SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-KSB/A
Amendment No. 1 to
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] 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: $12,981,268.
The aggregate market value of the voting stock held by non-affiliates as of
March 22, 1999 was $8,766,131.
There were 3,049,089 common shares outstanding as of March 22, 1999.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [x]
The issuer ("NEIC" or the "Company") hereby amends Item 10 of Part III of
its Annual Report on Form 10-KSB for the fiscal year ended December 31,
1998, to read in its entirety as set forth below.
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
NAME AND ANNUAL COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- ------------------ ---- ------ ----- ---------------
Robert G. Schatz 1998 175,673 1,356 44,541
President and Chief 1997 175,012 0 41,505
Executive Officer 1996 155,289 90,495 73,960
Ronald A. Libby 1998 120,465 7,000 3,984
Chief Operating 1997 110,319 25,293 3,316
Officer 1996 101,173 36,707 7,740
________
(1) For Mr. Schatz, other compensation in 1998 consists of $3,366 of
vacation pay, $5,575 for Company-paid insurance premiums, $34,000
in lieu of prior year incentive payments, and $1,600 of matching
contributions under the 401(k) Plan; other compensation in 1997
consists of $3,365 in retroactive salary adjustments, $2,540 for
Company-paid insurance premiums, $34,000 in lieu of prior year
incentive payments, and $1,600 of matching contributions under the
401(k) Plan; and other compensation in 1996 consists of $60,000
in lieu of prior year incentive payments, $9,590 of vacation pay,
$2,540 for Company-paid insurance premiums, and $1,830 of matching
contributions under the 401(k) Plan.
For Mr. Libby, other compensation in 1998 consists of $2,692 of
vacation pay and $1,292 of matching contributions under the 401(k)
Plan; other compensation in 1997 consists of $2,116 of vacation pay
and $1,200 of matching contributions under the 401(k) Plan; and
other compensation in 1996 consists of $7,740 of vacation pay.
SCHATZ EMPLOYMENT AGREEMENT
The Company is a party to an 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.
Under the bonus arrangement, if the Company's aggregate After-Tax Profit
(as defined) for 1998, 1999, and 2000 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 would equal 5% of the
excess over such target; to the extent that After-Tax Profit exceeds
approximately $5.2 million, Mr. Schatz would 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 adjustment, to account for capital
influxes into the Company or to account for dividends or distributions of
capital to shareholders.
Under the Employment Agreement, if the Company terminates his employment
"without cause" or Mr. Schatz terminates his employment "for good reason"
(as such terms are defined in the Agreement), he is entitled to (i) a lump-
sum severance payment of $175,000, (ii) up to one year's continuation of
health insurance and other Company benefits, and (iii) additional payments
totaling $175,000 over an eight-year period, with interest at the federal
long-term rate (as defined). Mr. Schatz's Employment Agreement preserves a
prior agreement to provide him an annual payment of $60,000 in 1996 and
$34,000 per year for a period of ten years thereafter, in settlement of his
claims for prior unpaid incentive compensation under his 1991 Employment
Agreement. For a period of 12 months after termination of employment, Mr.
Schatz would be subject to a noncompetition covenant, restricting his
ability to provide services to any insurance business in Maine or any other
state in which NEIC was conducting business or actively planning to conduct
business.
EFFECT OF MCA MERGER TRANSACTION
ON SCHATZ EMPLOYMENT ARRANGEMENTS
The Company has executed an Agreement and Plan of Merger with Motor Club of
America. MCA has announced its intention to retain Mr. Libby as President
and Chief Operating Officer of the Company. At the time of the merger, Mr.
Schatz would step down as President and Chief Executive Officer and would
resign from the NEIC Board of Directors.
On March 16, 1999, MCA and NEIC entered into an Undertaking and Agreement
with Mr. Schatz, under which he will receive the same severance payments and
benefits as are provided under his Employment Agreement upon termination
without cause. In addition, Mr. Schatz has agreed to waive his rights to
the three-year profit sharing bonus, in exchange for a lump sum payment of
$16,000. Consistent with the terms of the merger, Mr. Schatz's stock option
for 200,000 shares will be terminated in exchange for a cash settlement of
$335,000, representing the spread between the merger price ($3.30 per share)
and the option exercise price ($1.625 per share). Mr. Schatz will retain
existing rights to indemnification by the Company, as set forth in NEIC's
bylaws and the form of Indemnification Agreement to which the Company and
its directors are parties. The Undertaking and Agreement will terminate and
be of no further force or effect if the MCA merger transaction for any
reason is not consummated.
LIBBY EMPLOYMENT AGREEMENT
The Company is a party to an Employment Agreement with Mr. Libby that was
executed in November 1998, effective as of January 1, 1998. The Agreement
provides for a base salary of $120,000 per annum (subject to annual
adjustments based on increases in the Consumer Price Index).
