<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Pursuant to Section 13 of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996
Commission file number 0-19347
HOME HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3584978
(State of incorporation) (I.R.S. Employer
Identification No.)
59 Maiden Lane, New York, New York 10038-4548
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 530-6600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
YES X NO
--- ---
At June 30, 1996, there were 14,114,500 shares of registrant's Series A Common
Stock, par value $.01 per share, outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME HOLDINGS INC.
Consolidated Statements of Income
Second Quarter and Six Months ended June 30,
(Unaudited)
($ millions)
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------- -----------------
1996 1995 1996 1995
----- ----- ----- -------
<S> <C> <C> <C> <C>
REVENUES:
Net earned premiums (note 2) $ 33 $ 271 $ 113 $ 623
Insurance net investment income 38 80 81 133
Insurance realized capital gains (losses) 10 (212) 10 (207)
Securities broker-dealer operations 122 115 239 216
----- ----- ----- -------
Total revenues 203 254 443 765
----- ----- ----- -------
OPERATING EXPENSES:
Losses and loss adjustment expenses (note 2) 86 496 191 846
Policy acquisition and other insurance expenses 34 98 81 204
Securities broker-dealer operations 110 109 220 204
Corporate interest expense 12 13 24 23
Other expenses -- 11 -- 23
----- ----- ----- -------
Total expenses 242 727 516 1,300
----- ----- ----- -------
Loss before income taxes (39) (473) (73) (535)
Income tax expense (1) (1) (2) (3)
----- ----- ----- -------
NET LOSS $ (40) $(474) $ (75) $ (538)
===== ===== ===== =======
</TABLE>
- ---------------
See notes to consolidated financial statements.
1
<PAGE> 3
HOME HOLDINGS INC.
Consolidated Balance Sheets
($ millions)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Insurance investments at fair value:
Portfolio swap receivable (note 5) $ 1,624 $ 2,130
Fixed maturities available for sale
(cost $31 and $33) 31 33
Equity securities (cost $18 and $24) (note 5) 23 24
Short-term investments 2 2
------- -------
Total insurance investments 1,680 2,189
Cash 57 34
Premiums receivable 332 384
Funds held by affiliate 273 265
Reinsurance receivables 2,260 2,383
Prepaid reinsurance premiums 2 24
Securities broker-dealer investments 454 539
Receivable from brokers, dealers and customers 2,306 1,896
Other assets 246 289
------- -------
Total assets $ 7,610 $ 8,003
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Unpaid losses and loss adjustment expenses $ 5,304 $ 5,814
Unearned premiums 24 141
Payables to brokers, dealers and customers 1,879 1,621
Securities of broker-dealer sold under
agreements to repurchase -- 131
Debt of securities broker-dealer 407 304
Corporate debt (note 4) 544 517
Other liabilities 599 552
------- -------
Total liabilities 8,757 9,080
------- -------
Litigation and contingencies (note 6)
Stockholders' deficiency: (note 3)
Series A preferred stock, $.01 par value; 170
shares authorized, issued and outstanding -- --
Series A common stock, $.01 par value;
40,000,000 shares authorized;
14,114,500 shares outstanding -- --
Series B convertible stock, $.01 par value;
15,000,000 shares authorized;
11,425,177 shares outstanding -- --
Paid-in capital 777 777
Deficit (1,927) (1,852)
Unrealized gains on insurance investments (note 5) 5 --
Unrealized currency translation adjustments (2) (2)
------- -------
Total stockholders' deficiency (1,147) (1,077)
------- -------
Total liabilities and stockholders' deficiency $ 7,610 $ 8,003
======= =======
</TABLE>
---------------
See notes to consolidated financial statements.
2
<PAGE> 4
HOME HOLDINGS INC.
Consolidated Statements of Cash Flows
Six Months ended June 30,
(Unaudited)
($ millions)
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (75) $(538)
Adjustments to reconcile net loss to net cash
used for operating activities:
Insurance realized capital (gains) losses (10) 207
Unpaid losses and loss adjustment expenses (510) (142)
Premiums and reinsurance receivables 197 (10)
Funds held by affiliate (8) --
Unearned premiums (117) (222)
Broker-dealer investments and receivables,
net of payables (109) 10
Other 7 76
----- -----
Net cash used for operating
activities (625) (619)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Portfolio swap receivable 506 624
Sales of fixed maturities 2 2
Sales of equity securities 15 3
Purchases of equity securities -- (1)
Other (5) (10)
----- -----
Net cash provided by investing
activities 518 618
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in debt of broker-dealer 103 123
Increase in corporate debt 27 214
Decrease in corporate debt -- (170)
Stock repurchase -- (92)
Issuance of preferred stock -- 98
Other -- (9)
----- -----
Net cash provided by financing
activities 130 164
----- -----
Net increase (decrease) in cash 23 163
Cash at beginning of period 34 144
----- -----
CASH AT END OF PERIOD $ 57 $ 307
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Corporate interest paid $ 12 $ 13
Broker-dealer interest paid $ 40 $ 36
Income taxes paid $ 1 $ 5
</TABLE>
- ---------------
See notes to consolidated financial statements.
3
<PAGE> 5
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
Home Holdings Inc. (the "Company") follows the accounting policies set
forth in the 1995 Annual Report on Form 10-K ("Annual Report") filed with
the Securities and Exchange Commission (the "Commission"). Users of
financial information produced for interim periods are encouraged to refer
to the footnotes contained in the Annual Report when reviewing interim
financial results, and to note 1 of such Annual Report for discussion of
the Company's recapitalization and related terms mentioned herein.
The accompanying interim consolidated financial statements are
unaudited. These financial statements reflect all adjustments, consisting
of normal recurring adjustments, necessary for a fair presentation of
financial position and results of operations. Results of interim periods
are not necessarily indicative of results for the full year.
2. PREMIUMS AND LOSSES
Premium and loss information for the second quarter and six months
ended June 30, follows:
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------- ---------------
1996 1995 1996 1995
---- ----- ----- -----
<S> <C> <C> <C> <C>
($ millions)
Written premiums:
Direct $ 3 $(124) $ 9 $ 17
Assumed 9 362 26 592
Ceded (2) (68) (17) (177)
---- ----- ----- -----
Net $ 10 $ 170 $ 18 $ 432
==== ===== ===== =====
Earned premiums:
Direct $ 10 $ 154 $ 38 $ 533
Assumed 30 216 116 299
Ceded (7) (99) (41) (209)
---- ----- ----- -----
Net $ 33 $ 271 $ 113 $ 623
==== ===== ===== =====
Losses and loss adjustment
expenses:
Direct $ 35 $ 307 $ 174 $ 668
Assumed 41 85 78 145
Ceded 10 104* (61) 33*
---- ----- ----- -----
Net $ 86 $ 496 $ 191 $ 846
==== ===== ===== =====
</TABLE>
* Includes a decrease to ceded losses and loss adjustment expenses of $189
million, related to the commutation and assignment of the stop loss
treaty.
4
<PAGE> 6
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
In connection with the Recapitalization as defined in note 1 of the
1995 Annual Report, on December 24, 1994, Zurich Insurance Company's U.S.
Branch ("Zurich American"), the Company and Trygg-Hansa AB, a corporation
organized under the laws of Sweden ("Trygg-Hansa") entered into the
Facultative Reinsurance Facility Agreement (the "Facility Agreement").
