<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file Number: 0-22016
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HOME STATE HOLDINGS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3429087
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Three South Revmont Drive, Shrewsbury, New Jersey 07702
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(Address of principal executive offices)
(Zip Code)
(908) 935-2600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No .
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On May 14, 1996, there were outstanding 5,660,000 shares of
Common Stock, $.01 par value, of the registrant.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Page
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Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Income............... 5
Condensed Consolidated Statements of Cash Flows........... 6
Notes to Condensed Consolidated Financial Statements...... 7
2
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HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1996 1995
(Unaudited)
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<S> <C> <C>
Investments
Fixed maturity securities held -to- maturity, at amortized cost
(market value $63,614,912 and $65,472,575, respectively) $62,677,368 $64,115,137
Fixed maturity securities available for sale, at market
value (amortized cost $11,185,465 and $11,385,460) 11,322,292 11,523,142
Short term investments at cost, which approximates market 5,787,511 3,157,274
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Total investments 79,787,171 78,795,553
Cash and cash equivalents 14,532,027 9,544,021
Premiums receivable 58,690,842 40,068,207
Reinsurance recoverable 77,837,632 50,580,799
Prepaid reinsurance premium 42,036,744 35,486,986
Finance notes receivable 14,146,097 1,966,643
Salvage and subrogation receivable 4,638,920 2,971,663
Deferred policy acquisition costs 8,829,287 7,086,287
Investment in mutual insurance company, at cost 4,500,000 4,500,000
Furniture and equipment (at cost (less accumulated depreciation
and amortization of $912,701 and $732,342) 3,147,432 3,058,802
Income taxes recoverable 267,551 973,963
Deferred tax assets, net 2,466,320 1,889,685
Other assets 7,190,577 3,598,729
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Total assets $318,070,600 $240,521,338
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</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY March 31, December 31,
1996 1995
(Unaudited)
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<S> <C> <C>
Insurance losses and loss adjustment expense reserves $123,423,678 $95,790,019
Unearned premiums 92,720,717 71,291,232
Reinsurance balance payable 19,350,538 8,532,721
Accrued expenses and other liabilities 16,597,566 3,203,092
Excess of fair value over cost of business acquired 2,885,998 3,053,076
Subordinated notes payable, net of original issue discount 16,320,000 16,300,000
Notes payable, Bank 5,900,000 2,000,000
Minority interest 1,298,972 1,298,972
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Total liabilities 278,497,469 201,469,112
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Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 100,000 shares authorized
and none issued and outstanding -- --
Common stock, $.01 par value; (10,000,000 shares
authorized, 5,660,000 shares issued and outstanding) 56,600 56,600
Additional paid-in capital 20,973,463 20,973,463
Unrealized depreciation of fixed maturity securities available for
sale, net of deferred taxes (39,723) (57,704)
Retained earnings 18,582,791 18,079,867
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Total stockholders' equity 39,573,131 39,052,226
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Total liabilities and stockholders' equity $318,070,600 $240,521,338
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</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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<TABLE>
<CAPTION>
Three Months Ended
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March 31,
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1996 1995
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(Unaudited) (Unaudited)
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<S> <C> <C>
Revenues:
Net premiums earned $23,445,823 $8,698,493
Recoveries on reinsurance premiums 1,681,032 612,893
Net investment income 1,024,976 686,434
Financial services group income 872,532 647,664
Other income 66,619 137,704
Net realized capital gains (losses) (2,092) 95,083
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Total revenues 27,088,890 10,878,271
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Expenses:
Insurance losses and loss adjustment expenses 20,483,939 6,690,868
General and administrative expenses,
principally acquisition costs 5,418,366 2,295,538
Interest expense 557,931 505,875
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Total expenses 26,460,236 9,492,281
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Income before income taxes and minority interest 628,654 1,385,990
Income taxes 125,730 350,334
Minority interest -- 11,000
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Net income $502,924 $1,024,656
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Net income per common share $0.09 $0.18
