UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to __________________
Commission File Number 0-17338
HOMEOWNERS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0033743
State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
400 SAWGRASS CORPORATE PARKWAY, SUNRISE, FLORIDA 33325
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 845-9100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based upon the closing market price of the registrant's common stock as of March
27, 1996 of $1.38, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $6,326,818.
Number of shares of common stock outstanding as of March 27, 1996, is 5,558,350.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders are incorporated by reference as Part III of this Annual Report.
<PAGE>
PART I
ITEM 1. BUSINESS
RECENT DEVELOPMENTS
During 1995, the Company received several inquiries from unaffiliated
third parties relating to various proposed transactions with the Company.
Consequently, the Company formed a Special Committee of the Board of
Directors to evaluate the alternatives available to the Company. The
Committee examined various options to enhance stockholder value, including
an alliance with a financial or strategic investor and/or a business
combination with an entity complementary to existing operations.
In September 1995, the Company announced that it had entered into
exclusive negotiations with Warrentech Corporation, relating to the
possible acquisition by Warrentech of the outstanding shares of the
Company in exchange for shares of Warrentech common stock. The exclusivity
period expired in January 1996, and these negotiations were terminated.
The Special Committee is continuing to examine alternatives to enhance
stockholder value. There can be no assurance that any of the same will
result in definitive agreements; or any assurance as to form or timing of
such a transaction , if it should occur.
On December 16, 1995, a jury verdict in the amount of $5,156,022 was
rendered in favor of the Plaintiff and against Homeowners Marketing
Services, Inc. ("HMS"), a subsidiary of the Company, in the following
matter: ACCELERATION NATIONAL INSURANCE COMPANY, PLAINTIFF, VS. HOMEOWNERS
MARKETING SERVICES, INC., ET AL., DEFENDANTS, in the Court of Common Pleas
of Franklin County, Ohio. HMS has filed an appeal of the judgment. Post
judgment proceedings have been initiated in Florida and elsewhere,
including discovery in aid of execution. Although such actions were
initially stayed in Florida, on March 13, 1996, the Circuit Court for
Broward County, Florida, dismissed an action by HMS which contested the
domestication of the judgment in Florida, and no stay is presently in
effect. In the event the judgment creditor proceeds to execute on its
judgment, such actions would have a material adverse effect on the
business of HMS, and could have a material adverse effect on the liquidity
of the Company.
COMPANY HISTORY
Homeowners Group, Inc. ("HOMG" or the "Company") was incorporated in 1988
in Delaware to act as the holding company for HMS and its subsidiaries,
which became subsidiaries of HOMG in the same year. The Company has
provided products and services to real estate brokerage firms since 1980.
DESCRIPTION OF BUSINESS
The Company has developed a national network of real estate brokers
("Members"), enrolled by the Company's franchisees ("Affiliates") and the
field sales force employed in the Corporate Owned Regions ("COR"). The
Company believes that it is a leading supplier of products and services to
real estate brokerage firms which market primarily residential properties.
The Company offers various types of memberships including a "full
membership," under which participating brokers have access to all of the
Company's products and services, and a "limited membership," under which
participating brokers and agents have access to certain of the Company's
products and services. The Company operates in the District of Columbia
and in all states except Alaska.
Members generally pay an initial membership fee and annual renewal fees,
in order to retain the rights of membership. Full members participate in
the Company's Errors & Omissions insurance ("E&O") program and pay
marketing or placement fees to the Company for access to the program.
Members also have the right to use products and services provided by other
vendors with which the Company has made preferred arrangements. See
"Membership" for specific information regarding the 1995 membership
programs.
Membership provides access to home warranty contracts and the real estate
brokers E&O insurance, in addition to access to the following programs: a
membership-wide referral networking system (REFNET(R)), the HMS
BuyerTrack(R) Follow-up System, the HMS Consumer Reach Program, a monthly
real estate publication (HMS NETWORKING(R)
2
<PAGE>
magazine), the HMS Risk Management System(R), HMS Photocard and certain
advertising and public relations materials. Historically, through 1995,
the Company has derived at least 88% of its annual revenues from the sale
of home warranty contracts by Members and from membership related fees.
The Company has granted the Affiliates the exclusive right, within defined
geographical territories, to enroll Members and train them in the
utilization and sale of the Company's products and services. The Company
directly enrolls Members in California, Florida (except northwest Florida,
which territory has been granted to an Affiliate) and Hawaii, and is a 45%
partner in a partnership which directly enrolls Members in Texas. During
1995, under various arrangements, the Company also began operating in the
previously franchised territories of Colorado, Indiana, Iowa, North
Dakota, South Dakota and Nebraska. Collectively, these territories are
known as Corporate Owned Regions. In 1994, the Company also directly
enrolled Members in Maine, Massachusetts, New Hampshire, and Vermont. In
May 1995, the Company franchised this New England territory. In 1995 the
Company also entered into agreements to manage, for a fee, the Kansas,
Oklahoma, Missouri territory and the Arizona, New Mexico territory.
Additionally, effective July 14, 1995, the Company purchased a nominal
interest in the Arizona, New Mexico territory. The Company has combined
administrative functions of the Kansas, Oklahoma and Missouri region with
the Texas region and the Arizona, New Mexico region with the California
region, which the Company believes will generate regional savings in
overhead expenses after the initial implementation costs.
Franchise realty organizations, such as CENTURY 21(R), ReMax(R) and
others, provide to their franchisees certain products and services, some
of which are similar to those offered by the Company. However, access to
such products and services generally requires an initial financial
commitment by the real estate brokerage firm, payment of a predetermined
percentage of revenues to the franchisor and mandatory utilization of some
of the franchisor's products and services. Under the Company's program,
Members pay for the Company's products and services which they elect to
use, once the initial membership fee and/or annual renewal fee has been
paid. The Company's membership agreement does not prohibit membership in
any real estate related franchise or service, and many HMS Members are
also members of franchise realty organizations.
DISTRIBUTION OF PRODUCTS AND SERVICES
FRANCHISEES
Homeowners Marketing Services International, Inc. ("HMSI"), a wholly-owned
subsidiary of the Company, has entered into franchise agreements with
Affiliates encompassing the District of Columbia and 39 states in which
HMS does not directly enroll Members. The Affiliates are granted exclusive
five-year licenses within defined territories to enroll, as Members, real
estate brokerage firms and agents which market primarily residential
properties and to market all products offered through the real estate
brokerage community by the Company.
Affiliates pay an initial fee for the grant of such license, which is
based upon the potential market for Member enrollment and product sales in
the defined territory. The franchise agreements are renewable by the
Affiliates with no additional franchise fee. Affiliates are paid a
predetermined commission from all membership fees and from sales of E&O
insurance programs, home warranty contracts, HMS BuyerTrack(R) programs,
Consumer Reach programs and other products sold within their territories.
The Affiliates are required to meet certain percentage quotas with respect
to enrollment of Members and sales of home warranty contracts in
connection with residential real estate closings transacted by Members
within their territories. In the event of continuing failure to achieve
the prescribed percentage quotas after notice, the Company may, at its
discretion, terminate the franchise agreement. The Affiliates are
responsible for obtaining all necessary licenses in connection with the
conduct of their businesses within their territories. The primary duties
of the Affiliates are to enroll Members and train them in the proper
utilization and sale of the Company's products and services. Marketing,
sales and promotional expenses associated with these activities are borne
by the Affiliates.
In order to strengthen the franchise system, the Company is negotiating
more stringent standards in its franchise agreements as they are up for
renewal. In 1995, ten franchise agreements were up for renewal. Three were
not
3
<PAGE>
renewed, and contract negotiations with the remaining seven are in
process. As a result of the non-renewed contracts, the Company is now
operating the Colorado, Indiana, Iowa, Nebraska, North Dakota and South
Dakota territories. In May, 1995, the Company franchised the New England
territory, consisting of the states of Maine, Massachusetts, New Hampshire
and Vermont. In February 1996, the Company terminated the Pennsylvania
franchise agreement for defaults under the agreement and began operating
this territory as a COR. The franchisee has filed a suit alleging breach
of contract, fraud and misrepresentation, and is seeking damages in the
amount of $50,000, trebled, reimbursements of costs and attorneys fees,
and an injunction to prevent the Company from terminating the franchise
agreement. The Company believes this suit is without merit, and has filed
a motion to transfer the case to Florida and a motion to dismiss the case.
MEMBERSHIP
The Company relies upon its Affiliates and COR sales force to continually
recruit new Members. To join the membership network, Members pay an
initial membership fee and each year thereafter, the Member must remit an
annual renewal fee in order to maintain membership. Members are entitled
to utilize the Company's products and services during the term of their
membership. Members are not, however, obligated to use all or any portion
of the products and services offered. Full Members pay a marketing fee or
placement fee for each real estate closing in which the member
participates for access to the E&O program. Since December 1993, the
Company has offered its new and renewal members an annually funded program
for all fees. Annual marketing/placement fees are determined based on the
Member's anticipated annual transaction volume. Members who select annual
funding pay either one lump sum upon enrollment/renewal, or three
installments over 180 days. At the end of 1995, nearly 57% of the
Company's full Members were enrolled in annual/installment E&O programs,
as opposed to a transactional payment program.
When a home warranty contract is sold in connection with a real estate
closing in which a Member participates, the Member receives reimbursement
(except in California, Arizona and Iowa, where it is prohibited by law),
in a predetermined amount, from the proceeds of the sale of such contract
in order to cover its administrative, inspection and processing costs.
Attrition has historically been attributable to termination by the Company
for non-payment of fees, the merger/closing of real estate brokerage
offices and to competitive pressures within the E&O market. As of December
31, 1995, 14,025 real estate brokerage firms operating 15,240 offices were
included as Members, including 3,736 firms operating 4,313 offices which
enrolled during 1995. The current E&O program with Continental Casualty
Company ("CNA"), pursuant to which the Company markets policies through
Victor O. Schinnerer ("Schinnerer"), CNA's exclusive underwriting manager,
has produced a marked increase in attrition and a shift from participation
in full membership to limited membership. Approximately 40% of the Members
at December 31, 1994 did not renew or were terminated by the Company
during 1995. Through 1995, full members declined from 7,622 to 5,773,
while "limited" members increased from 8,575 to 9,467. These trends are
due to the fact that all of the Company's previous E&O programs had a
program approach to underwriting (i.e. large groups of Members received
identical premium rates and were subject to less stringent underwriting
criteria), whereas the CNA/Schinnerer program carries an individual
approach to underwriting. Also, the market is extremely price sensitive
and the price competition has had a significant negative impact on the
Company's renewal rates. The Company believes that some of its competition
reduced prices to gain market share, a practice in which CNA/Schinnerer
does not engage.
In response to the decline in membership resulting from the transition to
the new E&O carrier, the Company has more aggressively marketed its
"limited membership" plans, which had been available, but did not
previously comprise a large portion of its total membership. Also, during
1995 and 1994, the Company allowed certain brokers continued eligibility
beyond their expiration date, as limited members, to use all of the
Company's products and services, with the exception of the E&O program,
with no additional membership fee. As of December 31, 1995, there were
approximately 3,800 such Members. However, this number fluctuates,
depending upon product usage by these limited Members. At December 31,
1995, approximately 62% of the Company's membership was comprised of
limited and new Agent or Mortgage Broker members discussed below, as
opposed to only 53% at December 31, 1994. Based upon Member enrollments as
of December 31, 1995, Member offices constitute approximately 10% of all
National Association of REALTORS(R) ("NAR") member offices.
4
<PAGE>
In 1995, the Company introduced its Warranty Sales Only membership
program, under which a broker's office can obtain access to sell the
Company's warranty product, but not its other products and services. Since
this program's inception in September 1995, 1,000 Warranty Sales Only
members have enrolled in the Company's new membership program.
PRODUCTS AND SERVICES
HOME WARRANTY CONTRACT
The Company offers, through its Members, home warranty contracts for a
fixed fee paid at the time of closing of residential sale transactions
participated in by HMS Members. The home warranty contract provides for
the repair or replacement, at the Company's discretion, of the major
mechanical systems and certain of the appliances of a residence which
malfunction as a result of normal wear and tear during the term of the
contract. The Company currently offers a home warranty contract for sale
in every state in which the Company operates, with the exception of
Connecticut.
The home warranty contract is marketed by Members to sellers and buyers of
residences. If the home warranty contract is purchased by the seller of a
residence, coverage is provided for the seller at no charge (except in
California and Nevada where there is a pro-rata charge) during the period
between the listing of the residence for sale and the closing. During this
listing period, the home warranty contract generally does not cover the
air conditioning and heating components of the residence. If the residence
is not sold within 180 days of the commencement of coverage, the contract
terminates, unless closing is scheduled within the next 60 days. Payment
is generally made at closing, either from the proceeds of the sale if the
warranty was placed with the seller, or from the buyer's closing costs if
the warranty was placed with the buyer. The home warranty contract
continues for a period of one year from closing for the benefit of the
buyer of the residence.
The home warranty contract is frequently purchased by the home seller,
enabling him/her to offer to a prospective buyer a residence with all of
the major systems and appliances covered for a period of one year from the
date of closing. The Company believes that the home warranty contract
makes a home more attractive to prospective buyers and causes a home to be
sold more rapidly by providing protection from unforeseen and expensive
repairs at low cost. The Company also believes that a home warranty helps
the Real Estate Broker by lowering risk from errors and omissions
lawsuits. Recently, the Company has noted that the sales mix is shifting
more towards buyers than sellers, indicating a greater awareness by the
ultimate user of the value of this product. The Company offers one year
renewals to selected existing home warranty contract holders. The Company
also offers a four-year home warranty contract for purchasers of newly
constructed homes. Renewed one year contracts, including second, third and
beyond year renewals, and four-year "new" home warranty contracts account
for 13% and 0.2%, respectively, of total home warranty contracts in force
as of December 31, 1995.
Generally, while the coverage and other terms differ to a degree between
states, under the terms of a home warranty contract, the Company agrees to
repair or replace, at the Company's discretion, for claims made during the
term of the contract, substantially all working component parts of a
residence's built-in appliances, refrigerator, washer, dryer, and central
heating, air conditioning, plumbing, hot water heater and electrical
systems. Optional coverage is provided at an additional charge for
swimming pools, spas, whirlpools and well pumps. Certain component parts
are not covered under the home warranty contract, and in every instance,
pre-existing defects and repairs or replacements occasioned as a result of
other than mechanical failure from normal wear and tear are not covered.
Consequential damages resulting from the failure of any component part of
the system or appliance, such as water damage from leaking pipes, are also
outside the scope of the home warranty contract. The Company has the
flexibility of offering several products with varying coverages within
each state. The Company also offers a lower priced warranty product which
covers primarily home appliances and electrical systems, but excludes
heating, ventilation, plumbing and air conditioning systems. Generally the
home warranty contract does not provide for any monetary limit on the
Company's obligations. The average selling price of a warranty was $352 in
1995, and $348 and $347 in 1994 and 1993, respectively. The average claim
paid in 1995 by the Company under its home warranty contracts was $213,
compared to $218 in 1994 and $222 in 1993. A claim occurred on
approximately 68% of all warranties in force in 1995, compared to 67% in
1994 and 68% in 1993. Although the Company will issue a home warranty
contract regardless of the age and size of the residence, in
5
<PAGE>
certain states there are surcharges based upon these factors. The home
warranty contract generally provides for a deductible to be paid by the
holder of the contract on each service call. As the contract terms are
generally for a one year period, claims are incurred and reported to the
Company within a short period of time.
Repair services under the home warranty contract are performed by
independent contractors located in the areas in which the contract is in
force. The Company has service arrangements with approximately 17,000
independent service contractors, nationally. Approximately 90% of the
Company's claims cost is paid to 1,900 of these contractors. When a
problem occurs, the homeowner makes a toll-free telephone call to the
Company's central processing center in Sunrise, Florida. A customer
service employee verifies that the home warranty contract is in force and
that the contract provides coverage of the reported problem. Utilizing an
automated search procedure, which attempts to locate the closest vendor
with highest approval rating, the employee advises the homeowner of the
service contractors phone number to arrange for a service call. If the
service contractor determines upon review that the repair will cost less
than the homeowner's deductible, the homeowner may elect to proceed with
the repair and pay the contractor, with no reimbursement from the Company.
If the repair is expected to exceed the deductible, the service contractor
is required to call the Company for authorization of the repair. The
Company's staff of authorization employees has practical, and sometimes
specialized, professional repair experience.
In 1995, the Company continued its focus (started at the end of 1994) on
expanding its renewal warranty contract sales, which increased by 70% over
1994 levels. The increase in renewal contract sales has been achieved by
several new marketing and collection techniques which have increased
renewal rates to an approximate 25% success rate versus an approximate 5%
rate in 1994.
Seventeen of the states in which the Company operates have enacted a
variety of legislation addressing home warranty contracts. Generally,
regulation of home warranty contracts requires the Company to reserve a
portion of its liquid and invested assets and/or place deposits with
regulatory agencies. As of December 31, 1995, approximately $9,900,000 of
cash and investments were needed to maintain the regulated subsidiaries'
required minimum reserve and surplus levels. Increases in warranty
production, as seen thus far in the first quarter of 1996, result in
increases in the Company's required reserve and surplus levels in the
regulated states. In addition, state regulators generally seek reserve
balances in excess of the minimum standards. In certain states, withdrawal
of any reserves in excess of statutory minimums requires approval from the
regulatory authorities. The Company has been advised by certain
authorities that such approval will not be granted. Accordingly, the
Company maintained reserves of approximately $14,000,000 as of December
31, 1995. See "Management's Discussion and Analysis of Financial Position
and Results of Operations - Liquidity and Capital Resources" for reserve
and surplus policies in regulated states. The Company is currently in
compliance with all statutory deposit, reserve and surplus requirements.
Although the Company is not aware of any pending legislation which would
negatively affect the sale of home warranty contracts, it is impossible to
predict legislation or regulations that may be adopted in the future and
which could affect the Company's home warranty contract business.
ERRORS AND OMISSIONS INSURANCE
Insurance Policies:
Members have access to real estate E&O insurance as a benefit of
membership. Historically, an attractive feature of the Company's E&O
program to Members has been that the premium could be paid monthly for
each closing participated in, with a one transaction per month minimum
premium. Beginning December 1, 1993, in conjunction with the Continental
Casualty Company ("CNA") program, the Company added an annually funded
premium, which may be paid in either one lump sum or in three installments
over 180 days. This insurance generally provides limits of between
$100,000 and $1,000,000 per loss and from $100,000 to $1,000,000 aggregate
per policy year. The policies generally provide coverage for unintentional
wrongful acts which occur during the term of the policy and are reported
up to 60 days after expiration of the policy and all claims after
expiration for which notice of wrongful act is given prior to expiration.
The policy provides for a deductible per loss and covers the real estate
brokerage firm and all officers,
6
<PAGE>
partners, stockholders, employees, salespersons and sales associates or
independent contractor brokers of the brokerage firm. At December 31, 1995
approximately 38% of the Company's members had active insurance policies.
In order to obtain E&O coverage, a potential full Member submits an
application for coverage to the insurer through an Affiliate field staff
representative. The insurer, through its underwriting manager, determines
whether to insure the applying Member and at what rate. All insurance
premiums are collected by the Company along with membership and
marketing/placement fees, and then the premium, net of the Company's
commission, is periodically remitted by the Company to the insurer. In
1995, the E&O program generated total premiums of approximately,
$12,000,000, essentially all of which related to the CNA program.
The Company and CNA/Schinnerer entered into agreements outlining the
responsibilities for the marketing, underwriting and administration of
this insurance program. The agreement requires the Company and its
Affiliates to market exclusively, on a right of first refusal basis,
through December 31, 1999, CNA's real estate errors and omissions
insurance products. If a potential insured is declined and not quoted, the
Company offers a secondary E&O product. Premiums written through secondary
carriers approximated 2% of total premium in 1995 and 5% in 1994.
Program:
From 1986 through April 1991, the insurer of the Company's E&O program was
Acceleration National Insurance Company ("Acceleration"), and from May
1991 through November 30, 1993, the insurer was a member company of
American International Group, Inc. ("AIG"). Under these two prior
programs, through November 30, 1992, Meridian Insurance Company, Ltd.
("Meridian"), a 100% owned subsidiary of the Company's former insurance
broker, was the reinsurer.
In November 1990, Acceleration notified the Company of its intention to
cancel the E&O program effective February 1, 1991. In exchange for a three
month extension on the E&O program cancellation date to April 30, 1991,
the Company agreed to cease obtaining investment income distributions from
Meridian, which it was entitled to under the terms of its agreements, to
allow investment income to accrue to the program pool and to increase the
amount of the letters of credit ("LOC's") provided to Meridian. The LOC's,
which totaled $2,059,274, were secured by U. S. Government securities of
$2,300,000. As a result of actuarial studies performed, in December 1991
the Company provided a reserve of $2,059,274 against its investments to
cover the possible loss under the Acceleration agreement. This provision
was included in unusual charges in the Company's 1991 consolidated
statement of income. In October 1992, Acceleration called the LOC,
contending that the program pool was depleted. Under the terms of the LOC,
the Company was required to liquidate the underlying investments and remit
the proceeds to Acceleration. In December 1991, Acceleration filed suit
against the Company relating to the 1986 - 1991 E & O program. The case
went to trial in November 1995, and on December 13, 1995 a jury rendered a
verdict against HMS, in favor of Acceleration in the amount of $5,156,022.
HMS has filed an appeal of the judgment. Post judgment proceedings have
been initiated in Florida and elsewhere, including discovery in aid of
execution. Although such actions were initially stayed in Florida, on
March 13, 1996, the Circuit Court for Broward County, Florida, dismissed
an action by HMS which contested the domestication of the judgment in
Florida, and no stay is presently in effect.
In December 1992, the Company formed a reinsurance subsidiary, POMG
Insurance Company, Ltd. ("POMG"), which acquired certain net assets from
Meridian and replaced Meridian as the reinsurer of all E&O policies
written beginning May 1, 1991. There was no monetary consideration given
and no loss recorded on the transaction. Under the Acceleration and AIG
programs, the Company bore reinsurance risk either directly through its
reinsurance subsidiary (POMG) or through the LOC's that it was required to
post with Meridian as collateral to be drawn upon in the event that the
assets in the reinsurance pool, together with investment income earned
thereon, were insufficient to cover the claims and related expenses
incurred. The amounts of the LOC's required to be posted by the Company
under the AIG program were subject to change at the discretion of the
insurer, based on contract volume and underwriting risk. The LOC amount
under the Acceleration program was fixed.
In the second and third quarters of 1993, the E&O program experienced
significant losses. Effective December 1, 1993, CNA replaced POMG as the
reinsurer and AIG as the insurer of the E&O policies issued through
November 30, 1993
7
<PAGE>
by AIG. This transaction took place through a novation of previous
reinsurance agreements in effect. The Company now markets CNA policies to
its membership network through Schinnerer, CNA's exclusive realtors E&O
program and underwriting manager. Pursuant to the agreement with CNA, the
Company discontinued POMG's operations, and none of its subsidiaries
participate in any reinsurance risk under the CNA program. The Company,
through its HOMS Insurance Agency, Inc. ("HOMS"), subsidiary acts solely
in the capacity of an insurance broker. Under the terms of the agreement,
the Company receives a fixed percentage of the E&O premiums collected as a
commission. The Company pays a portion of these commissions to the
Affiliates and Company Owned Regions generating the premium volume. The
Company has recorded certain liabilities and is subject to certain
contingencies in connection with the agreements with CNA. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
In connection with the CNA program, the Company is obligated to pay CNA $5
million over a period estimated to be five years. The Company makes
payments against this obligation through reductions in the commission it
earns on the premiums generated under the program. Accordingly, the
Company has agreed to meet certain premium volume quotas, on an annualized
basis, with scheduled minimum repayments. Additionally, there is a
specified minimum premium volume which must be attained. If E&O premiums
fall below the specified minimum premium volume, CNA may review the
program, give the Company an opportunity to address the issue and then, at
its option, may stop the program and take ownership of the Company's
expiration list, and the Company is required to make a cash payment equal
to 5% of the difference in the actual premium volume and the premium
volume quota to be applied against the obligation to CNA. If, on an annual
basis, premium volume falls below the premium volume quota, but is above
the specified minimum premium volume, a cash payment equal to 5% of the
difference between the actual premium volume and premium volume quota must
be made to CNA, to be applied against the obligation to CNA. In 1995, the
premium volume quota was $20 million, and the specified minimum premium
volume was $15 million. The premium volume written was $12 million, below
both the premium volume quota and the specified minimum premium volume.
However, in March 1996, the Company and CNA entered into an amendment of
the agreement, modifying the specified minimum premium volume levels to
$12 million in 1995, $13 million in 1996, $15 million in 1997 and $20
million thereafter. If, on an annual basis, premium volume falls below the
premium volume quotas of $17 million in 1995, $18 million in 1996, and $20
million for each year thereafter, but is above the specified minimum
premium volume previously disclosed, a cash payment equal to 5% of the
difference between the actual premium volume and the premium volume quota
must be made to CNA, to be applied against the obligation to CNA. As of
December 31, 1995, the balance due CNA totaled approximately $3.6 million.
The cash payment due for the 1995 shortfall totals $250,000, and must be
made in equal monthly instalments between March 1996 and December 1996.
The Company is currently in compliance with the terms of the agreements as
modified. The agreement to market CNA insurance exclusively to its
membership has been extended through December 31, 1999.
In 1990, Willis Corroon Corporation of Tennessee, the managing general
agent under the AIG program, began reimbursing the Company for expenses
incurred by the Company to administer the E&O programs. The Company
received approximately $1,443,000 and $2,975,000 in 1994 and 1993,
respectively. The Company recorded these reimbursements in revenue, net of
directly related expenses incurred in the course of processing
applications and performing other administrative tasks. The runoff of the
AIG program was completed in 1994, and thus, no administrative
reimbursement was earned on this program in 1995. Under the program
offered through CNA, the Company receives a similar fee on transactional
premium collections only, which is recorded as an offset to G&A expense.
In addition, under the CNA program, the Company receives a commission of
10% on all premiums collected and pays a portion of the commission to the
Affiliate and COR offices generating the premium volume. The Company
earned approximately $1,250,000 in commissions under the current program
in 1995 and $1,002,000 in 1994.
Other Insurance Products:
In 1992, the Company began exploring insurance products similar to real
estate brokers E&O for non-real estate brokers, and specifically, home
sellers' protection plans, which cover a home seller for unintentional
wrongful acts occurring in connection with the sale of a home. This
coverage was introduced in late 1992 as part of the Company's new HMS
SellerTrack(R) program, and is provided to home sellers who elect
membership in Homeowners Association of America ("HAA"), a consumer
organization. The coverage is insured in a similar manner to the real
estate E&O
8
<PAGE>
coverage marketed by the Company, and is underwritten by Homestead
Insurance Company. The Company bears no insurance risk on this product.
CONSUMER REACH PROGRAM
The Company's Consumer Reach Program was designed to target the end
consumer directly through separate approaches to the home seller and home
buyer. Under the first phase, the HMS SellerTrack(R) program, home sellers
receive a membership kit when listing their homes with a participating
Member. The kit contains materials, including a video tape and brochure,
which offer the home seller tips on how to prepare a home for a potential
buyer. The SellerTrack kits are marketed by Affiliates and COR's to
Members in their territories, as a listing tool to increase business
volume. Upon enrollment in the Consumer Reach program, Members are
notified that participation in this program requires that they use the
Company's warranty product exclusively.
The second phase of the Consumer Reach marketing program, HMS BuyerPak, is
targeted at assisting home buyers in their endeavor to purchase a new
home. The contents of the BuyerPak kits are similar to those of the
SellerTrack kits.
HMS BUYERTRACK(R) FOLLOW-UP SYSTEM
The Company offers Members five-year and three-year BuyerTrack(R) programs
which are funded at the closing of the sale of a residence. The program
provides a system for maintaining contact with former customers of the
Member with the goal of generating listings through direct referrals and
repeat business. The BuyerTrack(R) program utilizes personalized direct
mail, return mail responses, mailgrams, survey questionnaires and similar
reminder items. The five-year and three-year programs are identical except
for their duration and the number of contacts between the Member and the
former customer. The BuyerTrack(R) program is provided to Members under
agreement with the Personal Marketing Company, one of the nation's largest
producers of newsletters.
HMS REFNET(R)
The Company's REFNET(R) system connects Members in 49 states and the
District of Columbia. The Company makes available a toll-free number
through which Members can make referral inquiries. The Company obtains
from its Members an office profile which contains information which would
be of interest to other Members when placing referrals, such as office
location, company size, number of agents, certified referral training,
average sales price per home offered, percentage referral fee offered and
other information concerning a Member's office. This information is
maintained in the REFNET(R) computer data base.
Upon receiving an inquiry from a referring Member, the REFNET(R)
representative provides the referring Member with the addresses and
telephone numbers of three Members registered in the system which are
identified as the closest match to the needs of the referring Member. Once
the referring Member has selected a receiving Member, the referral fee
between the two is privately negotiated. Unlike traditional referral
systems, the Company does not participate in any portion of the referral
fee. Access to REFNET(R) is a benefit of membership, and no separate fee
is charged for this service for Members.
HMS RISK MANAGEMENT SYSTEM(R)
The Company offers a Risk Management System to its Members that extends
beyond basic E&O coverage. It is a national program in the industry that
provides specific risk reduction measures. In addition to professional
liability protection, elements of the system include a Risk Management
Advisory Center, Risk Management Educational Programs, Home Warranty
Protection Plan, and Home Warranty Indemnification. There is no fee for
participating Members.
ADVERTISING AND SALES PROMOTION PROGRAM
As a benefit of membership, the Company offers various advertising and
public relations materials and ideas designed to enhance the business of
Members. These materials include a subscription to HMS NETWORKING(R)
magazine, a public relations guide, camera ready advertising materials for
use by Members, sample creative ads, displays, and other materials.
9
<PAGE>
COMPETITION
The Company encounters competition with respect to most of its products
and services. The principal area in which the Company has historically
encountered competition is in the home warranty contract business.
Competition in that industry has increased as consumer awareness and
acceptance of the home warranty concept has grown. The Company's largest
national competitor in the home warranty contract business is American
Home Shield. The primary competitive factors in that industry are sales
force presence, price, scope of coverage and quality of service. Through
the Company's focus on maintaining and educating its members, its focus on
Warranty Sales Only memberships, its franchise distribution network, its
vendor network, and its focus on service, the Company believes it can
effectively compete in the home warranty contract business. The price and
scope of coverage of its home warranty contract are competitive with those
generally offered by the industry. The Company encounters additional
warranty competition from companies presently offering the same or similar
services as the Company offers on an individual appliance or system
contract basis.
In early 1994, Employers Re, which had been a relatively small Realtor E&O
competitor, joined forces with American Home Shield, a major competitor in
the warranty arena, and became a strong competitive force, and continues
to be a strong competitive force. The realtor E&O market is extremely
price sensitive. The Company is required to offer the CNA program, which
has impacted the Company's ability to compete. Additional competition has
entered the Realtor E&O market through independent insurance agents who
can offer a variety of insurance products, thus meeting all of the
customer's insurance needs. These independent insurance agents often
provide a selection of E&O products.
FOREIGN OPERATIONS
In October 1991, the Company acquired an 80% interest in a British
subsidiary, Home Guarantee Corporation, ("HGC"), which began marketing
home warranty contracts in the United Kingdom during 1992. HGC did not
generate significant revenues, and during the second quarter of 1994, the
Company determined that it was no longer in the best interests of the
Company to continue funding this operation. During the third quarter of
1994, after a proposed sale of the Company's interest in HGC was not
consummated due to the potential buyer's inability to obtain financing,
the Company ceased funding HGC. The one time charges for severance pay,
the balance due under the subsidiary's lease agreement and the write off
of the subsidiary's net assets related to the termination of that
operation, totaled approximately $724,000. These charges are included in
the "Unusual items" caption in the accompanying consolidated statements of
income.
During 1994, the Company's net expenses relating to HGC approximated
$761,000, prior to the Company's decision to cease funding this operation.
The following table sets forth financial information about the Company's
foreign and domestic operations for 1994 and 1993. The Company had no
activity from foreign operations in 1995.
FOREIGN DOMESTIC TOTAL
------- -------- -----
(in thousands)
1994
Revenue $16 $52,762 $52,778
Operating (loss) (761) (72) (833)
Total assets 0 39,199 39,199
1993
Revenue $13 $51,331 $51,344
Operating income (loss) (869) 3,615 2,746
Total assets 246 45,648 45,894
10
<PAGE>
In May 1995 HGC was liquidated, and after the financial settlement of all
outstanding liabilities, approximately $275,000 was taken into income in
the second quarter of 1995.
EMPLOYEES
As of February 29, 1996, the Company employed 192 persons on a full-time
basis, 72 of whom administer the home warranty contract business in the
United States, and 46 of whom enroll and service Members in the CORs. The
Company believes that its employee relations are good. None of the
Company's employees are represented by a labor union or covered by any
collective bargaining agreement.
In early September 1994, the Company underwent an organizational
restructuring, reducing its total work-force by approximately 20%. The
restructuring resulted in annual cost savings of approximately $1,700,000,
through reductions in salary, benefits and payroll tax expenses. The one
time charge for severance pay and related benefits, totaling $1,063,000 is
included in "Unusual items" in the accompanying consolidated 1994
statement of income.
ITEM 2. PROPERTIES
The Company's corporate offices are located at 400 Sawgrass Corporate
Parkway, Sunrise, Florida. The Company leases approximately 24,980 square
feet in a two-story office building for a ten year term, expiring December
31, 2005. The Company currently pays rent of approximately $33,000 per
month, including sales tax and maintenance charges. The Company also
leases office space for regional sales and administrative offices in
Northern California and Texas under leases with remaining terms of one and
three years, respectively.
ITEM 3. LEGAL PROCEEDINGS
The Company incurs numerous lawsuits in the ordinary course of its home
warranty contract business, typically concerning whether claims under such
home warranty contracts are entitled to coverage. The Company does not
believe any of these suits are material to the Company's operations or
financial results.
In December 1991, suit was brought against HMS and the Company by
Acceleration National Insurance Company ("Acceleration") for damages
related to the real estate errors and omissions insurance ("E & O")
program in which Acceleration was the policy issuing company. Also named
as defendants in this action were Willis Corroon Corporation of Ohio
(f/k/a Corroon & Black of Ohio, Inc.) and Meridian Insurance Company, Ltd.
("Meridian"), a Bermuda corporation and subsidiary of Willis Corroon
Corporation of Tennessee.
On December 13, 1995, a jury in the Court of Common Pleas of Franklin
County, Ohio rendered a verdict against HMS. The verdict was in favor of
Acceleration in the amount of $5,156,022, and accrues interest at the rate
of 10% per annum. Post judgment proceedings have been initiated in Florida
and elsewhere, including discovery in aid of execution. Although such
actions were stayed in Florida, effective March 13, 1996, the Circuit
Court for Broward County, Florida, dismissed an action by HMS, which
contested the domestication of the judgment in Florida, and such stay is
no longer in effect.
In February 1996, a lawsuit was filed against the Company in the Court of
Common Pleas of Bucks County, Pennsylvania, by the former franchisee of
the Pennsylvania territory, alleging breach of contact, fraud and
misrepresentation, and is seeking damages in the amount of $50,000,
trebled, reimbursement of costs and attorney's fees, and an injunction to
prevent the Company from terminating the franchise agreement. The Company
believes this suit is without merit, and has filed a motion to transfer
the case to Florida and a motion to dismiss the case.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 22, 1995, the Company held its annual stockholders meeting.