Pursuant to the Facility Agreement, Zurich American agreed to issue
facultative reinsurance certificates and related cut-through endorsements
with respect to policies issued by The Home Insurance Company and its
insurance subsidiaries ("Home Insurance"), if requested by Home Insurance
and if such risks met Zurich American's underwriting criteria.
On February 9, 1995, the Facility Agreement was amended to provide that
existing or prospective insureds of Home Insurance that decline a Zurich
American reinsurance certificate would be offered a Zurich American
insurance policy with associated premiums and liabilities being assumed by
Home Insurance through a 100% quota share reinsurance agreement.
On June 12, 1995, the Facility Agreement was further amended to provide
for settlements of balances after June 12, 1995 due between Home Insurance
and Zurich American and to delete a provision for a 1% renewal premium
payable by Zurich American with respect to direct policies issued by
Zurich American under the Facility Agreement. The Facility Agreement
terminated as of June 12, 1995.
The effect of the Facility Agreement for the second quarter and six
months ended June 30, follows:
($ millions)
<TABLE>
<CAPTION>
Second Quarter Six Months
-------------- ---------------
1996 1995 1996 1995
---- ----- ----- -----
<S> <C> <C> <C> <C>
Written premiums:
Direct** $(1) $ (84) $ (6) $(205)
Assumed 6 355 16 546
Ceded -- (6) (5) (34)
--- ----- ---- -----
Net $ 5 $ 265 $ 5 $ 307
=== ===== ==== =====
Earned premiums
Direct** $(1) (99) $ (6) $(139)
Assumed 6 149 16 197
Ceded -- (15) (5) (21)
--- ----- ---- -----
Net $ 5 $ 35 $ 5 $ 37
=== ===== ==== =====
</TABLE>
** Negative direct premiums is due to policies cancelled and subsequently
assumed.
5
<PAGE> 7
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Asbestos/Pollution Losses and Loss Adjustment Expenses
The 1996 second quarter and six months incurred loss and loss
adjustment expenses relating to policies which have been alleged to
contain asbestos/pollution exposure ("Asbestos/Pollution Policies") were
nil for the 1996 second quarter and six months compared with $20 million
and $35 million, respectively, for the same periods in 1995. The 1996
second quarter and six months incurred loss for Asbestos\Pollution
Policies reflected $16 million and $42 million of paid losses,
respectively, offset by decreases of $16 million and $42 million,
respectively, to unpaid losses and loss adjustment expenses for the same
periods.
Estimation of loss reserves for Asbestos/Pollution Policies is one of
the most difficult aspects of establishing reserves, especially in view of
changes in the legal and tort environment which affect the development of
loss reserves. There is a high degree of uncertainty with respect to
future exposure from these types of claims because significant issues
exist as to the liabilities of the insureds, the extent to which insurance
coverage exists, diverging legal interpretations and judgments state by
state relating to, among other things, when the loss occurred and what
policies provide coverage; what claims are covered; whether there is an
insurer obligation to defend; how policy limits are determined; how policy
exclusions are applied and interpreted; and whether clean-up costs
represent insured property damage, and other matters. Home Insurance is
engaged in litigation over the interpretation of policy coverage and other
liability issues. If the courts expand the intent of the policies and the
scope of coverage, as they sometimes have in the past, additional
liabilities may emerge. Conversely, proposals for regulatory reform may
serve to reduce or limit future liabilities. Among other complications,
there are uncertainties regarding the number and identity of insureds with
potential exposure, lack of historical data and long reporting delays.
Management believes these issues are not likely to be resolved in the near
future. Given these uncertainties, management believes that it is
virtually impossible to determine ultimate losses in this area and no
meaningful range for adequate reserves for such ultimate losses can be
established at this time.
With respect to claims involving exposures to asbestos and certain
other toxic torts, the development of the legal insurance coverage issues
is more advanced and the insurance companies have had a longer history in
defending and settling such claims. As a result, Home Insurance
establishes specific case reserves for these asbestos and toxic tort
claims at such time as Home Insurance is able to estimate the probable
ultimate cost to Home Insurance over reasonably foreseeable future periods
of time. Pollution claims, however, continue to present the range of
issues presented above. Policyholders generally do not make available
sufficient information from which the reasonable costs of clean-up or
remediation, even if covered by a Home Insurance policy, might be
estimated. Moreover, successful defense by Home Insurance on coverage
issues might eliminate all coverage for a particular claim or group of
claims. Accordingly, the development of a factual basis from which a claim
can be evaluated
6
<PAGE> 8
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
with respect to exposure and coverage can take months to years from
receipt of an initial claim. Thus, reserves with respect to specific
pollution cases typically are set, if at all, only after substantial
factual discovery is completed in the action.
In 1995, Home Insurance established a single Environmental and Mass
Tort Division, which will also include a new team to merge legal,
actuarial and financial expertise in collaborating with policyholders and
reinsurers to find alternative resolutions to claims in the environmental
and mass tort areas. Management believes that these organizational changes
will increase operational efficiency, while assuring that Home Insurance
takes a unified and consistent approach to these claims. This division is
also preparing an inventory of potential exposures for Asbestos/Pollution
Policies, which Home Insurance will utilize to evaluate its use of
industry benchmarks to establish reserves.
Losses for such claims are likely to be reflected in future years and,
due to the uncertainties discussed above, the ultimate losses may vary
materially from current reserves and could have a materially adverse
effect on the Company's financial condition and results of operations.
The process of estimating reserve requirements is necessarily imperfect
and involves an evaluation of a large number of variables discussed above.
Therefore, there can be no assurance that the ultimate liability will not
exceed amounts reserved. However, on the basis of (i) current legal
interpretations, and political, economic and social conditions, (ii) Home
Insurance's internal procedures, which analyze Home Insurance's experience
with similar cases and historical trends, such as reserving patterns, loss
payments, pending levels of unpaid claims and product mix, and (iii)
management's judgments of the relevant factors regarding reserve
requirements for claims relating to Asbestos/Pollution Policies,
management believes that adequate provision has been made for Home
Insurance's loss reserves.
7
<PAGE> 9
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
3. STOCKHOLDERS' DEFICIENCY
Dividend Restrictions
The Company has been notified by the New Hampshire Insurance Department
(the "New Hampshire Department") that, in light of the Recapitalization,
Home Insurance cannot pay any dividends without prior approval of the New
Hampshire Department. If the New Hampshire Department rejects future
dividend payments, the Company will be forced to raise cash through
capital infusions, the issuance of additional debt, or the sale of assets
in order to meet its current obligations; however, there are no assurances
that such sources will be available. Under the terms of the
Recapitalization Agreement, Centre Finance Dublin ("Centre Finance"), an
affiliate of Zurich Insurance Company, agreed to purchase up to $46
million aggregate principal amount of the Company's 7% Series B Senior
Working Capital Notes to fund interest payments through December 1996 on
the Public Indebtedness. Such Series B Senior Working Capital Notes will
be purchased by Centre Finance on the applicable interest payment dates
for the Public Indebtedness. As of June 30, 1996 the Company has issued
$35 million of the Series B Senior Working Capital Notes.
Based on the Company's most current cash flow projections, funds on
hand and funds that can be used from the issuance of Series B Senior
Working Capital Notes should be sufficient to meet the Company's cash flow
needs through the end of 1996. The preparation of cash flow projections,
however, requires many assumptions and estimates by management, and the
actual outcome and results can vary materially from such estimates.