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Weighted average number of common shares 5,666,992 5,693,425
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</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31,
---------------------------------
1996 1995
---------------------------------
(Unaudited)
---------------------------------
<S> <C> <C>
Net cash from operating activities $14,451,151 $6,276,761
Investing activities:
Purchase of investment securities (6,749,659) (10,843,746)
Proceeds from sale/maturity of fixed maturity
investments, held-to-maturity 5,585,322 5,681,963
Proceeds from sale/maturity of fixed maturity
investments, available-for-sale 200,000 --
Purchase of Merchant Bakers, net of cash acquired -- 2,803,758
Purchase of notes receivable -- 113,052
Purchase of furniture and equipment (219,354) (125,931)
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Net cash used in investing activities (1,183,691) (2,370,904)
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Financing activities:
Proceeds from notes payable, net 3,900,000 --
Purchase of financing note receivables (12,179,454) (3,023,035)
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Net cash used in financing activities (8,279,454) (3,023,035)
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Net increase in cash and cash equivalents 4,988,006 882,822
Cash and cash equivalents, beginning of year 9,544,021 6,182,811
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Cash and cash equivalents, end of period $14,532,027 $7,065,633
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Cash paid during the period for income taxes $ -- $560,000
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Cash paid during the period for interest $538,000 $483,000
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</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
HOME STATE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. GENERAL
The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation of financial position and results of operations, have been made.
Interim results are not necessarily indicative of the results for the full
year. It is recommended that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements as
of December 31, 1995 and 1994, and for each of the three years in the period
ended December 31, 1995, and related notes thereto, included in the Annual
Report of Home State Holdings, Inc. (the "Company") on Form 10-K for the year
ended December 31, 1995.
2. FINANCING NOTE RECEIVABLES
Insurance premium finance notes typically do not exceed twelve months. Premium
finance charges are earned, beginning with the effective month of the policy,
over the applicable installment period and reflected in income using the
sum-of-the-months-digits method, a method that provides results that are not
materially different from the effective interest method. Accordingly, unearned
premium finance charges are established for the unamortized portion of finance
charges applicable to the premium finance note receivables.
3. ACQUISITION
On March 2, 1995, the New York State Insurance Department (the
"Superintendent") approved the acquisition of control of Merchant Bakers
(which had been managed by the Company since December 28, 1992) by the Company
pursuant to a Plan of Conversion (the "Plan"), converting Merchant Bakers from
a mutual to a stock insurance company. The closing of this transaction
occurred on March 31, 1995, and has been accounted for as a purchase, and
accordingly, the net assets and results of operations of Merchant Bakers are
included in the financial statements beginning March 31, 1995. A portion of
the purchase price has been allocated to the assets and liabilities of
Merchant Bakers' eligible policy holders in satisfaction of their equitable
interests in Merchant Bakers. The Company, at the date of acquisition, had
$6.0 million in surplus notes issued by Merchant Bakers and accrued interest
related to such surplus notes of $439,000. Two million dollars of these notes
were converted to Merchant Bakers common stock and additional paid-in capital
on March 31, 1995. The remaining $4.0 million of notes and the accrued
interest, which have been eliminated in consolidation, will be converted to
additional paid-in capital upon approval by the Superintendent. The fair
value of net assets acquired exceeded the cost by $3.6 million, which has been
included in "excess of fair value over cost of business acquired" on the
consolidated balance sheets, and is being amortized straight line over a five
year period.
The following unaudited pro forma information shows the results of the
Company's operations as if the purchase of Merchant Bakers had been made as of
January 1, 1995. Total revenues, net include and net income per share at
March 31, 1995 was $16.6 million, $1.9 million and $0.34, respectively.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995.
The winter storms of 1995-96 produced one of the worst first quarter
catastrophic losses ever recorded by the property and casualty industry.
Particularly affected were insurers like Home State with significant
concentrations of insured risks in the Northeast. These storms resulted in
more than $2.5 billion of industry- wide losses and contributed to the negative
impact on the Company's first quarter operating results, particularly with
respect to physical damage and liability claims.
