SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the registrant [X]
Filed by party other than the registrant [_]
Check the appropriate box:
[x] Preliminary proxy statement
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
HOMEOWNERS GROUP, INC.
(Name of Registrant as Specified in Its Charter)
HOMEOWNERS GROUP, INC.
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[ ] Fee computed on table below per Exchange Act Rules 14a-
6(i)(4) and 0-11
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[x] Fee paid previously with preliminary materials
[x] No fee required
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing party:
(4) Date filed:
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HOMEOWNERS GROUP, INC.
400 Sawgrass Corporate Parkway
Sunrise, Florida 33325-6235
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 21, 1997
TO THE STOCKHOLDERS OF HOMEOWNERS GROUP, INC.:
A Special Meeting of Stockholders of Homeowners Group, Inc., a Delaware
corporation (the "Company") will be held on March 21, 1997, at the Signature
Grand, 6900 State Road 84, Davie, Florida, at 10:00 A.M. local time, for the
following purposes:
(1) To consider and vote upon a proposal to approve and adopt
an Agreement and Plan of Merger dated as of May 14, 1996, as amended by
Amendment to Agreement and Plan of Merger dated as of October 31, 1996
and as further amended by Second Amendment to Agreement and Plan of
Merger dated as of January 31, 1997 (the "Merger Agreement"), among The
Cross Country Group, Inc., a Nevada corporation ("Cross Country"), CHGI
Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Cross Country ("CHGI") and the Company, pursuant to
which: (a) CC Acquisition Corporation, a Delaware corporation and
assignee of the rights and obligations of CHGI under the Merger
Agreement ("Merger Sub") will be merged with and into the Company (the
"Merger"), with the Company being the surviving corporation and wholly
owned directly by HAC, Inc., a Florida corporation ("HAC") and a
wholly-owned subsidiary of Cross Country Associates, L.L.C., a
Delaware limited liability company ("Associates"); and (b) each of the
shares of the Company's Common Stock, $0.01 par value per share (the
"Shares"), outstanding at the effective time of the Merger (other than
Shares held by Cross Country and its affiliates and stockholders who
perfect their statutory appraisal rights under Delaware law), will be
converted into the right to receive $2.06 (the "Merger Consideration")
net in cash, without interest; and
(2) To transact such other business as may properly come
before the meeting or any adjournments or postponements thereof (the
"Special Meeting").
Only holders of record of Shares at the close of business on February
13, 1997 are entitled to notice of and to vote at the Special Meeting.
The Company's Board of Directors has approved the Merger Agreement,
having determined that the acquisition of the Company pursuant to the Merger
Agreement is fair and in the best interests of the Company and its stockholders.
The Company's financial advisor, Raymond James & Associates, Inc., has advised
the Company that, in its opinion, the
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consideration to be paid to the Company's stockholders pursuant to the Merger
Agreement is fair to the stockholders from a financial point of view.
If the Company's stockholders adopt the Merger Agreement, it is
currently anticipated that the Merger will be consummated as promptly as
practicable after the satisfaction of certain conditions to the Merger.
As soon as practicable after the Merger is consummated, a Letter of
Transmittal will be mailed to all stockholders of record to use in surrendering
their Company stock certificates. Please do not send your stock certificates to
the Company until you receive the Letter of Transmittal, which will include
instructions on the procedure to be used in sending in your certificates.
Stockholders of the Company who do not vote in favor of approval and
adoption of the Merger Agreement and who otherwise comply with the provisions of
Section 262 of the Delaware General Corporation Law will, under certain
circumstances, have the right, if the Merger is consummated, to dissent and to
demand appraisal of the fair market value of their Shares. See "Appraisal
Rights" in the accompanying Proxy Statement, and Annex C thereto, for a
description of the procedures required to be followed in order to exercise
properly dissenters' rights.
To assure that your vote will be counted, please complete, date and
sign the enclosed proxy and return it promptly in the enclosed prepaid envelope
whether or not you plan to attend the Special Meeting. Your proxy may be revoked
in the manner described in the accompanying Proxy Statement at any time before
it has been voted at the Special Meeting.
By Order of the Board of Directors,
Karen Childress
Secretary
YOUR VOTE IS IMPORTANT. PLEASE EXECUTE
AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER
OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING.
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PROXY STATEMENT
HOMEOWNERS GROUP, INC.
400 SAWGRASS CORPORATE PARKWAY
SUNRISE, FLORIDA 33325-6235
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 21, 1997
This Proxy Statement (the "Proxy Statement") is being furnished to
holders of shares of Common Stock, $0.01 par value per share (the "Shares"), of
Homeowners Group, Inc., a Delaware corporation (the "Company"), in connection
with the solicitation of proxies by the Board of Directors of the Company for
use at a Special Meeting of Stockholders to be held March 21, 1997 at the
Signature Grand, 6900 State Road 84, Davie, Florida, at 10:00 A.M., local time,
and at any adjournment or postponement thereof (the "Special Meeting"). Only
holders of record of Shares at the close of business on February 13, 1997 (the
"Record Date") are entitled to notice of and to vote at the Special Meeting.
This Proxy Statement and form of proxy was first mailed to the Company's
stockholders on or about February 13, 1997.
At the Special Meeting, the holders of Shares will be asked: (i) to
consider and vote upon a proposal unanimously approved by the Board of Directors
to approve and adopt an Agreement and Plan of Merger dated as of May 14, 1996
(the "Original Merger Agreement"), as amended by Amendment to Agreement and Plan
of Merger dated as of October 31, 1996 (the "First Amendment") and as further
amended by Second Amendment to Agreement and Plan of Merger dated as of January
31, 1997 (the "Second Amendment" and together with the Original Merger Agreement
and the First Amendment, the "Merger Agreement") among The Cross Country Group,
Inc., a Nevada corporation ("Cross Country"), CHGI Acquisition Corporation, a
Delaware corporation and a wholly-owned subsidiary of Cross Country ("CHGI"),
and the Company, pursuant to which CC Acquisition Corporation, a Delaware
corporation and assignee of the rights and obligations of CHGI under the Merger
Agreement ("Merger Sub") will be merged with and into the Company (the
"Merger"), with the Company being the surviving corporation (the "Surviving
Corporation") and wholly owned by HAC, Inc., a Florida corporation ("HAC") and
wholly-owned subsidiary of Cross Country Associates, L.L.C., a Delaware
limited liability company ("Associates"); and (ii) to transact such other
business as may properly come before the Special Meeting.
Pursuant to the Merger Agreement, each Share outstanding at the
effective time of the Merger (other than Shares held by Cross Country and its
affiliates and stockholders who perfect their statutory appraisal rights under
Delaware law) will be converted into the right to receive $2.06 (the "Merger
Consideration") net in cash, without interest. A copy of the Merger Agreement is
attached hereto as Annex A.
The effect of the Merger will be to convert the Company from a publicly
held to a privately held corporation wholly owned by HAC, while providing to the
public stockholders a
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cash price for their Shares representing a premium over market prices prevailing
prior to the announcement of the Merger.
--------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL
A Special Committee was appointed by the Board of Directors (the
"Special Committee"), to review the terms of the Merger Agreement and to
report to the Board of Directors regarding the fairness of the Merger to the
Company's stockholders. At a meeting held on May 14, 1996, the Special Committee
voted to recommend that the Board of Directors approve the Original Merger
Agreement. The Board of Directors, at a meeting held immediately thereafter,
approved the Original Merger Agreement. At a joint meeting with the Special
Committee on November 6, 1996, the Board of Directors unanimously approved the
First Amendment, and at a joint meeting with the Special Committee on February
3, 1997, approved the Second Amendment. The Board of Directors has determined
that the Merger is fair to and in the best interest of the Company's public
stockholders and resolved to recommend that the Company's stockholders approve
and adopt the Merger Agreement. The Special Committee and the Board of
Directors, in reaching their respective decisions, considered a number of
factors, including the opinion of Raymond James & Associates, Inc. ("Raymond
James"), an investment banking firm engaged by the Special Committee as its
exclusive financial advisor, that the Merger Consideration is fair to the
Company's stockholders from a financial point of view. See "THE MERGER"--
Recommendation of the Special Committee and the Board; Fairness of the Merger"
and "--Opinion of Raymond James & Associates, Inc.."
Based upon the 5,558,350 Shares of the Company outstanding on the
Record Date, reduced by the 611,500 Shares owned by affiliates of Cross Country,
and assuming that no stockholders perfect their statutory appraisal rights, an
aggregate of $10,190,511 will be paid to the Company's stockholders other than
affiliates of Cross Country in the Merger in exchange for their Shares.
On May 13, 1996, the last trading day prior to the Company's
announcement of the execution of the Merger Agreement, the reported closing
price per share of the Company's Common Stock on the Nasdaq NMS was $1-7/8. On
February 13, 1997, the last trading day prior to the date of this Proxy
Statement, the reported closing price per share on the Nasdaq NMS was $_____.
All information contained in this Proxy Statement concerning Cross
Country, CHGI, Merger Sub, HAC and Associates, the financing for the Merger
and plans for the Surviving Corporation has been supplied by Cross Country.
Except as otherwise indicated, all other information contained in this Proxy
Statement has been supplied by the Company.
The Board of Directors recommends a vote FOR adopting the Merger
Agreement.
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Stockholders are urged to read and consider carefully the information
contained in this Proxy Statement and to consult with their personal financial
and tax advisors.
--------------------
The date of this Proxy Statement is February 14, 1997.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SUMMARY...........................................................................................................1
The Special Meeting...........................................................................................1
Parties to the Merger.........................................................................................1
Background of and Reasons for the Merger......................................................................2
Recommendation of the Special Committee and the Board.........................................................4
Opinion of Financial Advisor..................................................................................4
The Merger and Payment to Stockholders........................................................................5
Record Date, Shares Entitled to Vote..........................................................................5
Required Vote.................................................................................................6
Effective Time................................................................................................6
Conditions to the Merger......................................................................................6
Regulatory Matters............................................................................................7
Interests of Certain Persons in the Merger....................................................................7
Appraisal Rights..............................................................................................8
Certain Federal Income Tax Consequences.......................................................................8
Source and Amount of Funds....................................................................................9
Failure to Consummate the Merger..............................................................................9
Fees and Expenses of the Merger Upon Termination..............................................................9
Price Ranges of Shares; Dividends............................................................................10
Selected Financial Data......................................................................................10
GENERAL INFORMATION..............................................................................................11
Voting at the Special Meeting; Required Vote.................................................................11
Proxies......................................................................................................11
Forward-Looking Information and Associated Risk..............................................................12
Available Information........................................................................................12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................................................13
THE MERGER.......................................................................................................15
Parties to the Merger........................................................................................15
Background of the Merger.....................................................................................17
Composition of the Special Committee.........................................................................24
Recommendation of the Special Committee and the Board; Fairness of the Merger................................25
Opinion of Raymond James & Associates, Inc...................................................................28
Plans for the Company After the Merger.......................................................................34
Interests of Certain Persons in the Merger...................................................................35
Reason of Cross Country for the Merger.......................................................................36
Failure to Consummate the Merger.............................................................................36
Certain Effects of the Merger................................................................................37
Certain Federal Income Tax Consequences......................................................................37
THE MERGER AGREEMENT.............................................................................................38
The Merger...................................................................................................38
Payment for Shares...........................................................................................39
The Exchange Fund............................................................................................40
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Regulatory Matters...........................................................................................40
Conditions, Representations and Covenants....................................................................40
Stock Options................................................................................................42
Directors and Officers of the Company Following the Merger; Certificate of Incorporation.....................42
Fees and Expenses............................................................................................42
Termination; Amendments......................................................................................43
Indemnification, Insurance and Releases......................................................................44
SOURCE AND AMOUNT OF FUNDS.......................................................................................44
Bank Financing...............................................................................................44
APPRAISAL RIGHTS.................................................................................................45
PRICE RANGES OF SHARES; DIVIDENDS................................................................................48
ACCOMPANYING AND INCORPORATED DOCUMENTS..........................................................................48
EXPERTS..........................................................................................................49
OTHER MATTERS....................................................................................................49
STOCKHOLDER PROPOSALS............................................................................................50
</TABLE>
ANNEX A - The Merger Agreement
ANNEX B - Fairness Opinion of Raymond James & Associates, Inc.
ANNEX C - Section 262 of the General Corporation Law of the State of Delaware
ii
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SUMMARY
The following summary is intended to highlight certain information
contained in this Proxy Statement. This summary does not purport to be complete
and is qualified in its entirety by the more detailed information contained
elsewhere in this Proxy Statement, the Annexes hereto and other documents
referred to herein. Unless defined herein, capitalized terms used in this
summary have the meanings ascribed to them elsewhere in this Proxy Statement.
Stockholders are urged to read this Proxy Statement, the Annexes hereto and the
documents referred to herein in their entirety.
THE SPECIAL MEETING
The Special Meeting will be held on Friday, March 21, 1997, at the
Signature Grand, 6900 State Road 84, Davie, Florida at 10:00 A.M., local time.
The Board of Directors has fixed the close of business on February 13, 1997 as
the Record Date. Only holders of record of Shares at the close of business on
the Record Date will be entitled to notice of and to vote at the Special
Meeting. The purpose of the Special Meeting is: (i) to consider and vote upon
approval and adoption of the Merger Agreement pursuant to which: (a) Merger Sub
will be merged with and into the Company with the Company being the Surviving
Corporation and wholly owned directly by HAC; and (b) each Share outstanding at
the effective time of the Merger (other than Shares held by Cross Country, CHGI,
Merger Sub, Associates and their affiliates and stockholders who perfect their
statutory appraisal rights under Delaware law) will be converted into the right
to receive $2.06 net in cash, without interest (the "Merger Consideration"); and
(ii) to transact such other business as may properly come before the Special
Meeting.
PARTIES TO THE MERGER
HOMEOWNERS GROUP, INC.
The Company was incorporated in 1988 in Delaware to act as the holding
company for Homeowners Marketing Services, Inc. ("HMS") and its subsidiaries,
which became subsidiaries of the Company in the same year as a result of a
reorganization prior to the Company's sale of its shares in a public offering.
HMS has provided products and services to real estate brokerage firms since
1980.
THE CROSS COUNTRY GROUP, INC.
Cross Country is a privately held company engaged primarily in
providing emergency roadside assistance on behalf of major corporations and
other organizations. Cross Country also provides loss reporting, address change,
consumer affairs, customer support and home assistance services for various
customers throughout the United States through various affiliates.
1
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CROSS COUNTRY ASSOCIATES, L.L.C.
Associates is a privately held limited liability company formed solely
for the purpose of holding the stock of HAC, and has not engaged in any business
activity unrelated to the Merger. The Managing Members of Associates are
substantially the same as the stockholders of Cross Country.
HAC, INC.
HAC is a direct, wholly-owned subsidiary of Associates formed solely
for the purpose of holding the stock of the Company following the Merger, and
has not engaged in any business activity unrelated to the Merger.
CC ACQUISITION CORPORATION
Merger Sub is a wholly-owned subsidiary of HAC and assignee of CHGI's
rights and obligations under the Merger Agreement. Merger Sub was formed solely
for the purpose of the Merger and has not engaged in any business activity
unrelated to the Merger.
CHGI ACQUISITION CORPORATION
CHGI is a direct, wholly-owned subsidiary of Cross Country formed
solely for the purpose of the Merger and has not engaged in any business
activity unrelated to the Merger. On June 14, 1996, CHGI assigned its rights and
obligations under the Merger Agreement to Merger Sub.
Except where otherwise indicated, use of the term Cross Country
includes Cross Country, Associates, HAC, Merger Sub and CHGI. The principal
executive offices of Cross Country, Associates, HAC, Merger Sub and CHGI are
located at 4040 Mystic Valley Parkway, Medford, Massachusetts 02133 and the
telephone number is (617) 393-9300.
BACKGROUND OF AND REASONS FOR THE MERGER
In January, 1995, the Company received several unsolicited inquiries
from unaffiliated third parties relating to various proposed transactions with
the Company, including the purchase of all of the outstanding Shares of the
Company. In response to these inquiries, the Company formed a Special Committee
of the Board of Directors to evaluate the alternatives available to the
Company.
The Committee retained Raymond James & Associates, Inc. ("Raymond
James") to act as its exclusive financial advisor to assist the Company in
evaluating the possible alternatives to maximize stockholder value, including
remaining independent, effecting a corporate restructuring, initiating
discussions with others, or other plans of business reorganization.
On December 13, 1995, a jury in the Court of Common Pleas of Franklin
County, Ohio, rendered a verdict against HMS in favor of Acceleration National
Insurance Company ("ANIC") in the amount of $5,156,022. The Company entered
into negotiations with ANIC in an effort to reach a settlement with respect to
payment of the judgment and certain terms of
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the Merger have been negotiated in connection with the settlement of this
judgment. Pursuant to an Agreement for Satisfaction of Judgment between and
among Accel International Corporation, ANIC, the Company and HMS, dated May 2,
1996, as amended, ANIC agreed to refrain from undertaking any action to execute
on the judgment until October 31, 1996.
After discussions with a number of potential strategic investors,
lenders, purchasers of certain assets of the Company and merger partners, the
Company negotiated and executed the Original Merger Agreement with Cross Country
on May 14, 1996. Pursuant to the Original Merger Agreement, Cross Country was
obligated to make available approximately $4.4 million (the "Settlement Amount")
for payment to ANIC immediately following the Effective Time (as defined herein)
in full satisfaction of the ANIC judgment which was in the amount of $5,156,022.
