<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 March 31, 1997
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 March 31, 1997, there were 14,114,500 shares of registrant's Series A Common
Stock, par value $.01 per share, outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOME HOLDINGS INC.
Consolidated Statements of Income
Quarter ended March 31,
(Unaudited)
($ millions)
<TABLE>
<CAPTION>
1997 1996
---- -----
<S> <C> <C>
REVENUES:
Net earned premiums (note 3) $ 3 $ 80
Insurance net investment income 27 43
Insurance realized capital gains 2 --
Securities broker-dealer operations -- 117
---- -----
Total revenues 32 240
---- -----
OPERATING EXPENSES:
Losses and loss adjustment expenses (note 3) 1 105
Policy acquisition and other insurance expenses 19 47
Corporate interest expense 13 12
Securities broker-dealer operations -- 110
---- -----
Total expenses 33 274
---- -----
(1) (34)
Equity in loss of securities broker-dealer (8) --
---- -----
Loss before income taxes (9) (34)
Income tax benefit (expense) 1 (1)
---- -----
NET LOSS $ (8) $ (35)
==== =====
</TABLE>
- ------------------
See accompanying notes to consolidated financial statements.
1
<PAGE> 3
HOME HOLDINGS INC.
Consolidated Balance Sheets
($ millions)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
------- -------
(Unaudited)
<S> <C> <C>
Insurance investments at fair value:
Portfolio swap receivable (note 6) $ 1,068 $ 1,243
Fixed maturities available for sale
(cost $28 and $26) 30 28
Equity securities (cost $16 and $17) 23 21
------- -------
Total insurance investments 1,121 1,292
Cash 19 36
Premiums receivable 276 290
Funds held by affiliate 235 248
Reinsurance receivables 2,720 2,765
Securities broker-dealer investments -- 392
Receivables from brokers, dealers and customers -- 2,258
Investment in securities broker-dealer (note 7) 156 --
Other assets 162 312
------- -------
Total assets $ 4,689 $ 7,593
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Unpaid losses and loss adjustment expenses $ 5,405 $ 5,687
Payables to brokers, dealers and customers -- 2,060
Debt of securities broker-dealer -- 246
Corporate debt (note 5) 573 567
Other liabilities 256 572
------- -------
Total liabilities 6,234 9,132
------- -------
Litigation and contingencies (note 8)
Stockholders' deficiency: (note 4)
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 (2,328) (2,320)
Unrealized gains on insurance investments (note 6) 9 6
Unrealized currency translation adjustments (3) (2)
------- -------
Total stockholders' deficiency (1,545) (1,539)
------- -------
Total liabilities and stockholders' deficiency $ 4,689 $ 7,593
======= =======
</TABLE>
- -------
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
HOME HOLDINGS INC.
Consolidated Statements of Cash Flows
Quarter ended March 31,
(Unaudited)
($ millions)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8) $ (35)
Adjustments to reconcile net loss to net cash
used for operating activities:
Insurance realized capital gains (2) --
Unpaid losses and loss adjustment expenses (282) (227)
Premiums and reinsurance receivables 60 87
Funds held by affiliate 13 (17)
Unearned premiums (2) (91)
Broker-dealer investments and receivables,
net of payables -- (141)
Other 22 20
----- -----
Net cash used for operating
activities (199) (404)
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Portfolio swap receivable 175 260
Purchase of fixed maturities (2) --
Sales of equity securities 3 3
Other -- (5)
----- -----
Net cash provided by investing
activities 176 258
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in corporate debt 6 9
Increase of debt of broker-dealer -- 130
Other -- --
----- -----
Net cash provided by financing
activities 6 139
----- -----
Net increase (decrease) in cash (17) (7)
Cash at beginning of period 36 34
----- -----
CASH AT END OF PERIOD $ 19 $ 27
===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW:
Broker-dealer interest paid -- 19
</TABLE>
- ------------------
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
1. GENERAL
Home Holdings Inc., a Delaware corporation (the "Company"), is a holding
company for its wholly-owned subsidiaries, The Home Insurance Company, a
New Hampshire corporation, and its insurance subsidiaries ("Home
Insurance"). Home Insurance generally ceased writing new or renewal
insurance on June 12, 1995 in connection with a recapitalization agreement
(the "Recapitalization Agreement" or the "Recapitalization") as defined in
note 1b to the 1996 Annual Report on Form 10-K ("Annual Report") filed with
the Securities and Exchange Commission (the "Commission"). Home Insurance
also owns Gruntal Financial Corp. ("Gruntal"), a holding company for a
securities brokerage business, and Sterling Forest Corporation ("Sterling
Forest"), a property development business. See note 7 for discussion of the
restructuring of Gruntal.
Order of Supervision
On March 3, 1997, Home Insurance was placed under formal supervision by
the New Hampshire Insurance Department (the "Department"). The Department
states in its Order of Supervision (the "Order") that this action was taken
in response to Home Insurance's Risk-Based Capital ("RBC") report filed
with the Department which indicates that a mandatory control level event
has occurred within the meaning of New Hampshire Revised Statutes of
Annotated 404-F:6 (a "Mandatory Control Level Event"). The Order
establishes that the Department will oversee and supervise Home Insurance
for the purpose of continuing and intensifying an economic, actuarial and
accounting review of the books, records and business affairs of Home
Insurance so as to determine what future actions may be appropriate. The
Order provides that Home Insurance may not take certain actions without the
prior approval of the Department, including, but not limited to:
i) Make any single claim payment in excess of $1 million except under
conditions specified therein.
ii) Make any payment to creditors or other persons in excess of
$500,000, except as set forth in clause (i) above.
iii)Make any single payment to cedents or reinsurers (a) in excess of
$250,000 or (b) out of the ordinary course of business, or any
commutation of any amount with any cedents or reinsurers.
iv) Release any obligation or collateral in excess of $500,000.
v) Materially change the terms of any contracts or enter into any new
contracts in excess of $500,000.
vi) Engage in any transactions with the Company, Risk Enterprise
Management Limited ("REM"), Zurich Home Investments Limited
("ZHI"), Zurich Insurance Company ("Zurich") or Trygg-Hansa AB
("Trygg-Hansa") or any subsidiaries, other affiliates or agents of
such entities.
4
<PAGE> 6
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
In addition, without limiting the general authority of the Department as
set forth above, the Department shall have the final authority to approve,
disapprove or control (including the power to direct) the following:
i) The initiation, settlement or withdrawal of any action, dispute,
arbitration, litigation, or proceeding of any kind involving Home
Insurance other than in the ordinary course of business.
ii) The location and material terms of all banking, investment, trust,
deposit and custodial accounts for assets of Home Insurance,
including but not limited to reserves.
2. ACCOUNTING POLICIES
The Company follows the accounting policies set forth in the 1996 Annual
Report. 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.
As a result of a reorganization, which closed on March 28, 1997, between
Gruntal and The 1880 Group LLC (the "Reorganization Agreement"), as
described in note 7, Home Insurance will report its investment in its
securities broker-dealer under the equity method of accounting in 1997. The
1997 consolidated statement of income reflects the equity in the income of
the securities broker-dealer as if the transaction was effective January 1,
1997.
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.
5
<PAGE> 7
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
3.PREMIUMS AND LOSSES
Premium and loss information for the quarter ended March 31, follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
($ millions)
<S> <C> <C>
Earned premiums:
Direct $ 5 $ 28
Assumed - 86
Ceded (2) (34)
--------- ---------
Net $ 3 $ 80
========= =========
Losses and loss adjustment expenses:
Direct $ 22 $ 139
Assumed 5 37
Ceded (26) (71)
--------- ---------
Net $ 1 $ 105
========= =========
</TABLE>
Asbestos/Pollution Losses and Loss Adjustment Expenses
The 1997 and 1996 first quarter incurred loss and loss adjustment
expenses relating to policies which have been alleged to contain
asbestos/pollution exposure ("Asbestos/Pollution Policies") were nil. The
1997 first quarter result for Asbestos/Pollution Policies reflected $10
million of paid losses, partially offset by decreases of $10 million to
unpaid losses and loss adjustment expenses. The 1996 first quarter result
reflected $26 million of paid losses offset by a $26 million decrease to
unpaid losses and loss adjustment expenses.
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
6
<PAGE> 8
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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 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, REM, in its capacity as manager of Home Insurance's operations,
established a single Environmental and Mass Tort Division, which includes a
new team to merge financial, legal and environmental engineering expertise
in negotiation with policyholders and reinsurers to find alternative
resolutions to claims in the environmental and mass tort areas. Management
believes that these organizational changes increase operational efficiency,
while assuring that Home Insurance takes a unified and consistent approach
to these claims. This division has also prepared an inventory of potential
exposures for Asbestos/Pollution Policies, which Home Insurance has
utilized 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
7
<PAGE> 9
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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.
Excess of Loss Reinsurance Agreement and Stop Loss Treaty
In connection with the recapitalization agreement, 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 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 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
reinsurers commence making payments under the Excess of Loss Reinsurance
Agreement. See the 1996 Annual Report - note 4 to the consolidated
financial statements for discussion of dividend restrictions. Also, up to
$290 million of additional coverage provided by the Excess of Loss
Reinsurance Agreement is linked to certain factors including dividend
payments from Home Insurance to the Company funding principal payments on
the Public Indebtedness as such debts become payable. The Excess of Loss
Reinsurance Agreement became effective on June 12, 1995 upon (i) the
payment by Home Insurance to Centre Reinsurance Dublin of $63 million and
(ii) the transfer by Home Insurance of $166 million to Centre Reinsurance
Dublin, representing the respective amounts received by Home Insurance from
Zurich International (Bermuda) Ltd. and Centre Reinsurance Limited as a
reinsurance commutation (exclusive of refunds of security costs). In 1996
an additional $43 million was transferred to Centre Reinsurance Dublin,
representing the amount received by Home Insurance from THI as a
reinsurance commutation.
Based on cash flow forecasts at December 31, 1996, the Company is
projecting that the coverage limits of the Excess of Loss Reinsurance
Agreement will be exhausted. Due to these projected future recoveries, loss
reserves with a net present value of $787 million were recorded as of March
31, 1997 and December 31, 1996 as a recoverable from the Excess of Loss
Reinsurance Agreement.
8
<PAGE> 10
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
4. LIQUIDITY AND STATUTORY SURPLUS
Dividend Restrictions and Liquidity
The Company has not received common stock dividends from Home Insurance
in 1997 and 1996.
The Company was notified in 1995 by the Department that, in light of the
Recapitalization, Home Insurance cannot pay any dividends without prior
approval of the Department. If the Department rejects future dividends
filings, 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. Based on the Company's most current cash flow
projections, without dividends from Home Insurance, the Company is not
likely to meet its cash flow needs during 1997. Under the terms of the
Recapitalization Agreement, Centre Finance Dublin ("Centre Finance") has
purchased approximately $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.
