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 June 30, 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.
(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 August 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
Condensed Consolidated Balance Sheets.......................................3
Condensed Consolidated Statements of Operations.............................5
Condensed Consolidated Statements of Cash Flows.............................6
Notes to Condensed Consolidated Financial Statements........................7
2
<PAGE>
HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
------------
<S> <C> <C>
Investments
Fixed maturity securities available for sale, at market
value (amortized cost $10,686,476 and $11,385,460, respectively) $ 10,749,971 $ 11,523,142
Fixed maturity securities held-to-maturity, at amortized cost
(market value $67,950,686 and $65,472,575, respectively) 67,776,433 64,115,137
Common stocks, at market value 367,322 --
Short term investments at cost, which approximates market 5,816,429 3,157,274
------------ ------------
Total investments 84,710,155 78,795,553
Cash and cash equivalents 14,459,299 9,544,021
Premiums receivable 44,411,532 40,068,207
Reinsurance recoverable 72,066,088 50,580,799
Prepaid reinsurance premium 45,118,758 35,486,986
Salvage and subrogation receivable 4,960,636 2,971,663
Deferred policy acquisition costs 10,029,287 7,086,287
Premium financing notes receivable 12,691,985 1,966,643
Investment in mutual insurance company, at cost 4,970,000 4,500,000
Furniture and equipment (at cost less accumulated depreciation
and amortization of $1,068,140 and $732,342) 3,664,938 3,058,802
Income taxes recoverable, net 4,427,477 973,963
Deferred tax assets, net 2,414,309 1,889,685
Other assets 6,102,511 3,598,729
------------ ------------
Total assets $310,026,975 $240,521,338
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
1996 1995
------------ -------------
(Unaudited
------------
<S> <C> <C>
Insurance losses and loss adjustment expense reserves $128,412,636 $ 95,790,019
Unearned premiums 94,750,896 71,291,232
Reinsurance balance payable 12,229,857 8,532,721
Accrued expenses and other liabilities 5,795,265 3,203,092
Excess of fair value of acquired net assets over cost 1,503,705 3,053,076
Subordinated notes payable, net of original issue discount 16,340,000 16,300,000
Notes payable, bank 15,200,000 2,000,000
Minority interest 1,255,016 1,298,972
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Total liabilities 275,487,375 201,469,112
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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 appreciation (depreciation) of fixed maturities available for
sale, net of taxes 41,907 (57,704)
Retained earnings 13,467,630 18,079,867
------------ -------------
Total stockholders' equity 34,539,600 39,052,226
------------ -------------
Total liabilities and stockholders' equity $310,026,975 $ 240,521,338
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months End
June 30, June 30,
---------------------------- ----------------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 25,576,848 $14,674,599 $ 49,022,671 $23,373,092
Recoveries on reinsurance premiums 433,542 1,234,931 2,114,574 1,847,824
Net investment income 1,061,004 880,722 2,085,980 1,567,156
Financial services group income 1,095,744 813,041 1,970,031 1,458,848
Other income (expense), net (45,316) 115,887 184,548 255,448
Net realized capital gains (losses) (1,994) 68,210 (4,086) 163,293
------------ ----------- ------------ -----------
Total revenues 28,119,828 17,787,390 55,373,718 28,665,661
------------ ----------- ------------ -----------
Expenses:
Insurance losses and loss adjustment expenses 31,387,527 12,144,869 51,871,466 18,835,737
Underwriting, general and administrative expenses,
principally acquisition costs 5,358,978 3,342,037 10,942,344 5,587,575
Interest expense 698,065 511,625 1,255,996 1,017,500
------------ ----------- ------------ -----------
Total expenses 37,444,570 15,998,531 64,069,806 25,440,812
------------ ----------- ------------ -----------
Income (loss) before income tax (benefit) and
minority interest (9,324,742) 1,788,859 (8,696,088) 3,224,849
Income tax (benefit) (4,165,625) 537,152 (4,039,895) 937,486
Minority interest (43,956) 21,000 (43,956) 32,000
------------ ----------- ------------ -----------
Net income (loss) $ (5,115,161) $ 1,230,707 $ (4,612,237) $ 2,255,363
============ =========== ============ ===========
Net income (loss) per common share and common share
equivalent $ (0.90) $ 0.22 $ (0.81) $ 0.40
============ =========== ============ ===========
Weighted average number of common shares and common
share equivalents outstanding 5,660,000 5,660,000 5,660,000 5,660,000
============ =========== ============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
