UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 3
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to __________________
Commission File Number 0-17338
HOMEOWNERS GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0033743
State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
400 SAWGRASS CORPORATE PARKWAY, SUNRISE, FLORIDA 33325
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (954) 845-9100
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
NONE NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Based upon the closing market price of the registrant's common stock as of March
27, 1996 of $1.38, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $6,326,818.
Number of shares of common stock outstanding as of March 27, 1996, is 5,558,350.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders are incorporated by reference as Part III of this Annual Report.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Homeowners Group, Inc.
Sunrise, Florida
We have audited the accompanying consolidated balance sheets of Homeowners
Group, Inc. and its subsidiaries (the "Company") as of December 31, 1995 and
1994 and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1995
and 1994 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE, LLP
Miami, Florida
March 27, 1996
24
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<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------
DECEMBER 31, 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $997,336 $5,875,844
Trading securities 9,250,349 8,244,409
Current portion of securities available for sale 1,811,624 17,506
Miscellaneous receivables 1,278,044 1,153,188
Deferred home warranty acquisition costs 5,666,899 5,677,322
Refundable income taxes 1,277,449 1,816,149
Deferred income taxes 6,769,294 4,880,781
Prepaid expenses and other current assets 1,080,458 1,281,693
----------- -----------
Total current assets $28,131,453 28,946,892
Restricted cash 3,160,000 1,407,851
Non-current portion of securities available for sale 1,834,981 4,078,966
Property and equipment - net 3,581,893 2,009,165
Other assets 432,327 1,177,026
Deferred income taxes - net of current portion 1,373,608 1,579,345
----------- -----------
TOTAL $38,514,262 $39,199,245
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $1,220,140 $1,763,718
Accrued expenses $5,208,761 $8,533,095
Litigation settlement 5,156,022 --
Current maturities of long term debt 1,537,257 1,065,487
Deferred home warranty revenue 16,239,431 16,118,752
----------- -----------
Total current liabilities 29,361,611 27,481,052
Long term debt - net of current portion 2,591,929 3,316,845
Commitments and contingencies - See Note 10
Stockholders' equity:
Preferred stock - $0.01 par value; 5,000,000
shares authorized; none issued and
outstanding - -
Common stock - $0.01 par value; 45,000,000
shares authorized; 5,558,350 shares
issued and outstanding
at December 31, 1995 and 1994 55,584 55,584
Additional paid-in capital 7,458,288 7,458,288
Retained earnings (accumulated deficit) (1,006,367) 902,289
Unrealized holding gain (loss) on securities
available for sale
(net of taxes of $34,745 in 1995) 53,217 (14,813)
----------- -----------
Total stockholders' equity 6,560,722 8,401,348
----------- -----------
TOTAL $38,514,262 $39,199,245
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenue $44,554,050 $52,777,840 $51,343,928
Operating costs and expenses:
Direct expenses 34,200,297 39,956,030 36,329,427
Unusual items - 1,787,355 -
General and administrative
expenses 9,261,562 12,012,742 12,268,706
------------ ----------- ------------
Total 43,461,859 53,756,127 48,598,133
------------ ----------- ------------
Operating income (loss) 1,092,191 (978,287) 2,745,795
Other income (expenses):
Investment income, net 1,367,482 120,455 2,599,169
Other, net (5,496,329) (172,707) (25,558)
------------ ----------- ------------
Total (4,128,847) (52,252) 2,573,611
------------ ----------- ------------
Income (loss) from continuing
operations before income taxes (3,036,656) (1,030,539) 5,319,406
(Provision) benefit for income
taxes 1,128,000 198,004 (2,128,527)
------------ ----------- ------------
Income (loss) from continuing
operations (1,908,656) (832,535) 3,190,879
Discontinued operation:
Loss from operation of
discontinued reinsurance
segment (net of income
tax benefits of $3,757,377) - - (6,227,680)
Loss on reinsurance portfolio
transfer, including provision of
$2,787,301 for operating
losses during phase out
period (net of income tax
benefits of $5,435,664) - - (9,009,563)
------------ ----------- ------------
Net loss ($1,908,656) ($832,535) ($12,046,364)
============ =========== ============
Per share information:
Income (loss) from continuing
operations ($0.34) ($0.15) $0.57
Loss from operation of
discontinued reinsurance
segment - - (1.12)
Loss on reinsurance portfolio
transfer - - (1.62)
------------ ----------- ------------
Net loss ($0.34) ($0.15) ($2.17)
============ =========== ============
Dividends declared per common
share $0.00 $0.00 $0.10
Weighted average common shares
outstanding 5,558,350 5,558,350 5,559,191
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,908,656) ($832,535) ($12,046,364)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Loss on reinsurance portfolio transfer - - 9,009,563
Depreciation and amortization 601,884 827,919 615,700
Allowance for loss on franchising fee revenue - 3,112,328 -
Provision (benefit) for deferred income taxes
on continuing operations (1,682,776) 1,461,460 (672,000)
Unrealized holding gain (losses) 68,030 (14,813) -
Foreign currency translation adjustment - 43,280 (12,356)
(Gain) loss on sale of securities (368,348) 642,002 (1,940,959)
Change in net assets of discontinued operation - - 410,419
Other changes in assets and liabilities:
Increase in miscellaneous receivables (124,856) (495,855) (88,280)
(Increase) decrease in deferred home warranty
acquisition costs 10,423 52,572 (1,374,396)
(Increase) decrease in refundable income
taxes on continuing operations 538,700 751,483 (1,007,577)
(Increase) decrease in prepaid expenses and
other assets 909,684 (2,359,965) (342,687)
Increase (decrease) in accounts payable (543,578) 448,955 355,616
Increase (decrease) in accrued expenses (3,324,336) (127,717) 2,604,909
Increase in litigation settlement 5,156,022 -- --
Increase in deferred home warranty revenue 120,679 395,328 3,172,153