Statutory Surplus
The accounting practices of insurance companies are prescribed or
permitted by certain regulatory authorities. Certain of these practices
differ from generally accepted accounting principles ("GAAP") used in
preparing the consolidated financial statements of the Company. The
Department gave Home Insurance permission to include in the 1996 Statutory
Annual Statement a non-tabular discount which results from discounting all
loss reserves, and allocated and unallocated loss adjustment expense
reserves at 7%. Home Insurance has sufficient assets that will earn 7% to
meet the expected stream of loss and loss adjustment expense payments. Home
Insurance calculated that the non-tabular discount is $444 million and $469
million at March 31, 1997 and December 31, 1996. The non-tabular discount
is not included in the Company's consolidated financial statements prepared
under GAAP. Home Insurance's consolidated policyholders' surplus determined
in accordance with statutory practices, and after reflecting the benefit of
non-tabular discount, was $30 million at March 31, 1997 compared with $55
million at December 31, 1996.
On March 3, 1997, Home Insurance was placed under formal supervision by
the Department. The Department states in its Order that this action was
taken in response to Home Insurance's RBC report filed with the Department,
as discussed below, which indicates that a Mandatory Control Level Event
has occurred. The Order establishes that the Department will oversee and
supervise Home Insurance for the purpose of continuing and intensifying an
economic, actuarial and accounting review of the books, records and
business affairs of Home Insurance so as to determine what future actions
may be appropriate. The Order also provides that Home Insurance may not
take certain actions without the prior approval of the Department,
including, among other matters, payment of
9
<PAGE> 11
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
claims and other obligations within certain dollar limits, and changes in
the terms and conditions of certain existing contracts and entering into of
certain new contracts.
In connection with the Department's involvement in approving the
Recapitalization, it had appointed in 1995, 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 REM.
The Company's loss reserves are determined through a process of
estimation which is necessarily imperfect, and ultimate losses may exceed
such estimates. See note 3 for further discussion. As the Company's
statutory surplus levels have continued to decline since December 31, 1994,
management can give no assurance that statutory surplus levels will be
sufficient to absorb materially deficient estimates of loss and loss
adjustment expenses reserves, if any. Management continues to believe that
its provision for loss reserves is adequate.
The Department also continues to direct a consulting actuarial firm to
perform a review of Home Insurance's loss reserves, and has retained a
second actuarial firm to perform a peer review of the findings. Such
reviews are expected to be completed during the second quarter of 1997.
Management cannot predict whether reserve estimates to be prepared by these
consultants will change the Department's view of the level of regulatory
intervention required for Home Insurance.
10
<PAGE> 12
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
5. CORPORATE DEBT
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
($ millions) ----------- ----------
<S> <C> <C>
7% Senior Notes due in 1998, net of
unamortized discount of nil in 1997 and 1996 $ 100 $ 100
7 7/8% Senior Notes due in 2003, net of
unamortized discount of $2 million in 1997
and 1996 177 177
7 7/8% Senior Notes due in 2003, net of
unamortized discount of nil in 1997 and 1996 1 1
12% Senior Subordinated Notes, issued at
original issue discount, $303 million
principal value due in 2004 121 118
8% Junior Subordinated Notes, issued at
original issue discount, $171 million
principal value due in 2004 93 91
12% Senior Subordinated Working Capital
Notes, issued at original issue discount,
$46 million principal value due in 2004 19 18
7% Series A Senior Working Capital Notes 16 16
7% Series B Senior Working Capital Notes 46 46
----------- ----------
Total Corporate Debt $ 573 $ 567
=========== ==========
</TABLE>
During 1995 and 1996, the Company issued to Centre Finance approximately
$46 million aggregate principal amount on the Company's 7% Series B Senior
Working Capital Notes to fund interest payments occurring through December
1996 on the Public Indebtedness. The principal on these notes is due on the
successive one year anniversaries of the Closing date; however, the date
can be extended for annual periods at the option of either Centre Finance
or the Company until December 15, 2003. The Company elected in 1996 to
extend the due date until June of 1997.
In addition, effective December 31, 1996, each of the Series A and Series
B Senior Working Capital Notes, was amended to change the timing of the
payment of interest. Prior to such amendment, interest was payable
quarterly. However, according to the amended terms, interest shall not be
due or payable until seven business days following the receipt by the
Company of written demand from holders of these notes, or when the
principal of the Series A and Series B Senior Working Capital Notes becomes
due and payable. If interest is not paid within seven business days of such
written demand, all interest accrued shall be deemed overdue and shall
immediately become due and payable. If interest becomes overdue, the
interest rate is adjusted upwards to the greater of (i) the rate of
interest on the
11
<PAGE> 13
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
notes, plus 3% or (ii) the prime rate plus 3%. As of March 31, 1997,
approximately $5 million of interest has been accrued but not paid on the
Series A and Series B Senior Working Capital Notes. As a result of the
amended terms, the interest is not overdue.
Neither Centre Finance nor Zurich nor Trygg-Hansa has 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, Zurich and Trygg-Hansa 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.
6. PORTFOLIO SWAP RECEIVABLE AND OTHER INSURANCE INVESTMENTS
The Portfolio Value Swap Agreement (the "Swap") is 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 underlying 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 underlying the Swap to a Portfolio Swap
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%. Subsequent changes to fair value of securities have not and
will not be recognized, as Centre Reinsurance Dublin bears the market risk.
As of March 31, 1997, the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of
$15 million because of a negative difference from the 7.5% target return.
The negative difference since January 1, 1997 resulted from the net of (i)
a $13 million difference in favor of the Company due to a decrease in the
fair value of investments underlying the Swap and (ii) a $2 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 $25 million.
The Company received $48 million from Centre Reinsurance Dublin on
January 21, 1997, to settle the 1996 Swap receivable. Securities and cash
totaling $210 million were transferred to Centre Reinsurance Dublin on
January 22, 1996, to settle the 1995 Swap liability.
12
<PAGE> 14
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
The fair value of securities managed by Zurich Investment Management Inc.
("ZIM") and underlying the Portfolio Swap Receivable from Centre
Reinsurance Dublin as of March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Estimated
Fair
Value
($ millions)
<S> <C>
Fixed Maturities:
U.S. Government and agency $ 541
Mortgage-backed securities 214
Corporate securities 191
Foreign governments 36
Other 2
----------
Total 984
Equity securities 1
Short-term investments 68
----------
Total Swap investments 1,053
Receivable from Centre Reinsurance Dublin 15
----------
Portfolio Swap Receivable $ 1,068
==========
</TABLE>
7. SECURITIES BROKER-DEALER
On February 24, 1997, Gruntal, and The 1880 Group LLC, a limited
liability company organized under the laws of Delaware, ("The 1880 Group"),
entered into the Reorganization Agreement. The Gruntal reorganization was
consummated on March 28, 1997. The reorganization resulted in Gruntal
transferring its securities broker-dealer operating companies, Gruntal &
Co. and The GMS Group, to a newly formed limited liability company, Gruntal
Financial, LLC ("Gruntal Financial"). In connection with the
reorganization, Gruntal changed its name to Home Financial Corp. ("Home
Financial") on April 1, 1997. Home Insurance is the sole owner of Home
Financial.
The Reorganization involved the issuance of several classes of securities
to Home Financial and The 1880 Group, including preferred securities, in an
aggregate nominal amount of $235 million as follows: (i) Gruntal Financial
issued to Home Financial securities called Preferred A Interests in a
nominal amount of $155.5 million and securities called Preferred B
Interests in a nominal amount of $70 million; and (ii) Gruntal Financial
issued to The 1880 Group securities called Preferred C Interests in an
nominal amount of $9 million. As a result of the Reorganization, Home
Financial owns 40% of the common interest of Gruntal Financial and The 1880
Group owns 60% of the common interest of Gruntal Financial. In connection
with the issuance of certain preferred securities to Home Financial,
13
<PAGE> 15
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Home Insurance and Centre Reinsurance Dublin entered into a swap agreement
intended to ensure that Home Insurance's investment in Gruntal Financial
yields at least $155.5 million plus a 7.5% per annum rate of return
thereon, subject to certain modifications with respect to certain
distributions and sales proceeds of the common and preferred interests of
Gruntal Financial. Expenses incurred by Gruntal in connection with the
transaction were $9 million. There was no gain or loss to Home Insurance
from the Reorganization after the impact to Gruntal of the transaction
expenses.
In connection with the Reorganization, the members of The 1880 Group
entered into management services agreements with The 1880 Group which, in
turn, will provide such services to Gruntal Financial.
Summarized financial information of Gruntal Financial for the first quarter
ended March 31 is set forth in the following tables:
<TABLE>
<CAPTION>
1997 1996
---- ----
($ millions)
<S> <C> <C>
Summarized Income Statement
Commissions $ 23 $ 25
Principal transactions 32 45
Underwriting and investment banking 8 9
Interest 32 29
Other 8 9
-------- ---------
Total revenues 103 117
Total expenses (111) (110)
-------- ---------
Income before income taxes $ (8) $ 7
======== =========
</TABLE>
Summarized Balance Sheet
<TABLE>
<CAPTION>
March 31
1997
--------
<S> <C>
Cash $ 6
Investments 427
Receivables from brokers, dealers and customers 2,332
Total assets 2,818
Payables to brokers, dealers and customers 2,030
Debt 337
Total liabilities 2,662
Stockholders' equity 156
</TABLE>
14
<PAGE> 16
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
8. 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.
In the ordinary course of its 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 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.
Pursuant to the Order, the Department has the final authority to approve,
disapprove or otherwise control (including the power to direct) the
initiation, settlement or withdrawal of any action, dispute, arbitration,
litigation or proceeding of any kind involving Home Insurance other than in
the ordinary course of business. In addition, pursuant to the Order, Home
Insurance is prohibited from making certain payments, as specified in the
Order, without the prior approval of the Department.
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 sought certification of both plaintiff and
defendant classes. The purported plaintiff class consisted 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 sought
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 ("NCCI"). The Complaint alleged 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 were sought in unspecified amounts plus
treble damages.
15
<PAGE> 17
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
A settlement between fourteen of the primary defendants, including Home
Insurance, was 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. The defendants submitted
to a verification process of their damage calculations. Final orders of
approval were issued by the court on November 1, 1996. The settlement is
being implemented through refunds to insureds.
On January 13, 1997 Home Insurance was served with suit papers issued
from the Chancery Court of Davidson County, Tennessee in a purported class
action. The allegations of the complaint are similar to those in the Texas
litigation case that was recently settled.
Plaintiffs allege that from 1987 until the present, the defendants,
individually, and in conspiracy with each other, used rates of premium and
policy forms for workers compensation retro policies other than those filed
with, and approved by, the Tennessee Commissioner of Insurance.
Specifically, the companies are alleged to have illegally passed through
residual market changes to their insureds during the class period. The NCCI
is alleged to be the conduit for sharing of information and the
instrumentality for making the illegal filings.
The principal causes of action are for breach of contract, fraud,
misrepresentation, conspiracy, unjust enrichment, and violation of the
Tennessee Consumer Protection and Trade Practices Acts. Compensatory and
punitive damages are sought in unspecified amounts plus treble damages.
A nearly identical class action complaint naming the same parties was
also filed in the Superior Court of Richmond Country, Georgia. It includes
the same common law causes of action that are asserted in the Tennessee
complaint, and others that allege violation of various provisions of the
Georgia statutory code, as well as RICO. Compensatory, punitive, and treble
damages are sought.
Both actions have been removed to federal court. Motions to remand the
actions to state court have been filed.
With respect to the Tennessee and Georgia actions discussed above, it is
too early to predict the outcome of these actions and whether or not they
will have a material adverse impact on the Company's financial condition.