In 1996, the inclusion of Home Mutual Insurance Company of Binghamton, NY
("Home Mutual") in an insurance pooling arrangement with New York Merchant
Bakers Insurance Company ("Merchant Bakers") magnified the effects of the
difficult winter on the Company's first quarter results. Home Mutual, which
writes primarily personal lines insurance predominantly in upstate New York,
has been a managed affiliate of the Company since the purchase of $4.5 million
of Home Mutual surplus notes in 1993. The geographic concentration of Home
Mutual's business in the heavily affected areas, contributed significantly to
the negative impact on Home Mutual's earnings, which impact has in turn been
substantially realized by the Company.
Gross premiums written by the Company increased from $17.5 million in the first
quarter of 1995 to $62.9 million in the comparable period of 1996, of which
$35.4 million represents Merchant Bakers. The Company's net earned premiums
increased 169% from $8.7 million in the first quarter of 1995 to $23.4 million
in the comparable period of 1996, of which $8.3 million represents Merchant
Bakers. The increase in net earned premiums resulted from increased premium
writings throughout 1995 and the inclusion of Merchant Bakers.
<PAGE>
Recoveries on reinsurance premiums increased from $613,000 in the first quarter
of 1995 to $1.7 million in the comparable period of 1996. This increase is a
direct result of an increase in ceded earned premium volume as well as
physical damage quota share adjustments. Recoveries on reinsurance premiums
was negatively impacted due to increased reserve development on losses ceded
to reinsurers.
Net investment income increased from $687,000 in the first quarter of 1995 to
$1.0 million in the comparable period of 1996. The increase in net
investment income was primarily a result of an increase in invested assets as
well as the inclusion of Merchant Bakers. Cash and invested assets was $93.5
million as of March 31, 1996 compared to $71.2 million as of March 31, 1995,
primarily as a result of the inclusion of Merchant Bakers and additional cash
flows provided by operating activities.
The Company had $95,000 of realized gains from the sale of securities in the
first quarter of 1995 as compared to $2,000 of realized losses in the
comparable period of 1996. The realized loss in 1996 was derived from the
call of one fixed maturity investment.
Income from the Company's financial services subsidiaries, consisting primarily
of reinsurance brokerage fees, financing revenue and management fees increased
from $648,000 in the first quarter of 1995 to $873,000 in the comparable
period of 1996. The financial services group is comprised of Aspen
Intermediaries, Inc., which provides reinsurance brokerages services; Tower
Hill, Inc., which provides premium finance services; and HSIM L.L.C. (as
successor to Home State Insurance Management, Inc.) which provides certain
administrative services. Aspen's reinsurance brokerages fees increased to
$674,000 in the first quarter of 1996 from $358,000 in the comparable period
of 1995. Tower Hill received $198,000 in financing income in the first
quarter of 1996 from $65,000 in the comparable period of 1995.
<PAGE>
Other income, consisting primarily of book rollover fees decreased from
$137,000 in the first quarter of 1995 to $66,000 in the comparable period of
1996. Book rollover fees were $105,000 in the first quarter of 1995 and zero
in the comparable period of 1996.
Insurance losses and loss adjustment expenses increased from $6.7 million in
the first quarter of 1995 to $20.5 million in the comparable period of 1996,
of which $7.9 million represents Merchant Bakers, primarily as a result of the
blizzard of 1996 and the eleven other winter storms in the Northeast, as well
as an increase in volume and risks assumed under premiums in force.
Consequently, the GAAP loss ratio increased to 82% in the first quarter of
1996 compared to 72% in the first quarter of 1995.
The GAAP expense ratio increased to 23% in the first quarter of 1996 from 22%
in the comparable period of 1995. The Company has experienced an increase in
its overall operating expenses in the first quarter of 1996 as compared to the
first quarter of 1995 largely to support the expansion of the Company's markets
for personal and commercial automobile business.
Interest expense increased to $557,000 in the first quarter of 1996 from
$505,000 in the comparable period of 1995 due to the interest expense related
to the bank credit facilities which were initially drawn down in late 1995.
Tax expense decreased from $350,000 in the first quarter of 1995 to $126,000 in
the comparable period of 1996 due primarily to an increase in the ratio of tax
free income to taxable income. Accordingly, the Company's effective tax rate
decreased from 25% in the first quarter of 1995 to 20% in the comparable period
of 1996.