Diane M. Gruber and Melvin Stewart, being the only nominees, were
re-elected at the meeting, for three year terms expiring in 1998.
Solicitation of proxies was made pursuant to Regulation 14A under the
Exchange Act of 1934, and there were no solicitations in opposition to
these nominees. Gary D. Lipson, Carl Buccellato and Michael A. Nocero,
Jr., M.D. constitute the remaining three directors, whose terms expire in
1996, 1997 and 1997, respectively.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market on the
NASDAQ National Market under the symbol HOMG. The following table sets
forth the high and low transaction prices for each quarterly period during
fiscal years 1995 and 1994. Stock price data reflects inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent
actual transactions.
Year Quarter High Low
1995 First $1.75 $0.63
Second 2.13 1.13
Third 2.00 1.00
Fourth 1.94 0.50
1994 First $4.00 $2.50
Second 3.25 1.75
Third 2.63 1.75
Fourth 2.00 0.38
STOCKHOLDERS
As of March 15, 1996, there were approximately 141 shareholders of record
of the Company's common stock, some of whom are brokerage firms which hold
shares in nominee name on behalf of their clients. The Company believes
that there are over 550 beneficial owners of its Common Stock.
DIVIDENDS
In 1993, the Company declared one semi-annual dividend of $0.10 per share.
The agreements reached with CNA impose certain restrictions on dividends
until funds due to CNA are paid in full. In 1995 and 1994, the Company did
not declare any dividends. The Company does not anticipate paying any
dividends in the foreseeable future.
12
<PAGE>
<TABLE>
<CAPTION>
ITEM 6: SELECTED FINANCIAL DATA
Years Ended December 31, 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS (in thousands)
Operating revenue $44,554 $52,778 $51,344 $45,578 $42,986
Income (loss) from continuing operations
before income taxes (3,037) (1,030) 5,319 3,891 (116)
Income (loss) from continuing operations (1,909) (833) 3,191 1,879 275
Discontinued operation:
Loss from operation of discontinued
reinsurance subsidiary -- -- (6,228) -- --
Estimated loss on reinsurance
portfolio transfer -- -- (9,009) -- --
Net income (loss) ($1,909) ($833) ($12,046) $1,879 $275
CASH FLOW FROM OPERATING ACTIVITIES
(in thousands) ($667) $3,046 ($1,557) $2,755 $2,454
DIVIDENDS DECLARED PER
COMMON SHARE $0.00 $0.00 $0.10 $0.20 $0.20
BALANCE SHEET (IN THOUSANDS)
Cash and investments $17,054 $19,625 $18,154 $19,176 $26,133
Total assets 38,514 39,199 45,894 41,068 38,705
Long-term debt, net of current portion 2,591 3,317 3,107 22 66
Deferred home warranty revenue
in excess of deferred home
warranty acquisition costs 10,572 10,441 9,994 8,196 6,906
Stockholders' equity 6,561 8,401 9,205 21,820 21,084
PER SHARE DATA
Income from continuing operations ($0.34) ($0.15) $0.57 $0.34 $0.05
Discontinued operation:
Loss from operation of discontinued
reinsurance subsidiary -- -- (1.12) -- --
Estimated loss on reinsurance
portfolio transfer -- -- (1.62) -- --
Net income (loss) ($0.34) ($0.15) ($2.17) $0.34 $0.05
Stockholders' equity $1.18 $1.51 $1.66 $3.93 $3.79
Weighted average common shares
outstanding (in thousands) 5,558 5,558 5,559 5,561 5,566
KEY BUSINESS INDICATORS:
Member offices 15,240 16,137 19,798 19,838 19,273
Home warranty contracts sold 105,324 112,737 100,914 82,672 78,836
RATIOS
Pre-tax margin on income from
continuing operations (7)% (2)% 10 % 9% 0 %
Margin on income from
continuing operations (4)% (2)% 6 % 4% 1 %
Effective income tax rate (37)% (19)% (37)% 52% (337)%
Return from continuing operations
on beginning assets (5)% (2)% 8 % 5% 1 %
Return from continuing operations
on average stockholders' equity (26)% (9)% 21 % 9% 1 %
</TABLE>
NOTE: CERTAIN AMOUNTS REFLECT RECLASSIFICATIONS FROM AMOUNTS REPORTED
PREVIOUSLY TO CONFORM TO CURRENT PRESENTATION.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table presents certain relationships deemed to be pertinent
indicators of the Company's results of operations:
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------
$ % $ % $ %
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Warranty revenue $37,181 83.5% $38,911 73.7% $31,954 62.2%
Membership & other revenue 6,120 13.7 11,339 21.5 16,648 32.5
E&O brokerage 1,253 2.8 2,528 4.8 2,742 5.3
Total operating revenue 44,554 100.0 52,778 100.0 51,344 100.0
Warranty costs 29,244 78.7 32,317 83.1 26,784 83.8
Membership & other costs 4,308 70.4 7,127 62.9 9,160 55.0
E&O brokerage 648 51.7 512 20.3 386 14.1
Total direct costs 34,200 76.8 39,956 75.7 36,330 70.8
Unusual items -- -- 1,787 3.4 -- --
G&A expense 9,262 20.8 12,013 22.8 12,268 23.9
Operating income (loss) 1,092 2.5 (978) (1.9) 2,746 5.3
- -----------------------------------------------------------------------------------------
</TABLE>
1995 COMPARED TO 1994
Home Warranty Operations:
Home warranty revenue, totaling $37,181,000 and representing 84% of total
operating revenue for 1995, decreased 4% from the 1994 figure of
$38,911,000, or 74% of total operating revenue, due primarily to declines
in home warranty contract sales. The decrease in contract sales is
primarily due to the loss of membership. Due to the Company's warranty
revenue recognition method, which recognizes contract revenue over the one
year term of the contract, warranty revenue for any period of time is also
impacted by production in the eleven months immediately preceding that
period. There have been no major pricing changes which would have
significantly affected warranty revenue.
Direct expenses of the warranty product, which consist primarily of claims
expense and acquisition costs, as a percentage of related operating
revenue decreased to 79% in 1995 from 83% in 1994, primarily due to a 2%
decrease in average claim severity and a 1% increase in warranty claim
frequency. Claim frequency experienced in 1995 returned to the 1993
levels, after the unusually high frequency experienced in 1994, as a
result of the severe weather patterns experienced across the country
throughout the first eight months of 1994. Through December, 1995 the
winter season has been extremely severe, resulting in negative experience
in the last quarter of the year. This trend has continued into the first
quarter of 1996, and has had a significant negative impact on the
Company's cash position and its results of operations.
The 1995 warranty acquisition cost ratio of 36% is slightly lower than the
1994 ratio, which approximated 38%. As the volume of contract sales shifts
between geographic regions, the Company's overall acquisition cost ratio
changes, since the Company's acquisition costs vary in different
locations. The acquisition cost ratio is expected to remain relatively
stable at its current level, assuming that the warranty product mix and
geographic distribution do not change significantly. Management, at this
time, does not expect such a change to occur.
The amount of general and administrative ("G&A") expenses of the home
warranty operation, which primarily include allocated fixed costs,
decreased significantly from the prior year period, and as a percentage of
related revenue. The 1995 expenses were positively impacted by the
work-force reduction that took place in September 1994.
14
<PAGE>
Membership and Other Operations:
Membership and other related revenue of $6,120,000 in 1995 was 46% lower
than 1994 revenue of $11,339,000, which is primarily related to the
changing mix of the membership base. A large portion of the Company's
membership no longer participates in the Company's E&O program and is
exempted from paying the associated marketing/placement fees. Further
impacting the membership results is the 6% decline in the Company's
membership base from the prior year level. These factors have caused
continuing decreases in related revenue and earnings in 1995, and reflect
the continuing effects of the change in Company's E&O carriers. As a
result of this change and the related increased competitive pressures
within the E&O market, the Company has been unable to retain some of its
Members as participants in its current E&O program. Additionally,
attraction of new full members is more difficult, due to premium quotes
which are not competitive for certain brokers and also due to declinations
by the Company's primary insurance carrier of certain other brokers.
Throughout 1995, the Company continued to focus on attracting new members
and retaining existing members who have either been declined coverage by
CNA or who have obtained their E&O coverage through another entity, as
participants in the Company's warranty and Consumer Reach programs. A new
membership program targeted at brokers desiring to use the Company's
warranty was introduced in mid-1995. This strategy has somewhat reduced
the negative impact of the loss of members on other revenues, evidenced by
the 1995 fourth quarter improvements in first year warranty contract
sales, as compared to prior quarters.
Direct expense of the membership operations approximated 70% of related
revenue for 1995 and 63% of related revenue for 1994. The disproportionate
cost ratio is related primarily to the results of the CORs, which were
particularly impacted by the membership declines, especially in the states
of California and Texas. Also impacting the direct cost ratio is the
effect of promotional discounting of some of the Company's membership
programs, a step the Company has taken to ease the membership transition
and retain some of its top producing members.
As with the home warranty operations, G&A expenses of the Company's
membership and other operations decreased from 1994 totals, due to the
September 1994 work-force reduction, combined with the focus on
controlling costs.
E&O Operations:
E&O related revenue for 1995, totaling $1,253,000 was 50% lower than the
1994 revenue of $2,528,000. The decrease in this revenue relates to the
decline in the Company's membership base, which has a corresponding effect
on the premium volume of the program and, thus, the commissions earned.
Direct expenses of the E&O operations increased from $513,000 in 1994 to
$648,000 in 1995. Under the current E&O program, the Company has agreed to
pay a portion of the commission it receives on the E&O premiums collected
to the Affiliates generating the premium volume. There was no such
arrangement under previous E&O programs, and, as 1994 was a transition
year, the 1995 increase was anticipated. As the premium volume under the
new program grows, the commission paid to the Affiliates will grow
proportionately.
United Kingdom Operations:
HGC was liquidated in 1995, and there were no activities of HGC to include
in the 1995 financial statements. HGC did not generate any significant
revenue and incurred an operating loss of $761,000 in 1994, exclusive of
the charges recorded by the parent company in writing off the net assets
of this subsidiary.
Reduction of Work-force:
In early September 1994, the Company underwent an organizational
restructuring, reducing its total work-force by approximately 20%. This
restructuring resulted in annual cost savings of approximately $1,700,000
in 1995, through reductions in salary, benefits and payroll tax expenses,
excluding the effects of any other personnel or staffing changes. The 1994
one time charge for severance pay and related benefits, totaling
$1,063,000 is included in "Unusual items" in the accompanying consolidated
statements of income. Approximately $400,000 of this total relates to an
agreement to terminate the employment contract between the Company and its
former Chairman of the Board of Directors.
15
<PAGE>
Other Income (Expense):
Investment income approximated $1,367,000 in 1995, an increase of
approximately 1000% from the 1994 level of $120,000. Unrealized holding
gains/losses on trading securities are included in the Company's earnings
for the period, and unrealized gains/losses on securities available for
sale are reported as a separate component of stockholders' equity. In
1994, rising interest rates caused the Company's investments in debt
securities to generate significant unrealized holding losses, especially
on its trading securities portfolio, which have been included in the
Company's consolidated income statement. In 1995, this trend reversed, and
the Company recognized significant income. Investment income is generated
primarily from the securities currently invested by the Company's
regulated home warranty subsidiaries, as well as from additional
investment of funds generated through the sales of warranty products.
Funds generated through the other operations of the Company's business are
generally invested in highly liquid overnight investments, and therefore
earn a minimal amount of interest over the course of a year.
In December 1995, a judgment was awarded against a wholly owned subsidiary
of the Company in the amount of $5,156,022. This amount was reported in
the other expense line item in the accompanying consolidated statements of
income.
Income Taxes:
The Company's effective tax rate in 1995 was a benefit of 37%, as compared
to a benefit of 19.2% on income from continuing operations in 1994.
As a result of the losses generated by the current year Acceleration
judgement, the 1994 work-force reduction and termination of its UK
operations, combined with the prior year losses generated by the Company's
discontinued reinsurance operations, the Company has recognized
significant income tax benefits in 1993 and 1994. A portion of the
Company's 1993 and 1994 pre-tax losses was carried back for income tax
purposes, to offset taxable income earned in the prior three years,
generating tax refunds for the Company. The remaining pre-tax losses give
rise to significant deferred tax benefits, which will be recognized in
future years, as the temporary book to tax differences which create the
deferred tax benefits become deductible for tax purposes. The total
deferred tax benefit which is expected to be realized in future years
approximates $8.1 million at December 31, 1995. Based upon management's
estimates of future taxable income and of the positive and negative
evidence regarding the likelihood of ultimate recognition of this benefit,
it has been determined that no valuation allowance is necessary. This
determination was based on the Company's taxable earnings history,
exclusive of non-recurring charges, and the period anticipated for full
recognition, assuming the Company maintains its current level of taxable
income, exclusive of non-recurring charges.
1994 COMPARED TO 1993
Home Warranty Operations:
Home warranty revenue, totaling $38,911,000 and representing 74% of total
operating revenue for 1994, increased 22% over the 1993 figure of
$31,954,000, or 62% of total operating revenue, due primarily to growth in
home warranty contract sales, which outpaced growth in other revenue
sources. Due to the Company's warranty revenue recognition method, which
recognizes contract revenue over the one year term of the contract,
warranty revenue for any period of time is also impacted by production in
the eleven months immediately preceding that period. Management believes
that much of this improvement can be attributed to a sales and marketing
strategy focused on educating Members about the value of the home
warranty. Improvements in the percentage of Members selling the Company's
warranty, from 19.4% in December 1993 to 22% in December 1994, indicate
the success of this strategy. The improvement in home warranty contract
sales is also partially attributable to the new SellerTrack program
introduced in 1993, which targets the home seller directly. Upon
enrollment in the Consumer Reach program, Members are notified that
participation in this program requires that they use the Company's
warranty product exclusively. Management periodically reviews the warranty
revenue recognition rates, and the current review did not result in any
revisions, as the current rates did not differ significantly from current
claims experience. There have been no major pricing changes which would
have significantly affected warranty revenue.
Direct expenses of the warranty product, which consist primarily of claims
expense and acquisition costs, as a percentage of related operating
revenue, decreased to 83% in 1994 from 84% in 1993, primarily due to a 7%
decrease in average claim severity, offset by a 4% increase in warranty
claim frequency. Claim frequency experienced in 1994 was negatively
impacted by the unusually severe weather patterns experienced across the
country throughout the first eight months of 1994 and appears to be
consistent with industry trends. Through December, 1994 the winter season
16
<PAGE>
has been unusually mild, resulting in positive experience in the second
half of the year. Also impacting 1994 claims experience, in late 1993, the
Company introduced in several states, a warranty with a $35 deductible as
opposed to the standard $100 deductible, which has contributed somewhat to
the increased claims frequency and decreased average severity. Such trends
are consistent with industry experience.
The 1994 warranty acquisition cost ratio of 38% is slightly higher than
the 1993 ratio, which approximated 37%. As the volume of contract sales
shifts between geographic regions, the Company's overall acquisition cost
ratio changes, since the Company's acquisition costs vary in different
locations. The acquisition cost ratio is expected to remain relatively
stable at its current level, assuming that the warranty product mix and
geographic distribution do not change significantly. Management, at this
time, does not expect such a change to occur.
Fourth quarter 1994 and preliminary 1995 results thus far reflect some
leveling of current warranty production. In 1995, it will be more
difficult for the Company to continue to exceed the 1994 record production
levels. At this time, management anticipates that production in 1995 will
approximate or be less than production levels seen in the comparable
periods of the preceding year, as the membership declines begin to more
heavily impact warranty production, primarily in the COR.
The amount of general and administrative ("G&A") expenses of the home
warranty operation, which primarily include allocated fixed costs,
decreased slightly from the prior year period, and as a percentage of
related revenue. Management has focused on controlling costs Company-wide.
In addition, the 1994 fourth quarter expenses have been positively
impacted by the work-force reduction that took place in September 1994.
Approximately $470,000 of the expense incurred in this restructuring was
allocated to the warranty product.
Membership and Other Operations:
Membership related revenue of $11,339,000 in 1994 was 32% lower than 1993
revenue of $16,648,000, which is primarily related to the changing mix of
the membership base, as a large portion of the Company's membership no
longer participates in the Company's E&O program and is exempted from
paying the associated marketing/placement fees. Further impacting the
membership results, is the 20% decline in the Company's membership base
from the prior year level. These factors have caused continuing decreases
in related revenue and earnings in 1994, and reflect the continuing
effects of the transition to the Company's current E&O program. As a
result of this transition and the related increased competitive pressures
within the E&O market, the Company has been unable to retain some of its
Members as participants in its current E&O program. Additionally,
attraction of new full members is more difficult, due to premium quotes
which are not competitive for certain brokers and also due to declinations
by the Company's primary insurance carrier of certain other brokers.
Throughout 1994, the Company has attempted to attract new members and
retain existing members who have either been declined coverage by the new
insurance carrier or who have obtained their E&O coverage through another
entity, as participants in the Company's warranty and Consumer Reach
programs. Originally designed to reduce the effects of the loss in
transaction and membership related fees, this strategy has been only
marginally effective in regaining that lost revenue, as those members who
are retained as participants in the Company's other programs are generally
not required to pay any significant membership fees.
As a result of the transition to the CNA/Schinnerer E&O program, which is
based on anticipated as opposed to actual closings for participants
electing an annually funded program, the number of closings by Members
reported to the Company is no longer totally indicative of the Company's
membership strength or results of operations. Further, Members who do not
participate in the Company's E&O program do not report closing information
to the Company. Based on the history of its existing Members, and the
number of closings reported by transactional participants, the Company
believes that its current membership participates in approximately 30% of
all transactions nationally, consistent with the 1993 experience.
Direct expense of the membership operations approximated 63% of related
revenue for 1994 and 55% of related revenue for 1993, declining only 22%
from 1993, despite the 32% decline in revenue. The disproportionate cost
ratio is related primarily to the expenses of the Consumer Reach program,
certain phases of which are still in the development stage and are not yet
generating adequate revenue to offset the expenses incurred. Also
impacting the direct cost ratio is the effect of promotional discounting
of some of the Company's membership programs, a step the Company has taken
to ease the membership transition and retain some of its top producing
members.
17
<PAGE>
As with the home warranty operations, G&A expenses of the Company's
membership and other operations decreased from 1993 totals, due to
management's focus on controlling costs Company-wide. Also, the 1994
fourth quarter expenses have been positively impacted by the work-force
reduction that took place in September 1994. Approximately $414,000 of the
workforce restructuring charge was allocated to membership and other
operations, while the full amount of the UK write-off was included in this
classification.
E&O Operations:
E&O related revenue for 1994, totaling $2,528,000 was 8% lower than the
1993 revenue of $2,742,000. The 1994 revenue includes commissions earned
on the new E&O program of approximately $1,002,000 and nearly $1,443,000
of E&O reimbursement on the prior E&O program. The expense reimbursement
earned in 1993 was a fixed percentage of total premiums collected, and is
reported net of expenses incurred primarily in processing applications of
the insured Members on behalf of the insurer. The decrease in this revenue
relates to the decline in the Company's membership base, which has a
corresponding effect on the premium volume of the program and, thus, the
commissions earned.
Operating costs and expenses of the E&O operations increased from
$2,459,000 in 1993 to $2,724,000 in 1994, including $180,000 related to
the workforce reduction that took place September 1994. Under the new E&O
program, the Company has agreed to pay a portion of the commission it
receives on the E&O premiums collected to the Affiliates generating the
premium volume. There was no such arrangement under previous E&O programs.
Consequently, as the premium volume under the new program grows, the
commission paid to the Affiliates will grow proportionately.
United Kingdom Operations:
HGC did not generate any significant revenue and incurred an operating
loss of $761,000 in 1994, exclusive of the charges recorded by the parent
company in writing off the net assets of the subsidiary, as described
below. HGC incurred a loss of $869,000 in the year ended December 31,
1993.
In the second quarter of 1994, the Company received a letter of intent for
the purchase of its 80% interest in HGC, however, the proposed transaction
was not consummated, due to the potential buyer's inability to obtain
financing. Consequently, the Company ceased funding HGC's operations in
the third quarter of 1994, effectively closing down the UK operation. The
one time charges for severance pay, the balance due under the subsidiary's
lease agreement and the write-off of the subsidiary's net assets, related
to the termination of that operation, totaled approximately $724,000.
These charges were accrued in the third quarter, and are included in the
"Unusual items" caption in the accompanying consolidated statements of
income. The UK operations are reported in the Membership and Other
category in the accompanying table.
Reduction of Work-force:
In early September 1994, the Company underwent an organizational
restructuring, reducing its total work-force by approximately 20%. This
restructuring is expected to result in annual cost savings of
approximately $1,700,000, through reductions in salary, benefits and
payroll tax expenses, excluding the effects of any other personnel or
staffing changes. The one time charge for severance pay and related
benefits, totaling $1,063,000 is included in "Unusual items" in the
accompanying consolidated statements of income. Approximately $400,000 of
this total relates to an agreement to terminate the employment contract
between the Company and its former Chairman of the Board of Directors.
Other Income:
Investment income approximated $120,000 in 1994, a decrease of 95% from
the 1993 level of $2,599,000. The 1993 earnings are the result of profit
taking initiated in the second quarter of 1993 on the Company's previously
unrealized gains on investments. Originally intended to be reinvested in
diversified debt and equity funds, essentially all equity securities were
sold. However, due to the capital and operating needs of POMG, which has
since been discontinued, management was not able to reinvest these funds.
Further discussion of POMG is presented in the "Discontinued Operations"
section herein. The Company's investment results in 1994 have been
severely impacted by market interest rates increases, as well as the
impact of implementation of Statement of Financial Accounting Standards,
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," in January 1994. SFAS 115 expands the use
18
<PAGE>
of fair value accounting for certain debt and equity securities that are
either held for trading purposes or are available for sale. This standard
requires that unrealized holding gains/losses on trading securities be
included in the Company's earnings for the period, and that unrealized
gains/losses on securities available for sale be reported as a separate
component of stockholders' equity. In 1994, rising interest rates have
caused the Company's investments in debt securities to generate
significant unrealized holding losses, especially on its trading
securities portfolio, which have been included in the Company's
consolidated income statement, as required by the new standard. Investment
income is generated primarily from the securities currently invested by
the Company's regulated home warranty subsidiaries, as well as from
additional investment of funds generated through the sales of warranty
products. Funds generated through the other operations of the Company's
business are generally invested in highly liquid overnight investments,
and therefore earn a minimal amount of interest over the course of a year.
Income Taxes:
The Company's effective tax rate in 1994 was a benefit of 19.2%, as
compared to a 40% provision on income from continuing operations in 1993.
As a result of the losses generated by the 1994 work-force reduction and
the termination of its UK operations, combined with the prior year losses
generated by the Company's discontinued reinsurance operations, the
Company has recognized significant income tax benefits in 1993 and 1994. A
portion of the Company's 1993 and 1994 pre-tax losses has been carried
back for income tax purposes, to offset taxable income earned in the prior
three years, generating tax refunds for the Company. The remaining pre-tax
losses give rise to significant deferred tax benefits, which will be
recognized in future years, as the temporary book to tax differences which
create the deferred tax benefits become deductible for tax purposes. The
total deferred tax benefit which is expected to be realized in future
years approximates $6.5 million at December 31, 1994. Based upon
management's estimates of future taxable income and of the positive and
negative evidence regarding the likelihood of ultimate recognition of this
benefit, it has been determined that no valuation allowance is necessary.
This determination was based on the Company's taxable earnings history,
exclusive of non-recurring charges, and the period anticipated for full
recognition, assuming the Company maintains its current level of taxable
income, exclusive of non-recurring charges.
Discontinued Operations:
In connection with the Company's discontinued reinsurance operation, the
Company is obligated to pay CNA $5,000,000 over a period originally
estimated to be three years. In 1994, the Company revised its estimate of
the repayment term of the CNA obligation to five years, and, accordingly,
adjusted the net present value of the obligation, based upon the new
repayment term. In addition, the Company revised its estimate of expenses
incurred relative to the reinsurance portfolio transfer, and consequently,
recorded an adjustment for the additional balances due. The net effect of
these two adjustments had no impact on the Company's consolidated results
of operations.
In consideration for CNA's assumption of POMG's reinsurance obligations,
the Company transferred POMG's net assets, excluding intercompany
balances, which approximated $6,100,000 at December 31, 1993, to CNA. The
Company contributed an additional $1,000,000 to POMG immediately prior to
the transfer of assets, bringing the total to $7,100,000, consisting of
the following:
NATURE CARRYING VALUE
------ --------------
Cash and investments $ 25,700,000
Assumed reinsurance premiums
receivable 6,000,000
Reinsurance recoverable 5,000,000
Other receivables 500,000
Accounts payable and accrued
expenses (1,000,000)
Reinsurance loss and loss
adjustment reserve (29,100,000)
------------
Net assets $ 7,100,000
============
19
<PAGE>
The Company is further obligated to pay CNA $5,000,000 over a period
originally estimated to be three years toward the ultimate settlement of
the transferred losses and expenses. CNA will maintain a separate
accounting for the POMG net assets. Additionally, a separate fund, the
"Holdback Fund," has been established to accumulate the aforementioned
$5,000,000 from the Company, additional funds to be contributed by
Schinnerer and CNA over the same period, and investment income earned on
these funds, to pay claims and expenses related to the reinsured policies
in excess of the POMG net assets. If the ultimate reinsured losses and
related expenses are less than the transferred net assets of POMG combined
with the assets in the Holdback Fund, CNA will distribute the remaining
assets among the Company, Schinnerer and itself according to a
predetermined formula. However, management believes that a refund is
unlikely. Until the $5,000,000 obligation is fulfilled, certain covenants
will be in effect restricting the indebtedness and dividend levels of the
Company.
In connection with the transfer of POMG's net assets to CNA, the Company
guaranteed the validity of a $5,000,000 reinsurance recoverable, one of
the POMG assets transferred to CNA. This asset represents amounts
recoverable from a third party insurance company under a reinsurance
treaty purchased by POMG to protect it from losses in excess of a
predetermined amount. The Company has posted approximately $1,250,000 from
its refundable income taxes in November 1994. The balance is due in three
instalments of $250,000, $250,000 and $1,250,000, which must be posted in
April, June and July of 1995, respectively. The Company has agreed, if
necessary, to pay an additional $2,000,000 related to the guarantee out of
future commissions. The Company has not recorded a provision for this
guarantee, as management, based on the opinion of its special insurance
counsel, has determined that the $5,000,000 reinsurance contract is valid.
Certain amounts in the Company's 1993 and 1992 consolidated financial
statements have been reclassified to reflect POMG as a discontinued
operation. Losses incurred by POMG through September 30, 1993, the
discontinued operations measurement date, totaled approximately
$6,200,000, net of income tax benefits of $3,800,000. Additionally, the
transaction resulted in a loss, including a provision for POMG operating
losses during the phase out period, of approximately $9,000,000. This loss
is comprised of the following:
NATURE CARRYING VALUE
------ --------------
Net assets transferred $7,100,000
Provision for losses during the
phase out period 2,800,000
Discounted value of additional
obligation to CNA 4,500,000
Income tax benefit (5,400,000)
----------
After-tax loss $9,000,000
==========
Under the CNA program, underwriting is performed on an individual insured
basis, whereas, AIG and all previous insurers of the Company's program
performed program underwriting. As this is a significant change in
philosophy, management believes that certain of its Members will benefit
individually while others will not benefit, and may choose to obtain
alternate E&O coverage outside of the HMS membership network.
While the acceptance of any new program is uncertain, management believes
that the strategic alliance with CNA and Schinnerer, whose E&O policies
provide the most comprehensive coverage available, will ultimately enable
the Company to maintain its position in the market, and consequently will
benefit the Company's core warranty and membership operations.
SEASONALITY
Most of the Company's revenue is generated at the time of residential
resale closings. These closings generally follow a seasonal pattern. First
quarter volume is usually the lowest, third quarter the highest, and
second and fourth quarters are about equal. Claims under home warranty
contracts are generally higher in the summer and winter months, while
general and administrative expenses are usually incurred evenly from
quarter to quarter. As a result, the Company's operating results in the
second half of a given year are generally better than the results in the
first half.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company generally receives payment for products and services before
disbursing funds for related direct expenses. Fees from Members and from
sales of home warranty contracts are received before related marketing
commissions are paid out and before claims are made under home warranty
contracts. Consequently, cash flow has been adequate to meet current
obligations. As a result of decreases in home warranty production growth
in 1995 as compared to 1994, cash collected on warranty contracts in 1995
was approximately $2,600,000 below 1994.
As discussed previously, the Company's membership and related revenues
were negatively affected by the decrease in new and renewal members and in
the related fees generated by the Company's membership. In 1995, the
Company continued to provide its Affiliates with various discounted
membership options. The Company's cash flow from membership operations
continued to be significantly impacted. However, the Company expects that
cash flow generated from its warranty and other operations, in combination
with the cost saving measures implemented, will be sufficient to meet its
operating needs on an ongoing basis.
In 1995, net cash used in operating activities totaled $667,000, as
compared to cash provided by operations of $3,046,000 in 1994. This
increased usage of cash is primarily due to the decline in warranty
production in 1995 from the comparable 1994 levels. Also impacting
operating cash flows are various payments for claims payable, Affiliate
and Member commissions and E&O premium remittances. In 1995, the Company
used $2,207,000 in investing activities, as compared to $3,502,000 in
1994, primarily due to increased expenditures for property and equipment,
offset by decreases in trading activity in the Company's portfolio of
securities available for sale. The increases in property and equipment
expenditures relate to investments in the Company's processing environment
technology, and also to leasehold improvements made in the Company's new
office building. Net cash used in financing activities totaled $2,005,000
in 1995, as compared to $1,038,000 in the comparable 1994 period, due to
the additional collateral placed on deposit with CNA, and to increasing
debt repayments, primarily on the CNA obligation.
Cash paid for income taxes is generally expected to approximate the
current income tax provision in a given year. However, due to the losses
incurred in 1993 and 1994, the Company has currently refundable income tax
benefits approximating $1,277,000. A portion of the prior year losses, and
the current year loss have generated NOL carryforwards that will be used
to offset future taxable income. Despite these NOL carry forwards, the
Company will be required to make estimated tax payments until certain of
the losses generated for financial statement purposes become deductible
for tax purposes. The Company intends to file for further refunds of taxes
paid in prior years. During 1994 the Company received $2.7 million as a
refund of Federal income taxes paid during 1993 and 1992, and a portion of
the taxes paid in 1991. The application for refund filed by the Company in
1995, approximating $1.3 million is still pending.
In consideration for CNA's assumption of POMG's reinsurance obligations,
which is more fully discussed in the BUSINESS - ERRORS & OMISSIONS
INSURANCE section herein, the Company has agreed to pay CNA $5,000,000
over a period estimated to be five years from the commencement of the CNA
E&O program toward the ultimate settlement of the transferred losses and
expenses. The agreements with CNA impose certain restrictive covenants
until the $5,000,000 CNA Obligation is satisfied. These covenants include
limits on dividends and on future borrowings. The funds due to CNA are a
senior obligation of the Company, secured by an interest in the common
stock of the Company's HOMS subsidiary and in the Company's Member list.
Through December 31, 1999, the Company and its Affiliates must provide
CNA/Schinnerer with right of first refusal on E&O insurance offered to its
membership. The Company forwards half of its commissions earned under the
CNA E&O program to CNA, to be applied as debt repayments on the obligation
until its satisfaction.
As of December 31, 1995, the net present value of the balance due to CNA
under this obligation was $3,601,000. During 1995 the Company made
principal repayments of approximately $329,000 against the obligation. In
addition to the assets transferred to CNA, the Company has guaranteed the
validity of a $5,000,000 reinsurance recoverable, one of the POMG assets
transferred. This guarantee is secured by $3,000,000 cash collateral
posted by the Company. The Company has agreed, if necessary, to pay an
additional $2,000,000 out of future commissions related to the guarantee.
Should this occur, the repayments on the $5,000,000 obligation will be
delayed until the $2,000,000 is paid. The Company will not be required to
further reduce its collected commission by more than 50% under these
agreements. The Company has not recorded a provision for this guarantee,
based upon the opinion of its special insurance counsel,
21
<PAGE>
that the cover note relating to the reinsurance contract is a binding
agreement, enforceable in accordance with its terms, and the objections
voiced by the reinsurer do not support a material basis for it to
successfully deny coverage.
In December 1991, Acceleration National Insurance Companies
("Acceleration"), the insurer of the Company's E&O program through April
1991, brought suit against the Company and HMS. On December 16, 1995, a
jury verdict in the amount of $5,156,022 was rendered in favor of the
Plaintiff and against HMS, in the following matter: ACCELERATION NATIONAL
INSURANCE COMPANY, PLAINTIFF, VS. HOMEOWNERS MARKETING SERVICES, INC., ET
AL., DEFENDANTS, in the Court of Common Pleas of Franklin County, Ohio.
HMS has filed an appeal of the judgment. Post judgment proceedings have
been initiated in Florida and elsewhere, including discovery in aid of
execution. Although such actions were initially stayed in Florida, on
March 13, 1996, the Circuit Court for Broward County, Florida, dismissed
an action by HMS which contested the domestication of the judgment in
Florida, and no stay is presently in effect. In the event the judgment
creditor proceeds to execute on its judgment, such actions would have a
material adverse effect on the business of HMS, and could have a material
adverse effect on the liquidity of the Company. The Company's efforts to
contest the domestication of the judgment in Florida, appeal the judgment
and otherwise prevent the judgment creditor from executing on its judgment
have resulted in substantial fees to professionals and other advisors,
which have further negatively impacted the Company's liquidity.
Seventeen of the states in which the Company's subsidiaries operate
regulate the home warranty business. Certain of these states require that
reserves be maintained to cover future repairs for the remaining terms of
warranty contracts (generally one year). As of December 31, 1995,
approximately $9,900,000 of cash and investments are needed to maintain
the regulated subsidiaries' required minimum reserve and surplus levels.
Of this amount, approximately $1,200,000 of cash and investments are held
by the regulated states to assure the Company's fulfillment of its
obligations to contract holders. Increases in warranty production, as seen
thus far in the first quarter of 1996, result in increases in the
Company's required reserve and surplus levels in the regulated states. In
addition, state regulators generally seek reserve balances in excess of
the minimum standards. In certain states, withdrawal of any reserves in
excess of statutory minimums requires approval from the regulatory
authorities. The Company has been advised by certain authorities that such
approval will not be granted. Accordingly, the Company maintained reserves
of approximately $14,000,000 as of December 31, 1995. The Company is
currently in compliance with all applicable surplus requirements.
The Company's 1994 work-force reduction and the closing of the UK
operation, both of which took place in September 1994, have had positive
impacts on the Company's cash position.
The Company is continuing its efforts to upgrade its current computer and
processing environments over the next two years, in an attempt to increase
operational efficiency, improve management information, and allow for
future growth in the Company's business. This plan is currently expected
to have an incremental cost of approximately $1,500,000 in excess of the
cost of maintaining, servicing and improving the existing system, over the
life of the project. Management expects that sufficient funds will be
available to cover the cost of the upgrade. If such funds are not
available, this project will be deferred.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS PAGE
------------------------------------------------------------------------
Independent Auditors' Report 24
Consolidated Balance Sheets - December 31, 1995 and 1994 25
Consolidated Statements of Operations - Years Ended
December 31, 1995, 1994 and 1993 26
Consolidated Statements of Cash Flows - Years Ended
December 31, 1995, 1994 and 1993 27
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1995, 1994 and 1993 28
Notes to Consolidated Financial Statements 29
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Homeowners Group, Inc.
