDERS
To Be Held June 17, 1998
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of North East Insurance Company ("NEIC" or
the "Company") for use at the 1998 Annual Meeting of Shareholders (the
"Meeting"). The Meeting will be held at __________________________________,
Maine at 9:00 a.m. on Wednesday, June 17, 1998.
When properly executed and returned, the enclosed proxy will be voted in
accordance with the choices marked. If no choice is specified, the proxy will
be voted as recommended by the Board of Directors. A proxy may be revoked at
any time before it is voted. Shareholders may revoke their proxies by
delivering written notice to the Clerk of the Company prior to the vote on a
given matter, by submitting a later dated proxy at or before the Meeting, or by
voting in person at the Meeting.
The record date for determining shareholders entitled to vote at the
Meeting (and any adjournment thereof) is April 28, 1998. All shareholders of
record as of the close of business on that date will be entitled to cast one
vote per share. This Proxy Statement and the accompanying form of proxy for the
Meeting are first being mailed to shareholders on or around April 30, 1998.
A description of matters to be voted upon begins at page __ of this Proxy
Statement. Certain information concerning share ownership, management, and
compensation appears below.
OWNERSHIP OF COMMON STOCK
As of the record date noted above, 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 the record 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) 26.7%
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
W.A. Financial, Inc. 155,280 (3) 5.1%
2656 S. Loop W. #103
Houston, TX 77054
<FN>
- -------------------
<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.
<F3> Information regarding W.A. Financial's beneficial ownership is given on
the basis of its Schedule 13D report dated August 4, 1995. The Company
believes that W.A. Financial is an affiliate of Michael E. Watts of Texas
Capital Securities, Inc. Texas Capital is a registered securities
broker-dealer and is one of the primary market makers for the Company's
common stock.
</FN>
</TABLE>
The following table shows, as of the record date, the number of shares of
NEIC common stock which, to the Company's knowledge, were beneficially owned by
all directors and certain executive officers of the Company, 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 the
Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED(1) OUTSTANDING
<S> <C> <C>
Robert G. Schatz 276,177 8.5%
Ronald A. Libby 40,000 1.3%
Edward B. Batal xxx
Terence C. Cummings 0
Robert A. Hancock 2,500
Wilson G. Hess 0
Joseph M. Hochadel 0
Bruce H. Suter xxx
Jonathan S. Kern (2) 810,000 27.0%
Deborah L. Harmon (2) 810,000 27.0%
[other nominees] (3)
All directors, nominees and executive
officers as a group xxx,xxx xx.x%
<FN>
- -------------------
<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.
<F3> ________ are nominees for election as directors.
</FN>
</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 description of all NEIC directors and ___ additional nominees for
election to the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Robert G. Schatz 52 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
Deborah L. Harmon 39 Director
Wilson G. Hess 45 Director
Joseph M. Hochadel 50 Director
Jonathan S. Kern 36 Director
Bruce H. Suter 77 Director
[nominees]
</TABLE>
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.
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, L.L.C., 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 below at page __ below.
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, L.L.C..
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.
[other nominees]
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 Company is
planning to change its compensation policies with regard to directors. Set
forth on pages ____ below is a description of proposed amendments to the NEIC
Stock Option Plan, and a description of a program under which (subject to
shareholder approval of the amendment) NEIC use stock options in compensating
directors.
The Company has an Audit Committee, a Finance and Investment Committee,
an Underwriting Committee, a Claims Committee, and an Executive Committee.
The Audit Committee presently consists of Messrs. Hancock (Chair), Hess,
and Hochadel. Its function is to oversee the work of the Company's chief
financial officer and external accountants and to assure the existence of an
effective accounting and internal control system. The Committee held ____
meetings during 1997.
The Finance and Investment Committee presently consists of Suter (Chair),
Hancock, and Batal, with Mr. Schatz serving as an ex-officio member. This
Committee oversees the investment of the Company's securities portfolio and
other investment-related actions of the Company. The Committee held ____
meetings during 1997.
The Underwriting Committee presently consists of Cummings and Batal. It
oversees underwriting activities of the Company and reviews and monitors
relationships with agents. The Committee held no meetings during 1997.