Payments on reserve for loss on reinsurance
portfolio transfer - (727,915) (240,603)
Payments for purchases of trading securities (7,434,195) (8,276,460) -
Proceeds from sales of trading securities 7,314,642 8,106,104 -
----------- ----------- ------------
Net cash provided by (used in) operating
activities (666,681) 3,046,171 (1,556,862)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment expenditures (2,138,361) (1,313,701) (249,953)
Purchases of investments classified as
available for sale (817,812) (11,149,647) -
Proceeds from sale of investments classified
as available for sale 749,641 8,960,902 -
Payments for investments of continuing
operations - - (19,517,221)
Proceeds from sale of investments of
continuing operations - - 27,453,949
----------- ----------- ------------
Net cash provided by (used in) investing
activities (2,206,532) (3,502,446) 7,686,775
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (830,409) (528,951) (43,829)
Dividends paid on common stock - - (1,111,670)
Amortization of discount on long term debt 167,849 312,585 -
Borrowings under financing arrangements 409,414 425,884 -
Collateralization of contingent guarantee to
CNA (1,752,149) (1,247,851) -
----------- ----------- ------------
Net cash used in financing activities (2,005,295) (1,038,333) (1,155,499)
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents (4,878,508) (1,494,608) 4,974,414
Cash and cash equivalents at beginning
of year 5,875,844 7,370,452 2,396,038
----------- ----------- ------------
Cash and cash equivalents at end of year $997,336 $5,875,844 $7,370,452
=========== =========== ============
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for:
Interest $285,911 $322,665 $4,884
Income taxes 31,442 328,007 548,126
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOREIGN
HOLDING CURRENCY
COMMON PAID IN RETAINED GAIN TRANSLATION TOTAL
STOCK CAPITAL EARNINGS (LOSS) ADJUSTMENT EQUITY
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1992 $55,584 $7,458,288 $14,337,023 $ - $(30,927) $21,819,968
Net loss for the
year (12,046,364) (12,046,364)
Foreign currency
translation loss (12,356) (12,356)
Dividends declared
on common stock (555,835) (555,835)
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1993 55,584 7,458,288 1,734,824 - (43,283) 9,205,413
---------------------------------------------------------------------
Net loss for the
year (832,535) (832,535)
Unrealized holding
loss (14,813) (14,813)
Foreign currency
translation gain 43,283 43,283
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1994 55,584 7,458,288 902,289 (14,813) - 8,401,348
---------------------------------------------------------------------
Net loss for the
year (1,908,656) (1,908,656)
Unrealized holding
gain 68,030 68,030
---------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1995 $55,584 $7,458,288 ($1,006,367) $53,217 $ - $6,560,722
=====================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The Company
- --------------------------------------------------------------------------------
Homeowners Group, Inc. ('HOMG') and its subsidiaries (collectively the
'Company') provide home warranty contracts, access to real estate errors and
omissions liability insurance ('E&O') and other products and services primarily
to residential real estate brokerage firms and agents. The Company enters into
agreements with real estate brokerage firms and agents ('Members') which grant
Members the right to use the products and services provided by the Company. The
Company generally markets its products and services through franchise agreements
whereby the third party operators ('Affiliates') have exclusive geographic
territories in which to enroll real estate brokerage firms as Members. Through
December 31, 1995, the Company had entered into agreements with Affiliates for
territories encompassing 39 states and the District of Columbia. In 1995, the
Company markets directly in California, Florida, except Northwest Florida which
territory has been granted to an Affiliate, Colorado, Indiana, Iowa, Nebraska,
North Dakota, South Dakota and Hawaii, ('Corporate-Owned Regions'), and is a 45%
partner in a partnership which directly enrolls Members in Texas. In 1994 and
part of 1995, the Company also directly enrolled Members in Maine,
Massachusetts, New Hampshire and Vermont, however, in May 1995, the Company
franchised this New England territory. During 1995, the Company entered into
management agreements, whereby it began managing the operations and
administration of the Kansas, Missouri, Oklahoma, Arizona and New Mexico
territories.
In October 1991, the Company acquired an 80% interest in a British subsidiary
which began marketing home warranty contracts in the United Kingdom in February
1992. The home warranty contract program and other insurance products offered by
this subsidiary were completely underwritten by Lloyd's of London, thereby
eliminating any underwriting risk to the Company. In the third quarter of 1994,
the Company ceased funding the UK operation, effectively closing down the
subsidiary. Accordingly, there was no foreign operations activity in 1995. See
further discussion of this transaction in Note 9.
Although the Company's home warranty contracts are generally not considered to
be insurance products, the Company is subject to insurance-type regulations in
many of the states in which the home warranty contracts are sold. Certain of
these states require that reserves be maintained to cover future repairs for the
remaining terms of the warranty contracts (generally one year). As of December
31, 1995, approximately $9,900,000 of cash and securities were needed to
maintain the regulated subsidiaries' minimum reserve and surplus levels.
Increases in warranty production, as seen thus far in the first quarter of 1996,
result in increases in the Company's required reserve and surplus levels in the
regulated states. In addition, state regulators generally seek reserve balances
in excess of the minimum standards. In certain states, withdrawal of any
reserves in excess of statutory minimums requires approval from the regulatory
authorities. The Company has been advised by certain authorities that such
approval will not be granted. Accordingly, the Company maintained reserves of
approximately $14,000,000 as of December 31, 1995. The Company is currently in
compliance with all applicable surplus requirements.