Sunrise, Florida
We have audited the accompanying consolidated balance sheets of Homeowners
Group, Inc. and its subsidiaries (the "Company") as of December 31, 1995 and
1994 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and 1994 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE, LLP
Miami, Florida
March 27, 1996
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
-------------------------------------------------------------------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $997,336 $5,875,844
Trading securities 9,250,349 8,244,409
Current portion of securities available for sale 1,811,624 17,506
Miscellaneous receivables 1,278,044 1,153,188
Deferred home warranty acquisition costs 5,666,899 5,677,322
Refundable income taxes 1,277,449 1,816,149
Deferred income taxes 6,769,294 4,880,781
Prepaid expenses and other current assets 1,080,458 1,281,693
----------- -----------
Total current assets $28,131,453 28,946,892
Restricted cash 3,160,000 1,407,851
Non-current portion of securities available for sale 1,834,981 4,078,966
Property and equipment - net 3,581,893 2,009,165
Other assets 432,327 1,177,026
Deferred income taxes - net of current portion 1,373,608 1,579,345
----------- -----------
TOTAL $38,514,262 $39,199,245
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts and accrued expenses payable $11,584,923 $10,296,813
Current maturities of long term debt 1,537,257 1,065,487
Deferred home warranty revenue 16,239,431 16,118,752
----------- -----------
Total current liabilities 29,361,611 27,481,052
Long term debt - net of current portion 2,591,929 3,316,845
Commitments and contingencies - See Note 10
Stockholders' equity:
Preferred stock - $0.01 par value; 5,000,000
shares authorized; none issued and
outstanding - -
Common stock - $0.01 par value; 45,000,000
shares authorized; 5,558,350 shares
issued and outstanding
at December 31, 1995 and 1994 55,584 55,584
Additional paid-in capital 7,458,288 7,458,288
Retained earnings (accumulated deficit) (1,006,367) 902,289
Unrealized holding gain (loss) on securities
available for sale
(net of taxes of $34,745 in 1995) 53,217 (14,813)
----------- -----------
Total stockholders' equity 6,560,722 8,401,348
----------- -----------
TOTAL $38,514,262 $39,199,245
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $44,554,050 $52,777,840 $51,343,928
Operating costs and expenses:
Direct expenses 34,200,297 39,956,030 36,329,427
Unusual items - 1,787,355 -
General and administrative
expenses 9,261,562 12,012,742 12,268,706
------------ ----------- ------------
Total 43,461,859 53,756,127 48,598,133
------------ ----------- ------------
Operating income (loss) 1,092,191 (978,287) 2,745,795
Other income (expenses):
Investment income, net 1,367,482 120,455 2,599,169
Other, net (5,496,329) (172,707) (25,558)
------------ ----------- ------------
Total (4,128,847) (52,252) 2,573,611
------------ ----------- ------------
Income (loss) from continuing
operations before income taxes (3,036,656) (1,030,539) 5,319,406
(Provision) benefit for income
taxes 1,128,000 198,004 (2,128,527)
------------ ----------- ------------
Income (loss) from continuing
operations (1,908,656) (832,535) 3,190,879
Discontinued operation:
Loss from operation of
discontinued reinsurance
segment (net of income
tax benefits of $3,757,377) - - (6,227,680)
Loss on reinsurance portfolio
transfer, including provision of
$2,787,301 for operating
losses during phase out
period (net of income tax
benefits of $5,435,664) - - (9,009,563)
------------ ----------- ------------
Net loss ($1,908,656) ($832,535) ($12,046,364)
============ =========== ============
Per share information:
Income (loss) from continuing
operations ($0.34) ($0.15) $0.57
Loss from operation of
discontinued reinsurance
segment - - (1.12)
Loss on reinsurance portfolio
transfer - - (1.62)
------------ ----------- ------------
Net loss ($0.34) ($0.15) ($2.17)
============ =========== ============
Dividends declared per common
share $0.00 $0.00 $0.10
Weighted average common shares
outstanding 5,558,350 5,558,350 5,559,191
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,908,656) ($832,535) ($12,046,364)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on reinsurance portfolio transfer - - 9,009,563
Depreciation and amortization 601,884 827,919 615,700
Allowance for loss on franchising fee revenue - 3,112,328 -
Provision (benefit) for deferred income taxes
on continuing operations (1,682,776) 1,461,460 (672,000)
Unrealized holding gain (losses) 68,030 (14,813) -
Foreign currency translation adjustment - 43,280 (12,356)
(Gain) loss on sale of securities (368,348) 642,002 (1,940,959)
Change in net assets of discontinued operation - - 410,419
Other changes in assets and liabilities:
Increase in miscellaneous receivables (124,856) (495,855) (88,280)
(Increase) decrease in deferred home warranty
acquisition costs 10,423 52,572 (1,374,396)
(Increase) decrease in refundable income
taxes on continuing operations 538,700 751,483 (1,007,577)
(Increase) decrease in prepaid expenses and
other assets 909,684 (2,359,965) (342,687)
Increase (decrease) in accounts and accrued
expenses payable 1,288,108 361,238 2,960,525
Increase in deferred home warranty revenue 120,679 395,328 3,172,153
Payments on reserve for loss on reinsurance
portfolio transfer - (727,915) (240,603)
Payments for purchases of trading securities (7,434,195) (8,276,460) -
Proceeds from sales of trading securities 7,314,642 8,106,104 -
----------- ----------- ------------
Net cash provided by (used in) operating
activities (666,681) 3,046,171 (1,556,862)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures (2,138,361) (1,313,701) (249,953)
Purchases of investments classified as
available for sale (817,812) (11,149,647) -
Proceeds from sale of investments classified
as available for sale 749,641 8,960,902 -
Payments for investments of continuing
operations - - (19,517,221)
Proceeds from sale of investments of
continuing operations - - 27,453,949
----------- ----------- ------------
Net cash provided by (used in) investing
activities (2,206,532) (3,502,446) 7,686,775
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (830,409) (528,951) (43,829)
Dividends paid on common stock - - (1,111,670)
Amortization of discount on long term debt 167,849 312,585 -
Borrowings under financing arrangements 409,414 425,884 -
Collateralization of contingent guarantee to
CNA (1,752,149) (1,247,851) -
----------- ----------- ------------
Net cash used in financing activities (2,005,295) (1,038,333) (1,155,499)
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents (4,878,508) (1,494,608) 4,974,414
Cash and cash equivalents at beginning
of year 5,875,844 7,370,452 2,396,038
----------- ----------- ------------
Cash and cash equivalents at end of year $997,336 $5,875,844 $7,370,452
=========== =========== ============
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest $285,911 $322,665 $4,884
Income taxes 31,442 328,007 548,126
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOREIGN
HOLDING CURRENCY
COMMON PAID IN RETAINED GAIN TRANSLATION TOTAL
STOCK CAPITAL EARNINGS (LOSS) ADJUSTMENT EQUITY
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1992 $55,584 $7,458,288 $14,337,023 $ - $(30,927) $21,819,968
Net loss for the
year (12,046,364) (12,046,364)
Foreign currency
translation loss (12,356) (12,356)
Dividends declared
on common stock (555,835) (555,835)
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1993 55,584 7,458,288 1,734,824 - (43,283) 9,205,413
---------------------------------------------------------------------
Net loss for the
year (832,535) (832,535)
Unrealized holding
loss (14,813) (14,813)
Foreign currency
translation gain 43,283 43,283
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 55,584 7,458,288 902,289 (14,813) - 8,401,348
---------------------------------------------------------------------
Net loss for the
year (1,908,656) (1,908,656)
Unrealized holding
gain 68,030 68,030
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 $55,584 $7,458,288 ($1,006,367) $53,217 $ - $6,560,722
=====================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The Company
- --------------------------------------------------------------------------------
Homeowners Group, Inc. ('HOMG') and its subsidiaries (collectively the
'Company') provide home warranty contracts, access to real estate errors and
omissions liability insurance ('E&O') and other products and services primarily
to residential real estate brokerage firms and agents. The Company enters into
agreements with real estate brokerage firms and agents ('Members') which grant
Members the right to use the products and services provided by the Company. The
Company generally markets its products and services through franchise agreements
whereby the third party operators ('Affiliates') have exclusive geographic
territories in which to enroll real estate brokerage firms as Members. Through
December 31, 1995, the Company had entered into agreements with Affiliates for
territories encompassing 39 states and the District of Columbia. In 1995, the
Company markets directly in California, Florida, except Northwest Florida which
territory has been granted to an Affiliate, Colorado, Indiana, Iowa, Nebraska,
North Dakota, South Dakota and Hawaii, ('Corporate-Owned Regions'), and is a 45%
partner in a partnership which directly enrolls Members in Texas. In 1994 and
part of 1995, the Company also directly enrolled Members in Maine,
Massachusetts, New Hampshire and Vermont, however, in May 1995, the Company
franchised this New England territory. During 1995, the Company entered into
management agreements, whereby it began managing the operations and
administration of the Kansas, Missouri, Oklahoma, Arizona and New Mexico
territories.
In October 1991, the Company acquired an 80% interest in a British subsidiary
which began marketing home warranty contracts in the United Kingdom in February
1992. The home warranty contract program and other insurance products offered by
this subsidiary were completely underwritten by Lloyd's of London, thereby
eliminating any underwriting risk to the Company. In the third quarter of 1994,
the Company ceased funding the UK operation, effectively closing down the
subsidiary. Accordingly, there was no foreign operations activity in 1995. See
further discussion of this transaction in Note 9.
Although the Company's home warranty contracts are generally not considered to
be insurance products, the Company is subject to insurance-type regulations in
many of the states in which the home warranty contracts are sold. Certain of
these states require that reserves be maintained to cover future repairs for the
remaining terms of the warranty contracts (generally one year). As of December
31, 1995, approximately $9,900,000 of cash and securities were needed to
maintain the regulated subsidiaries' minimum reserve and surplus levels.
Increases in warranty production, as seen thus far in the first quarter of 1996,
result in increases in the Company's required reserve and surplus levels in the
regulated states. In addition, state regulators generally seek reserve balances
in excess of the minimum standards. In certain states, withdrawal of any
reserves in excess of statutory minimums requires approval from the regulatory
authorities. The Company has been advised by certain authorities that such
approval will not be granted. Accordingly, the Company maintained reserves of
approximately $14,000,000 as of December 31, 1995. The Company is currently in
compliance with all applicable surplus requirements.
As warranty production increases, the Company's required reserve and surplus
levels increase, which reduces the cash available to the Company to fund its
operations. During 1995, the Company's membership and related revenues continued
to be negatively impacted by the 1993 change in insurance carriers, both in
terms of numbers of new and renewal members, and in the fees generated by the
Company's membership. Throughout 1995 and 1994, the Company provided its
Affiliates with various discounted membership options to ease the transition,
and to maintain competitiveness in the marketplace. As a result of these
factors, the Company's cash flow from membership operations has been
significantly impacted. However, the Company expects that cash flow generated
from warranty and other operations will be sufficient to meet its needs on an
ongoing basis. See also Note 2, for discussion of the Company's cash collateral
requirements relative to the 1993 transfer of its discontinued reinsurance
operations and Note 10 for discussion of other commitments and contingencies
impacting cash flow.
2. Discontinued Reinsurance Operations
- --------------------------------------------------------------------------------
In December 1992, the Company formed its own reinsurance subsidiary, POMG
Insurance Company, Ltd. ('POMG'), which acquired certain net assets from
Meridian Insurance Company, Ltd. ('Meridian'), the previous reinsurer of the
Company's E&O program. The acquisition was accounted for as a purchase, and
there was no monetary consideration given and no loss recorded on the
transaction. Through this transaction, POMG replaced Meridian as the reinsurer
of all E&O policies written beginning May 1, 1991. In December 1992, the
subsidiary purchased a $5,000,000 aggregate stop loss reinsurance policy to
further protect it from the risk of loss in excess of a predetermined amount on
the first two E&O policy years.
Under the E&O program immediately prior to POMG's formation, the Company was
originally required to provide a $7,000,000 letter of credit ('LOC') to the
reinsurer which was required to be secured by US Government securities
approximating $8,400,000 (cost and market). The amount of the LOC required to be
posted by the Company was subject to change at the discretion of the insurer,
based on contract volume and underwriting risk. In the event that funds
available in the E&O program pool, together with investment income earned
thereon, were insufficient to cover the claims and expenses incurred by the
program, the Company's US Government securities would have been used to fund
payment
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
under the LOC's. Pursuant to the formation of POMG, the $7,000,000 LOC issued in
1991 to Meridian was reissued by POMG to a subsidiary of American International
Group, Inc. ('AIG'), the insurer of the Company's E&O program at that time. In
December 1992, AIG raised the LOC amount to $16,000,000 based on their periodic
evaluation of underwriting performance and premium volume. Concurrent with the
agreement reached with Continental Casualty Company ('CNA'), which is discussed
further below, the LOC was canceled, and the Company is no longer obligated
under any LOC's. As a result, the Company is not subject to any insurance risk
in relation to the CNA E&O program.
In the second and third quarters of 1993, the E&O program experienced
significant losses. Effective December 1, 1993, CNA replaced POMG as the
reinsurer of the E&O policies issued through November 30, 1993 to the Company's
Members by certain subsidiaries of AIG. This transaction took place through a
novation of previous reinsurance agreements in effect. For policies issued from
December 1, 1993 forward, CNA became the insurer, and the Company began
marketing CNA policies to its Members through Victor O. Schinnerer and Company,
Inc. ('Schinnerer'), CNA's exclusive program and underwriting manager. Pursuant
to the agreement with CNA, the Company discontinued POMG's operations. The
Company, through its HOMS Insurance Agency, Inc. ('HOMS') subsidiary acts solely
in the capacity of an insurance broker. Under the terms of the agreements, the
Company receives a fixed percentage of the E&O premiums collected as a
commission. The Company pays a portion of these commissions to the Affiliates
generating the premium volume. In February 1994, the Company, CNA and AIG
entered into definitive agreements, effective as of December 1, 1993, setting
forth the terms described above.
In consideration for CNA's assumption of POMG's reinsurance obligations, the
Company transferred POMG's net assets, excluding intercompany balances, to CNA.
These net assets approximated $6,100,000 at December 31, 1993. The Company
contributed an additional $1,000,000 to POMG immediately prior to the transfer
of assets, bringing the total to $7,100,000, consisting of the following:
NATURE CARRYING VALUE
- --------------------------------------------------------------------------------
Cash and investments $25,700,000
Assumed reinsurance premiums
receivable 6,000,000
Reinsurance recoverable 5,000,000
Other receivables 500,000
Accounts payable and
accrued expenses (1,000,000)
Reinsurance loss and loss
adjustment reserve (29,100,000)
-----------
Net assets $ 7,100,000
-----------
The Company is further obligated to pay CNA $5,000,000 (the 'CNA Obligation')
over a period estimated to be five years, toward the ultimate settlement of the
transferred losses and expenses. CNA is maintaining a separate accounting for
the POMG net assets. Additionally, a separate fund, the 'Holdback Fund,' has
been established to accumulate the aforementioned $5,000,000 from the Company,
additional funds to be contributed by Schinnerer and CNA over the same period,
and investment income earned on these funds, to pay claims and expenses related
to the reinsured policies in excess of the POMG net assets. If the ultimate
reinsured losses and related expenses are less than the transferred net assets
of POMG, combined with the assets in the Holdback Fund, CNA will distribute the
remaining assets among the Company, Schinnerer and itself according to a
predetermined formula. However, management believes that a refund is unlikely.
In connection with the transfer of POMG's net assets to CNA, the Company
guaranteed the validity of a $5,000,000 reinsurance recoverable, one of the POMG
assets transferred to CNA. This asset represents amounts recoverable from a
third party insurance company under the reinsurance treaty purchased by POMG.
This guarantee is secured by $3,000,000 cash collateral posted by the Company.
This amount is reported as restricted cash in the accompanying consolidated
balance sheet. The Company has agreed, if necessary, to pay an additional
$2,000,000, related to the guarantee, out of future commissions. The Company has
not recorded a provision for this guarantee, based on the opinion of its special
insurance counsel, that the cover note relating to the reinsurance contract is a
binding agreement, enforceable in accordance with its terms, and the objections
voiced by the reinsurer do not support a material basis for it to successfully
deny coverage.
The agreements with CNA impose certain restrictive covenants until the
$5,000,000 CNA Obligation is satisfied. These covenants include limits on
dividends and on future borrowings. The funds due to CNA are a senior obligation
of the Company, secured by an interest in the common stock of the Company's HOMS
subsidiary and in the Company's Member list. For a five year period ending
November 30, 1998, the Company and its Affiliates must provide CNA/Schinnerer
with right of first refusal on E&O insurance offered to its membership.
Revenue, including investment earnings, of the discontinued operation
approximated $16,571,000 through September 30, 1993, the discontinued operations
measurement date. Losses incurred by POMG through September 30, 1993 totaled
approximately $6,200,000, net of income tax benefits of $3,800,000.
Additionally, the transaction resulted in a loss, including a provision for POMG
operating losses during the phase out period, of approximately $9,000,000. This
loss is comprised of the following:
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NATURE CARRYING VALUE
- --------------------------------------------------------------------------------
Net assets transferred $ 7,100,000
Provision for losses during
the phase out period 2,800,000
Discounted value of CNA
obligation 4,500,000
Income tax benefits (5,400,000)
------------
After-tax loss $ 9,000,000
------------
3. Summary Of Significant Accounting Policies
- --------------------------------------------------------------------------------
Principles Of Consolidation -- The accompanying consolidated financial
statements include the accounts of HOMG and all of its majority owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation. The Company's 45% interest in the partnership enrolling and
servicing Members in Texas is accounted for by the equity method. The earnings
from the partnership are included in operating revenue in the accompanying
consolidated statements of income.
Accounting Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue And Expense Recognition -- Home warranty contract revenue is recognized
over the life of the contract (generally one year) in proportion to historical
experience of repair costs. Direct costs incurred in acquiring the contracts are
recognized in the same manner. In the third quarter of 1993, the Company refined
its definition of direct acquisition costs to include certain additional
expenses, such as incentive bonuses paid to the Company's Members and
Affiliates, costs of personnel directly involved in acquiring the contracts, and
premium taxes. Such costs have been reclassified from amounts previously
reported according to this refinement. Repair costs under home warranty
contracts are expensed as mechanical breakdowns are reported to and repairs are
authorized by the Company. All other revenues and expenses are recognized upon
delivery or receipt of the related products or services.
Property And Equipment -- Property and equipment is carried at cost and
depreciated on the straight-line method over their estimated useful lives, which
range from three to seven years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives of the improvements.
Investments -- The Company accounts for its investments according to Statement
of Financial Accounting Standards ('SFAS') No. 115, 'Accounting for Certain
Investments in Debt and Equity Securities.' This standard requires that the
Company report at fair value the securities which are held for trading purposes,
or which are available for sale. Unrealized holding gains and losses on trading
securities are determined based upon the change in fair value and are included
in investment income in the accompanying consolidated statements of income.
Unrealized holding gains on securities available for sale are also determined
based upon the changes in fair values, and are reported as a separate component
in the stockholders equity section of the balance sheet. Gains and losses on
securities are determined based upon specific identification of the securities
sold. The Company does not currently have any securities which are classified as
held to maturity.
Income Taxes -- Income taxes are provided in accordance with SFAS No. 109,
'Accounting for Income Taxes.' Under this standard, deferred tax assets and
liabilities represent the tax effects, based on current tax law, of future
deductible or taxable amounts attributable to events that have been recognized
in the financial statements.
Foreign Currency Translation -- The financial statements of the Company's
British subsidiary are translated into US dollars in accordance with SFAS No.
52, 'Foreign Currency Translation.' Net assets of the subsidiary, whose
functional currency is the British Pound Sterling, are translated at current
exchange rates, while results of operations are translated at average exchange
rates in effect for the year.
Net Income Per Common Share -- Net income per common share is based upon the
weighted average number of common shares outstanding during each year. Dilutive
stock options and warrants are included in the calculation of weighted average
shares utilizing the Treasury Stock Method. Primary and fully diluted earnings
per share are essentially the same in all years presented in the accompanying
consolidated statements of income. The inclusion of common stock equivalents in
the 1993 computation of weighted average shares has a dilutive effect on the per
share amount of income from continuing operations, but an antidilutive effect on
the per share amounts from discontinued operations and on the net loss. In this
circumstance, in accordance with Accounting Principles Board ('APB') Opinion No.
30, the common stock equivalents are recognized for all computations even though
they have an antidilutive effect on one of the per share amounts. The
antidilution is insignificant, and does not change the per share amounts.
Discontinued Operations -- The Company reviews the liabilities recorded in
association with its 1993 discontinued reinsurance operations annually, and
adjusts the balances as necessary. In 1995 and 1994, the Company revised its
estimate of the net present value of the CNA obligation, based upon the actual
payments remitted, and in 1994, to reflect an estimated
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
repayment term of five years, as opposed to the original estimated term of three
years. This change in estimate resulted in an increase in the discount on the
obligation, which will be amortized to interest expense over the life of the
obligation. Further, in both years, the Company revised its estimate of expenses
incurred relative to the reinsurance portfolio transfer, and recorded an
adjustment for the additional balances due. The net effect of these two
adjustments had no impact on the Company's consolidated results of operations.
Franchising Fee Revenue -- The Company records franchising fee revenue in
accordance with SFAS No. 45, 'Accounting for Franchise Fee Revenue.' Under this
standard, franchising revenue is recorded when all material services or
conditions related to the sale are complete, substantially all of the initial
services of the franchisor required by the franchise agreement are complete, and
no other material conditions or obligations related to the determination of
substantial performance exist.
New Accounting Pronouncements -- The Company has not adopted SFAS No. 123,
'Accounting for Stock-Based Compensation,' which established financial
accounting and reporting standards for employee stock-based compensation plans,
including stock options, stock purchase plans, restricted stock and stock
appreciation rights. SFAS No. 123 defines and encourages the use of fair value
method of accounting for employee stock-based compensation. The Company has not
determined whether it will adopt the method of measuring stock-based employee
compensation prescribed in SFAS No. 123 or continue to use the method prescribed
in Accounting Principles Board Opinion No. 25, with the disclosures required by
SFAS No. 123. SFAS No. 123 is effective for transactions entered into in fiscal
years that begin after December 15, 1995.
Reclassifications -- Certain amounts in the accompanying 1995, 1994 and 1993
consolidated financial statements have been reclassified from amounts previously
reported to conform to the current presentation.
4. United Kingdom Operations
- --------------------------------------------------------------------------------
The 1994 and 1993 general and administrative expenses incurred by the Company's
previous 80% owned British subsidiary approximated $777,000 and $882,000,
respectively, and are included in the accompanying 1994 and 1993 consolidated
statements of income. Operating revenue generated by the subsidiary in 1994 and
1993 approximated $16,000 and $13,000, respectively. During the third quarter of
1994, the Company ceased funding this operation, effectively closing down the
subsidiary. See further discussion of this transaction at Note 9.
5. Property and Equipment
- --------------------------------------------------------------------------------
Property and equipment consists of the following at December 31:
1995 1994
---- ----
Office furnishings and equipment $1,497,939 $1,403,682
Leasehold improvements 713,970 367,266
Computer equipment and software 3,985,487 2,333,972
Automobiles 47,533 47,533
Assets held under capital lease 499,032 474,359
---------- ----------
Total 6,743,961 4,626,812
Accumulated depreciation
and amortization (3,162,068) (2,617,647)
---------- ----------
Property & equipment--net $3,581,893 $2,009,165
---------- ----------
Depreciation and amortization expense on property and equipment for the years
ended December 31, 1995, 1994 and 1993 approximated $602,000, $749,000 and
$537,000, respectively, and is included in general and administrative expenses
in the accompanying consolidated statements of income.
<PAGE>
6. Investments
- --------------------------------------------------------------------------------
Investments consist of the following at December 31:
1995 1994
---- ----
Trading securities,
at fair value $9,250,349 $8,244,409
Current securities
available for sale 1,811,624 17,506
Non-current securities
available for sale,
consisting primarily
of debt securities,
at fair value 1,834,981 4,078,966
----------- -----------
Total carrying value
of investments $12,896,954 $12,340,881
----------- -----------
Information with respect to unrealized holding gains and losses, as of December
31, 1995:
UNREALIZED UNREALIZED
HOLDING GAINS HOLDING LOSSES
------------- --------------
1995
Trading securities $302,791 $22,404
Securities available for sale 87,961 --
-------- --------
Total $390,752 $22,404
-------- --------
1994
Trading securities $ -- $371,509
Securities available for sale 22,931 37,744
-------- --------
Total $ 22,931 $409,253
-------- --------
Gross realized gains from sales of securities available for sale totaled
$106,139 for the year ended December 31, 1995. Gross
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
unrealized holding gains and losses from sales of securities available for sales
totaled $1,744 and $143,774, respectively, for the year ended December 31, 1994.
Gains and losses on securities are determined based upon specific identification
of the securities sold.
Contractual maturities of securities classified as available for sale as of
December 31, 1995 are as follows:
AMORTIZED MARKET
COST VALUE
---- -----
Due in one year or less $1,793,879 $1,811,624
Due after one year through five years 1,664,062 1,705,892
Due after five years 113,672 129,089
---------- ----------
Total securities classified as
available for sale $3,571,613 $3,646,605
---------- ----------
At December 31, 1995, municipal bonds and cash deposits in the amount of $1.2
million were held by various state regulatory agencies to assure performance of
the Company's obligations under home warranty contracts.
7. Income Taxes
- --------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes consists of the
following for the years ended December 31:
1995 1994 1993
---- ---- ----
Domestic ($3,036,656) ($269,582) $6,189,952
Foreign -- (760,957) (870,546)
----------- --------- ----------
Total ($3,036,656) ($1,030,539) $5,319,406
The provision (benefit) for income taxes consists of the following for the years
ended December 31:
1995 1994 1993
---- ---- ----
Continuing Operations:
Current:
Federal $501,776 $(1,678,495) $2,566,527
State 53,000 19,031 234,000
----------- ----------- -----------
Total 554,776 (1,659,464) 2,800,527
Deferred (1,682,776) 1,461,460 (672,000)
----------- ----------- -----------
Total provision (benefit)
on income from
continuing operations (1,128,000) (198,004) 2,128,527
Discontinued Operation:
Tax benefit from loss on
operation of discontinued
reinsurance segment -- -- (3,757,377)
Tax benefit from estimated
loss on reinsurance
portfolio transfer -- -- (5,435,664)
----------- ----------- -----------
Total provision (benefit)
for income taxes ($1,128,000) ($198,004) ($7,064,514)
----------- ----------- -----------
Tax benefits resulting from the 1993 operations of the Company's discontinued
reinsurance subsidiary have been carried back to the prior three years for
refunds of taxes paid in those years. The remaining tax benefits from the 1993
losses generated by the discontinued operation and the 1994 unusual charges will
be carried forward for realization in future years. Based upon management's
analysis of the positive and negative evidence regarding the likelihood of
realization of this asset, a valuation allowance was deemed to be unnecessary.
The Company historically has provided deferred income taxes primarily on
deferred home warranty contract revenues and acquisition costs, which are
recognized for tax purposes before recognition in the financial statements. The
Company also provides deferred income taxes on deferred marketing fee revenue
and expenses under the annually funded E&O programs. The major portion of these
benefits reverse within one year. In 1993, the Company also provided deferred
income tax benefits on the provision for loss on disposal of its discontinued
reinsurance subsidiary. The operating losses incurred by the reinsurance
subsidiary prior to its disposal generated a net operating loss carryback for
the Company of approximately $2,300,000. The components of the net deferred
income tax assets are as follows:
1995 1994
---- ----
Deferred home warranty revenue $6,414,575 $6,381,809
Deferred home warranty acquisition
costs (2,238,425) (2,247,974)
Litigation accrual 2,036,628 --
Deferred marketing fee revenue 314,326 424,972
Deferred marketing fee commissions (145,403) (205,344)
Miscellaneous (106,157) (176,492)
Current portion of provision for loss
on disposal of reinsurance
subsidiary 493,750 703,810
---------- ----------
Current portion of deferred income tax asset 6,769,294 4,880,781
Non-current portion of provision for loss on
disposal of reinsurance subsidiary 991,855 1,246,805
NOL tax carryforward 342,292 298,000
Capitalized software (659,554) --
AMT credit 699,015 34,540
---------- ----------
Total deferred income tax asset $8,142,902 $6,460,126
---------- ----------
Realization of the deferred tax asset is dependent on generating sufficient
taxable income during the carryforward periods. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term, if estimates of future
taxable income during the carryforward period are reduced.
The provision (benefit) for income taxes on income from continuing operations
included in the accompanying consolidated statements of income differs from the
provision (benefit) computed using the statutory federal income tax rate (34%),
due to the effects of the following items:
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------
% OF % OF % OF
$ PRETAX $ PRETAX $ PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit)
at statutory rate ($1,032,463) (34.0)% ($350,383) (34.0)% $1,808,598 34.0%
Tax exempt income (32,640) (1.1) -- -- (34,378) (0.6)
State taxes, net of
Federal benefit (108,610) (3.5) 16,236 1.6 154,440 2.9
Non-deductible losses
incurred by UK
subsidiary -- -- 52,320 5.1 -- --
Other 45,713 1.5 83,823 8.1 199,867 3.7
----------- ----- --------- ----- ---------- ----
Provision (benefit)
on income from
continuing
operations ($1,128,000) (37.1)% ($198,004) (19.2)% $2,128,527 40.0%
----------- ----- --------- ----- ---------- ----
</TABLE>
8. Long Term Debt
- --------------------------------------------------------------------------------
Long term debt consists of the following at December 31:
1995 1994
---- ----
Net present value of
obligation to CNA,
discounted at 6% $3,601,513 $4,045,671
Obligations under capital
leases 319,166 336,661
Other notes payable, due in
monthly installments of
$13,802 plus interest 208,507 --
---------- ----------
Total 4,129,186 4,382,332
Less current portion (1,537,257) (1,065,487)
---------- ----------
Long term debt,
net of current portion $2,591,929 $3,316,845
---------- ----------
Estimated aggregate annual maturities of long term debt are as follows:
YEAR MATURITIES
---- ----------
1996 $1,537,257
1997 1,136,640
1998 1,056,747
1999 398,542
In connection with the CNA program, the Company is obligated to pay CNA $5
million. The Company makes payments against this obligation through reductions
in the commission it earns on the premiums generated under the program (see Note
2). Accordingly, the Company has agreed to meet certain minimum premium volume
levels, on an annualized basis, which will ensure that the obligation is paid in
full over the term of the agreement, with scheduled minimum repayments. If E&O
premiums fall below the specified minimum levels, CNA may review the program,
give the Company an opportunity to address the issue and then, at its option,
may stop the program and take ownership of the Company's expiration list. If, on
an annual basis, premium volume falls below the specified level, a cash payment
equal to 5% of the difference between the actual premium volume and minimum
premium volume must be made to CNA. In 1995, the Company did not meet all of the
specified financial and production requirements. However, in March 1996, the
Company and CNA entered into an amendment of the agreement, modifying the
specified minimum premium volume levels to $12 million in 1995, $13 million in
1996, $15 million in 1997 and $20 million thereafter. The agreement to market
CNA insurance exclusively to its membership has been extended through December
31, 1999. If, on an annual basis, premium volume falls below the premium volume
quotas of $17 million in 1995, $18 million in 1996, and $20 million for each
year thereafter, but is above the specified minimum premium volume previously
disclosed, a cash payment equal to 5% of the difference between the actual
premium volume and the premium volume quota must be made to CNA, to be applied
against the obligation to CNA. As of December 31, 1995, the balance due CNA
totaled approximately $3.6 million. The cash payment due for the 1995 shortfall
totals $250,000, and must be made in equal monthly instalments between March
1996 and December 1996. The Company is currently in compliance with the terms of
the agreements as modified.
Estimated annual repayments of the CNA obligation are based on anticipated
premium volume. In 1995 and 1994, the Company revised its estimate of the net
present value of the CNA obligation, based upon the actual payments remitted,
and in 1994, to reflect an estimated repayment term of five years, as opposed to
the original estimate of three years. This change in estimate resulted in an
increase in the discount on the obligation, which will be amortized to interest
expense over the life of the obligation. The funds due to CNA, which are
recorded at net present value, are a senior obligation of the Company, secured
by an interest in the common stock of the Company's HOMS subsidiary and in the
Company's Member list.
9. Unusual Items
- --------------------------------------------------------------------------------
During September 1994, the Company recorded unusual charges totaling $1,787,355.
These charges represent expenses related to a reduction in the Company's
workforce and the closing of its UK operations.
In early September 1994, the Company underwent an organizational restructuring,
reducing its total work force by approximately 20%. This restructuring is
expected to result in annual cost savings of approximately $1,700,000, through
reductions in salary, benefits and payroll tax expenses. The charge, included in
the `Unusual items' caption in the accompanying consolidated statements of
income, totaled approximately $1,063,000. Approximately $400,000 of this
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
total related to an agreement to terminate the employment contract between the
Company and its former Chairman of the Board of Directors.
In the second quarter of 1994, the Company received a letter of intent for the
purchase of its 80% interest in HGC, however, the proposed transaction was not
consummated, due to the inability of the buyer to obtain financing. The Company,
in the third quarter of 1994 ceased funding the subsidiary, which has
effectively closed down its operations. One time charges for severance pay, the
balance due under the subsidiary's lease agreements and write-off of the
subsidiary's net assets, totaled approximately $724,000, and is included in the
'Unusual items' caption in the accompanying consolidated statements of income.
10. Commitments And Contingencies
- --------------------------------------------------------------------------------
The Company is subject to various lawsuits and claims arising in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company currently rents office space in Sunrise, Florida, under a lease
which expires on December 31, 2005. The lease requires annual increases of 3% of
the base rent per square foot through the end of the lease term plus actual
maintenance expenses and property tax increases. The Company also leases office
space in certain of the Corporate-Owned Regions for remaining terms of up to
three years. Future minimum annual rental payments approximate $266,000 in 1996,
$313,000 in 1997, $307,000 in 1998, $304,000 in 1999, $313,000 in 2000, and
$1,652,764 thereafter. Rental expense for 1995, 1994 and 1993 approximated
$563,000, $601,000 and $567,000, respectively, and is included in general and
administrative expenses in the accompanying consolidated statements of income.
On December 16, 1995, a jury verdict in the amount of $5,156,022 was rendered in
favor of the Plaintiff and against Homeowners Marketing Services, Inc. ("HMS"),
a subsidiary of the Company, in the following matter: Acceleration National
Insurance Company, Plaintiff, vs. Homeowners Marketing Services, Inc., et al.,
Defendants, in the Court of Common Pleas of Franklin County, Ohio. HMS has filed
an appeal of the judgment. Post judgment proceedings have been initiated in
Florida and elsewhere, including discovery in aid of execution. Although such
actions were initially stayed in Florida, on March 13, 1996, the Circuit Court
for Broward County, Florida, dismissed an action by HMS which contested the
domestication of the judgment in Florida, and no stay is presently in effect. In
the event the judgment creditor proceeds to execute on its judgment, such
actions would have a material adverse effect on the business of HMS, and could
have a material adverse effect on the liquidity of the Company. The judgment,
which accrues interest at the rate of 10% per annum, is recorded in other
expense in the accompanying consolidated statements of income, and in accrued
and other expenses in the accompanying consolidated balance sheets.