The Claims Committee presently consists of Messrs. Batal, Cummings, and
Suter. It reviews and monitors actuarial certifications of loss and loss
adjustment reserves, and monitors the handling of insureds' claims. The
Committee held ____ meetings during 1997.
The Compensation Committee presently consists of Messrs. Hess (Chair),
Hancock, and Kern. The Committee is responsible for determining executive
compensation (subject to review and approval by the Board) and for
administering the NEIC Stock Option Plan. The Committee held ___ meetings in
1997.
The Executive Committee presently consists of Messrs. Hochadel (Chair),
Kern, Schatz, and Suter. Its primary function is to act on behalf of the Board
at times when it is impractical to call a special meeting of the entire board.
The powers of the Executive Committee are limited by the Bylaws of the Company.
For example, the Committee has no power to amend the Articles of Incorporation
or Bylaws of the Company. The Committee held ____ meetings during 1997.
The Board also maintains various ad hoc committees, whose function it is
to study specific issues and make recommendations to the full Board.
The Board of Directors held a total of ______ meetings in 1997. Except
for ____________, each of the Directors was present at 75% or more of the total
number of Board and Committee meetings he was eligible to attend in each year.
EXECUTIVE COMPENSATION AND
RELATED MATTERS
Set forth below is certain information concerning the compensation of
Robert G. Schatz, the President and Chief Executive Officer of the Company, and
the only other 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>
ANNUAL COMPENSATION
NAME AND --------------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ---------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Robert G. Schatz 1997 $xxx,xxx $xx,xxx $xx,xxx
President and Chief 1996 $155,289 $96,216 $69,590
Executive Officer 1995 $150,000 $30,000 $ -0-
Ronald A. Libby 1997 $ xx,xxx $xx,xxx $ x,xxx
Chief Operating 1996 $101,173 $36,707 $ 7,740
Officer 1995 $ 90,346 $ -0- $ 3,557
</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% $2.375 6/10/07
<FN>
- -------------------
<F1> Mr. Libby's option is subject to vesting requirements and becomes
exercisable in five equal installments of 20,000 shares each on the grant
date (June 10, 1997) and the next four anniversary dates thereafter. Upon
termination of employment, the unvested portion of the option will expire
unless termination results from death or disability or (under certain
circumstances) occurs within one year after a Change in Control (as
defined).
</FN>
</TABLE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-BASED PLANS
NUMBER OF SHARES PERFORMANCE OR OTHER ---------------------------------------
UNITS OR OTHER PERIOD UNTIL THRESHOLD TARGET
RIGHTS ($) MATURATION OR PAYOUT ($) ($) (1) MAXIMUM ($) (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
<FN>
- -------------------
<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
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.
</FN>
</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, described below.
If the Company's After-Tax Profit (as defined) of NEIC 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 severance compensation
equal to $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 payments totaling $175,000
plus interest at the federal long-term rate (as defined), which amount is
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 previously unpaid bonuses.
EMPLOYMENT CONTINUITY AGREEMENTS
In October 1996 the Board approved Employment Continuity Agreements with
Mr. Libby and one other executive officer. 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.
OTHER MATTERS RELATING TO
THE COMPANY'S DIRECTORS AND OFFICERS
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 as follows: _______________________. The
acquisition of these shares has since been reported.
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 three of the Directors.
Presently, two Ballantrae nominees (Ms. Harmon and Mr. Kern) serve as
Directors. The Agreement contemplates that at the 1997 Annual Meeting of
Shareholders the Company will seek shareholder approval of a change in the
Board of Directors, whereby the Directors will be divided into three classes to
be elected in staggered three-year terms. The Ballantrae nominees are to be
divided among those three classes. 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. (These limitations are subject to
certain exceptions that could allow Ballantrae to purchase a certain block of
stock which currently represents 5.2% of the outstanding shares.) 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 1996 and 1997 were approximately $______ and $170,000,
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 1996 or 1997.
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 1996 or 1997.
PROPOSED RIGHTS OFFERING
The Company has filed a Registration Statement with the Securities and
Exchange Commission, covering a proposed issuance of common stock pursuant to a
rights offering (the "Rights Offering") to NEIC shareholders. The Company
presently expects that the Rights Offering will commence in June or July of
1998. Details concerning the Rights Offering will be published at a later time.
SUMMARY OF ACTIONS TO BE TAKEN
AMENDMENT TO AUTHORIZE STAGGERED BOARD
The Board of Directors has again approved a proposal to amend the
Articles of Incorporation to divide the Board into three classes, each to be
elected to staggered terms of office.
