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BALLANTRAE PARTNERS, L.L.C.
75 WEST END AVENUE R-12E
NEW YORK, NY 10023
TELEPHONE (212) 957-1337
July 8, 1996
Mr. Robert G. Schatz
Chairman of the Board
North East Insurance Company
482 Payne Road
Scarborough, ME 04074
Dear Bob:
Thank you for your cooperation in permitting us to obtain a copy of the
offering package for your proposed private placement.
We are disappointed that we have not been given a response to our letter
dated July 2, which requested that the Board reconsider this offering. It is
clear from the offering materials that our July 2 letter was accurate, and that
NEIC is in the process of massive and unprecedented stock offering at a fire
sale price and in a manner that disadvantages the shareholders of NEIC (and
therefore Ballantrae Partners as a future shareholder of NEIC).
As our filings indicate, we would like to support you and your team in the
management of NEIC. Our only concern is that you raise capital at the highest
price in a manner fair to all shareholders. The proposed offering, however, is
not fair to any shareholders. In particular, we have concerns about the timing
of the offering, the price of the offering and the manner in which you are
executing the offering.
TIMING
We do not understand your urgent need to raise capital through the issuance
of unregistered, illiquid securities in the midst of our acquiring a 27%
interest in the Company. Using registered securities would involve a longer
period of time, but would in all likelihood allow the Company to raise capital
at a fair market value. It would seem to be a lot easier (and therefore less
costly) to raise this money once there is resolution to our Form A process and
the underlying value of the Shares is unleashed. More importantly, though, there
has been no indication in your public filings (your l995 10-KSB and March 1996
lO-QSB) or at your annual meeting which occurred 14 days prior to the date of
the offering, that there is an urgent need for capital. Nor does the PPM
indicate any urgency to raise capital at a seriously dilutive price. For a
Company that has not raised capital in the past 15 years, the timing of this
offering could be reasonably seen as an attempt to dilute our future position.
PRICING
We recognize that NEIC could use more capital at some point in time. In
fact, we would like to support your efforts to raise capital. However, we would
propose to do so only at a fair price. We believe NEIC's plan to issue stock at
a price below market and book value is extremely unfair and damaging
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Mr. Robert G. Schatz
July 8, 1996
Page 2
for the Company's shareholders.(1) Ballantrae is disturbed that such a punitive
offering is being intentionally effectuated without even offering the right to
all shareholders to participate in the offering pro-rata according to their
current ownership position. The timing, price and structure of the offering all
indicate a desire to dilute the existing shareholders. As we have told you
several times in the past, we would be willing to invest substantial capital
directly into NEIC at a fair price to shareholders.
OFFERING METHOD
You are proposing to increase the number of outstanding shares of NEIC by
50% by issuing unregistered stock that cannot be traded for a number of years.
The Company has long suffered from having illiquid stock by virtue of the
Gershuny shares and we have all seen how this illiquidity has depressed the
value of the stock. We cannot understand why you would choose to offer more
illiquid stock in a way which is clearly not as helpful to the Company as having
all registered, tradable securities outstanding, unless there are other
motivations you have not described in the offering materials.(2)
ALTERNATIVE PROPOSAL TO RAISE CAPITAL
As we have mentioned in the past, we are prepared to invest additional
capital in NEIC. We would like to discuss with you the following proposal:
1. NEIC would initiate a rights offering of 800,000 registered shares at $2.00
per share open to all existing shareholders pro-rata to their current ownership.
Ballantrae would invest a minimum of its pro-rata share of 27% of all shares so
issued and would consider purchasing all 800,000 shares ($1.6 million) to the
extent that no other shareholders wish to participate in the offering. This
transaction would be subject to approval of our current Form A application
process with the State of Maine and the State of New York, but we anticipate
filing our Form A's with both states this week, and we have been told that we
will have resolution to this process within 30-60 days (roughly the same as the
August 15, 1996 termination date of the offering).
2. To the extent that you require a portion of the $1.6 million immediately
(before we finalize the Form A process), we would consider making a bridge loan
to NEIC. We understand that these funds would not be admitted as
______________________
1 The dilution cost of this transaction to shareholders of NEIC is
$900,000, or 15% of the existing surplus and capital of NEIC. Ballantrae's share
of this dilution is $243,000 which represents 27% of the total. Derived as
follows: existing book value of approximately $5.9 million. Additional capital
raised equals $1.6 million based on 1.5 million shares at $1.20 per share,
$150,000 in underwriting expenses and $40,000 in legal fees. Total book value
will now equal approximately $7.6 million with 4.5 million shares outstanding
for a new book value per share of $1.69 per share vs the existing book value of
$1.98 per share at 3/31/96. This dilution of $.30 per share on the approximately
3 million shares equals $900,000.