As warranty production increases, the Company's required reserve and surplus
levels increase, which reduces the cash available to the Company to fund its
operations. During 1995, the Company's membership and related revenues continued
to be negatively impacted by the 1993 change in insurance carriers, both in
terms of numbers of new and renewal members, and in the fees generated by the
Company's membership. Throughout 1995 and 1994, the Company provided its
Affiliates with various discounted membership options to ease the transition,
and to maintain competitiveness in the marketplace. As a result of these
factors, the Company's cash flow from membership operations has been
significantly impacted. However, the Company expects that cash flow generated
from warranty and other operations will be sufficient to meet its needs on an
ongoing basis. See also Note 2, for discussion of the Company's cash collateral
requirements relative to the 1993 transfer of its discontinued reinsurance
operations and Note 10 for discussion of other commitments and contingencies
impacting cash flow.
2. Discontinued Reinsurance Operations
- --------------------------------------------------------------------------------
In December 1992, the Company formed its own reinsurance subsidiary, POMG
Insurance Company, Ltd. ('POMG'), which acquired certain net assets from
Meridian Insurance Company, Ltd. ('Meridian'), the previous reinsurer of the
Company's E&O program. The acquisition was accounted for as a purchase, and
there was no monetary consideration given and no loss recorded on the
transaction. Through this transaction, POMG replaced Meridian as the reinsurer
of all E&O policies written beginning May 1, 1991. In December 1992, the
subsidiary purchased a $5,000,000 aggregate stop loss reinsurance policy to
further protect it from the risk of loss in excess of a predetermined amount on
the first two E&O policy years.
Under the E&O program immediately prior to POMG's formation, the Company was
originally required to provide a $7,000,000 letter of credit ('LOC') to the
reinsurer which was required to be secured by US Government securities
approximating $8,400,000 (cost and market). The amount of the LOC required to be
posted by the Company was subject to change at the discretion of the insurer,
based on contract volume and underwriting risk. In the event that funds
available in the E&O program pool, together with investment income earned
thereon, were insufficient to cover the claims and expenses incurred by the
program, the Company's US Government securities would have been used to fund
payment
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
under the LOC's. Pursuant to the formation of POMG, the $7,000,000 LOC issued in
1991 to Meridian was reissued by POMG to a subsidiary of American International
Group, Inc. ('AIG'), the insurer of the Company's E&O program at that time. In
December 1992, AIG raised the LOC amount to $16,000,000 based on their periodic
evaluation of underwriting performance and premium volume. Concurrent with the
agreement reached with Continental Casualty Company ('CNA'), which is discussed
further below, the LOC was canceled, and the Company is no longer obligated
under any LOC's. As a result, the Company is not subject to any insurance risk
in relation to the CNA E&O program.
In the second and third quarters of 1993, the E&O program experienced
significant losses. Effective December 1, 1993, CNA replaced POMG as the
reinsurer of the E&O policies issued through November 30, 1993 to the Company's
Members by certain subsidiaries of AIG. This transaction took place through a
novation of previous reinsurance agreements in effect. For policies issued from
December 1, 1993 forward, CNA became the insurer, and the Company began
marketing CNA policies to its Members through Victor O. Schinnerer and Company,
Inc. ('Schinnerer'), CNA's exclusive program and underwriting manager. Pursuant
to the agreement with CNA, the Company discontinued POMG's operations. The
Company, through its HOMS Insurance Agency, Inc. ('HOMS') subsidiary acts solely
in the capacity of an insurance broker. Under the terms of the agreements, the
Company receives a fixed percentage of the E&O premiums collected as a
commission. The Company pays a portion of these commissions to the Affiliates
generating the premium volume. In February 1994, the Company, CNA and AIG
entered into definitive agreements, effective as of December 1, 1993, setting
forth the terms described above.
In consideration for CNA's assumption of POMG's reinsurance obligations, the
Company transferred POMG's net assets, excluding intercompany balances, to CNA.
These net assets approximated $6,100,000 at December 31, 1993. The Company
contributed an additional $1,000,000 to POMG immediately prior to the transfer
of assets, bringing the total to $7,100,000, consisting of the following:
NATURE CARRYING VALUE
- --------------------------------------------------------------------------------
Cash and investments $25,700,000
Assumed reinsurance premiums
receivable 6,000,000
Reinsurance recoverable 5,000,000
Other receivables 500,000
Accounts payable and
accrued expenses (1,000,000)
Reinsurance loss and loss
adjustment reserve (29,100,000)
-----------
Net assets $ 7,100,000
-----------
The Company is further obligated to pay CNA $5,000,000 (the 'CNA Obligation')
over a period estimated to be five years, toward the ultimate settlement of the
transferred losses and expenses. CNA is maintaining a separate accounting for
the POMG net assets. Additionally, a separate fund, the 'Holdback Fund,' has
been established to accumulate the aforementioned $5,000,000 from the Company,
additional funds to be contributed by Schinnerer and CNA over the same period,
and investment income earned on these funds, to pay claims and expenses related
to the reinsured policies in excess of the POMG net assets. If the ultimate
reinsured losses and related expenses are less than the transferred net assets
of POMG, combined with the assets in the Holdback Fund, CNA will distribute the
remaining assets among the Company, Schinnerer and itself according to a
predetermined formula. However, management believes that a refund is unlikely.
In connection with the transfer of POMG's net assets to CNA, the Company
guaranteed the validity of a $5,000,000 reinsurance recoverable, one of the POMG
assets transferred to CNA. This asset represents amounts recoverable from a
third party insurance company under the reinsurance treaty purchased by POMG.
This guarantee is secured by $3,000,000 cash collateral posted by the Company.
This amount is reported as restricted cash in the accompanying consolidated
balance sheet. The Company has agreed, if necessary, to pay an additional
$2,000,000, related to the guarantee, out of future commissions. The Company has
not recorded a provision for this guarantee, based on the opinion of its special
insurance counsel, that the cover note relating to the reinsurance contract is a
binding agreement, enforceable in accordance with its terms, and the objections
voiced by the reinsurer do not support a material basis for it to successfully
deny coverage.