Under this amendment, Class I Directors would be elected initially to a
one-year term, expiring at the Annual Meeting of Shareholders in 1999;
thereafter the Class I Directors would be elected to three-year terms. Class II
Directors would be elected initially to a two-year term, expiring at the Annual
Meeting of Shareholders in 2000; thereafter the Class II Directors would be
elected to three-year terms. Class III Directors would be elected to three-year
terms, the first expiring at the Annual Meeting of Shareholders in 2001. The
Amendment also would require a two-thirds vote in order for the shareholders to
further amend this provision of the Articles of Incorporation or to approve
other changes to the Articles or Bylaws affecting the size of the Board or the
election of Directors. A copy of the proposed Amendment appears as Exhibit A to
this Proxy Statement.
The principal purpose of a staggered board is to provide for greater
continuity of membership on the board. With staggered three-year terms for
board members, only about a third of the directors are elected in any given
year. Thus a proxy contest in a single year will generally not be sufficient to
change a majority of the directors, unless the proponents can garner sufficient
votes to remove other directors from office.
Staggered boards of directors are quite common among publicly-held
companies, in which the stock ownership is subject to significant change from
year to year through open-market transactions. Having a staggered board may
encourage persons seeking to acquire control of a company to engage in good
faith, arms-length negotiations with the board concerning their proposal,
rather than waging a hostile proxy contest, and may permit the board to engage
in such negotiations from a stronger position. On the other hand, having a
staggered board could have the effect of deterring third parties from
initiating proxy contests or from acquiring substantial blocks of a company's
shares. Such proxy contests and acquisitions of substantial blocks of shares
tend, at least temporarily, to increase market prices for a company's stock.
The NEIC Board of Directors believes that promoting greater continuity of
board composition is in the best interests of the Company and its shareholders.
NEIC's insurance business is dependent on developing and maintaining long-term
relationships with its independent agents. Over the past several years, NEIC
has experienced a number of attempted changes in control, as different groups
sought to acquire a large block of stock owned by Bernard D. Gershuny. The
Company believes that uncertainties over future control made it more difficult
for NEIC to build relationships with agents and made it more difficult for NEIC
to obtain an upgrade in its Best's rating. In connection with Ballantrae's
purchase of Mr. Gershuny's shares in 1997, the Company took a number of steps
to reassure existing officers and employees as to continuity of management. One
such step has been to recommend that the shareholders amend the Articles of
Incorporation to implement a staggered board.
Presently, the Company's Articles of Incorporation provide that all
Director terms expire at each Annual Meeting of Shareholders. The proposed
Amendment divides Directors into classes whose terms expire over a three-year
period. As is presently the case, however, a vote of two-thirds of the
outstanding shares can remove an NEIC Director prior to expiration of his or
her term of office. Thus a two-thirds vote would in any event be sufficient to
change the entire Board of Directors of the Company at any meeting of
shareholders.
The proposed Amendment provides that the shareholders may amend
board-related provisions of the Articles of Incorporation or Bylaws only by a
two-thirds vote of the outstanding shares -- the same vote required to remove
Directors from office. In the absence of such a provision, a simple majority
vote could be sufficient to circumvent the staggered Board provisions and allow
election of a majority of Directors at a single meeting.
Adoption of this proposed amendment is a condition to consummation of the
Rights Offering.
Approval of this proposed Amendment to the Articles of Incorporation will
require the affirmative vote of a majority of the outstanding shares of Common
Stock of the Company. For these purposes, abstentions and broker non-votes will
have the same effect as a vote against the proposal. (A broker non-vote occurs
when a broker, or other fiduciary, votes on at least one matter but lacks
authority to vote on another matter.)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THIS PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION.
ELECTION OF DIRECTORS
The Company's articles of incorporation provide for a Board of Directors
of not fewer than 7 nor more than 21 members, as from time to time determined
by resolution of the Board of Directors or by the shareholders. Directors are
elected at each Annual Meeting of Shareholders for one year terms. If the
shareholders approve the above-described amendment to the Certificate of
Organization, then the Directors must be divided into three classes (as close
in number as is practicable) and elected to staggered terms as described above.