Although this amount was reduced by the payment by the Company of $1,401,485 on
September 4, 1996 (representing the proceeds of a federal income tax refund),
the unpaid portion of the Settlement Amount has accrued interest at the rate of
10% per annum since September 1, 1996.
Following execution of the Original Merger Agreement, various claims
against the Company were brought to the attention of Cross Country. As a result,
Cross Country advised the Company that certain obligations and contractual
relationships of the Company differed from the representations made to Cross
Country in the Original Merger Agreement, and that the potential payments and
costs associated therewith had a material adverse affect on Cross Country's
valuation of the Company. Cross Country therefore notified the Company that it
would be unwilling to consummate the Merger unless such obligations and
relationships were terminated or modified so as to eliminate such adverse
impact.
Although the Company believes that the disclosures to Cross Country
were appropriate, in light of the limited economic resources available to the
Company, the fact that a previously extensive offering process had resulted in
only limited interest in the Company and the fact that the holder of a
material judgment against one of the Company's principal subsidiaries had
agreed, at that time, to refrain from taking any action with respect to its
judgment only until October 31, 1996, the Company agreed to address the
objections raised by Cross Country to the consummation of the Merger. The
Company's decision was further based on continuing losses by the Company which
amounted to approximately $.07 per share for the first nine months of 1996 and
management's belief that profitable operations were not likely in the near
future.
Extensive efforts were undertaken by the Company to settle the
subject obligations and contractual relationships and to quantify the actual
costs associated therewith. Certain of these efforts were successful but
require the payment of approximately $1,026,000 by the Company. In addition,
a disputed claim of approximately $700,000 remains unresolved.
In light of the foregoing required payments and in consideration of the
remaining contingency, the Company and Cross Country entered into the First
Amendment as of October 31, 1996, reducing the Merger Consideration in the
Original Merger Agreement to
3
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$2.06. In connection with negotiating the First Amendment, the Company
attempted to obtain from ANIC an extension of its October 31, 1996 deadline for
foregoing action to collect on the judgment. When ANIC refused to grant such an
extension, The Cross Country Group, L.L.C., an affiliate of Cross Country,
purchased the judgment from ANIC for $2.75 million, and simultaneously entered
into an Agreement for Satisfaction of Judgment with the Company and HMS,
pursuant to which The Cross Country Group, L.L.C. agreed not to take action to
collect on the judgment until January 31, 1997. The Company guaranteed the
obligation of HMS and pledged the shares of HMS and another subsidiary of the
Company to secure such guarantee. HMS and the subsidiary granted security
interests in their assets as part of the First Amendment. The Company and Cross
County entered into the Second Amendment on February 3, 1997, effective as of
January 31, 1997 to extend the time period for consummation of the Merger and
the time for satisfaction of the judgment referred to above. This date has been
extended until the earlier of: (i) July 1, 1997 or (ii) termination of the
Merger Agreement for any reason. If the Merger is not consummated by July 1,
1997 or the Merger Agreement is terminated, The Cross Country Group, L.L.C. is
entitled to seek enforcement of the entire outstanding amount of the judgment.
For a further discussion of the background and reasons for the
Merger, see "THE MERGER-Background of the Merger".
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD
At a meeting held on May 14, 1996, the Special Committee determined
that the Merger was fair to the Company's stockholders and recommended that the
Board of Directors approve the Original Merger Agreement. The Board of
Directors, at a meeting held immediately thereafter, approved the Original
Merger Agreement. At a joint meeting with the Special Committee on November 6,
1996, the Board of Directors unanimously approved the First Amendment and at a
joint meeting with the Special Committee held on February 3, 1997, unanimously
approved the Second Amendment. The Board of Directors has determined that the
Merger is fair to and in the best interest of the Company's stockholders,
and has approved the Merger Agreement and resolved to recommend that the
Company's stockholders approve and adopt the Merger Agreement. For a
discussion of the factors considered by the Special Committee and the Board of
Directors in reaching their respective decisions, see "THE
MERGER--Recommendation of the Special Committee and the Board; Fairness of the
Merger," "--Background of the Merger" and "--Opinion of Raymond James &
Associates, Inc."
THE BOARD, INCLUDING THE SPECIAL COMMITTEE, HAS UNANIMOUSLY RECOMMENDED
THAT STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
The Special Committee has retained Raymond James to provide financial
advice and other assistance to the Special Committee. On May 14, 1996, Raymond
James delivered its opinion to the Special Committee and the Board of Directors
to the effect that a payment of $2.35 net in
4
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cash for each share of the Company's Common Stock was fair to the Company's
public stockholders from a financial point of view at that time. Based upon the
developments discussed above leading to the execution of the First Amendment to
the Merger Agreement, on November 6, 1996, Raymond James delivered a new opinion
to the Special Committee that the Merger Consideration ($2.06 per share) is fair
to the Company's public stockholders from a financial point of view. Raymond
James has confirmed that its opinion has not been withdrawn as of the date of
this Proxy Statement. A copy of Raymond James' November 26, 1996 opinion is
attached hereto as Annex B. Stockholders are urged to read this opinion in its
entirety for assumptions made, matters considered, procedures followed and scope
of review by Raymond James in rendering its opinion. See "THE MERGER--Opinion
of Raymond James & Associates, Inc."
THE MERGER AND PAYMENT TO STOCKHOLDERS
If the Merger Agreement is approved and adopted by the stockholders of
the Company and the Merger is consummated, the Company will become a
wholly-owned subsidiary of HAC. The Merger Agreement also provides, among other
things, that the stockholders of the Company will be entitled to receive the
Merger Consideration, without interest, for each of their Shares (other than
Shares held by Cross Country and its affiliates and stockholders who perfect
their statutory appraisal rights under Delaware law). See "THE MERGER
AGREEMENT--Payment for Shares" and "APPRAISAL RIGHTS."
In order to receive the Merger Consideration following the Merger, each
holder of a stock certificate representing Shares (a "Certificate") will be
required to surrender such Certificate, together with a duly executed and
properly completed letter of transmittal and any other required documents, to
____________, prior to the Effective Time (as defined herein) to act as the
paying agent (the "Paying Agent"). The Paying Agent will send instructions to
stockholders regarding the procedures for surrendering Certificates, together
with a letter of transmittal to be used for this purpose, as promptly as
practicable after the Merger has been consummated. See "THE MERGER
AGREEMENT--Payment for Shares" and "--The Exchange Fund."
STOCKHOLDERS SHOULD NOT SEND ANY CERTIFICATES WITH THE ENCLOSED PROXY.
RECORD DATE, SHARES ENTITLED TO VOTE
Holders of record of Shares outstanding at the close of business on
February 13, 1997 (the "Record Date") are entitled to notice of and to vote at
the Special Meeting. At that date, 5,558,350 Shares were outstanding, each of
which will be entitled to one vote on each matter to be acted upon or which may
properly come before the Special Meeting. A list of stockholders entitled to
vote at the Special Meeting may be examined at the offices of the Company,
located at 400 Sawgrass Corporate Parkway, Sunrise, Florida 33325-6235, during
the 10-day period preceding the Special Meeting.
5
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REQUIRED VOTE
The presence, in person or by proxy, of the holders of one-third of the
outstanding Shares is necessary to constitute a quorum at the Special Meeting.
Holders of Shares on the Record Date are entitled to one vote per Share,
exercisable in person or by a properly executed proxy, at the Special Meeting
with respect to all matters to be acted upon. Under the Company's Certificate of
Incorporation (the "Certificate of Incorporation"), and By-laws, as amended (the
"By-laws") and applicable law, the affirmative vote of the holders of a majority
of the Shares is required to approve and adopt the Merger Agreement. The Company
has been advised that Cross Country is the holder of proxies executed by the
members of the Board of Directors and one executive officer granting Cross
Country the right to vote the Shares held by them, currently 698,481 Shares
(12.56% of the outstanding Shares), as to all matters related to the Merger and
that Cross Country intends to vote such Shares, in addition to the 611,500
Shares (11% of the outstanding Shares) owned by its affiliates, in favor of
the approval and adoption of the Merger Agreement. These proxies were granted on
May 14, 1996. See "THE MERGER--Interests of Certain Persons in the Merger."
All Shares represented at the Special Meeting by properly executed
proxies received prior to the vote at the Special Meeting, unless previously
revoked, will be voted in accordance with the instructions thereon. If no
instructions are given, proxies will be voted FOR approval and adoption of the
Merger Agreement. Any proxy may be revoked by the person giving it at any time
before it is voted. A proxy may be revoked by filing with the Secretary of the
Company either a written notice of revocation bearing a later date than the
proxy or a subsequent proxy relating to the same Shares, or by attending the
Special Meeting and voting in person (although attendance at the Special Meeting
will not in and of itself constitute revocation of a proxy).
EFFECTIVE TIME
The Merger will be effective as of the date and time of filing of a
Certificate of Merger with the Secretary of State of the State of Delaware (the
"Effective Time") in accordance with the General Corporation Law of the State of
Delaware (the "DGCL"). The Merger Agreement provides that such filing will be
made as soon as practicable following approval and adoption of the Merger
Agreement by the Company's stockholders and the satisfaction or waiver of
certain other conditions stated in the Merger Agreement.
CONDITIONS TO THE MERGER
The obligations of the Company, Cross Country and Merger Sub to
consummate the Merger are subject to the requisite approval and adoption of the
Merger Agreement by the Company's stockholders, the receipt of certain
regulatory approvals and compliance with certain other covenants and conditions
set forth in the Merger Agreement. See "THE MERGER AGREEMENT-Conditions,
Representations and Covenants."
6
<PAGE>
REGULATORY MATTERS
Seventeen of the states in which the Company's subsidiaries operate
regulate the home warranty business in which such subsidiaries are engaged.
The states of California, Florida and Virginia require pre-approval of a change
in control of the Company. The Merger Agreement requires the parties to use
their best efforts to obtain all such approvals and provides that the receipt of
such approvals is a condition to consummating the transaction. All required
notices and applications have been filed by the Company and Cross Country with
such states. All of the states have responded and all requested supplemental
forms have been filed. On January 27, 1997, the state of Virginia's Bureau of
Insurance approved Cross Country's application for pre-Merger approval. There
can be no assurance that such approval will be obtained from California or
Florida, and, if obtained, there can be no assurance as to the date of such
approval. There can also be no assurance that such approval will not contain
a condition or requirement which will be unacceptable to Cross Country. See "THE
MERGER AGREEMENT-Regulatory Matters"
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The Company has been advised that on May 14, 1996, the members of the
Board of Directors and one executive officer granted proxies to Cross Country
with respect to 698,481 Shares owned by them (12.56% of the outstanding Shares)
as to all matters related to the Merger and that Cross Country intends to vote
such Shares in favor of the approval and adoption of the Merger Agreement.
Directors and existing officers of the Company will receive the same
consideration for their Shares as the other stockholders of the Company. It is
expected that certain of the current officers of the Company will continue as
officers and key employees of the Surviving Corporation after the Merger. Carl
Buccellato will resign as Chairman, Chief Executive Officer and President of the
Surviving Corporation and Subsidiaries at the Effective Time. In exchange for
agreeing to surrender his rights under his current employment agreement with the
Company and as compensation for his agreement not to compete for a two-year
period, Mr. Buccellato will receive a payment of $200,000 at the closing of the
Merger and an additional $600,000 payable in installments of $25,000 per month
during the two years following the Merger plus interest on the unpaid balance at
8.25% per annum. Mr. Buccellato beneficially owns 263,453 Shares (excluding
presently exercisable options to purchase 260,000 Shares at $2.00 per Share) or
approximately 4.7% of the outstanding shares. Gary D. Lipson, a director of the
Company, will receive $100,000 payable in 12 equal monthly installments of
$8,333.33 in consideration of the termination of an engagement agreement between
Mr. Lipson and the Company.
Upon consummation of the Merger, Mr. Buccellato, C. Gregory Morris,
Vice President, Treasurer and Chief Financial Officer of the Company, and Melvin
Stewart, a director of the Company, will receive $15,600, $3,600 and $32,750,
respectively, in settlement of their respective stock options. Certain directors
of the Company are parties to agreements with the Company, which agreements must
be amended or canceled as a condition to the obligations of Cross Country to
proceed with the Merger.
7
<PAGE>
The Company has agreed in the Merger Agreement to provide and maintain
directors' and officers' liability insurance and to indemnify the current
directors and officers of the Company for a period of four years after the
Effective Time. See "THE MERGER AGREEMENT--Indemnification, Insurance and
Releases."
As a result of the proposed Merger, stockholders will have no ownership
interest in the Surviving Corporation and will not participate in any potential
profits of the Surviving Corporation after the Merger. In addition, the payments
or benefits described above will not be made to stockholders who are not
officers or directors of the Company.
For a more detailed description of the interests of certain officers,
directors and stockholders of the Company in the Merger, see "THE
MERGER--Interests of Certain Persons in the Merger."
APPRAISAL RIGHTS
Under Delaware law, stockholders who do not vote in favor of the Merger
and file demands for appraisal prior to the stockholder vote on the Merger
Agreement, upon the consummation of the Merger, have the right to obtain a cash
payment for the "fair value" of their Shares (excluding any element of value
arising from the accomplishment or expectation of the Merger). In order to
exercise such rights, a stockholder must comply with all of the procedural
requirements of Section 262 ("Section 262") of the DGCL, a description of which
is provided in "APPRAISAL RIGHTS" herein and the full text of which is attached
to this Proxy Statement as Annex C. Such "fair value" would be determined in
judicial proceedings, the result of which cannot be predicted. Failure to take
any of the steps required under Section 262 may result in a loss of such
dissenters' rights.
In addition, the Merger Agreement provides that Cross Country may
terminate the Merger Agreement if the holders of more than 10% of the Shares
claim or perfect appraisal rights.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In general, the receipt of cash by a stockholder pursuant to the Merger
or the exercise of appraisal rights will be a taxable event for such stockholder
for federal income tax purposes and may also be a taxable event under applicable
local, state and foreign tax laws. A stockholder will recognize gain or loss for
federal income tax purposes equal to the difference between: (i) the amount of
cash that he or she has received, and (ii) his or her tax basis in the Shares
surrendered in exchange therefor. Such gain or loss will be capital gain or
loss, provided the Shares are held as capital assets as of the Effective Time.
The tax consequences for a particular stockholder may depend upon the facts and
circumstances applicable to such stockholder. Accordingly, each stockholder
should consult his or her own tax advisor with respect to the federal, state,
local or foreign tax consequences of the Merger.
ALL STOCKHOLDERS SHOULD READ CAREFULLY THE DISCUSSION SET FORTH UNDER
"THE MERGER--CERTAIN FEDERAL INCOME TAX
8
<PAGE>
CONSEQUENCES" AND ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL LAW INCOME TAX CONSEQUENCES TO THEM OF THE MERGER, AS
WELL AS THE POSSIBLE APPLICATION OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
SOURCE OF FUNDS
The total amount of funds required for Cross Country to consummate
the Merger, is estimated to be approximately $10.3 million. This amount does not
include the $2.75 million paid by The Cross County Group, L.L.C. to purchase the
judgment held by ANIC. HAC and Merger Sub expect to obtain the funds required to
consummate the Merger from borrowings by HAC and Cross Country pursuant to the
Credit Agreement (as defined herein) in the amount of $25 million (the
"Financing") with Fleet Bank N.A. (the "Bank"). Pursuant to the Merger
Agreement the availability of financing is not a condition to the obligations of
Cross Country, HAC and Merger Sub to consummate the Merger. Funding under the
Credit Agreement will occur simultaneously with the consummation of the Merger.
See "SOURCE AND AMOUNT OF FUNDS."
FAILURE TO CONSUMMATE THE MERGER
In the event that the Merger is not consummated because it is not
approved by the required vote of the stockholders of the Company, holders of
more than 10% of the Shares claim or perfect appraisal rights or any other term
or condition to the consummation of the Merger is not satisfied or waived, it is
likely that the Company will be without adequate resources to pay the full
amount due to The Cross County Group, L.L.C. as holders of the ANIC judgment
which would become immediately due and payable under the Settlement Agreement.
In such event, the Company would be forced to seek alternatives to paying the
full amount of the judgment. No other alternatives are presently being
considered.
FEES AND EXPENSES OF THE MERGER UPON TERMINATION
The Company has agreed that in the event that the Merger Agreement is
terminated for certain reasons, including the holders of in excess of 10% of the
Shares claiming or perfecting appraisal rights, the Board of Directors of the
Company recommending a merger or acquisition transaction other than the Merger,
the Board of Directors of the Company withdrawing, modifying or amending its
recommendation contained in this Proxy Statement in any respect materially
adverse to Cross Country or Merger Sub, or the stockholders of the Company
failing to approve the Merger, the Company will reimburse Cross Country for all
of the reasonable, documented, out-of-pocket expenses actually incurred by Cross
Country and Merger Sub in connection with the Merger including expenses of legal
counsel, investment bankers and accountants, plus a fee of $500,000. See "THE
MERGER AGREEMENT--Fees and Expenses."