In February 1996, a lawsuit was filed against the Company in the Court of Common
Pleas of Bucks County, Pennsylvania, by the former franchisee of the
Pennsylvania territory, alleging breach of contact, fraud and misrepresentation,
and is seeking damages in the amount of $50,000, trebled, reimbursement of costs
and attorney's fees, and an injunction to prevent the Company from terminating
the franchise agreement. The Company believes this suit is without merit, and
has filed a motion to transfer the case to Florida and a motion to dismiss the
case. No accrual for this matter has been reflected in the accompanying
consolidated financial statements.
The Company has entered into various employment contracts with certain of its
executive officers and management personnel, which provide for salary
continuation of a minimum of six months in the event of termination without
cause. In addition, the Company entered into an agreement with an officer in
December 1995, which provides for annual compensation of $377,211, adjusted for
changes in the Consumer Price Index, through December 31, 2000, with an
automatic three year extension, unless notice of termination is given by either
party six months prior to the termination of the initial term. The agreement
also contains a change in control provision that would entitle the officer to
receive a minimum of 2.99 times the annual compensation. The agreement also
calls for certain other fringe benefits during the term of the agreement.
The Company also entered into an engagement agreement with a director, to
provide legal services to the Company for a one year period. The agreement calls
for a minimum payment of a non-refundable $100,000 retainer.
In connection with the transfer of POMG's net assets to CNA, the Company
guaranteed the validity of a $5,000,000 reinsurance recoverable, one of the POMG
assets transferred to CNA. The Company has not recorded a provision for this
guarantee, based upon the opinion of its special insurance counsel, that the
cover note relating to the reinsurance contract is a binding agreement,
enforceable in accordance with its terms, and the objections voiced by the
reinsurer do not support a material basis for it to successfully deny coverage.
See also Note 2.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. Stock Options, Warrants And Purchase Rights
- --------------------------------------------------------------------------------
The Company adopted stock option plans in 1988 authorizing issuance of up to
600,000 shares of common stock to officers and other employees. Of the
authorized shares, 300,000 may be issued as 'incentive stock options' within the
meaning of Section 422 of the Internal Revenue Code, and 300,000 may be issued
as non-qualified options. The options issued through 1992 generally become
exercisable two years after the date of grant and expire no later than ten years
after the date of grant. The options issued in 1993 generally become exercisable
over a five year period, beginning on the date of grant. Information with
respect to options under the above plans follows:
OPTION PRICE AVAILABLE
STOCK OPTIONS PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
- --------------------------------------------------------------------------------
At December 31, 1992 $5.00 - $9.75 388,050 207,550 208,950
------------- -------- -------- --------
Granted 4.00 200,000 28,000 (200,000)
Canceled 5.00 - 9.75 (29,500) (29,500) 29,500
------------- -------- -------- --------
At December 31, 1993 4.00 - 9.75 558,550 206,050 38,450
------------- -------- -------- --------
Granted 2.00 80,000 (80,000)
Became exercisable 5.75 75,900
Canceled 4.00 - 9.75 (156,250) (43,650) 156,250
------------- -------- -------- --------
At December 31, 1994 2.00 - 9.00 482,300 238,300 114,700
Granted 2.00 240,000 (240,000)
Became exercisable 2.00 203,000
Canceled 2.00 - 3.00 (286,600) (224,600) 286,600
------------- -------- -------- --------
At December 31, 1995 $2.00 435,700 216,700 161,300
------------- -------- -------- --------
In May 1992, effective September 1991, the Company adopted a non-employee
directors' stock option plan authorizing issuance of up to 300,000 shares of
common stock. Options under this plan become exercisable annually over the five
years following the date of grant and expire no later than ten years after the
date of grant. Options for 75,000 shares were granted at $6.50 per share on
September 26, 1991; options for 25,000 shares were granted at $5.50 per share on
January 28, 1993; options for 25,000 shares were granted at $3.375 per share on
September 23, 1993; and options for 25,000 shares were granted at $2.00 per
share on December 22, 1995. The options issued prior to 1995 were repriced in
December 1994, to $2.00 per share. All of these options remain outstanding at
December 31, 1995. Options for 80,000 shares are exercisable at December 31,
1995.
In 1988, the Company issued five-year stock purchase warrants for 100,000 shares
to outside directors and 150,000 shares to the underwriters of the initial
public offering. All 250,000 warrants expired in 1993; none had been exercised.
In 1991, the Company issued similar warrants for 25,000 shares to an outside
director. These warrants are for $10.80 per share and are exercisable at any
time until April 11, 1996.
In 1990, the Company declared a dividend of one right for each share of common
stock outstanding as of November 12, 1990. The rights will be distributed and
become immediately exercisable upon the earlier of 10 days following a public
announcement that a person or group of affiliated persons has acquired the
rights to acquire beneficial ownership of 20% or more of the Company's
outstanding shares or 10 days following the commencement of a tender offer or
exchange offer that would result in a person or affiliated group beneficially
owning 30% or more of the outstanding shares. Each right permits the holder to
acquire one share of common stock for a price of $30 per share. The rights may
be redeemed by the Company at any time prior to the tenth day after the
acquisition of 20% of the outstanding shares or the announcement of an offer for
30% of the outstanding shares. Upon the occurrence of certain events after the
rights become exercisable, each right would, subject to certain adjustments and
alternatives, entitle the holder to purchase common stock of the Company or the
acquiring entity having a market value of twice the $30 exercise price of the
right (except that acquiring persons would not be able to exercise the rights).
The rights are intended to enable all of the Company's stockholders to realize
the long term value of their investment in HOMG. They will not prevent a
takeover, but should encourage anyone seeking to acquire the Company to
negotiate with the Board of Directors prior to attempting the takeover. The
rights will expire at the close of business November 1, 2000.
In December 1994, the Company repriced all outstanding options to $2.00 per
share, with the exception of the options granted to the current Chairman and the
former Chairman of the Board of Directors and the Chief Financial Officer. The
options granted to the Chief Financial Officer were repriced to $3.00 per share.
The options granted to the former Chairman have been canceled effective January
1995. Upon such cancellation, 100,000 options were granted to the current
Chairman of the Board, at $3.00 per share. In December 1995, all of the options
granted to the Chief Financial Officer were repriced to $2.00 per share. Also in
December 1995, 140,000 options granted to the Chairman from 1988 through 1992
were canceled, and replaced by a new grant of 140,000 options, exercisable for a
ten year period at $2.00 per share.
12. Quarterly Financial Results (Unaudited)
- --------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1995 (In thousands except per share amounts)
Operating revenue $10,835 $11,218 $11,540 $10,961
Income from operations
before income taxes 514 676 245 (4,471)
Net income (loss) 316 415 142 (2,779)
Per share data:
Net income (loss) $0.06 $0.07 $0.03 ($0.50)
The fourth quarter 1995 results include a charge of $5,156,022, related to the
Acceleration trial judgment rendered against a wholly owned subsidiary of the
Company. See also Note 10.
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
The information required by Items 10, 11, 12 and 13 of this part is
incorporated by reference to the Registrant's definitive Proxy statement
for the 1996 Annual Meeting of Stockholders.
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements of Homeowners Group, Inc.
and subsidiaries are included in Part II, Item 8 of this annual report.
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Operations - Years Ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows - Years Ended December 31, 1995,
1994 and 1993
Consolidated Statements of Stockholders' Equity Years Ended December 31,
1995, 1994 and 1993
Notes to Consolidated Financial Statements
37
<PAGE>
EXHIBITS
FILING IN WHICH
EXHIBIT IS
EXHIBIT INCORPORATED BY
NUMBER REFERENCE
------ ---------------
3.1 Articles of Incorporation *
3.2 By-Laws *
3.3 Amendments to By-laws Form 10-K for the
Year Ended
December 31, 1992
4.1 Form of Representative's Warrants *
4.2 Form of Outside Directors' Warrants *
4.3 Amendment to Stock Purchase Warrant Form 10-Q for the
issued to Hambrecht & Quist Quarter ended
June 30, 1989
4.4 Amendment to Stock Purchase Warrants Form 10-K for the
issued to Directors Campora, Nocero, Year ended
Sayers and Woodman dated February 8, 1990 December 31, 1989
10.1 Form of Franchise Agreement Form 10-K for the
Year ended
December 31, 1989
10.2 Management Consulting Agreement with Form 10-K for the
Phoenix Financial, Inc. dated Year ended
February 8, 1990 December 31, 1989
10.11 1988 Incentive Stock Option Plan *
10.12 1988 Stock Option Plan *
10.13 Form of Selling Shareholder Standstill *
Agreement
10.15 Agreement to Market, Underwrite, Issue Form 10-K for the
and Administer Policies of Insurance Year ended
dated as of July 1, 1988 among the December 31, 1989
Company, Acceleration National
Insurance Company and Corroon & Black
of Ohio, Inc.
10.20 Amendment to 1988 Incentive Stock Form 10-K for the
Option Plan Year ended
December 31, 1990
10.21 Amendment to 1988 Stock Option Plan Form 10-K for the
Year ended
December 31, 1990
38
<PAGE>
FILING IN WHICH
EXHIBIT IS
EXHIBIT INCORPORATED BY
NUMBER REFERENCE
------ ---------------
10.22 Novation Agreement, dated as of Form 8-K dated
December 1, 1992, by and among December 1, 1992
Birmingham Fire Insurance Company of
Pennsylvania, Meridian Insurance
Company, Ltd., and POMG Insurance
Company, Ltd.
10.23 Agency Pledge Account Agreement, Form 8-K dated
dated as of December 1, 1992 by and December 1, 1992
among the Northern Trust Company,
POMG Insurance Company, Ltd., and Morgan
Guaranty Trust Company of New York.
10.24 Pledge Agreement dated as of Form 8-K dated
December 1, 1992, by and among December 1, 1992
Morgan Guaranty Trust Company
of New York and POMG Insurance
Company, Ltd.
10.25 Employment Agreement with Melvin Form 10-K for the
Stewart, dated June 1, 1992 Year Ended
December 31, 1992
10.27 Employment Agreements with individual Form 10-K for the
members of the Company's Executive Year Ended
Management Group, dated August 2, 1993 December 31, 1993
10.28 Novation Agreement, dated as of Form 8-K dated
December 1, 1993, by and among February 11, 1994
Birmingham Fire Insurance Company of the
State of Pennsylvania, POMG Insurance
Company, Ltd. and Continental Casualty
Company
10.29 Real Estate Errors & Omissions Program Form 8-K dated
Administration and Holdback Fund Agreement February 11, 1994
dated as of December 1, 1993, between
Continental Casualty Company, Homeowners
Group, Inc, HOMS Insurance Agency, Inc.
and POMG Insurance Company, Ltd.
10.30 Amendment No. 1 to Real Estate Errors & Filed herewith
Omissions Program Administration and
Holdback Fund Agreement
10.31 Employment Agreement with Carl Filed herewith
Buccellato, dated December 22, 1995
10.32 Engagement agreement between Homeowners Filed herewith
Group, Inc. and Gary D, Lipson, dated
December 22, 1995
10.33 Lease between Camtech Associates and Filed herewith
Homeowners Group, Inc.
dated November 1, 1995
39
<PAGE>
FILING IN WHICH
EXHIBIT IS
EXHIBIT INCORPORATED BY
NUMBER REFERENCE
------ ---------------
11 Computation of Income Per Common Filed herewith
Share for Each of the Three Years Ended
December 31, 1994
22 Subsidiaries of the Registrant Filed herewith
27 Financial Data Schedule (for SEC use only)
--------------------
*Amendment No. 2 to Form S-1 of Homeowners Group, Inc. filed with
the SEC on July 13, 1988
REPORTS ON FORM 8-K
The Company filed a current Report on Form 8-K on February 7, 1996, disclosing
the judgment against Homeowners Marketing Services, Inc., a wholly owned
subsidiary.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOMEOWNERS GROUP, INC.
Date: March 29, 1996 /s/ CARL BUCCELLATO
--------------------------------------
Carl Buccellato, Chairman of the Board
President and Chief Executive Officer
Date: March 29, 1996 /s/ C. GREGORY MORRIS
--------------------------------------
C. Gregory Morris, Vice-President,
Treasurer and Chief Financial Officer
Date: March 29, 1996 /s/ KAREN CHILDRESS
--------------------------------------
Karen Childress, Principal
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934 this Annual
Report has also been signed by the following persons on behalf of the Registrant
in the capacities indicated:
MEMBERS OF THE BOARD OF DIRECTORS
Date: March 29, 1996 /s/ CARL BUCCELLATO
--------------------------------------
Carl Buccellato, President, Chairman
and Chief Executive Officer
Date: March 29, 1996 /s/ DIANE M. GRUBER
--------------------------------------
Diane M. Gruber, Director
Date: March 29, 1996 /s/ GARY D. LIPSON
--------------------------------------
Gary D. Lipson, Director
Date: March 29, 1996 /s/ MICHAEL A. NOCERO, JR. M.D.
--------------------------------------
Michael A. Nocero, Jr. M.D., Director
Date: March 29, 1996 /s/ MELVIN STEWART
--------------------------------------
Melvin Stewart, Director
41
EXHIBIT 10.30
Amendment 1
It is hereby understood and agreed that the Real Estate Errors and Omissions
Program Administration and Holdback Agreement ("Agreement") effective December
1, 1993, entered into among Continental Casualty Company, Homeowners Group,
Inc., HOMS Insurance Agency, Inc. and POMG Insurance Company, Ltd. is amended by
deleting Paragraph 6.2C in its entirety, Paragraph 8.6 in its entirety,
Paragraph 10.1 in its entirety, and substituting the following Paragraph 6.2C,
Paragraph 8.6, and Paragraph 10.1:
6.2.C. If in any calendar year, commencing with policy year 1994, on an
annualized basis HOMS' production of premium falls below $10 million but is
above $7.5 million for calendar year 1994, falls below $17 million but
above $12 million for calendar year 1995, falls below $18 million but above
$13 million for calendar year 1996, and if on an annualized basis HOMS
production for subsequent years falls below $20 million, but is above $15
million, HOMG shall make or cause to be made a cash payment in the Holdback
fund equal to 5% of the difference between the actual amount of annualized
premium and $7.5 million in 1994, $17 million in 1995, $18 million in 1996,
and $20 million thereafter as an advance against the $5 million obligation
of HOMS under subparagraph B hereof and not in addition thereto. Such
payment shall be made within 45 days of the end of the calendar year.
8.6. The covenants, warranties and representations contained in paragraphs
8.1-8.4 shall only apply until the HOMG Obligation has been fully
satisfied. However, HOMG and CNA agree that in the event that HOMG or HOMS
cease to actively market real estate errors and omissions insurance
coverage, all ownership in the RE&O Policy expiration list automatically
shall vest in CNA. On an annualized basis HOMG agrees to the production of
premium for the RE&O Program of $7.5 million for calendar year 1994, $12
million for calendar year 1995, $13 million for calendar year 1996, $15
million for 1997, and $20 million for subsequent years.
10.1 This Agreement shall remain in effect until December 31, 1999, except
that the provisions of this Agreement
<PAGE>
relating to the Holdback and Collateral Funds shall remain in existence
until the earlier of January 1, 2004 or until all assets in the Holdback
and Collateral Funds have been disbursed.
All other provisions of the Agreement shall remain the same.
Homeowners Group, Inc.
By: /s/ CARL BUCCELLATO
--------------------------------------
Name: Carl Buccellato
Title: President/CEO
Date: 3/25/96
HOMS Insurance Agency, Inc.
By: /s/ CARL BUCCELLATO
--------------------------------------
Name: Carl Buccellato
Title: President/CEO
Date: 3/25/96
POMG Insurance Company, Ltd.
By: /s/ CARL BUCCELLATO
--------------------------------------
Name: Carl Buccellato
Title: President/CEO
Date: 3/25/96
2
<PAGE>
Continental Casualty Company
By: /s/ ROGER GRAHAM
--------------------------------------
Name: Roger Graham
Title: Vice President
Date: March 25, 1996
3
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of December 22, 1995, by and
between HOMEOWNERS GROUP, INC., a Delaware corporation (the "Company"), and CARL
BUCCELLATO (the "Executive").
WITNESSETH:
WHEREAS, the Company desires to continue to employ the Executive, and the
Executive desires to continue to be employed by the Company, pursuant to the
provisions contained in this Employment Agreement (the "Agreement");
NOW, THEREFORE, in consideration of the premise, and the respective
covenants and agreements of each of the Company and the Executive contained in
this Agreement, each of the Company and the Executive agrees as follows:
ARTICLE I
EMPLOYMENT
1.1 THE COMPANY. The Company employs the Executive and the Executive
accepts such employment. Subject to the direction of the Board of Directors of
the Company and the Executive Committee thereof, the Executive shall serve as
the Chairman of the Board, President and Chief Executive Officer of the Company.
The Executive shall have such responsibilities, perform such duties and exercise
such power and authority as are inherent in, or incident to, the offices of
Chairman of the Board, President and Chief Executive Officer. The Executive
shall devote his full business time and attention, and his best efforts, to the
diligent performance of such duties.
1.2 SUBSIDIARY CORPORATIONS. The Executive shall serve as the Chairman of
the Board, President and Chief Executive Officer of each and every one of the
Company's direct and indirect subsidiary corporations, including without
limitation Homeowners Marketing Services, Inc., a Florida corporation ("HMS"),
Homeowners Association of America, Inc., a Florida corporation ("HAA"), and HOMS
Insurance Agency, Inc., a Florida corporation ("HOMS").
<PAGE>
ARTICLE II
TERM
Subject to the provisions of Article VI below, the term of this
Agreement shall be for a period of five years, commencing as of January l,
1996 and expiring on December 31, 2000. Unless either party shall give to
the other written notice of termination on or before June 30, 2000, the term
of this Agreement shall, on December 31, 2000, be extended for a period of
three years, commencing as of January l, 2001 and expiring on December 31,
2003.
ARTICLE III
SALARY
3.1 INITIAL SALARY. In full payment for the obligations to be performed
by the Executive during the term of this Agreement, the Company shall pay to
the Executive a salary at an annual rate equal to the sum of (a) Three
Hundred Seventy-Seven Thousand Two Hundred Eleven Dollars ($377,211) and (b)
a cost of living adjustment for the 1995 calendar year determined pursuant
to the provisions of that certain Employment Agreement dated as of June 1,
1992 by and between the Company and the Executive (the "Previous Agreement")
(subject to applicable payroll and/or other taxes required by law to be
withheld).
3.2 ADJUSTMENT OF SALARY. As promptly as practicable after the
conclusion of each of the Company's fiscal years during the term of the
Executive's employment hereunder, the certified public accountants regularly
retained by the Company shall determine the increase, if any, in the cost of
living, using as the basis of such computation the current applicable
Consumer Price Index published by the Bureau of Labor Statistics of the
United States Department of Labor (the "Index"). Any such increase shall be
computed as follows:
(a) The Index number in the column for Miami, Florida, entitled
"all items," for the month of January shall be the "Current Index Number" and
the corresponding Index number for the immediately preceding January,
commencing with January 1995, shall be the "Base Index Number."
(b) The increase in the cost of living shall be determined by
dividing the Current Index Number by the Base Index Number and subtracting
the integer 1 from the quotient thereof, and then multiplying the remainder
by One Hundred Percent (100%) in accordance with the following formula:
2
<PAGE>
Increase (CURRENT INDEX NUMBER
in = -------------------- - 1) x 100%
Cost of Living Base Index Number
(c) The percentage increase in the cost of living, multiplied by
the Executive's then current salary, shall be the increase required to be
determined pursuant to this Section 3.2.
(d) If the publication of the Consumer Price Index is
discontinued for any reason, then the parties shall utilize comparable
statistics of the cost of living for the City of Miami, Florida, the City of
Fort Lauderdale, Florida, Dade County, Florida, or Broward County, Florida,
as computed and published by an agency or instrumentality of the United
States of America or by a responsible financial periodical or recognized
authority then to be selected by the parties.
(e) In the absence of fraud or manifest error, any determination
made by the Company's accountants pursuant to this Section 3.2 shall be
conclusive and binding upon the Company and the Executive.
(f) The Executive's then current salary shall be adjusted as of
January 1 of each year, commencing as of January 1, 1997, in accordance with
the provisions of this Section 3.2 and such adjustment shall remain in effect
during such year.
3.3 PAVMENT OF SALARY. Payments of salary shall be made to the
Executive in installments from time to time on the same dates payments of
salary are generally made to all senior management employees of the Company.
ARTICLE IV
BONUS
The Executive may receive an annual bonus in an amount determined
by the Board of Directors of the Company, in its discretion, if and when so
determined by the Board of Directors.
ARTICLE V
CERTAIN FRINGE BENEFITS
5.1 GENERALLY. The Executive shall be entitled to receive such benefits
and to participate in such benefit plans as are generally provided from time
to time by the Company to its senior management employees; provided,
however, that nothing contained in this Section 5.1 shall be construed to
obligate the Company to provide any specific benefits to its employees
generally.
3
<PAGE>
5.2 VACATIONS. The Executive shall be entitled to vacation time on an
annual basis in accordance with such policies as are from time to time adopted
by the Company's Board of Directors with respect to its senior management
employees.
5.3 AUTOMOBILE. The Company shall provide the Executive a luxury automobile
for use by the Executive in connection with the performance of his duties under
this Agreement. The Executive shall be entitled to receive reimbursement for
such automobile expenses as are incurred by the Executive in connection with the
performance of his duties under this Agreement. Such reimbursement shall include
the cost of operating the automobile, the cost of maintenance of such automobile
and the cost of insurance of such automobile.
5.4 STOCK OPTIONS. The Executive shall be entitled to participate in the
Company's stock option plans as may from time to time be in effect and to
receive such incentive or other stock options as may from time to time be
granted to him thereunder; provided, however, that nothing contained in this
Section 5.4 shall be construed to obligate the Company, its Board of Directors
or any committee of its Board of Directors to grant any incentive or other stock
option whatsoever to the Executive.
5.5 LIFE INSURANCE. The Company shall purchase and maintain in effect one
or more term insurance policies on the life of the Executive in an aggregate
amount of not less than One Million Dollars ($1,000,000). The beneficiary of
each such policy shall be the person or persons who shall from time to time be
designated in writing by the Executive to the Company. In the absence of any
written designation to the contrary, the beneficiary of all such insurance
policies shall be the Executive's spouse.
5.6 INCOME TAX RETURNS AND ESTATE PLANNING. The Company shall pay for the
cost of preparation of the Executive's annual federal income tax returns and for
reasonable estate planning advice that the Executive receives from time to time.
5.7 REIMBURSEMENT OF MEDICAL EXPENSES. The Company shall reimburse the
Executive for the full amount of any medical, dental and optical expenses not
covered under any group medical plan from time to time in effect for the benefit
of Company employees generally. Such coverage shall include without limitation
mental health care and treatment and other medical, dental and optical expenses
not covered under the Company's health care plan now or hereafter in effect. The
Company may satisfy its obligation to the Executive under this Section 5.7 by
providing excess medical, dental, optical and other health care insurance
coverage for the Executive's benefit.
4
<PAGE>
5.8 ANNUAL PHYSICAL EXAMINATION. To the extent not covered by any
group medical plan from time to time in effect for the benefit of Company
employees generally or other insurance coverage provided by the Company for
the benefit of the Executive, the Company shall reimburse the Executive for
the full cost of a complete annual physical examination.
5.9 BUSINESS AND ENTERTAINMENT EXPENSES. The Company shall
reimburse the Executive for all reasonable business and
entertainment expenses related to the Executive's position with the
Company.
ARTICLE VI
TERMINATION OF EMPLOYMENT
6.1 CERTAIN DEFINITIONS. The following terms shall have the
following respective meanings when utilized in this Agreement:
(a) "Bonus" shall mean, as of a given date, the most recent annual
bonus awarded by the Company to the Executive.
(b) "Cause" shall mean any action by the Executive or
any inaction by the Executive which constitutes:
(i) fraud, embezzlement, misappropriation,
dishonesty or breach of trust;
(ii) a felony or moral turpitude;
(iii) a material breach or violation of any or all of the
covenants, agreements and obligations of the Executive set forth
in this Agreement, other than as the result of the Executive's
death or Disability (as hereinafter defined);
(iv) a willful or knowing failure or refusal by the Executive to
perform any or all of his material duties and responsibilities as
an officer of the Company, other than as the result of the
Executive's death or Disability; or
(v) gross negligence by the Executive in the performance of any
or all of his material duties and responsibilities as an officer
of the Company, other than as a result of the Executive's death
or Disability;
provided, however, that if the basis for any termination of the Executive's
employment by the Company as set forth in the Termination Notice (as
hereinafter defined) delivered by the
5
<PAGE>
Company to the Executive is any or all of the definitions of Cause set
forth in Sections 6.1(b)(iii), 6.1(b)(iv) or 6.1(b)(v) of this Agreement,
then, in such event, the Executive shall have fifteen (15) days from and
after the date of his receipt of such Termination Notice to present a
reasonable plan to cure such action or inaction specified in the
Termination Notice, which plan may require more than fifteen (15) days to
cure the specified action or inaction, but such plan must be reasonably
satisfactory to the Company and the Executive must proceed diligently to
effectuate such plan.
(c) "Compensation" shall mean the sum of the Executive's
Salary (as hereinafter defined) and Bonus.
(d) "Disability" shall mean any mental or physical
illness, condition, disability or incapacity which prevents the Executive
from reasonably discharging his duties and responsibilities as an officer of
the Company. If any disagreement or dispute shall arise between the Company
and the Executive as to whether the Executive suffers from any Disability,
then, in such event, the Executive shall submit to the physical or mental
examination of a physician licensed under the laws of the State of Florida,
who is mutually agreeable to the Company and the Executive, and such
physician shall determine whether the Executive suffers from any Disability.
In the absence of fraud or bad faith, the determination of such physician
shall be final and binding upon the Company and the Executive. The entire
cost of such examination shall be paid for solely by the Company.
(e) "Good Reason" shall mean:
(i) the assignment by the Board of Directors or the Executive
Committee of the Board of Directors to the Executive, without his
express written consent, of duties and responsibilities which
results in the Executive having less significant duties and
responsibilities or exercising less significant power and
authority than he had, or duties and responsibilities or power
and authority not comparable to that of the level and nature
which he had, immediately prior to such assignment;
(ii) the removal of the Executive from, or a failure to reappoint
the Executive to, his then current position or positions with the
Company or its subsidiaries or affiliates, except (A) with the
Executive's express written consent or (B) in connection with any
termination of the Executive's employment by the Company as the
result of the Executive's Protracted Disability (as hereinafter
defined) or for Cause;
6
<PAGE>
(iii) the reduction of the Executive's Salary or
the reduction of any or all of the Executive's
benefits set forth in Article V above;
(iv) the Company's failure to perform on a timely
basis its obligations under this Agreement;
(v) the Company's requiring the Executive, without his express
written consent, to travel on Company business to an extent
substantially greater than the Executive's business travel
obligations immediately prior to such time;
(vi) the Company's requiring the Executive, without his express
written consent, to change his place of permanent residency to
place outside of Broward County, Florida;
(vii) the Company's moving its executive offices to a place
outside of Broward County, Florida, without the Executive's
express written consent; or
(viii) the failure of the Company to obtain the express written
assumption of, and agreement to perform on a timely basis, the
Company's obligations under this Agreement by any successor to
the Company as required by Article IX of this Agreement.
(f) "Protracted Disability" shall mean any Disability which
prevents the Executive from reasonably discharging his duties and
responsibilities as an officer of the Company for a period of twelve (12)
consecutive months.
(g) "Salary" shall mean, as of a given date, the Executive's then
current annual salary.
(h) "Termination Date" shall mean a specific date not less than
forty-five (45) nor more than ninety (90) days from and after the date of any
Termination Notice upon which the Executive's employment by the Company shall
be terminated in accordance with the provisions of this Agreement.
(i) "Termination Notice" shall mean a written notice which sets
forth (i) the specific provision of this Agreement relied upon to terminate
the Executive's employment, (ii) in reasonable detail the facts and
circumstances claimed to provide the basis for the termination of the
Executive's employment, and (iii) a Termination Date.
7
<PAGE>
6.2 TERMINATION OF EMPLOYMENT.
(a) Notwithstanding the provisions of Article II hereof, this
Agreement (i) shall automatically terminate upon the death of the Executive
pursuant to the provisions of Section 6.3 hereof, (ii) may be terminated at
any time by the Company pursuant to the provisions of Sections 6.4 or 6.5
hereof, and (iii) may be terminated at any time by the Executive pursuant to
the provisions of Section 6.6 hereof.
(b) If either the Company or the Executive shall desire to
terminate the Executive's employment by the Company pursuant to any of the
provisions of Sections 6.4, 6.5 or 6.6 of this Agreement, then, in such
event, the party causing such termination shall provide a Termination Notice
to the other party.
(c) If this Agreement shall be terminated pursuant to
any of the provisions of this Article VI, the Company shall be discharged
from all of its obligations to the Executive under this Agreement upon the
payment to the Executive of the amount set forth in the Section of this
Article VI pursuant to which such termination shall occur. The Executive's
sole and exclusive remedy for the termination of this Agreement, regardless
of whether such termination shall be initiated by the Company or the
Executive, and regardless of whether such termination shall be with or
without Cause, shall be the payment by the Company to the Executive of the
amount set forth in the Section of this Article VI pursuant to which such
termination shall occur.
6.3 TERMINATION UPON DEATH OF EXECUTIVE. If during the term of this
Agreement the Executive shall die, then the employment of the Executive by
the Company shall automatically terminate on the date of the Executive's
death. In such event, not more than thirty (30) days after the date of the
Executive's death, the Company shall pay to the Executive's estate or as
otherwise directed by the Executive's personal representative, an amount in
cash equal to the Executive's Compensation (subject to applicable payroll
and/or other taxes required by law to be withheld) determined as of the
date of the Executive's death.
6.4 DISABILITY OF EXECUTIVE.
(a) In the event that at any time during the term of
this Agreement the Executive shall suffer any Disability, then the Company
shall be obligated to continue to pay in the ordinary and normal course of
its business to the Executive or his legal representative, as the case may
be, the Executive's Compensation (subject to applicable payroll and/or other
taxes required by law to be withheld) from the date that the Executive shall
first suffer any such Disability to the date that the Executive's employment
by the Company shall be terminated pursuant to any of the provisions of this
Agreement.
8
<PAGE>
(b) In the event that the Executive shall suffer any
Protracted Disability during the term of this Agreement, then the Company may
terminate the Executive's employment under this Agreement. In such event, in
addition to any other benefits which may have been provided by the Company to
the Executive or his legal representative, as the case may be, pursuant to
the provisions of Section 6.4(a) above, not later than the Termination Date
specified in the Termination Notice delivered by the Company to the Executive
or his legal representative, as the case may be, the Company shall pay to the
Executive or as otherwise directed by the Executive's legal representative an
amount in cash equal to the Executive's Compensation (subject to applicable
payroll and/or taxes required by law to be withheld) determined as of the
date of such Termination Notice. Subsequent to such Termination Date, the
Executive or his legal representative, as the case may be, shall also be
entitled to receive any benefits which may be payable under any disability
insurance policy or disability plan provided to the Executive by the Company.
6.5 TERMINATION OF EMPLOYMENT BY COMPANY.
(a) The Company may terminate this Agreement at any time with
Cause. In such event, the Company shall be obligated to continue to pay in
the ordinary and normal course of its business to the Executive only his
Salary (subject to applicable payroll and/or other taxes required by law to
be withheld) through the Termination Date set forth in the Termination
Notice.
(b) The Company may terminate this Agreement at any time
without Cause. If any such termination shall occur on or before December 31,
2000, then, in such event, not later than the Termination Date specified in
the Termination Notice, the Company shall pay to the Executive, in cash, an
amount equal to (i) the Executive's Compensation, determined as of the date
of the Termination Notice, multiplied by (ii) the greater of (A) the number
of years and any portion of a year remaining in the term of this Agreement or
(B) three (subject to applicable payroll and/or other taxes required by law
to be withheld). If any such termination shall occur after December 31, 2000,
then, in such event, not later than the Termination Date specified in the
Termination Notice, the Company shall pay to the Executive, in cash, an
amount equal to (i) the Executive's Compensation, determined as of the date
of the Termination Notice, multiplied by (ii) three (subject to applicable
payroll and/or other taxes required by law to be withheld).
6.6 TERMINATION OF EMPLOYMENT BY EXECUTIVE.
(a) The Executive may termlnate this Agreement at any time with
Good Reason. If any such termination shall occur on or before December 31,
2000, then, in such event, not later than the Termination Date specified in
the Termination Notice, the Company
9
<PAGE>
shall pay to the Executive, in cash, an amount equal to (i) the Executive's
Compensation, determined as of the date of the Termination Notice, multiplied
by (ii) the greater of (A) the number of years and any portion of a year
remaining in the term of this Agreement or (B) three (subject to applicable
payroll and/or other taxes required by law to be withheld). If any such
termination shall occur after December 31, 2000, then, in such event, not
later than the Termination Date specified in the Termination Notice, the
Company shall pay to the Executive, in cash, an amount equal to (i) the
Executive's Compensation, determined as of the date of the Termination
Notice, multiplied by (ii) three (subject to applicable payroll and/or other
taxes required by law to be withheld).
(b) The Executive may terminate this Agreement at any time without
Good Reason. In such event, the Company shall be obligated to continue to pay
in the ordinary and normal course of its business to the Executive only his
Salary (subject to applicable payroll and/or other taxes required by law to
be withheld) through the Termination Date set forth in the Termination
Notice.