A resolution will be offered at the Meeting to establish the number of
Directors at _____ and to elect the following ___ persons as Directors in the
classes stated:
CLASS I (to serve until the 1999 Annual Meeting of Shareholders):
- --------------------------------------.
CLASS II (to serve until the 2000 Annual Meeting of Shareholders):
- --------------------------------------.
CLASS III (to serve until the 2001 Annual Meeting of Shareholders):
- --------------------------------------.
If the above-described amendment to the Articles of Incorporation is not
approved, then each Director will be elected to a one-year term, expiring at
the 1999 Annual Meeting of Shareholders.
The foregoing individuals have each consented to be named as nominees and
to serve as Directors if elected. Biographical information concerning the
nominees appears at pages ____ above.
Each director position will be filled by plurality vote. Abstentions and
broker non-votes will not affect the tally of votes cast in the election.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF EACH OF THE NOMINEES LISTED ABOVE.
RATIFICATION OF ACCOUNTANTS
The shareholders will be asked to ratify the appointment of Coopers &
Lybrand L.L.P. as the Company's independent accountants for the fiscal year
ending December 31, 1998. Coopers & Lybrand has served as the Company's
independent accountants since 1981. One or more representatives of Coopers &
Lybrand will be present at the Meeting, will have an opportunity to make a
statement to the Meeting if they desire to do so, and will be available to
respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND.
AMENDMENT TO INCREASE AUTHORIZED COMMON STOCK
The Company's authorized stock presently consists of 6,000,000 shares of
common stock, no par value. As of April 28, 1998, there were [3,046,842] shares
of common stock outstanding and an additional 300,000 shares reserved for
issuance under outstanding stock options. Moreover, the Board of Directors has
authorized the Company to engage in a Rights Offering (described elsewhere in
this Proxy Statement) under which the Company would issue up to 500,000
additional shares of Common Stock. An increase in the number of authorized
shares will be necessary in order to consummate this transaction.
Subject to shareholder approval, the Board has voted unanimously to
double the authorized common stock, to 12,000,000 shares. The additional shares
authorized under the proposed amendment would be available for any proper
corporate purpose, including future business acquisitions, or equity financing
programs. The Board would have authority to issue such shares from time to time
without further approval of the shareholders unless such approval were
otherwise required by applicable laws and regulations.
Except for the contemplated Rights Offering and except for issuances
pursuant to the NEIC Stock Option Plan, the Company presently has no specific
plans to issue additional shares. The Board believes that a substantial
increase in authorized shares is desirable in order to maintain the Company's
flexibility to issue shares from time to time without the delays that could
result if such shares had not been previously authorized by the shareholders.
Shareholders have no preemptive rights with respect to the Company's
shares. As described above, however, the Standstill Agreement with Ballantrae
provides Ballantrae certain rights akin to preemptive rights on future sales of
common stock to third parties. See discussion at page __ above.
The increased flexibility represented by the additional authorized shares
could, in some circumstances, have the effect of discouraging an attempt to
change control of the Company. However, applicable insurance laws generally
require prior approval from the state insurance agencies prior to any issuance
of stock to a person who will thereby have voting control over more than 10% of
the outstanding shares. These restrictions, as a practical matter, will
restrict the Board's ability to issue a large block of stock to a single person
or group in an effort to block a competing takeover bid. Those same laws would
also restrict a competing bidder's ability to acquire more than 10% of the
outstanding shares. As a result, use of the unissued stock as an antitakeover
device would subject to significant restrictions, and would be unlikely to
occur absent special circumstances.
The form of resolution for adoption of the proposed amendment is as
follows:
RESOLVED: THAT THE ARTICLES OF INCORPORATION OF NORTH EAST
INSURANCE COMPANY BE AMENDED TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK, $1.00 PAR VALUE, FROM 6,000,000 SHARES TO
12,000,000 SHARES.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THIS AMENDMENT TO THE ARTICLES OF INCORPORATION.