While there should be sufficient funds to meet its cash needs through
1996, there can be no assurances that events or circumstances described
herein or unforeseen will not result in a cash shortfall before December
31, 1996. The Company is currently reviewing its cash needs and cash
sources for 1997. Without dividends from Home Insurance, the Company is
unlikely to be able to meet its cash needs during 1997.
Statutory Information
The accounting practices of insurance companies are prescribed or
permitted by certain regulatory authorities. Certain of these practices
differ from the generally accepted accounting principles used in preparing
the consolidated financial statements of the Company. Home Insurance's
consolidated policyholders' surplus determined in accordance with
statutory practices was $211 million at June 30, 1996 compared with $230
million at December 31, 1995.
In connection with the New Hampshire Department's involvement in
approving the Recapitalization, it has appointed a representative to act
as an on-site monitor for the Company's operations, with certain rights of
access and cooperation from the Company and Risk Enterprise Management
Limited. The New Hampshire Department also continues to direct a
consulting actuarial firm to perform an accelerated review of Home
Insurance's loss reserves, with particular emphasis on Asbestos/Pollution
Policies.
8
<PAGE> 10
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
4. CORPORATE DEBT
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
($ millions)
7% Senior Notes due in 1998, net of
unamortized discount of $1 in 1996 and 1995 $ 99 $ 99
7 7/8% Senior Notes due in 2003, net of
unamortized discount of $1 in 1996
and $2 in 1995 178 177
7 7/8% Senior Notes due in 2003, net of
unamortized discount of nil in 1996 and 1995 1 1
12% Senior Subordinated Notes, issued at
original issue discount, $303 million
principal value due in 2004 111 105
8% Junior Subordinated Notes, issued at
original issue discount, $171 million
principal value due in 2004 87 84
12% Senior Subordinated Working Capital
Notes, issued at original issue discount,
$46 million principal value due in 2004 17 16
7% Series A Senior Working Capital Notes 16 12
7% Series B Senior Working Capital Notes 35 23
---- ----
Total Corporate Debt $544 $517
==== ====
</TABLE>
Interest on the Series A and Series B Senior Working Capital Notes is
payable quarterly, and at June 30, 1996, approximately $2 million of
interest was accrued but not paid by the Company and accordingly is
overdue. On any overdue payment of principal or interest, the interest
rate is adjusted upwards to the greater of (i) the rate of interest on the
notes, plus 3% or (ii) the prime rate plus 3%. Non-payment of interest at
the due date additionally constitutes an event of default under the terms
of the Series A and Series B Senior Working Capital Notes which, among
other things, would remove Centre Finance's obligation to fund additional
Series A and Series B Senior Working Capital Notes. Centre Finance and its
affiliates have waived their rights and privileges with respect to a
default of an interest payment, except interest rate adjustments, through
December 31, 1996.
Principal on the Series A and Series B Senior Working Capital Notes of
approximately $16 million and $24 million, respectively, was due June
1996. Pursuant to the Standby Working Capital Credit Agreement, dated as
of April 26, 1995, the Company, on May 21, 1996, elected to extend the due
date of such principal until June 1997. Additionally, $12 million of
Series B Senior Working Capital Notes issued on June 15, 1996, matures on
June 15, 1997.
9
<PAGE> 11
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Neither Centre Finance nor Zurich Insurance Company have any
obligations pursuant to the Recapitalization or otherwise to provide any
capital or other financial support to the Company or its subsidiaries
other than the limited amounts specifically provided for pursuant to the
Recapitalization and related agreements. Centre Finance and Zurich
Insurance Company have informed the Company that they do not intend to
provide any financial support beyond such limited amounts as may be
required pursuant to the Recapitalization.
5. PORTFOLIO SWAP RECEIVABLE AND OTHER INSURANCE INVESTMENTS
The Portfolio Value Swap Agreements (the "Swap") are designed to
transfer control and market risk of the portfolio to Centre Reinsurance
Dublin. The Company has accounted for the Swap as if the investments
covered by the Swap were sold to Centre Reinsurance Dublin. The Company,
however, continues to retain legal ownership. As a result, the Company has
reclassified its investments covered by the Swap to a balance receivable
from Centre Reinsurance Dublin ("Portfolio Swap Receivable"), valued at
the fair value of the portfolio investments on the effective date (January
1, 1995) less withdrawals made to fund operations plus the total return of
7.5%. Centre Reinsurance Dublin bears the market risk and will reimburse
the Company or be reimbursed by the Company for any changes in the fair
value of securities underlying the Swap as discussed below.
As of June 30, 1996, the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of
$58 million because of a negative difference from the 7.5% target return.
The negative difference since January 1, 1996 resulted from the net of (i)
a $50 million difference in favor of the Company due to a decrease in the
fair value of investments underlying the Swap and (ii) a $8 million
difference in favor of the Company for investment income representing an
upward adjustment to reach the 7.5% target yield. Actual investment income
before such adjustments was $73 million.
Securities and cash totaling $210 million were transferred to Centre
Reinsurance Dublin on January 22, 1996, to settle the 1995 Swap liability.
In the six months ended June 30, 1996, the Company recognized $5
million in unrealized gains on insurance equity investments not underlying
the Swap.
10
<PAGE> 12
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
In the second quarter of 1996, Zurich Investment Management Inc.
("ZIM") replaced its affiliate, Centre Investment Services Limited, as
manager of the Company's cash and invested assets. The fair value of
securities managed by ZIM and underlying the Portfolio Swap Receivable
from Centre Reinsurance Dublin is as follows:
<TABLE>
<CAPTION>
Estimated
Fair
Value
<S> <C>
($ millions)
Fixed Maturities:
U.S. Government and agency $ 455
Mortgage-backed 458
Corporate 508
Foreign governments 49
Other 3
------
Total 1,473
Equity securities 8
Short-term investments 85
Total Swap investments 1,566
Receivable from Centre Reinsurance Dublin 58
Portfolio Swap Receivable $1,624
======
</TABLE>
6. LITIGATION AND CONTINGENCIES
Home Insurance, in common with the insurance industry, is subject to
litigation, including claims for punitive damages and for
extra-contractual damages, in the normal course of its business. Gruntal
Financial Corporation ("Gruntal"), in the ordinary course of its business,
has been named as a defendant or co-defendant in a number of lawsuits,
including class actions and arbitration proceedings, some of which involve
claims for damages of substantial or unspecified amounts.
In the ordinary course of their business, Home Insurance is involved in
insurance litigation, including claims litigation involving the defense of
policyholders arising from suits brought by third parties, litigation or
arbitration to recover sums due from reinsurers, actions brought by
policyholders alleging the improper failure to settle or defend suits, and
actions to recover premiums due from insureds, including premiums due
under retrospectively-rated insurance policies and premium balances due
from agents or brokers. In addition, Home Insurance is involved in
non-insurance litigation arising out of investments and employment-related
matters.
While the aggregate dollar amounts involved in these legal proceedings
cannot be
11
<PAGE> 13
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
determined with certainty, if the Company or its subsidiaries were
required to pay the amounts at issue, such payment or payments could have
a material adverse effect on the Company's financial condition or results
of operations. However, in the opinion of management, the ultimate
aggregate liability in these actions is not expected to exceed the amounts
currently reserved in an amount which would have a material adverse effect
on the Company's financial condition or results of operations. There are
no assurances that the outcome of these matters will not vary materially
from management's estimates.