9
<PAGE>
PRICE RANGES OF SHARES; DIVIDENDS
The Shares are listed on the Nasdaq National Market ("NMS") under the
symbol HOMG. On April 3, 1996, the last trading day prior to the filing by Cross
Country of a Schedule 13D announcing that it had acquired in excess of five
percent of the Shares, the reported closing sales price per Share on the NMS was
$1-1/2. On May 13, 1996, the last trading day prior to the Company's
announcement of the execution of the Merger Agreement, the reported closing
sales price per Share on the NMS was $1- 7/8. On November 6, 1996, the last
trading day prior to the Company's announcement of the First Amendment, the
reported closing sales price per Share on the NMS was $1-1/2. On February 13,
1997, the last trading day prior to the date of this Proxy Statement, the
reported closing sales price per Share on the NMS was $___. Stockholders are
urged to obtain current quotations for the Shares. Certain agreements to which
the Company is a party impose restrictions on the payment of dividends. In
addition, the Merger Agreement prohibits the declaration of dividends or
distributions with respect to the Shares. See "PRICE RANGES OF SHARES;
DIVIDENDS."
SELECTED FINANCIAL DATA
The following summarized consolidated financial data is qualified in
its entirety by the more detailed financial information, including the Company's
financial statements, included in the Company's Annual Report an Form 10-K for
the year ending December 31, 1996 and the Company's Forms 10-Q for the quarter
ended March 31, June 30 and September 30, 1996 incorporated into and
accompanying this Proxy Statement.
10
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Operating revenue $42,986 $45,578 $51,344 $52,778 $44,554 $33,593 $33,971
Income (loss) from continuing
operations before income taxes (116) 3,891 5,319 (1,030) (3,037) 1,435 (580)
Income (loss) from continuing 275 1,879 3,191 (833) (1,909) 871 (374)
operations
Discontinued operations:
Loss from operation of
discontinued reinsurance subsidiary -- -- (6,228) -- -- -- --
Estimated loss on reinsurance
portfolio transfer -- -- (9,009) -- -- -- --
Net income (loss) 275 1,879 (12,046) (833) (1,909) 871 (374)
CASH FLOW FROM OPERATING
ACTIVITIES 2,454 2,755 (1,557) 3,046 (667) 412 4,636
DIVIDENDS DECLARED PER
COMMON SHARE 0.20 0.20 0.10 0.00 0.00 0.00 0.00
BALANCE SHEET DATA
Cash and investments 26,133 19,176 18,154 19,625 17,054 19,997 18,052
Total Assets 38,705 41,068 45,894 39,199 38,514 38,637 39,479
Long-term debt, net of current 66 22 3,017 3,317 2,591 2,671 1,879
portion
Deferred home warranty revenue in
excess of deferred home warranty 6,906 8,196 9,994 10,441 10,572 10,515 11,869
acquisition costs
Stockholders' equity 21,084 21,820 9,205 8,401 6,561 9,343 6,167
PER SHARE DATA
Income (loss) from continuing 0.05 0.34 0.57 (0.15) (0.34) 0.16 (0.07)
operations
Discontinued operation:
Loss from operation of
discontinued reinsurance subsidiary -- -- (1.12) -- -- -- --
Estimated loss on reinsurance
portfolio transfer -- -- (1.62) -- -- -- --
Net income (loss) 0.05 0.34 (2.17) (0.15) (0.34) 0.16 (0.07)
Stockholders' equity 3.79 3.93 1.66 1.51 1.18 1.68 1.11
Weighted average common shares
outstanding (in thousands) 5,566 5,561 5,559 5,558 5,558 5,558 5,558
</TABLE>
10
<PAGE>
GENERAL INFORMATION
VOTING AT THE SPECIAL MEETING; REQUIRED VOTE
The Board of Directors has fixed the close of business on February
13, 1997 as the Record Date. As of the Record Date, there were 5,558,350 Shares
entitled to vote at the Special Meeting and there were ___ holders of record of
such Shares. Holders of Shares on the Record Date are entitled to one vote per
Share, exercisable in person or by a properly executed proxy, at the Special
Meeting with respect to all matters to be acted upon.
The presence, in person or by properly executed proxy, of the holders
of one-third of the outstanding Shares is necessary to constitute a quorum at
the Special Meeting. Pursuant to the Certificate of Incorporation, By-laws and
applicable law, the affirmative vote of the holders of a majority of the Shares
is necessary to approve and adopt the Merger Agreement. Abstentions will be
counted as present for purposes of determining whether a quorum is present.
Since the Merger requires the approval of a majority of the outstanding Shares,
abstentions will have the same effect as a negative vote. Under the rules of the
New York Stock Exchange and the National Association of Securities Dealers,
member organizations which hold shares in street name for customers will not
have the authority to vote on the Merger unless they receive specific
instructions from beneficial owners. Under the DGCL, such a non-vote will not be
counted as present for purposes of a quorum and will otherwise have the same
effect as a vote against the Merger. The Company has been advised that Cross
Country is the holder of proxies executed by the members of the Board of
Directors and one executive officer of the Company granting Cross County the
right to vote the Shares held by them, currently 698,481 Shares (12.56% of the
outstanding Shares) with respect to all matters relating to the Merger and that
Cross County intends to vote said Shares in addition to the 611,500 Shares
(11.0% of the outstanding Shares) owned by its affiliates in favor of the
approval and adoption of the Merger Agreement.
PROXIES
All Shares represented at the Special Meeting by properly executed
proxies received prior to or at the Special Meeting, unless such proxies
previously have been revoked, will be voted at the Special Meeting in accordance
with the instructions on the proxies. If no such instructions are indicated,
proxies will be voted FOR approval and adoption of the Merger Agreement. The
Board of Directors does not know of any matters, other than as described in the
attached Notice of Special Meeting of Stockholders, which are to come before the
Special Meeting. If any other matters are properly presented at the Special
Meeting for action, the persons named in the enclosed form of proxy and acting
thereunder will have the discretion to vote on such matters in accordance with
their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by
filing with the Secretary of the Company written notice of revocation bearing a
later date than the proxy; by duly executing and delivering to the Secretary of
the Company, at or prior to the Special Meeting, a subsequent proxy relating to
the same Shares; or by attending the Special Meeting and voting in person
(although
11
<PAGE>
attendance at the Special Meeting will not, by itself, constitute revocation of
a proxy). Any written notice revoking a proxy should be sent to Homeowners
Group, Inc., 400 Sawgrass Corporate Parkway, Sunrise, Florida 33325-6235,
Attention: Karen Childress, Secretary.
Proxies are being solicited by and on behalf of the Company's Board of
Directors. The Company will bear the cost of preparing and mailing the proxy
material furnished to the Company's stockholders in connection with the Special
Meeting. The Company will solicit proxies by mail, and the Company's directors,
officers and employees may also solicit proxies by telephone, telegram, personal
contact or otherwise. Such persons will receive no additional compensation for
such services but may be reimbursed for reasonable out-of-pocket expenses in
connection with such solicitation. Arrangements will be made to furnish copies
of solicitation materials to fiduciaries, custodians and brokerage houses for
forwarding to beneficial owners of Shares held in the names of such fiduciaries,
custodians and brokerage houses. Such persons will be paid reasonable
out-of-pocket expenses. The Company has retained the firm of Corporate Investor
Communications, Inc., for a fee of $4,500 plus reasonable out-of-pocket
expenses, to assist in the solicitation of proxies by the methods described
above.
No person is authorized to give any information or make any
representation not contained in this Proxy Statement, and, if given or made,
such information or representation should not be relied upon as having been
authorized by the Company or by Cross Country or their affiliates.
FORWARD-LOOKING INFORMATION AND ASSOCIATED RISK
Management believes that this Proxy Statement contains forward-looking
information within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including statements regarding, among
other items, the Company's earnings. This forward-looking information is based
largely on the Company's revenues and expectations and is subject to a number of
risks and uncertainties, certain of which are beyond the Company's control.
Actual results could differ materially as a result of the factors described in
the section "THE MERGER--Opinion of Raymond James & Associates, Inc.",
including, among others, general economic conditions and competitive factors. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Proxy Statement will in fact
transpire.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, is required to file periodic
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission") relating to its business, financial statements and
other matters. Such reports, proxy statements and other information, are
available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at 500 W. Madison Street, 14th Floor, Chicago, Illinois 60661, and Seven
World Trade Center, Suite 1300, New York, New York 10048. In addition, such
reports, proxy statements and other information can be obtained from the
Commission's web site at http://www.sec.gov. Copies of such material also can be
12
<PAGE>
obtained from the Commission at prescribed rates by addressing written requests
for such copies to the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Such materials may also be inspected at
the offices of the Nasdaq National Market System, 1735 K Street, N.W.,
Washington, D.C. 20006.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information concerning beneficial
ownership, as of January 27, 1997, by persons known to the Company (based upon
filings on Schedules 13D and 13G filed pursuant to the Exchange Act) to own five
percent or more of the Company's outstanding voting securities. The table also
shows information concerning beneficial ownership by all directors, by each of
the Company's Named Executive Officers (as such term is defined in the Exchange
Act) and by all directors and executive officers as a group. The number of
shares beneficially owned by each director or executive officer is determined
under rules of the Commission, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has the right to
acquire within 60 days of January 27, 1997, through the exercise of any stock
option or other right. Unless otherwise indicated, each person has sole
investment and voting power (or shares such powers with his or her spouse), with
respect to the shares set forth in the following table.
13
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-----------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) SHARES PERCENT
-------------- ------------------
<S> <C> <C>
Carl Buccellato 523,453 (2) 9.0%
Diane M. Gruber 20,050 (3) 0.4%
Gary D. Lipson 33,500 (4) 0.6%
Michael A. Nocero, Jr. M.D 135,500 (5) 2.1%
Melvin Stewart 305,375 (6) 5.5%
C. Gregory Morris 30,000 (7) 0.5%
Sandra Stewart Bernstein 406,862 (8) 7.3%
2810 North 46th Avenue
Hollywood, FL 33021
Dimensional Fund Advisors, Inc. 361,300 (8) 6.5%
1299 Ocean Avenue
Santa Monica, CA 90401
T. Rowe Price Small Cap Value Fund, Inc. 350,000 (8) 6.3%
100 E. Pratt Street
Baltimore, MD 21202
NAPAQ Corporation, et al 611,500 (9) 11.0%
4040 Mystic Valley Parkway
Boston, MA 02155
DC Investment Partners Opportunity Fund, L.P 906,500 (10) 16.3%
2200 Abbott Martin Road, Suite 201
Nashville, TN 37215
All Directors and Executive Officers as a Group (6 1,047,878 (11) 17.8%
persons)
</TABLE>
- ------------------------
(1) The address of all executive officers and directors is 400 Sawgrass
Corporate Parkway, Sunrise, FL 33325.
(2) Includes 14,397 shares of common stock held by Carl Buccellato as Trustee of
the Renee Buccellato Trust, the Lori Ann Buccellato Trust and the Matthew
Buccellato Trust. Includes presently exercisable options to purchase 260,000
shares of common stock.
(3) Includes presently exercisable option to purchase 10,000 shares of common
stock. The total does not include 1,000 shares owned by Gayle N. Gruber, Ms.
Gruber's daughter, as to which beneficial ownership is disclaimed by Ms. Gruber.
(4) Includes presently exercisable options to purchase 17,500 shares of common
stock.
14
<PAGE>
(5) Includes 70,000 shares of common stock owned under a retirement plan for the
benefit of Michael A. Nocero, Jr. M.D. and indirect ownership of 24,000 shares
owned by his daughters. Includes presently exercisable options to purchase
17,500 shares of common stock.
(6) Includes 243,701 shares of common stock held by Melvin Stewart as Trustee of
the Melvin Stewart Trust. Also includes 15,788 shares of common stock held by
Mitchell Stewart as Trustee of the Bari Udell Trust, as to which trust Melvin
Stewart has the power to direct the voting and investment of such shares as
trust advisor and as to which beneficial ownership is disclaimed by Mr. Stewart.
(7) Consists of presently exercisable options to purchase 30,000 shares of
common stock.
(8) Ownership shares and percentages based upon the Schedules 13G as provided to
the Company.
(9) Ownership shares and percentages based on Schedules 13D, as amended, as
provided to the Company. Consists of four related persons that own positions:
NAPAQ Corporation, HAC, Inc., Cross Country Motor Club, Inc. and Jeffrey C.
Wolk. Each of these persons is affiliated with The Cross Country Group, Inc.
(10) Ownership shares and percentages based on Schedule 13D, as amended, as
provided to the Company. Consists of four related parties that own positions: D.
Robert Crants, Michael W. Devlin, Lucius E. Burch and the Stephens Group, Inc.
(11) Includes (i) an aggregate of 285,000 shares of common stock which the
officers and directors have the right to acquire through the exercise of
presently exercisable options and (ii) an additional 50,000 shares of common
stock which the officers and directors will have the right to acquire though the
exercise of options that will become exercisable contemporaneously with the
consummation of the Merger.
Ms. Gruber, Messrs. Buccellato, Lipson, Morris and Stewart and Dr.
Nocero have advised the Company that they have granted proxies to Cross Country
with respect to the right to vote the Shares held by them, currently 698,481
Shares (12.56% of the outstanding Shares), with respect to all matters relating
to the Merger.
THE MERGER
PARTIES TO THE MERGER
HOMEOWNERS GROUP, INC.
The Company was incorporated in 1988 in Delaware to act as the holding
company for Homeowners Marketing Services, Inc. ("HMS") and its subsidiaries,
which became subsidiaries of the Company in the same year as a result of a
reorganization prior to the Company's sale of its Shares in a public offering.
HMS has provided products and services to real estate brokerage firms since
1980.
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 ("CORs"). The Company
believes that it is a leading
15
<PAGE>
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 only certain of the
Company's products and services, principally the home warranty product. 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. Full membership also provides access to
the following programs: a membership-wide referral networking system
(REFNET/registered mark), the HMS BuyerTrack/registered mark/ Follow-up System,
the HMS Consumer Reach Program, the HMS Risk Management System, HMS Photocard
and certain advertising and public relations materials. Both full members and
limited members have access to the home warranty product, which they sell to
either sellers or buyers of a home. 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, Colorado, Idaho, Florida (except
northwest Florida, which territory has been granted to an Affiliate), Hawaii,
Indiana, Iowa, Nebraska, North Dakota, Oregon, South Dakota and Washington, and
is a 45% partner in a partnership which directly enrolls Members in Texas.
Collectively, these territories are known as Corporate Owned Regions. The
Company manages, for a fee, the Kansas, Oklahoma, Missouri territory and the
Arizona, New Mexico territory and owns a nominal interest in the Arizona, New
Mexico territory. The Company has combined administrative functions of the
Kansas, Oklahoma and Missouri region and of the Arizona, New Mexico and the
Texas region. The Colorado region and the Washington, Oregon and Idaho regions
have combined administrative functions with the California region.
Franchise realty organizations, such as CENTURY 21/registered mark/,
ReMax/registered mark/ 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
16
<PAGE>
estate related franchise or service, and many HMS Members are also members of
franchise realty organizations.
THE CROSS COUNTRY GROUP, INC.
Cross Country is a privately held company engaged primarily in
providing emergency roadside assistance on behalf of major corporations and
other organizations. Cross Country also provides loss reporting, address change,
consumer affairs, customer support and home assistance services for various
customers throughout the United States through various affiliates. The principal
executive offices of Cross Country are located at 4040 Mystic Valley Parkway,
Medford, Massachusetts 02133, and the telephone number is (617) 393-9300.
CROSS COUNTRY ASSOCIATES, L.L.C.
Associates is a privately held limited liability company formed solely
for the purpose of holding the stock of HAC, and has not engaged in any business
activity unrelated to the Merger. The Managing Members of Associates are
substantially the same as the stockholders of Cross Country. The principal
executive offices of Associates are located at 4040 Mystic Valley Parkway,
Medford, Massachusetts 02133.
HAC, INC.
HAC is a direct, wholly-owned subsidiary of Associates formed solely
for the purpose of holding the stock of the Company following the Merger, and
has not engaged in any business activity unrelated to the Merger.
CC ACQUISITION CORPORATION
Merger Sub is a wholly-owned subsidiary of HAC and assignee of CHGI's
rights and obligations under the Merger Agreement. Merger Sub was formed solely
for the purpose of the Merger and has not engaged in any business activity
unrelated to the Merger.
CHGI ACQUISITION CORPORATION
CHGI is a direct, wholly-owned subsidiary of Cross Country formed
solely for the purpose of the Merger and has not engaged in any business
activity unrelated to the Merger. On June 14, 1996, CHGI assigned its rights and
obligations under the Merger Agreement to Merger Sub.
BACKGROUND OF THE MERGER
In January, 1995, the Company received several unsolicited inquiries
from unaffiliated third parties relating to various proposed transactions with
the Company, including the purchase of all of the outstanding Shares of the
Company. In response to these inquiries, the Company
17
<PAGE>
formed a Special Committee of the Board of Directors to evaluate the
alternatives available to the Company.
The Special Committee retained Raymond James to act as its exclusive
financial advisor to assist the Company in evaluating the possible alternatives
to maximize stockholder value, including remaining independent, effecting a
corporate restructuring, obtaining new financing, sale of various operating
assets of the Company, initiating discussions with others regarding the
acquisition of the Company and other possible forms of business reorganization.
Initially, the Special Committee considered the alternatives of
obtaining financing and entering into an agreement with a strategic investor.
Negotiations were held with potential lenders to provide funds to the
Company under an arrangement which would have permitted conversion of the debt
position to equity. This alternative was rejected after evaluation of the
costs of such financing and the potential dilutive impact of such financing on
existing stockholders.
Based upon the Company's recent operating results, and the various
contingencies facing the Company, the Special Committee concluded that the
Company would be better served if it combined with a strong complementary
business entity. Therefore, the option of remaining independent was not selected
as a viable course of action for the Company to pursue. Accordingly, the
options related to corporate restructuring or business reorganization were also
deemed to be secondary to the business combination alternatives.