AMENDMENT OF NEIC STOCK OPTION PLAN
At the 1997 Annual Meeting, the NEIC shareholders approved the North East
Insurance Company Stock Option Plan, authorizing the grant of stock options for
the purchase of up to 400,000 shares of common stock. The purpose of the Plan
is to provide outside directors and key employees of the Company with
additional incentives to contribute to the success of the Company and to assist
the Company in attracting and retaining qualified directors and employees.
Pursuant to the Plan, the Company has granted stock options covering 300,000
shares.
Subject to shareholder approval, the Board of Directors of the Company
has voted to amend the Plan to increase the number of shares available for
issuance. Specifically, the Board proposes to double the size of the Plan to
800,000 shares.
ADMINISTRATION OF THE PLAN. The Plan is administered by a Committee of
two or more non-employee directors appointed by the Board of Directors. The
Committee will have full authority to interpret the Plan and to establish rules
and regulations governing the administration of the Plan. In its discretion,
the Board may exercise any of the duties and authority of the Committee.
AWARDS UNDER THE 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 NEIC common stock
at a designated option price per share. (These two types of options have
different tax consequences, as described below.) 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.
Employees of the Company may receive Incentive Stock Options,
Nonqualified Stock Options, or Stock Appreciation Rights under the Plan, or a
combination thereof. The Committee has discretion to determine which employees
of the Company shall be granted awards under the Plan, the time or times at
which awards shall be granted, and the terms, conditions, and restrictions of
each award. Presently, the Company has approximately 42 employees who would be
eligible to receive awards under the Plan.
Employees may be awarded either Incentive Stock Options or Nonqualified
Stock Options, in each case carrying an option price of not less than 100% of
the fair market value per share on the date of grant. The term of each option
shall be set forth in an option agreement. 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.
Employees may also be awarded Stock Appreciation Rights entitling the
holder to receive payment of an amount equal to the excess of (i) the fair
market value per share of NEIC common stock on the date of exercise over (ii)
the grant price of the right (which price may not less be than 100% of the fair
market value of the common stock on the date of grant). The terms of such an
award shall be set forth in an SAR agreement. The Committee has discretion to
determine the grant price and term within which, and conditions upon which, the
right may be exercised.
The Committee may also grant Nonqualified Stock Options or Stock
Appreciation Rights to non-employee Directors of the Company. Such awards are
subject to the same limitations under the Plan as grants of Nonqualified Stock
Options or Stock Appreciation Rights. Non-employee Directors are not eligible
for Incentive Stock Options.
Payment to the Company for exercise of an ISO or NSO may be made in cash,
Company stock, or a combination thereof, or in such other manner as the
Committee may approve. Payment upon exercise of a SAR is to be made in cash,
stock, or a combination thereof, as specified in the SAR agreement.
CALCULATION OF SHARE LIMITATION. In the event that a participant
surrenders previously owned NEIC common stock in full or partial payment of the
exercise price of an option under the Plan, only the net number of shares
issued upon exercise will be counted toward the share limitation. In the event
of a stock split or other pro rata change in the number of shares owned by
shareholders, the limitation on shares issuable under the Plan will be adjusted
proportionately.
EFFECT OF TERMINATION OF EMPLOYMENT. Termination of an
employee-participant's employment may affect the exercisability of an
outstanding option or SAR. The Plan does not require employment-related
limitations on exercise, but generally provides that termination of employment
will accelerate the expiration date of an option unless the option agreement
otherwise provides. If an employee ceases to be employed by the Company, any
outstanding Incentive Stock Option will lose its favorable tax status unless
exercised within a specified time thereafter (or, in the case of death or
disability, one year thereafter).
In the case of awards to non-employee directors, termination of the
participant's status as a director will not affect the exercisability of the
award, unless the option agreement or SAR agreement otherwise provides.
EFFECT OF A CHANGE IN CONTROL. The Plan provides that upon a Change in
Control Event (as defined), and except as the terms of the option agreement or
SAR agreement otherwise provide and except for formula awards to non-employee
directors, all outstanding options and rights not previously exercisable shall
become immediately exercisable by the holder. These provisions are generally
triggered by a merger or other reorganization in which the Company is not the
surviving or continuing corporation (except for certain transactions involving
the formation of a holding company for NEIC) or by substantial changes in the
composition of the Board which have not been approved in advance by independent
directors of the Company. In view of the limited number of shares available for
issuance under the Plan, acceleration of the exercisability of awards is not
expected to have a material effect on any proposed change in control.
