UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. 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
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 ____
On October 25, 1995, there were 5,558,350 shares of the registrant's common
stock issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
HOMEOWNERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------------------- ------------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $3,226,461 $997,336
Trading securities 4,854,498 9,250,349
Current portion of securities available for sale 1,053,836 1,811,624
Miscellaneous receivables 1,356,290 1,278,044
Deferred home warranty acquisition costs 6,169,724 5,666,899
Refundable income taxes 0 1,277,449
Current portion of deferred income taxes 6,659,718 6,896,920
Prepaid expenses and other current assets 735,616 1,196,026
--------------------------- ------------------------
Total current assets 24,056,143 28,374,647
Restricted cash 3,160,000 3,160,000
Non-current portion of securities available for sale 5,756,631 1,834,981
Property and equipment - net 4,243,853 3,581,893
Other assets 530,060 432,327
Deferred and refundable income taxes - net of current portion 1,935,713 1,373,608
--------------------------- ------------------------
TOTAL $39,682,400 $38,757,456
=========================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $2,244,911 $1,219,699
Litigation settlement 3,786,932 5,156,022
Accrued expenses payable 5,883,585 5,647,433
Current maturities of long term debt 1,843,918 1,537,257
Deferred home warranty revenue 18,039,065 16,239,431
--------------------------- ------------------------
Total current liabilities 31,798,411 29,361,611
Long term debt - net of current portion 1,879,020 2,591,929
Commitments and contingencies
Stockholders' equity:
Common stock - $0.01 par value; 45,000,000 shares authorized;
5,558,350 shares issued and outstanding
at September 30, 1996 and December 31, 1995 55,584 55,584
Additional paid-in capital 7,458,288 7,458,288
Retained earnings (1,542,440) (1,201,845)
Unrealized holding gain (loss) on securities available for sale 33,536 53,217
--------------------------- ------------------------
Total stockholders' equity 6,004,968 6,365,244
--------------------------- ------------------------
TOTAL $39,682,400 $38,757,456
=========================== ========================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
HOMEOWNERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------- ------------------------------------------
1996 1995 1996 1995
---------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUE $12,054,376 $11,540,238 $34,044,170 $33,593,030
OPERATING COSTS AND EXPENSES:
Direct expenses 9,682,546 9,267,857 27,191,175 25,899,415
General and administrative expenses 2,208,928 2,055,903 7,052,270 7,008,609
Unusual items 417,381 0 417,381 0
-------------------- ------------------ --------------------- -------------------
Total 12,308,855 11,323,760 34,660,826 32,908,024
-------------------- ------------------ --------------------- -------------------
OPERATING INCOME (LOSS) (254,479) 216,478 (616,656) 685,006
OTHER INCOME (EXPENSE):
Investment income - net 294,110 148,520 483,896 1,041,872
Other income (expense) - net (180,006) (119,921) (392,169) (291,820)
-------------------- ------------------ --------------------- -------------------
Total 114,103 28,599 91,727 750,052
INCOME BEFORE INCOME TAXES (140,375) 245,077 (524,929) 1,435,058
PROVISION FOR INCOME TAXES 42,662 (103,000) 184,334 (564,000)
-------------------- ------------------ --------------------- -------------------
NET INCOME (LOSS) ($97,713) $142,077 ($340,596) $871,058
==================== ================== ===================== ===================
PER SHARE AMOUNTS:
Net income (loss) ($0.02) $0.03 ($0.06) $0.16
==================== ================== ===================== ===================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,558,350 5,558,350 5,558,350 5,558,350
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
HOMEOWNERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------------
1996 1995
----------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ($340,595) $871,058
Adjustments:
Depreciation and amortization 589,286 430,333
Provision (benefit) for deferred income taxes 266,666 (589,000)
(Gain) loss on trading securities 98,326 (445,989)
Other net changes in assets and liabilities:
Decrease in miscellaneous receivables (78,246) (60,312)
(Increase) decrease in deferred home warranty acquisition costs (502,825) 132,489
Decrease in deferred income taxes 685,879 1,121,074
(Increase) decrease in prepaid expenses and other assets 301,266 (50,012)
Increase (decrease) in accounts payable 1,025,212 (255,268)
Decrease in litigation settlement (1,369,090) 0
Increase (decrease) in accrued expenses payable 235,711 (1,029,732)
Increase (decrease) in deferred home warranty revenue 1,799,634 (59,061)
Purchases of trading securities (3,791,187) (830,264)