HOME STATE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Net cash from operating activities $ 9,811,342 $ 10,489,395
------------ ------------
Investing activities:
Purchase of investment securities (13,058,288) (15,675,556)
Proceeds from sale/maturity of fixed maturity
investments, held-to-maturity 6,966,822 6,417,975
Proceeds from sale/maturity of fixed maturity
investments, available-for-sale 500,000 6,000,000
Investment in mutual company (470,000) --
Purchase of common stocks (367,322) --
Purchase of Merchant Bakers, net of cash acquired -- (726,764)
Purchase of notes receivable -- 113,052
Purchase of furniture and equipment (941,934) (228,410)
------------ ------------
Net cash used in investing activities (7,370,722) (4,099,703)
------------ ------------
Financing activities:
Purchase of premium financing note receivables (10,725,342) (4,802,989)
Net borrowings on notes payable - bank 13,200,000 --
------------ ------------
Net cash used in financing activities 2,474,658 (4,802,989)
------------ ------------
Net increase in cash and cash equivalents 4,915,278 1,586,703
Cash and cash equivalents, beginning of year 9,544,021 6,182,811
------------ ------------
Cash and cash equivalents, end of period $ 14,459,299 $ 7,769,514
============ ============
Cash paid during the period for income taxes -- $ 1,810,000
============ ============
Cash paid during the period for interest $ 1,255,996 $ 997,500
============ ============
</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 the 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. PREMIUM FINANCING NOTES RECEIVABLE
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 financing notes receivable.
3. NOTES PAYABLE - BANK
The Company maintains an $18.0 million revolving credit facility with a
bank, of which $15.2 million was outstanding as of June 30, 1996. The
credit line bears interest at the bank's libor rate which approximated
8.00% at June 30, 1996. Interest is payable on a monthly basis.
4. INVESTMENT IN MUTUAL INSURANCE COMPANY
In the second quarter of 1996, the Company purchased an additional
$470,000 of Home Mutual surplus notes. The Company has not received and
does not accrue interest income on these notes.
5. 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
7
<PAGE>
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 was
being amortized straight line over a five year period.
During the second quarter of 1996, the Company reviewed the excess of
fair value of acquired net assets over cost, after considering the
effects of increased provisions for net loss and LAE reserves recorded
during the quarter. As a result of this review, the Company reduced the
amortization period of the excess from five years to three years and
accelerated the related amortization during the quarter ended June 30,
1996, recognizing a benefit of $1.5 million or $0.26 per share, net of
taxes. The remaining unamortized balance of the excess will be ratably
amortized through December 31, 1997.
The following unaudited pro forma information reports 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 income and net income
per share for the six months ending June 30, 1995 on a pro forma basis
would have been $34.4 million, $3.8 million and $0.68, respectively.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
Three months ended June 30, 1996 compared to three months ended June 30, 1995.
During the second quarter, the Company undertook a detailed assessment of its
loss reserve assumptions supporting ultimate loss ratios in light of adverse
development occurring in 1996 on its auto liability lines of business.
Management performed the reserve analysis in conjunction with the stated desire
of the Board of Directors to strengthen loss and loss adjustment expense ("LAE")
reserves given the continuing adverse loss reserve development, severe winter
storm losses in 1996, rapid growth in the Company's premium volume and
continuing price competition in the Company's commercial auto lines. This review
was conducted with the assistance of the Company's external actuaries and newly
hired internal actuary with the express goal of increasing the level of
conservatism in the Company's loss and LAE reserve estimates in light of these
factors. Expected loss ratios for new business have been similarly adjusted to
reflect current reserving trends.
As a result of this review, during the second quarter of 1996, the Company
increased its insurance loss and LAE reserves by $7.5 million or $1.32 per
share, after taxes. In addition, the Company increased its estimates of direct
and ceded losses, recognizing a decrease in recoveries on reinsurance premiums
in the amount of $610,000 or $0.11 per share, after taxes. After the effects of
the increase in the loss and LAE reserves and the reduction in estimated
recoveries on reinsurance premium reserves, the GAAP loss ratio was 121%.