The agreements with CNA impose certain restrictive covenants until the
$5,000,000 CNA Obligation is satisfied. These covenants include limits on
dividends and on future borrowings. The funds due to CNA are a senior obligation
of the Company, secured by an interest in the common stock of the Company's HOMS
subsidiary and in the Company's Member list. For a five year period ending
November 30, 1998, the Company and its Affiliates must provide CNA/Schinnerer
with right of first refusal on E&O insurance offered to its membership.
Revenue, including investment earnings, of the discontinued operation
approximated $16,571,000 through September 30, 1993, the discontinued operations
measurement date. Losses incurred by POMG through September 30, 1993 totaled
approximately $6,200,000, net of income tax benefits of $3,800,000.
Additionally, the transaction resulted in a loss, including a provision for POMG
operating losses during the phase out period, of approximately $9,000,000. This
loss is comprised of the following:
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NATURE CARRYING VALUE
- --------------------------------------------------------------------------------
Net assets transferred $ 7,100,000
Provision for losses during
the phase out period 2,800,000
Discounted value of CNA
obligation 4,500,000
Income tax benefits (5,400,000)
------------
After-tax loss $ 9,000,000
------------
3. Summary Of Significant Accounting Policies
- --------------------------------------------------------------------------------
Principles Of Consolidation -- The accompanying consolidated financial
statements include the accounts of HOMG and all of its majority owned
subsidiaries. All significant intercompany transactions have been eliminated in
consolidation. The Company's 45% interest in the partnership enrolling and
servicing Members in Texas is accounted for by the equity method. The earnings
from the partnership are included in operating revenue in the accompanying
consolidated statements of income.
Accounting Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue And Expense Recognition -- Home warranty contract revenue is
recognized over the life of the contract (generally one year) in proportion to
historical experience of repair costs. Direct costs incurred in acquiring the
contracts are recognized in the same manner. In the third quarter of 1993, the
Company refined its definition of direct acquisition costs to include certain
additional expenses, such as incentive bonuses paid to the Company's Members and
Affiliates, costs of personnel directly involved in acquiring the contracts, and
premium taxes. Such costs have been reclassified from amounts previously
reported according to this refinement. Repair costs under home warranty
contracts are expensed as mechanical breakdowns are reported to and repairs are
authorized by the Company. Initial and renewal membership fees are recognized
upon collection and enrollment of a new member or upon processing the renewal
application of a renewed member. E&O premium commissions are recognized upon
collection of the related premiums. All other revenues and expenses are
recognized upon delivery or receipt of the related products or services.
Property And Equipment -- Property and equipment is carried at cost and
depreciated on the straight-line method over their estimated useful lives, which
range from three to seven years. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful lives of the improvements.
Investments -- The Company accounts for its investments according to Statement
of Financial Accounting Standards ('SFAS') No. 115, 'Accounting for Certain
Investments in Debt and Equity Securities.' This standard requires that the
Company report at fair value the securities which are held for trading purposes,
or which are available for sale. Unrealized holding gains and losses on trading
securities are determined based upon the change in fair value and are included
in investment income in the accompanying consolidated statements of income.
Unrealized holding gains on securities available for sale are also determined
based upon the changes in fair values, and are reported as a separate component
in the stockholders equity section of the balance sheet. Gains and losses on
securities are determined based upon specific identification of the securities
sold. The Company does not currently have any securities which are classified as
held to maturity.
Income Taxes -- Income taxes are provided in accordance with SFAS No. 109,
'Accounting for Income Taxes.' Under this standard, deferred tax assets and
liabilities represent the tax effects, based on current tax law, of future
deductible or taxable amounts attributable to events that have been recognized
in the financial statements.
Foreign Currency Translation -- The financial statements of the Company's
British subsidiary are translated into US dollars in accordance with SFAS No.
52, 'Foreign Currency Translation.' Net assets of the subsidiary, whose
functional currency is the British Pound Sterling, are translated at current
exchange rates, while results of operations are translated at average exchange
rates in effect for the year.
Net Income Per Common Share -- Net income per common share is based upon the
weighted average number of common shares outstanding during each year. Dilutive
stock options and warrants are included in the calculation of weighted average
shares utilizing the Treasury Stock Method. Primary and fully diluted earnings
per share are essentially the same in all years presented in the accompanying
consolidated statements of income. The inclusion of common stock equivalents in
the 1993 computation of weighted average shares has a dilutive effect on the per
share amount of income from continuing operations, but an antidilutive effect on
the per share amounts from discontinued operations and on the net loss. In this
circumstance, in accordance with Accounting Principles Board ('APB') Opinion No.
30, the common stock equivalents are recognized for all computations even though
they have an antidilutive effect on one of the per share amounts. The
antidilution is insignificant, and does not change the per share amounts.
Discontinued Operations -- The Company reviews the liabilities recorded in
association with its 1993 discontinued reinsurance operations annually, and
adjusts the balances as necessary. In 1995 and 1994, the Company revised its
estimate of the net present value of the CNA obligation, based upon the actual
payments remitted, and in 1994, to reflect an estimated
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
repayment term of five years, as opposed to the original estimated term of three
years. This change in estimate resulted in an increase in the discount on the
obligation, which will be amortized to interest expense over the life of the
obligation. Further, in both years, the Company revised its estimate of expenses
incurred relative to the reinsurance portfolio transfer, and recorded an
adjustment for the additional balances due. The net effect of these two
adjustments had no impact on the Company's consolidated results of operations.
Franchising Fee Revenue -- The Company records franchising fee revenue in
accordance with SFAS No. 45, 'Accounting for Franchise Fee Revenue.' Under this
standard, franchising revenue is recorded when all material services or
conditions related to the sale are complete, substantially all of the initial
services of the franchisor required by the franchise agreement are complete, and
no other material conditions or obligations related to the determination of
substantial performance exist.