ARTICLE VII
TERMINATION OF EMPLOYMENT
SUBSEQUENT TO A CHANGE IN CONTROL OF THE COMPANY
7.1 CHANGE IN CONTROL OF THE COMPANY DEFINED. For purposes of this
Article VII, the term "Change in Control of the Company" shall mean any
change in control of the Company of a nature which would be required to be
reported (a) in response to Item 6(e) of Schedule 14A of Regulation 14A, as
in effect on the date of this Agreement, promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (b) in response to
Item 1 of the Current Report on Form 8-K, as in effect on the date of this
Agreement, promulgated under the Exchange Act, or (c) in any filing by the
Company with the Securities and Exchange Commission; provided, however, that,
without limitation, a Change in Control of the Company shall he deemed to
have occurred if:
(i) any "person" (as such term is defined in Sections 13(d)(3)
and 14(d)(2) of the Exchange Act), other than the Company, any
majority-owned subsidiary of the Company or any compensation plan
of the Company or any majority-owned subsidiary of the Company,
becomes the "beneficial owner" (as such term is defined in Rule
13d-3 of the Exchange
10
<PAGE>
Act), directly or indirectly, of securities of the Company (whether by merger,
consolidation, reorganization or otherwise) representing fifteen percent (15%)
or more of the combined voting power of the Company's then outstanding
securities;
(ii) during any period of two consecutive years during the term of this
Agreement, the individuals who at the beginning of such period constitute the
Board of Directors of the Company cease for any reason to constitute at least a
majority of such Board of Directors, unless the election of each director who
was not a director at the beginning of such period has been approved in advance
by directors representing at least two-thirds of the directors then in office
who were directors at the beginning of such period;
(iii) any "person" (as such term is defined in Sections 13(d)(3) and 14(d)(2) of
the Exchange Act), other than the Company, any subsidiary of the Company or any
compensation, retirement, pension or other employee benefit plan or trust of the
Company or any subsidiary of the Company, becomes the "beneficial owner" (as
such term is defined in Rule l3d-3 promulgated under the Exchange Act), directly
or indirectly, of securities of HMS, HAA or HOMS, respectively, or any successor
to HMS, HAA or HOMS, respectively (whether by merger, consolidation,
reorganization or otherwise) representing a majority of the combined voting
power of the then outstanding securities of HMS, HAA or HOMS, as the case may
be;
(iv) the Company shall merge or consolidate with or into another corporation or
other entity, or enter into a binding agreement to merge or consolidate with or
into another corporation or other entity, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
corporation or entity) not less than eighty-five percent (85%) of the combined
voting power of the voting securities of the Company or such surviving
corporation or entity outstanding immediately after such merger or
consolidation;
11
<PAGE>
(v) HMS shall merge or consolidate with or into another corporation or other
entity, or enter into a binding agreement to merge or consolidate with or into
another corporation or other entity, other than a merger or consolidation which
would result in the voting securities of HMS outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving corporation or entity) not
less than a majority of the combined voting power of the voting securities of
HMS or such surviving corporation or entity outstanding immediately after such
merger or consolidation;
(vi) HAA shall merge or consolidate with or into another corporation or other
entity, or enter into a binding agreement to merge or consolidate with or into
another corporation or other entity, other than a merger or consolidation which
would result in the voting securities of HAA outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving corporation or entity) not
less than a majority of the combined voting power of the voting securities of
HAA or such surviving corporation or entity outstanding immediately after such
merger or consolidation;
(vii) HOMS shall merge or consolidate with or into another corporation or other
entity, or enter into a binding agreement to merge or consolidate with or into
another corporation or other entity, other than a merger or consolidation which
would result in the voting securities of HOMS outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving corporation or entity) not
less than a majority of the combined voting power of the voting securities of
HOMS or such surviving corporation or entity outstanding immediately after such
merger or consolidation;
(viii) the Company shall sell, lease, exchange, transfer, convey or otherwise
dispose of all or substantially all of its assets, or enter into a binding
agreement for the sale, lease, exchange, transfer, conveyance or other
disposition of all or substantially all of its assets, in one transaction or in
a series of related transactions;
12
<PAGE>
(ix) any of HMS, HAA or HOMS shall sell, lease, exchange,
transfer, convey or otherwise dispose of all or substantially all
of its respective assets, or enter into a binding agreement for
the sale, lease, exchange, transfer, conveyance or other
disposition of all or substantially all of its respective assets,
in one transaction or in a series of related transactions;
(x) the Company shall liquidate or dissolve, or
any plan or proposal shall be adopted for the
liquidation or dissolution of the Company; or
(xi) any of HMS, HAA or HOMS shall liquidate or dissolve, or any
plan or proposal shall be adopted for the liquidation or
dissolution of any of HMS, HAA or HOMS.
7.2 TERMINATION OF EMPLOYMENT AFTER CHANGE IN CONTROL OF COMPANY.
(a) Notwithstanding the provisions of Articles II and VI of this
Agreement, in the event that there shall occur any Change in Control of the
Company and at any time subsequent to the date of any such Change in Control
of the Company, either the Company shall terminate the employment of the
Executive without Cause or the Executive shall terminate his employment for
Good Reason, then, in any such event, the following shall occur:
(i) Not later than the Termination Date specified in the
Termination Notice delivered by the Company to the Executive, or
by the Executive to the Company, as the case may be, the Company
shall pay to the Executive an amount, in cash, equal to his "base
amount," as such term is defined in Section 280G of the Internal
Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder, determined as of the date of the
Termination Notice, multiplied by Two and Ninety-Nine One
Hundredths (2.99) (the "Change in Control Termination Amount")
(subject to applicable payroll and/or other taxes required by law
to be withheld); and
(ii) Any and all stock options granted to the Executive under any
stock option plan of the Company as may from time to time be in
effect, which shall not by their terms have vested on or before
such Termination Date, shall vest on such Termination Date.
13
<PAGE>
(b) The Change in Control Termination Amount shall be
determined by the Company's regularly retained certified public accountants
in consultation with the Company's regularly retained attorneys. In making
such determination, the Company's regularly retained certified public
accountants and attorneys shall liberally construe the provisions of the
Internal Revenue Code of 1986, as amended, and the applicable rules and
regulations thereunder. In the absence of fraud or manifest error, any
determination made pursuant to this Section 7.2(b) shall be conclusive and
binding upon the Company and the Executive.
(c) Notwithstanding anything to the contrary set forth
in Sections 7.2(a) and 7.2(b) above, the amount paid by the Company to the
Executive shall be limited to the maximum amount which will not constitute a
"parachute payment," as such term is defined in Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended. This limitation shall first be
applied to amounts provided pursuant to clause (ii) of Section 7.2(a) hereof
(otherwise included in the calculation of a parachute payment) to the extent
thereof and then to amounts provided pursuant to clause (i) of Section 7.2(a)
hereof.
ARTICLE VIII
CERTAIN RESTRICTIONS ON THE EXECUTIVE
8.1 CERTAIN RESTRICTIONS. The Executive covenants and agrees
with the Company as follows:
(a) He shall not at any time, directly or indirectly,
for himself or any other person, firm, corporation, partnership, association
or other entity (collectively, a "Person") which competes in any manner with
the Company or any of its subsidiaries or affiliates in the United States of
America or its territories and possessions or any other countries in which
the Company as of the date of termination of this Agreement conducts its
business directly or indirectly through any of its subsidiaries or affiliates
(collectively, the "Territory"), employ, attempt to employ or enter into any
contractual arrangement for employment with, any employee or former employee
of the Company or any of its subsidiaries or affiliates, unless such former
employee shall not have been employed by the Company or any of its
subsidiaries or affiliates for a period of at least one year.
(b) He shall not, during the term of this Agreement and for a
period of three years from and after the date of termination of this
Agreement, directly or indirectly, (i) acquire or own in any manner any
interest in, or loan any amount to, any Person which competes in any manner
with the Company or any of its subsidiaries
14
<PAGE>
or affiliates in the Territory, (ii) be employed by or serve as an employee,
agent, officer, or director of, or as a consultant to, any Person, other than
the Company and its subsidiaries and affiliates, which competes in any manner
with the Company or its subsidiaries or affiliates in the Territory, or (iii)
compete in any manner with the Company or its subsidiaries or affiliates in
the Territory. The foregoing provisions of this Section 8.1(b) shall not
prevent the Executive from acquiring and owning not more than three percent
(3%) of the equity securities of any Person whose securities are listed for
trading on a national securities exchange or are regularly traded in the
over-the-counter securities market.
(c) In the course of the Executive's employment by the
Company, the Executive will have access to confidential or proprietary
information of the Company and its subsidiaries and affiliates. The Executive
shall not at any time divulge or communicate to any Person, or use to the
detriment of the Company or its subsidiaries or affiliates, any such
confidential or proprietary information. The term "confidential or
proprietary information" shall mean information not generally available to
the public, including without limitation personnel information, financial
information, customer lists, supplier lists, ownership information, marketing
plans and analyses, trade secrets, know-how, computer software, management
agreements and procedures and techniques of operating and managing the
business of the Company and its subsidiaries and affiliates. The Executive
acknowledges and agrees that all confidential or proprietary information is
and shall remain the property of the Company and its subsidiaries and
affiliates, and agrees to maintain all such confidential or proprietary
information in strictest confidence.
8.2 REMEDIES. It is recognized and acknowledged by each of the Company
and the Executive that a breach or violation by the Executive of any or all of
his covenants and agreements contained in Section 8.1 of this Agreement will
cause irreparable harm and damage to the Company and its subsidiaries and
affiliates in a monetary amount which would be virtually impossible to
ascertain and, therefore, will deprive the Company of an adequate remedy at
law. Accordingly, if the Executive shall breach or violate any or all of his
covenants and agreements set forth in Section 8.1 hereof, then the Company and
its subsidiaries and affiliates shall have resort to all equitable remedies,
including without limitation the remedies of specific performance and
injunction, both permanent and temporary, as well as all other remedies which
may be available at law.
8.3 INTENT. It is the intent of the parties that the restrictions set
forth in Section 8.1 hereof shall be enforced to the fullest extent
permissible under the laws and public policies of each jurisdiction in which
enforcement of such restrictions may be sought. If any provision contained in
Section 8.1 hereof shall
15
<PAGE>
be adjudicated by a court of competent jurisdiction to be invalid or
unenforceable because of its duration or geographic scope, then such
provision shall be reduced by such court in duration or geographic scope or
both to such extent as to make it valid and enforceable in the jurisdiction
where such court is located, and in all other respects shall remain in full
force and effect.
ARTICLE IX
SUCCESSOR TO THE COMPANY
The Company shall require any successor, whether direct or
indirect, and whether by purchase, merger, consolidation or otherwise, to all
or substantially all of the business or properties and assets of the Company,
to execute and deliver to the Executive, not later than the date of the
consummation of any such purchase, merger, consolidation or other
transaction, a written instrument in form and in substance reasonably
satisfactory to the Executive and his legal counsel pursuant to which any
such successor shall agree to assume and to perform on a timely basis or to
cause to be performed on a timely basis all of the Company's covenants,
agreements and obligations set forth in this Agreement (a "Successor
Agreement"). The failure of the Company to cause any such successor to
execute and deliver a Successor Agreement to the Executive shall (a)
constitute a breach of the provisions of this Agreement by the Company and
(b) be deemed to constitute a termination by the Executive of his employment
hereunder (as of the date upon which any such successor shall succeed to all
or substantially all of the business or properties and assets of the Company)
for Good Reason.
ARTICLE X
ATTORNEYS' FEES
In the event that any litigation shall arise between the Company
and the Executive based, in whole or in part, upon this Agreement or any or
all of the provisions contained herein, then, in any such event, the
prevailing party in any such litigation shall be entitled to recover from the
non-prevailing party, and shall be awarded by a court of competent
jurisdiction, any and all reasonable fees and disbursements of trial and
appellate counsel paid, incurred or suffered by such prevailing party as the
result of, arising from, or in connection with, any such litigation.
16
<PAGE>
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 GOVERNING LAW. This Agreement shall be governed by, and shall be
construed and interpreted in accordance, with the laws of the State of Florida,
without giving effect to the principles of conflicts of law thereof.
11.2 NOTICES. Any and all notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed to have been duly given when delivered by hand, or when delivered by
United States mail, by registered or certified mail, postage prepaid, return
receipt requested, to the respective parties at the following respective
addresses:
If to the Company: Homeowners Group, Inc.
6365 Taft Street
Suite 2000
Hollywood, Florida 33084
Attention: Chief Financial Officer
If to the Executive: Carl Buccellato
507 Palm Drive
Hallandale, Florida 33009
or to such other address as either party may from time to time give written
notice of to the other in accordance with the provisions of this Section 11.2.
11.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Company and the Executive with respect to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
arrangements, both oral and written, between the Company and the Executive with
respect to such subject matter. Without limiting the generality of the
immediately preceding sentence, and except as otherwise provided in Section 3.1
above, the Previous Agreement is superseded by this Agreement and shall be of no
further force or effect from and after January 1, 1996.
11.4 AMENDMENTS. This Agreement may not be amended or modified in any
manner, except by a written instrument executed by each of the Company and the
Executive.
11.5 BENEFITS; BINDING EFFECT. This Agreement shall be for the benefit of,
and shall be binding upon, each of the Company and the Executive and their
respective heirs, personal representatives, executors, legal representatives,
successors and assigns.
17
<PAGE>
11.6 SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall
not affect the enforceability of the remaining portions of this Agreement or
any part hereof, all of which are inserted conditionally on their being
valid in law. Except as otherwise provided in Section 8.3 above, if any one
or more of the words, phrases, sentences, clauses or sections contained in
this Agreement shall be declared invalid by any court of competent
jurisdiction, then, in any such event, this Agreement shall be construed as
if such invalid word or words, phrase or phrases, sentence or sentences,
clause or clauses, or section or sections had not been inserted.
11.7 NO WAIVERS. The waiver by either party of a breach or violation of
any provision of this Agreement by the other party shall not operate nor be
construed as a waiver of any subsequent breach or violation. The waiver by
either party to exercise any right or remedy it or he may possess shall not
operate nor be construed as a bar to the exercise of such right or remedy by
such party upon the occurrence of any subsequent breach or violation.
11.8 JURISDICTION AND VENUE; SERVICE OF PROCESS; WAIVER OF
TRIAL BY JURY.
(a) Any claim or dispute arising out of, connected with,
or in any way related to this Agreement which results in litigation shall be
instituted by the complaining party and adjudicated either in the Federal
District Court for the Southern District of Florida or in the Circuit Court
for Broward County, Florida, and each of the parties to this Agreement
consent to the personal jurisdiction of and venue in such courts. In no event
shall either party to this Agreement contest the jurisdiction or venue of
such courts with respect to any such litigation.
(b) Each of the Company and the Executive agrees that
service of any process, summons, notice or document, by United States
registered or certified mail, to its or his address set forth in or as
provided in Section 11.2 above shall be effective service of such process,
summons, notice or document for any action, suit or proceeding brought
against it or him by the other party in the Federal District Court for the
Southern District of Florida or in the Circuit Court for Broward County,
Florida.
(c) In recognition of the fact that the issues which would arise
under this Agreement are of such a complex nature that they could not be
properly tried before a jury, each of the Company and the Executive waives
trial by jury.
11.9 HEADINGS. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of any or all of the provisions hereof.
18
<PAGE>
11.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the separate parties in separate counterparts, each of which
shall be deemed to constitute an original and all of which shall be deemed to
constitute the one and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has executed and delivered
this Agreement on the date first written above.
HOMEOWNERS GROUP, INC.
By /s/ C. GREGORY MORRIS
----------------------------------
C. Gregory Morris,
Vice President and
Chief Financial Officer
/s/ CARL BUCCELLATO
-----------------------------------
Carl Buccellato
19
EXHIBIT 10.32
ENGAGEMENT AGREEMENT
THIS ENGAGEMENT AGREEMENT is entered into on December 22, 1995, by and
between HOMEOWNERS GROUP, INC., a Delaware corporation (the "Company"), and GARY
D. LIPSON (the "Attorney").
WITNESSETH:
WHEREAS, the Attorney has provided substantial and valuable legal services
to the Company and its subsidiary corporations and affiliated entities over a
period of several years;
WHEREAS, in providing such services, the Attorney has consistently
demonstrated diligence, ability, skill, expertise and efficiency, all for the
benefit of the Company and its subsidiary corporations and affiliated entities;
WHEREAS, the business of the Company and its subsidiary
corporations and affiliated entities is very complex;
WHEREAS, many of the business and contractual relationships of the Company
and its subsidiary corporations and affiliated entities are novel, complex and
difficult;
WHEREAS, the Attorney is knowledgeable about the businesses in which the
Company and its subsidiary corporations and affiliated entities are engaged and
about the Company and its subsidiary and affiliated corporations and their
respective operations, contractual relationships and affairs;
WHEREAS, the Company desires to insure the Attorney's availability, on a
continuing basis, to provide legal services to the Company and its subsidiary
corporations and affiliated entities;
WHEREAS, the Company desires to utilize a substantial portion of the
Attorney's time, on a continuing basis, to provide legal services to the Company
and its subsidiary corporations and affiliated entities;
WHEREAS, the Attorney's acceptance of the engagement by the Company, on the
terms desired by the Company, will undoubtedly limit engagement of the Attorney
by other clients or potential clients;
<PAGE>
WHEREAS, a substantial portion of the services anticipated to
be performed by the Attorney will be of great significance to the
Company;
WHEREAS, in the course of performing legal services for the Company, it is
anticipated that substantial time demands and special requests will be made of
the Attorney by the Company;
WHEREAS, the hourly rate to be charged by the Attorney to the Company
pursuant to this Engagement Agreement (the "Agreement") is substantially less
than the hourly rate ordinarily charged by the Attorney to new clients;
WHEREAS, the hourly rate to be charged by the Attorney to the Company
pursuant to this Agreement is substantially less than that ordinarily charged by
attorneys of comparable or similar knowledge, experience and expertise to that
of the Attorney located in South Florida for legal services of a comparable or
similar nature to those anticipated to be provided by the Attorney to the
Company;
WHEREAS, the Company desires to be able to predict and to plan
for the payment of fees for legal services to the Attorney;
WHEREAS, the Board of Directors of the Company has reviewed this Agreement
with the advice of independent legal counsel;
WHEREAS, the Board of Directors of the Company believes this
Agreement to be reasonable in its terms;
WHEREAS, the Board of Directors of the Company believes that the engagement
of the Attorney, on the terms set forth in this Agreement, is in the best
interests of the Company and its shareholders;
NOW, THEREFORE, in consideration of the premises, and the respective
covenants and agreements of each of the Company and the Attorney contained in
this Agreement, each of the Company and the Attorney agrees as follows:
ARTICLE I
PREMISES
The parties acknowledge and agree that each and every one of the premises
set forth above is true and correct.
2
<PAGE>
ARTICLE II
ENGAGEMENT
The Company engages the Attorney to provide legal services to the Company
for a minimum of five hundred (500) hours per calendar year and the Attorney
accepts such engagement. The Attorney shall make himself available to provide
legal services if and when so requested by the Company.
ARTICLE III
FEES AND EXPENSES
3.1 NONREFUNDABLE RETAINER. The Company acknowledges that, based upon the
premises set forth in this Agreement, the Attorney, by his execution and
delivery of this Agreement, is making a significant commitment to the Company of
his time and resources for the benefit of the Company and to the detriment of
the Attorney's ability to be engaged by existing clients and potential clients.
As a result, and in order to induce the Attorney to enter into this Agreement
and to perform his obligations hereunder, the Company shall pay to the Attorney
a nonrefundable retainer equal to One Hundred Thousand Dollars ($100,000)(the
"Nonrefundable Retainer"). The Company acknowledges that the Nonrefundable
Retainer is reasonable and is earned by the Attorney as of the date of this
Agreement, except to the extent that the Nonrefundable Retainer is forfeited by
the Attorney pursuant to the provisions of Section 4.4(a) below. The
Nonrefundable Retainer shall be in addition to any amount charged by the
Attorney to the Company for legal services rendered by him.
3.2 INITIAL HOURLY RATE. The Attorney shall initially charge the Company
for his services on the basis of an hourly rate of Two Hundred Dollars ($200)
(the "Hourly Rate"). The Attorney shall invoice the Company in increments of
one-tenth of an hour.
3.3 ADJUSTMENT OF HOURLY RATE. The Hourly Rate shall be increased as of
January of each year, commencing as of January l, 1997. The amount of such
increase shall be mutually determined in good faith by the Chief Executive
Officer of the Company and the Attorney; provided, however, that the amount of
such increase shall be not less than five percent (5%) of the Attorney's then
current Hourly Rate. If the Chief Executive Officer of the Company and the
Attorney are unable to come to such mutual agreement, then the Attorney may
terminate this Agreement and such termination shall be deemed a termination
without Cause (as such term is hereinafter defined) hereunder.
3
<PAGE>
3.4 EXPENSES. The Company shall advance to the Attorney or reimburse him
for all out-of-pocket costs and expenses incurred by him on the Company's
behalf. Such out-of-pocket costs and expenses may include, but are not
limited to, long-distance telephone and facsimile charges, photocopy
expenses, filing and recording fees, delivery charges and travel expenses. If
a substantial amount is required to be paid by the Attorney to any party on
the Company's behalf, the Attorney reserves the right, in his discretion, to
require the Company to advance such amount to him prior to its payment by the
Attorney.
3.5 PAYMENT OF FEES AND EXPENSES. After the conclusion of each calendar
month, the Attorney shall invoice the Company for legal services rendered by
him at the then current Hourly Rate and for expenses incurred by him on
behalf of the Company during such month. Any such invoice sent to the Company
by the Attorney shall be paid in full by the Company within thirty days after
its receipt thereof.
ARTICLE IV
DURATION OF AGREEMENT
4.1 DURATION. This Agreement shall be effective as of the date hereof
and shall remain in effect unless and until it is terminated by either of the
Company or the Attorney pursuant to the provisions of this Agreement.
4.2 TERMINATION BY COMPANY. The Company may terminate this Agreement and
discharge the Attorney at any time, with or without cause, by the delivery of
written notice to such effect to the Attorney.
4.3 TERMINATION BY ATTORNEY. The Attorney may terminate this Agreement
and withdraw from providing legal services to the Company at any time as
provided by the Rules of Professional Conduct of the Rules Regulating the
Florida Bar.
4.4 PAYMENTS TO ATTORNEY UPON TERMINATION.
(a) If the Company shall terminate this Agreement and discharge the
Attorney with Cause (as such term is hereinafter defined), then
simultaneously with the termination of this Agreement, the Company shall pay
to the Attorney, in cash, all amounts which shall have become payable by the
Company to him pursuant to the provisions of Sections 3.4 and 3.5 of this
Agreement, and the Nonrefundable Retainer shall be deemed forfeited by the
Attorney. The term "Cause" shall mean (i) the suspension or
4
<PAGE>
termination for any reason of the Attorney's membership in the Florida Bar;
(ii) the Attorney's conviction of a felony; or (iii) any action or inaction
on the part of the Attorney which constitutes fraud, embezzlement,
misappropriation, breach of trust or moral turpitude.
(b) If the Company shall terminate this Agreement and discharge the
Attorney without Cause, or if the Attorney shall terminate this Agreement and
withdraw from providing legal services to the Company, then simultaneously
with the termination of this Agreement, the Company shall pay to the
Attorney, in cash, (i) all amounts which shall have become payable by the
Company to him pursuant to the provisions of Sections 3.4 and 3.5 of this
Agreement and (ii) the full amount of the Nonrefundable Retainer.
ARTICLE V
CLAIMS AND DISPUTES
5.1 JURISDICTION AND VENUE. Any claim or dispute arising out of,
connected with, or in any way related to this Agreement which results in
litigation shall be instituted by the complaining party and adjudicated
either in the Federal District Court for the Southern District of Florida or
in the Circuit Court for Dade or Broward County, Florida, and each of the
parties to this Agreement consent to the personal jurisdiction of and venue
in such courts. In no event shall either party to this Agreement contest the
jurisdiction or venue of such courts with respect to any such litigation.
5.2 SERVICE OF PROCESS. Each of the Company and the Attorney agrees that
service of any process, summons, notice or document, by United States
registered or certified mail, to its or his address set forth in or as
provided in Section 6.2 below shall be effective service of such process,
summons, notice or document for any action, suit or proceeding brought
against it or him by the other party in the Federal District Court for the
Southern District of Florida or in the Circuit Court for Dade or Broward
County, Florida.
5.3 WAIVER OF TRIAL BY JURY. In recognition of the fact that the issues
which would arise under this Agreement are of such a complex nature that they
could not be properly tried before a jury, each of the Company and the
Attorney waives trial by jury.
5.4 ATTORNEYS' FEES AND EXPENSES. In the event that any litigation or
other proceeding shall arise between the Company and the Attorney or
involving either or both of them based, in whole or in part, upon this
Agreement or any or all of the provisions contained herein, then, in any such
event, the prevailing party in
5
<PAGE>
any such litigation or other proceeding shall be entitled to recover from
the non-prevailing party, and shall be awarded by a court or other authority
of competent jurisdiction, any and all reasonable fees and disbursements of
trial and appellate counsel paid, incurred or suffered by such prevailing
party as the result of, arising from, or in connection with, any such
litigation or other proceeding.
5.5 INTEREST. Any amount which is not paid by the Company to the
Attorney when due hereunder shall bear simple interest from the date such
payment was due to the date actually paid by the Company to the Attorney at
the highest rate of interest permitted by the laws of the State of Florida.
5.6 RETENTION OF DOCUMENTS; CHARGING LIEN. The Company understands and
acknowledges that the Attorney has the right to retain any and all files,
papers and other property coming into his possession in connection with his
engagement by the Company until he has been paid all amounts which have
become payable to him pursuant to this Agreement. The Company agrees to the
imposition of a charging lien on all real and personal property that is
preserved, protected or obtained by the Attorney as a result of the services
provided pursuant to this Agreement for any amount which may become payable
to the Attorney pursuant to the Agreement.
5.7 REFORMATION OF AGREEMENT.
(a) It is the intent of the parties that the provisions of this
Agreement shall be enforced to the fullest extent permissible under the laws
and public policies of the State of Florida and the Rules of Professional
Conduct of the Rules Regulating the Florida Bar.
(b) If any provision contained in this Agreement shall be
adjudicated by any court or other authority of competent jurisdiction to be
invalid or unenforceable, then such provision may be modified by such court
or other authority so as to make it valid and enforceable, and in all other
respects this Agreement shall remain in full force and effect.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 GOVERNING LAW. This Agreement shall be governed by, and shall be
construed and interpreted in accordance, with the laws of the State of
Florida, without giving effect to the principles of conflicts of law
thereof.
6
<PAGE>
6.2 NOTICES. Any and all notices and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed to have been duly given when delivered by hand, or when delivered by
United States mail, by registered or certified mail, postage prepaid, return
receipt requested, to the respective parties at the following respective
addresses:
If to the Company: Homeowners Group, Inc.
6365 Taft Street
Suite 2000
Hollywood, Florida 33084
Attention: President
with a copy to: Paul Berkowitz, Esq.
Greenberg, Traurig
1221 Brickell Avenue
Miami, Florida 33133
If to the Attorney: Gary D. Lipson, Esq.
914 Matanzas Avenue
Coral Gables, Florida 33146
or to such other address as either party may from time to time give written
notice of to the other in accordance with the provisions of this Section 6.2.
6.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Company and the Attorney with respect to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
arrangements, both oral and written, between the Company and the Attorney with
respect to such subject matter.
6.4 AMENDMENTS. This Agreement may not be amended or modified in any
manner, except by a written instrument executed by each of the Company and the
Attorney.
6.5 BENEFITS: BINDING EFFECT. This Agreement shall be for
the benefit of, and shall be binding upon, each of the Company and
the Attorney and their respective heirs, personal representatives,
executors, legal representatives, successors and assigns.
6.6 AGENCY RELATIONSHIP. The relationship between the
Company and the Attorney shall be that of principal and agent,
respectively. The Attorney shall not be deemed to be a partner,
joint venturer, franchisee or employee of the Company.
7
<PAGE>
6.7 NO WAIVERS. The waiver by either party of a breach or violation of any
provision of this Agreement by the other party shall not operate nor be
construed as a waiver of any subsequent breach or violation. The failure by
either party to exercise any right or remedy it or he may possess shall not
operate nor be construed as a bar to the exercise of such right or remedy by
such party upon the occurrence of any subsequent breach or violation.
6.8 HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
any or all of the provisions hereof.
6.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the separate parties in separate counterparts, each of which
shall be deemed to constitute an original and all of which shall be deemed to
constitute the one and the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has executed and delivered
this Agreement on the date first written above.
HOMEOWNERS GROUP, INC.
By /s/ CARL BUCCELLATO
------------------------------
Carl Buccellato,
President
/s/ GARY D. LIPSON
------------------------------
Gary D. Lipson
8
EXHIBIT 10.33
LEASE AGREEMENT
between
CAMTECH ASSOCIATES,
a Florida general partnership
and
HOMEOWNERS GROUP, INC.
a Delaware corporation
Dated: November 1, 1995
Sawgrass Office Campus, Bldg. A
400 Sawgrass Parkway
Sunrise, Florida 33325
<PAGE>
SUMMARY OF LEASE
THIS DOCUMENT IS MERELY A SUMMARY AND ANY PROVISIONS OF THE LEASE AND
OTHER AGREEMENT BETWEEN LANDLORD AND TENANT SHALL PREVAIL OVER CONFLICTING
PROVISIONS CONTAINED HEREIN.
(A) LANDLORD'S MAILING ADDRESS: 6400 North Andrews Avenue
Fort Lauderdale, Florida 33309
(B) TENANT'S NAME: Homeowners Group, Inc.
MAILING ADDRESS: 400 Sawgrass Parkway
Sunrise, Florida 33325
(C) DEMISED PREMISES: Office Campus, Bldg. A
400 Sawgrass Parkway
Sunrise, Florida 33325
RENTABLE SQUARE FOOTAGE 24,980
(D) TERM: Ten (10) years
(E) COMMENCEMENT DATE: Sixty (60) days following Turnover Date
EXPIRATION DATE: One hundred twenty (120) months following
Commencement Date
(F) BASE RENT: $10.75 Per Square Foot (Year 1)
LEASE TERM ANNUAL RENT MONTHLY INSTALLMENT
(Year 1) (Year 1)
10 years $268,535.00 Base Rent $22,377.91
Additional Rent $ 8,347.48
Sales Tax $ 1,843.52
----------
TOTAL $32,568.91
(G) INTERIM OPERATING EXPENSES: $4.01 Per Square Foot (1995 estimate)
(H) SECURITY/DAMAGE DEPOSIT: $44,800.00
(I) PERMITTED USE: General business and Administrative offices
(J) EXHIBITS: The following exhibits attached to this Lease are hereby
incorporated herein and made a part hereof.
EXHIBIT "A" - Premises
EXHIBIT "B" - Legal Description
EXHIBIT "C" - Site Plan
EXHIBIT "D" - Estoppel Certificate
EXHIBIT "E" - Tenant Rules and Regulations
EXHIBIT "F" - Electrical Service Agreement
EXHIBIT "G" - Parking
EXHIBIT "H" - Subordination, Non-Disturbance & Attornment Agreement
EXHIBIT "I" - Signage
EXHIBIT "J" - Office Campus Phase II Land
Please make all checks payable to: Camtech Associates
c/o Stiles Property Management
6400 North Andrews Avenue
Ft. Lauderdale, Florida 33309
PLEASE INCLUDE CAMTECH ASSOCIATES, AS AN ADDITIONAL INSURED ON ALL INSURANCE
POLICIES.
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (hereinafter referred to as the "Lease") is made
and entered into the 1st day of November, 1995, by and between CAMTECH
ASSOCIATES, a Florida general partnership (hereinafter referred to as
"Landlord") and Homeowners Group, Inc., Delaware corporation (hereinafter
referred to as "Tenant").
WITNESSETH:
THAT LANDLORD, in consideration of the rents and agreements hereafter
promised and agreed by Tenant to be paid and performed, does hereby lease to
Tenant, and Tenant does hereby lease from Landlord, the real property described
herein, subject to the following terms.
ARTICLE I
DESCRIPTION OF PROPERTY; TERM
SECTION 1.1 DESCRIPTION OF PROPERTY. Landlord hereby leases to Tenant
and Tenant hereby leases from Landlord the following space: approximately 24,980
rentable square feet (hereinafter called the "Demised Premises" or "Premises")
approximately as shown on Exhibit "A" and made a part of this Lease, which
Premises comprises the Building known as Sawgrass Office Campus, Building A,
located at 400 Sawgrass Parkway, Sunrise, Florida 33325 (hereinafter called the
"Building"), as described in Exhibit "B" and depicted on the site plan attached
hereto as Exhibit "C", together with the right to use all of the facilities
contained in the Building and parking areas. All of the land and real property
underlying the Building or adjacent thereto, with all improvements thereto
including the Building, and used in connection with the operation of the
Building shall be referred to herein as the "Property". Prior to occupancy of
the Premises, Landlord's architect will certify the exact square footage of the
Premises, and Tenant's Rent set forth below will be adjusted accordingly.
SECTION 1.2 TERM. Tenant shall have and hold the Premises for a term
of ten (10) years (hereinafter referred to as the "Term" or "Lease Term"),
commencing sixty (60) days following the Turnover Date (as herein defined) (the
"Commencement Date") and expiring one hundred twenty (120) months thereafter
(the "Expiration Date"). In the event the Turnover Date occurs later than
November 15, 1995, Landlord shall reimburse Tenant an amount not to exceed the
equivalent of fifty percent (50%) of Tenant's Rent obligation at its current
location, (based upon the rental rate being paid during the last year of the
Lease Term thereof) for a period not to exceed 45 days from the Turnover Date.
For the purposes of this Lease, the "Turnover Date" shall be defined as the date
on which Landlord tenders possession of the Premises to Tenant for Tenant's
completion of alterations to the Premises. Except for the payment of Rent,
Tenant shall be bound by all of the terms and conditions as contained herein,
including the insurance requirements set forth in Article X below, as of the
Turnover Date. If the Turnover Date does not occur by February 1, 1996, Tenant
shall be entitled to cancel the Lease by written notice to Landlord. In such
event, Landlord shall reimburse Tenant for all reasonable out-of-pocket
expenses, not to exceed $10,000.0 in connection with this Lease. Tenant further
agrees that it shall be responsible for all electricity serving the Premises as
of the Turnover Date. If the Term of this Lease commences on any day of the
month other than the first day, Rent from such date to the end of such month
shall be prorated according to the number of days in such month and paid on a
per diem basis, in advance, on or before the Commencement Date. Tenant agrees
that it will execute, prior to occupancy, an Estoppel Certificate in the form
attached hereto as Exhibit "D", certifying said dates. Tenant's failure or
refusal to execute said Estoppel Certificate shall constitute a default
hereunder.
1
<PAGE>
ARTICLE II
BASE RENT
SECTION 2.1 BASE RENT: LATE CHARGE: SALES TAX. Subject to Section 2.2
below, Tenant agrees to pay Landlord an aggregate base rent for the first year
of the Lease Term in the amount of $268,535.00 (the "Base Rent"), payable in 12
equal monthly installments of $22,377.91 in advance of the first day of each and
every month during the first year of the Lease Term. The first month's Rent
(defined below) shall be paid simultaneously with the execution of this Lease.
In addition, Tenant shall be responsible for the payment of Additional Rent as
provided in Article III below (the Base Rent and Additional Rent shall sometimes
be collectively referred to as the "Rent"). In the event any monthly Rent
payment is not paid within ten (10) days after it is due, Tenant agrees to pay a
late charge of five (5%) percent of the amount of the payment due. Tenant
further agrees that the late charge imposed is fair and reasonable, complies
with all laws, regulations and statutes, and constitutes an agreement between
Landlord and Tenant as to the estimated compensation for costs and
administrative expenses incurred by Landlord due to the late payment of Rent to
Landlord by Tenant. Tenant further agrees that the late charge assessed pursuant
to this Lease is not interest, and the late charge assessed does not constitute
a lender or borrower/creditor relationship between Landlord and Tenant, and may
be treated by Landlord as Additional Rent owed by Tenant. Tenant shall pay to
Landlord all sales or use taxes pertaining to the Rent (currently 6%) which
shall bc remitted by Landlord to the Florida Department of Revenue.
SECTION 2.2 BASE RENT ABATEMENT. Landlord hereby agrees to waive the
first three (3) monthly payments of Base Rent during the Lease Term. Tenant
hereby agrees to pay its Proportionate Share of Operating Expenses during the
full term of the Lease, including the Base Rent abatement period.
Notwithstanding the foregoing, however, the entire Base Rent otherwise due and
payable during the 3-month abatement period shall become immediately due and
payable upon the occurrence of an event of default by Tenant under the Lease.