The Company also reviewed the excess of fair value of acquired net assets over
cost, related to the 1995 acquisition of Merchant Bakers (the "excess"), in
light of the increased provision for net loss and LAE reserves. As a result of
this review, the Company reduced the amortization period of the excess from five
years to three years and accelerated the related amortization during the quarter
ended June 30, 1996, recognizing a benefit of $1.5 million or $0.26 per share,
net of taxes. The remaining unamortized balance of the excess will be ratably
amortized through December 31, 1997.
9
<PAGE>
The Company has received letters of intent to buy $10,000,000 of Cumulative
Preferred Stock and Warrants, in the amount of $5,000,000 to each by Swiss
Reinsurance America Corporation ("Swiss Re") and Reliance Insurance Company
("Reliance"). The preferred stock will carry a dividend rate of 7.5% and will
have warrants attached entitling each of Swiss Re and Reliance to purchase
670,000 shares of the Company's common stock at an exercise price of $9.50,
which represents a 33% premium over the most recent market price for the
Company's common stock. The sale is subject to negotiation and execution of
binding agreements. In addition, Swiss Re will acquire the discretionary right
to purchase an additional $5,000,000 Cumulative Preferred Stock and Warrants
within six months of the initial closing and will be provided with
representation on Home State's Board of Directors.
The Company also expects to seek to complete the placement of an additional
$5,000,000 of Cumulative Preferred Stock to bring the total of the offering to
$20,000,000. Proceeds of the offerings will be used primarily to increase the
capital and surplus of the Company's insurance subsidiaries.
The winter storms of 1995-96 produced one of the worst 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 caused more than $2.5 billion of industry-wide losses
and resulted in increased physical damage and liability claims which impacted
the Company's net income and earnings per share by an estimated $1.5 million and
$0.27, respectively in the first quarter of 1996 and $660,000 or $0.12,
respectively in the second quarter of 1996.
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 results. Home Mutual, which writes primarily personal
10
<PAGE>
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 Company purchased an additional $470,000 surplus note in June,
1996. The geographic concentration of Home Mutual's business in areas most
heavily affected by the storms, 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 $29.6 million in the second
quarter of 1995 to $37.8 million in the comparable period of 1996. The Company's
net earned premiums increased 74% from $14.7 million in the second quarter of
1995 to $25.6 million in the comparable period of 1996. The increase in net
earned premiums resulted from increased writings as well as the pooling of Home
Mutual's underwriting results.
Recoveries on reinsurance premiums decreased from $1.2 million in the second
quarter of 1995 to $434,000 in the comparable period of 1996, primarily as a
result of the $925,000 adjustment taken by the Company during the quarter in
conjunction with the loss and LAE reserve adjustment discussed previously.
Net investment income increased from $881,000 in the second quarter of 1995 to
$1.1 million in the comparable period of 1996. The increase in net investment
income was primarily a result of an increase in invested assets. Cash and
invested assets were $99.2 million as of June 30, 1996 compared to $66.2 million
as of June 30, 1995.
The Company had $68,000 of realized gains from the sale of securities in the
second 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 fixed maturity investments.
Income from the Company's financial services subsidiaries, consisting primarily
of reinsurance brokerage fees, financing revenue and management fees increased
from $813,000 in the second quarter of 1995 to $1.1 million in the comparable
period of 1996. The financial services group is comprised of Aspen
Intermediaries, Inc. ("Aspen"), which provides reinsurance brokerages services;
Tower Hill, Inc. ("Tower Hill"), which provides premium finance services; and
HSIM L.L.C. ("HSIM") which provides certain administrative services to the
Company. Aspen's reinsurance brokerages fees increased to $545,000 in the second
quarter of 1996 from $393,000 in the comparable period of 1995. Tower Hill
earned $549,000 in financing income in the second quarter of 1996 compared to
$193,000 in the second quarter of 1995. HSIM earned $225,000 in management fees
from Home Mutual in the second quarter of 1995 compared to no such fees in the
second quarter of 1996.
11
<PAGE>
Other income or expense, net, decreased from income of $116,000 in the second
quarter of 1995 (and consisted primarily of book rollover fees) to expenses of
$45,000 in the comparable period of 1996 (consisting primarily of premium
receivable write-offs).