New Accounting Pronouncements -- The Company has not adopted SFAS No. 123,
'Accounting for Stock-Based Compensation,' which established financial
accounting and reporting standards for employee stock-based compensation plans,
including stock options, stock purchase plans, restricted stock and stock
appreciation rights. SFAS No. 123 defines and encourages the use of fair value
method of accounting for employee stock-based compensation. The Company has not
determined whether it will adopt the method of measuring stock-based employee
compensation prescribed in SFAS No. 123 or continue to use the method prescribed
in Accounting Principles Board Opinion No. 25, with the disclosures required by
SFAS No. 123. SFAS No. 123 is effective for transactions entered into in fiscal
years that begin after December 15, 1995.
Reclassifications -- Certain amounts in the accompanying 1995, 1994 and 1993
consolidated financial statements have been reclassified from amounts previously
reported to conform to the current presentation.
4. United Kingdom Operations
- --------------------------------------------------------------------------------
The 1994 and 1993 general and administrative expenses incurred by the Company's
previous 80% owned British subsidiary approximated $777,000 and $882,000,
respectively, and are included in the accompanying 1994 and 1993 consolidated
statements of income. Operating revenue generated by the subsidiary in 1994 and
1993 approximated $16,000 and $13,000, respectively. During the third quarter of
1994, the Company ceased funding this operation, effectively closing down the
subsidiary. See further discussion of this transaction at Note 9.
5. Property and Equipment
- --------------------------------------------------------------------------------
Property and equipment consists of the following at December 31:
1995 1994
---- ----
Office furnishings and equipment $1,497,939 $1,403,682
Leasehold improvements 713,970 367,266
Computer equipment and software 3,985,487 2,333,972
Automobiles 47,533 47,533
Assets held under capital lease 499,032 474,359
---------- ----------
Total 6,743,961 4,626,812
Accumulated depreciation
and amortization (3,162,068) (2,617,647)
---------- ----------
Property & equipment--net $3,581,893 $2,009,165
---------- ----------
Depreciation and amortization expense on property and equipment for the years
ended December 31, 1995, 1994 and 1993 approximated $602,000, $749,000 and
$537,000, respectively, and is included in general and administrative expenses
in the accompanying consolidated statements of income.
<PAGE>
6. Investments
- --------------------------------------------------------------------------------
Investments consist of the following at December 31:
1995 1994
---- ----
Trading securities,
at fair value $9,250,349 $8,244,409
Current securities
available for sale 1,811,624 17,506
Non-current securities
available for sale,
consisting primarily
of debt securities,
at fair value 1,834,981 4,078,966
----------- -----------
Total carrying value
of investments $12,896,954 $12,340,881
----------- -----------
Information with respect to unrealized holding gains and losses, as of December
31, 1995:
UNREALIZED UNREALIZED
HOLDING GAINS HOLDING LOSSES
------------- --------------
1995
Trading securities $302,791 $22,404
Securities available for sale 87,961 --
-------- --------
Total $390,752 $22,404
-------- --------
1994
Trading securities $ -- $371,509
Securities available for sale 22,931 37,744
-------- --------
Total $ 22,931 $409,253
-------- --------
Gross realized gains from sales of securities available for sale totaled
$106,139 for the year ended December 31, 1995. Gross
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
unrealized holding gains and losses from sales of securities available for sales
totaled $1,744 and $143,774, respectively, for the year ended December 31, 1994.
Gains and losses on securities are determined based upon specific identification
of the securities sold.
Contractual maturities of securities classified as available for sale as of
December 31, 1995 are as follows:
AMORTIZED MARKET
COST VALUE
---- -----
Due in one year or less $1,793,879 $1,811,624
Due after one year through five years 1,664,062 1,705,892
Due after five years 113,672 129,089
---------- ----------
Total securities classified as
available for sale $3,571,613 $3,646,605
---------- ----------
At December 31, 1995, municipal bonds and cash deposits in the amount of $1.2
million were held by various state regulatory agencies to assure performance of
the Company's obligations under home warranty contracts.
7. Income Taxes
- --------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes consists of the
following for the years ended December 31:
1995 1994 1993
---- ---- ----
Domestic ($3,036,656) ($269,582) $6,189,952
Foreign -- (760,957) (870,546)
----------- --------- ----------
Total ($3,036,656) ($1,030,539) $5,319,406
The provision (benefit) for income taxes consists of the following for the years
ended December 31:
1995 1994 1993
---- ---- ----
Continuing Operations:
Current:
Federal $501,776 $(1,678,495) $2,566,527
State 53,000 19,031 234,000
----------- ----------- -----------
Total 554,776 (1,659,464) 2,800,527
Deferred (1,682,776) 1,461,460 (672,000)
----------- ----------- -----------
Total provision (benefit)
on income from
continuing operations (1,128,000) (198,004) 2,128,527
Discontinued Operation:
Tax benefit from loss on
operation of discontinued
reinsurance segment -- -- (3,757,377)
Tax benefit from estimated
loss on reinsurance
portfolio transfer -- -- (5,435,664)
----------- ----------- -----------
Total provision (benefit)
for income taxes ($1,128,000) ($198,004) ($7,064,514)
----------- ----------- -----------
Tax benefits resulting from the 1993 operations of the Company's discontinued
reinsurance subsidiary have been carried back to the prior three years for
refunds of taxes paid in those years. The remaining tax benefits from the 1993
losses generated by the discontinued operation and the 1994 unusual charges will
be carried forward for realization in future years. Based upon management's
analysis of the positive and negative evidence regarding the likelihood of
realization of this asset, a valuation allowance was deemed to be unnecessary.