During the first nine months of 1995, Raymond James circulated
confidentiality agreements to multiple interested parties, including Cross
Country. These agreements provided, among other things, that the interested
parties and their representatives would maintain the confidential nature of
information about the Company supplied to them and that for a specified period
(generally three years) from the date of such agreements they would not, without
the prior written approval of the Company's Board of Directors, engage in or
propose any transaction directly or indirectly to acquire any securities or
assets of the Company or its subsidiaries or act, alone or in concert with
others, to seek to control or influence the management, Board of Directors, or
policies of the Company. No information was provided to Cross Country at this
time, based on their refusal to sign a confidentiality agreement on terms
similar to those executed by other interested parties. During this period,
Raymond James circulated information about the Company and its operations to
approximately ten interested parties who had signed confidentiality agreements.
Three of the parties who signed confidentiality agreements presented written
or verbal proposals to acquire all or a portion of the Company.
In June 1995, the Special Committee met with representatives of First
Service Corporation, an organization which proposed a loan to the Company
convertible into shares of Common Stock. The Special Committee concluded that
this proposal would have resulted in an unacceptable dilution to the Company's
stockholders at the conversion price proposed. In addition, such a proposal
would not have provided liquidity to the Company's stockholders.
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The Special Committee also met in June 1995 with The American
HomeShield division of Service Master LP regarding the acquisition of the
Company. Although numerous proposals were made, the acquisition of the Company
would have been dependent on favorable resolution of the ANIC litigation which
was then ongoing and modification of certain other contractual relationships
which the Special Committee did not believe was feasible on economic terms
acceptable to the Company. In addition, the discount required by HomeShield to
complete the Merger prior to the completion of the referenced litigation was
deemed unacceptable by the Special Committee and negotiations terminated.
During this period, the Special Committee was also engaged in
discussions with Warrantech Corporation, an administrator and marketer of
service contracts and after-market warranties on computer electronics, computers
and computer peripherals, appliances, automobiles, automotive components and
recreational vehicles for retailers and distributors. In September, 1995, after
a review of the foregoing proposals, the Company announced that it had entered
into exclusive negotiations with Warrantech. The Warrantech proposal was to
exchange shares of Warrantech common stock for shares of the Company's Common
Stock. Each share of the Company's Common Stock would have been exchanged for
that number of Warrantech shares determined by dividing 1.25 by the price of
Warrantech shares during a specified period. From September 1995, through
January 1996, the Company pursued negotiations with Warrantech.
On December 13, 1995, a jury in the Court of Common Pleas of Franklin
County, Ohio, rendered a verdict against HMS, in favor of ANIC in the amount of
$5,156,022. The Company then engaged in negotiations with ANIC in an effort to
reach a settlement with respect to payment of the judgment.
The Company and Warrantech were unable to conclude an agreement. The
failure to reach agreement was principally due to the impact on the Company of
the ANIC judgment, the refusal of Warrantech to agree to deliver a minimum
number of shares to the Company's stockholders and certain contingencies imposed
by Warrantech including renegotiation of certain Company contracts on terms
acceptable to Warrantech in its sole discretion. The Company announced on
January 26, 1996 that its exclusive negotiations with Warrantech had terminated.
The Special Committee and Raymond James again contacted potential bidders with
whom discussions had been superceded during the Warrantech negotiations.
Discussions were also held with ANIC in an attempt to negotiate a
settlement of the judgment obtained by it and to postpone its attempts to
realize on its judgment. As a condition of ANIC agreeing to refrain from
exercising its rights under its judgment, the Company was required to waive its
rights to appeal the ANIC judgment. The Board of Directors agreed to such waiver
based in part upon the fact that the Company was without the funds needed to
obtain the bond required to pursue the appeal.
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The Special Committee thereafter entered into negotiations with HFS
Incorporated, with respect to the acquisition of the Company for shares of
HFS' common stock. Under this proposal the Shares of the Company were to be
valued at $2.20 per share.
While these negotiations were in process, the Company was advised by
Cross Country that certain of its affiliates had acquired in excess of five
percent of the Shares of the Company and that it wished to enter into
negotiations with respect to the acquisition of the Company. The contacts
between the Company and Cross Country originally began with discussions
regarding joint marketing of products in February 1996. A subsequent meeting was
held in March 1996 in New York City at which Cross Country proposed acquiring
the Company. This meeting was attended by Carl Buccellato, Gary Lipson and Diane
Gruber, on behalf of the Company, and Howard Wolk, Sidney Wolk and Ted Wolk, on
behalf of Cross Country. Cross Country originally proposed advancing funds to
the Company to satisfy the ANIC judgment, with such funds being secured by a
lien on Company assets. The Company representatives rejected this proposal in
favor of an acquisition of the Company by Cross Country.
Although Cross Country made various proposals to acquire the
outstanding Shares of the Company, until May 3, 1996, Cross County and the
Company could not agree on an acceptable form of confidentiality agreement and
confidential information was not furnished to Cross Country until said date.
Therefore, the March 15, 1996 proposal of Cross Country to acquire the
outstanding Shares of the Company at $1.95 per share, the April 30, 1996
proposal at $2.10 per share and the May 3, 1996 proposal of $2.35 per share
(including an agreement to pay ANIC the full amount of its judgment) were based
solely on Cross Country's review of publicly available information. All of these
proposals were subject to reduction in price based upon the outcome of certain
contingencies. They were therefore rejected for both this reason and the fact
that, until May 3, 1996, they were less than the alternative bid from HFS. Upon
agreement with Cross Country on May 3, 1996 as to the terms of a confidentiality
agreement, the Company provided information to Cross Country.
During this period the Company continued its negotiations with ANIC
regarding a potential settlement. The Company reached an agreement with ANIC
to defer action with respect to efforts to realize on its judgment until May 5,
1996, and to pay to ANIC upon consummation of a merger the sum of $4.1 million
in satisfaction of the judgment. This date was subsequently extended until May
12, 1996 in exchange for an increase in the amount to be paid to ANIC in
satisfaction of the judgment against HMS upon consummation of the Merger. The
increase payable to ANIC was to be proportionately equal to the percentage
increase in the amount to be received by the Company's stockholders in excess of
$2.20 per share^ rounded up to the next $50,000. By way of example, a payment to
the Company's stockholders of $2.35 per share would have resulted in payment to
ANIC of $4.4 million. The Company agreed to pay to ANIC the proceeds of a
federal income tax refund which was then expected to be approximately $1.4
million in partial satisfaction of said judgment.
The Special Committee established May 9, 1996 as a deadline for
submission of bids to acquire the Company. On May 7, 1996, Raymond James, on
behalf of the Company, notified
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potential bidders of the May 9, 1996 deadline. The notification included a form
of Merger Agreement which the Company was willing to sign.
HFS expressed concern regarding both the apparent willingness of
Cross Country to engage in a hostile takeover and the refusal of the Company's
franchisees to agree to amend their franchise agreements in accordance with HFS
requests. HFS therefore declined to submit a bid. The only bid received prior to
the deadline was from Cross Country. On May 10, 11, 13 and 14, counsel to the
Special Committee, Raymond James and counsel to Cross Country had further
negotiations regarding the specific terms of the Merger Agreement, including the
representations and warranties to be provided by the Company and various
conditions precedent to the closing, including cancellation and modification of
certain agreements. The Merger Agreement was signed by Cross Country and the
Company on May 14, 1996.
On June 14, 1996, Cross Country advised the Company that pursuant to
the terms of the Merger Agreement, the rights and obligations of CHGI had been
assigned to Merger Sub.
Following execution of the Original Merger Agreement, various
claims against the Company were brought to the attention of Cross Country. As a
result, Cross Country determined that certain obligations and contractual
relationships of the Company differed from the representations made to Cross
Country in the Original Merger Agreement. Cross Country concluded that these
obligations and contractual relationships, as discussed below, committed the
Company to various payments and obligations which Cross Country believed had a
material adverse impact on its valuation of the Company. Cross Country
therefore notified the Company that it would be unwilling to consummate the
Merger unless such obligations and relationships were terminated or modified in
a manner acceptable to Cross Country. As an alternative, Cross Country offered
to consummate the Merger without resolution of these issues at $1.80 per share.
Although the Company disagrees with Cross Country's assertion that
such non-disclosure constituted breach of the Merger Agreement, in light of the
limited economic resources available to the Company, the fact that a previously
extensive offering process had resulted in only limited interest in the Company
and the fact that ANIC had agreed, at that time, to refrain from taking any
action with respect to its judgment only until October 31, 1996, the Company
agreed to address the objections raised by Cross Country to the consummation of
the Merger. The Company's decision was further based on continuing losses by the
Company which amounted to approximately $.07 per share for the first nine
months of 1996 and the belief of management that profitable operations were
not likely in the near future.
Extensive efforts were undertaken by the Company to settle the
foregoing obligations and contractual arrangements and to quantify the actual
costs associated therewith. Certain of these efforts were successful but
require the payment of funds by the Company or the commitment to pay funds upon
consummation of the Merger to obtain such modifications. One such situation, a
claim by the Company's franchisees that payments were due to them for 1995 as
a result of profit sharing agreements was first brought to Cross Country's
attention in July, 1996. This claim was disputed by the Company, but settled for
a payment of $591,965, payable within five days after consummation of the
Merger, in order to avoid litigation and
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maintain good relationships with the franchisees. The provider of reinsurance
for the Company's warranty products alleged its arrangement with the Company was
exclusive. Although the Company disputed such a claim, Cross Country advised the
Company that it was unwilling to proceed with the Merger unless this dispute was
resolved. This contract was terminated for a payment of approximately $260,000.
An employment arrangement which the Merger Agreement required be terminated
without cost, required the payment of approximately $175,000. In another case, a
claim by a supplier of marketing services to the Company that it is entitled
under an existing agreement to continuing royalties from the sale of certain
products, which rights it was willing to waive for a payment of approximately
$700,000, is disputed by the Company. Despite efforts to resolve this matter,
the claim remains outstanding.
Upon quantification of the costs associated with the foregoing
obligations, and in light of the Company's ongoing and potential obligation to
make payments associated therewith, Cross Country agreed to proceed with the
Merger at $2.06 per share. After negotiations with Cross Country and in light of
the losses of the Company and the lack of perceived alternatives and the other
factors discussed above, the Company agreed to execute the First Amendment and
proceed with the Merger at a reduced price per share of $2.06.
On May 14, 1996, at a meeting of the Special Committee, Raymond James
delivered to the Special Committee its opinion that the consideration of $2.35
per Share to be received by the holders of Shares pursuant to the Original
Merger Agreement was fair to the Company's public stockholders from a financial
point of view at that time. Based upon the developments discussed above leading
to the execution of the First Amendment, on November 6, 1996, Raymond James
delivered a verbal opinion to the Special Committee that, based on its analysis
to that date, the Merger Consideration ($2.06 per share) is fair to the
Company's stockholders from a financial point of view. After discussing Raymond
James' opinion, the Special Committee and the Board of Directors, in a joint
meeting at which counsel to the Special Committee and a representative of
Raymond James participated, determined that the proposed Merger was fair to the
stockholders of the Company and approved and adopted the Merger Agreement,
subject to a number of conditions including the delivery of Raymond James'
written fairness opinion, which was received on November 26, 1996 (See "THE
MERGER AGREEMENT-Conditions, Representations and Covenants") and recommended to
the stockholders that they approve and adopt the Merger Agreement.
The Company and Cross Country thereafter entered into the First
Amendment as of October 31, 1996, reducing the Merger Consideration in the
Original Merger Agreement to $2.06. The First Amendment further modified the
arrangement with Carl Buccellato to provide that Mr. Buccellato would waive all
rights under his existing employment agreement and agree not to compete for a
two year period in exchange for a payment of $200,000 at the closing of the
Merger and an additional $600,000 payable in installments of $25,000 per month
during the two years following the Merger plus interest on the unpaid balance at
8.25% per annum. The arrangement with Mr. Buccellato under the original Merger
Agreement called for a waiver of his rights under his employment agreement
(which extended through
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December 31, 2000 at a base compensation level of $385,000 per year) in exchange
for a payment of $800,000 at the time of the Merger and the payment of $200,000
per year under a three-year consulting agreement requiring that his services be
available to Cross Country for 1,000 hours per year. The modified arrangement
does not call for the provision of consulting services.
In connection with negotiating the First Amendment, and in order to
allow the Merger to proceed, the Company attempted to obtain from ANIC an
extension of its October 31, 1996 deadline for foregoing action to collect on
the judgment. When ANIC refused to grant such an extension, The Cross Country
Group, L.L.C., an affiliate of Cross Country, purchased the rights of ANIC under
its judgment, making The Cross Country Group, L.L.C. the holder of the
judgment against HMS, a subsidiary of the Company. The balance of the judgment
had been reduced by a payment by the Company on September 4, 1996 of
$1,401,485.20, representing the proceeds of a federal income tax refund received
by the Company. The Company and HMS then entered into an agreement with The
Cross County Group, L.L.C. which extended the period during which Cross
Country would agree to take no action with respect to the judgment until
January 31, 1997 (the "Settlement Agreement") (this date has been extended
until the earlier of: (i) July 1, 1997 or (ii) termination of the Merger
Agreement as part of the Second Amendment). In consideration of The Cross
Country Group, L.L.C.'s agreeing to extend the date for enforcement of the
judgment, the Company guaranteed the payment of the judgment against HMS and
pledged the shares of HMS and another Company subsidiary as collateral. In
addition, the two subsidiaries granted security interests in their assets to
secure the obligation to repay the judgment. As a result of such arrangements,
the Company is now responsible for a judgment which was previously only against
one of its subsidiaries and has further pledged assets upon which The Cross
Country Group L.L.C. could foreclose to satisfy its claim in the event that the
Merger is not completed or the judgment is not paid prior to July 1, 1997. The
Special Committee noted that such arrangement provided the holder of the
judgment with possibly greater legal rights. However, in light of the fact that
ANIC would not agree to extend its October 31, 1996 deadline for foregoing
action to collect on the judgment, the Special Committee and the Board believed
that the failure to agree to this arrangement, pursuant to which The Cross
Country Group, L.L.C. purchased the judgment and entered into the Settlement
Agreement, could have resulted in the bankruptcy of the Company as it was
without resources to pay the outstanding balance of the judgment.
In connection with the First Amendment and the Settlement Agreement,
the Company also amended its existing Shareholder Rights Plan to permit Cross
Country and its affiliates to purchase an unlimited number of Shares of Common
Stock in unsolicited privately negotiated transactions without causing the
rights to separate or become exercisable. Such amendment was not effective until
three days after announcement of the signing of the Amendment and was only to be
effective so long as no other offers were received to purchase the Company
during that three-day period. The three-day period expired without receipt of
any such offers.
Such amendment permits Cross Country to acquire additional Shares prior
to the Merger making it less likely that an alternative bidder for the Company
will emerge.
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Although the Special Committee and the Board of Directors viewed this as a
negative factor, in light of the absence of any other bidders since May 1996 and
the inability of the Company to satisfy the ANIC judgment without the large
investment by Cross Country, the amendment to the Rights Plan was deemed
acceptable.
On December 20, 1996, HAC acquired an additional 120,000 Shares at
$1.73 per share in a single, unsolicited privately negotiated transaction,
bringing the total ownership by affiliates of Cross Country to 611,500 shares as
of February 13, 1997. Cross Country has advised the Company that while it
reserves its right to do so, neither it nor its affiliates currently intend to
acquire additional Shares except pursuant to the Merger.
On February __, 1997, the Special Committee held a telephonic
conference with representatives of Raymond James and counsel to the Special
Committee. During this telephonic conference, Raymond James confirmed that it
had not withdrawn its fairness opinion attached hereto as Annex B. After
participating in the foregoing discussion, the Special Committee confirmed its
determination that the Merger is fair to the stockholders of the Company, which
confirmation was based on the factors considered in connection with the Special
Committee's initial fairness determination as discussed under "Recommendation of
the Board; Fairness of the Merger."
The Special Committee and the Board of Directors held a meeting on
February __, 1997, wherein the Special Committee discussed its prior meeting
with Raymond James and the fact that the Special Committee had confirmed its
determination that the Merger is fair to the stockholders of the Company. After
participating in the foregoing discussion, the Board of Directors confirmed its
determination that the Merger is fair to and in the best interest of the public
stockholders of the Company, which confirmation was based on the factors
considered in connection with the Board of Directors' fairness determination
as discussed under "Recommendation of the Board; Fairness of the Merger."
COMPOSITION OF THE SPECIAL COMMITTEE
The Special Committee was composed of all directors of the Company with
the exception of Carl Buccellato, the President and Chief Executive Officer of
the Company. Mr. Buccellato was not included in the membership of the Special
Committee, based upon the belief of the Board of Directors that the possibility
of employment of Mr. Buccellato by an acquirer of the Company might impair his
independence. Although the Merger Agreement provides that Mr. Lipson will
receive $100,000 for cancellation of certain agreements between Mr. Lipson and
the Company, the Board of Directors concluded that this payment did not raise a
potential conflict of interest as the payments to be received are in
cancellation of existing rights. It is not anticipated that Mr. Lipson will
perform services for the Company after the Merger.