A petition was filed on December 13, 1993, in the District Court of
Dallas County, Texas, joining Home Insurance as a defendant in a
previously filed action. The action seeks certification of both plaintiff
and defendant classes. The purported plaintiff class consists of all Texas
insureds who were charged premiums above state-approved rates for casualty
coverage through the use of retrospectively-rated policies for a period
beginning prior to May 15, 1987, through April 1, 1992. Plaintiffs seek to
certify a defendant class of all insurers doing business in Texas who
charged the alleged excessive rates, plus certain brokers and the National
Council on Compensation Insurance. The Complaint alleges that defendants
entered into a conspiracy to devise various methods of charging and
collecting the allegedly excessive rates and, in doing so, breached their
contracts with plaintiffs, breached their fiduciary duty and violated the
Texas Insurance Code and the Deceptive Trade Practices Act. Compensatory
and punitive damages are sought in unspecified amounts plus treble
damages.
The Texas Legislature has passed a statute which, under certain
circumstances, may exempt insurers from liability for the alleged
overcharges if they did not charge insureds more than residual market
rates and were not members of a defendant class alleged in an action filed
prior to May, 1993. The action in which the intervention was filed was
commenced prior to May, 1993, however, and Home Insurance is allegedly a
member of the class which that action seeks to certify. Pursuant to the
terms of Home Insurance's premium agreements with its insureds, a motion
was filed to stay the litigation pending arbitration which was denied by
the court. Home Insurance's motion for leave to file a petition for a writ
of mandamus subsequent to this ruling was denied by the appellate court. A
settlement between fourteen of the primary defendants, including Home
Insurance, has been reached. Home Insurance has contributed approximately
$8 million, which had been accrued as of December 31, 1995, under a trust
agreement pending final court approval. On July 5, 1996 the Texas District
Court gave preliminary approval to the settlement.
A complaint and temporary restraining order issued from the New York
State Supreme Court were served upon Home Insurance by Bertholon-Rowland
Corp., a large producer of Home Insurance's professional liability
business in New York and Massachusetts. The action arises out of the
producer's decision to terminate its business relationship with Home
Insurance on six months' notice, and Home Insurance's subsequent immediate
suspension of the producer's authority to act on its
12
<PAGE> 14
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
behalf. The complaint seeks an injunction and damages nullifying the
suspension of authority and enforcing the producer's contractual rights to
its customer accounts and commissions. Compensatory and punitive damages
are sought. By stipulation of the parties the restraining order was
dissolved and legal proceedings stayed pending submission of the dispute
to an arbitration panel. Home Insurance obtained a preliminary injunction
against Bertholon-Rowland preventing it from issuing cancellations and
non-renewal notices to Home Insurance insureds pending the arbitration
hearing which was conducted in June and July of 1995. The final award of
the arbitration panel dated August 7, 1995 ordered, among other things,
that Bertholon-Rowland's damages claim against Home Insurance be denied.
Home Insurance's motion to confirm the arbitration award was submitted to
the court on October 12, 1995. On November 8, 1995, Bertholon-Rowland
obtained a court order temporarily restraining alleged violations of its
ownership rights to policy expirations, and filed a motion for a
preliminary injunction against Home Insurance and Zurich-American
Insurance Group and Professional Liability Underwriting Managers Inc. due
to the alleged violations and seeking other relief as well. Subsequently,
Bertholon-Rowland filed a motion to amend the temporary restraining order
based upon alleged continuing violations of its expiration rights. The
motions are pending before the court. The Company does not believe that
the outcome of this action will have a material adverse effect on its
financial condition or results of operations.
On February 13, 1991, Home Insurance and its subsidiaries were acquired
from AmBase (the "Acquisition") pursuant to a stock purchase agreement
(the "Stock Purchase Agreement"). As part of the Stock Purchase Agreement,
as amended, AmBase provided Home Insurance a tax indemnification for
certain taxes assessed against AmBase and its consolidated group, which
included Home Insurance, for all periods ending on or before December 31,
1989. The Stock Purchase Agreement, as amended, also provided for a
"hold-back" of a portion of the purchase consideration by the Company to
be used to pay (i) liabilities for federal or state income taxes,
including interest thereon, assessed against AmBase, Home Insurance or any
other member of the AmBase affiliated group for years ending on or before
December 31, 1989, and (ii) certain other liabilities, and to the extent
not used for these purposes, to be paid to AmBase.
Home Insurance, as a member of the AmBase affiliated group, joined in
filing consolidated federal income tax returns with AmBase during tax
years through February 13, 1991, and is severally liable for any federal
income tax, including interest, ultimately assessed against AmBase for
years during such period. In the event AmBase federal income tax and
interest assessments exceed the amount held back pursuant to the Stock
Purchase Agreement, as amended, and AmBase does not have sufficient
financial resources to pay the excess amount, Home Insurance would be
severally liable for such excess amount.
13
<PAGE> 15
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
AmBase federal tax years through 1991 have been examined and settled by
the Internal Revenue Service, with the exception of a "Fresh Start" issue
for the 1987 tax year and no additional assessments can be made. Based
upon public disclosures by AmBase and information provided by AmBase to
the Company under the terms of the Stock Purchase Agreement, as amended,
(i) AmBase believes that it has meaningful defenses with respect to the
"Fresh Start" tax issue that is material to AmBase and (ii) the Company
believes that if AmBase does not have sufficient financial resources to
pay federal income tax and interest assessments for the 1987 tax year for
which Home Insurance is severally liable and for the additional AmBase
withholding tax issue still open for which Home Insurance believes it is
not liable, any liability of Home Insurance for such amounts in excess of
the amount held back pursuant to the Stock Purchase Agreement, as amended,
would not have a material adverse effect on the Company's or Home
Insurance's financial condition or results of operations. No amounts have
been accrued by Home Insurance or the Company in excess of the amount held
back pursuant to the Stock Purchase Agreement, as amended.
Home Insurance is involved in a dispute with its landlord, Olympia and
York Maiden Lane Company (the "Landlord"), with respect to its lease of
its principal offices at 59 Maiden Lane, New York, New York. The Landlord
is in default of certain bond obligations that are secured by the building
and, consequently, the Landlord has made an assignment of rents to the
trustee (the "Trustee") representing the Landlord's bondholders. On June
24, 1996, the Landlord's bondholders obtained a judgment of foreclosure
and it is anticipated that the Landlord's bondholders will complete the
foreclosure, and gain possession of the building shortly.
On June 1, 1996, Home Insurance began withholding rent and tax payments
to the Landlord. Subsequently, the Trustee and the Landlord issued several
notices to Home Insurance threatening to terminate its lease and/or seek
possession of the premises. On July 19, 1996, Home Insurance brought an
action against the Landlord and the Trustee in its capacity as trustee in
New York State Supreme Court entitled, The Home Insurance Company v.
Olympia & York Maiden Lane Company, et al., seeking a preliminary
injunction to prohibit the Landlord from terminating the lease or
beginning an independent rent action in Landlord-Tenant court. In this
action, Home Insurance seeks damages from the Landlord for rent
overcharges, refusal to obtain tax relief which would benefit Home
Insurance, failure to maintain the building including certain life safety
systems, and failure to meet its obligations (including statutory and
regulatory obligations) with respect to The Americans with Disabilities
Act and asbestos in the building.