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 arose 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 behalf. The complaint sought an
injunction and
16
<PAGE> 18
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
damages nullifying the suspension of authority and enforcing the producer's
contractual rights to its customer accounts and commissions. Compensatory
and punitive damages were sought. By stipulation of the parties the
restraining order was dissolved and legal proceedings stayed pending
submission of the dispute to an arbitration panel. 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.
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
17
<PAGE> 19
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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. On August 9, 1996 the Court entered a decision and
interim order, which, as amended through September 12, 1996, appointed a
mediator and provided that Home Insurance deposit in escrow with a receiver
approximately $7.4 million representing the June and July rent and June tax
payment. The order states that the escrow payment "shall not per se
constitute a secured claim under New Hampshire Revised Statutes Annotated
402 - C: 3 but may be subject to the provisions of New Hampshire Insurance
Laws, Chapter 402 - C in the event of proceedings thereunder or similar
proceedings in this or any other jurisdiction". Home Insurance made this
escrow payment and the mediation proceeded.
As a condition for continuing the preliminary injunction, Home Insurance
increased its deposit in escrow to $10.7 million. The Landlord moved for
summary judgment for past due rent. Home Insurance moved to amend its
complaint (i) to add a cause for constructive eviction from approximately
23% of its premises, where its environmental expert has identified
"significantly damaged" asbestos containing materials ("ACM"); (ii) to
increase the
18
<PAGE> 20
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
amount of damages sought by Home Insurance for the Landlord's refusal to
obtain tax relief to more than $20 million; (iii) to join the bondholders
as a class action; and (iv) to consolidate the foreclosure action brought
by the Trustee against the Landlord. On December 30, 1996 the Court granted
(i) Home's motion to amend with respect to items (i) and (ii), but denied
Home Insurance's motion with respect to item (iii) pending mediation, and
also with respect to item (iv) without prejudice to renew before the
assigned judge. The Court granted the Landlord's motion for partial summary
judgment on its counterclaims holding Home Insurance liable for rent due
and owing from June 1, 1996 to November 30, 1996, plus interest from
September 1, 1996, together with costs and disbursements. The remainder of
the Landlord's motion was denied without prejudice. The Court stayed entry
and execution of the Landlord's judgment. In accordance with the Court's
order, Home Insurance filed its amended and supplemental verified
complaint. The Landlord and Trustee counterclaimed, and Home Insurance
replied. On March 4, 1997, the Court directed Home Insurance to deposit
into escrow, without prejudice, rent for the period September 1, 1996
through November 30, 1996, which payment was due to be made by April 1,
1997. Home Insurance has sought an extension of time to make this payment.
The court has not ruled on this request. On March 27, the landlord moved
for summary judgement for additional rent, purportedly due and owing for
entry of the earlier summary judgment, and for other relief. The court has
not ruled on the landlords motion. Concurrent with the litigation, the
Company, the Landlord and the Trustee are currently engaged in mediation.
Management believes that it is 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.
On or about January 17, 1997, Marine Midland (the trustee in the action
described above), brought an action entitled Marine Midland Bank v. Zurich
Insurance Company, et al. in New York State Supreme Court against Zurich
and certain affiliates, Home Insurance and REM alleging, among other
things, that the conveyance to Zurich of the right to write renewal
business on policies of Home Insurance constituted a fraudulent transfer
under New York State law because Home Insurance purportedly was rendered
insolvent as a result and did not receive adequate consideration from
Zurich for this right. Plaintiff in its complaint disregards that the
transaction, which permitted the conveyance of this right to Zurich, was
approved by the Department in April 1995. The complaint, which does not
seek any relief against Home Insurance, demands judgment against Zurich and
certain of its affiliates for all past and future rent due under the lease
between Home Insurance and its landlord, not paid by Home Insurance, plus
interest, or alternatively, for the imposition of a constructive trust upon
the proceeds obtained by Zurich from the conveyance noted above, which
according to plaintiff would secure the repayment of Home Insurance's
purported obligations under its lease, as well as attorneys' fees. The
complaint also seeks from REM damages in the amount of all rents due and
owing under the lease plus interest, as well as, a declaration that REM is
obligated to make all future rent payments. On March 27, 1997, REM and Home
Insurance moved to dismiss the complaint. Marine Midland Bank served its
responsive papers on May 9, 1997. Defendants have until June 6, 1997 to
file their reply. Management believes that it is too early to predict with
certainty the ultimate outcome of this dispute.
19
<PAGE> 21
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
Home Insurance is involved in a dispute with the NCCI as administrator of
the National Workers' Compensation Reinsurance Pool ("the Pool"). The Pool
collects premium and pays losses for various residual market plans around
the country. The premium is supposed to be distributed to pool members in
proportion to their market share and held in reserve. The NCCI sends a
quarterly invoice to each pool member for its share of the losses as
calculated and paid by the Pool in that quarter.
Home Insurance is a participant in the Pool, and, as of March 31, 1997,
Home Insurance is carrying loss reserves, calculated on an undiscounted
basis, of approximately $251 million allocated to the Pool. On May 6, 1997,
Home Insurance received notice from the NCCI that the Pool's invoices
totaling $35,324,555 were due and unpaid and that the Board of Governors of
the Pool had voted on April 28, 1997 to approve (i) the NCCI's
determination that Home Insurance's allocable share of outstanding reserve
obligations to the Pool was $236,237,269 and (ii) the acceleration of such
amount. On May 7, 1997, Home Insurance received from NCCI a demand that
Home Insurance obtain a letter of credit to secure this alleged obligation
to the Pool of $271,561,824.
Home Insurance disputes the extent of its obligations to the Pool, and
believes that it has meaningful legal defenses to both the acceleration and
the demand for security. In addition, Home Insurance has on several
occasions demanded an audit to determine the actual amount of its
obligation. To date, however, Home Insurance's demands for an audit have
been refused. Home Insurance and the NCCI currently are engaged in
settlement negotiations with respect to these matters. Management believes
it is too early to predict with certainty the ultimate outcome of this
matter; however, an unfavorable outcome could have a material adverse
impact on the Company's financial condition.
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. Gruntal presently 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 was used in substantial part to
benefit Gruntal. Gruntal has submitted claims to its insurer, Home
Insurance, under the applicable insurance policy and 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. Gruntal discussed its investigation
relating to Abandoned Property with the governmental and self-regulatory
bodies involved. In addition, Gruntal
20
<PAGE> 22
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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")
orders.
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 prejudgment 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 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 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, LLP and a former General Counsel of the
Commission, was engaged to serve as Fund Administrator (hereinafter, the
"Fund Administrator").
In June 1996, with the approval of the Commission, the NYSE and the NASD,
Gruntal engaged Irving M. Pollack, Esq., a 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. 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 performing
these 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.
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
21
<PAGE> 23
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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. 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
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.
22
<PAGE> 24
HOME HOLDINGS INC.
Notes to Consolidated Financial Statements
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 condition of
Gruntal or the Company.
During the third quarter of 1996, Gruntal discovered that approximately
2,800 principal transactions involved customers that were employee benefit
plans or individual retirement arrangements under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or parallel provisions of
the Internal Revenue Code. In the absence of an available exemption, these
transactions would be "prohibited transactions" under Section 406 of ERISA
and Section 4975 of the Code. Gruntal is examining the availability of
certain exemptions. Management believes it is too early to predict with
certainty the ultimate outcome of this matter, but management does not
believe that such costs will have a material adverse effect on the
financial position of Gruntal or the Company.
REM's service agreement with the Company provides that REM will receive a
contingent fee amounting to 15% in excess of its actual costs, accumulating
with interest, as follows: 100% of the annual amounts for the years 1995
through 2000 and 33% of the amounts from years 2000 until 2005, payable on
and after 2005. The fee is payable by Home Insurance contingent upon prior
approval of the Department. Based on the issuance of the Order, and based
on projections that the Excess of Loss Reinsurance Agreement will be fully
exhausted, the payment of such fees is considered remote and therefore has
not been accrued in the consolidated financial statements. The contingent
liability as of March 31, 1997 was $41 million.
23
<PAGE> 25
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.
Insurance revenues were $32 million in the three months ended March 31,
1997, compared with $123 million in the same period of 1996. The net loss
was $8 million in the three months ended March 31, 1997, as compared to $35
million in the same period in 1996.
Insurance revenues and pre-tax loss were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
($ millions)
<S> <C> <C>
Net earned premiums $ 3 $ 80
Net investment income 27 43
Realized capital gains 2 -
-------- ---------
Insurance revenues $ 32 $ 123
======== =========
Underwriting loss $ (17) $ (72)
Net investment income 27 43
Realized capital gains 2 -
-------- ---------
Insurance pre-tax income (loss) $ 12 $ (29)
======== =========
</TABLE>
24
<PAGE> 26
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.
Underwriting results by product were as follows:
Underwriting Loss
<TABLE>
<CAPTION>
1997 1996
---- ----
($ millions)
<S> <C> <C>
Commercial casualty $ (8) $(25)
Commercial property (2) (26)
---- ----
Commercial accounts group (10) (51)
Professional liability (3) (10)
Other specialty lines (2) (4)
---- ----
Specialty lines group (5) (14)
---- ----
Run-off operations (2) (7)
---- ----
Total $(17) $(72)
==== ====
</TABLE>
Underwriting losses were $17 million in the three months of 1997,
compared with $72 million in the same period of 1996. The 1997 underwriting
losses were primarily due to general expenses incurred managing the run-off
of Home Insurance's operations. 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 commercial accounts group underwriting loss was $10 million in the
three months of 1997, compared with $51 million, in the same period of
1996. The 1997 underwriting loss included commercial casualty and property
losses of $8 million and $2 million, respectively, compared to $25 million
and $26 million, respectively, in the same period of 1996. The 1997
commercial accounts group losses were primarily due to general expenses
incurred in managing the run-off of its operations. The 1996 losses were
primarily due to lower earned premiums and expenses incurred in managing
the run-off of its operations.
25
<PAGE> 27
HOME HOLDINGS INC.
The specialty lines group loss was $5 million in the three months of 1997
compared with $14 million in the same period of 1996. The 1997 specialty
lines group loss was due to general expenses incurred in managing the
run-off of its operations. The 1996 loss was primarily due to lower earned
premiums and expenses incurred in managing the run-off of its operations.
The run-off operations loss was $2 million in the three months of 1997,
compared with $7 million in the same period of 1996. Underwriting losses
from Asbestos/Pollution Policies for the first quarter of 1997 and 1996
were nil.
Investments
As of March 31, 1997, the Company has recorded, as a component of the
Portfolio Swap Receivable, an amount due from Centre Reinsurance Dublin of
$15 million because of a negative difference from the 7.5% target return.
The negative difference since January 1, 1997 resulted from the net of (i)
a $13 million difference in favor of the Company due to a decrease in the
fair value of investments underlying the Swap and (ii) a $2 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 $25 million.
In the three months ended March 31, 1997, the Company recorded a $3
million increase in unrealized gains on insurance equity investments not
underlying the Swap.
Other
Corporate interest expense was $13 million in the three months ended
March 31, 1997, compared with $12 million in the same period of 1996.
Equity in the income of the securities broker-dealer was a loss of $8
million for the three months ended March 31, 1997. The 1997 first quarter
loss was primarily due to $9 million of transaction expenses relating to
the restructuring of Gruntal. See note 7 of the consolidated financial
statements for further discussion.