2 We also have concerns that the Private Placement Memorandum contains
an inadequate level of disclosure. We believe that this exposes NEIC and its
directors to unnecessary securities law liability. We believe it would be a
large mistake to consummate the offering based upon the limited disclosure
provided in the PPM.
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Mr. Robert G. Schatz
July 8, 1996
Page 3
surplus, but if you have some undisclosed urgency that cannot wait for 30-60
days, we want to be responsive. We note that the Company has not disclosed in
its public filings that it is having immediate liquidity problems.
Bob, we believe the foregoing is beneficial to NEIC because it (1) eliminates
costly underwriting commissions of $125,000-150,000 (10%), (2) is non-dilutive
to existing shareholders, and (3) represents a fair price for the securities of
NEIC. Obviously, to the extent that NEIC cooperates with Ballantrae in the Form
A proceedings, we could expedite the timing for our investing additional
capital.
We are also willing to discuss with you and assist NEIC with any other
reasonable financing transaction. What is most confusing to us is your
unwillingness to work with us. We would think the Board (consistent with its
fiduciary duties) would want to raise capital at the highest price possible.
Since we have offered to invest substantial capital directly into the Company,
and would like to do so at a price higher than your existing alternatives, we
would think that you would be motivated to cooperate with our Form A process.
FURTHER ACTIONS
It has now been almost a week since we sent you our July 2 letter. In
addition to the letter I sent to you, I attempted to contact two of your
directors on June 28, Joe Hochadel (at work) and Ed Dilworth (at home) and
neither has responded. Under normal circumstances, I would find these lack of
responses peculiar given the size of our proposed investment. Under the current
circumstances, it is tantamount to a complete disregard for interests of the
shareholders of NEIC.(3) We believe that the proposed transaction would be a
serious breach of fiduciary duty by the Directors of NEIC and will likely
subject the Directors to personal liability. If the Company insists on ignoring
us, we are fully prepared to undertake all options available to us to protect
our investment.
Bob, we are disappointed with the way our relationship has transpired. From
the very beginning of our conversations we have expressed our desire to work
with you, the Directors and Management to build a better North East Insurance
Company. I spent almost 20 years of my life in Maine and personally would like
nothing more than to be able to bring capital and jobs to Maine companies. Our
group is motivated to help create a company that is safe for the insureds of
NEIC, profitable for its shareholders and a rewarding place to work. We continue
to hope these goals can be achieved with you and your team in place, and would
like to work with you toward that end.
We are prepared to meet with you and your representatives (or have a
conference call) as soon as tomorrow morning to discuss the offering and our
proposals further. If we do not hear from you by the close of business on
Wednesday, we will assume that NEIC has chosen to continue to ignore our
concerns.
______________________
3 We note that senior management and the members of the Board hardly
own any shares of Common Stock and will therefore not be harmed by the offering.
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Mr. Robert G. Schatz
July 8, 1996
Page 4
Sincerely,
Murry N. Gunty
Managing Director
Ballantrae Partners
cc: Tom Record, Maine Bureau of Insurance
Edward B. Batal, Director - North East Insurance Company
David D. Chase, Director - North East Insurance Company
Terrance P. Cummings, Director - North East Insurance Company
Edward L. Dilworth, Jr., Director - North East Insurance Company
Andrew Greenbaum, Director - North East Insurance Company
Robert A. Hancock, Director - North East Insurance Company
Wilson G. Hess, Director - North East Insurance Company
Joseph M. Hochadel, Director - North East Insurance Company
Bruce H. Suter, Director - North East Insurance Company
Jonathan S. Kern, Managing Director - Ballantrae Partners
Deborah L. Harmon, Managing Director - Ballantrae Partners
Lawrence T. Yanowitch, Tucker, Flyer & Lewis
Michae1 High, Drummond, Woodsum & MacMahon
Cynthia Shenker, Wilson, Elser, Moskowitz
Alex Clark, Advest Inc.
Gregory Fryer, Verrill and Dana