SECTION 2.3 BASE RENT ADJUSTMENT. Commencing on the first (1st)
anniversary of the Lease, and each and every anniversary thereafter including
option years, if any, the Base Rent shall increase by three (3%) percent over
the previous year's Base Rent.
SECTION 2.4 PAYMENT WITHOUT NOTICE OR DEMAND. The Rent called for in
this Lease shall be paid to Landlord without notice or demand, and without
counterclaim, offset, deduction, abatement, suspension, deferment, diminution or
reduction except as otherwise set forth herein. Tenant hereby waives all rights
(except as conferred by statute otherwise) to quit, terminate or surrender this
Lease or the Premises or any part thereof, or to any abatement, suspensions,
deferment, diminution or reduction of the Rent on account of any such
circumstances or occurrence except as set forth herein.
SECTION 2.5 PLACE OF PAYMENT. All payments of Rent shall be made and
paid by Tenant to Stiles West Associates, Ltd., c/o Stiles Property Management,
6400 North Andrews Avenue, Fort Lauderdale, Florida 33309, or at such other
place as Landlord may, from time to time, designate in writing to Tenant. All
Rent shall be payable in current legal tender of the United States, as the same
is then by law constituted. Any extension, indulgence, or waiver granted or
permitted by Landlord in the time, manner or mode of payment of Rent, upon any
one (1) occasion, shall not be construed as a continuing extension, indulgence
or waiver, and shall not preclude Landlord from demanding strict compliance
herewith.
2
<PAGE>
ARTICLE III
ADDITIONAL RENT
SECTION 3.1 ADDITIONAL RENT. In addition to the Base Rent, Tenant
shall pay as "Additional Rent" the Operating Expenses (as herein defined) of the
Building and the Property. Additional Rent shall be paid to Landlord in
accordance with the following provisions:
1. Landlord shall furnish to Tenant prior to thirty (30) days after
the beginning of each calendar year, including the first calendar year, a budget
setting forth Landlord's estimate of Operating Expenses for the upcoming year.
Tenant shall pay to Landlord, on the first day of each month as Additional Rent,
an amount equal to one-twelfth (1/12th) of Landlord's estimate of the Operating
Expenses for that calendar year. If there shall be any increase or decrease in
the Operating Expenses for any year, whether during or after such year, Landlord
shall furnish to Tenant a revised budget and the Operating Expenses shall be
adjusted and paid or credited, as the case may be. If a calendar year ends after
the expiration or termination of this Lease, the Additional Rent payable
hereunder shall be prorated to correspond to that portion of the calendar year
occurring within the Term of this Lease.
2. Within 120 days after the end of each calendar year, Landlord shall
furnish to Tenant an operating statement showing the actual Operating Expenses
incurred for the preceding calendar year. Tenant shall either receive a refund
or be assessed an additional sum based upon the difference between the actual
Operating Expenses and the Additional Rent payments made by Tenant during said
year. Any additional sum owed by Tenant to Landlord shall be paid within thirty
(30) days of receipt of assessment. Any refund owed by Landlord to Tenant shall
be credited toward Tenant's next month's rental payment. Each operating
statement given by Landlord shall be conclusive and binding upon Tenant unless,
within thirty (30) days after Tenant's receipt thereof, Tenant shall notify
Landlord that it disputes the accuracy of said operating statement. In no event
shall Landlord recover more than 100% of its actual costs for operating
expenses. Failure of Landlord to submit the written statement referred to herein
shall not waive any rights of Landlord, unless such statement is not submitted
within one year from the end of the prior calendar year. Tenant shall have the
right, within 6 months of its receipt of the operating statement at Tenant's
sole cost and expense, to audit Landlord's records pertaining to operating
expenses, any overbilling discovered in such audit shall be promptly refunded to
Tenant. In the event the overstatement of charges exceeds 5% of the sum
previously billed to Tenant, Landlord shall reimburse Tenant for the reasonable
cost of such audit. All of Landlord's books and records shall be maintained in
accordance with accounting practices generally accepted in the industry.
3. Landlord's "Operating Expenses", as calculated pursuant to Section
3.1.1 above, shall mean expenses relating to the operation and maintenance of
the Building and the Property, and all amenities and appurtenances relating
thereto, including, without limitation, the following:
(a) reasonable and customary management fees, wages and salaries of
all persons engaged in the maintenance and operation of the
Building and Property;
(b) social security taxes and all other taxes which may be levied
against Landlord;
(c) medical and general benefits for all Building employees, pension
payments and other fringe benefits;
(d) administrative expenses and charges;
(e) all insurance premiums;
3
<PAGE>
(f) stand-by sprinkler charges, water charges and sewer charges;
(g) electricity and fuel used in the heating, ventilation,
air-conditioning, lighting and all other operations of the common
areas of the Property, if any;
(h) trash removal from the Building;
(i) painting of the Building; provided, however, if repainting of the
Building occurs at any time during the last four years, the only
portion of such cost which shall be included in the Operating
Expenses, shall be a fraction, the numerator of which is the
number of months remaining under the Lease Term when the
repainting occurs, and the denominator of which is the number of
months of the useful life of the painting of the Building.
(j) window cleaning and related equipment and supplies;
(k) maintenance and repair of the Building and Property;
(l) maintenance and service contracts;
(m) tools, equipment and supplies necessary for the performance of
repairs and maintenance (which are not required to be capitalized
for federal income tax purposes);
(n) maintenance, repair and replacement of all mechanical and
electrical equipment in the Building; provided, however, the only
portion OF HVAC replacement expenses that shall be included in
Operating Expenses shall be a fraction the numerator of which is
the number of months remaining under the Lease Term when the
replacement is made, and the denominator of which is the number of
months of the useful life of the replacement item.
(o) maintenance and repair of elevators, restrooms, lobbies, and
hallways of the Building;
(p) Tenant's proportionate share of maintenance of pavement, curbs,
walkways, lighting facilities, landscaping, driveways, parking
areas and drainage areas upon the Property. Tenant's proportionate
share shall be determined by dividing Tenant's rentable square
footage leased hereunder by the total rentable square footage of
Sawgrass Office Campus Buildings A & B.
(q) personal property taxes;
(r) real estate taxes assessed against the Building and the Property.
The term "real estate taxes" shall mean any tax or assessment
levied, assessed or imposed at any time by any governmental
authority upon or against the Building or the Property or any part
thereof, any tax or assessment levied, or any franchise, income,
profit or other tax or governmental imposition levied, assessed or
imposed against or upon Landlord in substitution in whole or in
part for any tax or assessment against or upon the Building and
the Property or any part thereof;
(s) assessments for public improvements imposed against the Building
and the Property and assessments of the Association (defined
below);
4
<PAGE>
(t) a reasonable amortization cost due to any capital expenditures
incurred to reduce or limit Operating Expenses of the Property and
Building, to provide electronic security for the Building, or
which may now or hereafter be required by governmental authority
or by Landlord's insurance carrier;
(u) all other reasonable and customary costs and expenses which would
be considered as an expense of maintaining, operating or repairing
the Building and the Property in accordance with accounting
practices generally accepted in the industry.
4. Operating Expenses shall not include the following;
(a) Payments of principal, interest, or other finance charges made on
any debt, or the amortization of funds borrowed by Landlord;
(b) Ground rent or other rental payments made under any ground lease
or underlying lease;
(c) Costs of structural repairs of a capital nature to the Building
including roof replacement, structural repairs to the roof,
curtain wall, foundation, floor slabs (except for normal caulking
and maintenance and except excessive and abnormal use on the part
of Tenant);
(d) Salaries, wages, or other compensation paid to officers or
executives of Landlord above the level of Building Manager;
(e) Salaries, wages, or other compensation or benefits paid to
off-site employees or other employees of Landlord who are not
assigned full-time to the operation, management, maintenance, or
repair of the Building; provided however, Operating Costs shall
include Landlord's reasonable allocation of compensation paid for
the wages, salary, or other compensation or benefits paid to the
individual Building manager, if offsite, who is assigned part time
to the operation, management, maintenance, or repair of the
Building;
(f) Costs of advertising and public relations and promotional costs
associated with the promotion or leasing of the Building and costs
of signs in or on the Building identifying the owners of the
Building or any Tenant of the Building;
(g) Any costs, fines or penalties incurred due to the violation by
Landlord of any governmental rule or authority;
(h) Any other expense for which Landlord actually receives
reimbursement from insurance (except for Landlord's deductible),
condemnation awards, other Tenants or any other source;
(i) Costs of repairs, restoration, replacements or other work
occasioned by (i) fire, windstorm or other casualty which is
covered by Landlord's insurance, except for deductible, (whether
such destruction be total or partial) and (ii) the exercise by
governmental authorities of the right of eminent domain (whether
such taking be total or partial);
(j) Costs incurred in connection with such disputes with tenants,
other occupants, or prospective Tenants, or costs and expenses
incurred in connection with negotiations or disputes with
employees, consultants, management agents, leasing agents,
purchasers or mortgagees of the Building;
5
<PAGE>
(k) Costs incurred in connection with the sale refinancing,
refinancing, mortgaging, selling or change of ownership of the
Building;
(l) Costs, fines, interest, penalties, legal fees or costs of
litigation incurred due to the late payments of taxes, utility
bills and other costs incurred by Landlord's failure to make such
payments when due;
(m) Costs incurred by Landlord which are associated with the operation
of the business of the legal entity which constitutes Landlord as
the same is separate and apart from the cost of the operation of
the Building, including legal entity formation and legal formation
and legal entity accounting (including incremental accounting fees
relating to the operation of the Building to the extent incurred
separately in reporting operating results to the Building's owners
or lenders);
(n) Costs of a capital nature or which would be capitalized under
generally accepted accounting principles, except as otherwise
provided in Section 3.1.3(t) above;
(o) General overhead and general administrative expenses and
accounting, recordkeeping and clerical support of Landlord or the
management agent;
(p) Fees for management of the Building in excess of three (3%) of
Tenant's Base Rent; as long as the Building is a single tenant
building;
(q) Costs arising from the presence of hazardous materials or
substances in or about or below the land or the Building,
including without limitation, hazardous substances in the
groundwater or soil except as proven to be the result of Tenant's
use or occupancy of the Building;
(r) Costs incurred for any items to the extent covered by a
manufacturer's, materialman's, vendor's or contractor's warranty;
(s) Non-cash items, such as deductions for depreciation and
amortization of the Building and the Building equipment, interest
on capital invested, bad debt losses, rent losses and reserves for
such losses;
(t) Expenses incurred in effecting compliance with requirements of
Americans With Disabilities Act or any other law in existence as
of the date hereof, except with work performed by the Tenant and
except for requirements resulting from Tenant's particular use of
the Premises;
(u) Legal fees (except for contesting tax assessments) or other
professional or consulting fees (except such other professional or
consulting fees that are directly related to the maintenance,
operation or management of the Building);
(v) All amounts which would otherwise be included in Operating Costs
which are paid to any affiliate or subsidiary of Landlord, or any
representative, employee or agent of same, to the extent the costs
of such services exceed the competitive rates for similar services
of comparable quality rendered by persons or entities of similar
skill, competence and experience;
(w) Services provided and costs incurred in connection with the
operation of ancillary operations owned, operated or subsidized by
Landlord, with the exception of Landlord's ownership and operation
of Office Campus Building B and the parking lot adjacent thereto;
6
<PAGE>
(x) Consulting costs and expenses paid by Landlord except to the
extent that such costs serve to reduce Tenant's Operating
Expenses.
5. The term "Declaration" shall mean that certain Declaration of
Covenants, Conditions and Restrictions for Sawgrass International Corporate
Park. Pursuant to the Declaration, a corporation not-for-profit, known as
Sawgrass Property Owners' Association, Inc. (the "Association") has been formed
to enforce the Declaration and to operate and maintain the Common Areas referred
to therein. Tenant agrees to pay Tenant's proportionate share of any and all
maintenance or other assessments imposed by the Association on Landlord as owner
of the Property as provided in the Declaration.
SECTION 3.2 INTERIM OPERATING EXPENSES. During the period from the
Commencement Date through December 31, 1995, Tenant shall pay as Interim
Operating Expenses $4.01 per square foot per year, payable monthly as Additional
Rent, which is merely an estimate of the actual Interim Operating Expenses for
such period. Not later than 120 days after the end of the calendar year,
Landlord shall compute the actual Operating Expenses incurred during such
period. Tenant shall either receive a refund or be assessed an additional sum
based upon the difference between Tenant's Proportionate Share of the actual
Operating Expenses and the payments of Interim Operating Expenses made by Tenant
during such period. Any additional sum owed by Tenant to Landlord shall be paid
within ten (10) days of receipt of assessment. Any additional sum owed by
Landlord to Tenant shall be credited toward Tenant's next month's rental
payment. Notwithstanding the foregoing, however, in no event shall Tenant's
proportionate share of "Controllable Operating Expenses" (defined below) be more
than thirty (30) cents over Landlord's estimate of the controllable portion of
interim Operating Expenses. Landlord's estimate of the controllable portion of
interim Operating Expenses is $1.54 per square foot of rentable area of the
Premises.
SECTION 3.3 CONTROLLABLE EXPENSE CAP. Landlord hereby represents that
"Controllable Operating Expenses" (all expenses other than real estate taxes,
Building insurance and utilities, including dumpster service) shall not increase
by more than five (5%) percent per year over the previous year's Controllable
Operating Expenses, cumulative during the Term hereof, and any renewal terms.
Landlord's actual costs for real estate taxes, Building insurance and utilities
shall be passed through to Tenant on a pro-rata basis.
ARTICLE IV
SECURITY/DAMAGE DEPOSIT
SECTION 4.1 SECURITY/DAMAGE DEPOSIT. Simultaneously with the execution
of this Lease, Tenant shall pay the sum of $44,800.00 to be held by Landlord as
a damage deposit and/or as security for the performance by Tenant of all of the
terms, covenants and conditions hereof and the payment of Rent or any other sum
due Landlord hereunder. Landlord shall have the right to apply all or any part
of the security deposit against: (a) unreasonable wear and tear of the Premises;
(b) loss or damage to the Premises or other property of the Landlord caused by
Tenant, Tenant's employees, agents invitee, or licensees; (c) the cost of
restoring the Premises, except for reasonable wear and tear, to the same
condition it was in at the time Tenant began occupancy thereof exclusive of
initial Tenant Improvements made by Tenant and subsequent alterations approved
by Landlord; and (d) Rent payments which remain due and owing beyond any
applicable grace period. Landlord shall not be limited in pursuing Landlord's
remedies against Tenant for costs, losses or damages to the Premises or to any
other property of Landlord for any such costs, losses or damages which are in
excess of the above described security deposit amount. Such security deposit
shall bear no interest and may be commingled with other security deposits or
funds of Landlord.
7
<PAGE>
ARTICLE V
USE OF PREMISES
SECTION 5.1 USE OF PREMISES. Tenant may use the Premises for general
business and administrative offices for a marketing company which provides real
estate related services to a national network of real estate brokerage firms,
and any other use not otherwise prohibited by applicable use restrictions or
zoning restrictions affecting the Premises. Tenant will not use or permit the
use of the Premises or any part thereof for any unlawful purpose, or in
violation of any and all applicable ordinances, laws, rules or regulations of
any governmental body, the Association or of Landlord provided for in Exhibit
"E" herein, and will not do or permit any act which would constitute a public or
private nuisance or waste or which would be a nuisance or annoyance or cause
damage to Landlord or Landlord's other tenants or which would invalidate any
policies of insurance or increase the premiums thereof, now or hereafter written
on the Building and/or the Property.
ARTICLE VI
PARKING
SECTION 6.1 PARKING. At all times during the Term hereof, there shall
be available at the Building one hundred (100) parking spaces for the
nonexclusive use of Tenant in the area crosshatched on Exhibit "G" attached
hereto, based upon a ratio of 4 parking spaces per 1,000 rentable square feet
being leased hereunder. In the event Tenant leases additional space as provided
herein, Tenant's number of parking spaces shall increase in accordance with said
ratio. In the event Tenant requires additional parking (the "Additional
Parking"), Landlord agrees to construct the Additional Parking on vacant land
within the Office Campus Phase II land as depicted on Exhibit "J" attached
hereto, if available, provided Landlord is the owner of said land and provided
it is sufficient for the construction of the Additional Parking. The cost of
construction of the Additional Parking shall be reimbursed to Landlord by Tenant
through the amortization of such cost (at an interest rate of twelve (12%)
percent per annum) over the remainder of the Lease Term, provided at least five
(5) years are remaining under the Lease Term. In the event less than five (5)
years remain, Tenant agrees, prior to Landlord's construction of the Additional
Parking, to extend the Term of the Lease for a period which shall not expire
prior to five (5) years from construction of the Additional Parking.
Alternatively, rather than extend the Term of the Lease as contemplated by the
preceding sentence, Tenant can elect to pay the construction cost amortized over
the remaining balance of the Lease Term. Landlord shall competitively bid the
construction with at lease three (3) contractors, and Landlord agrees that its
"soft" construction costs shall be reasonable.
ARTICLE VII
PREPARATION OF THE PREMISES
SECTION 7.1 LEASEHOLD IMPROVEMENTS. The Premises shall be completed
and prepared for by Tenant, at Tenant's expense, subject to the conditions of
ARTICLE XI below. The facilities, materials and work to be furnished, installed
and performed in the Premises by Tenant, at its expense, are hereinafter
referred to as "Tenant's Alterations". Landlord agrees to contribute up to $5.00
per square foot (inclusive of architectural fees and permitting) towards
Tenant's cost of performing Tenant's Alterations to the Premises (the "Tenant
Improvement Allowance"). The Tenant Improvement Allowance shall be funded once
per month based on work in place as certified by Tenant's architect. Together
with each request for payment which Landlord shall pay within ten (10) days of
Tenant's application therefor, Tenant shall submit a partial release of lien by
its cont;actor for the previous disbursement. Within thirty (30) days after
final disbursement, Tenant shall deliver a final contractor's release of lien.
8
<PAGE>
Landlord hereby grants to Tenant permission to install two concrete
pads on the exterior of the Building, the location and size of which shall be
subject to Landlord's prior approval. Upon the expiration or earlier termination
of this Lease, and upon Landlord's request, which request must be given to
Tenant on or before thirty (30) days prior to Lease expiration or earlier
termination, Tenant shall be obligated to remove the concrete pads and repair
any damage to the Building or the Property resulting from such installation.
SECTION 7.4 ACCEPTANCE OF PREMISES. Tenant acknowledges that Landlord
has not made any representations or warranties with respect to the condition of
the Premises and neither Landlord nor any assignee of Landlord shall be liable
for any latent defect therein. Landlord shall, however, be responsible for
repairing any damage resulting from a latent defect. The taking of possession of
the Premises by Tenant shall be conclusive evidence that the Premises were in
good and satisfactory condition at the time such possession was taken, except
for the minor insubstantial details of which Tenant gives Landlord notice within
thirty (30) days after the Commencement Date. If Landlord shall give Tenant
permission to enter into possession of the Premises prior to the Commencement
Date, such possession or occupancy shall be deemed to be upon all the terms,
covenants, conditions, and provisions of this Lease, including the execution of
an estoppel certificate. Landlord hereby represents and warrants to Tenant, to
the best of Landlord's knowledge, no hazardous substances exist within the
Building or on the Property as of the date of Tenant's possession, and Landlord
indemnifies and holds Tenant harmless with respect to any loss, damage or claim
which the Tenant suffers by virtue of environmental matters, including but not
limited to, violation of environmental regulations or laws, other than those
caused by Tenant. This provision is in addition to Section 24.2.
ARTICLE VIII
LANDLORD AND TENANT OBLIGATIONS
SECTION 8.1 TENANT'S OBLIGATIONS. Tenant shall be responsible for all
repairs, THE NEED for which arises out of: (a) the performance or existence of
Tenant's Work or alterations; (b) the installation, use or operation of Tenant's
Property (defined below) in the Premises; (c) the moving of Tenant's Property in
or out of the Building; (d) the act, omission, misuse or neglect of Tenant or
any of its subtenants, employees, agents, contractors or invitees. Tenant shall
also be responsible for the replacement of all scratched, damaged or broken
doors and glass in and about the Premises, the maintenance and replacement of
wall and floor coverings in the Premises, and for the repair and maintenance of
all sanitary and electrical fixtures therein.
SECTION 8.2 LANDLORD'S OBLIGATIONS. Landlord shall be obligated to
keep and maintain the systems and facilities serving the Premises, in good
working order and shall make all repairs as and when needed in or about the
common areas and the Premises, except for those repairs for which Tenant is
responsible pursuant to any of the provisions of this Lease. Landlord shall not
be liable for any damage to Tenant's Property caused by (a) water from bursting
or leaking pipes, or waste water about the Property unless caused by the
negligence of Landlord or that of its employees, agents or contractors; (b) from
an intentional or negligent act of any other tenant or occupant of the Building
or the Property; (c) fire, hurricane or other acts of God; (d) riots or vandals;
or (e) from any other cause not directly attributable to the negligent or
wrongful act of Landlord, its agents or employees. Landlord shall not be
required to furnish any services or facilities to, or to make any repairs to or
replacements or alterations of the Premises where necessitated due to the fault
of Tenant, its agents ar.d employees, or other tenants, their agents or
employees. In addition, the Landlord agrees to maintain and keep at all times,
at Landlord's sole costs and expense, which expense shall be reimbursed by
Tenant through the payment of Additional Rent, the Building (and access thereto)
in good order and condition and to make any and all repairs promptly as and when
needed. Prior to making any repairs, Landlord agrees to provide Tenant with
reasonable notice, except in the case of an emergency when no notice shall be
required, and
9
<PAGE>
further agrees to use its best efforts to minimize interference with Tenant's
access to or use of the Premises. Notwithstanding the foregoing however, to the
extent that Landlord is required under the terms of this Lease to furnish such
services or make repairs or alterations to the Premises or the Building, and to
the extent the Premises are rendered untenable or unusable for the purposes set
forth in this Lease, as a result of Landlord's failure to do so (or failure to
commence to do so) for a period of more than five (5) business days, Tenant
shall be entitled to abate its rent following such five (5) day period until
such time as the Premises have been rendered tenable or usable by Landlord as
required hereunder.
SECTION 8.3 FLOOR LOADS: NOISE AND VIBRATION. Tenant being the only
Tenant in the Building, shall not place a load upon any floor of the Premises
which exceeds the load per square foot which such floor was designed to carry or
which is allowed by law. Business machines and mechanical equipment belonging to
Tenant which cause noise, electrical interference or vibration that may be
transmitted to the structure of the Building or to the Premises to such a degree
as to be objectionable to Landlord or other tenants in the Building, shall, at
Tenant's expense, be placed and maintained by Tenant in settings of cork,
rubber, or spring-type vibration eliminators sufficient to eliminate such noise,
electrical interference or vibration. Landlord represents that, to the best of
its knowledge, the minimum live load capacities of the Building are as follows:
100 pounds p.s.f. of floor l and 50 pounds p.s.f. of floor 2.
SECTION 8.4 GAS. ELECTRICITY AND TELEPHONE. In the event Tenant elects
to have natural gas at the Premises, Tenant, at Tenant's sole cost and expense,
shall be responsible for connecting to the natural gas line on 136th Avenue.
Tenant shall thereafter be responsible for all costs associated with such
service, including an emergency generator. Tenant's natural gas service shall be
separately metered and paid directly by Tenant to the utility company providing
such service. Tenant's use of electrical energy in the Premises shall not, at
any time, exceed the capacity of any of the electrical conductors and equipment
in or otherwise serving the Premises. In order to ensure that such capacity is
not exceeded and to avert possible adverse effects upon the Building's electric
service, Tenant shall not, without Landlord's prior written consent in each
instance, connect major equipment to the Building's electric distribution system
or telephone system, or make any alteration or addition to the electric system
of the Premises existing on the Commencement Date. Tenant's electrical usage
under this Lease contemplates only the use of normal and customary office
equipment including, but not limited to, personal computers, printers, modems,
and other computer data equipment used by Tenant in the conduct of its business.
In the event Tenant wishes to install any office equipment which uses
substantial additional amounts of electricity, then Tenant agrees that
Landlord's consent is required before the installation of such additional office
equipment. Tenant shall be solely liable for electricity and telephone expenses
relating to the Premises. Tenant's electrical service shall be separately
metered, per Electrical Service Agreement attached hereto as Exhibit F. Tenant
shall have the right, at Tenant's sole cost and expense, to install, maintain
and provide fuel for Tenant's Uninterrupted Power Source system together with a
concrete pad for same, subject to Landlord's prior approval as set forth in
Section 7.1 above.
SECTION 8.5 JANITORIAL SERVICE. Tenant, at Tenant's sole cost and
expense, shall provide janitorial service for the Premises. Alternatively,
Tenant may elect to have janitorial service provided by Landlord, in which event
the actual cost thereof shall be included in Operating Expenses.
SECTION 8.6 RIGHT TO STOP SERVICES. Landlord reserves the right,
without any liability to Tenant and without affecting Tenant's covenants and
obligations hereunder, to stop service of the heating, air conditioning,
electric, sanitary, or other Building systems serving the Premises, or to stop
any other services required by Landlord under this Lease, whenever and for so
long as may be necessary, by reason of accident, emergencies, strikes, or the
making of repairs or changes which Landlord is required to make pursuant to this
Lease, by law or in good faith deems necessary, and Landlord shall not be held
liable for delays in the restoration of such services
10
<PAGE>
resulting from difficulty in securing proper supplies of fuel, steam, water,
electricity, labor, supplies, or any other cause beyond Landlord's reasonable
control. Notwithstanding the foregoing, however, in the event such stoppage of
services continues for a period of more than five (5) consecutive business days
due to the actions or inaction or Landlord, Tenant shall be entitled to abate
its base rent and additional rent payments until such services are restored.
SECTION 8.7 HEATING VENTILATION AND AIR CONDITIONING. Except as
otherwise provided herein, Landlord shall provide and maintain the heating,
ventilation and air conditioning system serving the Building. The maintenance of
the HVAC system shall be at Landlord's expense, which expense shall be
reimbursed by Tenant through the payment of Additional Rent.
ARTICLE IX
LANDLORD'S AND TENANT'S PROPERTY
SECTION 9.1 LANDLORD'S PROPERTY. Except as stated in Paragraph 9.2
below, all fixtures, improvements and appurtenances attached to or built into
the Premises at the commencement of or during the Term of this Lease, whether or
not by or at the expense of Tenant, shall be and remain a part of the Premises,
and shall be deemed the property of Landlord ("Landlord's Property") and shall
not be removed by Tenant except as otherwise specifically set forth herein.
Further, any carpeting in the Premises on the Commencement Date, shall not be
removed by Tenant.
SECTION 9.2 TENANT'S PROPERTY. All moveable partitions, business and
trade fixtures, machinery and equipment, communications equipment and office
equipment, whether or not attached to or built into the Premises, which are
installed in the Premises by or for the account of Tenant without expense to
Landlord and which can be removed without structural damage to the Building, and
all furniture, furnishings and other articles of moveable personal property
owned by Tenant and located in the Premises (hereinafter collectively referred
to as "Tenant's Property") shall be and shall remain the property of Tenant and
may be removed by Tenant at any time during the Term of this Lease, provided
Tenant is not in default hereunder. In the event Tenant's Property is so
removed, Tenant shall repair or pay the cost of repairing any damage to the
Premises or to the Building resulting from the installation and/or removal
thereof and restore the Premises to the same physical condition and layout as
they existed at the time Tenant was given possession of the Premises normal wear
& tear and Tenant's leasehold improvements and subsequent alterations excepted.
Any equipment or other property for which Landlord shall have granted any
allowance or credit to Tenant shall not be deemed to have been installed by or
for the account of Tenant without expense to Landlord, shall not be considered
Tenant's Property and shall be deemed the property of Landlord.
SECTION 9.3 REMOVAL OF TENANT'S PROPERTY. At or before the Expiration
Date of this Lease, or within five (5) days after any earlier termination
hereof, Tenant, at its expense, shall remove from the Premises all of Tenant's
Property (except such items thereof as Landlord shall have expressly permitted
to remain, which property shall become the property of Landlord), and Tenant
shall repair any damage to the Premises or the Building resulting from any
installation and/or removal of Tenant's Property, and shall restore the Premises
to the same physical condition and layout as they existed immediately following
completion of Tenant's initial improvements in the Premises, reasonable wear and
tear and initial leasehold improvements and subsequent alterations excepted. Any
other items of Tenant's Property which shall remain in the Premises after the
Expiration Date of this Lease, or after a period of five (5) days following an
earlier termination date, may, at the option of Landlord, be deemed to have been
abandoned, and in such case, such items may be retained by Landlord. Landlord
upon Landlord's approval of Tenant's plans, may request Tenant to remove and pay
to Landlord the cost of repairing any damage to the Premises or the Building
resulting from any installation and/or removal of Tenant's Property and the cost
of restoring the Premises to the same physical condition and layout as they
existed at the time Tenant
11
<PAGE>
was given possession of the Premises, reasonable wear and tear excepted.
Notwithstanding the foregoing, Tenant shall not be required to remove any
alterations to the Premises unless Landlord's written consent to such
alterations (including Tenant's initial Tenant Improvements) was specifically
conditioned on the requirement that Tenant remove such alterations upon the
expiration of the Lease Term.
SECTION 9.4 LANDLORD'S LIEN AND SECURITY INTEREST. As security for the
performance of Tenant's obligations under this Lease, Tenant hereby grants to
Landlord a security interest in and Landlord's lien upon all of Tenant's
furniture, fixtures and equipment located in the Premises which are not now or
in the future encumbered by a security interest in favor of a vendor or lender.
Tenant hereby irrevocably appoints Landlord as Tenant's attorney- in-fact and
empowers Landlord to execute on Tenant's behalf a UCC-I Financing Statement,
renewals and terminations thereof, for the purpose of perfecting Landlord's
security interest. Notwithstanding the foregoing, however, Landlord hereby
agrees to execute a Landlord's Waiver in the event Tenant leases or obtains
financing secured by any equipment or furniture necessary for Tenant's use and
occupation of the Premises, or other financing relating to the Tenant's business
or operations.
ARTICLE X
INSURANCE
SECTION 10.1 TENANT'S INSURANCE.
1. Tenant shall, during the Term of this Lease, maintain insurance
against public liability, including that from personal injury or property damage
in or about the Premises resulting from the occupation, use or operation of the
Premises, insuring both Landlord and Tenant, in amount of not less than One
Million ($1,000,000) Dollars Combined Single Limit for both bodily injury and
property damage.
2. Tenant shall maintain insurance upon all property including
personal property in the Premises owned by Tenant, or for which Tenant is
legally liable, and shall provide Landlord with evidence of same. The insurance
specified herein shall provide protection against perils included within the
standard Florida form of fire and extended coverage insurance policy, together
with insurance against vandalism and malicious mischief.
3. All policies of insurance provided for in Section 10.1 shall be
issued in a form acceptable to Landlord by insurance companies with general
policyholder's rating of A-(XI) as rated in the most current available "Best's
Insurance Reports", and qualified to do business in Florida, or such other
insurance company approved by Landlord in writing. Each and every such policy:
(a) shall be issued in the name of Tenant and shall include Landlord
and any other parties in interest designated in writing by notice
from Landlord to Tenant as additional insureds;
(b) shall be for the mutual and joint benefit and protection of
Landlord and Tenant and any such other parties in interest named
as additional insureds;
(c) shall (or a certificate thereof shall) be delivered to Landlord
and any such other parties in interest within ten (10) days
before delivery of possession of the Premises to Tenant and
thereafter, within thirty (30) days prior to the expiration of
each policy, and as often as any such policy shall expire or
terminate, renewal or additional policies shall be procured and
maintained in like manner and to like extent;
(d) shall contain a provision that the insurer will give to Landlord
and such other parties
12
<PAGE>
in interest at least thirty (30) days notice in writing in
advance of any cancellation, termination or lapse, or the
effective date of any reduction in the amount of insurance;
(e) shall be written as a primary policy which does not contribute to
and is not in excess of coverage which Landlord may carry; and
(f) shall contain a provision that Landlord and any such other parties
in interest, although named as an insured, shall nevertheless be
entitled to recover under said policies for any loss occasioned
to it, its servants, agents and employees by reason of the
negligence of Tenant.
4. Any insurance provided for in Section 10.1 may be maintained by
means of a policy or policies of blanket insurance, provided, however, that: (i)
Landlord and any other parties in interest from time to time designated by
Landlord to Tenant shall be named as additional insureds thereunder as their
interests may appear; (ii) the coverage afforded Landlord and any such other
parties in interest will not be reduced or diminished by reason of the use of
such blanket policy of insurance; and (iii) the requirements set forth in this
ARTICLE X are otherwise satisfied.
5. These insurance requirements are subject to commercially reasonable
modification in the event any Superior Mortgage (hereafter defined) of Landlord
requires different insurance. In such event, the reasonable requirements of such
Superior Mortgagee shall control provided such requirements do not unreasonably
increase Tenant's insurance premiums.
SECTION 10.2 LANDLORD'S INSURANCE. Landlord shall, at its expense (as
part of the Operating Costs), at all times during the term hereof, maintain or
cause to be maintained in effect coverage under a policy or policies of fire and
extended coverage insurance covering the Building, in an amount not less than
100% of the full replacement value (exclusive of the cost of excavation,
foundations and footings) providing protection against any peril generally
included within the classification (Fire Extended Coverage). Tenant shall be
named as an additional insured under Landlord's insurance on the Building. Prior
to the Commencement Date, Landlord shall deliver to Tenant a certificate of
insurance in form reasonably satisfactory to Tenant evidencing the insurance
required to be maintained by Landlord hereunder.
SECTION 10.3 WAIVER OF SUBROGATION. Landlord and Tenant release each
other, and their respective representatives from any claims for damages to the
Premises or the Building and other improvements in which the Premises are
located, and to the fixtures, personal property, tenant's improvements and
alterations of either Landlord or Tenant in the Premises or the Building that
are caused by or result from risks insured against (or required hereunder to be
insured against) under any property insurance policies carried by the parties
and enforce at the time of any such damage to the limits of any such coverage.
Each party shall cause each insurance policy obtained by it to provide that the
insurance company waive all right of recovery by way of subrogation against each
other in connection with any damage covered by any property insurance policy.
Neither parties shall be liable to the other for property damages caused by fire
or other casualty or any of the risks insured against under any property
insurance policy required by this Lease to the limits of any such property
insurance company.
SECTION 10.4 DESTRUCTION OF THE PREMISES OR BUILDING. If, during the
Term hereof, the Premises and/or the Building are damaged by reason of fire or
other casualty, Tenant shall give immediate notice thereof to Landlord. Subject
to the prior rights of any Superior Mortgagee, Landlord shall restore the
Premises and/or the Building to substantially the same condition they were in
immediately before said destruction. If the restoration can be accomplished
within 180 working days after the date Landlord receives notice of the
destruction, such destruction shall not serve to terminate this Lease. If the
restoration cannot be performed within the time stated in this Section, then
within ninety (90) days after the parties determine that the restoration cannot
be
13
<PAGE>
completed within said time, either party may terminate this Lease upon thirty
(30) days notice to the other party. If Tenant fails to terminate this Lease and
restoration is permitted under existing laws, Landlord, at its election, may
restore the Premises and/or the Building, within a reasonable period of time,
and this Lease shall continue in full force and effect. Rent shall be abated
during the period in which the Premises (or portion thereof on a prorated basis)
are rendered untenantable as a result of such damage, unless said damage was
caused by the negligence or intentional wrongful act of Tenant or its employees,
agents or invitees. Notwithstanding the foregoing, however, if the Premises
shall be damaged or destroyed to the extent untenantable, within the last twelve
(12) months of the Lease Term, either party shall have the right to terminate
this Lease, provided that notice thereof is given to the other party not later
than sixty (60) days after such damage or destruction. Should Landlord elect to
terminate this Lease, the entire insurance proceeds shall be and remain the
outright property of Landlord, subject to the prior rights of any Superior
Mortgagee, and except any proceeds received for Tenant's personal Property which
shall be the property of Tenant.