The Special Committee also includes members who are Affiliates with
franchise agreements containing terms similar to the agreements between the
Company and non-director Affiliates. All of the proposals received by the
Company involved the potential of modifying the relationship between the Company
and its franchisees. While the interests of
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the members of the Special Committee who are franchisees are potentially
different than that of stockholders who are not franchisees, the Board of
Directors concluded that because these directors had substantially the same
rights under their franchise agreements as all other Affiliates, and therefore
the same interests as other Affiliates in the consummation of the Merger, they
would not have a conflict of interest in evaluating the Merger.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE MERGER
At a joint meeting of the Special Committee and the Board of Directors
held on November 6, 1996, the Special Committee and the Board of Directors
unanimously determined that the Merger is fair to and in the best interest of
the public stockholders of the Company and resolved to recommend that the
stockholders approve and adopt the Merger Agreement.
The Special Committee, in reaching its decision, considered the factors
set forth below and the Board of Directors adopted the analysis of the Special
Committee. Except as indicated, all of these items were considered as positive
factors in concluding to recommend that the stockholders approve and adopt the
Merger Agreement.
(i) The opinion of Raymond James regarding the fairness, from
a financial point of view, of the Merger Consideration to the public
stockholders of the Company and the written report and oral
presentations regarding such report by Raymond James to the Special
Committee and the Board of Directors. See "Background of Merger" and
"Opinion of Raymond James & Associates, Inc." Based on Raymond James'
expertise and experience in the evaluation of businesses in connection
with transactions similar to the Merger and Raymond James' explanations
of its methodology and analyses, the Special Committee and the Board of
Directors believed that Raymond James' opinion as to the fairness of
the Merger Consideration to be received by the public stockholders was
well supported and sound and adopted their analysis.
(ii) The significant premium by which the Merger Consideration
of $2.06 per Share exceeds the last closing sales price ($1.50) of the
Shares on the day prior to the filing by Cross Country of a Schedule
13D reporting that it and its affiliates had acquired in excess of five
percent of the outstanding Shares, the premium by which the Merger
Consideration exceeds the highest price at which the Shares traded in
the six months ($1.75) preceding such announcement date, and the fact
that the Merger Consideration is substantially in excess of the
Company's book value per Share of $1.11 at September 30, 1996. The
Special Committee and the Board of Directors believed that these
premiums are comparable to, or in excess of, premiums paid in recent
acquisition transactions and supported the Special Committee's and the
Board of Directors' determination as to the fairness of the Merger.
However, due to the inherent differences between the business
operations and prospects of the Company and the businesses, operations
and prospects of other acquired companies available for analysis, there
were a limited number of comparable transactions considered by Raymond
James. Accordingly, Raymond James concluded it was inappropriate to,
and did not rely solely on the historical takeover analysis.
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(iii) The effect of the ANIC judgment and its settlement on
the Company and its stockholders. The factors considered in this
regard, which the Board of Directors and Special Committee believed
supported their decision to enter into the First Amendment, included
the following:
(a) the ability of the holder of the judgment to
seize assets of HMS (a significant source of revenues to the
Company), as part of its rights as a judgment creditor and the
resulting disruption to the business and affairs of the
Company in the absence of a settlement;
(b) the ability of the holder of the judgment to
pursue remedies against the Company and its subsidiaries in
an effort to collect on its judgment in the absence of a
settlement;
(c) extension of the period during which the holder
of the judgment would agree to refrain from taking action
against the Company under the Settlement Agreement until the
earlier of: (i) July 1, 1997 or (ii) termination of the Merger
Agreement;
(d) the fact that the Company has expended
approximately $1.6 million to date in litigation expenses in
the ANIC matter and had earlier waived its rights to appeal
the judgment.
(iv) The Board of Director's and the Special Committee's
assessment that the reduction in the price per share from $2.35 to
$2.06 was justified in light of the additional obligations of the
Company and the absence of alternatives available to the Company as a
result of the factors discussed in "Background of the Merger."
(v) The absence of a financing condition to consummation of
the Merger.
(vi) The Board of Director's and Special Committee's
assessment that Cross Country will be able to cause the Merger to be
consummated given the nature and sources of Cross Country's financing
agreements with respect to the Merger, the institutions entering into
such agreements and the limited conditions to the obligations of such
institutions to fund such loans.
(vii) The Board of Directors' and Special Committee's belief
that Cross Country would be able to obtain the regulatory approvals
necessary to consummate the Merger.
(viii) The adequacy of the information regarding the Company
which the Special Committee and its financial and legal advisors had
been provided. The members of the Board of Directors and the Special
Committee have knowledge of and a familiarity with the business,
financial condition, results of operations and prospects of the
Company, as well as the industry, the risks associated with achieving
the Company's projected operating results, and the impact on the
Company of general economic and market conditions.
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Based on such knowledge and general knowledge about stock market values, the
members of the Board of Directors and the Special Committee believed that the
projections considered by Raymond James were reasonable and supported the Board
of Directors' and the Special Committee's fairness determination.
(ix) The establishment of the Special Committee to make an
independent determination as to the fairness of the Merger supported
the Board of Directors' and the Special Committee's determination of
fairness.
(x) The terms and conditions of the Merger Agreement,
including the opportunity that all of the Company's stockholders will
have to dispose of all of their Shares for cash.
(xi) The risk that the Merger would not be consummated in
light of the conditions to the consummation of the Merger, which were
considered by the Special Committee and the Board of Directors to be
minimal after the execution of the First Amendment.
(xii) The continued ability of the Board of Directors under
the Merger Agreement to furnish confidential information to, and to
discuss and negotiate with, any third party that has initiated contact
with the Company or any of its subsidiaries, if the Board of Directors
determines, in good faith, based upon the advice of the Company's
independent outside counsel, that such action is required to satisfy
the Board of Directors' fiduciary duties to the Company's stockholders.
See "THE MERGER AGREEMENT-Termination; Amendments" and "-Fees and
Expenses."
(xiii) The length of the period of the sale process, the
number of potential purchasers contacted and the belief of the Board of
Directors that all viable alternatives had been investigated in
pursuing the maximization of stockholder value.
(xiv) The opportunity stockholders have to demand appraisal
of their Shares in accordance with Delaware law. While the Special
Committee and Board of Directors believe the Merger is fair to the
Company's public stockholders, the availability of dissenters' rights
for stockholders who may disagree with this belief was viewed as
positive and supported the decision of the Special Committee and the
Board of Directors to recommend approval of the Merger Agreement.
(xv) The losses incurred by the Company in recent years and
the conclusion of management that such losses could not be reversed
without additional capital, the same being unavailable upon terms
acceptable to the Company.
(xvi) The stockholders of the Company would lose the
opportunity to participate in the future operations of the Company.
Based on the alternatives available to the Company, the Board of
Directors and the Special Committee viewed continued operations as an
independent entity to represent little opportunity for profit to the
stockholders, particularly in light of the ANIC judgment.
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(xvii) The amendment of the Shareholder Rights Agreement
permitting Cross Country to acquire additional Shares which the Board
of Directors and Special Committee viewed as a negative in light of the
inhibiting effect on other potential bidders. However, in light of the
absence of other bidders through the bidding process, this factor was
outweighed by the willingness of Cross Country to purchase the ANIC
judgment for $2.75 million and agree to refrain from commencing
execution on the same.
The Board of Directors and the Special Committee viewed the
modification of the arrangements with Mr. Buccellato and Cross Country as a
relationship between those two parties and did not consider such agreement to
have any impact on the consideration to be paid to the stockholders of the
Company.
The foregoing analysis was conducted based upon the First Amendment to
the Merger Agreement. A similar analysis had been undertaken by the Board of
Directors and the Special Committee in connection with the Original Merger
Agreement. Such analysis resulted in the conclusion that the price of $2.35 per
share was fair and in the best interests of the stockholders. The Board of
Directors and the Special Committee concluded that the reduced merger price is
fair to and in the best interest of the public stockholders based upon the
events which occurred after the execution of the Original Merger Agreement and
are discussed in "Background of the Merger."
In view of the wide variety of factors considered in connection with
their evaluation of the Merger Agreement, neither the Special Committee nor the
Board of Directors found it practicable to, and did not, quantify or otherwise
assign relative weights to the individual factors considered in reaching their
respective determinations.
OPINION OF RAYMOND JAMES & ASSOCIATES, INC.
The Special Committee retained Raymond James to render an opinion as to
the fairness, from a financial point of view, of the consideration to be issued
to stockholders of the Company in the Merger. Raymond James is a nationally
recognized investment banking firm and as part of its investment banking
business, Raymond James is regularly engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes. The
Company selected Raymond James to render a fairness opinion in connection with
the Merger because of Raymond James' experience in transactions similar to the
Merger as well as Raymond James' engagement as the Company's financial advisor
since January 1995 and its involvement in the Company's consideration of various
strategic alternatives since that time.
Raymond James delivered to the Special Committee an opinion letter,
dated November 26, 1996, which stated that, based on the assumptions and subject
to qualifications set forth therein which are summarized below, as of November
26, 1996, the consideration to be received by the stockholders of the Company in
the Merger was fair, from a financial point of view, to the stockholders of the
Company. Raymond James was involved in structuring the
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Merger, soliciting potential purchasers of the Company, and assisted in
negotiating the terms of the Merger. Raymond James was not requested to, and
accordingly did not, express any opinion with respect to the underlying business
decision of the Company to effect the Merger, the structure or tax consequences
of the Merger Agreement or the availability or advisability of any alternatives
to the Merger. THE FULL TEXT OF THE WRITTEN OPINION OF RAYMOND JAMES WHICH SETS
FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, LIMITATION
ON AND THE SCOPE OF REVIEW BY RAYMOND JAMES IN RENDERING ITS OPINION IS ATTACHED
AS ANNEX B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS OF THE COMPANY ARE URGED TO READ RAYMOND JAMES' OPINION IN ITS
ENTIRETY.
In connection with Raymond James' review of the proposed Merger and the
preparation of its opinion, Raymond James examined (i) the financial terms and
conditions of the Merger Agreement; (ii) the audited financial statements of the
Company and its affiliates; (iii) certain unaudited financial statements and
operating reports of the Company, its subsidiaries and affiliates; (iv) certain
internal financial analyses and forecasts for the Company, its subsidiaries and
affiliates prepared by management, and (v) certain other publicly available
information on the Company. Raymond James also held discussions with members of
the management of the Company and its subsidiaries to discuss the foregoing
and considered other matters which they deemed relevant to their inquiry.
Raymond James assumed and relied upon the accuracy and completeness of
all such information and did not attempt to verify independently any of such
information, nor did they make or obtain an independent appraisal of the assets
or liabilities (contingent or otherwise) of the Company, its subsidiaries and
affiliates. With respect to financial forecasts, Raymond James assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of management, and relied upon management to advise
them promptly if any information previously provided became inaccurate or was
required to be updated during the period of their review.
Raymond James' opinion was based upon market, economic, financial and
other circumstances and conditions existing and disclosed to them as of
November 26, 1996 and such opinion specifically stated that any change in such
circumstances would require a reevaluation of their opinion.
In conducting their investigation and analyses and in arriving at their
opinion expressed herein, Raymond James took into account such accepted
financial and investment banking procedures and considerations as they deemed
relevant, including the review of (i) historical and projected revenues,
operating earnings, net income and capitalization of the Company and its
subsidiaries and certain other publicly held companies in businesses Raymond
James believed to be comparable to that of the Company; (ii) the then current
financial position and results of operations of the Company and its
subsidiaries and forecasted results of such entities; (iii) the historical
market prices and trading activity of the common stock of the Company; (iv)
financial and operating information concerning selected business combinations
which were deemed comparable in whole or in part; and (v) the general condition
of the securities markets.
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PRO FORMA ANALYSIS. Raymond James prepared for the Board of Directors a
pro forma analysis of the Company's 1995 income statement and management's 1996
and 1997 projected income statements. As warranty contracts are only for a
one-year term, the Company did not believe that projections beyond 1997 were
sufficiently reliable to be of value in this analysis. Raymond James noted the
limitations of analysis of such a relatively short period of future projections
and concluded that it was inappropriate to rely solely on any analysis of
management's projections in determining the fairness of the merger
consideration.
In 1995, the Company reported a net loss of $1,908,656 or $0.34 per
share. Raymond James adjusted the Company's reported results on a pro forma
basis to account for several non-recurring or one-time items including: (i) the
elimination of non-recurring legal, consulting and other related expenses; (ii)
the elimination of market value adjustments from securities being marked to
market; (iii) the elimination of the ANIC judgment; and (iv) the effect of
the settlements with the Company's franchisees regarding certain 1995
profit-sharing payments. The effect of the adjustments, on a fully-taxed basis,
increased the Company's net income per share on a pro forma basis in 1995 to
$0.21
Management provided Raymond James with a projection for the balance of
1996 and for 1997. Management noted that said projections were similar to those
previously provided to Cross Country. Raymond James adjusted managements'
projections to account for: (i) the elimination of non-recurring legal,
consulting and other related expenses; and (ii) the elimination of capital gains
and benefits from securities being marked to market at a profit. The effect of
the adjustments, had no impact on the Company's projected revenues for 1996
($46.3 million) or 1997 ($46.9 million). Such adjustments increased the
Company's projected net earnings on a pro forma basis to $575,000 and projected
net earnings per share on a pro forma basis in 1996 to $0.10. These adjustments
increased projected net earnings on a pro forma basis in 1997 to a loss of
$49,000 and increased net earnings per share to a loss of $0.01 in 1997. Raymond
James also calculated a pro forma projected revenues, net income and earnings
per share in 1997 assuming a 10% increase in warranty revenue production over
projected 1996 levels. After all adjustments and assuming a 10% increase in
direct warranty expenses, this pro forma calculation indicated revenues of $49.6
million, net income of $263,000 and earnings per share of $0.05. Raymond James
relied solely on management's projections and calculated more favorable
projections solely for illustrative purposes. Raymond James provided no opinion,
and did not state that these adjusted projections were more appropriate than the
projections provided by management.
Raymond James noted that its pro forma calculations did not take into
account the negative effect of funding the ANIC judgment or its settlement nor
did they take into account any profit-sharing payments to Affiliates in either
1996 or 1997, all of which would have the effect of reducing pro forma earnings.
Management's projections for 1996 anticipated an increase in home warranty
production over 1995 and a 3.5% increase in 1997 over 1996 but a material
decrease in membership related revenue in both years due to decreasing
participation in the Company's E&O program and a 5% increase in general and
administrative costs in 1997. Raymond James also noted that the Company, through
the third quarter of 1996, was not performing to the original 1996 projections
provided earlier in the year, primarily due to continued deterioration in the
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Company's membership-related revenue at a faster than anticipated rate and also
due to higher than projected warranty claims expense.
MARKET VALUATION ANALYSIS. Raymond James prepared for the Board of
Directors an analysis of the relationship of several transaction values for the
Common Stock of the Company ranging from $1.80 to $2.35 per share to (i) the
nominal book value per share of Common Stock at September 30, 1996, and (ii) the
closing sale price of the Common Stock on various dates prior to the date Cross
Country filed its initial Form 13-D with the Securities and Exchange Commission
(April 4, 1996).
At a transaction value of $2.06 per share, the market valuation
analysis indicated a 85.7% premium over the Company's nominal book value per
share of $1.11 at September 30, 1996, a 37.3% premium over the closing market
price ($1.50) one day prior to the initial Cross Country Group 13-D filing, a
24.1% premium over the closing market price ($1.66) one week prior to the
initial Cross Country Group 13-D filing, and a 106.0% premium over the closing
market price ($1.00) four weeks prior to the initial Cross Country Group 13-D
filing.
Raymond James also analyzed and calculated the Company's Enterprise
Value at various transaction values for the Common Stock of the Company ranging
from $1.80 to $2.35 per share. Enterprise Value was defined and calculated as
the consideration to be paid to the Company's stockholders and stock option
holders at various transaction values per share plus funded debt to be assumed
by a buyer as of September 30, 1996, plus the value of the ANIC settlement less
excess available cash projected as of December 31, 1996. Raymond James then
compared these Enterprise Values to the Company's trailing 12 months revenues as
of September 30, 1996 and the number of warranty contracts sold by the Company
over the same trailing 12 month period.
At a transaction value of $2.06 per share, the ratio of Enterprise
Value to trailing 12 months revenues was 0.43x, and Enterprise Value divided by
warranty contracts sold was $167.
Raymond James also prepared for the Board of Directors an analysis of
the relationship between various pro forma transaction values and pro forma
1995, projected 1996 and 1997, and pro forma projected 1996 earnings per share.
Raymond James added $0.75 per share on a pro forma basis to the $2.06 per share
to be paid to the stockholders in the Merger. This $0.75 represents the value
per share of Common Stock of the ANIC settlement ($1,401,485 already paid to
ANIC and the $2,750,000 paid by Cross Country for the remaining claim). This pro
forma adjustment was calculated by Raymond James in order to present a
meaningful comparison to Raymond James' calculation of the Company's pro forma
earnings per share which reflect no adjustments for the obligation and funding
of the ANIC settlement.
At a pro forma transaction value of $2.81 (pro forma equivalent to the
$2.06 transaction value), Raymond James' analysis indicated price-to-earnings
ratios of 13.4x for pro forma 1995 earnings per share ($0.21), 28.1x for pro
forma projected 1996 earnings per share ($0.10), 56.2x for pro forma projected
1997 earnings per share ($0.05) (which assumes a 10% increase in warranty
production) and a non-meaningful multiple for management's pro forma projected
1997 net loss per share of ($0.01) (which assumes no increase in warranty
production).
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PRECEDENT TRANSACTION ANALYSIS. Raymond James analyzed publicly
available information for selected completed acquisitions of companies believed
by Raymond James to be comparable to the Company. As there are few public
companies that have existed which are closely comparable to the Company, Raymond
James ultimately considered only two transactions: ServiceMaster L.P.'s
acquisition of American Home Shield Corporation and American Home Shield
Corporation's acquisition of Sierra Home Service Companies, Inc. Both American
Home Shield Corporation and Sierra Home Service Companies represent companies
operated exclusively in the home warranty industry.