TAX CONSEQUENCES OF AN AWARD. For federal tax purposes, a participant
generally will not realize income at the time a Nonqualified Stock Option or
Stock Appreciation Right is granted. When the participant exercises the option
or right, however, he or she will realize ordinary income in the amount of the
difference between option or grant price and the fair market value of the stock
or payment received by him or her. The Company may take a business deduction at
the time the option or right is exercised, in the amount includable as ordinary
income by the employee.
Under the Internal Revenue Code, Incentive Stock Options are accorded
different tax treatment. An option holder generally will not realize income at
the time of grant or exercise of an Incentive Stock Option. Upon sale of the
underlying shares, if the sale occurs at least two years after the option was
granted and at least one year after the date the shares were transferred to the
employee, the gain realized on such sale will be treated as long-term gain. The
Company may not take a business deduction with respect to shares transferred
under Incentive Stock Options if the sale occurs in accordance with these time
requirements. However, if the employee fails to meet either of the time
requirements described above, the excess of the fair market value of the shares
at the time of exercise of the Incentive Stock Option over the option price
will generally be treated as ordinary income in the year of sale and the
Company will be entitled to a corresponding deduction.
FURTHER AMENDMENTS; TERMINATION. The Committee or the Board of Directors
may amend the Plan at any time, without shareholder approval, unless the
amendment would increase the maximum number of shares for which awards may be
granted under the Plan, or would modify the class of employees eligible to
participate in the Plan.
NEW PLAN BENEFITS. Subject to shareholder approval of the amendment, the
Board has decided to implement a program to award NSOs to outside directors in
lieu of cash compensation. NSOs would be granted at the rate of 1,000 shares
per quarter, and would have an exercise price equal to 100% of the fair market
value of the common stock on the last day of the quarter. Initially, awards
will be made retroactively to directors, for the six quarters between October
1, 1996 and April 30, 1998, all of which will bear an exercise of $___ per
share (the closing price of NEIC common stock on April 30, 1998). Thereafter,
awards will be made quarterly as of the end of each new quarter, until such
time as the Committee or the Board determines to change or terminate this
program. Pursuant to SEC requirements, the following table illustrates the
awards contemplated to be issued in 1998. There presently is no plan to grant
options to employees during 1998.
NEW PLAN BENEFITS
NEIC STOCK OPTION PLAN
<TABLE>
<CAPTION>
DOLLAR VALUE ($) IF STOCK
APPRECIATES FOR 10 YEARS AT
---------------------------- NO. OF
0%/YR. 5%/YR. 10%/YR. UNITS
------ ------- ------- ------
<S> <C> <C> <C> <C>
Robert G. Schatz 0 0 0 0
Ronald A. Libby 0 0 0 0
Executive Officer Group 0 0 0 0
Non-Executive Director Group 0 xxx,xxx xxx,xxx xx,xxx
Non-Executive Officer Employee
Group 0 0 0 0
</TABLE>
The affirmative vote of a majority of the outstanding shares of NEIC
common stock is needed to approve the Plan. For these purposes, abstentions and
broker non-votes will have the same effect as a vote against this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THIS AMENDMENT OF THE NEIC STOCK OPTION PLAN.
OTHER MATTERS
All expenses of this solicitation will be borne by the Company. No person
will receive any additional compensation for soliciting proxies from any
shareholder. In addition to use of the mails, proxies may be solicited
directly, or by telephone or other means, by Company employees. The Company
will reimburse brokerage firms, custodians, nominees, and fiduciaries for the
reasonable expenses of forwarding proxy materials to beneficial owners.
At the date of this Proxy Statement, Management knows of no other matters
that are to be brought before the Meeting. However, if any matters other than
those set forth in the accompanying Notice should properly come before the
Meeting, the persons named in the enclosed proxy will vote the proxies on such
matters in their discretion.
Shareholder Proposals for 1999 Meeting. The Company will consider for
inclusion in its proxy materials for the 1999 Annual Meeting any shareholder
proposal received by the Company in proper written form by December 31, 1998.