ARTICLE XI
ALTERATIONS AND CONSTRUCTION LIENS
SECTION 11.1 ALTERATIONS BY TENANT. No alterations shall be made by
Tenant unless the following conditions are met:
(a) Tenant shall have received the prior written consent of Landlord,
which consent shall not be unreasonably withheld. Tenant shall provide
a written request to the Landlord accompanied by plans for the
proposed alteration. Landlord shall approve or reject Tenant's request
within fifteen (15) days of Tenant's request. Landlord's failure to
deny the request within fifteen (15) days of Tenant's proposed
alterations shall constitute approval of the request. Landlord shall
not be entitled to receive any fee for any review of the request by
Tenant under Section 11.1.
(b) All such alterations or improvements shall be performed by
Landlord at Tenant's expense or by a contractor approved by Landlord,
which approval shall not be unreasonably withheld, and which shall be
granted or denied within fifteen (15) business days of Tenant's
request. In the event that Landlord does not act upon Tenant's request
within the time provided, then such contractor shall be deemed to have
been approved by Landlord.
(c) Landlord's approval of the plans, specifications and working
drawings for Tenant's alterations shall create no responsibility or
liability on the part of Landlord for their completeness, design
sufficiency, or compliance with all laws, rules and regulations of
governmental agencies or authorities;
(d) Tenant shall have procured all permits, licenses and other
authorizations required for the lawful and proper undertaking thereof.
Tenant shall assume full responsibility for compliance with any laws,
codes or regulations, including associated costs for same, and
specifically including changes to the Building which such Tenant
alterations require, even if codes, laws and regulations in effect
when the Building was originally constructed would not have
required such changes. Tenant shall not otherwise be responsible for
code compliance matters relating to the original construction of the
Building.
(e) all alterations when completed shall be of such a nature as not to
(i) reduce or otherwise adversely affect the value of the Premises;
(ii) diminish the general utility or change the general character
thereof; (iii) result in an increase of the Operating Expenses, beyond
the Operating Expense cap described above; or (iv) adversely affect
14
<PAGE>
the mechanical, electrical, plumbing, security or other such systems
of the Building or the Premises;
(f) all alterations made by Tenant shall remain on and be surrendered
with the Premises on expiration or earlier termination of this Lease,
except that Landlord can elect, simultaneously with Landlord's
approval, to require Tenant to remove any and all alterations Tenant
has made to the Premises. With respect to alterations which the Tenant
proposes to make after Landlord's approval of the initial leasehold
improvements, Landlord, in connection with Landlord's approval of
Tenant's plans for alterations, may condition approval upon the
Tenant's agreement to remove and repair or pay to the Landlord the
cost of repairing any damage to the Premises or the Building resulting
from such installation and/or removal of Tenant's property and the
costs of restoring the premises to the same physical condition and
layout as they existed at the time Tenant was given possession of the
Premises, normal wear and tear and Tenant's initial leasehold
improvements and subsequent alterations approved by the Landlord
excepted. If Landlord does not require removal in connection with its
approval of any alteration by the Tenant, then Tenant shall not be
obligated for removal of such alterations or for the cost of repairing
connection with damage related to such removal.
(g) Notwithstanding anything contained in this Section to the
contrary, Tenant shall not be obligated to obtain Landlord's consent
for alterations to the Premises which do not require a building
permit, have a value of less than $5,000, are not visible from the
exterior of the Building, and do not affect the Building structure.
SECTION 11.2 CONSTRUCTION REQUIREMENTS.
A. The following items must be submitted to Landlord's representative prior to
commencement of Tenant's alterations:
(l) two final and complete sets of Construction Documents, prepared by a
licensed Architect, that will be used for obtaining a building permit and
for construction purposes;
(2) a copy of building permit;
(3) a copy of a Certificate.of Insurance form from the General Contractor's
insurance agent naming the Landlord as an additional insured;
(4) a list of all subcontractors from the General Contractor who will
be providing materials and/or services to the Premises.
(5) prior to commencement of construction, Tenant must procure a
construction dumpster for the disposal of all construction materials.
The Building dumpster may not be used for this purpose.
B. The following items must be submitted to Landlord's representative upon
completion of Tenant's alterations:
(l) copy of Certificate of Occupancy;
(2) final Releases of Lien from all subcontractors;
(3) copy of Contractor's Affidavit.
15
<PAGE>
SECTION 11.3 CONSTRUCTION LIENS. Tenant agrees that it will make full
and prompt payment of all sums necessary to pay for the cost of repairs,
alterations, improvements, changes or other work done by Tenant to the Premises
and further agrees to indemnify and hold harmless Landlord from and against any
and all such costs and liabilities incurred by Tenant, and against any and all
construction liens arising out of or from such work or the cost thereof which
may be asserted, claimed or charged against the Premises or the Building or site
on which it is located. Notwithstanding anything to the contrary in this Lease,
the interest of Landlord in the Premises shall not be subject to liens for
improvements made by or for Tenant, whether or not the same shall be made or
done in accordance with any agreement between Landlord and Tenant, and it is
specifically understood and agreed that in no event shall Landlord or the
interest of Landlord in the Premises be liable for or subjected to any
construction liens for improvements or work made by or for Tenant; and this
Lease specifically prohibits the subjecting of Landlord's interest in the
Premises of any construction liens for improvements made by Tenant or for which
Tenant is responsible for payment under the terms of this Lease. All persons
dealing with Tenant are hereby -placed upon notice of this provision. In the
event any notice or claim of lien shall be asserted of record against the
interest of Landlord in the Premises or Building or the site on which it is
located on account of or growing out of any improvement or work done by or for
Tenant, or any person claiming by, through or under Tenant, for improvements or
work the cost of which is the responsibility of Tenant, Tenant agrees to have
such notice of claim of lien cancelled and discharged of record as a claim
against the interest of Landlord in the Premises, the Building or the Property
(either by payment or bond as permitted by law), within twenty (20) days after
notice to Tenant by Landlord, and in the event Tenant shall fail to do so,
Tenant shall be considered in default under this Lease.
ARTICLE XII
ASSIGNMENT AND SUBLETTING
SECTION 12.1 TENANT'S TRANSFER.
(a) Tenant shall not voluntarily assign or encumber its interest in
this Lease or in the Premises, or sublease all or any part of the Premises, or
allow any other person or entity (except Tenant's authorized representatives) to
occupy or use all or any part of the Premises, without first obtaining
Landlord's written consent, which consent shall not be unreasonably withheld.
Any assignment, encumbrance or sublease without Landlord's written consent shall
be voidable and, at Landlord's election, shall constitute a default hereunder.
No consent to any assignment, encumbrance, or sublease shall constitute a
further waiver of the provisions of this Section. Notwithstanding anything
continued in this Section to the contrary, Landlord's consent shall not be
required in the case of an assignment or sublet to any affiliate of Tenant.
(b) If Tenant is a partnership, a withdrawal or change, voluntary,
involuntary, or by operation of law, of any partner/or partners owning 50% or
more of the partnership, or the dissolution of the partnership, shall be deemed
a voluntary assignment.
(c) If Tenant is a corporation, any dissolution, merger, consolidation
or other reorganization of Tenant, or the sale or transfer of a controlling
percentage of the capital stock of Tenant, or the sale of 51% of the total
combined voting power of all classes of Tenant's capital stock issued,
outstanding, and entitled to vote for the election of directors, shall be deemed
a voluntary assignment subject to Paragraph (a) above. This Section 12.1(c)
shall not apply in the event the surviving entity's net worth is equal to or
greater than Tenant's net worth as of the date hereof.
(d) Landlord may consent to the sublease of all or any part of the
Premises provided Tenant and the sublessee enter into a sublease incorporating
the same terms and conditions as
16
<PAGE>
contained herein (exclusive of rent), and Landlord and Tenant shall share
equally in any increased Rent, including sales tax, paid by a sublessee or
assignee.
(e) Any assignment agreed to by Landlord shall be evidenced by a
validly executed Assignment and Assumption of Lease Agreement. Any attempted
transfer, assignment, subletting, mortgaging or encumbering of this Lease in
violation of this Section shall be void and confer no rights upon any third
person. Such attempt shall constitute a material breach of this Lease and
entitle Landlord to the remedies provided for default.
(f) If, without such prior written consent, this Lease is transferred
or assigned by Tenant, or if the Premises, or any part thereof, are sublet or
occupied by anybody other than Tenant, whether as a result of any act or
omission by Tenant, or by operation of law or otherwise, Landlord may, in
addition to and not in diminution of, or substitution for, any other rights and
remedies under this Lease, or pursuant to law to which Landlord may be entitled
as a result thereof, collect Rent directly from the transferee, assignee,
subtenant or occupant and apply the net amount collected to the Rent herein
reserved.
SECTION 12.2 TENANT'S LIABILITY. Notwithstanding any assignment or
sublease, and notwithstanding the acceptance of Rent by Landlord from any such
assignee or sublessee, Tenant shall continue to remain liable for the payment of
Rent hereunder and for the performance of all of the agreements, conditions,
covenants and terms herein contained.
SECTION 12.3 LANDLORD'S TRANSFER. Landlord shall have the right to
sell, assign, mortgage, or otherwise encumber or dispose of Landlord's interest
in the Premises, the Building, the Property and this Lease subject to Article
XX, below, and provided any assignee or future Landlord agrees to be bound by
the terms of Section 4.1 hereof relating to the repayments of Tenant's security
deposit.
ARTICLE XIII
OBLIGATIONS
SECTION 13.1 OBLIGATIONS OF TENANT. Tenant shall, during the Term of
this Lease, at its sole cost and expense, comply with all valid laws,
ordinances, regulations, orders and requirements of any governmental authority
which may now or hereafter be applicable to the Premises or to its use, whether
or not the same shall interfere with the use or occupancy of the Premises,
arising from (a) Tenant's use of the Premises; (b) the manner or conduct of
Tenant's business or operation of its installations, equipment or other property
therein; (c) any cause or condition created by or at the instance of Tenant; or
(d) breach of any of Tenant's obligations hereunder, whether or not such
compliance requires work which is structural or non-structural, ordinary or
extraordinary, foreseen or unforeseen; and Tenant shall pay all of the costs,
expenses, fines, penalties and damages which may be imposed upon Landlord by
reason or arising out of Tenant's failure to fully and promptly comply with and
observe the provisions of this Section. Tenant shall give prompt notice to
Landlord of any notice it receives of the violation of any law or requirement of
any public authority with respect to the Premises or the use or occupation
thereof. Landlord represents that, upon the Commencement Date hereof, the
Premises shall be in compliance with the requirements of the Americans with
Disabilities Act. If, at any time during the Term hereof, it is determined that
the Premises are not in compliance, Landlord, at its expense, shall bring the
Premises into compliance, provided that such non-compliance was not caused by
alterations performed by Tenant, or as a result of Tenant's particular use of
the Premises. Landlord and Tenant agrees to defend, indemnify and save each
other harmless from and against all claims, loss, liability, cost and damages
including, but not limited to, suits, fines, judgments, claims for personal
injury or property damage arising out of any claim against the Landlord, or
17
<PAGE>
Tenant, respectively, the basis of which is the vioLation of an Americans with
Disabilities Act compliance obligation with respect to the Building or the
Premises for which the other party was responsible.
SECTION 13.2 RULES AND REGULATIONS. Tenant shall also comply with all
rules and regulations now existing (See Exhibit "E"), or as may be subsequently
applied by Landlord provided such additional rules and regulations do not
interfere with Tenant's normal conduct of business, and provided any future
rules or regulations imposed by Landlord are not in conflict with the terms of
this Lease, in which event the terms of this Lease shall control.
ARTICLE XIV
RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS
SECTION 14.1 PAYMENT OR PERFORMANCE. Landlord shall have the right,
upon ten (10) days prior written notice to Tenant (or without notice in case of
emergency or in order to avoid any fine, penalty, or cost which may otherwise be
imposed or incurred), following the expiration of any applicable cure period, to
make any payment or perform any act required of Tenant under any provision in
this Lease, and in exercising such right, to incur necessary and incidental
costs and expenses, including reasonable attorney's fees. Nothing herein shall
imply any obligation on the part of Landlord to make any payment or perform any
act required of Tenant, and the exercise of the right to do so shall not
constitute a release of any obligation or a waiver of any default.
SECTION 14.2 REIMBURSEMENT. All payments made and all reasonable costs
and expenses incurred in connection with Landlord's exercise of the right set
forth in Section 14.1, shall be reimbursed by Tenant within ten (10) days after
receipt of a bill setting forth the amounts so expended, together with interest
at the annual rate of Prime plus 2% from the respective dates of the making of
such payments or the incurring of such costs and expenses. Any such payments,
costs and expenses made or incurred by Landlord may be treated as Additional
Rent owed by Tenant.
ARTICLE XV
NON-LIABILITY AND INDEMNIFICATION
SECTION 15.1 NON-LIABILITY OF LANDLORD. Neither Landlord, nor any
beneficiary, joint venture partner, agent, servant, or employee of Landlord, nor
any Superior Mortgagee (as defined in Article XX below), shall be liable to
Tenant for any loss, injury, or damage to Tenant or to any other person, or to
its property, unless caused by or resulting from the negligence or intentional
wrongful act of Landlord, its agents, servants or employees, in the operation or
maintenance of the Premises or the Building, subject to the doctrine of
comparative negligence in the event of contributory negligence on the part of
Tenant or any of its subtenants, licensees, employees, agents or contractors.
Tenant recognizes that any Superior Mortgagee will not be liable to Tenant for
injury, damage or loss caused by or resulting from the negligence of Landlord.
Further, neither Landlord, nor any Superior Mortgage, nor any joint venture
partner, director, officer, agent, servant, or employee of Landlord shall be
liable (a) for any such damage caused by other tenants or persons in, upon or
about the Building, or caused by operations in construction of any private,
public or quasi-public work; or (b) for incidental or consequential damages or
lost profits arising out of any loss of use of the Premises, or any equipment or
facilities therein, by Tenant or any person claiming through or under Tenant.
18
<PAGE>
SECTION 15.2 INDEMNIFICATION
(a) Tenant hereby agrees to indemnify Landlord and hold it harmless
from and against all claims, actions, damages, liability, and expenses which may
arise in connection with bodily injury, loss of life, and/or damage to property
arising from or out of any occurrence in, upon, or at the Demised Premises, or
the occupancy or use by Tenant of the Demised Premises or any part thereof, or
occasioned totally or in part by any negligent act or omission of Tenant, its
agents, contractors, employees, servants, or subtenants unless such damage is
due to the negligent or wrongful act or omission of Landlord, its agents or
employees. In case Landlord shall, without fault on its part, be made a party to
any litigation commenced by or against Tenant in connection with the Demised
Premises, Tenant hereby agrees to hold Landlord harmless and pay all costs,
expenses, and reasonable attorney's fees and costs incurred by Landlord in
connection with such litigation. To the maximum extent permitted by law, Tenant
agrees to use and occupy the Demised Premises at Tenant's own risk, except as
otherwise provided herein and except for any loss or damage resulting from any
negligent or wrongful act or omission of Landlord, its agents or employees.
(b) Landlord shall indemnify, defend and save Tenant harmless from and
against any and all claims, actions, damages, liability and expense in
connection with loss of life, personal injury and/or damage to or destruction of
property arising from or out of any occurrence in, upon or at the common areas,
or occasioned wholly in or part by any act or omission of Landlord, its agents,
contractors, employees or servants, unless such damage is due to the negligent
or wrongful act or omission of Tenant, its agents or employees. In case Tenant,
without fault on its part, shall be made a part to any such litigation without
fault on its part, commenced by or against Landlord, then Landlord shall protect
and hold Tenant harmless and pay all costs and attorneys' fees incurred by
Tenant in connection with such litigation, and any appeals thereof.
SECTION 15.3 INDEPENDENT OBLIGATIONS; FORCE MAJEURE. If either party
to this Lease, as the result of any (i) strikes, lockouts or labor disputes,
(ii) inability to obtain labor or materials or reasonable substitutes therefor,
(iii) acts of God, governmental action, condemnation, civil commotion, fire or
other casualty, or (iv) other conditions similar to those enumerated in this
Section (other than inability to pay monies due under this Lease) beyond the
reasonable control of the party obligated to perform, fails punctually to
perform any non-monetary obligation on its part to be performed under this
Lease, then such failure shall be excused and not be a breach of this Lease by
the party in question, but only to the extent occasioned by such event. Except
as expressly set forth herein, Landlord shall not be liable to Tenant for any
failure or defect in the supply, quantity or character of electricity or water
furnished to the Premises, by reason of any requirement, act or omission of the
public utility or others serving the Buildings with electric energy, steam, oil,
gas or water, or for any other reason whether similar or dissimilar, beyond
either party's reasonable control. Tenant shall not hold Landlord liable for any
latent defect in the Premises (provided, however, Landlord shall repair any
damage resulting from a latent defect upon notice from Tenant) or the Building
nor shall Landlord be liable for injury or damage to person or property caused
by fire, theft, heating or air-conditioning or lighting apparatus, or from
falling plaster, or from steam, gas, electricity, water, rain, or dampness,
which may leak or flow from any part of the Buildings, or from the pipes,
appliances or plumbing work of the same, unless caused by the negligence of
Landlord, its agents or employees.
ARTICLE XVI
DEFAULT
SECTION 16.1 EVENTS OF DEFAULT. Tenant shall be in default under this
Lease if any one or more of the following events shall occur:
19
<PAGE>
(a) Tenant shall fail to pay any installment of the Rent and/or any
expenses called for hereunder as and when the same shall become due
and payable, and such default shall continue for a period of ten (10)
days after receipt of written notice that the same is due; or
(b) Tenant shall default in the performance of or compliance with any
of the other terms or provisions of this Lease, and such default shall
continue for a period of thirty (30) days after the giving of written
notice thereof from Landlord to Tenant, or, in the case of any such
default which cannot, with bona fide due diligence, be cured within
said thirty (30) days, Tenant shall fail to proceed within said thirty
(30) day period to cure such default and thereafter to prosecute the
curing of same with all due diligence (it being intended that as to a
default not susceptible of being cured with due diligence within such
period of thirty (30) days, the time within which such default may be
cured shall be extended for such period as may be necessary to permit
the same to be cured with due diligence); or
(c) Tenant shall assign, transfer, mortgage or encumber this Lease or
sublet the Premises in a manner not permitted by ARTICLE XII; or
(d) Tenant shall file a voluntary petition in bankruptcy or any Order
for Relief be entered against it, or shall file any petition or answer
seeking any arrangement, reorganization, composition, readjustment or
similar relief under any present or future bankruptcy or other
applicable law, or shall seek or consent to or acquiesce in the
appointment of any trustee, receiver, or liquidator of Tenant of all
or any substantial part of Tenant's properties; or
(e) If any creditor of Tenant shall file a petition in bankruptcy
against Tenant or for reorganization of Tenant, under state or federal
law, and if such petition is not discharged within ninety (90) days
after the date on which it is filed; or
then, and in any such event, or during the continuance thereof (subject to the
time period described in subparagraph (e) above), Landlord may, at its option,
by written notice to Tenant, designate a date not less than five (5) days from
the giving of such notice on which this Lease shall end, and thereupon, on such
date, this Lease and all rights of Tenant hereunder shall terminate.
SECTION 16.2 SURRENDER OF PREMISES. Upon any such termination of this
Lease, Tenant shall surrender the Premises to Landlord, and Landlord, at any
time after such termination, may, without further notice, re-enter and repossess
the Premises without being liable to any prosecution or damages therefore.
SECTION 16.3 RELETTING. At any time or from time to time after any
such termination of this Lease, Landlord may relet the Premises or any part
thereof, in the name of Landlord or otherwise, for such term or terms and on
such conditions as Landlord, in its sole discretion, may determine, and may
collect and receive the rents therefore. Landlord shall in no way be responsible
or liable for any failure to relet the Premises or any part thereof or for any
failure to collect any rent due upon any such reletting.
SECTION 16.4 SURVIVAL OF OBLIGATIONS. No termination, pursuant to this
ARTICLE XVI, shall relieve Tenant of its liability and obligations under this
Lease, and such liability and obligations shall survive any such termination.
SECTION 16.5 HOLDOVER. Should Tenant hold over and remain in
possession of the Premises at the expiration of any Term hereby created, Tenant
shall, by virtue of this Section, become a Tenant at sufferance and shall pay
Landlord 150% of the Rent per month of the last
20
<PAGE>
monthly installment of Rent above provided to be paid. Said tenancy at
sufferance shall be subject to all the conditions and covenants of this Lease as
though the same had been a tenancy at sufferance instead of a tenancy as
provided herein, and Tenant shall give to Landlord at least thirty (30) days
prior written notice of any intention to vacate the Premises, and shall be
entitled to ten (10) days prior notice of any intention of Landlord to evict
Tenant from the Premises in the event Landlord desires possession of the
Premises; provided, however, that said Tenant at sufferance shall not be
entitled to ten (10) days notice in the event the said Rent is not paid in
advance without demand, the ten (10) days written notice otherwise required
being hereby expressly waived.
SECTION 16.6 DEFAULT BY LANDLORD. If Landlord shall violate, neglect
or fail to perform or observe any of the representations, covenants, provisions,
or conditions contained in the Lease on its part to be performed or observed,
which default continues for a period of more than thirty (30) days after receipt
of written notice from Tenant specifying such default, or if such default is of
a nature to require more than thirty (30) days for remedy and continues beyond
the time reasonably necessary to cure, Tenant may, upon further written notice
to Landlord, and after providing Landlord with an additional thirty (30) day
cure period thereafter, incur any reasonable expense necessary to perform the
obligation of Landlord specified in such notice and bill Landlord for the
reasonable costs thereof. All remedies of Tenant provided for herein or
otherwise at law or in equity, shall be cumulative and concurrent.
ARTICLE XVII
DAMAGES/REMEDIES
SECTION 17.1 DAMAGES. In the event this Lease is terminated under the
provisions or any provisions of law by reason of default hereunder on the part
of Tenant, Tenant shall pay to Landlord sums equal to the Rent which would have
been payable by Tenant had this Lease not been so terminated, payable upon the
due dates therefor following such termination through the Expiration Date of
this Lease, less the fair market value of the Premises during the terminated
portion of the Lease Term.
If Landlord, at its option shall relet the Premises during said
period, Landlord shall credit Tenant with the net rents received by Landlord
from such reletting, such net rents to be determined by first deducting from the
gross rents, as and when received by Landlord, the expenses incurred or paid by
Landlord in terminating this Lease and in securing possession thereof, as well
as the expenses of reletting, including, without limitation, the alteration and
preparation of the Premises for new tenants, brokers' commissions, attorneys'
fees and all other expenses properly chargeable against the Premises and the
rental therefrom. It is hereby understood that any such reletting may be for a
period shorter or longer than the remaining Term of this Lease but in no event
shall Tenant be entitled to receive any excess of such net rents over the sum
payable by Tenant to Landlord hereunder, nor shall Tenant be entitled in any
suit for the collection of damages pursuant hereto to a credit in respect of any
net rents from a reletting, except to the extent that such rents are actually
received by Landlord.
SECTION 17.2 REMEDIES. Lawsuits for the recovery of such damages, or
any installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the Term of this Lease would have expired, nor
limit or preclude recovery by Landlord against Tenant of any sums or damages
which, in addition to the damages particularly provided above, Landlord may
lawfully be entitled by reason of any default hereunder on the part of Tenant.
All remedies of Landlord provided for herein, or otherwise at law or in equity,
shall be cumulative and concurrent.
21
<PAGE>
ARTICLE XVIII
EMINENT DOMAIN
SECTION 18.1 TAKING. If any part of the Building or if more than 20%
of the Property shall be taken by condemnation (or by voluntary conveyance upon
notice of condemnation) or in any other manner for any public or quasi- public
use or purpose, which materially affects Tenant's use and occupancy of the
Premises, then Tenant, at its option, may terminate this Lease as of the date of
vesting of title as a result of such taking, and the Base Rent and Additional
Rent shall be prorated and adjusted as of such date.
SECTION 18.2 AWARD. Landlord shall be entitled to receive the entire
award or payment in connection with any taking without deduction therefrom,
except to the extent that Tenant shall be entitled to compensation based upon
damages sustained to Tenant's Property. Tenant shall not -be precluded from
taking its own action against the condemning authority to the extent allowable
by law.
SECTION 18.3 TEMPORARY TAKING. If the temporary use or occupancy of
all or any part of the Premises shall be taken by condemnation or in any other
manner for any public or quasi-public use or purpose during the Term of this
Lease, Tenant shall be entitled, except as hereinafter set forth, to receive
that portion of the award or payment for such taking which represents
compensation for the use and occupancy of the Premises, for the taking of
Tenant's Property and for moving expenses, and Landlord shall be entitled to
receive that portion which represents reimbursement for the cost of restoration
of the Premises. This Lease shall be and remain unaffected by such taking and
Tenant shall continue to pay the Rent in full when due. If the period of
temporary use or occupancy shall extend beyond the Expiration Date of this
Lease, that part of the award which represents compensation for the use and
occupancy of the Premises (or a part thereof) shall be divided between Landlord
and Tenant so that Tenant shall receive so much thereof as represents the period
up to and including such Expiration Date and Landlord shall receive so much as
represents the period after such Expiration Date. All monies received by
Landlord as, or as part of, an award for temporary use and occupancy for a
period beyond the date through which the Rent has been paid by Tenant, shall be
held and applied by Landlord as a credit against the Rent becoming due
hereunder.
SECTION 18.4 PARTIAL TAKING. In the event of any taking of less than
the whole of the Premises, the Building and/or the Property, which does not
result in termination of this Lease: (a) subject to the prior rights of a
Superior Mortgagee, Landlord, at its expense, shall proceed with reasonable
diligence to repair the remaining parts of the Building and the Premises (other
than those parts of the Premises which are Tenant's Property) to substantially
their former condition to the extent that the same is feasible (subject to
reasonable changes which Landlord shall deem desirable), so as to constitute a
complete and tenantable Building and Premises; and (b) Tenant, at its expense,
shall proceed with reasonable diligence to repair the remaining parts of the
Premises which are deemed Tenant's Property pursuant hereto, to substantially
their former condition to the extent feasible, subject to reasonable changes
which Tenant shall deem desirable, and limited to the extent of the condemnation
award funds made available to Tenant for such purpose. Such work by Tenant shall
be deemed alterations as described in Section 11.1 hereinabove. In the event of
any partial taking, Tenant shall be entitled to a reduction in Rent for the
remainder of the Lease Term following such partial taking based upon the
percentage of space taken relative to the original Premises leased.
22
<PAGE>
ARTICLE XIX
QUIET ENJOYMENT
SECTION 19.1 QUIET ENJOYMENT. Landlord agrees that Tenant, upon paying
all Rent and all other charges herein provided for and observing and keeping the
covenants, agreements, terms and conditions of this Lease and the rules and
regulations of Landlord affecting the Premises on its part to be performed,
shall lawfully and quietly hold, occupy and enjoy the Premises during the Term
of this Lease.
ARTICLE XX
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
SECTION 20.1 SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE. A. On or
before thirty (30) days from the date hereof, Landlord covenants to obtain from
each lender the security for whose loan encumbers the Property (and each lessor
whose interest in the Property is paramount to Landlord's ("Overlessor") at the
time of execution hereof, an executed nondisturbance agreement assuring Tenant
that, notwithstanding any default by Landlord to the lender or Overlessor or any
foreclosure or deed in lieu thereof (or Overlessor's termination proceedings),
Tenant's rights under this Lease shall continue in full force and effect and its
possession of the Premises shall remain undisturbed, except in accordance with
the provisions of this Lease, so long as Tenant is not in default hereunder so
as to permit Lease termination. Such agreement(s) shall be substantially in form
and content as Exhibit "H" attached hereto. If Landlord breaches its
obligations(s) hereunder, Tenant may terminate this Lease by written notice to
Landlord at any time prior to Tenant's receipt of all required nondisturbance
agreements.
B. Tenant shall, upon Landlord's request, subordinate this Lease in
the future to any mortgage lien placed by Landlord upon the Project or any part
thereof, provided that such lender executes a nondisturbance agreement providing
that if Tenant is not then in default under this Lease, this Lease shall not
terminate as a result of the foreclosure of such lien, or conveyance in lieu
thereof, and Tenant's rights under this Lease shall continue in full force and
effect and its possession shall be undisturbed, except in accordance with the
provisions of this Lease. Tenant will, upon request of the lienholder, be a
party to such an agreement, and will agree that, if such lienholder succeeds to
the interest of Landlord, Tenant will recognize said lienholder (or successor in
interest of the lienholder) as its Landlord under the terms of this Lease. Such
agreement shall be substantially in form and content as Exhibit "H" attached
hereto.
SECTION 20.2 NOTICE TO LANDLORD AND SUPERIOR MORTGAGEE. If any act or
omission of Landlord would give Tenant the right, immediately or after the lapse
of a period of time, to cancel this Lease or to claim a partial or total
eviction, Tenant shall not exercise such light (a) until it has given written
notice of such act or omission to Landlord and any Superior Mortgagee whose name
and address shall previously have been furnished to Tenant; and (b) until a
reasonable period of time for remedying such act or omission shall have elapsed
following the giving of such notice and following the time when such Superior
Mortgagee shall have become entitled under such Superior Mortgage to remedy the
same.
23
<PAGE>
ARTICLE XXI
LANDLORD'S RIGHT OF ACCESS
SECTION 21.1 ACCESS FOR MAINTENANCE AND REPAIR. Landlord reserves the
right, and Tenant shall permit Landlord, to install, erect, use and maintain
pipes, ducts and conduits in and through the Premises. Landlord shall be allowed
to take all materials into and upon the Premises that may be required in
connection therewith, without any liability to Tenant and without any reduction
of Tenant's covenants and obligations hereunder. Landlord and its agents shall
have the right to enter upon the Premises for the purpose of making any repairs
therein or thereto which shall be considered necessary or desirable by Landlord,
in such a manner as not to unreasonably interfere with Tenant in the conduct of
Tenant's business on the Premises. Landlord shall use reasonable efforts to
provide Tenant with reasonable notice prior to entering the Premises, except in
the case of emergency, and shall use its best efforts to minimize interference
with Tenant's conduct of business.
SECTION 21.2 ACCESS FOR INSPECTION AND SHOWING. Upon reasonable notice
to Tenant and during normal business hours, Landlord and its agents shall have
the right to enter and/or pass through the Premises to examine the Premises and
to show them to actual and prospective purchasers, mortgagees or lessors of the
Building. During the period of six (6) months prior to the Expiration Date of
this Lease, Landlord and its agents may exhibit the Premises to prospective
tenants. Landlord shall use reasonable efforts to identify such guests except in
the event anonymity is requested.
SECTION 21.3 LANDLORD'S ALTERATIONS AND IMPROVEMENTS. If, at any time,
any windows of the Premises are temporarily darkened or obstructed by reason of
any repairs, improvements, maintenance and/or cleaning in or about the Building,
or if any part of the Building, other than the Premises, is temporarily or
permanently closed or inoperable, the same shall be without liability to
Landlord and without any reduction or diminution of Tenant's obligations under
this Lease.
ARTICLE XXII
SIGNS AND OBSTRUCTIONS
SECTION 22.1 SIGNS. Tenant shall not place or suffer to be placed or
maintained upon any exterior door, roof, wall or window of the Premises or the
Building, any sign, awning, canopy or advertising matter of any kind, and will
not place or maintain any decoration, lettering or advertising matter on the
glass of any window or door of the Premises except as approved by Landlord, and
will not place or maintain any freestanding standard within or upon the Common
Area of the Building or immediately adjacent thereto; without first obtaining
Landlord's express prior written consent. No exterior or interior sign visible
from the exterior of the Building shall be permitted. Tenant further agrees to
maintain any such signage approved by Landlord in good condition and repair at
all times and to remove the same at the end of the Term of this Lease if
requested by Landlord. Upon removal thereof, Tenant agrees to repair any damage
to the Premises caused by such installation and/or removal. Notwithstanding
anything contained in this Section 22.1 to the contrary, Tenant shall have the
right to install its sign on the Building in accordance with Exhibit "I"
attached hereto, the location and specifications of which shall be subject to
Landlord's prior approval, and all appropriate governmental approvals. Tenant,
at Tenant's sole cost and expense, shall be responsible for maintaining such
signage and, upon expiration or earlier termination of this Lease, Tenant shall
remove same and repair any damage to the Building resulting from the
installation of Tenant signage.
SECTION 22.2 OBSTRUCTIONS. Tenant shall not obstruct the
sidewalks; parking lots or other public portions of the Building or the
Property in any manner whatsoever.
24
<PAGE>
ARTICLE XXIII
NOTICES
SECTION 23.1 NOTICES. Any notices required or permitted to be given
under this Agreement shall be in writing and shall be deemed to have been given
if delivered by hand, sent by recognized overnight courier (such as Federal
Express), telecopied (followed by overnight courier) or mailed by certified or
registered mail, return receipt requested, in a postage prepaid envelope, and
addressed as follows:
If to Landlord: Camtech Associates, c/o Stiles Property
Management
6400 North Andrews Avenue
Fort Lauderdale, Florida 33309
Attn: Vickie Baisden
Fax No.: (305) 776-9188
With a copy to: Stiles Corporation
6400 North Andrews Avenue
Fort Lauderdale, Florida 33309
Attn: Legal Department
Fax No.: (305) 776-9386
If to Tenant Homeowners Group, Inc.
400 Sawgrass Parkway
Sunrise, Florida 33325
Attn:____________________________
Fax No.: (305)___________________
With a copy to: Homeowners Group, Inc.
400 Sawgrass Parkway
Sunrise, Florida 33325
Attn: Maxine A. Gutman, Esq.
Fax No.: (305)____________________
With a copy to: Holland & Knight
One East Broward Boulevard, Suite 1300
Fort Lauderdale, Florida 33301
Attn: James M. Norman, Esq.
Telephone: (305) 525-1000
Fax No.: (305) 463-2030
Notices personally delivered or sent by overnight courier shall be
deemed given on the date of delivery, notices telecopied (and followed by
overnight courier) shall be deemed given on the date of telecopy, with
confirmation of sending, and notices otherwise mailed in accordance with the
foregoing shall be deemed given five (5) days after deposit in the U.S. mails.
ARTICLE XXIV
MISCELLANEOUS
SECTION 24.1 SUBSTITUTE PREMISES.