The Court granted a temporary restraining order on July 19, 1996, in
favor of Home Insurance pending the submission of opposition papers by the
Landlord and a reply due from Home Insurance on August 6, 1996. On August
7, 1996, the Court heard oral argument concerning the restraining order
and, on August 9, 1996, the Court entered a decision and interim order in
this matter. Subject to Home Insurance depositing in escrow with a Court
appointed receiver $7,800,000 covering base rent for the months of
June, July and August of 1996, the Court ordered that the temporary
restraining order stay in place while a Court appointed mediator
investigate Home Insurance's allegations. On August 12, 1996, the
Landlord answered the complaint and counterclaimed for rent and
additional rent in the amount of $10,356,710 and other unspecified
damages for enforcement costs and contract interest, among other things.
Management believes it's too early to predict with certainty the
ultimate outcome of this dispute, however, an unfavorable outcome could
have a material adverse impact on the Company's financial condition.
14
<PAGE> 16
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
In or about October 1994, Gruntal discovered a defalcation in its back
office operations area. Gruntal notified the New York Stock Exchange Inc.
("NYSE"), the Commission and the United States Attorney's Office for the
Southern District of New York ("USAO"). Gruntal also undertook an inquiry
into the circumstances and facts of the defalcation and into related
matters. At this time, Gruntal believes that approximately $14 million,
consisting in substantial part of funds that should have or potentially
could have been abandoned property under the laws of various states
("Abandoned Property"), was embezzled or improperly diverted, including
approximately $5 million in such funds that were diverted to accounts
established at Gruntal in the names of fictitious customers and used in
substantial part to benefit Gruntal. Gruntal believes that the theft is
substantially covered by insurance and has submitted claims to its
insurer, Home Insurance, under the applicable insurance policy. To date,
approximately $8.5 million has been advanced to Gruntal by the carrier.
Home Insurance's net retention on the claim was approximately $1 million,
with the balance reinsured. Based upon information furnished by Gruntal,
inquiries were undertaken by the NYSE, the Commission and USAO.
In August 1995, two former employees of Gruntal, Charles Meizoso, a
Senior Vice President, and Eugene McCloskey, an Internal Audit Manager,
pled guilty to a criminal information filed against them by the USAO. The
first count of the information alleged a conspiracy involving Meizoso,
McCloskey, Waseam Ahmad, Gruntal's former executive cashier (now
deceased), and others, the principal purpose of which was alleged to be to
embezzle in excess of $5 million, including funds that represented
Abandoned Property. The second count of the information alleged a
conspiracy involving Meizoso, McCloskey, Ahmad and others, the principal
purpose of which was alleged to be to divert for Gruntal's benefit in
excess of $5 million of funds, consisting largely of Abandoned Property,
by falsifying Gruntal's records and fraudulently transferring funds to
fictitious customer accounts, from which some of the funds were thereafter
used to pay Gruntal's expenses or to increase its profits. In April 1996,
Edward Bao, a former director and Executive Vice President of Gruntal, was
indicted by a grand jury in the Southern District of New York. The 17
count indictment alleged that Bao conspired with Meizoso, McCloskey, Ahmad
and others, to misappropriate funds, including Abandoned Property, and
divert such funds to Gruntal's benefit. The indictment further charged Bao
with mail fraud and making certain false entries in Gruntal's book and
records. In April 1996, the Commission filed a separate civil injunction
against Bao based on, among other things, Bao's alleged role in the
diversion of funds, including Abandoned Property, for Gruntal's benefit,
the filing of false and misleading reports and a registration statement by
Gruntal with the Commission between 1985 and 1987 and certain sales of
common stock of Gruntal by Bao in 1987.
In connection with these matters, Gruntal has taken steps designed to
bring the firm into compliance with the Abandoned Property laws of the
various states in question, including the recrediting of customers and, to
the extent it has been unable to identify customer accounts for
recrediting, the escheatment of Abandoned Property to such states and the
adoption of new procedures and controls relating to Abandoned Property.
15
<PAGE> 17
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
In addition, Gruntal advised the NYSE, the Commission, USAO and the
National Association of Securities Dealers, Inc. ("NASD") that it was
conducting a separate review relating to the execution and reporting of
certain Over-the Counter ("OTC") trades, which appears to have involved
delayed executions of customer trades and questionable reporting and
pricing activities.
In April 1996, pursuant to a settlement entered into between Gruntal
and the Commission, and without admitting or denying the allegations
therein, Gruntal consented to the entry of an administrative order in
which the Commission found that Gruntal's practices with respect to
Abandoned Property violated antifraud and broker-dealer reporting and
recordkeeping provisions of the federal securities laws, and aided and
abetted violations of the federal securities laws by the Company. The
Commission order censured Gruntal and required Gruntal to pay $5.5 million
in disgorgement and pre-judgment interest and a monetary fine of $4
million, and reimburse any customers determined by an independent
consultant acceptable to the Commission to have been financially harmed by
Gruntal's OTC execution and reporting practices. The disgorgement fund
will be administered and disbursed by a fund administrator pursuant to a
report and a plan which will be submitted to the Commission and which will
require court approval. Under the terms of the settlement, the fund
administrator is also required to verify Gruntal's representation to the
Commission that it has repaid, recredited, escheated or segregated and
scheduled for escheatment $6.7 million which Gruntal has identified as
escheatable, or presently believes to be escheatable, or has identified as
belonging to customers, contra-parties, vendors and other third parties.
In addition, the independent consultant will review Gruntal's operating
policies and procedures with respect to the operations and OTC areas and
recommend further changes, if deemed appropriate. In June 1996, at the
direction of the Commission and as approved by the order of the United
States District Court for the Southern District of New York in SEC v.
Gruntal & Co., Incorporated, et al., 96 Civ. 2514, James R. Doty, Esq., a
partner in the law firm of Baker & Botts, L.L.P. and a former General
Counsel of the Commission, was engaged to serve as Fund Administrator.
In June 1996, with the approval of the Commission, the NYSE and the
NASD, Gruntal engaged Irving M. Pollack, Esq., former Commissioner of the
Commission, to serve as Independent Consultant (hereinafter "the
Independent Consultant"), pursuant to the settlement with the Commission,
and, additionally, pursuant to other settlements with the Commission, NYSE
and NASD, described below. In performing their reviews, the fund
administrator and independent consultant are authorized to rely upon work
performed or to be performed by the Quality Assurance Task Force
established by Gruntal's Chief Executive Officer to conduct a diagnostic
review of Gruntal's departments and business activities, and upon work by
other representatives of Gruntal.
16
<PAGE> 18
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Gruntal also entered into a separate settlement with the Commission in
April 1996, pursuant to which Gruntal consented, without admitting or
denying the allegations therein, to the entry of an administrative order
in which the Commission found that Gruntal violated antifraud and
recordkeeping provisions of the federal securities laws in connection with
the execution of certain transactions for investment advisory clients and
the non-disclosure to advisory clients of the receipt of certain payments
for order flow. The Commission's order censured Gruntal and required
Gruntal to pay a monetary fine of $1 million, reimburse any clients
determined by the Independent Consultant to have been financially harmed
as a result of the violations, and pay into the United States Treasury the
amount of payment that the Independent Consultant determines Gruntal
received for order flow on transactions executed for advisory client
accounts plus accrued interest thereon. Under the terms of the settlement,
the Independent Consultant also will review Gruntal's policies and
procedures with respect to the execution of orders for advisory client
accounts and the coding, and reporting on client confirmations and
internal Gruntal records, of transactions executed by Gruntal and
recommend further changes, if deemed appropriate. In performing this
review, the independent consultant is entitled to rely upon work performed
or to be performed by Gruntal's Quality Assurance Task Force and upon work
by other representatives of Gruntal.