Insurance losses and LAE increased from $12.1 million in the second quarter of
1995 to $31.4 million in the comparable period of 1996, as a result of the
aforementioned $11.3 million reserve adjustment ($7.5 million, net of taxes), in
addition to the increase in volume and risks assumed under premiums in force.
Consequently, the GAAP loss ratio increased to 121% in the second quarter of
1996 compared to 76% in the second quarter of 1995.
The Company's GAAP expense ratio increased to 24% in the second quarter of 1996
from 23% in the first quarter of 1996 and 21% in the comparable period of 1995.
The Company reduced its ceding commission rates under its new reinsurance
agreements effective for 1996 which has the effect of increasing net commission
expenses. Additionally, the Company entered into a service agreement to sell its
assigned risk business at Home Mutual which has resulted in a shift of expenses
from losses to underwriting expense. The associated expense for servicing this
business is now being reflected in the statement of operations as a result of
the pooling agreement entered into in 1996 between Home Mutual and Merchant
Bakers.
12
<PAGE>
Interest expense increased to $698,000 in the second quarter of 1996 from
$512,000 in the comparable period of 1995 due to the interest expense related to
the bank credit facilities. During the second quarter of 1996, the Company drew
down $9.3 million to fund its increased premium financing operations. These
lines of credit carried an average interest rate of approximately 8% during the
quarter.
Tax expense decreased from $537,000 in the second quarter of 1995 to a tax
benefit of $4.2 million in the comparable period of 1996 due primarily to the
increase in the loss and LAE reserves. Accordingly, the Company's effective tax
rate decreased from 30.0% in the second quarter of 1995 to a 44.7% tax benefit
rate in the comparable period of 1996.
Net income decreased from $1.2 million in the second quarter of 1995 to a net
loss of $5.1 million in the comparable period of 1996 and the Company's GAAP
combined ratio increased from 97% in the second quarter of 1995 to 145% in the
comparable period of 1996 as a result of the factors noted above.
Six months ended June 30, 1996 compared to six months ended June 30, 1995.
Gross premiums written by the Company increased from $47.1 million in the first
six months of 1995 to $99.8 million in the comparable period of 1996. The
Company's net earned premiums increased 109% from $23.4 million in the six
months ended June 30, 1995 to $49.0 million in the comparable period of 1996.
The increase in net earned premiums resulted from increased premium writings and
the inclusion of Merchant Bakers for the full six months of 1996 and the Home
Mutual business assumed under the 1996 pooling arrangement.
Net investment income increased from $1.6 million in the first six months of
1995 to $2.1 million in the comparable period of 1996. The increase in net
investment income was primarily a result of an increase in invested assets and
the inclusion of Merchant Bakers for the full six months of 1996.
13
<PAGE>
The Company had $163,000 of realized gains from the sale of securities in the
first six months of 1995 as compared to $4,000 of realized losses in the
comparable period of 1996. The realized gains in 1995 were derived primarily
from the sale of U.S. Treasury Note investments.
Recoveries on reinsurance premiums increased from $1.8 million in the first six
months of 1995 to $2.1 million in the comparable period of 1996. This increase
is a direct result of the inclusion of Merchant Bakers for the full six months
of 1996 and an increase in ceded earned premium volume offset by increased loss
reserve development on prior year risks ceded to reinsurers and the adjustment
to loss and LAE reserves previously discussed.
Income of the financial services subsidiaries increased from $1.5 million in the
first six months of 1995 to $2.0 million in the comparable period of 1996. This
increase is primarily attributable to the expansion of the Company's premium
financing operations and increased ceded premiums subject to brokerage fees.
Aspen earned reinsurance brokerage fees of $749,000 in the first six months of
1995 as compared to $1.2 million in the comparable period of 1996. HSIM earned
$450,000 in management fees from Home Mutual in the first six months of 1995 as
compared to zero in the comparable period of 1996 and Tower Hill earned $193,000
in financing income in the first six months of 1995 as compared to $748,000 for
the first six months of 1996.
Other income, net, decreased from $255,000 in the first six months of 1995 to
$185,000 in the comparable period of 1996. In 1995, other income consisted
primarily of book rollover fees. In 1996, other income consists primarily of
finance and service charges earned, offset by premium receivable write-offs.