Income tax benefit was $1 million in the three months of 1997 compared
with an expense of $1 million in the same period of 1996. Taxes in 1997 and
1996 were comprised of state and foreign taxes. The Company was unable to
recognize a federal income tax benefit against its 1997 or 1996 pre-tax
losses because there was no available taxable income in the carryback
period.
26
<PAGE> 28
HOME HOLDINGS INC.
FINANCIAL CONDITION
Consolidated
Following the Closing, 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 Department that, in light of the
Recapitalization, Home Insurance cannot pay any dividends without prior
approval of the Department.
On March 3, 1997, Home Insurance was placed under formal supervision by
the Department. The Department states in its Order that this action was
taken in response to Home Insurance's RBC report filed with the Department
which indicates that a Mandatory Control Level Event has occurred. The
Order establishes that the Department will oversee and supervise Home
Insurance for the purpose of continuing and intensifying an economic,
actuarial and accounting review of the books, records and business affairs
of Home Insurance so as to determine what future actions may be
appropriate. The Order also provides that Home Insurance may not take
certain actions without the prior approval of the Department, including,
among other matters, payment of claims and other obligations within certain
dollar limits, and changes in the terms and conditions of certain existing
contracts and entering into of certain new contracts.
If the Department rejects future dividends filings, 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. Based
on the Company's most current cash flow projections, without dividends from
Home Insurance, the Company is unlikely to be able to meet its cash flow
needs during 1997, which include interest payments on the Public
Indebtedness of $11.6 million due on June 15, 1997 and December 15, 1997,
respectively. Under the terms of the Recapitalization Agreement, Centre
Finance has purchased approximately $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.
To fund additional cash requirements incurred in connection with the
Equity Repurchase Transaction, as defined in note 1b to the 1996 Annual
Report, the Recapitalization and other extraordinary needs, Centre Finance
and ZCI purchased, in 1995 and 1996, $15 million principal amount of the
Company's 12% Senior Subordinated Working Capital Notes due and $16 million
principal amount of the Company's 7% Series A Senior Working Capital Notes.
Effective December 31, 1996, each of the Series A and Series B Senior
Working Capital Notes, was amended to change the timing of the payment of
interest. Prior to such amendment, interest was payable quarterly. However,
according to the amended terms, interest shall not be due or payable until
seven business days following the receipt by the Company of written demand
from holders of these notes, or when the principal of the Series
27
<PAGE> 29
HOME HOLDINGS INC.
A and Series B Senior Working Capital Notes becomes due and payable. If
interest is not paid within seven business days of such written demand, all
interest accrued shall be deemed overdue and shall immediately become due
and payable. If interest becomes overdue, 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%. As of March 31, 1997, approximately $5 million
of interest has been accrued but not paid on the Series A and Series B
Senior Working Capital Notes. As a result of the amended terms, the
interest is not overdue.
Neither Centre Finance nor Zurich nor Trygg-Hansa has 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, Zurich and Trygg-Hansa 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. Home
Insurance is subject to regulatory restrictions on the amount of dividends
that must be paid as described above. The Company did not receive any
common stock dividends from Home Insurance in 1997 and 1996. Based on the
Company's most current cash flow projections, without dividends from Home
Insurance, the Company is unlikely to be able to meet its cash flow needs
during 1997.
At March 31, 1997, the Company's outstanding corporate debt was $573
million and, at December 31, 1996, was $567 million. As part of the
Recapitalization, Trygg-Hansa refinanced the sum of $178 million of
indebtedness outstanding under the Credit Agreement ($170 million) and the
Interest Deferral Agreement ($8 million). In exchange the Company issued
$98 million of 12% Senior Subordinated Notes, at original issue discount
($303 million principal value) and $80 million of 8% Junior Subordinated
Notes at original issue discount ($171 million principal value). The
principal repayments under the Public Indebtedness are $100 million in 1998
and $180 million in 2003, however the repayment of the 2003 Senior Notes
have changed as a result of an exchange (see discussion below). The Company
would need to fund the required principal payments for the Public
Indebtedness through dividend income from Home Insurance.
Pursuant to the Bondholder Agreement, in exchange for the consent by each
Bondholder to the waivers and amendments to the indentures governing the
Public Indebtedness necessary to consummate the Recapitalization, the
Company completed an exchange offer on August 25, 1995, in which
approximately $179 million principal value of the 2003 Senior Notes were
exchanged for the New Notes, which provide for sinking fund payments (to be
applied to the mandatory retirement of the New Notes) in installments of
approximately $36 million each in year 1999 through 2003. All other terms
and conditions of the New Notes are substantially the same as the 2003
Senior Notes.
28
<PAGE> 30
HOME HOLDINGS INC.
In March, 1997, Moody's lowered its rating of the Company's debt security
to Ca from B3, and Standard and Poor's Corporation ("S&P") lowered its
ratings to CC from B-.
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 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 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 reinsurers commenced 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 1b to the 1996 Annual Report as such debts become
payable.
Based on cash flow forecasts at December 31, 1996, the Company is
projecting that the coverage limits of the Excess of Loss Reinsurance
Agreement will be exhausted. Due to these projected future recoveries, loss
reserves with a net present value of $787 million were recorded as of March
31, 1997 and December 31, 1996 as a recoverable from the Excess of Loss
Reinsurance Agreement.
Beginning June 1996, 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
was required to deposit in escrow with a court appointed receiver
approximately $10.7 million. See note 8 to the consolidated financial
statements for further discussion.
Home Insurance is involved in a dispute with NCCI. Home Insurance is a
participant in the Pool, and, as of March 31, 1997, Home Insurance is
carrying loss reserves, calculated on an undiscounted basis, of
approximately $251 million allocated to the Pool. On May 6, 1997, Home
Insurance received notice from the NCCI that the Pool's invoices totaling
$35,324,555 were due and unpaid and that the Board of Governors of the Pool
had voted on April 28, 1997 to approve (i) the NCCI's determination that
Home Insurance's allocable share of outstanding reserve obligations to the
Pool was $236,237,269 and (ii) the acceleration of such amount. On May 7,
1997, Home Insurance received from NCCI a demand that Home Insurance obtain
a letter of credit to secure this alleged obligation to the Pool of
$271,561,824. See note 8 to the consolidated financial statements for
further discussion.
29
<PAGE> 31
HOME HOLDINGS INC.
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 primarily earning investment income,
collection of premiums receivable and reinsurance receivables, collection
of the Portfolio Swap Receivable and sale of assets. At March 31, 1997, the
Portfolio Swap Receivable of $1,068 million was available to provide for
any foreseeable immediate cash requirements.
On March 3, 1997, Home Insurance was placed under formal supervision by
the Department. The Department states in its Order that this action was
taken in response to Home Insurance's RBC report filed with the Department
which indicates that a Mandatory Control Level Event has occurred. The
Order establishes that the Department will oversee and supervise Home
Insurance for the purpose of continuing and intensifying an economic,
actuarial and accounting review of the books, records and business affairs
of Home Insurance so as to determine what future actions may be
appropriate. The Order also provides that Home Insurance may not take
certain actions without the prior approval of the Department, including,
among other matters, payment of claims and other obligations within certain
dollar limits, and changes in the terms and conditions of certain existing
contracts and entering into of certain new contracts.
Cash used for insurance operating activities was $221 million in the
three months ended March 31, 1997 compared with $263 million in the same
period in 1996. The net outflows in 1997 and 1996 were primarily due to
paid losses and lower premium collections, resulting from the run-off of
operations.
The Department gave Home Insurance permission to include in the 1996
Statutory Annual Statement a non-tabular discount which results from
discounting all loss reserves, and allocated and unallocated loss
adjustment expense reserves at 7%. Home Insurance has sufficient assets
that will earn 7% to meet the expected stream of loss and loss adjustment
expense payments. Home Insurance calculated that the non-tabular discount
is $444 million and $469 million at March 31, 1997 and December 31, 1996,
respectively. The non-tabular discount is not included in the Company's
consolidated financial statements prepared under GAAP. Home Insurance's
consolidated policyholders' surplus determined in accordance with statutory
practices, and after reflecting the benefit of non-tabular discount, was
$30 million and $55 million at March 31, 1997 and December 31, 1996,
respectively.
30
<PAGE> 32
HOME HOLDINGS INC.
The Company's loss reserves are determined through a process of
estimation which is necessarily imperfect, and involves an evaluation of a
large number of variables. 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. See note 3 to the consolidated financial
statements for further discussion.
The Department also continues to direct a consulting actuarial firm to
perform a review of Home Insurance's loss reserves, and has retained a
second actuarial firm to perform a peer review of the findings. Such
reviews are expected to be completed during the second quarter of 1997.
Management cannot predict whether reserve estimates to be prepared by these
consultants will change the Department's view of the level of regulatory
intervention required for Home Insurance.
Securities Broker-Dealer
Certain minimum amounts of capital must be maintained by securities
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 March 27, 1997, Gruntal & Co.'s net capital, as
defined by the Commission and other regulatory authorities, was
approximately $118 million, which was $97 million in excess of the
aggregate minimum required.
On February 24, 1997, Gruntal, and The 1880 Group LLC a limited liability
company organized under the laws of Delaware, ("The 1880 Group"), entered
into the Reorganization Agreement. The Gruntal reorganization was
consummated on March 28, 1997. The reorganization resulted in Gruntal
transferring its securities broker-dealer operating companies, Gruntal &
Co. and The GMS Group, to a newly formed limited liability company, Gruntal
Financial, LLC ("Gruntal Financial"). In connection with the reorganization
Gruntal changed its name to Home Financial Corp. ("Home Financial") on
April 1, 1997. Home Insurance is the sole owner of Home Financial.
The Reorganization involved the issuance of several classes of securities
to Home Financial and The 1880 Group, including preferred securities, in an
aggregate nominal amount of $235 million as follows: (i) Gruntal Financial
issued to Home Financial securities called Preferred A Interests in a
nominal amount of $155.5 million and securities called Preferred B
Interests in a nominal amount of $70 million; and (ii) Gruntal Financial
issued to The 1880 Group securities called Preferred C Interests in an
nominal amount of $9 million. As a result of the Reorganization, Home
Financial owns 40% of the common interest of Gruntal Financial and The 1880
Group owns 60% of the common interest of Gruntal
31
<PAGE> 33
HOME HOLDINGS INC.
Financial. In connection with the issuance of certain preferred securities
to Home Financial, Home Insurance and Centre Reinsurance Dublin entered
into a swap agreement intended to ensure that Home Insurance's investment
in Gruntal Financial yields at least $155.5 million plus a 7.5% per annum
rate of return thereon, subject to certain modifications with respect to
certain distributions and sales proceeds of the common and preferred
interests of Gruntal Financial. Expenses incurred by Gruntal in connection
with the transaction were $9 million. There was no gain or loss to Home
Insurance from the Reorganization after the impact to Gruntal of the
transaction expenses.
Sterling Forest
On May 15, 1996 Governors Pataki of New York and Whitman of New Jersey,
and Speaker of the House Gingrich, announced an agreement in principle for
the purchase and sale of a substantial part of Sterling Forest lands for
public parkland. In connection therewith, a Purchase and Sale Agreement
between Sterling Forest and Sterling Lake Associates, as seller, and Trust
for Public Land and Open Space Institute, as buyer, was signed on February
18, 1997 (the "Sterling Forest Agreement").