In addition, Gruntal entered into a stipulation with the NYSE staff in
March 1996 to resolve the NYSE's investigation of Abandoned Property and
other issues relating to the supervision of pricing and valuation of
certain collateralized mortgage obligations and certain proprietary
trading accounts, as well as the accuracy of FOCUS reports previously
filed with the NYSE and the late filing of certain other required reports
with the NYSE. Pursuant to the stipulation, which was approved by the NYSE
in April 1996, Gruntal was censured and required to pay a $1 million fine
to the NYSE. In addition, Gruntal agreed to appoint an independent
director acceptable to the NYSE to serve on Gruntal's Board of Directors
for the next five years. Gruntal also agreed to retain the Independent
Consultant to review Gruntal's systems and procedures and make
recommendations for additional systems and procedures, if necessary,
reasonably designed to ensure Gruntal's compliance with federal securities
laws and NYSE rules and to prevent the recurrence of the violations
described in the stipulation.
In April 1996, pursuant to a consent between Gruntal and the NASD, and
without admitting or denying the allegations therein, Gruntal also
consented, among other things, to findings by the NASD that during 1995
through the date of the consent, Gruntal violated certain provisions of
the NASD Bylaws and Rules of Fair Practice by trading ahead of certain
customer limit orders, failing to report or timely report certain trading
transactions and failing to enforce written supervisory procedures
relating to the execution of limit orders. Pursuant to the terms of the
consent, Gruntal was censured and required to pay a fine of $200,000, up
to $100,000 of which may be waived to the extent of payment by Gruntal to
customers harmed by certain trading practices, as discussed below. In
addition, Gruntal agreed to retain the Independent Consultant to review
and, if appropriate, make recommendations with respect to Gruntal's
practices and written procedures pertaining to Gruntal's trading,
execution and reporting
17
<PAGE> 19
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
practices in Nasdaq securities. Gruntal is also required to pay to each
customer identified by the Independent Consultant as harmed by practices
described above the amount by which each customer was harmed plus accrued
interest.
The disgorgement amounts and fines described above in connection with
the Commission, NYSE and NASD regulatory matters were accrued in the
December 1995 financial statements. The Company has made timely payments
of the disgorgement amounts and fines as required under these settlements.
As discussed above, the USAO undertook a separate investigation
relating to the Abandoned Property matter. Based upon the information
presently available, Gruntal cannot predict whether the USAO will charge
Gruntal with any criminal violations. Gruntal believes that any decision
by the USAO to prosecute Gruntal would have a materially adverse impact on
Gruntal's financial condition. Gruntal has advised the USAO of its views
and has also communicated a number of factors that in Gruntal's view would
support a decision not to indict Gruntal, including Gruntal's
self-reporting to, and cooperation with, governmental, regulatory and
self-regulatory bodies, remediation of past non-compliance with state
abandoned property laws and recrediting of customer accounts, adoption of
new policies and procedures, management and personnel changes, ongoing
review of its business practices, and willingness to agree to the
appointment of an independent monitor with authority to review Gruntal's
business activities and recommend further changes in policies and
procedures.
Gruntal has also brought the Abandoned Property and other matters
referred to above to the attention of the Commodity Futures Trading
Commission ("CFTC") and the North American Securities Administrators
Association, a national association of state securities regulators. These
matters could result in additional investigations and proceedings by the
CFTC and state securities regulators, in connection with which such
authorities may seek to impose additional sanctions against Gruntal.
Although the ultimate outcome cannot be predicted with certainty,
management presently believes that any such sanctions would not have a
materially adverse effect on the consolidated financial statements of
Gruntal or the Company.
18
<PAGE> 20
HOME HOLDINGS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following should be read in conjunction with the consolidated financial
statements.
CONSOLIDATED
Consolidated revenues were $203 million and $443 million in the second
quarter and six months ended June 30, 1996, respectively, compared with $254
million and $765 million, respectively, in the same periods of 1995. The net
loss was $40 million and $75 million in the second quarter and six months
ended June 30, 1996, respectively, as compared to $474 million and $538
million, respectively, during the same periods in 1995. The 1995 six months
net loss reflected losses of $418 million related to transactions in
connection with the Recapitalization, including (i) a loss of $189 million
due to the commutation and assignment of the Stop Loss Treaty, (ii) net
realized capital losses of $208 million, pertaining to previously recorded
unrealized losses covered under the Portfolio Swap Agreement and (iii)
transaction expenses of $21 million of which $12 million were recorded in
the second quarter.
HOME INSURANCE
Insurance revenues and pre-tax loss were as follows:
<TABLE>
<CAPTION>
Second Quarter Six Months
----------------- -----------------
1996 1995 1996 1995
---- ----- ----- -----
<S> <C> <C> <C> <C>
($ millions)
Net earned premiums $ 33 $ 271 $ 113 $ 623
Net investment income 38 80 81 133
Realized capital gains 10 (212) 10 (207)
---- ----- ----- -----
Insurance revenues $ 81 $ 139 $ 204 $ 549
==== ===== ===== =====
Underwriting loss $(87) $(323) $(159) $(427)
Net investment income 38 80 81 133
Realized capital gains 10 (212) 10 (207)
---- ----- ----- -----
Insurance pre-tax loss $(39) $(455) $ (68) $(501)
==== ===== ===== =====
</TABLE>
19
<PAGE> 21
HOME HOLDINGS INC.
Underwriting Results
In connection with the Recapitalization which closed on June 12, 1995,
Home Insurance ceased writing new and renewal business except for limited
risks that Home Insurance is obligated to continue writing for an interim
period. All Home Insurance operations are being run-off subsequent to June
12, 1995. Prior to the Closing of the Recapitalization, the Company had
attempted to mitigate the effect of the downgrades by the rating agencies by
entering into a Facility Agreement which allowed Home Insurance's clients to
have access to the security of Zurich American, a Company that is A+ rated
by A.M. Best. The Facility Agreement terminated June 12, 1995.
Net earned premiums and underwriting results by product were as follows:
Net Earned Premiums
<TABLE>
<CAPTION>
Second Quarter Six Months
---------------------- ---------------------
1996 1995 1996 1995
------- -------- ------- -------
<S> <C> <C> <C> <C>
($ millions)
Commercial casualty $ 18 $ 145 $ 68 $ 352
Commercial property 5 14 9 28
------- -------- ------- -------
Commercial accounts group 23 159 77 380
Professional liability 4 48 13 108
Other specialty lines 3 54 14 115
------- -------- ------- -------
Specialty lines group 7 102 27 223
Run-off operations 3 10 9 20
------- -------- ------- -------
Total $ 33 $ 271 $ 113 $ 623
======= ======== ======= =======
</TABLE>
Underwriting Loss
<TABLE>
<CAPTION>
Second Quarter Six Months
---------------------- ---------------------
1996 1995 1996 1995
------- -------- ------- -------
<S> <C> <C> <C> <C>
($ millions)
Commercial casualty $ (55) $ (42) $ (80) $ (78)
Commercial property (16) (24) (42) (42)
------- -------- ------- -------
Commercial accounts group (71) (66) (122) (120)
Professional liability (8) (30) (18) (45)
Other specialty lines (4) (11) (8) (14)
------- -------- ------- -------
Specialty lines group (12) (41) (26) (59)
------- -------- ------- -------
Run-off operations (4) (27) (11) (59)
------- -------- ------- -------
Total before the commutation
and assignment of the
stop loss treaty (87) (134) (159) (238)
Commutation and assignment of the
stop loss treaty - (189) - (189)
------- -------- ------- -------
Total $ (87) $ (323) $ (159) $ (427)
======= ======== ======= =======
</TABLE>
20
<PAGE> 22
HOME HOLDINGS INC.