Insurance losses and loss adjustment expenses increased from $18.8 million in
the first six months of 1995 to $51.9 million in the comparable period of 1996,
primarily as a result of an increase in volume and risks assumed under premiums
in force, the inclusion of Merchant Bakers and Home Mutual pooled results for
the full six months of 1996 and the aforementioned reserve adjustment. The GAAP
loss ratio increased to 101% in the first six months of 1996 compared to 75% in
the comparable period of 1995.
14
<PAGE>
The GAAP expense ratio increased to 24% in the first six months of 1996 from 22%
in the comparable period of 1995. The Company reduced its ceding commission
rates under its new reinsurance agreements effective for 1996 which has the
effect of increasing net commission expenses. Additionally, the Company entered
into a service agreement to sell its assigned risk business at Home Mutual which
has resulted in a shift of expenses from losses to underwriting expense. The
associated expense for servicing this business is now being reflected in the
statement of operations as a result of the pooling agreement entered into in
1996 between Home Mutual and Merchant Bakers.
Interest expense amounted to $1.3 million in the first six months of 1996 as
compared to $1.0 million for the first six months of 1995 as a result of the
increased use of the Company's and Tower Hill's bank credit facilities to
support the growth of the premium financing business. During the first six
months of 1996, the Company drew down $13.2 million to fund such growth.
Tax expense decreased from $937,000 in the first six months of 1995 to a tax
benefit of $4.0 million in the comparable period of 1996 due primarily to the
increase in the loss and loss adjustment expense reserve. The Company's
effective tax rate decreased from 29.1% in the first six months of 1995 to a
46.5% tax benefit rate in the comparable period of 1996.
Net income was $2.3 million in the first six months of 1995 compared to a net
loss of $4.6 million in the first six months of 1996, and the Company's GAAP
combined ratio increased from 97% in the first six months of 1995 to 125% in the
comparable period of 1996 as a result of the factors noted above.
15
<PAGE>
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 1994, 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 June 30, 1996, $5.0 million and $10.2 million had been drawn
down by the Company and Tower Hill, respectively.
For the six months ended June 30, 1996, cash flow from operations decreased to
$9.8 million as compared to $10.5 million for the six months ended June 30,
1995.
The Company believes that cash flow, remaining Private Placement proceeds and
its corporate and premium finance lines of credit with banks 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 are
not expected to impair the ability of the Company to meet its cash obligations.
The Company has received letters of intent, to buy $10,000,000 of Cumulative
Preferred Stock and Warrants ("the Preferred"), in the amount of $5,000,000 by
each of Swiss Reinsurance America Corporation ("Swiss Re") and Reliance
Insurance Company ("Reliance"). The Preferred will carry a dividend rate of 7.5%
and will have warrants attached entitling each of Swiss Re and Reliance to
purchase 670,000 shares of the Company's common stock at an exercise price of
$9.50, which represents a 33% premium over the most recent market price for the
Company's common stock. The sale is subject to negotiation and execution of
binding agreements. In addition, Swiss Re will acquire the discretionary right
to purchase an additional $5,000,000 Cumulative Preferred Stock and Warrants
within six months of the initial closing and will be provided with
representation on Home State's Board of Directors. The Company also expects to
seek to complete the placement of an additional $5,000,000 of Cumulative
Preferred Stock to bring the total of the offering to $20,000,000. Proceeds of
the offerings will be used primarily to increase the capital and surplus of the
Company's insurance subsidiaries.
16
<PAGE>
Purchases of investment securities were $13.1 million for the six months ended
June 30, 1996. These purchases were primarily funded by operations and by
proceeds from the maturity of investments of $7.5 million. For the comparable
period in 1995, $15.7 million was used for the purchase of investment
securities, which was primarily funded by proceeds from the sale/maturity of
investments of $12.4 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.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of stockholders of the Company was held on June 12,
1996 and, following the adjournment thereof, June 14, 1996. At the
meeting, Robert Abidor, Michael H. Monier and Harold C. Stowe were
elected as Class III Directors, receiving 5,234,171, 5,234,371 and
5,234,371 votes, respectively, with authority to vote withheld on
85,618, 85,418 and 85,418 shares, respectively. The stockholders also
ratified the appointment of Coopers & Lybrand, L.L.P., as auditors for
the fiscal year ending December 31, 1996 by a vote of 5,313,914 for,
2,775 against and 3,100 abstaining.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Agreement between Home State Holdings, Inc. and Robert Abidor
dated June 13, 1996.