Proceeds from sales of trading securities 5,716,104 1,176,935
----------------------- ---------------------
Net cash provided by operating activities 4,636,142 412,251
----------------------- ---------------------
Cash flows from investing activities:
Property and equipment expenditures (1,189,835) (1,262,761)
Purchases of securities classified as available for sale (3,036,938) (1,245,890)
Proceeds from sale of securities classified as available for sale 2,226,004 1,067,972)
----------------------- ---------------------
Net cash used in investing activities (2,000,769) (1,440,679)
----------------------- ---------------------
Cash flows from financing activities:
Repayments of debt (1,090,876) (507,375)
Amortization of discount on long term debt 148,378 207,825
Purchases of restricted cash 0 (1,752,149)
Borrowings under capital lease obligation 536,250 140,000
----------------------- ---------------------
Net cash used in financing activities (406,247) (1,911,699)
----------------------- ---------------------
Net increase (decrease) in cash and cash equivalents 2,229,125 (2,940,127)
Cash and cash equivalents at beginning of period 997,336 5,875,844
----------------------- ---------------------
Cash and cash equivalents at end of period $3,226,461 $2,935,717
======================= =====================
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest $169,622 $215,272
Income taxes 137,499 30,814
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
HOMEOWNERS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(Unaudited)
1. GENERAL
The consolidated balance sheet as of September 30, 1996 and the consolidated
statements of income and cash flows for the three and nine month periods ended
September 30, 1996 and 1995 have been prepared by the Company, without audit. In
the opinion of management, all adjustments, which include only normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows at September 30, 1996, and for the periods presented,
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
included in the Company's 1995 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission.
2. 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.
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. The judgment
is reported separately under the caption "Litigation settlement" in the
accompanying consolidated balance sheets. In May, 1996, the Company entered into
a definitive merger agreement (the "Merger Agreement") with The Cross Country
Group, Inc. ("Cross Country"), pursuant to which Cross Country agreed to
purchase all of the outstanding shares of the Company for $2.35 per share in
cash. The Merger Agreement was amended as of October 31, 1996, to reflect a
price of $2.06 per share in cash. Under the terms of the Merger Agreement, Cross
Country agreed to pay the balance due to Acceleration National Insurance Company
("ANIC") under a settlement agreement, upon closing of the Merger. Pursuant to
the settlement agreement, on September 4, 1996, the Company paid to ANIC the
full amount of its 1994 federal income tax refund, together with interest, which
totaled $1,401,485. The remaining balance due bears interest at the rate of 10%
per annum from September 1, 1996 until the settlement amount is paid in full. An
affiliate of Cross Country purchased the judgment from ANIC as of October 31,
1996, for approximately $2.75 million. The Cross Country affiliate has agreed,
under certain conditions, to take no action to collect on the judgment before
January 31, 1997. See further discussion in MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - RECENT DEVELOPMENTS.
5
<PAGE>
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 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 case was transferred to federal court in Florida on
July 11, 1996. The Company believes this suit is without merit. On October 10,
1996, the former franchisee filed a lawsuit in the state court in Florida
against a subsidiary of the Company and two of the Company's directors alleging
fraud, and seeking damages of $350,000. The Company believes that this suit is
also without merit, and has filed a motion for abatement of the action.
Accordingly, no accrual for either of these matters has been reflected in the
accompanying consolidated financial statements.
In connection with the transfer of the net assets of POMG Insurance Company, Ltd
("POMG") to Continental Casualty Company ("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
reinsurance company under a reinsurance treaty purchased by POMG to protect it
from losses in excess of a predetermined amount. The Company has placed
$3,000,000 into a collateral accountto secure its guarantee, and has also
agreed, if necessary, to pay the additional $2,000,000 related to the guarantee
from 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 that the various objections voiced by the
reinsurer do not support a material basis for it to successfully deny coverage.