Raymond James noted that in October 1989, ServiceMaster L.P. acquired
American Home Shield Corporation in a transaction in which American Home Shield
shareholders received (i) $9.50 in cash per share, and (ii) a contingent right
to receive future payments ranging from $0.00 to an aggregate of $3.50 in cash
depending upon the future earnings performance of American Home Shield
Corporation as a subsidiary of ServiceMaster. The contingent value rights
initially traded in the open market for $1.375 per right and eventually realized
$0.91 in payout. The American Home Shield financial advisor had valued the
rights between $1.00 and $1.90 per right.
Assuming a per share value range of $10.50 and $11.40 for American Home
Shield at the time of its sale, Raymond James noted that the implied
price-to-earnings ratio on its 1989 projections ranged from 10.3x to 11.2x. In
addition, Raymond James noted that American Home Shield management invested in
the ServiceMaster transaction as minority shareholders. Calls and puts were put
in place to allow/obligate ServiceMaster to acquire this minority position at
11.1x trailing earnings at a future date.
Raymond James also calculated multiples and other ratios in the
ServiceMaster - American Home Shield transaction which it deemed relevant.
Assuming a $10.50 to $11.40 per share range of value for American Home Shield,
the range of Enterprise Value divided by home warranty contracts outstanding was
approximately $332 to $373; the range of Enterprise Value to trailing 12 months
revenues was approximately 1.18x to 1.32x; and the range of the premium to book
value per share was approximately 199% to 225%. Raymond James noted that the
price-to-earnings multiples derived from the Cross Country-Company transaction
compared favorably to the ServiceMaster-American Home Shield transaction, and
further indicated that they considered this measure one of the most meaningful
given the different circumstances of the companies and time periods involved.
Raymond James also analyzed the March 1996 acquisition of Sierra Home
Service Companies, Inc. by American Home Shield Corporation (still a subsidiary
of ServiceMaster). Raymond James noted that in this transaction, Sierra's
Enterprise Value divided by home warranty contracts outstanding approximated
$159. Enterprise Value to trailing 12 months revenues was approximately 0.49x
and the premium to book value per share was approximately 64%. No
price-to-earnings multiples were relevant as Sierra had been unprofitable in the
periods preceding its sale.
Raymond James noted that the Market Valuation Analysis of the Cross
Country - Company transaction indicated multiples and ratios which were lower
than the ServiceMaster -
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American Home Shield transaction, with the notable exception of the
price-to-earnings multiples. Raymond James also noted that the same analysis
indicated that the Cross Country - Company transaction multiples and ratios
approximated or materially exceeded the American Home Shield - Sierra
transaction. Given the relative similarities between the Company and its
circumstances with Sierra, Raymond James concluded that this analysis supported
its conclusion and was accorded meaningful weight.
COMPARABLE PUBLIC COMPANY ANALYSIS. Using publicly available
information, Raymond James prepared for the Board of Directors an analysis of
selected financial data for certain publicly-held companies in businesses which
Raymond James believed to be similar in various respects to the Company.
Specifically, Raymond James included in its review: CUC International,
FirstService Corporation, Rollins Inc., ServiceMaster L.P., Warrantech
Corporation and First American Financial. Due to the lack of consistency in the
valuation multiples accorded to these companies as a group and the fact that
none of the selected companies represented a sufficiently comparable company to
the Company, Raymond James believed that a purely quantitative comparable public
company analysis would not be particularly meaningful in the context of the
Merger. Raymond James applied minor weight to this analysis in determining its
conclusion.
STOCK PRICE AND TRADING VOLUME ANALYSIS. Raymond James examined the
history of the daily trading prices (defined as closing price) and trading
volume of the Common Stock for the two years preceding May 14, 1996. Raymond
James noted that approximately 50% of the Shares traded in both the preceding
one and two-year periods at prices of $1.25 per share or below. In the one-year
period preceding May 14, 1996, less than 6% had traded above $2.00 per share.
For the two-year period preceding May 14, 1996, Shares had traded as high as
$2.75 per share, but less than 4% had traded above $2.00 per share. The Common
Stock traded for $1.50 per share on the day prior to the announcement of the
Acceleration judgment and $0.75 per share on the date of such announcement.
Raymond James also noted the trading history of the stock since the initial May
14, 1996 announcement of the Cross Country transaction. In addition, Raymond
James noted that the Common Stock was trading for $0.875 per share at the time
the Board of Directors engaged the firm to assist them in evaluating various
strategic alternatives.
HISTORICAL TAKEOVER PREMIUM ANALYSIS. Raymond James prepared for the
Board of Directors an analysis of certain publicly available information for
selected mergers and acquisitions of public companies in transactions valued
between $5 million and $50 million since January 1, 1994. Raymond James compared
the purchase price per share in the selected transaction to the target's closing
stock price one day, one week and four weeks prior to the relevant announcement
date of the impending transaction to calculate the premium over such stock
price. Raymond James noted that the median premium for the periods one day, one
week and four weeks prior to the relevant announcement date of the selected
transaction were 33.3%, 40.8% and 43.9%, respectively. The average premiums
calculated were 43.7%, 51.0% and 53.7%, respectively. Raymond James noted that
at a transaction value of $2.06 per share, the premiums to be paid to
stockholders over the Company's closing stock price one day, one week and four
weeks prior to the date of the initial Cross Country Form 13-D filing are 37.3%,
24.1% and 106.0%, respectively. Raymond James noted that the premiums to be paid
to the Company's stockholders over book value; historic stock prices, including
those existing at
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the time of the Company's initiation of the sale process; and recent stock
prices were material and generally supported its conclusions.
Because the reasons for and the circumstances surrounding the precedent
transactions were specific to such transactions and because of the inherent
differences between the businesses, operations and prospects of the Company and
the businesses, operations and prospects of the selected acquired companies
analyzed, Raymond James believed that it was inappropriate to, and therefore did
not, rely solely on the historical takeover premium analysis.
In evaluating the fairness of the consideration to be paid to the
Company's stockholders pursuant to the Merger Agreement, including the decrease
in consideration from $2.35 to $2.06 per share, Raymond James noted to the
Special Committee and the Board of Directors that (i) the Company was not
performing to the original 1996 projections provided earlier in the year upon
which the $2.35 was partially determined to be fair, (ii) the value of the
Company to potential acquirors, including Cross Country, was reduced due to
economic and liability issues first identified by Cross Country several months
after the execution of the Original Merger Agreement, (iii) the time limitations
imposed by the judgments against the Company significantly reduced the
availability of other alternatives, and (iv) none of the previously interested
potential acquirors had indicated a continued interest in acquiring the Company.
Raymond James noted that its analyses of the transactions in November
1996 versus its analysis in May 1996 reflected decreases in certain measures of
value, such as book value premiums, premiums over historic market prices and
comparable precedent transaction multiples, roughly approximating the price
decrease of $2.35 per share to $2.06. Raymond James also noted, however, more
material decreases in Company performance including a decrease in pro-forma
projected earnings per share for 1996 from $0.24 in May to $0.10 in November
1996.
The Company entered into an engagement letter with Raymond James on
January 28, 1995 pursuant to which the Company retained Raymond James as its
exclusive financial advisor. For its services relating to the fairness opinion
referred to herein, Raymond James received a $50,000 fee upon delivery of its
initial opinion and a $50,000 fee upon delivery of its subsequent written
opinion. For its advisory services, Raymond James received a $50,000 retainer,
and will receive $100,000 upon the closing of the Merger. The Company has also
agreed to reimburse Raymond James for its reasonable out-of-pocket expenses and
has agreed to indemnify Raymond James against certain liabilities that may arise
in connection with its engagement, including liabilities that may arise under
federal securities laws. In the ordinary course of its business, Raymond James
may trade the Common Stock of the Company for its own account and for the
account of its customers and, accordingly, may at any time hold a long or short
position in such Common Stock.
PLANS FOR THE COMPANY AFTER THE MERGER
HAC expects that the business and operations of the Surviving
Corporation will be continued by HAC substantially as they are currently being
conducted by the Company and its
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subsidiaries and that HAC will make additional investments in the Company as
appropriate to increase the Company's business. HAC does not currently intend to
dispose of any assets of the Surviving Corporation, other than in the ordinary
course of business. It is anticipated, however, that HAC will from time to time
evaluate and review its businesses, operations and properties and make such
changes as are deemed appropriate.
Except as described in this Proxy Statement, none of Associates, HAC,
Merger Sub or the Company has any present plans or proposals involving the
Company or its subsidiaries which relate to or would result in an extraordinary
corporate transaction such as a merger, reorganization, or liquidation, or a
sale or transfer of a material amount of assets, or any material change in the
present dividend rate or policy, indebtedness or capitalization, or any other
material change in the Company's corporate structure or business. However, HAC
will review proposals or may propose the acquisition or disposition of assets or
other changes in the Surviving Corporation's business, corporate structure,
capitalization, management or dividend policy which it considers to be in the
best interest of the Surviving Corporation and its stockholder.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors with
respect to the Merger, stockholders should be aware that although directors and
existing officers of the Company will receive the same consideration for their
Shares as the other stockholders of the Company, certain members of the Board of
Directors and of the Company's management have interests that may present them
with actual or potential conflicts of interest.
The Company has been advised that on May 14, 1996, the members of the
Board of Directors and one executive officer granted proxies to Cross Country
with respect to 698,481 Shares owned by them (12.56% of the outstanding Shares)
as to all matters related to the Merger and that Cross Country intends to vote
such Shares in favor of the approval and adoption of the Merger Agreement.
It is expected that certain of the current officers of the Company
will continue as officers and key employees of the Surviving Corporation after
the Merger. Carl Buccellato will resign as Chairman, Chief Executive Officer
and President of the Surviving Corporation and its subsidiaries at the Effective
Time. In exchange for agreeing to surrender his rights under his current
employment agreement with the Company, Mr. Buccellato will receive a payment of
$200,000 at the closing of the Merger and an additional $600,000 payable in
installments of $25,000 per month during the following two years plus interest
on the unpaid balance at 8.25% per annum. Mr. Buccellato beneficially owns
263,453 Shares (excluding options to purchase 260,000 Shares) or approximately
4.7% of the outstanding shares. Gary D. Lipson, a director of the Company, will
receive $100,000 payable in equal monthly installments of $8,333.33 in
consideration of the termination of an engagement agreement between Mr. Lipson
and the Company.
Pursuant to the Merger Agreement, the holders of options to purchase
common stock of the Company, which options are exercisable at a price below
$2.06 per share (which include employees and one non-employee director), will
surrender such options and
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receive payments equal to the excess of $2.06 over the exercise price.
Therefore, upon consummation of the Merger, Mr. Buccellato, C. Gregory Morris,
Vice President, Treasurer and Chief Financial Officer of the Company, and Melvin
Stewart, a director of the Company, will be entitled to payments of $15,600,
$3,600 and $32,750, respectively, in settlement of their respective stock
options.
Certain directors of the Company are parties to area franchise,
management agreements and consulting agreements with the Company (the
"Affiliated Franchisees") which were amended on April 26, 1996 (the
"Amendments"). In addition to the Amendments, one of the Affiliated Franchisees
entered into an option agreement with the Company dated April 26, 1996. The
Affiliated Franchisees have agreed to cancel the option and Amendments prior to
the Effective Time.
In addition, the Company has agreed that, in the event that the Merger
is not consummated for certain reasons, the Company will pay the reasonable
documented out-of-pocket fees, costs and expenses incurred or to be incurred by
Cross Country and Merger Sub and their affiliates and stockholders in connection
with the Merger, including expenses of legal counsel, investment bankers and
accountants, plus a fee in the amount of $500,000. See "THE MERGER AGREEMENT--
Fees and Expenses."
The Company has agreed in the Merger Agreement to provide directors'
and officers' liability insurance and to indemnify the current directors and
officers of the Company. See "THE MERGER AGREEMENT--Indemnification,
Insurance and Releases."
As a result of the proposed Merger, stockholders will have no
ownership interest in the Surviving Corporation and will not participate in any
potential earnings and growth of the Surviving Corporation after the Merger. In
addition, the payments or benefits described above will not be made to
stockholders who are not officers or directors of the Company.
REASON OF CROSS COUNTRY FOR THE MERGER
Cross Country's reason for proposing the Merger at this time is its
belief that its sole ownership of the Company could allow greater focus on
long-term objectives and flexibility in the Company's operations rather than the
short-term focus which may have resulted from the effects of current operating
results on the public market for the Shares and that its ability to make
additional capital available will enable the Company to increase its business.
FAILURE TO CONSUMMATE THE MERGER
In the event that the Merger is not consummated, it is likely that
the Company will be without adequate resources to pay the full amount due to The
Cross County Group, L.L.C. under the Settlement Agreement. In such event, the
Company would be forced to seek alternatives to paying the full amount of the
judgment. No other alternatives are presently being considered.
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CERTAIN EFFECTS OF THE MERGER
If the Merger is consummated, the Company's stockholders will no longer
have any interest in, and will not be stockholders of, the Company and,
therefore, will not participate in its future potential earnings and growth and
will not be subject to the risks associated with an investment in the Company.
Instead, each such stockholder will have the right to receive upon consummation
of the Merger a payment of $2.06 in cash for each Share he or she held (other
than Shares held by Cross Country and its affiliates and stockholders who
perfect their statutory appraisal rights under Delaware law) whether or not the
Company's future operations meet the projections on which the determination of
the fairness of the price was based. Conversely, if the Merger is consummated,
Cross Country will realize all of the Company's profits and losses, as well as
any future improvements in the Company's operations.
The Company will, as a result of the Merger, become a wholly-owned
subsidiary of HAC and will be a privately held company. The registration of the
Shares under the Exchange Act will then be terminated. In addition, because the
Shares would no longer be publicly held, the Company would be relieved of the
obligation to comply with the proxy rules of Regulation 14A under Section 14 of
the Exchange Act, and its officers, directors and stockholders owning more than
10% of the outstanding Shares would be relieved of the reporting requirements
and "short swing" trading restrictions under Section 16 of the Exchange Act.
Further, the Company will cease filing information with the Commission. The
Company will also be de-listed from Nasdaq NMS.
If the Merger Agreement is not adopted by the required vote of the
Company's stockholders, or the Merger is not consummated for any other reason,
such failure to consummate the Merger will require the Company to pay the full
amount of the judgment. This could have a material adverse effect on the
liquidity of the Company. In such event, the Company would be forced to seek
alternatives to pay the full amount due under the Settlement Agreement. No
other alternatives are presently being considered.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a description of certain federal income tax
consequences to stockholders who receive cash for their Shares in the Merger or
upon the exercise of appraisal rights. The discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, administrative positions of the Internal Revenue Service (the
"Service") and court decisions. The Company will not seek any rulings from the
Service with respect to the transactions contemplated hereby. The following
discussion is limited to the material federal income tax aspects of the Merger
for a holder of Shares who is a citizen or resident of the United States and who
holds the Shares as capital assets. This discussion also does not purport to
deal with all aspects of taxation that may be relevant to a particular investor
in light of his or her individual circumstances or to certain types of investors
(including insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, nonresident aliens and foreign corporations)
subject to special treatment under the federal income tax laws.
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In general, the receipt of cash by a stockholder pursuant to the Merger
or the exercise of appraisal rights will be a taxable event for that stockholder
for federal income tax purposes and may also be a taxable event under applicable
state, local and foreign tax laws. A stockholder will recognize gain or loss for
federal income tax purposes equal to the difference between (i) the amount of
cash that he or she receives in exchange for his or her Shares and (ii) his or
her tax basis in those Shares. That gain or loss will be capital gain or loss
and will be long-term capital gain or loss if the stockholder has held those
Shares for more than one year as of the Effective Time.
A stockholder may be subject to backup withholding of federal income
tax at a rate of 31% on payments made to him or her in exchange for his or her
Shares, unless the stockholder is exempt from backup withholding or provides the
Paying Agent with his or her correct taxpayer identification number (by
completing IRS Form W-9 or the Substitute Form W-9 to be included with the
letter of transmittal), certifies as to no loss of exemption from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. A stockholder who does not provide the Paying Agent
with his or her correct taxpayer identification number may be subject to
penalties imposed by the Service. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. The Company will
report to each stockholder and the Service the amount of any "reportable
payments" made to the stockholder and the amount of tax withheld, if any.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH IN THIS PROXY STATEMENT
ARE BASED ON CURRENT LAW AND ARE FOR GENERAL INFORMATION ONLY. THE TAX
CONSEQUENCES FOR A PARTICULAR STOCKHOLDER WILL DEPEND UPON THE FACTS AND
CIRCUMSTANCES APPLICABLE TO THAT STOCKHOLDER. ACCORDINGLY, EACH STOCKHOLDER IS
URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO
THE STOCKHOLDER OF THE MERGER IN LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS AND ANY POSSIBLE CHANGES IN THOSE LAWS. THE FOREGOING DISCUSSION MAY NOT BE
APPLICABLE WITH RESPECT TO SHARES RECEIVED PURSUANT TO THE EXERCISE OF EMPLOYEE
STOCK OPTIONS OR OTHERWISE AS COMPENSATION.
THE MERGER AGREEMENT
The following is a summary of the material provisions of the Original
Merger Agreement, the First Amendment and the Second Amendment, conformed
copies of which are attached hereto as Annex A and incorporated by reference
herein. Such summary is qualified in its entirety by reference to the text of
the Merger Agreement.