27 Financial Data Schedule
(b) Form 8-K dated June 13, 1996 was filed during the quarter ended June
30, 1996 reporting on the resignation of Robert Abidor as President of
the Company (Item 5).
CAUTIONARY STATEMENT
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.
18
<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: August 16, 1996 By: /s/ MARK S. VAUGHN
--------------------------- ------------------------
Mark S. Vaughn
Acting President and
Chief Executive Officer
Date: August 16, 1996 By: /s/ ERIC A. REEHL
--------------------------- -----------------------
Eric A. Reehl
Acting Executive Vice President
and Chief Financial Officer
Date: August 16, 1996 By: /s/ KENNETH E. EDWARDS
--------------------------- ----------------------------
Kenneth E. Edwards
Senior Vice President - Finance
EXHIBIT 10.1
AGREEMENT
Agreement made this 13th day of June, 1996 by and between Home State
Holdings, Inc., a Delaware Corporation with offices at Three South Revmont
Drive, Shrewsbury, New Jersey 07702 (the "Company") and Robert Abidor, an
individual residing at 55 Shrewsbury Drive, Rumson, New Jersey 07760 ("Abidor").
W I T N E S S E T H
WHEREAS, the Company and Abidor are parties to that certain
employment agreement entered into the 1st day of June 1995 (the "Employment
Agreement"); and
WHEREAS, Abidor is the President and Chief Executive Officer and
a director of the Company and of some or all of the entities wholly or majority
owned by the Company (the "Subsidiaries") or managed by the Company or its
Subsidiaries (the "Affiliates"); and
WHEREAS, the Company and Abidor desire to shorten the duration
of the Employment Agreement.
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company and Abidor
hereby agree as follows:
1. Section 1 of the Employment Agreement is amended in its
entirety to read as follows:
(a) The duties of Abidor, effective immediately, and until
December 31, 1996 will be reduced as may be necessary and appropriate to
facilitate the recuperation by Abidor from his recent surgery and the nature of
his duties will be to assist the Company as he may be reasonably requested in
the transition of management of the Company to a different Chief Executive
Officer. In this regard, Abidor will not be required to work full time and may
perform his duties, at his discretion, insofar as practicable, from his
residence or other locations outside the Company's offices, at his election.
Abidor will make himself reasonably available to provide historical information
about the operations of the Company, to advise as requested on future operations
and plans of the Company, and to assist in maintaining the Company relationships
with its reinsurers, insurance agents, financial institutions, stock market
analysis, professionals, employees and otherwise to assist in the ongoing
business of the Company. Effective upon the execution of this Agreement, Abidor
resigns as an officer of the Company and as a director and officer of each of
the Company's Subsidiaries. Abidor shall execute and deliver to the Company and
the subsidiaries such resignation letters and other related documents as the
Company may reasonably request. Failure to comply with such request will be
deemed a material breach of this Agreement.
(b) Effective January 1, 1997 Abidor will become an independent
consultant to the Company and will, upon request of the Company, assist the
Company with historical information concerning the operations of the Company
known to Abidor and otherwise assist the Company in any manner relating to
Abidor's experience with the Company and its customers, service providers,
reinsurers, employees or other relationships; provided, however, the services to
be provided by Abidor will be scheduled in such a manner as not to unreasonably
interfere with such other employment or business interests as Abidor may then
have.
(c) At all times during the term hereof and thereafter, Abidor
will make himself available and assist the Company and its Subsidiaries
(including providing information, appearing as a witness, assisting in
preparation of witnesses, or otherwise assisting) with respect to any claims
made against or on behalf of the Company or its Subsidiaries or Affiliates or
litigation or regulatory inquiries or proceedings to which the Company or its
Subsidiaries or Affiliates may become a party to the extent any such claims,
litigation or proceeding is based upon matters arising during Abidor's
employment by the Company and assistance of Abidor is deemed by the Company to
be necessary or appropriate with respect to the handling of such matter.