Net income decreased from $1.0 million in the first quarter of 1995 to $502,000
in the comparable period of 1996 and the Company's GAAP combined ratio
increased from 94% in the first quarter of 1995 to 105% in the
<PAGE>
comparable period of 1996 as a result of the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the Company's 1993 initial public offering (the
"IPO"), the Company's operations were primarily funded by private placements
of equity and convertible debt securities and subsequently by cash flow from
operations. Since the IPO until the last quarter of 1995, the Company's
operations have been financed by cash flow and IPO proceeds. In October 1994,
the Company completed a private placement of $17.0 million of subordinated
notes and warrants (the "Private Placement"). The subordinated notes were
issued as part of a financing strategy to provide additional funds for the
Company's growth. In 1996, the Company negotiated a $18.0 million line of
credit ($13.0 million in favor of Tower Hill, its premium finance subsidiary
and $5.0 million for use by the Company). At March 31, 1996 $5.0 million and
$900,000 had been drawn down by the Company and Tower Hill, respectively.
For the three months ended March 31, 1996, cash flow from operations increased
to $14.5 million as compared to $6.3 million for the three months ended March
31, 1995.
The Company believes that cash flow, remaining Private Placement proceeds and
its corporate and premium finance lines of credit would be sufficient to fund
current liquidity requirements and capital needs during the remainder of 1996.
The Company's insurance subsidiaries are subject to certain restrictions on
their ability to transfer funds to the parent company in the form of cash
dividends, loans or advances without regulatory approval. These restrictions,
described below, are not expected to impair the ability of the Company to meet
its cash obligations. However, to the extent the Company seeks to increase
the capital of its insurance subsidiaries, make acquisitions or pursue
additional business opportunities, additional financing is likely to be
required. Accordingly, the Company is actively exploring financing
alternatives which could take the form of a convertible debt or equity
security. There can, however, be no assurance that the Company will obtain
financing on terms it deems acceptable.
<PAGE>
Purchases of investment securities were $00.0 million for the
three months ended March 31, 1996. These purchases
were primarily funded by operations and by proceeds from the maturity of
investments of $0.0 million. For the comparable period in 1995, $10.8 million
was used for the purchase of investment securities, which was primarily funded
by proceeds from the sale/maturity of investments of $5.7 million.
The Company maintains a significant portion of its assets in high quality,
fixed income investments with relatively short maturities. An increase in
interest rates will generally cause a decline in the market value of fixed
income securities although presenting the opportunity to reinvest proceeds from
maturing securities at higher yields. A decline in interest rates may result
over time in lower yields as the proceeds from maturing securities are
reinvested although this may be offset by increases in the market value of
fixed income investments with longer maturities. Because of the relatively
short maturities of the Company's investments, the Company does not anticipate
changes in interest rates which will materially affect its liquidity and
capital resources.
<PAGE>
PART II
OTHER INFORMATION
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) No reports on Form 8-K were filed during the quarter
ended March 31, 1996.
CAUTIONARY STATEMENT
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-Q, any Form 10-K, Form 8-K or
any other written or oral statements made by or on behalf of the Company may
include forward-looking statements which reflect the Company's current views
with respect to future events and financial performance. These
forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors (which are described in
more detail elsewhere in documents filed by the Company with the Securities
and Exchange Commission) include, but are not limited to, uncertainties
relating to general economic conditions and cyclical industry conditions,
uncertainties relating to government and regulatory policies, volatile and
unpredictable developments (include storms and catastrophes), the legal
environment, the uncertainties of the reserving process and the competitive
environment in which the Company operates. The words "believe," "expect,"
"anticipate," "project," "plan," "expect" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
<PAGE>
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 STATE HOLDINGS, INC.
(Registrant)
Date: May 15, 1996 By: /s/ ROBERT ABIDOR
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Robert Abidor
President and
Chief Executive Officer
Date: May 15, 1996 By: /s/ KENNETH E. EDWARDS
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Kenneth E. Edwards
Senior Vice President - Finance