THE MERGER
The Merger Agreement provides that, subject to approval of the Merger
Agreement by the Company's stockholders and satisfaction or waiver of certain
other conditions, a duly executed
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copy of the related Certificate of Merger will be filed with the Secretary of
the State of Delaware. Upon such filing, Merger Sub will be merged with and into
the Company, the separate corporate existence of Merger Sub will cease, and the
Company will continue, under its name, as the Surviving Corporation.
Upon the Effective Time, each Share (other than Shares held by Cross
Country, Merger Sub and their affiliates and stockholders who perfect their
statutory appraisal rights under Delaware law or held in treasury by the
Company) will, by virtue of the Merger and without any action on the part of the
holder thereof, be converted solely into the right to receive $2.06 in cash,
without interest, will no longer be outstanding and will be canceled. Each share
of common stock of Merger Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one share of common
stock of the Surviving Corporation.
Holders of Shares who do not vote to approve and adopt the Merger
Agreement and who otherwise strictly comply with the provisions of Delaware law
regarding statutory appraisal rights have the right to seek a determination of
the fair value of their Shares and payment in cash therefor in lieu of the
Merger Consideration. See "APPRAISAL RIGHTS."
PAYMENT FOR SHARES
Prior to the Effective Time, Merger Sub will designate the Paying
Agent. Promptly after the Effective Time, the Paying Agent will mail or make
available to each stockholder a notice and letter of transmittal containing
instructions for surrendering Certificates in exchange for payment thereof. No
stockholder should surrender any Certificates until the stockholder receives the
letter of transmittal and other materials for such surrender. Upon receipt of
any such Certificates together with a duly executed letter of transmittal and
other requested documents, the Paying Agent will mail a check, in an amount
equal to $2.06 for each Share represented by such Certificates, to the
registered owner or, subject to certain conditions more fully described below,
his or her transferee.
Each Certificate which, prior to the Effective Time, represented Shares
(other than Shares held by Cross Country and its affiliates and stockholders who
perfect their statutory appraisal rights under Delaware law), will, after such
time, evidence only the right to receive the amount of cash into which the
Shares represented thereby shall have been converted. No interest will be paid
or accrued on the amounts payable upon the surrender of any such Certificate.
If payment of the Merger Consideration is to be made to a person other
than the person in whose name the Certificate surrendered is registered, it will
be a condition of payment that the Certificate so surrendered will be properly
endorsed or otherwise be in proper form for transfer and that the person
requesting such payment will pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the Certificate
surrendered, or will establish to the satisfaction of the Surviving Corporation
that such tax either has been paid or is not applicable.
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THE EXCHANGE FUND
Immediately prior to or at the Effective Time, Cross Country will
deposit or cause to be deposited with the Paying Agent, in trust for the benefit
of the Company's stockholders (other than Cross Country, Merger Sub and their
affiliates and stockholders who perfect their statutory appraisal rights under
Delaware law) and the holders of options with exercise prices below $2.06, the
aggregate Merger Consideration to which holders of Shares will be entitled at
the Effective Time together with an amount equal to the payment to which the
holders of such options are entitled pursuant to the Merger Agreement.
Promptly following the date that is six months after the Effective
Time, the Paying Agent will return to the Surviving Corporation all Merger
Consideration, and the Paying Agent's duties will terminate. Thereafter, each
holder of a Certificate may surrender such Certificate to the Surviving
Corporation and (subject to applicable abandoned property, escheat and similar
laws) receive in exchange therefor the Merger Consideration.
REGULATORY MATTERS
Seventeen of the states in which the Company's subsidiaries operate
regulate the home warranty business in which such subsidiaries are engaged. The
states of Florida, California and Virginia require pre-approval of a change in
control of the Company. The Merger Agreement requires the parties to use their
best efforts to obtain all such approvals and provides that the receipt of such
approvals is a condition to consummating the transaction. All required notices
and applications have been filed by the Company and Cross Country with such
states. All of the states have responded and all requested supplemental forms
have been filed. On January 27, 1997, the State of Virginia's Bureau of
Insurance approved Cross Country's application for pre-Merger approval. There
can be no assurance that such approval will be obtained from California or
Florida, and, if obtained, there can be no assurance as to the date of such
approval. There can also be no assurance that such approval will not contain
a condition or requirement which will be unacceptable to Cross Country.
CONDITIONS, REPRESENTATIONS AND COVENANTS
The respective obligations of Cross Country and Merger Sub, on the one
hand, and the Company, on the other, to consummate the Merger are subject to the
following conditions, among others: (i) the approval and adoption of the Merger
Agreement by the affirmative vote of the holders of outstanding Shares to the
extent required by the Certificate of Incorporation, By-laws and applicable law;
(ii) the absence of any effective or threatened temporary restraining order,
preliminary injunction or other order issued by a court of competent
jurisdiction preventing the consummation of the transactions contemplated by the
Merger Agreement; (iii) the Settlement Agreement remaining in full force and
effect; (iv) the performance in all material respects of the covenants and
agreements made by Cross Country and Merger Sub, or the Company, as applicable,
prior to or at the Effective Time; and (v) the accuracy in all material
respects of the representations and warranties made by Cross Country and Merger
Sub, or the Company, as applicable, in the Merger Agreement at and as of the
Effective Time. The
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obligations of Cross Country and Merger Sub to effect the Merger are subject to
the following additional conditions: (i) the Company shall have taken all
appropriate action to obtain the cancellation of all Options (as defined herein)
in exchange for payment by the Paying Agent in an amount equal to the excess of
$2.06 over the exercise prices thereof; (ii) Cross Country and Merger Sub
obtaining such regulatory consents, approvals or clearances as are necessary in
connection with the consummation of Merger; (iii) the holders of Shares
representing more than 10% of the total number of Shares as of the Record Date
shall not have taken actions prior to the Effective Time intended to cause their
Shares to be appraised pursuant to Section 262 of the DGCL; (iv) the Company
shall have canceled certain agreements entered into after April 1, 1996 with
certain of its directors; (v) consents have been obtained from the landlord of
the building in which the Company's headquarters are located and the other
parties to certain agreements of the Company; and (vi) all regulatory, consents,
approvals or clearances necessary for the consummation of the Merger have been
obtained. In addition, the obligation of the Company to effect the Merger is
subject to the condition that Raymond James shall not have withdrawn its opinion
that the Merger is fair to the Stockholders of the Company from a financial
point of view.
The Merger Agreement contains various customary representations and
warranties of Cross Country, Merger Sub and the Company. The representations of
Cross Country and Merger Sub relate to due organization, corporate
authorization, consents and approvals, absence of breach, lack of prior
activities and the Financing. The representations of the Company relate to due
organization, capitalization, corporate authorization, absence of certain
changes, consents and approvals, absence of breach of other agreements, status
of certain franchise agreements, title to assets and the binding nature of the
ANIC Settlement Agreement.
The Company has agreed to conduct its business in the ordinary and
usual course prior to the Effective Time. In this regard, the Company has agreed
that it will not, without the prior written consent of Cross Country, engage in
certain types of transactions, including, among other things, the issuance of
Shares, declaration of dividends or distributions with respect to the Shares,
modification of certain agreements or the incurrence of indebtedness beyond
certain limits. In addition, Cross Country, Merger Sub and the Company have made
further agreements regarding certain filings with the Commission; the vote at
the Special Meeting; best efforts to consummate successfully the Merger; notices
in connection with the Merger; access to the Company's records; public
announcements; and indemnification of the Company's officers and directors. In
addition, during the period from the date of the Merger Agreement to the
Effective Time, the Company has agreed not to solicit or initiate discussions,
directly or indirectly, concerning any possible proposal regarding a sale of the
Company's capital stock or a merger, acquisition, sale of assets or similar
transaction involving the Company or any subsidiary, division or major asset
thereof. The Company, however, is permitted to consider unsolicited proposals
from third parties, if any such proposals are made and the Board of Directors
determines that the proposal represents a financially superior transaction for
the Stockholders of the Company and the Board of Directors determines after
consultation with counsel that the failure to take such action would be
inconsistent with its fiduciary duties, written notice is provided to Cross
Country and the Company keeps Cross Country advised of the status of such
discussions or negotiations.
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STOCK OPTIONS
At or immediately prior to the Effective Time, the Company will take
all action necessary to cancel all of the outstanding options to purchase
Shares (the "Options"), whether or not presently exercisable, which have been
granted under any stock options or other compensation plan or arrangement of the
Company. Each holder of an Option that is exercisable on or prior to the
Effective Time will be entitled to receive from the Paying Agent in cancellation
thereof a cash payment (subject to any withholding taxes) in an amount equal to
the excess, if any, of the Merger Consideration over the per Share exercise
price of such Option, multiplied by the number of Shares subject to such
exercisable Option (the "Option Settlement Amount"). No payment will be made by
the Company in respect of any Option having an exercise price equal to or
greater than the Merger Consideration. All exercisable Options will be canceled
upon the payment of the Option Settlement Amount. At the Effective Time, any
such exercisable Option that the holder thereof has not consented to
cancellation will be converted into, and shall only represent the right to
receive, the Option Settlement Amount.
Immediately prior to the Effective Time, all of the Company's stock
option, stock bonus and stock award plans or arrangements, that provide for
the issuance of Shares of the capital stock of the Company, will be
terminated, and no further stock options, bonuses or awards shall be granted
thereunder subsequent to the Effective Time. Without the prior written consent
of Cross Country, the Company will not make any additional grants of stock
options, stock bonuses or stock awards under any of such plans prior to the
Effective Time.
DIRECTORS AND OFFICERS OF THE COMPANY FOLLOWING THE MERGER; CERTIFICATE OF
INCORPORATION
The officers and directors of Merger Sub immediately prior to the
Effective Time will be the initial officers and directors of the Surviving
Corporation. It is expected that the directors of Merger Sub immediately prior
to the Merger (and therefore the directors of the Surviving Corporation) will be
different than the current directors of the Company. The Certificate of
Incorporation of Merger Sub will be the Certificate of Incorporation of the
Surviving Corporation, until thereafter amended.
FEES AND EXPENSES
If the Merger is not consummated and (I) the Merger Agreement is
terminated because: (A) holders of more than 10% of the Shares shall have
claimed or perfected appraisal rights; (B) the Company (or the Board of
Directors of the Company) shall have authorized, recommended, proposed or
publicly announced its intention to enter into any merger or consolidation
agreement (other than this Agreement) or any other transaction in which all or
substantially all of the Company's or any Company subsidiary's equity or assets
would be acquired by a third party (other than Cross Country, Merger Sub or any
of their affiliates); (C) the Board of Directors of the Company does not
recommend in this Proxy Statement that the Company's stockholders adopt and
approve the Merger, the Merger Agreement and the transactions contemplated
thereby; (D) after publicly recommending in this Proxy Statement that Company's
stockholders adopt and approve the Merger, the Merger Agreement and the
transactions contemplated hereby, the Board of Directors of the Company shall
have withdrawn, modified or amended such recommendation in
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any respect materially adverse to Cross Country or Merger Sub; or (II) (A) at
any time on or prior to the expiration of two years following termination of the
Merger Agreement, a definitive agreement is entered into for the acquisition of
all or substantially all of the Company's equity or assets with a person other
than Cross Country or Merger Sub or any of their respective affiliates at either
(i) a price per share in excess of $2.06 per Share, or (ii) an aggregate
purchase price in excess of the aggregate purchase price contemplated in the
Merger Agreement (which shall include the payments to The Cross Country Group,
L.L.C. pursuant to the Settlement Agreement), or (B) if the following shall
have occurred: (i) a meeting of the stockholders of the Company shall have been
held to adopt the Merger Agreement and the stockholders shall have failed to
adopt the Merger Agreement, and (ii) there shall have existed at the record date
for the Meeting or at the date thereof a person or group who shall have
beneficially owned or been entitled to vote or direct the voting of not less
than 20% of the then outstanding Shares, and who shall have voted against the
Merger Agreement and the transactions contemplated thereby, or (iii) at the date
of the Meeting a person or group other than Cross Country or Merger Sub or any
of their affiliates shall have in good faith proposed (and such person or group
shall appear to have the ability to consummate such proposal) to acquire the
Company, then in the event of either (I) or (II), the Merger Agreement requires
the Company to promptly reimburse Cross Country and Merger Sub and their
affiliates and stockholders for their reasonable documented out-of-pocket
expenses actually incurred by them in connection with the proposed acquisition
of the Company including expenses of legal counsel, investment bankers and
accountants plus a fee of $500,000.
TERMINATION; AMENDMENTS
The Merger Agreement may be terminated at any time prior to the
Effective Time by the mutual written consent of the respective Board of
Directors of Cross Country, Merger Sub and the Company, by any of them if the
Merger has not been consummated by July 1, 1997 or if a court of competent
jurisdiction or other United States governmental body shall have issued an
order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Merger and such order,
judgment or decree shall have become final and non appealable. The Merger
Agreement may be terminated at any time prior to the Effective Time by Cross
Country if (i) the Merger shall not have been consummated on or before the later
of (A) July 1, 1997 or (B) two business days after the Company Stockholders'
Meeting; (ii) there shall have occurred (A) any general suspension of, or
limitation on prices for, trading in securities on the New York Stock Exchange
or National Association of Securities Dealers Automated Quotations System, (B) a
declaration of a banking moratorium or any limitation or suspension of payments
by any U.S. governmental authority on the extension of credit by lending
institutions, (C) a commencement of war or armed hostilities directly involving
the United States, or (D) any limitation (whether or not mandated) by any
governmental authority which will materially adversely affect the extension of
credit by banks or other lending institutions in the United States; (iii)
holders of more than 10% of the Company's Common Stock shall have claimed or
perfected appraisal rights; (iv) the Company (or the Board of Directors of the
Company) shall have authorized, recommended, proposed or publicly announced its
intention to enter into any merger or consolidation agreement (other than the
Merger Agreement) or any other transaction in which all or substantially all of
the Company's or any Company subsidiary's equity or assets would be acquired by
a third party (other than parent, Merger Sub or any of their affiliates; (v) the
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Company's Board of Directors does not recommend in this Proxy Statement that
the Company's stockholders adopt and approve the Merger, the Merger Agreement
and the transactions contemplated thereby; or (vi) the Board of Directors of the
Company withdraws, modifies or amends its recommendation that the Company's
stockholders adopt and approve the Merger, the Merger Agreement and the
transactions contemplated thereby in any respect materially adverse to Cross
Country or Merger Sub.
The Merger Agreement may be amended by the mutual written agreement by
the parties thereto as evidenced by action taken by the Board of Directors of
Cross Country, Merger Sub and the Company, whether before or after stockholder
approval; provided, however, that after any such stockholder approval, no
amendment may be made without the further approval of the stockholders which
would reduce the amount or change the form of the Merger Consideration or effect
any other change to the Merger Agreement which would materially and adversely
affect the stockholders of the Company.
INDEMNIFICATION, INSURANCE AND RELEASES
The Merger Agreement provides that the current directors and officers
of the Company will be indemnified, defended and held harmless by the Surviving
Corporation for their acts and omissions prior to the Effective Time to the
fullest extent permitted by applicable law and any existing indemnity
agreements. The Surviving Corporation, as applicable, will advance expenses to
such indemnified parties to the fullest extent so permitted. The Merger
Agreement also provides that Cross Country will cause the Surviving Corporation
to maintain and provide officers' and directors' liability insurance to the
Company's current officers and directors on terms not materially less favorable
in coverage and amounts to that of the Company's present policy for a period of
four years following the Effective Time; provided, however, that in providing
such insurance, the Surviving Corporation will have no obligation to pay annual
premiums in excess of $153,900. In addition, the directors of the Company, on
the one hand, and Cross Country, Merger Sub and their affiliates, on the other,
have agreed to exchange mutual releases with respect to the Merger and the
transactions related to the Merger.
SOURCE AND AMOUNT OF FUNDS
The total amount of funds required to consummate the transactions
contemplated by the Merger Agreement and to pay related fees and expenses is
estimated to be approximately $10.3 million. This amount does not include the
$2.75 million paid by The Cross County Group, L.L.C. to purchase the judgment
from ANIC. HAC and Merger Sub expect to obtain these funds from the borrowing by
HAC under a $25 million line of credit pursuant to the credit agreement
described below.
BANK FINANCING
Cross Country and HAC have entered into a credit agreement with Fleet
Bank, pursuant to which the funds needed to consummate the Merger will be made
available to HAC to consummate the Merger.
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APPRAISAL RIGHTS
The following summary does not purport to be a complete statement of
the provisions of Delaware law relating to the appraisal rights of stockholders
and is qualified in its entirety by reference to the provisions of Section 262
of the DGCL set forth in full as Annex C to this Proxy Statement.
Stockholders who follow the procedures set forth in Section 262 may
receive, in lieu of the $2.06 cash per Share to be paid in the Merger, a cash
payment equal to the "fair value" of their Shares. Such fair value is to be
determined by judicial appraisal and could be more than, the same as, or less
than, the Merger Consideration. The statutory right of appraisal granted by
Section 262 is subject to strict compliance with the procedures set forth below.
Failure to follow any of these procedures may result in a termination or waiver
of appraisal rights under Section 262.