(d) Abidor will not, during the term of this Agreement, have or
hold himself out as having the power or authority to bind the Company or its
Subsidiaries in any manner except as he may be specifically authorized in
writing by the Company.
(e) Commencing the date hereof, it shall be within the Company's
discretion as to whether or not to provide Abidor with the use of an office at
the Company's offices and as to his access or lack of access to the Company's
e-mail and other communication systems.
2. Section 2 of the Employment Agreement is amended to provide
that the term of the Employment Agreement shall expire on the third anniversary
of the date of this Agreement.
3. Section 3 of the Employment Agreement is amended in its
entirety to provide that as compensation for the services to be provided
hereunder, the Company shall pay to Abidor from the date of this Agreement until
2
<PAGE>
the first anniversary of this Agreement will be at the annual rate of $300,000;
from the first anniversary date of this Agreement until the second anniversary
of this Agreement at the annual rate of $200,000; and from the second
anniversary date of this Agreement until the third anniversary of this Agreement
at the annual rate of $100,000. Such amounts shall be payable during the term
hereof in semi-monthly or weekly installments in conformity with the Company's
regular payroll dates, with applicable federal, state, and local withholding
taxes through December 31, 1996 and reporting of income on Form 1099 commencing
January 1, 1997 at which date Abidor will no longer be an employee of the
Company and will serve only in the capacity of an independent consultant. This
compensation will be in full satisfaction of any obligation of the Company or
any subsidiary to pay any compensation top Abidor under the Employment
Agreement, whether by reason of the shortening of the term of the Employment
Agreement or otherwise.
4. The fringe benefits provided to Abidor pursuant to Section 4
of the Employment Agreement will be provided until December 31, 1996. The
automobile presently provided to Abidor by the Company will continue to be
provided until December 31, 1996. Thereafter, as a consultant, Abidor will not
be entitled to such fringe benefits or automobile. Upon termination of such
fringe benefits, Abidor shall be given the opportunity (if and for so long as
permitted by the insurance policies then in effect) to continue his group health
insurance coverage under the Consolidated Omnibus Budget Reconciliation Act
("COBRA") and to transfer the ownership of any term life insurance insuring his
life and owned by the Company or any other insurance policies on or for Abidor
to himself (or his designee) upon such person assuming all obligations
thereunder.
5. Since Abidor will not be working full time, the vacation
provisions of Section 5 of the Employment Agreement will no longer apply. Abidor
waives any accrued but unpaid vacation pay presently outstanding.
6. Abidor will be reimbursed for reasonable expenses as provided
in Section 6 of the Employment Agreement with the further proviso that specific
expenses, or specific policy with respect to the incurring of expenses shall
have been agreed to between Abidor and the President of the Company. There are
no unreimbursed business expenses of Abidor at the date hereof.
7. The provisions of Section 7 of the Employment Agreement
relating to confidential information will remain in force relating to
information obtained by Abidor in his capacity as President and Chief Executive
Officer as well as information obtained by him in connection with his continued
employment hereunder. The Obligation to return proprietary information and
copies thereof will commence on the date of this Agreement to the extent, if
any, requested by the Company from time to time.
3
<PAGE>
8. The provisions of Section 8 of the Employment Agreement
relating to non-competition shall continue in force until the third anniversary
of the date of this Agreement.
9. The provisions of Section 9 of the Employment Agreement
relating to Proprietary Intellectual Property will remain in effect.
10. The provisions of Section 10 of the Employment Agreement
relating to Enforcement will remain in effect.
11. The provisions of Section 11 of the Employment Agreement
relating to Survival will remain in effect.
12. The provisions of Section 12 of the Employment Agreement
relating to Termination are deleted in their entirety. The Company will have the
right to terminate this Agreement and the compensation payable to Abidor
hereunder in the event that Abidor breaches any material term of this Agreement
and fails to cure within 30 days after written notice, provided, however, the
right to cure shall be available only once for any particular type of conduct.
13. The provisions of Section 13 of the Employment Agreement are
replaced in their entirety to provide that the payments called for under this
Agreement will continue to be made to Abidor in the event of his death or in the
event he is unable to perform the services herein contemplated by reason of
physical or mental disability. In the event of the voluntary termination by
Abidor of the services to be performed hereunder, the compensation payable to
Abidor will cease.