The Company historically has provided deferred income taxes primarily on
deferred home warranty contract revenues and acquisition costs, which are
recognized for tax purposes before recognition in the financial statements. The
Company also provides deferred income taxes on deferred marketing fee revenue
and expenses under the annually funded E&O programs. The major portion of these
benefits reverse within one year. In 1993, the Company also provided deferred
income tax benefits on the provision for loss on disposal of its discontinued
reinsurance subsidiary. The operating losses incurred by the reinsurance
subsidiary prior to its disposal generated a net operating loss carryback for
the Company of approximately $2,300,000. The components of the net deferred
income tax assets are as follows:
1995 1994
---- ----
Deferred home warranty revenue $6,414,575 $6,381,809
Deferred home warranty acquisition
costs (2,238,425) (2,247,974)
Litigation accrual 2,036,628 --
Deferred marketing fee revenue 314,326 424,972
Deferred marketing fee commissions (145,403) (205,344)
Miscellaneous (106,157) (176,492)
Current portion of provision for loss
on disposal of reinsurance
subsidiary 493,750 703,810
---------- ----------
Current portion of deferred income tax asset 6,769,294 4,880,781
Non-current portion of provision for loss on
disposal of reinsurance subsidiary 991,855 1,246,805
NOL tax carryforward 342,292 298,000
Capitalized software (659,554) --
AMT credit 699,015 34,540
---------- ----------
Total deferred income tax asset $8,142,902 $6,460,126
---------- ----------
Realization of the deferred tax asset is dependent on generating sufficient
taxable income during the carryforward periods. Although realization is not
assured, management believes it is more likely than not that all of the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term, if estimates of future
taxable income during the carryforward period are reduced. In reaching this
determination, management reviewed the Company's historical performance, and
projections of future results, should the Company's performance continue at the
current level, exclusive of non-recurring events and transactions. These
projections provided positive evidence of future probable realization of the
full tax asset within the prescribed carryforward time frame. The projected
realization also considered the negative impact of charges which could result
from adverse resolution of certain outstanding contingencies; most notably the
Company's guarantee to CNA of a $5 million reinsurance recoverable, related to
the transfer of the POMG net assets. Negative evidence reviewed consisted of
several non-recurring charges incurred by the Company over the past three years.
As each of these charges was deemed to be unusual in nature, each of them
different from the other, and there was no expectation of future recurrences of
such items, the positive evidence was determined to outweigh the negative
evidence.
The provision (benefit) for income taxes on income from continuing operations
included in the accompanying consolidated statements of income differs from the
provision (benefit) computed using the statutory federal income tax rate (34%),
due to the effects of the following items:
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994 1993
- -----------------------------------------------------------------------------------------------
% OF % OF % OF
$ PRETAX $ PRETAX $ PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit)
at statutory rate ($1,032,463) (34.0)% ($350,383) (34.0)% $1,808,598 34.0%
Tax exempt income (32,640) (1.1) -- -- (34,378) (0.6)
State taxes, net of
Federal benefit (108,610) (3.5) 16,236 1.6 154,440 2.9
Non-deductible losses
incurred by UK
subsidiary -- -- 52,320 5.1 -- --
Other 45,713 1.5 83,823 8.1 199,867 3.7
----------- ----- --------- ----- ---------- ----
Provision (benefit)
on income from
continuing
operations ($1,128,000) (37.1)% ($198,004) (19.2)% $2,128,527 40.0%
----------- ----- --------- ----- ---------- ----
</TABLE>
8. Long Term Debt
- --------------------------------------------------------------------------------
Long term debt consists of the following at December 31:
1995 1994
---- ----
Net present value of
obligation to CNA,
discounted at 6% $3,601,513 $4,045,671
Obligations under capital
leases 319,166 336,661
Other notes payable, due in
monthly installments of
$13,802 plus interest 208,507 --
---------- ----------
Total 4,129,186 4,382,332
Less current portion (1,537,257) (1,065,487)
---------- ----------
Long term debt,
net of current portion $2,591,929 $3,316,845
---------- ----------
Estimated aggregate annual maturities of long term debt are as follows:
YEAR MATURITIES
---- ----------
1996 $1,537,257
1997 1,136,640
1998 1,056,747
1999 398,542
In connection with the CNA program, the Company is obligated to pay CNA $5
million. The Company makes payments against this obligation through reductions
in the commission it earns on the premiums generated under the program (see Note
2). Accordingly, the Company has agreed to meet certain minimum premium volume
levels, on an annualized basis, which will ensure that the obligation is paid in
full over the term of the agreement, with scheduled minimum repayments. If E&O
premiums fall below the specified minimum levels, CNA may review the program,
give the Company an opportunity to address the issue and then, at its option,
may stop the program and take ownership of the Company's expiration list. If, on
an annual basis, premium volume falls below the specified level, a cash payment
equal to 5% of the difference between the actual premium volume and minimum
premium volume must be made to CNA. In 1995, the Company did not meet all of the
specified financial and production requirements. However, in March 1996, the
Company and CNA entered into an amendment of the agreement, modifying the
specified minimum premium volume levels to $12 million in 1995, $13 million in
1996, $15 million in 1997 and $20 million thereafter. The agreement to market
CNA insurance exclusively to its membership has been extended through December
31, 1999. If, on an annual basis, premium volume falls below the premium volume
quotas of $17 million in 1995, $18 million in 1996, and $20 million for each
year thereafter, but is above the specified minimum premium volume previously
disclosed, a cash payment equal to 5% of the difference between the actual
premium volume and the premium volume quota must be made to CNA, to be applied
against the obligation to CNA. As of December 31, 1995, the balance due CNA
totaled approximately $3.6 million. The cash payment due for the 1995 shortfall
totals $250,000, and must be made in equal monthly instalments between March
1996 and December 1996. The Company is currently in compliance with the terms of
the agreements as modified.