Under the Employment Agreement, in the event that the Company terminates his
employment without "Cause" or Mr. Libby terminates his employment for "Good
Reason" (as such terms are defined in the Agreement), he is entitled to (i)
severance payments of $120,000 over the following 12 months and (ii) up to 6
months' continuation of health insurance and other Company benefits. For
one year after termination of employment, Mr. Libby would be subject to a
noncompetition covenant, restricting his ability to provide services to any
insurance business in Maine or any other state in which NEIC was conducting
business or actively planning to conduct business.
The initial term of the Employment Agreement expires December 31, 1999. The
agreement is subject to two-year extensions unless Mr. Libby fails to give
notice of renewal or the Company gives notice of non-renewal. Upon any non-
renewal at the Company's election, Mr. Libby would be entitled to non-
renewal payments totalling $120,000 over the 12 months after expiration of
the agreement.
In June 1997 Mr. Libby was granted a stock option for 100,000 shares of
Common Stock, at the then prevailing market price per share ($2.375). The
option expires in 2007.
KOREN EMPLOYMENT AGREEMENT; RESIGNATION
In December 1998, the Company and Mr. Koren executed an Employment
Agreement, to be effective as of October 1, 1998 through December 31, 1999.
The Agreement provides for a base salary of $85,000 per annum (subject to
annual adjustments based on increases in the Consumer Price Index).
Under the Employment Agreement, in the event that the Company terminates his
employment without "Cause" or Mr. Koren terminates his employment for "Good
Reason" (as such terms are defined in the Agreement), he is entitled to (i)
severance payments of $85,000 over the following 12 months and (ii) up to 6
months' continuation of health insurance and other Company benefits. For
one year after termination of employment, Mr. Koren would be subject to a
noncompetition covenant, restricting his ability to provide services to any
insurance business in Maine or any other state in which NEIC was conducting
business or actively planning to conduct business. The Agreement contains a
non-renewal provision (similar to that contained in Mr. Libby's contract),
which provides for non-renewal payments totalling $50,000 under certain
circumstances.
On March 24, 1999 the Company received a letter from Mr. Koren's counsel,
stating that Mr. Koren was voluntarily terminating his employment for "Good
Reason" pursuant to an Employment Continuity Agreement with the Company
(described below). The letter demanded payment in accordance with that
agreement. On March 29, 1999, the Company received another letter from Mr.
Koren's counsel, stating that Mr. Koren may also file charges of
discrimination based on age, religion, and certain other factors. The
Company has denied liability for all such claims.
Employment Continuity Agreements were executed with Mr. Libby and Mr. Koren
in October 1996. Under those Agreements, if the executive's employment were
terminated within twelve months after the occurrence of a "Change in Control
Event" (as defined), then the executive would receive 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 would accrue if the executive terminated his employment for "Good
Reason" (as defined). The Employment Continuity Agreement also provided for
a stay-on bonus equal to 100% of his annual base salary if the executive
remained 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 would 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.
The Company asserts that Mr. Libby's and Mr. Koren's recently executed
Employment Agreements supersede the Employment Continuity Agreements with
those executives, and that in any case there has occurred no "Change in
Control Event" and no alternation in Mr. Koren's employment situation which
would constitute "Good Reason" for him to terminate his employment. A
voluntary resignation by Mr. Koren also would not entitle him to any
severance payments under the Employment Agreement. However, the Company has
offered to negotiate a reasonable retirement payment to Mr. Koren in view of
his many years of service to North East. To date, no resolution of Mr.
Koren's claims has been reached.
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.
The Board in 1998 approved a program by which the Company awards stock
options on a quarterly basis to each non-employee director. As of the last
day of the calendar quarter, each such director receives 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. Messrs. Batal, Cummings,
Hancock, Hess, Hochadel and Suter each received a one-time grant of options
for 10,000 shares on April 10, 1998, at an exercise price of $2.8125 per
share (the market price of the stock on that date). Thereafter, each of
Messrs. Batal, Cummings, Hancock, Hess, Hochadel, Russ and Suter each
received quarterly option grants for 1,000 shares at $2.6875, $1.75, and
$2.625 per share as of June 30, September 30 and December 31, 1998
respectively. During 1998, pursuant to the same director stock option
program, two former directors of NEIC received options on April 10, 1998
for 7,000 shares each at $2.8125 per share and options for 1,000 shares
each on June 30, 1998 at $2.6875 per share. All director stock options are
immediately exercisable and carry a term of five years.
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: May 13, 1999 NORTH EAST INSURANCE COMPANY
By: /s/ Graham S. Payne
Treasurer, Chief Financial Officer