To be entitled to receive payment of the fair value of the Shares, a
stockholder (i) must file a written demand for appraisal of his or her Shares
with the Company prior to the voting by stockholders on the Merger Agreement at
the Special Meeting (such demand must reasonably inform the Company of the
identity of the stockholder and that the stockholder intends thereby to demand
an appraisal of his or her Shares); (ii) must not vote his or her Shares in
favor of approval and adoption of the Merger Agreement; and (iii) must have his
or her Shares valued in an appraisal proceeding, as described below. A proxy or
vote against approval and adoption of the Merger Agreement will not satisfy the
requirement that a stockholder file a written demand for appraisal as set forth
above. The requirement of a written demand is separate from, and should not be
confused with, the requirement that a stockholder not vote in favor of approval
and adoption of the Merger Agreement. A failure to vote on the Merger Agreement
will not be construed as a vote in favor of approval and adoption of the Merger
Agreement and will not constitute a waiver of a stockholder's rights of
appraisal. A stockholder who returns a signed proxy indicating that he or she
abstains from voting will similarly not waive his or her rights of appraisal.
However, because a proxy signed and left blank will, unless properly revoked, be
voted in favor of approval and adoption of the Merger Agreement, a stockholder
who returns a signed proxy left blank will waive his or her rights of appraisal.
Therefore, a stockholder electing to exercise appraisal rights who votes by
proxy must not leave his or her proxy blank, but must either vote against
approval and adoption of the Merger Agreement or abstain from voting. At any
time within 60 days after the Effective Time, any stockholder may withdraw his
or her demand for appraisal and accept the $2.06 per Share in cash to be paid in
the Merger. Any stockholder seeking appraisal rights must hold the Shares for
which appraisal is sought on the date of making the demand, continuously hold
such Shares through the Effective Time, and otherwise comply with Section 262.
It is a condition to the obligations of Cross Country and Merger Sub to
consummate the Merger that appraisal rights not be demanded by more than 10% of
the outstanding Shares. See "The MERGER AGREEMENT - Conditions,
Representations and Covenants."
Only a holder of record of Shares on the Record Date is entitled to
seek appraisal of the fair value of the Shares registered in such holder's name.
The demand for appraisal must be executed by or for the holder of record, fully
and correctly, as such holder's name appears on the
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holder's Certificates. If the Shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the demand should be made
in that capacity, and if the Shares are owned of record by more than one person,
as in a joint tenancy or tenancy in common, the demand should be made by or for
all owners of record. An authorized agent, including one or more joint owners,
may execute the demand for appraisal for a holder of record; however, such agent
must identify the record owner or owners and expressly disclose in such demand
that the agent is acting as agent for the record owner or owners. Beneficial
owners who are not record owners and who intend to exercise appraisal rights
should instruct the record owner to comply strictly with the statutory
requirements with respect to the exercise of appraisal rights before the date of
the Special Meeting.
A record holder, such as a broker who holds Shares as nominee for
beneficial owners, some of whom desire to demand appraisal, must exercise
appraisal rights on behalf of such beneficial owners with respect to the Shares
held for such beneficial owners. In such case, the written demand for appraisal
should set forth the number of Shares for which the demand is being made. Unless
a demand for appraisal specifies a number of Shares, such demand will be
presumed to cover all Shares held in the name of such record owner.
If the Merger Agreement is approved and adopted by the stockholders,
the Company will send a notice, either before the Effective Time or within ten
days thereafter, stating that appraisal rights are available to each stockholder
who has filed an adequate written demand for appraisal with the Company and who
has not voted in favor of approval and adoption of the Merger Agreement. Within
120 days after the Effective Time, the Company or any stockholder seeking
appraisal rights may file a petition in the Court of Chancery demanding a
determination of the value of the Shares of all stockholders seeking appraisal
rights. The Company does not intend to file such a petition, and all
stockholders seeking to exercise appraisal rights should initiate all necessary
action with respect to the perfection of their appraisal rights within the time
periods and in the manner prescribed in Section 262. Within 120 days after the
Effective Time, any stockholder who has complied with the provisions of Section
262, upon written request, shall be entitled to receive from the Company a
statement setting forth the aggregate number of Shares not voted in favor of
approval and adoption of the Merger Agreement and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
Shares. Such written statement will be mailed to any such stockholder within ten
days after his or her written request for such a statement is received by the
Company or within ten days after expiration of the period for delivery of
demands for appraisal under Section 262(d), whichever is later.
If a petition for appraisal is timely filed, the Court of Chancery will
conduct a hearing on such petition to determine whether the stockholders seeking
appraisal rights have complied with Section 262 and have thereby become entitled
to appraisal rights. The Court of Chancery will then determine the fair value of
the Shares exclusive of any element of value arising from the expectation or
accomplishment of the Merger, but including a fair rate of interest, if any, to
be paid on the amount determined to be the fair value. In determining fair
value, the Court of Chancery is to take into account all relevant factors.
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Stockholders considering appraisal should bear in mind that the fair
market value of their Shares determined under Section 262 could be more than,
the same as, or less than, the consideration they will receive pursuant to the
Merger Agreement if they do not seek appraisal of their Shares, and that the
written opinion of Raymond James set forth as Annex B hereto is not necessarily
an opinion regarding fair value under Section 262.
The costs of the appraisal proceeding may be assessed against one or
more parties to the proceeding as the Court of Chancery may consider equitable.
Upon application by a stockholder, the Court of Chancery may order all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceedings (including, without limitation, reasonable attorneys' fees
and the fees and expenses of experts) to be charged PRO RATA against the value
of all of the Shares entitled to an appraisal.
A stockholder will fail to perfect his or her right of appraisal if he
or she (i) does not deliver a written demand for appraisal to the Company prior
to the vote for approval and adoption of the Merger Agreement, (ii) votes his or
her Shares in favor of approval and adoption of the Merger Agreement, (iii) does
not file a petition for appraisal within 120 days after the Effective Time, or
(iv) delivers to the Company both a written withdrawal of his or her demand for
appraisal and an acceptance of the terms of the Merger Agreement, except that
any such attempt to withdraw such demand not made within 60 days after the
Effective Time requires the written approval of the Company.
If an appraisal proceeding is properly instituted, such proceeding may
not be dismissed as to any stockholder who has perfected his or her right of
appraisal without the approval of the Court of Chancery, and any such approval
may be conditioned on such terms as the Court of Chancery deems just.
After the Effective Time, no stockholder who has demanded appraisal
rights will be entitled to vote his or her Shares for any purpose or to receive
dividends on, or other distributions in respect of, such Shares (except
dividends or distributions payable to stockholders on a date prior to the
Effective Time).
FAILURE BY A STOCKHOLDER TO FOLLOW THE STEPS REQUIRED BY DELAWARE LAW
FOR PERFECTING RIGHTS OF APPRAISAL MAY RESULT IN THE LOSS OF SUCH RIGHTS. IN
VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DGCL, STOCKHOLDERS WHO ARE
CONSIDERING DISSENTING FROM THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND EXERCISING THEIR RIGHTS UNDER SECTION 262 SHOULD CONSULT THEIR LEGAL
ADVISORS.
All written communications from stockholders with respect to the
exercise of appraisal rights should be mailed to Homeowners Group, Inc., 400
Sawgrass Corporate Parkway, Sunrise, Florida 33325- 6235, Attention: Karen
Childress, Secretary.
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PRICE RANGES OF SHARES; DIVIDENDS
The Company's common stock is listed on the Nasdaq NMS under the symbol
HOMG. The following table set forth the high and low transaction prices for each
quarterly period during fiscal years 1995 and 1996 and for the period January
1, 1997 through February 13, 1997. 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
1996 First $1.78 $0.50
Second 2.19 1.31
Third 2.13 1.88
Fourth 2.06 1.50
1997 First (through
February 13, 1997)
The Merger Agreement provides that, prior to the Effective Time, the
Company may not declare dividends on the Shares without the prior consent of
Cross Country. In addition, certain agreements to which the Company is a party
impose restrictions on dividends until funds due to the other party are paid in
full.
On April 3, 1996, the last trading day prior to the filing by Cross
Country of a Schedule 13D reporting that it and its affiliates had acquired in
excess of five percent of the Shares, the reported closing sales price per Share
on the Nasdaq NMS was $1-1/2. On May 13, 1996, the last trading day prior to the
Company's announcement of the execution of the Merger Agreement, the reported
closing sales price per Share on the Nasdaq NMS was $1-7/8. On February 13,
1997, the last trading day prior to the date of this Proxy Statement, the
reported closing sales price per Share on the Nasdaq NMS was $___, there were
5,558,350 Shares outstanding and there were approximately 800 holders of Shares,
some of which are brokerage firms which held Shares in nominee name on behalf of
their clients. Holders of Shares are urged to obtain current quotations for the
Shares.
ACCOMPANYING AND INCORPORATED DOCUMENTS
This Proxy Statement is accompanied by the following documents which
are incorporated by reference in this Proxy Statement and are deemed to be a
part hereof:
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(1) The Company's Annual Report on Form 10-K for the year
ended December 31, 1995 as amended by Amendment No. 1 thereto on Form
10-K/A filed on April 29, 1996, Amendment No. 2 thereto on Form
10-K/A filed on November 14, 1996 and Amendment No. 3 thereto on Form
10-K/A filed on February 3, 1997;
(2) The Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, June 30 and September 30, 1996;
(3) The Company's current report on Form 8-K, dated May
14, 1996 and filed June 19, 1996; and
(4) The Company's current report on Form 8-K dated
November 7, 1996 and filed November 14, 1996.
Any statement contained in a document incorporated by reference shall
be deemed to be modified or superseded for all purposes to the extent that a
statement contained in this Proxy Statement or any subsequently filed document
modifies or replaces such statement.
All documents or reports subsequently filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and
prior to the date of the Special Meeting shall be deemed to be incorporated by
reference into this Proxy Statement and to be a part of this Proxy Statement
from the date of filing of such document.
The Company will furnish any exhibit to any of the documents
accompanying this Proxy Statement upon the payment of a specified reasonable fee
which fee will be limited to the Company's reasonable expenses in furnishing
such exhibit. Requests for such copies should be directed to Karen Childress,
Secretary, Homeowners Group, Inc., 400 Sawgrass Corporate Parkway, Sunrise,
Florida 33325-6235, telephone number: (954) 845-9100. To ensure timely delivery,
such requests should be made by February 28, 1997.
EXPERTS
The consolidated financial statements of the Company and its
subsidiaries of December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995 that are incorporated by reference in
this Proxy Statement have been incorporated by reference herein in reliance upon
the report of Deloitte & Touche LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of said firm as experts in
accounting and auditing.
OTHER MATTERS
As of the date of this Proxy Statement, the only business which the
Board of Directors intends to present or knows that others will present at the
Special Meeting is that hereinabove set forth. If any other matter or matters
are properly brought before the Special Meeting, it is the
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intention of the persons named in the accompanying form of proxy to vote the
proxy on such matters in accordance with their judgments.
STOCKHOLDER PROPOSALS
In anticipation of this Special Meeting of Stockholders, no regular
annual meeting of stockholders was held in 1996. In the event that the Special
Meeting of Stockholders is postponed or in the event that the Merger Agreement
is not approved and adopted, the Company will schedule an annual meeting of
stockholders and will take such actions as are reasonably appropriate to inform
the holders of the Shares of the same. A proposal by a stockholder which
complies with requirements as to the form and substance established by
applicable laws and regulations will be included in the Proxy Statement in
connection with such annual meeting if received by the Company prior to the date
established by the Company for such receipt.
Karen Childress
Secretary
Sunrise, Florida
February 14, 1997
50
<PAGE>
SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This Amendment, dated as of this 31st day of January, 1997, is entered
into by and among The Cross Country Group, Inc. ("Parent"), CC Acquisition
Corporation ("Merger Sub"), and Homeowners Group, Inc. (the "Company").
WHEREAS, Parent, CHGI Acquisition Corporation, a wholly-owned
subsidiary of Parent (the "Sub") and the Company entered into an Agreement and
Plan of Merger dated as of May 14, 1996 (the "Agreement"); and
WHEREAS, Parent, Merger Sub and the Company amended the Agreement as of
October 31, 1996 (the "First Amendment"); and
WHEREAS, Parent, Merger Sub and the Company desire to further amend the
Agreement.
NOW, THEREFORE, in consideration of the premises and agreements herein
contained, Parent, Merger Sub and the Company agree as follows, effective as of
the date hereof, with capitalized terms not otherwise defined herein having the
same meaning as set forth in the Agreement:
1. Section 7.14 is hereby deleted in its entirety and replaced
with the following:
"7.14 MODIFICATION OF SETTLEMENT AGREEMENT. The Company and
The Cross Country Group, L.L.C., as the assignee of the rights of ANIC,
shall enter into the Settlement Agreement (substantially in the form of
Exhibit O hereto) contemporaneously with the execution of this
Amendment which shall provide for, among other things, agreement of The
Cross Country Group, L.L.C. to take no action with respect to
realization on its rights under the Settlement Agreement prior to the
earlier of: (a) July 1, 1997 or (b) the termination of its obligations
under this Agreement, in consideration for the guarantee of the
obligation of HMS under the Settlement Agreement by the Company, the
pledge by the Company of the shares of HMS and Homeowners Marketing
Services International, Inc. ("HMSII") owned by the Company to The
Cross Country Group, L.L.C. to secure the guarantee and the grant by
HMS and HMSII of a security interest in their respective assets in
favor of The Cross Country Group, L.L.C. to further secure such
guarantee."
2. Section 9.12 is hereby deleted in its entirety and replaced
with the following:
"9.12 FRANCHISE AGREEMENT - AMENDMENT AND ESTOPPEL AGREEMENT
AND PROFIT SHARING RELEASE. The Company shall have caused HMSI to: (i)
enter into and execute an amendment to existing franchise agreements
(including franchise agreements whose terms have been extended to July
1, 1997) with all Franchisees upon terms and conditions satisfactory to
Parent, and (ii) have obtained estoppel
<PAGE>
letters and releases from all Franchisees which shall contain a waiver
of any and all claims the Franchisees have or may have under the
existing franchise agreements including, without limitation, a waiver
of all claims for profit sharing for 1996."
3. Section 12.1(b)(i) shall be deleted in its entirety and
replaced with the following:
"(i) the Merger shall not have been consummated on or before
the later of: (A) July 1, 1997, or (B) two business days after the
Company's stockholders' meeting;".
4. Section 12.1 (c)(i) shall be deleted in its entirety and
replaced with the following:
"(i) the Merger shall not have been consummated on or before
July 1, 1997,".
5. COUNTERPARTS. This Amendment may be executed in two or
more counterparts, each of which shall be deemed an original, but which
together shall constitute one and the same instrument.
6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the internal laws of the State of Delaware
without giving effect to principles of conflicts of laws.
7. Except as modified by this Amendment, the terms of the
Agreement, as amended by the First Amendment, shall remain unmodified and
in full force and effect.
-2-
<PAGE>
IN WITNESS WHEREOF, each party has executed this Amendment as of the
date first set forth above.
THE CROSS COUNTRY GROUP, INC.
By: /s/ Howard Wolk
------------------------------------------
Name:
Title:
CC ACQUISITION CORPORATION
By: /s/ Howard Wolk
------------------------------------------
Name:
Title:
HOMEOWNERS GROUP, INC.
By: /s/ Greg Morris
------------------------------------------
Name:
Title:
-3-
<PAGE>
EXHIBIT A
CONSENT OF RAYMOND JAMES & ASSOCIATES, INC.
Homeowners Group, Inc.
Sunrise, Florida
We hereby consent to the reference and use in the Proxy Statement of our
opinion dated November 26, 1996.
Raymond James & Associates, Inc.
St. Petersburg, Florida
<PAGE>
HOMEOWNERS GROUP, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
ON MARCH 21, 1997
The undersigned hereby appoints Diane Gruber and Gary D. Lipson, and
each or both of them, as true and lawful agents and proxies with full power of
substitution in each, to represent the undersigned in all matters coming before
the Special Meeting of Stockholders of Homeowners Group, Inc. to be held at the
SIGNATURE GRAND, 6900 STATE ROAD 84 ON MARCH 21, 1997 AT 10:00 A.M., Dania,
Florida, time and any postponements or adjournments thereof, and to vote as
follows:
(1) To adopt an Agreement and Plan of Merger dated as of May
14, 1996, as amended as of October 31, 1996 AND AS FURTHER AMENDED AS
OF JANUARY 31, 1997, among The Cross Country Group, Inc., a Nevada
corporation ("Cross Country"), CHGI Acquisition Corporation, a Delaware
corporation and a wholly-owned subsidiary of Cross Country ("CHGI") and
Homeowners Group, Inc. pursuant to which CC Acquisition Corporation, a
Delaware corporation and assignee of the rights and obligations of CHGI
under the Merger Agreement, as amended, will be merged with and into
Homeowners Group, Inc. with Homeowners Group, Inc. being the surviving
corporation:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) OTHER MATTERS:
In their discretion, to vote with respect to any other matters
that may come before the Meeting, any postponements or adjournments
thereof, including matters incident to its conduct.
PLEASE DATE AND SIGN ON THE REVERSE SIDE
<PAGE>
(Reverse Side)
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER SPECIFIED ABOVE
BY THE STOCKHOLDER. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED IN
FAVOR OF THE PROPOSAL LISTED IN ITEM (1).
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW.
----------------------------------------
----------------------------------------
Dated:----------------------------, 1997
Joint owners should each sign. Executors, administrators, custodians or
corporation officers should give full title.
PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
----------------------------------------
Dated:----------------------------, 1997
Joint owners should each sign. Executors, administrators, custodians or
corporation officers should give full title.
PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.
NO POSTAGE NECESSARY IF MAILED IN THE UNITED STATES.