14. The provisions of Section 14(a) of the Employment Agreement
are not restated at the date hereof. The provisions of Section 14(b) of the
Employment relating to indemnification of Abidor will continue in full force and
effect.
15. The provisions of Section 18 of the Employment Agreement are
amended to change the address for notices to the addresses given at the head of
this Agreement and the address for copies of any notices given to the Company to
Dorsey & Whitney, 250 Park Avenue, New York, New York 10022, Attention: Perez C.
Ehrich and copies of notices to Abidor shall be sent to Norman J. Peer, Wilentz,
Goldman & Spitzer, 90 Woodbridge Center Drive, Box 10, Woodbridge, New Jersey
07095-0958.
16. The remaining provisions of the Employment Agreement remain
in full force and effect and are incorporated into this Agreement as if set
forth at length herein.
4
<PAGE>
17. Abidor will serve as a Director of the Company until
December 31, 1996 but will resign as a Director on that date. Abidor resigns his
position on any committees of the Board of Directors. Abidor may, if he wishes,
resign as a director earlier than December 31, 1996. In order to effectuate the
foregoing provision, Abidor has delivered to the Company his irrevocable
resignation as a director to become effective December 31, 1996. Any attempt by
Abidor to rescind such resignation, unless agreed to by the Company, is a
material breach of this Agreement.
18. The Company and Abidor agree that the announcement to be
made relating to the matters set forth herein will be substantially as set forth
in the Press Release annexed hereto. A letter from Abidor to employees in the
form annexed hereto to accompany the circulation of the Press Release to
employees of the Company will be circulated to such employees by the Company.
The Company and Abidor each agree not to disparage the other by making any
public statement or any filing required by law or by making any disclosure
necessary or appropriate under federal or state securities laws or under other
applicable laws, rules or regulations. Abidor will not communicate with
employees of the Company in a manner which disrupts the relations between the
Company and such employee nor will Abidor disparage any officer, director or
employee of the Company or its Subsidiaries as relates to such person's
employment by the Company or its Subsidiaries. Should any potential or future
employer contact the Company for a reference, the Company may, pursuant to its
established procedures, limit its response to verify only Abidor's job title and
dates of employment.
19. Abidor, on his own behalf and on behalf of his heirs and
legal representatives releases the Company and each of its Subsidiaries, and
their respective officers, directors, employees and agents from and in respect
of any causes of action, suits, claims demands, charges, judgments, damages,
levies and executions of whatsoever kind, nature and/or description, whether
legal or equitable, whether known or unknown, liquidated or contingent, direct
or indirect, which he may have from the beginning of time to the date of this
Agreement arising out of or related to his relationship with the Company as an
employee, Officer, Director or shareholder excepting only his rights under the
terms and conditions of this Agreement as herein provided.
20. The Company hereby releases and as controlling shareholder
of each of its Subsidiaries will cause each subsidiary to release, Abidor from
and in respect of any causes of action, suits, claims, demands, charges,
judgments, damages, levies and executions of whatsoever kind, nature and/or
description, whether legal or equitable, whether known or unknown, liquidated or
contingent, direct or indirect, which it may have from the beginning of time to
the date of this Agreement arising out of or related to Abidor's actions as
President and Chief Abidor Officer of the Company and any of its Subsidiaries
excepting only its rights under the terms and conditions of this Agreement and
any matter as to which Abidor would not be entitled to indemnification under
Section 14 hereof.
5
<PAGE>
21. Abidor acknowledges and agrees that he fully understands
this Agreement and has signed it voluntarily after consultation with counsel.
22. Abidor may keep the computer provided to him by the Company
identified as Gateway PS-133 family PC package.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed on the date first above written.
HOME STATE HOLDINGS, INC.
By: /s/
---------------------------------
Mark Vaughn
Its: Acting President and CEO
/s/
---------------------------------
Robert Abidor
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 10,749,971
<DEBT-CARRYING-VALUE> 67,776,433
<DEBT-MARKET-VALUE> 67,950,686
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<TOTAL-INVEST> 84,710,155
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<RECOVER-REINSURE> 72,066,088
<DEFERRED-ACQUISITION> 10,029,287
<TOTAL-ASSETS> 310,026,975
<POLICY-LOSSES> 128,412,636
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