Under the terms of the Sterling Forest Agreement more than 15,000 acres
of Sterling Forest land will be acquired as parkland by the state of New
York under the management of the Palisades Interstate Park Commission, at a
total purchase price of $55 million. Under the Sterling Forest Agreement
the buyers have up to two years to raise the funding. The purchase price
for any lands not yet acquired, however, will increase annually if the
purchase has not been fully consummated by the first anniversary of the
agreement. A total of $49 million has been committed, as of May 14, 1997,
by a combination of federal and state governments, and one not-for-profit
conservation foundation. Sterling Forest will continue to own approximately
2,200 acres of land and existing improvement for future sale or
development.
32
<PAGE> 34
HOME HOLDINGS INC.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the stockholders of the Company held
on May 13, 1997 (The "Annual Meeting"), the following matters
were submitted to a vote of security holders:
(i) the election of directors
(ii) amendments to the Restated Certificate of
Incorporation of the Company; and
(iii) amendments to the By-Laws of the Company.
All of the present directors of the Company, including Mr. Jan
Bruneheim, Mr. Steven D. Germain, Mr. Michael Palm and Mr. Zaid
O.B. Pedersen, were elected to serve as directors of the
Company until their successors are duly elected and qualified.
Amendments to the Restated Certificate of Incorporation of the
Company and amendments to the By-Laws of the Company were
approved.
With respect to the election of directors, 12,586,697 shares of
Series A Common Stock were voted in favor of the slate of
directors nominated for re-elections. There were no votes cast
against any of the directors, nor were there any abstentions.
With respect to the amendments to the Restated Certificate of
Incorporation of the Company, 12,586,697 shares of Series A
Common Stock of the Company were voted in favor of the proposed
amendments and 11,425,177 shares of Series B Convertible Stock
of the Company were voted in favor of the proposed amendments.
There were no votes cast against any of the amendments, nor
were there any abstentions.
With respect to the amendments to the By-Laws of the Company,
12,586,697 Shares of Series A Common Stock of the Company were
voted in favor of the proposed amendments and 11,425,177 shares
of Series B Convertible Stock of the Company were voted in
favor of the proposed amendments. There were no votes cast
against any of the amendments, nor were there any abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Form of Amended and Restated Certificate of
Incorporation of the Company, as approved by the
stockholders of the Company on May 13, 1997.
3.2 By-Laws of the Company, as approved by the stockholders
of the Company on May 13, 1997.
10.1 Governance Agreement Termination and Mutual Release
dated as of April 15, 1997 by and among Trygg-Hansa AB
(formerly Trygg-Hansa SPP Holdings AB), Trygg-Hansa
Omsesidig Livforsakring, Trygg-Hansa Holding B.V.,
Centre Reinsurance (Bermuda) Limited and Zurich Home
Investments Limited (formerly ZCI Investments Limited).
10.2 Amendment No. 1 dated as of April 15, 1997 to the
Securityholders' Agreement dated as of June 12, 1995 by
and among the Company, Zurich Home Investments Limited
(formerly ZCI Investments Limited), Centre Reinsurance
(Bermuda) Limited, Insurance Partners Advisors, L.P.,
Trygg-Hansa AB and Trygg-Hansa Holding B.V.
Form 8-K
Report on Form 8-K was filed by the Company on April 14, 1997.
33
<PAGE> 35
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
---------------------------
May 14, 1997 Richard H. Hershman
Treasurer
(Principal Financial and Accounting Officer
through the Services Agreement with
Risk Enterprise Management Limited)
34
<PAGE> 36
EXHIBIT INDEX
3.1 Form of Amended and Restated Certificate of
Incorporation of the Company, as approved by the
stockholders of the Company on May 13, 1997.
3.2 By-Laws of the Company, as approved by the stockholders
of the Company on May 13, 1997.
10.1 Governance Agreement Termination and Mutual Release
dated as of April 15, 1997 by and among Trygg-Hansa AB
(formerly Trygg-Hansa SPP Holdings AB), Trygg-Hansa
Omsesidig Livforsakring, Trygg-Hansa Holding B.V.,
Centre Reinsurance (Bermuda) Limited and Zurich Home
Investments Limited (formerly ZCI Investments Limited).
10.2 Amendment No. 1 dated as of April 15, 1997 to the
Securityholders' Agreement dated as of June 12, 1995 by
and among the Company, Zurich Home Investments Limited
(formerly ZCI Investments Limited), Centre Reinsurance
(Bermuda) Limited, Insurance Partners Advisors, L.P.,
Trygg-Hansa AB and Trygg-Hansa Holding B.V.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HOME HOLDINGS INC.
FIRST: The name of the Corporation is Home Holdings Inc. (hereinafter
the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at that address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"GCL").
FOURTH: A. The total number of shares of stock which the Corporation
shall have authority to issue is (1) 40,000,000 shares of Series A Common Stock,
each having a par value of One Cent ($.01) (the "Series A Common Stock"); (2)
15,000,000 shares of Series B convertible stock, par value One Cent ($.01) per
share (the "Series B Convertible Stock", and together with the Series A Common
Stock, the "Common Stock"); and (3) 300 shares of preferred stock, par value One
Cent ($.01) per share (the "Preferred Stock"), to be issued in one or more
classes or in one or more series within such class, which classes or series may
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, including,
without limiting the generality of the foregoing, such provisions as may be
desired concerning voting, redemption, dividends, dissolution or distribution of
assets, conversion or exchange, and such other subjects or matters as may be
established or amended by the Board of Directors and stated in a resolution or
resolutions
<PAGE> 2
adopted from time to time, and without any stockholder action or approval
thereof required, providing for the issue of such shares of Preferred Stock.
B. The rights of the holders of the Series A Common Stock and
Series B Convertible Stock shall be as follows:
(1) Except as otherwise provided in this Amended and
Restated Certificate of Incorporation, all shares of Series A Common Stock and
Series B Convertible Stock shall be identical and shall entitle the holders
thereof to the same rights and privileges;
(2) Each holder of shares of Series A Common Stock
shall be entitled to one vote for each share of Series A Common Stock on all
matters. Except as otherwise required by law or provided in this Amended and
Restated Certificate of Incorporation, the holders of shares of Series B
Convertible Stock shall have no vote on any matter;
(3) Subject to the rights of the holders of Preferred
Stock or any other class or series of stock having a preference as to dividends
over the Series A Common Stock and the Series B Convertible Stock then
outstanding, the holders of Series A Common Stock and Series B Convertible Stock
shall be entitled to receive, to the extent permitted by law, and to share
equally and ratably, share for share, such dividends as may be declared from
time to time by the Board of Directors, whether payable in cash, property or
securities of the Corporation; provided, however, that if the dividends that are
declared are payable in shares of Series A Common Stock or Series B Convertible
Stock, such dividends shall be declared at the same rate on each class of stock,
and the dividends payable to holders of Series A Common Stock shall be paid in
shares of Series A Common Stock and the dividends payable to holders of Series B
Convertible Stock shall be paid in Series B Convertible Stock;
(4) In the event of the voluntary or involuntary
liquidation, dissolution, distribution of assets or other winding up of the
Corporation, after distribution in full of preferential amounts, if any, to be
distributed to the holders of shares of Preferred Stock or any other class or
series of stock having a preference as to liquidating distributions over the
Series A Common Stock and the Series B Convertible Stock, the holders of the
Series A Common Stock and the Series B Convertible Stock shall be entitled to
share equally and ratably, share for share, in all of the remaining assets of
the Corporation of whatever kind available for distribution to stockholders. A
consolidation or merger of the
2
<PAGE> 3
Corporation with and into any other corporation or corporations shall not be
deemed to be a liquidation, dissolution or winding-up of the Corporation as
those terms are used in this section;
(5) (a) Each record holder of Series B Convertible
Stock is entitled at any time to convert any or all of the shares of such
holder's Series B Convertible Stock into an equal number of shares of Series A
Common Stock; provided, however, that no holder of Series B Convertible Stock is
entitled to convert any share or shares of Series B Convertible Stock to the
extent that, as a result of such conversion, such holder or its Affiliates (as
defined in the Securityholders' Agreement, dated as of June 12, 1995, by and
among the Corporation and several of its securityholders) would directly or
indirectly own, control or have power to vote or dispose of a greater quantity
of securities of any kind issued by the Corporation than such holder and its
Affiliates are permitted to own, control or have power to vote or dispose of
under any law or under any regulation, order, rule or other requirement of any
governmental authority at any time applicable to such holder and its Affiliates.
(b) Each conversion of shares of Series B Convert-
ible Stock, as herein described, shall be effected by the surrender of the
certificate or certificates representing the shares to be converted at the
principal office of the Corporation at any time during normal business hours,
upon 30 days' prior written notice by the holder of such shares to be converted
stating that such holder desires to convert the shares, or a stated number of
the shares, represented by such certificate or certificates into Series A Common
Stock, that upon such conversion such holder and its Affiliates shall not
directly or indirectly own, control or have the power to vote or dispose of a
greater quantity of securities of any kind issued by the Corporation than such
holder and its Affiliates are permitted to own, control or have the power to
vote or dispose of under any law or under any regulation, order, rule or other
requirement of any governmental authority at any time applicable to such holder
and its Affiliates. Such conversion shall be deemed to have been effected as of
the close of business on the date on which such certificate or certificates have
been surrendered, and at such time the rights of the holder of the converted
stock as such holder shall cease and the person or persons in whose name or
names the certificate or certificates for shares of Series A Common Stock are to
be issued upon such conversion shall be deemed to have become the holder or
holders of record of the shares of Series A Common Stock as are to be
represented thereby.
3
<PAGE> 4
(c) Promptly after such surrender referred
to above the Corporation shall issue and deliver, in accordance with the
surrendering holder's instructions, (i) the certificate or certificates for the
Series A Common Stock issuable upon such conversion and (ii) a certificate
representing any Series B Convertible Stock which was represented by the
certificate or certificates delivered to the Corporation in connection with such
conversion but which was not converted.
(d) The issuance of certificates for Series
A Common Stock upon conversion of Series B Convertible Stock shall be made
without charge to the holders of such shares for any issuance tax (except stock
transfer taxes) in respect thereof or other cost incurred by the Corporation in
connection with such conversion and related issuance of Series A Common Stock.
(6) If the Corporation in any manner subdivides or
combines the outstanding shares of Series A Common Stock or Series B
Convertible Stock, the outstanding shares of the other class of common stock
shall be proportionately subdivided or combined.
(7) The Corporation shall not close its books against
the transfer of any shares of Series A Common Stock issued or issuable upon
conversion of Series B Convertible Stock in any manner that would interfere with
the timely conversion of such Series B Convertible Stock.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors.
B. The directors shall have concurrent power with the
stockholders to adopt, amend, or repeal the By-Laws of the Corporation.
C. The number of directors of the Corporation shall be as from
time to time fixed by, or in the manner provided in, the By-Laws of the
Corporation. Election of directors need not be by written ballot unless the
By-Laws so provide.
4
<PAGE> 5
D. In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the GCL,
this Amended and Restated Certificate of Incorporation, and any By-Laws adopted
by the stockholders; provided, however, that no By-Laws hereafter adopted by the
stockholders shall invalidate any prior act of the directors which would have
been valid if such By-Laws had not been adopted.