On April 10, 1996, CNA issued a Notice of Arbitration to the reinsurer with
respect to its refusal to honor the reinsurance treaty. The arbitration process
has begun and is currently in the early stage of discovery.
3. 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. All options become
immediately exercisable upon a change in control of the Company.
In December 1994, the Company re-priced all outstanding employee 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
re-priced to $3.00 per share. The options granted to the former Chairman were
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 re-priced
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. At the
same time, an additional grant of 120,000 options was issued to the Chairman of
the Board, effective January 2, 1996. The options became fully exercisable as of
the effective date. Information with respect to options under the above plans
follows:
6
<PAGE>
<TABLE>
<CAPTION>
OPTION PRICE AVAILABLE
STOCK OPTIONS PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 (286,600) (224,600) 286,600
----------- ------- ------- ------
At December 31, 1995 $2.00 435,700 216,700 161,300
Became exercisable 2.00 147,000
Canceled 2.00 (5,850) (5,850) 5,850
----------- ------- ------- ------
At September 30, 1996 $2.00 429,850 357,850 167,150
----------- ------- ------- ------
</TABLE>
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 $0.75 per
share on December 22, 1995. As of September 30, 1996, options for 117,500 shares
remained outstanding, of which 62,500 were exercisable.
In 1991, the Company issued a five year stock purchase warrant for 25,000 shares
to an outside director. The warrant, which was exercisable at $10.80 per share,
expired on 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. As part of the
amendment to the Merger Agreement, the stock rights plan was amended to permit
Cross Country and its affiliates to purchase an
7
<PAGE>
unlimited number of shares in privately negotiated transactions, without the
rights being distributed or becoming exercisable.
4. RECLASSIFICATIONS
Certain amounts in the accompanying 1995 consolidated financial statements have
been reclassified from amounts previously reported to conform to the current
presentation.
8
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index to Exhibits
11. Computation of Net Income per Common Share
for the three and nine month periods ended
September 30, 1996 and 1995.
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
HOMEOWNERS GROUP, INC.
March 2, 1997 By: /s/ C. GREGORY MORRIS
---------------------
C. Gregory Morris
Vice President, Treasurer and
Chief Financial Officer
9
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
11 Computation of Net Income per Common Share for the three and
nine month periods ended September 30, 1996 and 1995.
27 Financial data schedule
EXHIBIT 11
HOMEOWNERS GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
FOR THE THREE AND NINE MONTHS ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Net income (loss) ($ 97,713) $142,077 ($340,596) $871,057
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 5,558,350
Weighted average additional common shares (options) - - - -
--------------------------- --------------------------
Weighted average primary common shares outstanding 5,558,350 5,558,350 5,558,350 5,558,350
--------------------------- --------------------------
Primary net income (loss) per common share ($0.02) $0.03 ($0.06) $0.16
====== ===== ====== =====
CALCULATION OF AVERAGE FULLY DILUTED NET INCOME (LOSS) PER COMMON SHARE:
Weighted average common shares outstanding during the year 5,558,350 5,558,350 5,558,350 5,558,350
Weighted average additional common shares (options) - - - -
--------------------------- --------------------------
Weighted average fully diluted common shares outstanding 5,558,350 5,558,350 5,558,350 5,558,350
--------------------------- --------------------------
Fully diluted net income (loss) per common share ($0.02) $0.03 ($0.06) $0.16
====== ===== ====== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 6,386,461
<SECURITIES> 5,908,334
<RECEIVABLES> 1,356,290
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,056,143
<PP&E> 4,243,853
<DEPRECIATION> 0
<TOTAL-ASSETS> 39,682,400
<CURRENT-LIABILITIES> 31,798,411
<BONDS> 0
0
0
<COMMON> 55,584
<OTHER-SE> 6,004,968
<TOTAL-LIABILITY-AND-EQUITY> 39,682,400
<SALES> 0
<TOTAL-REVENUES> 34,044,170
<CGS> 0
<TOTAL-COSTS> 27,191,175
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (524,929)
<INCOME-TAX> (184,334)
<INCOME-CONTINUING> (340,596)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (340,596)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