Estimated annual repayments of the CNA obligation are based on anticipated
premium volume. In 1995 and 1994, the Company revised its estimate of the net
present value of the CNA obligation, based upon the actual payments remitted,
and in 1994, to reflect an estimated repayment term of five years, as opposed to
the original estimate of three years. This change in estimate resulted in an
increase in the discount on the obligation, which will be amortized to interest
expense over the life of the obligation. The funds due to CNA, which are
recorded at net present value, are a senior obligation of the Company, secured
by an interest in the common stock of the Company's HOMS subsidiary and in the
Company's Member list.
9. Unusual Items
- --------------------------------------------------------------------------------
During September 1994, the Company recorded unusual charges totaling $1,787,355.
These charges represent expenses related to a reduction in the Company's
workforce and the closing of its UK operations.
In early September 1994, the Company underwent an organizational
restructuring, reducing its total work force by approximately 20%. This
restructuring is expected to result in annual cost savings of approximately
$1,700,000, through reductions in salary, benefits and payroll tax expenses. The
charge, included in the `Unusual items' caption in the accompanying consolidated
statements of income, totaled approximately $1,063,000. Approximately $400,000
of this total related to an agreement to terminate the employment contract
between the Company and its former Chairman of the Board of Directors. The plan
to terminate employees was approved and carried out prior to September 30, 1994.
The benefit arrangement awarded to the terminated employees was within the
Company policy, or according to employment contracts with certain employees. As
of December 31, 1994, approximately $923,000 had been paid against the
liability, and $140,000 remained accrued and unpaid. There were no adjustments
to the liability other than to reflect payments to terminated employees.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
total related to an agreement to terminate the employment contract between the
Company and its former Chairman of the Board of Directors.
In the second quarter of 1994, the Company received a letter of intent for the
purchase of its 80% interest in HGC, however, the proposed transaction was not
consummated, due to the inability of the buyer to obtain financing. The Company,
in the third quarter of 1994 ceased funding the subsidiary, which has
effectively closed down its operations. One time charges for severance pay, the
balance due under the subsidiary's lease agreements and write-off of the
subsidiary's net assets, totaled approximately $724,000, and is included in the
'Unusual items' caption in the accompanying consolidated statements of income.
10. Commitments And Contingencies
- --------------------------------------------------------------------------------
The Company is subject to various lawsuits and claims arising in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position or results of operations.
The Company currently rents office space in Sunrise, Florida, under a lease
which expires on December 31, 2005. The lease requires annual increases of 3% of
the base rent per square foot through the end of the lease term plus actual
maintenance expenses and property tax increases. The Company also leases office
space in certain of the Corporate-Owned Regions for remaining terms of up to
three years. Future minimum annual rental payments approximate $266,000 in 1996,
$313,000 in 1997, $307,000 in 1998, $304,000 in 1999, $313,000 in 2000, and
$1,652,764 thereafter. Rental expense for 1995, 1994 and 1993 approximated
$563,000, $601,000 and $567,000, respectively, and is included in general and
administrative expenses in the accompanying consolidated statements of income.
On December 16, 1995, a jury verdict in the amount of $5,156,022 was rendered in
favor of the Plaintiff and against Homeowners Marketing Services, Inc. ("HMS"),
a subsidiary of the Company, in the following matter: Acceleration National
Insurance Company, Plaintiff, vs. Homeowners Marketing Services, Inc., et al.,
Defendants, in the Court of Common Pleas of Franklin County, Ohio. HMS has filed
an appeal of the judgment. Post judgment proceedings have been initiated in
Florida and elsewhere, including discovery in aid of execution. Although such
actions were initially stayed in Florida, on March 13, 1996, the Circuit Court
for Broward County, Florida, dismissed an action by HMS which contested the
domestication of the judgment in Florida, and no stay is presently in effect. In
the event the judgment creditor proceeds to execute on its judgment, such
actions would have a material adverse effect on the business of HMS, and could
have a material adverse effect on the liquidity of the Company. The judgment,
which accrues interest at the rate of 10% per annum, is recorded in other
expense in the accompanying consolidated statements of income, and in accrued
and other expenses in the accompanying consolidated balance sheets.
In February 1996, a lawsuit was filed against the Company in the Court of Common
Pleas of Bucks County, Pennsylvania, by the former franchisee of the
Pennsylvania territory, alleging breach of contact, fraud and misrepresentation,
and is seeking damages in the amount of $50,000, trebled, reimbursement of costs
and attorney's fees, and an injunction to prevent the Company from terminating
the franchise agreement. The Company believes this suit is without merit, and
has filed a motion to transfer the case to Florida and a motion to dismiss the
case. No accrual for this matter has been reflected in the accompanying
consolidated financial statements.
The Company has entered into various employment contracts with certain of its
executive officers and management personnel, which provide for salary
continuation of a minimum of six months in the event of termination without
cause. In addition, the Company entered into an agreement with an officer in
December 1995, which provides for annual compensation of $377,211, adjusted for
changes in the Consumer Price Index, through December 31, 2000, with an
automatic three year extension, unless notice of termination is given by either
party six months prior to the termination of the initial term. The agreement
also contains a change in control provision that would entitle the officer to
receive a minimum of 2.99 times the annual compensation. The agreement also
calls for certain other fringe benefits during the term of the agreement.
<PAGE>
The Company also entered into an engagement agreement with a director, to
provide legal services to the Company for a one year period. The agreement calls
for a minimum payment of a non-refundable $100,000 retainer.