SIXTH: A. The Corporation shall indemnify to the fullest extent permit-
ted under and in accordance with the laws of the State of Delaware any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that he is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, trustee, employee or
agent of or in any other capacity with another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
B. The Corporation shall indemnify to the fullest extent
permitted under and in accordance with the laws of the State of Delaware any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in
5
<PAGE> 6
view of all of the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
C. Expenses including attorneys' fees incurred in defending
any civil, criminal, administrative or investigative action, suit or proceeding
shall (in the case of any such action, suit or proceeding against a director or
an officer of the Corporation) or may (in the case of any such action, suit or
proceeding against a trustee, employee or agent of the Corporation) be paid by
the Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article SIXTH.
D. The indemnification and other rights set forth in this
Article SIXTH shall not be deemed exclusive of any provisions with respect
thereto in the By-Laws or any other contract or agreement between the
Corporation and any officer, director, employee or agent of the Corporation.
E. Neither the amendment nor repeal of Sections A, B, C or D
of this Article SIXTH nor the adoption of any provision of this Amended and
Restated Certificate of Incorporation inconsistent with Sections A, B, C or D of
Article SIXTH shall eliminate or reduce the effect of Sections A, B, C and D of
this Article SIXTH in respect of any matter occurring prior to such amendment,
repeal or adoption of an inconsistent provision or in respect of any cause of
action, suit or claim relating to any such matter which would have given rise to
a right of indemnification or right to receive expenses pursuant to Sections A,
B, C or D of this Article SIXTH if such provision had not been so amended or
repealed or if a provision inconsistent therewith had not been so adopted.
F. No director shall be personally liable to the Corporation
or any stockholder for monetary damages for breach of fiduciary duty as a
director, except for any matter in respect of which such director (1) shall be
liable under Section 174 of the GCL or any amendment thereto or successor
provision thereto, or (2) shall be liable by reason that, in addition to any and
all other requirements for liability, he:
(a) shall have breached his duty of loyalty to the Corporation
or its stockholders;
6
<PAGE> 7
(b) shall not have acted in good faith or, in failing to act,
shall not have acted in good faith;
(c) shall have acted in a manner involving intentional
misconduct or a knowing violation of law or, in failing to act, shall
have acted in a manner involving intentional misconduct or a knowing
violation of law; or
(d) shall have derived an improper personal benefit.
If the GCL is amended after the effective date of this Amended
and Restated Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the GCL as so amended.
Neither the alteration, amendment or repeal of this Section F
nor the adoption of any provision of this Amended and Restated Certificate of
Incorporation inconsistent with this Section F shall eliminate or reduce the
effect of this Section F in respect of any matter occurring, or any cause of
action, suit or claim that, but for this Section F, would accrue or arise, prior
to such alteration, amendment, repeal or adoption.
SEVENTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
7
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
HOME HOLDINGS INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for
the election of directors or for any other purpose shall be held at such time
and place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of
Stockholders shall be held on such date and at such time as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting, at which meetings the stockholders shall elect by a plurality vote a
Board of Directors, and transact such other business as may properly be brought
before the meeting in accordance with these By-Laws. Written notice of the
Annual Meeting stating the place, date and hour of the meeting shall be given to
each stock-
<PAGE> 2
holder entitled to vote at such meeting not less than ten nor more than sixty
days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by
law or by the Amended and Restated Certificate of Incorporation, Special
Meetings of Stockholders, for any purpose or purposes, may be called (i) by any
director or officer of the Corporation or (ii) at the request in writing of
stockholders owning a majority of the capital stock of the Corporation issued
and outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting. Written notice of a Special Meeting stating
the place, date and hour of the meeting and the purpose or purposes for which
the meeting is called shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting.
Section 4. Quorum. Except as otherwise provided by law or by
the Amended and Restated Certificate of Incorporation, the holders of a majority
of the capital stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business. If, however, such
quorum shall not be present or represented at any meeting of the stockholders,
the stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally noticed. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
entitled to vote at the meeting.
Section 5. Voting. Unless otherwise required by law, the
Amended and Restated Certificate of Incorporation or these By-Laws, any question
brought before any meeting of stockholders shall be decided by the vote of the
holders of a majority of the stock represented and entitled to vote thereat.
Unless otherwise provided in the Amended and Restated Certificate of
Incorporation, each stockholder represented at a meeting of stockholders shall
be entitled to cast one vote for each share of the capital stock entitled to
vote thereat held by such stockholder. Such votes may be cast in person or by
proxy but no proxy shall be voted after three years from its date, unless such
proxy provides for a longer period. The Board of Directors, in its discretion,
or the officer of the Corpora-
2
<PAGE> 3
tion presiding at a meeting of stockholders, in his discretion, may require that
any votes cast at such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless
otherwise provided in the Amended and Restated Certificate of Incorporation, any
action required or permitted to be taken at any Annual or Special Meeting of
Stockholders of the Corporation, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer
of the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 8. Stock Ledger. The stock ledger of the Corporation
shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 7 of this Article II or the books
of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
3
<PAGE> 4
ARTICLE III
DIRECTORS
Section 1. Number and Election of Directors. The number of
members of the Board of Directors of the Corporation shall consist of a minimum
of three directors and a maximum of fifteen directors, the exact number of which
shall be fixed initially at four members and thereafter from time to time by a
majority of the entire Board of Directors. Except as provided in Section 3 of
this Article III, directors shall be elected by a plurality of the votes cast at
Annual Meetings of Stockholders. Each director so elected shall hold office
until the next Annual Meeting and until his successor is duly elected and
qualified, or until his earlier resignation or removal. Any director may resign
at any time upon notice to the Corporation. Directors need not be stockholders.
Section 2. Designation of Directors. Only directors who have
been duly designated in accordance with this section shall be eligible for
election as directors of the Corporation. Directors shall be designated as
follows: (1) TH and its Permitted Transferees may designate two directors ("TH
Nominees") and (2) ZHI and its Permitted Transferees may designate two directors
("ZHI Nominees"). If the number of directors is increased above four, ZHI and
its Permitted Transferees shall have the right to designate such additional
directors. Directors shall be nominated by the majority of the Board of
Directors of the Corporation, subject to the foregoing provisions of this
Section 2.
Section 3. Resignation, Removal and Replacement of Directors.
Any director designated by a Party pursuant to Section 2 of this Article III may
be removed, with or without cause, by such designating Party. In the event that
any director (a "Withdrawing Director") designated in the manner set forth in
Section 2 of Article III is unable to serve, or once having commenced to serve,
is removed or withdraws from the Board of Directors of the Corporation, such
Withdrawing Director's replacement (the "Substitute Director") on the Board of
Directors of the Corporation shall be designated by the Party who designated the
Withdrawing Director.
In the event any Party entitled to designate a director
pursuant to Article III, Section (1) hereof ceases to be so entitled, the
vacancy or vacancies resulting therefrom shall be filled by the remaining
directors or by the Parties in the manner provided by law.
4
<PAGE> 5
Section 4. Duties and Powers. The business of the Corporation
shall be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Amended and Restated Certificate of
Incorporation or by these By-Laws directed or required to be exercised or done
by the stockholders.
Section 5. Meetings. The Board of Directors of the Corporation
may hold meetings, both regular and special, either within or without the State
of Delaware. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined by
the Board of Directors. Special meetings of the Board of Directors may be called
by the Chairman, if there be one, the President, or any other officer of the
Corporation, or any director. Notice thereof stating the place, date and hour of
the meeting shall be given to each director either by mail not less than
forty-eight (48) hours before the date of the meeting, by telephone or telegram
on twenty-four (24) hours' notice, or on such shorter notice as the person or
persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 6. Quorum. Except as may be otherwise specifically
provided by law, the Amended and Restated Certificate of Incorporation or these
By-Laws, at all meetings of the Board of Directors, a majority of the entire
Board of Directors shall constitute a quorum for the transaction of business and
the act of a majority of the directors present at any meeting at which there is
a quorum shall be the act of the Board of Directors. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 7. Actions of Board. Unless otherwise provided by the
Amended and Restated Certificate of Incorporation or these By-Laws, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting, if all the members of the
Board of Directors or committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee.
Section 8. Meetings by Means of Conference Telephone. Unless
otherwise provided by the Amended and Restated Certificate of Incorporation or
these By-Laws, members of the Board of Directors of the Corporation, or any
5
<PAGE> 6
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors or such committee by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section 8 shall constitute presence in person at such meeting.
Section 9. Committees. The Board of Directors may designate,
by resolution, one or more committees, each committee to consist of one or more
of the directors of the Corporation. TH and ZHI shall be entitled to appropriate
representation on any committees of the Board of Directors of the Corporation
and on the boards of directors of the Corporation's direct or indirect
Subsidiaries. The Board of Directors may designate, by resolution, one or more
directors as alternate members of any committee who may replace any absent or
disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a designation
by the Board of Directors of an alternate member to replace the absent or
disqualified member, the Party that designated such absent or disqualified
member may appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to the
extent allowed by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation.
Each committee shall keep regular minutes and report to the Board of Directors
when required.
Section 10. Compensation. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 11. Interested Directors. No contract, agreement,
arrangement or transaction between the Corporation and one or more of its
directors or officers, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the contract, agreement,
arrangement or transaction, or
6
<PAGE> 7
solely because his or their votes are counted for such purpose if (i) the
material facts as to his or their relationship or interest and as to the
contract, agreement, arrangement or transaction are disclosed or are known to
the Board of Directors or the committee, and the Board of Directors or committee
in good faith authorizes the contract, agreement, arrangement or transaction by
the affirmative votes of a majority of the disinterested directors, even though
the disinterested directors be less than a quorum; or (ii) the material facts as
to his or their relationship or interest and as to the contract, agreement,
arrangement or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract, agreement, arrangement or
transaction is specifically approved in good faith by vote of the stockholders;
or (iii) the contract, agreement, arrangement or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by the Board
of Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract,
agreement, arrangement or transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be
elected by the Board of Directors and shall include a President and a Treasurer.
The Board of Directors, in its discretion, may also elect a Chairman of the
Board of Directors (who must be a director), a Secretary and one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited by
law, the Amended and Restated Certificate of Incorporation or these By-Laws. The
officers of the Corporation need not be stockholders of the Corporation nor,
except in the case of the Chairman of the Board of Directors, need such officers
be directors of the Corporation.
Section 2. Election. The Board of Directors at its first
meeting held after each Annual Meeting of Stockholders shall elect the officers
of the Corporation who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board of Directors; and all officers of the Corporation shall hold
office until their successors are chosen and qualified, or until their earlier
resignation or removal. Any officer elected by the Board of Directors may be
removed at any time by the
7
<PAGE> 8
affirmative vote of a majority of the Board of Directors. Any vacancy occurring
in any office of the Corporation shall be filled by the Board of Directors. The
salaries of all officers of the Corporation shall be fixed by the Board of
Directors.
Section 3. Voting Securities Owned by the Corporation. Powers
of attorney, proxies, waivers of notice of meeting, consents and other
instruments relating to securities owned by the Corporation may be executed in
the name of and on behalf of the Corporation by the President or any Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation in
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of
the Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. He shall be the Chief Executive
Officer of the Corporation, and except where by law the signature of the
President is required, the Chairman of the Board of Directors shall possess the
same power as the President to sign all contracts, certificates and other
instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as from time to
time may be assigned to him by these By-Laws or by the Board of Directors.