INTENTIONALLY DELETED
25
<PAGE>
SECTION 24.2 ENVIRONMENTAL INDEMNITY. Landlord and Tenant agree to
indemnify and hold each other harmless from and against any and all loss, claim,
liability, damages, injuries to person, property, or natural resources, cost,
expense, action or cause of action, arising in connection with the release or
presence of any "Hazardous Substances" at or about the Building, through the
acts of the other party, its employees, agents or invitees acting with the other
party's authority, whether foreseeable or unforeseeable, regardless of the
source of such release and when such release occurred or such presence is
discovered. The foregoing indemnity includes, without limitation all costs in
law or in equity of removal, remediation of any kind, and disposal of such
Hazardous Substances, all costs of determining whether the Premises is in
compliance and to cause the Premises to be in compliance with all applicable
environmental laws, all costs associated with claims for damages to persons,
property, or natural resources, and either party's reasonable attorneys' and
consultants' fees and court costs. This indemnity shall survive the expiration
or earlier termination of this Lease. For the purposes of definition, Hazardous
Substances means any toxic or hazardous wastes, pollutants or substances,
including, without limitation, asbestos, PBCs, - petroleum products and
by-products, substances defined or listed as "hazardous substances" or "toxic
substances" or similarly identified in or pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9061 ET. SEQ., hazardous materials identified in or pursuant to
the Hazardous Materials Transportation Act 49 U.S.C. Section 1802 et seq.
Landlord represents that, to the best of its knowledge, no hazardous substances
exist in the Building or on the Property at the time Landlord tenders possession
of the Premises to Tenant for commencement of construction of Tenant
Alterations.
SECTION 24.3 RADON GAS. Pursuant to Florida Statutes, Section
404.056[8], the following disclosure is required by law: Radon is a naturally
occurring radioactive gas that, when it has accumulated in a building in
sufficient quantities, may present health risks to persons who are exposed to it
over time. Levels of radon that exceed federal and state guidelines have been
found in buildings in Florida. Additional information regarding radon and radon
testing may be obtained from your county public health unit.
SECTION 24.4 BROKER COMMISSION. Landlord and Tenant covenant, warrant
and represent that Stiles Realty Co., Commercial Florida Realty Partners, Inc.
and Cushman & Wakefield of Florida (hereinafter collectively "Brokers") were
instrumental in bringing about and/or consummating this Lease. Further,
neither Landlord nor Tenant have had any conversations or negotiations with any
broker except those Brokers concerning the leasing of the Premises. Both parties
agree to indemnify the other against and from any claims for any brokerage
commissions (except those payable to Brokers) and all costs, expenses and
liabilities in connection therewith, including, without limitation, reasonable
attorneys' fees and expenses, for any breach of the foregoing. This indemnity
shall survive the expiration or earlier termination of this Lease. Landlord
shall pay all brokerage commissions due Brokers in accordance with a separate
agreement between Landlord and Broker.
SECTION 24.5 FINANCIAL STATEMENTS. Throughout the Term of this Lease,
Tenant shall provide Landlord, at the request of Landlord but not more than once
annually, its most current and complete annual report and financial statement.
SECTION 24.6 ESTOPPEL CERTIFICATES. Each party agrees, at any time and
from time to time as requested by the other party, to execute and deliver to the
other a statement certifying that this Lease is unmodified and in full force and
effect (or if there have been modifications, that the same is in full force and
effect as modified and stating the modifications), certifying the dates to which
the Base Rent and Additional Rent have been paid, stating whether or not the
other party is in default in performance of any of its obligations under this
Lease, and, if so, specifying each such default, and stating whether or not any
event has occurred which, with the giving of notice or passage of time, or both,
would constitute such a default, and, if so, specifying each such event. Each
party shall also include in any such statements such other information
concerning this Lease
26
<PAGE>
as the other party may reasonably request. In the event either party fails to
comply with this Section, such failure shall constitute a material breach of the
Lease. If Tenant fails to execute the initial Estoppel Certificate, Rent shall
continue to accrue, but Landlord shall be under no obligation to deliver
possession of the Premises.
SECTION 24.7 NO RECORDATION. This Lease shall not be recorded by
Tenant in the Public Records of Broward County, Florida, or in any other place.
Any attempted recordation by Tenant shall render this Lease null and void and
entitle Landlord to the remedies provided for Tenant's default. However, at the
request of either party, both parties shall promptly execute, acknowledge and
deliver to Landlord a Memorandum of Lease with respect to this Lease, and a
Memorandum of Modification of Lease with respect to any modification of this
Lease, sufficient for recording. Such Memorandum shall not be deemed to change
or otherwise affect any of the obligations or provisions of this Lease. The
party requesting said Memorandum of Lease shall pay for its preparation and
recording.
SECTION 24.8 GOVERNING LAW. This Lease shall be governed by and
construed in accordance with the laws of the State of Florida. If any provision
of this Lease or the application thereof to any person or circumstance shall,
for any reason and to any extent, be invalid or unenforceable, the remainder of
this Lease shall remain in full force and effect. The table of contents,
captions, headings and titles in this Lease are solely for convenience of
reference and shall not affect its interpretation. This Lease shall be construed
without regard to any presumption or other rule requiring construction against
the party causing this Lease to be drafted. Each covenant, agreement,
obligation, or other provision of this Lease on Tenant's part to be performed,
shall be deemed and construed as a separate and independent covenant of Tenant,
not dependent on any other provision of this Lease. All terms and words used in
this Lease, regardless of the number or gender in which they are used, shall be
deemed to include any other number and any other gender, as the context may
require.
SECTION 24.9 RELATIONSHIP OF PARTIES. Nothing contained in this Lease
will be deemed or construed to create a partnership or joint venture between
Landlord and Tenant, or to create any other relationship between the parties
other than that of Landlord and Tenant
SECTION 24.10 CAPACITY TO EXECUTE LEASE. If Tenant is other than a
natural person, Tenant represents that it is legally constituted, in good
standing and authorized to conduct business in the State of Florida. Tenant
further represents that the person who is executing this Lease on its behalf has
the full power and authority to perform such execution and deliver the Lease to
Landlord, and that upon such execution and delivery, the Lease shall be valid
and binding upon Tenant in accordance with its respective terms and conditions.
To further evidence the foregoing, upon request by Landlord, Tenant shall
deliver to Landlord an appropriate corporate or partnership resolution
specifying that the signator to the Lease has been duly authorized to execute
same on behalf of Tenant.
SECTION 24.11 EXCULPATION. Landlord's and Tenant's obligations and
liability to each other with respect to this Lease shall be limited solely to
Landlord's interest in the Property and Tenant's leasehold interest, and neither
Landlord nor Tenant, nor any of the partners of either party, nor any officer,
director, or shareholder of either party, shall have any personal liability
whatsoever with respect to this Lease.
SECTION 24.12 WAIVER OF TRIAL BY JURY. It is mutually agreed by and
between Landlord and Tenant that the respective parties hereto shall, and they
hereby do, waive trial by jury in any action, proceeding or counterclaim brought
by either of the parties against the other on any matter arising out of or in
any way connected with this Lease, the relationship of Landlord and Tenant or
Tenant's use or occupancy of the Premises.
27
<PAGE>
SECTION 24.13 ATTORNEYS'S FEES. In connection with any litigation
arising out of this lease, the prevailing party shall be entitled to recover its
costs and reasonable attorneys' fees through and including appellate litigation
and any post judgment proceedings.
SECTION 24.14 OPTION TO RENEW.
(a) Option Period. So long as Tenant is not in default under this
Lease, beyond any applicable notice and cure period either at the
time of exercise or at the time the extended term commences.
Tenant will have the option to extend the initial ten (10) year
term of this Lease for two (2) additional periods of five (5)
years (the "option periods") on the same terms, covenants, and
conditions of this Lease, except that the monthly rent during the
option periods will be ninety-five percent (95 %) of the then
current fair market rental rate determined pursuant to paragraph
(b), but in no event less than the rent being charged in the last
year of the initial lease term. Tenant will exercise its options
by giving Landlord written notice ("Option Notice") at least two
hundred and seventy (270) days prior to the expiration of the
initial term of this Lease or first option period.
(b) OPTION PERIOD MONTHLY RENT. The monthly rent for the option period
will be determined as follows:
1. Landlord and Tenant will have thirty (30) days after Landlord
receives the option notice within which to agree on the then
fair market rental value of the Premises as defined in
paragraph (b)(3). If they agree on the monthly rent for the
option period within the aforesaid thirty (30) day period, they
will amend this Lease by stating the monthly rent for the
option period.
2. If they are unable to agree on the monthly rent for the
option period within the aforesaid thirty (30) days, then, the
monthly rent for the option period will be the then fair market
rental value of the Premises as determined in accordance with
paragraph (b)(4).
3. The "then fair market rental value of the Premises" means
what a Landlord under no compulsion to lease the Premises and a
Tenant under no compulsion to lease the Premises would
determine as rents for the option period, as of the
commencement of the option period, taking into consideration
such factors (but not limited to the stated factors) as the
uses permitted under this Lease, the quality, size, design, and
location of the Premises, and the rent for comparable Premises
located in the Plantation/Sunrise office market, the
creditworthiness of Tenant, whether there are brokerage
commissions due for the extension, lack of vacancy periods, and
improvement allowances.
4. Any dispute or difference between the parties under this
Lease with respect to fair market rental value of the Premises
shall be resolved by arbitration as provided herein. The party
desiring arbitration, shall appoint one arbitrator and notify
the other party. The other party, within fifteen (15) days of
receipt of the first party's notice, shall also appoint an
arbitrator by written notice to the first party. Should the
second party not appoint an arbitrator within such fifteen (15)
day period, the matter shall be arbitrated by the arbitrator
appointed by the first party. Should the second party timely
appoint an arbitrator, the two appointed arbitrators shall
appoint a third arbitrator within fifteen (15) days after the
appointment of the second arbitrator. If the two arbitrators do
not agree upon a third arbitrator within
28
<PAGE>
said time, the third arbitrator shall be appointed by the
Administrative Judge of the Circuit Court in Broward County,
Florida. The three arbitrators so appointed shall forthwith
proceed to arbitrate the dispute in Broward County, Florida.
Each party shall bear the cost of the arbitrator appointed by
it, and the parties shall share equally in the cost of the
third arbitrator. Except as otherwise provided herein, the
arbitration shall be conducted according to the rules and
procedures of the American Arbitration Association. Upon the
issuance of a final award by the arbitrator, either party may
apply to the Circuit Court for an order confirming such final
award, in accordance with the provisions of Section 684.24 of
the Florida Statutes, as the same may be amended from time to
time.
SECTION 24.15 RIGHT OF FIRST OFFER/RIGHT OF FIRST REFUSAL.
(A) If this Lease is in effect and Tenant has not defaulted under any
of the terms and conditions hereunder, Tenant shall have the right of first
offer to lease any then unleased space which from time to time becomes available
in the adjacent building known as Sawgrass Office Campus, Building "B" during
the Term hereof. In the event any such space becomes available for lease,
Landlord shall use its best efforts to so notify Tenant, and Tenant shall have
ten (10) days thereafter to provide Landlord with written notice of its
intention to lease such space at the then current rental rate being paid
hereunder. If Tenant fails to respond to Landlord's notice within said ten (10)
day period or declines its right of first offer to lease such space, Landlord
shall have the right thereafter to market such space to third party tenants.
This right of first offer shall be null and void in the event the Office Campus
"B" building is sold, at any time during the Lease Term, or any renewal term, to
an entity other than the Landlord hereunder. Likewise, Tenant shall have an
ongoing right to lease unleased space in said Building "B" on the same terms and
conditions of this Lease at the then current rental rate being paid hereunder,
provided Landlord is not in receipt of a third party offer to lease such space,
in which event the provisions of Subsection (B) below shall apply.
(B) If this Lease is in effect and Tenant has not defaulted under any
of the terms and conditions hereunder, Tenant shall have the right of first
refusal relative to any space in the adjacent building known as Sawgrass Office
Campus, Building "B" during the term hereof. If, during the term hereof,
Landlord shall receive a bona fide offer from any third party to lease space
which is available in Office Campus Building "B", which offer Landlord shall
desire to accept, or if Landlord makes an offer to any third party to lease
space in Office Campus "B", Landlord shall use its best efforts to promptly
notify Tenant and Tenant shall have ten (10) days thereafter to provide Landlord
with written notice of its intention to lease such space upon the same terms and
conditions as set forth in such third party offer. If Tenant fails to respond to
Landlord's notice within said ten (10) day period or declines its right of first
refusal to lease such space, Landlord shall have the right thereafter to lease
such space to a third party tenant without further obligation to Tenant. This
right of first refusal shall be null and void in the event the Office Campus
Building "B" is sold, at any time during the lease term, or any renewal term, to
an entity other than the Landlord hereunder. It is expressly understood and
agreed that the foregoing rights of first offer and rights of first refusal are
subject to any other rights of first offer or rights of first refusal for the
subject space existing as of the date of this Lease.
In the event Tenant exercises either of its rights set forth in
Subsections (A) or (B) above, Landlord shall contribute the same Tenant
Improvement Allowance per rentable square foot of expansion space as the initial
Premises, multiplied by a fraction, the numerator of which is the number of
month then remaining under the Lease, and the denominator of which is 120.
Further, in such event with respect to the expansion space, Base Rent and
Additional Rent shall commence upon the earlier of ninety (90) days after the
expansion space is delivered to Tenant, or Tenant obtains a Certificate of
Occupancy for the expansion space.
29
<PAGE>
(C) In the event Landlord develops a speculative office building
within the Office Campus Phase II land as depicted on Exhibit "J" attached
hereto, Tenant shall, within fifteen (15) days after the date on which Landlord
presents Tenant with a complete written proposal as to all relevant terms and
conditions, have the option to lease up to 50% of such building, but in no event
less than 5,000 square feet, at a rate to be determined by Landlord in
accordance with its proforma for the building, or as otherwise negotiated in
good faith by the parties. The Landlord's pro forma for the building that it
proposes to Tenant will be no less favorable than the pro forma for the Building
upon which it offers to other prospective tenants has been or will be based.
Thereafter, Tenant shall have a right of first refusal relative to any space
therein. If, during the term hereof, Landlord shall receive a bona fide offer
from any third party to lease space which is available in the speculative office
building which offer Landlord shall desire to accept, or if Landlord makes an
offer to any third party to lease space in the speculative office building,
Landlord shall use its best efforts to promptly notify Tenant and Tenant shall
have seven (7) days thereafter to provide Landlord with written notice of its
intention to lease such space upon the same terms and conditions as set forth in
such third party offer. If Tenant fails to respond to Landlord's notice within
said seven (7) day period or declines its right of first refusal to lease such
space, Landlord shall have the right thereafter to lease such space to a third
party tenant without further obligation to Tenant
(D) Failure of Landlord to provide notice as set forth in Subsections
(A), (B) or (C) above shall not constitute a default under the Lease until the
fourth such time Landlord fails to notify Tenant relative to 5,000 square feet
or less, or until the second such time Landlord fails to notify Tenant relative
to more than 5,000 square feet;; provided, however, in the event Landlord is in
default under this Section 24.15, Tenant shall be entitled to its remedies set
forth in Section 16.6 above.
(E) The rights of Tenant and obligations of Landlord under this
Section 24.15 shall be binding on any affiliate of Landlord or any entity
controlled by Terry W. Stiles and/or William Horvitz.
SECTION 24.16 RIGHT OF FIRST REFUSAL TO PURCHASE THE BUILDING.
Landlord hereby grants to Tenant the right of first refusal to purchase Sawgrass
Office Campus Building "A", Building "B" or the speculative building, provided
Tenant has leased not less than fifty (50%) percent of such speculative building
(hereinafter collectively the "Building") throughout the term of this Lease. In
the event Landlord shall receive a bona fide offer from any third party for the
purchase of the Building, which offer Landlord shall desire to accept, or if
Landlord makes an offer to any third party to sell the Building, Landlord shall
promptly deliver to Tenant a copy of such offer, and Tenant shall, within
fifteen (15) days thereafter, respond to Landlord notifying Landlord of its
intent to purchase the Building upon the same terms and conditions as set forth
in such offer. Should Tenant elect to purchase the Building, the closing shall
take place within ninety (90) days of Tenant's written notification to purchase.
If Tenant shall not exercise the right of first refusal set forth herein,
Landlord shall be free to consummate the transaction on the terms described in
the notice, except for any modifications resulting from the purchaser's due
diligence.
SECTION 24.17 CANCELLATION OPTION. Tenant shall have the option to
cancel this Lease between the 63rd and the 65th month of the Lease Term (the
"First Cancellation Option") and between the 93rd and the 95th month of the
Lease Term (the "Second Cancellation Option") by providing Landlord with not
less than six (6) months prior written notice, during which time Landlord shall
have access to the Premises for the purposes of marketing same to prospective
tenants. In the event Tenant exercises the First Cancellation Option, Tenant
shall pay to Landlord the equivalent of six (6) months Base Rent at the then
prevailing rate. In the event Tenant exercises the Second Cancellation Option,
Tenant shall pay to Landlord the equivalent of four (4) months base rent at the
then prevailing rate. In addition, Tenant shall pay any paid, but unearned real
estate commissions. In the event Tenant exercises any of the foregoing options
to cancel, Tenant shall reimburse Landlord for the unamortized portion of Tenant
improvements, as well as any paid,
30
<PAGE>
but unearned real estate commissions. Additionally, in the event Tenant, in good
faith, enters into a lease with Landlord for a minimum of 37,000 square feet in
any new or existing building owned by Landlord, upon terms and conditions
mutually agreed to by Landlord and Tenant, Tenant shall have the option to
cancel this lease. This option to cancel shall be null and void in the event the
Building being leased hereunder is sold, at any time during the Lease Term, or
any renewal term, to an entity other than the Landlord or any entity controlled
by Terry Stiles and/or William Horvitz.
SECTION 24.18 LANDLORD'S REPRESENTATIONS.
(a) Upon the date of this Lease, Landlord shall own good and
marketable fee simple title to the Premises.
(b) There are no pending or, to the knowledge of Landlord, any
threatened actions or legal proceedings affecting the Premises or Landlord's
interest therein.
(c) Landlord is not aware of any facts or circumstances which would
materially and adversely affect Tenant's use or value of the Premises.
(d) This lease, and the consummation of the transactions set forth
therein, are valid and binding upon Landlord, and do not constitute a default
under any contract to which Landlord is a party or by which it is bound.
(e) Landlord has not received notice, nor has Landlord any knowledge,
of any violation of law, regulation, ordinance, order or other governmental
requirements having jurisdiction over or affecting any part of the Premises.
(f) The current tenant occupying the Premises has executed a Lease
Termination Agreement agreeing to vacate the Premises on or before November 15,
1995.
SECTION 24.19 ENTIRE AGREEMENT. This Lease constitutes the entire
understanding between the parties and shall bind the parties hereto, their
successors and assigns. No representations, except as herein expressly set
forth, have been made by either party to the other, and this Lease cannot be
amended or modified except by a writing signed by Landlord and Tenant.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day
and year first above written.
"TENANT"
Homeowners Group, Inc.
a Delaware corporation
/s/ CARYN M. MAXWELL /s/ CARL BUCCELLATO
- ------------------------- -------------------------------
/s/ MAXINE A. GUTMAN By: /s/ CARL BUCCELLATO
- ------------------------- -------------------------------
Print Name & Title
Pres./CEO
31
<PAGE>
(SIGNATURES CONTINUED)
"LANDLORD"
Signed, sealed and delivered Camtech Associates
in the presence of: a Florida general partnership
By: C2T, Ltd. a Florida limited
Partnership, General
By: C2T, Ltd. a Florida limited
Partnership, General
/s/ [ILLEGIBLE]
- --------------------------
/s/ [ILLEGIBLE] By: /s/ TERRY W. STILES
- -------------------------- ----------------------------
Terry W. Stiles, its President
32
<PAGE>
Exhibit "A"
Floor Plan of Premises
Floor plan for Building A.
<PAGE>
Exhibit "B"
Legal Description
LAND DESCRIPTION
PHASE I
A portion of Parcel 1, MARINA WEST PARCEL A, according to the plat thereof, as
recorded in Plat Book 121, Page 17 of the Public Records of Broward County,
Florida, more particularly described as follows:
COMMENCE at the northeast corner of said Parcel 1; thence S 0-04'35" E, along
the east boundary of said Parcel 1, and the westerly right-of-way line of N.W.
136th Avenue, as shown on said plat and amended by resolution recorded in
Official Records Book 14278, Page 881 and by Special Warranty Deed recorded in
Official Record Book 14244, Page 593, all of the Public Records of Broward
County, Florida, a distance of 191.97 feet; thence N 89- 55'25" E., 12.00 feet;
thence S 06-45'59" W, 100.72 feet; thence S 0-04'35" E. 82.63 feet to the POINT
OF BEGINNING; thence continue S 0-04'35" E. 36.40 feet; thence N 89-55'25" E,
12.00 feet; thence S 0-04'35" E, 27.97 feet; thence S 0-06-45'59" W, 100.72
feet; thence S 0-04'35" E, 76.55 feet, (the last five courses described being
coincident with said right-of-way line); thence S 89-55'25" W, 54.75 feet;
thence S 0-04'35" E, 42.51 feet; thence S 44-55'26" W, 102.51 feet; thence S
89-55'25" W, 78.01 feet; thence S 0-04'25" E, 34.00 feet to a point of
intersection with the northerly right-of-way line of Sawgrass Corporate Parkway,
as described in Official Records Book 14312, Page 78 of the Public Records of
Broward County, Florida; thence S 89-55'25" W, along said right-of-way line,
137.61 feet; thence northwesterly, along said right-of-way line and along the
arc of a tangent curve being concave to the northeast, having a radius of 382.26
feet, a delta of 41-33'34", an arc distance of 277.27 feet; thence N 56- 41'38"
E, 46.87 feet; thence N 37-54'35" E, 65.31 feet to a point on the arc of a
non-tangent curve (radial line through said point bears S 36- 49'33" W); thence
northwesterly, along the arc of said curve being concave to the northeast,
having a radius of 120.00 feet, a delta of 53-05'53", an arc distance of 111.21
feet; thence N 0-04'35" W, 100.59 feet; thence N 89- 55'25" E, 375.00 feet
thence N 0-04'35" W, 20.00 feet; thence N 89-55'25" E, 190.00 feet to the POINT
OF BEGINNING.
Said lands lying in Broward County, Florida containing 9.361 acres, more or
less.
<PAGE>
EXHIBIT "D"
ESTOPPEL CERTIFICATE
RE: Premises:______________________________
Suite No:_________
LEASE DATED:_______________
BETWEEN_______________________________________, (Landlord) and
____________________________________________(Tenant)
1. The Lease is presently in full force and effect and is unmodified
except as indicated at the end of this Certificate.
2. Tenant took possession of the Premises on
3. The Term of the Lease commences on __________, and expires on___________
4. Tenant has accepted possession of the Premises and all improvements
required by the terms of the Lease to be made by Landlord have been
completed to the satisfaction of Tenant.
5. No Rent under the Lease has been paid more than 30 days in advance of its
due date.
6. Landlord has not defaulted in its obligations under the Lease to Tenant.
7. Tenant, as of this date, has no charge, lien, cause of action, claim or
right of offset against Landlord under the Lease or otherwise, against
rents or other charges due or to become due under the Lease.
8. There are no oral agreements between the parties to this Lease or relating
to this Lease and there have been no oral representations made by either
party which are being relied upon by either party except as indicated at the
end of this certificate. The purpose of this statement is to make clear that
the entire agreement between the parties has been reduced to writing.
9. Tenant is leasing rentable square feet in the Building.
10. The present Base Rent is $ per square foot, per year.
11. Tenant's security deposit is $___________ and has been paid in full and is
presently held by Landlord.
________________________
BY:_____________________
<PAGE>
EXHIBIT "E"
TENANT RULES & REGULATIONS
1. PARKING
Tenants and occupants of the building shall have access to the parking
area through common driveways. The parking areas are non-exclusive and
available to all Tenants and their employees, licensees, and guests,
other than reserved spaces. Landlord may, at any time during the term by
notice to Tenant, designate for Tenants' use other reasonable parking
spaces on the land, provided the number of parking spaces is not reduced,
by mutual agreement. No commercial or recreational vehicles shall be
parked on the premises except those vehicles parked on a short-time
temporary basis while delivering, repairing or servicing the Building
and/or its Tenants.
2. SIGNAGE
Tenant shall not affix any device, sign or other fixture to the outside
of the building without the written consent of the Landlord, in each and
every case, which consent shall not be unreasonably withheld.
It is understood that there shall be uniformity as to appearance of all
signage relating to this Building. Signage shall consist of the
following:
A. A site sign designed by Landlord and maintained by Landlord shall
contain the name of the Center.
B. All signage for the building will be of the same look and family size
and letter style. No advertising type signs shall be allowed. The
Landlord reserves the right, however, to attach such signs to the
Premises as are necessary for leasing and marketing purposes.
3. No awnings or other projections shall be attached to the outside walls
of the Building, except as permitted in Tenant's Plans and
Specifications approved by Landlord. Tenant shall not place anything
or allow anything to be placed near the glass of any window, door,
partition, or wall which may appear unsightly from inside or outside
of the Premises.
4. The parking areas, sidewalks, entrances, passages, courts, stairways,
corridors, and halls shall not be obstructed or encumbered by any Tenant,
unless a Tenant is specifically granted such right in his Lease, nor used
for any purpose other than ingress or egress to and from the Premises and
for parking.
5. In the event Tenant must dispose of crates, boxes, etc. which will not
fit into office wastepaper baskets, it will be the responsibility of
Tenant to dispose of same. In no event shall Tenant set such items in the
public hallways or other areas of the building or parking areas,
excepting Tenant's own premises for disposal.
6. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed
and no sweepings, rubbish, rags, or other substances shall be placed
therein. All damages resulting from any misuse of the fixtures shall be
become by the Tenant who, or whose servants, employees, agents, visitors,
or licensees shall have caused the same.
<PAGE>
7. No bicycles, vehicles, or animals of any kind shall be brought into or
kept in or about the Premises. No Tenant shall cause or permit any
unusual or objectionable odors to be produced upon or permeate from the
Premises.
8. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighboring
buildings or premises or those having business with them, whether by the
use of any musical instrument, radio, talking machine, musical noise,
whistling, singing, or in any other way. No Tenant shall throw anything
out of the doors, windows, or skylights, or down the passageways.
9. Each Tenant, upon occupancy of its space, will be issued two (2) keys
to the leased space. Without first obtaining Landlord's written consent
which shall not be unreasonably withheld or delayed, no additional locks
or bolts of any kind shall be placed upon any of the doors or windows by
any Tenant, nor shall any changes be made in - existing locks or the
mechanism thereof. Each Tenant must, upon the termination of his tenancy,
return to the Landlord all keys of offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the event of
the need for additional keys, or the loss of any keys so furnished, such
Tenant shall pay to the Landlord the cost thereof, as determined, from
time to time, by the Landlord.
10. The Landlord reserves the right to prescribe the weight and position of
all safes, which must be placed upon 2 inch thick plank strips to
distribute the weight. The moving of safes or other fixtures or bulky
matter of any kind must be made after previous notice to the Manager of
the building. Any damage done to the Building or to the Tenants or to
other persons in bringing in or removing safes, furniture or other bulky
or heavy articles shall be paid for by the Tenant.
11. Canvassing, soliciting and peddling in the Building is prohibited and
each Tenant shall cooperate to prevent the same.
12. The Landlord may retain a pass key to the Leased Premises, and allowed
admittance thereto at all times to enable the representatives to examine
the said Premises.
13. The Landlord reserves the right to make such other and further
reasonable rules and regulations as in its judgment may from time to time
be needed for the safety, care and cleanliness of the Premises, and for
the preservation of good order therein, and any such other or further
rules and regulations shall be binding upon the parties hereto with the
same force and effect as if they had been inserted herein at the time of
the execution hereof.
14. No Tenant, nor any of the Tenant's servants, employees, agents,
visitors, or licensees, shall at any time bring or keep upon the Premises
any inflammable, combustible, or explosive fluid, chemical or substance,
except as are reasonably and customary in connection with Tenant's
permitted use.
15. Landlord will not be responsible for any lost or stolen personal
property, equipment, money or jewelry from Tenant's Premises or public
rooms regardless of whether such loss occurs when the area is locked
against entry or not.
16. Tenant shall not use the Premises for housing, lodging, sleeping nor
any immoral or illegal purpose.
17. Tenant and its employees, and visitors are not permitted to smoke in
the Building.
33
<PAGE>
18. Tenant shall not operate, or permit to be operated, any mechanical
machinery, steam engine, or boiler without Landlord's written consent, in
each and every case; Tenant will not allow the use of oil, burning
fluids, kerosene, gasoline or other fuels within the Premises.
19. No article deemed as extra hazardous on account of fire or explosion
shall be brought into the Premises.
20. No loitering or littering.
21. In the event of any inconsistency between the Lease with Tenant and the
rules and regulations herein, the terms of the Lease shall control.
<PAGE>
EXHIBIT " F"
ELECTRICAL SERVICE AGREEMENT
PREMISES: Suite:_________
Address:__________________________
__________________________________
LEASE DATED:________________________
BETWEEN:__________________________________________________
and
__________________________________________________
1. Tenant's electrical service is separately metered.
2. Tenant is responsible for initiating and terminating electrical service.
3. Tenant's security deposit will be applied to any unpaid electric utility
bills, if applicable.
EXHIBIT 11
<TABLE>
<CAPTION>
HOMEOWNERS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET LOSS PER COMMON SHARE
FOR EACH OF THE THREE YEARS ENDED DECEMBER 31,
1995 1994 1993
------------ ----------- ----------
<S> <C> <C> <C>
Income (loss) from continuing operations ($1,908,656) ($832,535) $3,190,879
Discontinued operation:
Loss from operation of discontinued reinsurance
subsidiary - - (6,227,680)
Loss on reinsurance portfolio transfer - - (9,009,563)
Net loss ($1,908,656) ($832,535) ($12,046,364)
------------ ----------
CALCULATION OF PRIMARY NET INCOME (LOSS) PER
COMMON SHARE:
Weighted average common shares outstanding
during the year 5,558,350 5,558,350 5,558,350
Weighted average additional common shares
(options) - - 841
------------ ---------- ------------
Weighted average primary common shares
outstanding 5,558,350 5,558,350 5,559,191
------------ ---------- ------------
Income (loss) from continuing operations per
common share ($0.34) ($0.15) $0.57
Discontinued operation:
Per share loss from operation of discontinued
reinsurance subsidiary - - (1.12)
Per share loss on reinsurance portfolio transfer - - (1.62)
-----
Primary net loss per common share ($0.34) ($0.15) ($2.17)
====== ====== ======
CALCULATION OF AVERAGE FULLY DILUTED EARNINGS
(LOSS) PER COMMON SHARE:
Weighted average common shares outstanding
during the year 5,558,350 5,558,350 5,558,350
Weighted average additional common shares
(options) - - 902
------------ ---------- ------------
Weighted average fully diluted common shares
outstanding 5,558,350 5,558,350 5,559,252
------------ ---------- ------------
Income (loss) from continuing operations per
common share ($0.34) ($0.15) $0.57
Discontinued operation:
Per share loss from operation of discontinued
reinsurance subsidiary - - (1.12)
Per share loss on reinsurance portfolio transfer - - (1.62)
-----
Fully diluted net loss per common share ($0.34) ($0.15) ($2.17)
====== ====== ======
</TABLE>
42
EXHIBIT 22
SUBSIDIARIES OF HOMEOWNERS GROUP, INC.
SUBSIDIARY COMPANIES PARENT COMPANY
-------------------- --------------
HOMEOWNERS MARKETING SERVICES, INC. HOMEOWNERS GROUP, INC.
FLORIDA CORPORATION
INCORPORATED ON JULY 2, 1980
HMS MORTGAGE COMPANY, INC. HOMEOWNERS GROUP, INC.
FLORIDA CORPORATION
INCORPORATED ON AUGUST 5, 1983
HOMS INSURANCE AGENCY, INC. HOMEOWNERS GROUP, INC.
FLORIDA CORPORATION
INCORPORATED ON AUGUST 11, 1983
HOMEOWNERS MARKETING SERVICES HOMEOWNERS GROUP, INC.
INTERNATIONAL, INC.
FLORIDA CORPORATION
INCORPORATED ON JANUARY 19, 1983
HOMEOWNERS ASSOCIATION OF
AMERICA, INC. HOMEOWNERS GROUP, INC.
FLORIDA CORPORATION
INCORPORATED ON OCTOBER 27, 1978
HAA OF VIRGINIA, INC. HOMEOWNERS ASSOCIATION
VIRGINIA CORPORATION OF AMERICA, INC.
INCORPORATED ON JANUARY 30, 1985
HAA HOME PROTECTION OF HOMEOWNERS ASSOCIATION
CALIFORNIA, INC. OF AMERICA, INC.
CALIFORNIA CORPORATION
INCORPORATED ON FEBRUARY 6, 1979
HOME GUARANTEE CORPORATION HOMEOWNERS GROUP, INC.
(FORMERLY BRITISH VENTURES, INC.)
FLORIDA CORPORATION
INCORPORATED ON NOVEMBER 7, 1991
ASSOCIATION TO PROPERLY MANAGE RISK, INC. HOMEOWNERS GROUP, INC.
FLORIDA NOT FOR PROFIT CORPORATION
INCORPORATED ON JANUARY 25, 1991
<PAGE>
SUBSIDIARY COMPANIES PARENT COMPANY
-------------------- --------------
HMS PURCHASING GROUP, INC. HOMEOWNERS GROUP, INC.
FLORIDA NOT FOR PROFIT CORPORATION
INCORPORATED ON DECEMBER 19, 1991
FLORIDA INSPECTION CORPORATION HOMEOWNERS MARKETING
FLORIDA CORPORATION SERVICES, INC.
INCORPORATED ON APRIL 15, 1991
HOMEOWNERS MARKETING SERVICES HOMEOWNERS GROUP, INC.
REAL ESTATE CORPORATION
FLORIDA CORPORATION
INCORPORATED ON OCTOBER 4, 1984
HMS OF TEXAS, INC. HOMEOWNERS GROUP, INC.
FLORIDA CORPORATION
INCORPORATED ON MARCH 10, 1988
HMS OF SOUTH FLORIDA, LTD. HOMEOWNERS GROUP, INC.
FLORIDA PARTNERSHIP
FORMED ON SEPTEMBER 20, 1993
HMS OF TEXAS HMS OF TEXAS, INC.
TEXAS PARTNERSHIP (45% GENERAL PARTNER)
FORMED ON JUNE 5, 1985
HAA SERVICE CORPORATION HOMEOWNERS GROUP, INC.
FLORIDA CORPORATION
FORMED ON JULY 11, 1994
HAA OF ARIZONA, INC. HOMEOWNERS GROUP, INC.
ARIZONA CORPORATION
FORMED ON DECEMBER 22, 1994
HAA OF GEORGIA, INC. HOMEOWNERS GROUP, INC.
GEORGIA CORPORATION
FORMED ON DECEMBER 19, 1994
HAA OF UTAH, INC. HOMEOWNERS GROUP, INC.
UTAH CORPORATION
FORMED ON DECEMBER 20, 1994
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,157,336
<SECURITIES> 9,250,349
<RECEIVABLES> 1,278,044
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 28,131,453
<PP&E> 3,581,893
<DEPRECIATION> 0
<TOTAL-ASSETS> 38,514,262
<CURRENT-LIABILITIES> 29,361,611
<BONDS> 0
0
0
<COMMON> 55,584
<OTHER-SE> 6,505,138
<TOTAL-LIABILITY-AND-EQUITY> 38,514,262
<SALES> 0
<TOTAL-REVENUES> 44,554,050
<CGS> 0
<TOTAL-COSTS> 34,200,297
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,036,656)
<INCOME-TAX> 1,128,000
<INCOME-CONTINUING> (1,908,656)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,908,656)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