In connection with the transfer of POMG's net assets to CNA, the Company
guaranteed the validity of a $5,000,000 reinsurance recoverable, one of the POMG
assets transferred to CNA. The Company has not recorded a provision for this
guarantee, based upon the opinion of its special insurance counsel, that the
cover note relating to the reinsurance contract is a binding agreement,
enforceable in accordance with its terms, and the objections voiced by the
reinsurer do not support a material basis for it to successfully deny coverage.
See also Note 2.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. Stock Options, Warrants And Purchase Rights
- --------------------------------------------------------------------------------
The Company adopted stock option plans in 1988 authorizing issuance of up to
600,000 shares of common stock to officers and other employees. Of the
authorized shares, 300,000 may be issued as 'incentive stock options' within the
meaning of Section 422 of the Internal Revenue Code, and 300,000 may be issued
as non-qualified options. The options issued through 1992 generally become
exercisable two years after the date of grant and expire no later than ten years
after the date of grant. The options issued in 1993 generally become exercisable
over a five year period, beginning on the date of grant. Information with
respect to options under the above plans follows:
OPTION PRICE AVAILABLE
STOCK OPTIONS PER SHARE OUTSTANDING EXERCISABLE FOR GRANT
- --------------------------------------------------------------------------------
At December 31, 1992 $5.00 - $9.75 388,050 207,550 208,950
------------- -------- -------- --------
Granted 4.00 200,000 28,000 (200,000)
Canceled 5.00 - 9.75 (29,500) (29,500) 29,500
------------- -------- -------- --------
At December 31, 1993 4.00 - 9.75 558,550 206,050 38,450
------------- -------- -------- --------
Granted 2.00 80,000 (80,000)
Became exercisable 5.75 75,900
Canceled 4.00 - 9.75 (156,250) (43,650) 156,250
------------- -------- -------- --------
At December 31, 1994 2.00 - 9.00 482,300 238,300 114,700
Granted 2.00 240,000 (240,000)
Became exercisable 2.00 203,000
Canceled 2.00 - 3.00 (286,600) (224,600) 286,600
------------- -------- -------- --------
At December 31, 1995 $2.00 435,700 216,700 161,300
------------- -------- -------- --------
In May 1992, effective September 1991, the Company adopted a non-employee
directors' stock option plan authorizing issuance of up to 300,000 shares of
common stock. Options under this plan become exercisable annually over the five
years following the date of grant and expire no later than ten years after the
date of grant. Options for 75,000 shares were granted at $6.50 per share on
September 26, 1991; options for 25,000 shares were granted at $5.50 per share on
January 28, 1993; options for 25,000 shares were granted at $3.375 per share on
September 23, 1993; and options for 25,000 shares were granted at $2.00 per
share on December 22, 1995. The options issued prior to 1995 were repriced in
December 1994, to $2.00 per share. All of these options remain outstanding at
December 31, 1995. Options for 80,000 shares are exercisable at December 31,
1995.
In 1988, the Company issued five-year stock purchase warrants for 100,000 shares
to outside directors and 150,000 shares to the underwriters of the initial
public offering. All 250,000 warrants expired in 1993; none had been exercised.
In 1991, the Company issued similar warrants for 25,000 shares to an outside
director. These warrants are for $10.80 per share and are exercisable at any
time until April 11, 1996.
In 1990, the Company declared a dividend of one right for each share of common
stock outstanding as of November 12, 1990. The rights will be distributed and
become immediately exercisable upon the earlier of 10 days following a public
announcement that a person or group of affiliated persons has acquired the
rights to acquire beneficial ownership of 20% or more of the Company's
outstanding shares or 10 days following the commencement of a tender offer or
exchange offer that would result in a person or affiliated group beneficially
owning 30% or more of the outstanding shares. Each right permits the holder to
acquire one share of common stock for a price of $30 per share. The rights may
be redeemed by the Company at any time prior to the tenth day after the
acquisition of 20% of the outstanding shares or the announcement of an offer for
30% of the outstanding shares. Upon the occurrence of certain events after the
rights become exercisable, each right would, subject to certain adjustments and
alternatives, entitle the holder to purchase common stock of the Company or the
acquiring entity having a market value of twice the $30 exercise price of the
right (except that acquiring persons would not be able to exercise the rights).
The rights are intended to enable all of the Company's stockholders to realize
the long term value of their investment in HOMG. They will not prevent a
takeover, but should encourage anyone seeking to acquire the Company to
negotiate with the Board of Directors prior to attempting the takeover. The
rights will expire at the close of business November 1, 2000.
In December 1994, the Company repriced all outstanding options to $2.00 per
share, with the exception of the options granted to the current Chairman and the
former Chairman of the Board of Directors and the Chief Financial Officer. The
options granted to the Chief Financial Officer were repriced to $3.00 per share.
The options granted to the former Chairman have been canceled effective January
1995. Upon such cancellation, 100,000 options were granted to the current
Chairman of the Board, at $3.00 per share. In December 1995, all of the options
granted to the Chief Financial Officer were repriced to $2.00 per share. Also in
December 1995, 140,000 options granted to the Chairman from 1988 through 1992
were canceled, and replaced by a new grant of 140,000 options, exercisable for a
ten year period at $2.00 per share.
12. Quarterly Financial Results (Unaudited)
- --------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1995 (In thousands except per share amounts)
Operating revenue $10,835 $11,218 $11,540 $10,961
Income from operations
before income taxes 514 676 245 (4,471)
Net income (loss) 316 415 142 (2,779)
Per share data:
Net income (loss) $0.06 $0.07 $0.03 ($0.50)
The fourth quarter 1995 results include a charge of $5,156,022, related to the
Acceleration trial judgment rendered against a wholly owned subsidiary of the
Company. See also Note 10.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOMEOWNERS GROUP, INC.
Date: February 5, 1997 /s/ C. GREGORY MORRIS
--------------------------------------
C. Gregory Morris, Vice-President,
Treasurer and Chief Financial Officer
37