Underwriting losses were $87 million and $159 million in the second
quarter and six months of 1996, respectively, compared with $323 million and
$427 million in the same periods of 1995. The 1996 underwriting losses were
primarily due to lower earned premiums and expenses incurred in managing the
run-off of Home Insurance's operations. The 1995 results include a loss of
$189 million due to the commutation and assignment of the Stop Loss Treaty,
in connection with the Recapitalization.
The commercial accounts group underwriting loss was $71 million and $122
million, respectively, in the second quarter and six months of 1996,
compared with $66 million and $120 million, respectively, in the same
periods of 1995. The 1996 underwriting losses included commercial casualty
losses of $55 million and $80 million in the second quarter and six months,
respectively, compared to $42 million and $78 million, respectively, in the
same periods of 1995. Commercial property losses of $16 million and $42
million in the second quarter and six months, respectively, were also
included in the 1996 underwriting loss compared with $24 million and $42
million for the same 1995 periods. The 1996 commercial accounts group losses
were primarily due to lower earned premiums and expenses incurred in
managing the run-off of its operations. The 1995 result reflected
unfavorable loss experience.
The specialty lines group losses were $12 million and $26 million in the
second quarter and six months of 1996, respectively, compared with $41
million and $59 million, respectively, in the same periods of 1995. The 1996
specialty lines group losses were primarily due to lower earned premiums and
expenses incurred in managing the run-off of its operations. The 1995
underwriting losses were primarily attributable to unfavorable loss
experience in professional liability and excess casualty/umbrella.
The run-off operations losses were $4 million and $11 million in the
second quarter and six months of 1996, respectively, compared with $27
million and $59 million, respectively, in the same periods of 1995.
Underwriting losses from Pollution/Asbestos Policies for the second quarter
and six months of 1996 were nil in 1996 compared to $20 million and $35
million, respectively, in the same 1995 periods.
Investments
As of June 30, 1996, the Company has recorded an increase to the Portfolio
Swap Receivable of $58 million representing a receivable from Centre
Reinsurance Dublin because of a negative difference from the 7.5% target
return. The negative difference since January 1, 1996 resulted from the net
of (i) a $50 million difference in favor of the Company due to a decrease in
the fair value of investments underlying the Swap and (ii) a $8 million
difference in favor of the Company for investment income representing an
upward adjustment to reach the 7.5% target yield. Actual investment income
before such adjustments was $73 million.
In the six months ended June 30, 1996, the Company recorded $5 million in
unrealized gains on insurance equity investments not underlying the Swap.
21
<PAGE> 23
HOME HOLDINGS INC.
GRUNTAL
An analysis of broker-dealer results for the second quarter ended June 30,
is set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
--------------- ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
($ millions)
Commissions $ 26 $ 22 $ 51 $ 41
Principal transactions 47 51 92 94
Underwriting and investment banking 9 7 18 14
Interest 31 29 60 55
Other 9 6 18 12
---- ---- ---- ----
Total revenues 122 115 239 216
Total expenses 110 109 220 204
---- ---- ---- ----
Income before income taxes $ 12 $ 6 $ 19 $ 12
==== ==== ==== ====
</TABLE>
Total broker-dealer revenues increased by $7 million and $23 million from
the second quarter and six months of 1995 to $122 million and $239 million
in 1996, respectively. The increases were primarily due to commissions and
clearing service fees.
Commissions increased $4 million and $10 million for the second quarter
and six months ending June 30, 1996 to $26 million and $51 million,
respectively, primarily due to increased sales of OTC securities and listed
equity securities. The increase in clearing service fees is primarily due to
increased correspondent transactions which increased 65% and 67%,
respectively, for the second quarter and six months ending June 30, 1996, in
comparison to the 1995 respective periods.
The increase in Gruntal's expenses for the second quarter and six months
of 1996, in comparison to the 1995 periods of $1 million and $16 million,
respectively, can be attributed to increased compensation expenses directly
related to compensable revenues.
OTHER
Corporate interest expense was $12 million and $24 million in the second
quarter and six months ended June 30, 1996, respectively, compared with $13
million and $23 million, respectively, in the same periods of 1995.
Other expenses were nil in the second quarter and six months of 1996,
compared to $11 million and $23 million, respectively, in the same periods
of 1995. The 1995 expenses were primarily comprised of transaction expenses
related to the Recapitalization.
22
<PAGE> 24
HOME HOLDINGS INC.
Income tax expense of $1 million and $2 million, respectively in the
second quarter and six months of 1996 compared with expense of $1 million
and $3 million, respectively, in the same periods of 1995. Taxes in 1996 and
1995 were comprised of state and foreign taxes. The Company was unable to
recognize a federal income tax benefit against its 1996 or 1995 pre-tax
losses.
FINANCIAL CONDITION
Consolidated
Following the closing of the Recapitalization, Home Insurance has
generally ceased writing new or renewal insurance or reinsurance business,
except for limited risks that Home Insurance is obligated to continue
writing for an interim period. The Company has been notified by the New
Hampshire Department that, in light of the Recapitalization, Home Insurance
cannot pay any dividends without prior approval of the New Hampshire
Department.
If the New Hampshire Department rejects future dividend payments, the
Company will be forced to raise cash through capital infusions, the issuance
of additional debt, or the sale of assets in order to meet its current
obligations; however there are no assurances that such sources will be
available. Under the terms of the Recapitalization Agreement, Centre Finance
agreed to purchase up to $46 million aggregate principal amount of the
Company's 7% Series B Senior Working Capital Notes to fund interest payments
occurring through December 1996 on the Public Indebtedness as described in
note 1 of the 1995 Annual Report. Such Series B Senior Working Capital Notes
will be purchased by Centre Finance on the applicable interest payment dates
for the Public Indebtedness. As of June 30, 1996 the Company has issued $35
million of the Series B Senior Working Capital Notes.
To fund additional cash requirements incurred in connection with the
Equity Repurchase Transaction, the Recapitalization and other extraordinary
needs, Centre Finance and Zurich Centre Investments Limited ("ZCI")
purchased $15 million principal amount of the Company's 12% Senior
Subordinated Working Capital Notes due and $12 million principal amount of
the Company's 7% Series A Senior Working Capital Notes, pursuant to the
Standby Working Capital Credit Agreement, dated as of April 26, 1995, by and
between the Company and ZHI. The Company, ZHI and Trygg-Hansa agreed that
the Company may issue and ZHI may purchase, additional Series A Senior
Working Capital Notes having an aggregate principal amount of $4 million,
and during 1996 the Company has issued $3.8 million of these notes.
23
<PAGE> 25
HOME HOLDINGS INC.
Interest on the Series A and Series B Senior Working Capital Notes is
payable quarterly, and, at June 30, 1996, approximately $2 million of
interest was accrued but not paid by the Company and accordingly is overdue.
On any overdue payment of principal or interest, the interest rate is
adjusted upwards to the greater of (i) the rate of interest on the notes,
plus 3% or (ii) the prime rate plus 3%. Non-payment of interest at the due
date additionally constitutes an Event of Default under the terms of the
Series A and Series B Senior Working Capital Notes which, among other
things, would remove Centre Finance's obligation to fund additional Series A
and Series B Senior Working Capital Notes. Centre Finance and its affiliates
have waived their rights and privileges with respect to a default of an
interest payment, except interest rate adjustments, through December 31,
1996.