Section 5. President. The President shall, subject to the
control of the Board of Directors and, if there be one, the Chairman of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. He or she shall execute all bonds, mortgages, contracts and
other instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-Laws, the Board of Directors or
the
8
<PAGE> 9
President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. If there be no Chairman of the
Board of Directors, the President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these By-Laws
or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or
in such person's absence or in the event of his inability or refusal to act (and
if there be no Chairman of the Board of Directors), the Vice President or the
Vice Presidents if there is more than one (in the order designated by the Board
of Directors) shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. Each Vice President shall perform such other duties and have such
other powers as the Board of Directors from time to time may prescribe. If there
be no Chairman of the Board of Directors and no Vice President, the Board of
Directors shall designate the officer of the Corporation who, in the absence of
the President or in the event of the inability or refusal of the President to
act, shall perform the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings
of the Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of Directors, and shall
perform such other duties as may be prescribed by the Board of Directors or
President, under whose supervision he shall be. If the Secretary shall be unable
or shall refuse to cause to be given notice of all meetings of the stockholders
and special meetings of the Board of Directors, and if there be no Assistant
Secretary, then either the Board of Directors or the President may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his signature. The Secretary
shall see that all books, reports, statements, certificates and other
9
<PAGE> 10
documents and records required by law to be kept or filed are properly kept or
filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of
the corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise
provided in these By-Laws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, any Vice President, if there be one, or
the Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if
there be any, shall perform such duties and have such powers as from time to
time may be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of his disability or refusal to act, shall perform the
duties of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books,
10
<PAGE> 11
papers, vouchers, money and other property of whatever kind in his possession or
under his control belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board
of Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation.
Section 2. Signatures. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming the certificate
of stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as the Board of Directors shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
11
<PAGE> 12
Section 4. Transfers. Stock of the Corporation shall be
transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by his attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, which shall be cancelled before a new
certificate shall be issued.
Section 5. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty days nor less than
ten days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by
law, the Amended and Restated Certificate of Incorporation or these By-Laws, to
be given to any director, member of a committee or stockholder, such notice may
be given by mail, addressed to such director, member of a committee or
stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the
12
<PAGE> 13
same shall be deposited in the United States mail. Written notice may also be
given personally or by facsimile transmission, telegram, telex or cable, and
shall be deemed to be given when sent.
Section 2. Waivers of Notice. Whenever any notice is required
by law, the Amended and Restated Certificate of Incorporation or these By-Laws,
to be given to any director, member of a committee or stockholder, a waiver
thereof in writing, signed, by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Amended and Restated Certificate
of Incorporation, if any, may be declared by the Board of Directors at any
regular or special meeting, and may be paid in cash, in property, or in shares
of the capital stock. Before payment of any dividend, there may be set aside out
of any funds of the Corporation available for dividends such sum or sums as the
Board of Directors from time to time, in its absolute discretion, deems proper
as a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have
inscribed thereon the name of the Corporation, the year of its organization and
the words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
13
<PAGE> 14
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings
other Than Those by or in the Right of the Corporation. Subject to Section 3 of
this Article VIII, the Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director or officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings
by or in the Right of the Corporation. Subject to Section 3 of this Article
VIII, the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be
14
<PAGE> 15
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any
indemnification under this Article VIII (unless ordered by a court) shall be
made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director or officer is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders. To
the extent, however, that a director or officer of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith, without the necessity of
authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any
determination under Section 3 of this Article VIII, a person shall be deemed to
have acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, or, with respect to any
criminal action or proceeding, to have had no reasonable cause to believe his
conduct was unlawful, if his action is based on the records or books of account
of the Corporation or another enterprise, or on information supplied to him by
the officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section 4
shall mean any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise of which such person is or was serving
at the request of the Corporation as a director, officer, employee or agent. The
provisions of this Section 4 shall not be deemed to be exclusive or to limit in
any way the circumstances in which a
15
<PAGE> 16
person may be deemed to have met the applicable standard of conduct set forth in
Sections 1 or 2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any
contrary determination in the specific case under Section 3 of this Article
VIII, and notwithstanding the absence of any determination thereunder, any
director or officer may apply to any court of competent jurisdiction in the
State of Delaware for indemnification to the extent otherwise permissible under
Sections 1 and 2 of this Article VIII. The basis of such indemnification by a
court shall be a determination by such court that indemnification of the
director or officer is proper in the circumstances because he has met the
applicable standards of conduct set forth in Sections 1 or 2 of this Article
VIII, as the case may be. Neither a contrary determination in the specific case
under Section 3 of this Article VIII nor the absence of any determination
thereunder shall be a defense to such application or create a presumption that
the director or officer seeking indemnification has not met any applicable
standard of conduct. Notice of any application for indemnification pursuant to
this Section 5 shall be given to the Corporation promptly upon the filing of
such application. If successful, in whole or in part, the director or officer
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement
of Expenses. The indemnification and advancement of expenses provided by or
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, contract, vote of stockholders or
disinterested directors or pursuant to the direction (howsoever embodied) of any
court of competent jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, it
being the policy of the Corporation that indemnification of the persons
specified in Sections 1 and 2 of this Article VIII shall be made to the fullest
extent permitted by law. The provisions of this Article VIII shall not be deemed
to preclude the indemnification
16
<PAGE> 17
of any person who is not specified in Sections 1 or 2 of this Article VIII but
whom the Corporation has the power or obligation to indemnify under the
provisions of the General Corporation Law of the State of Delaware, or
otherwise.
Section 8. Insurance. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a director or officer
of the Corporation, or is or was a director or officer of the Corporation
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power or the obligation to
indemnify him against such liability under the provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article
VIII, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For purposes of
this Article VIII, references to "fines" shall include any excise taxes assessed
on a person with respect to an employee benefit plan; and references to "serving
at the request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article VIII.
17
<PAGE> 18
Section 10. Survival of Indemnification and Advancement of
Expenses. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article VIII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director
or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 11. Limitation on Indemnification. Notwithstanding
anything contained in this Article VIII to the contrary, except for proceedings
to enforce rights to indemnification (which shall be governed by Section 5
hereof), the Corporation shall not be obligated to indemnify any director or
officer in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, provide rights to indemnification and to the advancement of expenses
to employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
These By-Laws may be altered, amended or repealed, in whole or
in part, or new By-Laws may be adopted by the stockholders or by the Board of
Directors, provided that notice of such alteration, amendment, repeal or
adoption of new By-Laws be contained in the notice of such meeting of
stockholders or Board of Directors as the case may be. All such amendments must
be approved by either the holders of a majority of the outstanding capital stock
entitled to vote thereon or by a majority of the entire Board of Directors then
in office.
18
<PAGE> 19
ARTICLE X
CERTAIN DEFINITIONS
Section 1. Defined Terms. For purposes of these By-Laws:
(a) The term "Corporation" shall mean Home Holdings
Inc.
(b) The term "entire Board of Directors" shall mean
the total number of directors which the Corporation would have if there were no
vacancies.
(c) The term "Party" shall mean TH or ZHI and their
respective Permitted Transferees, individually.
(d) The term "Parties" shall mean TH and ZHI and
their respective Permitted Transferees, collectively.
(e) The term "Permitted Transferees" shall have the
meaning ascribed to it in the Securityholders' Agreement.
(f) The term "Securityholders' Agreement" shall mean
the Securityholders' Agreement, dated as of June, 12, 1995, made and entered
into by and among the Corporation, ZHI, TH, Insurance Partners Advisors, L.P., a
limited partnership organized under the laws of Delaware, and Centre Reinsur-
ance (Bermuda) Limited, a corporation organized under the laws of Bermuda, as
amended, supplemented or modified from time to time.
(g) The term "Subsidiaries" shall have the meaning
ascribed to it in the Securityholders' Agreement.
(h) The term "TH" shall mean Trygg-Hansa AB, a
corporation organized under the laws of Sweden.
(i) The term "ZHI" shall mean Zurich Home Invest-
ments Limited, a corporation organized under the laws of Bermuda.
19
<PAGE> 20
Section 2. Other Terms. As used in the By-Laws, the following
terms shall have the meanings assigned in the Sections referred to opposite such
terms below:
<TABLE>
<CAPTION>
Term Defined in Section
- ---- ------------------
<S> <C>
"Chairman" or
"Chairman of the Board".....................................................................Art. IV, Section 4
"Designees"..................................................................................Art. III, Section 2
"Secretary"..................................................................................Art. IV, Section 7
"Special Meeting" or
"Special Meeting of Stockholders"...........................................................Art. II, Section 3
"TH Nominees"................................................................................Art. III, Section 2
"Withdrawing Director".......................................................................Art. III, Section 3
"ZHI Nominees"...............................................................................Art. III, Section 2
</TABLE>
20
<PAGE> 1
Exhibit 10.1
Conformed Copy
GOVERNANCE AGREEMENT
TERMINATION AND MUTUAL RELEASE
THIS TERMINATION AND MUTUAL RELEASE (this "Mutual Release") is
made as of the 15th day of April, 1997, by and among Trygg-Hansa AB (formerly
Trygg-Hansa SPP Holding AB), a corporation organized under the laws of Sweden
("THAB"), Trygg-Hansa Omsesidig Livforsakring, a corporation organized under the
laws of Sweden ("THL"), Trygg-Hansa Holding B.V., a corporation organized under
the laws of Sweden ("THH"), Centre Reinsurance (Bermuda) Limited, a corporation
organized under the laws of Bermuda ("Centre Re"), and Zurich Home Investments
Limited, a corporation organized under the laws of Bermuda ("Zurich")
(collectively, the "Parties", and each, individually, a "Party").
WHEREAS, the Parties, either directly or as successors in
interest, are parties to the Governance Agreement, dated as of December 22, 1993
(the "Governance Agreement"), by and among THAB, THL, Industrial Mutual
Insurance Company, a corporation organized under the laws of Finland ("IMI"),
International Insurance Investors, L.P., a limited partnership organized under
the laws of Bermuda ("III"), Centre Re and the Trustees of the Estate of Bernice
Pauahi Bishop (the "Bishop Estate") which agreement regulated certain aspects of
the Parties' investment in Home Holdings Inc., a corporation organized under the
laws of the State of Delaware (the "Company");
WHEREAS, IMI, III and the Bishop Estate, and any of their
respective assignees and successors, no longer beneficially own any shares of
any class of stock of the Company; and
WHEREAS, the Parties desire to terminate the Governance
Agreement in order to effectuate the purposes and intent of the Securityholders'
Agreement, dated June 12, 1995, by and among the Company, ZCI Investments
Limited, a corporation organized under the laws of Bermuda and predecessor of
Zurich, Insurance Partners Advisors, L.P., a limited partnership organized under
the laws of Delaware, and THAB (the "Securityholders' Agreement").
<PAGE> 2
NOW THEREFORE, in consideration of the covenants and mutual
promises contained herein, the Parties hereby agree as follows:
(1) The Parties hereby acknowledge and agree that the
Governance Agreement is terminated in all respects and that the Parties are
fully, completely, irrevocably and forever discharged from any and all
obligations set forth therein, pursuant thereto or arising therefrom.