Any such proposals should be addressed to the Company as follows: North East
Insurance Company, 482 Payne Road, P.O. Box 1418, Scarborough, ME 04074, Attn:
Chairman of the Board of Directors.
By Order of the Board of Directors
SAMUEL M. KOREN, Clerk
Exhibit A
PROPOSED AMENDMENT TO
ARTICLES OF INCORPORATION
The Articles of Incorporation (formerly Certificate of Organization) of
the Company are hereby amended such that Article Fourth shall read in its
entirety as follows:
FOURTH: The Board of Directors shall consist of not less than seven nor
more than twenty-one directors, the number of Directors to be fixed from time
to time by vote of the Directors or by the affirmative vote of at least
two-thirds of the outstanding shares of the Company entitled to vote for the
election of Directors.
At the 1997 Annual Meeting of Shareholders, the Directors shall be
divided into three classes, as nearly equal in number as possible, with the
term of office of Class I to expire at the 1998 Annual Meeting of Shareholders,
the term of office of Class II to expire at the 1999 Annual Meeting of
Shareholders, and the term of office of Class III to expire at the 2000 Annual
Meeting of Shareholders, with the Directors in each class to hold office until
their respective successors are duly elected and qualified. At each Annual
Meeting of Shareholders after 1997, Directors elected to succeed those
Directors whose terms expire shall be elected for a term of office to expire at
the third succeeding Annual Meeting of Shareholders after their election.
In addition to any vote required by law or by any other provision of
these Articles of Incorporation, the affirmative vote of at least two-thirds of
the outstanding shares of the Company entitled to vote for the election of
Directors shall be required for any action by the shareholders to amend or
repeal this Article Fourth or to adopt, amend, or repeal any other provisions
of the Articles of Incorporation or Bylaws of the Company governing the size of
the Board, the number of Directors in each class of Directors, the quorum or
vote required to elect or remove Directors, or the procedures for nominating
Directors or filling any vacancy in the Board.
[FORM OF PROXY]
NORTH EAST INSURANCE COMPANY
PROXY
(SOLICITED BY THE BOARD OF DIRECTORS)
The undersigned appoints Robert G. Schatz and Samuel M. Koren, or either of
them, proxies with full power of substitution, to represent and vote all shares
of Common Stock of North East Insurance Company held by the undersigned, at the
Annual Meeting of Shareholders to be held June 17, 1998, or any adjournment
thereof.
1. TO APPROVE THE PROPOSED STAGGERED BOARD AMENDMENT TO THE ARTICLES
OF INCORPORATION
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. TO FIX THE NUMBER OF DIRECTORS AT ____ AND TO ELECT THE FOLLOWING
NOMINEES TO THE BOARD OF DIRECTORS FOR THE TERMS STATED
Class I (term expiring at 1999 Annual Meeting of Shareholders):
[nominees]
Class II (term expiring at 2000 Annual Meeting of Shareholders):
[nominees]
Class III (term expiring at 2001 Annual Meeting of Shareholders):
[nominees]
(To withhold authority to vote for any individual nominee, strike a
line through the nominee's name)
NOTE: If Proposal 1 is not adopted by the shareholders, then each
of the nominees named above will be elected to a one-year term.
3. TO RATIFY THE APPOINTMENT OF COOPERS & LYBRAND AS AUDITORS FOR THE
CURRENT YEAR
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED
CAPITAL STOCK TO 12,000,000 SHARES
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. TO AMEND THE NEIC STOCK OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. In their discretion, upon such other matters as may properly come
before the Meeting.
This proxy, when properly executed, will be voted in the manner directed hereby
by the undersigned shareholder. Where no direction is made, this proxy will be
voted FOR the nominated directors and FOR Proposals 1, 3, and 4. The
undersigned hereby revokes any proxy previously given and acknowledges receipt
of the Notice of, and Proxy Statement for, the aforesaid Meeting.
Dated: ________________________, 1998
_____________________________________
Signature
_____________________________________
Signature
NOTE: Personal representatives, custodians, trustees, partners, corporate
officers, and attorneys-in-fact should add their titles as such.
PLEASE VOTE AND DATE THIS PROXY, SIGNING IT AS YOUR NAME APPEARS ON YOUR STOCK
CERTIFICATES AND RETURN THE PROXY IN THE ENVELOPE PROVIDED.