Principal on the Series A and Series B Senior Working Capital Notes of
approximately $16 million and $24 million, respectively was due June 1996.
Pursuant to the Standby Working Capital Credit Agreement, dated as of April
26, 1995, the Company, on May 21, 1996, elected to extend the due date until
June 1997. Additionally, $12 million of Series B Senior Working Capital
Notes issued on June 15, 1996, matures on June 15, 1997.
Neither Centre Finance nor Zurich Insurance Company have any obligations
pursuant to the Recapitalization or otherwise to provide any capital or
other financial support to the Company or its subsidiaries other than the
limited amounts specifically provided for pursuant to the Recapitalization
and related agreements. Centre Finance and Zurich Insurance Company have
informed the Company that they do not intend to provide any financial
support beyond such limited amounts as may be required pursuant to the
Recapitalization.
The sources of funds of the Company consist primarily of dividends from
Home Insurance. Accordingly, the Company's ability to pay its obligations
depends on the receipt of sufficient funds from Home Insurance. Since Home
Insurance is subject to regulatory restrictions on the amount of dividends
that can be paid as described above, its assets are not necessarily
available to the Company on a current basis. The Company did not receive
common stock dividends from Home Insurance in 1996 or 1995.
Based on the Company's most current cash flow projections, funds on hand
and funds that can be used from the issuance of Series B Senior Working
Capital Notes should be sufficient to meet the Company's cash flow needs
through the end of 1996. The preparation of cash flow projections, however,
requires many assumptions and estimates by management, and the actual
outcome and results can vary materially from such estimates. While there
should be sufficient funds to meet its cash needs through 1996, there can
be no assurances that events or circumstances described herein or
unforeseen will not result in a cash shortfall before December
31, 1996. The Company is currently reviewing its cash needs and cash
sources for 1997. Without dividends from Home Insurance, the Company is
unlikely to be able to meet its cash needs during 1997.
At June 30, 1996 and December 31, 1995, the Company's outstanding
corporate debt was $544 million and $517 million, respectively.
Home Insurance and Centre Reinsurance Dublin entered into the Excess of
Loss Reinsurance Agreement, dated as of June 12, 1995. Home Insurance is
provided with an aggregate limit of $1.3 billion subject to certain
adjustments, attaching at the point that
24
<PAGE> 26
HOME HOLDINGS INC.
Home Insurance has no remaining cash or assets readily convertible into cash
to pay any of its obligations. Among such adjustments, in the event that
Home Insurance pays any dividends to the Company prior to the third
anniversary of the Closing of the Recapitalization to fund interest payments
on the Public Indebtedness, the limit will be increased by the amount of
such dividends plus interest thereon at the rate of 7.5% per annum,
compounded, from the date such dividends were paid to the date the reinsurer
commences making payments under the Excess of Loss Reinsurance Agreement.
Also, up to $290 million of additional coverage provided by the Excess of
Loss Reinsurance Agreement shall be linked to certain factors including
dividend payments from Home Insurance to the Company funding principal
payments on the Public Indebtedness and the New Notes (as defined in note 1
to the 1995 Annual Report) as such debts become payable.
Based on cash flow forecasts at December 31, 1995, the Company is
projecting that coverage limits of the Excess of Loss Reinsurance Agreement
will be substantially exhausted, and due to these projected future
recoveries, loss reserves with a net present value of $415 million were
recorded in 1995 as a recoverable from the Excess of Loss Reinsurance
Agreement. The Company has not recorded any changes to the recoverable in
the first half of 1996, based on current information, but continuing
reassessment of these projections will be performed during the year.
Beginning June 1996, as discussed in note 6, Home Insurance is withholding
rent and tax payments to its Landlord. Amounts withheld for rent of
approximately $3 million per month, are being accrued pending resolution of
litigation.
Home Insurance
Following the closing of the Recapitalization, Home Insurance has
generally ceased accepting business except as required by regulation or
contractual obligations. As a result, payment of future claims and operating
expenses would be met by earning investment income or through liquidating
the investment portfolio. At June 30, 1996, the Portfolio Swap Receivable of
$1,624 million was available to provide for any foreseeable immediate cash
requirements.
Cash used for insurance operating activities was $625 million for the six
months ended June 30, 1996 compared with $619 million in the 1995 period.
The cash used for operating activities in 1996 was due primarily to lower
premiums collections resulting from the run-off of operations, and 1995 was
impacted by low premium collections and payments for the Excess of Loss
Reinsurance Agreement. Cash used for operating activities was funded
primarily from sales of fixed maturities, underlying the Swap.
The cash flow of Home Insurance's operations is derived primarily from
investment income and proceeds from sales, redemptions and maturities of
investments. Home Insurance's funds are applied primarily to claim payments
and operating expenses.
25
<PAGE> 27
HOME HOLDINGS INC.
Home Insurance's statutory surplus at June 30, 1996 was $211 million
compared with $230 million at December 31, 1995. The New Hampshire
Department also continues to direct a consulting actuarial firm to perform
an accelerated review of Home Insurance's loss reserves, with particular
emphasis on Asbestos/Pollution Policies.
Sterling Forest Corporation ("Sterling Forest")
On May 15, 1996 an agreement in principle was announced for the sale of a
substantial part of Sterling Forest lands for public parkland. A letter of
intent between Sterling Forest, as seller, and Trust for Public Land and
Open Space Institute, as purchaser, was later signed and contract
preparation is underway. Under the terms of the agreement, more than 15,000
acres will be acquired as parkland, at a total acquisition cost of $55
million, and Sterling Forest will continue to own approximately 2,220 acres
of land and existing improvements, for future development. There is no
accounting recognition of the sale in the financial statements until the
transaction is consummated, however, no material impact on net income is
anticipated upon consummation.
Securities Broker-Dealer
Certain minimum amounts of capital must be maintained by Gruntal's
broker-dealer subsidiaries to satisfy the requirements of the Uniform Net
Capital Rule (Rule 15c3-1) of the Commission and the capital rules of other
regulatory authorities. At June 30, 1996, Gruntal & Co.'s net capital as
defined by the Commission and other regulatory authorities was $102 million,
which was $80 million in excess of the aggregate minimum required.
26
<PAGE> 28
HOME HOLDINGS INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K were filed by the Company on April 4, 1996,
May 3, 1996, June 14, 1996 and June 21, 1996.
27
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOME HOLDINGS INC.
By: /s/ RICHARD H. HERSHMAN
---------------------------------------
August 14, 1996 Richard H. Hershman
Treasurer
(Principal Financial and Accounting Officer
through the Services Agreement with
Risk Enterprise Management Limited)
28
<PAGE> 30
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 31
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 23
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,680
<CASH> 57
<RECOVER-REINSURE> 2,260
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 7,610
<POLICY-LOSSES> 5,304
<UNEARNED-PREMIUMS> 24
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 544
0
0
<COMMON> 0
<OTHER-SE> (1,147)
<TOTAL-LIABILITY-AND-EQUITY> 7,610
113
<INVESTMENT-INCOME> 81
<INVESTMENT-GAINS> 10
<OTHER-INCOME> 239
<BENEFITS> 191
<UNDERWRITING-AMORTIZATION> 81
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> (73)
<INCOME-TAX> 2
<INCOME-CONTINUING> (75)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (75)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 5,814
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 5,304
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