(2) As material inducement for each Party to enter into this
Mutual Release, each of the Parties knowingly, voluntarily and irrevocably (a)
releases, acquits and forever discharges each Party from, (b) covenants not to
sue any other Party with respect to, and (c) waives any rights with respect to
any and all charges, complaints, claims, liabilities, obligations, promises,
agreements, controversies, damages, actions, causes of action, suits, rights,
demands, costs, losses, debts and expenses of any nature whatsoever, known or
unknown, suspected or unsuspected, foreseen or unforeseen, matured or unmatured,
which from the beginning of the world up to and including the date hereof,
exist, have existed, or may arise from any matter whatsoever under the
Governance Agreement, which such Party ever had, now has, or at any time
hereafter may have, own or hold against any other Party. Nothing herein shall
release any Party from any of its obligations under this Mutual Release.
(3) This Mutual Release constitutes the sole and complete
understanding of the Parties with respect to the subject matter hereof. The
Parties represent to each other that in executing this Mutual Release, they do
not rely and have not relied upon any representation or statement not set forth
herein made by any other Party, including such other Party's agents,
representatives or attorneys, with regard to the subject matter, basis or effect
of this Mutual Release.
(4) The terms and conditions of this Mutual Release shall
inure to the benefit of and be binding upon the respective past, present and
future successors, assigns, administrators or heirs (as applicable) of each
Party (collectively, the "Party Assignees"), and any and all past, present and
future directors, officers, shareholders, managers, agents, representatives,
advisors, consultants, employees, subsidiaries, administrators or heirs (as
applicable) of the Party or Party Assignees and their respective past, present
and future successors, assigns, affiliates or heirs (as applicable).
-2-
<PAGE> 3
(5) No amendment, modification or alteration of the terms and
provisions of this Mutual Release shall be binding unless the same shall be in
writing and duly executed by the Parties. No waiver of any of the provisions of
this Mutual Release shall be deemed to or shall constitute a waiver of any other
provision hereof. No delay on the part of any Party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof.
(6) This Mutual Release shall be governed by, and construed
and enforced under the laws of the State of New York, without regard to conflict
of laws rules thereof. Each Party hereby irrevocably and unconditionally
consents to submit to the exclusive jurisdiction of the courts of the State of
New York and of the United States of America, in each case located in the County
of New York, for any litigation arising out of or relating to this Mutual
Release (and agrees not to commence any litigation relating thereto except in
such courts), and further agrees that service of any process, summons, notice or
document by United States registered mail to its respective address set forth in
this Mutual Release shall be effective service of process for any litigation
brought against it in any such court. Each Party hereby irrevocably and
unconditionally waives any objection to the laying of venue of any litigation
arising out of this Mutual Release in the courts of the State of New York, and
hereby further irrevocably and unconditionally waives and agrees not to plead or
claim in any such court that any such litigation brought in any such court has
been brought in an inconvenient forum.
(7) In the event that any one or more of the provisions of
this Mutual Release is held to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions will not in
any way be affected or impaired thereby. If any one or more of the provisions
contained in this Mutual Release is held to be excessively broad as to duration,
scope, activity or subject, such provision shall be construed by limiting and
reducing it so as to be enforceable to the maximum extent compatible with
applicable law.
(8) All notices and other communications hereunder shall be in
writing and shall be deemed effec or given upon (a) electronic confirmation when
sent by facsimile transmission, (b) confirmed delivery by a recognized courier
service or an affidavit of the messenger when delivered by hand, or (c) the
expiration of seven (7) calendar days after the day when mailed by certified or
registered mail, postage prepaid, addressed to the following addresses (or at
such other address for a Party as shall be specified by like notice):
-3-
<PAGE> 4
(a) If to THAB, THL or THH,
TRYGG-HANSA AB
Fleminggatan 18
S-106 26 Stockholm
Sweden
Attention: Mr. Zaid O.B. Pedersen
Telephone: 46-8-693-10-00
Facsimile: 46-8-650-93-67
(b) If to Centre Re or Zurich,
Zurich Home Investments Limited
Cumberland House
One Victoria Street
Hamilton, Bermuda HMHK
Attention: President
Telephone: (809) 295-8501
Facsimile: (809) 295-3705
In each case above, with
copies to the Company,
Home Holdings Inc.
c/o The Home Insurance Company
59 Maiden Lane
New York, New York 10038
Attention: General Counsel
Telephone: (212) 530-6600
Facsimile: (212) 530-3413
-4-
<PAGE> 5
(9) This Mutual Release may be executed in counterparts, each
of which shall for all purposes be deemed to be an original and all of which
shall constitute the same instrument.
IN WITNESS WHEREOF, the undersigned have duly executed this
Mutual Release as of the date first written above.
TRYGG-HANSA AB (formerly
TRYGG-HANSA SPP HOLDING AB)
By: /s/ Zaid Pedersen
------------------------------
Name: Zaid Pedersen
Title: Chief Financial Officer
TRYGG-HANSA OMSESIDIG LIVFORSAKRING
By: /s/ Lars Lonnborg
------------------------------
Name: Lars Lonnborg
Title: President
TRYGG-HANSA HOLDING B.V.
By: /s/ Jan Bruneheim
------------------------------
Name: Jan Bruneheim
Title: Director
-5-
<PAGE> 6
CENTRE REINSURANCE (BERMUDA) LIMITED
By: /s/ Andrea Hodson
------------------------------
Name: Andrea Hodson
Title: Secretary
ZURICH HOME INVESTMENTS LIMITED
By: /s/ Roger Thompson
------------------------------
Name: Roger Thompson
Title: Vice President
-6-
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1 TO
SECURITYHOLDERS' AGREEMENT
AMENDMENT NO. 1 (this "Amendment"), dated as of April, 15,
1997, to the Securityholders' Agreement (the "Agreement") dated as of the 12th
day of June 1995, entered into by and among Home Holdings Inc., a Delaware
corporation (the "Company"), ZCI Investments Limited, a corporation organized
and existing under the laws of Bermuda (now known as Zurich Home Investments
Limited and referred to herein as the "Purchaser"), Centre Reinsurance (Bermuda)
Limited, a corporation organized and existing under the law of Bermuda ("Centre
Re"), Insurance Partners Advisors, L.P., a limited partnership organized and
existing under the laws of Delaware ("IP"), Trygg-Hansa AB, a corporation
organized and existing under the Laws of Sweden ("Trygg-Hansa"), and Trygg-Hansa
Holding B.V., a corporation organized and existing under the Laws of Sweden
("Trygg-Hansa Holding" and, together with Trygg-Hansa, "TH"). The Company, the
Purchaser, Centre Re, IP and TH are sometimes individually referred to as
"Party" and collectively as the "Parties".
WHEREAS, the Parties desire to amend certain provisions of the
Agreement relating to the composition of the Board of Directors as more fully
described herein; and
WHEREAS, this Amendment is made pursuant to Section 9.5 of the
Agreement.
NOW, THEREFORE, for good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the Parties agree as
follows:
Section 1. Definitions. All capitalized terms used herein and
not otherwise defined shall have the meanings assigned to them in the
Agreement.
Section 2. Amendment of Agreement.
(a) The Agreement is hereby amended in its entirety to remove
IP as a Party to the Agreement.
(b) Section 3.1 of the Agreement is hereby amended and
replaced in its entirety to read as follows:
3.1 Number and Membership. (a) The Board of Directors
of the Company shall be fixed at four directors, subject to
the terms of paragraph (b) below.
(b) The Parties and the Company shall take all action
within their respective power, including, but not limited to,
the voting of Capital Stock of the Company, required to cause
the Board of Directors of the Company to consist of at least
four members (subject to the provision of this paragraph (b))
and to at all times include (i) two designees of TH and its
Permitted Transferees (the "TH
<PAGE> 2
Nominees") and (ii) two designees of the Purchaser and its
Permitted Transferees (the "Purchaser Nominees"). In addition,
if the number of directors is increased above four, the
Purchaser shall have the right to designate the additional
directors, and such additional directors shall also be deemed
to be "Purchaser Nominees". TH and the Purchaser shall also be
entitled to appropriate representation on any committees of
the Board of Directors of the Company and on the boards of
directors of the Company's direct and indirect Subsidiaries.
Notwithstanding the foregoing provisions of this Section 3.1,
if the Warrants are not exercised on or prior to their
expiration date, TH shall have the right, after such
expiration date, to appoint a majority of the members of the
Board of Directors (and any committees thereof) of the Company
and its direct and indirect Subsidiaries.
Section 3. Status of Agreement. The Agreement and the terms
and conditions thereof shall remain in full force and effect except as amended
pursunt to this Amendment. This Amendment is limited solely for the purposes and
to the extent expressly set forth herein and nothing herein contained or implied
shall constitute an amendment or waiver of any other term, provision or
condition of the Agreement.
Section 4. References to Agreement. References in this
Amendment and the Agreement to the Agreement and words therein of similar
import, shall be deemed to be references to the Agreement as amended hereby and
as further amended from time to time.
Section 5. Counterparts. This Amendment may be executed in any
number of counterparts, all of which taken together shall constitute one
Amendment, and any of the parties thereto may execute this Amendment by signing
such a counterpart.
Section 6. Governing Law. This Amendment shall be construed
and enforced in accordance with, and the rights of the parties shall be governed
by, the laws of the State of New York, without reference to its conflicts of
laws principles.
Section 7. Effectiveness. This Amendment shall become
effective upon the execution and delivery by each party hereto of a counterpart
hereof.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the Parties hereto have duly executed this
Amendment as of the date and year first above written.
HOME HOLDINGS INC.
By: /s/ Richard H. Hershman
----------------------------------------------
Name: Richard H. Hershman
Title: Treasurer
ZURICH HOME INVESTMENTS LIMITED
(formerly known as ZCI Investments Limited)
By: /s/ Andrea Hodson
----------------------------------------------
Name: Andrea Hodson
Title: Assistant Secretary
CENTRE REINSURANCE (BERMUDA)
LIMITED
By: /s/ Andrea Hodson
----------------------------------------------
Name: Andrea Hodson
Title: Vice President & Assistant Secretary
INSURANCE PARTNERS ADVISORS, L.P.
By: Service GenPar, L.P., its
General Partner
By: Service Partners, Inc., its
General Partner
By: /s/ Robert Spass
----------------------------------------------
Name: Robert Spass
Title: President
TRYGG-HANSA AB
By: /s/ Zaid O.B. Pedersen
----------------------------------------------
Name: Zaid O.B. Pedersen
Title: Chief Financial Officer
-3-
<PAGE> 4
TRYGG-HANSA HOLDING B.V.
By: /s/ Jan Bruneheim
----------------------------------------------
Name: Jan Bruneheim
Title: Director
-4-
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 30
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 23
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,121
<CASH> 19
<RECOVER-REINSURE> 2,720
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 4,689
<POLICY-LOSSES> 5,405
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 573
0
0
<COMMON> 0
<OTHER-SE> (1,545)
<TOTAL-LIABILITY-AND-EQUITY> 4,689
3
<INVESTMENT-INCOME> 27
<INVESTMENT-GAINS> 2
<OTHER-INCOME> (8)
<BENEFITS> 1
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 19
<INCOME-PRETAX> (9)
<INCOME-TAX> (1)
<INCOME-CONTINUING> (8)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 5,687
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 5,405
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
