The Company's corporate offices are located at 400 Sawgrass Corporate Parkway, Sunrise, Florida. The Company leases approximately 24,980 square feet in a two-story office building for a ten year term, expiring December 31, 2005. The Company currently pays rent of approximately $33,000 per month, including sales tax and maintenance charges. The Company also leases office space for regional sales and administrative offices in Northern California and Texas under leases with remaining terms of one and three years, respectively.
The following table presents certain relationships deemed to be pertinent indicators of the Company's results of operations:
Direct expenses of the E&O operations increased from $513,000 in 1994 to $648,000 in 1995. Under the current E&O program, the Company has agreed to pay a portion of the commission it receives on the E&O premiums collected to the Affiliates generating the premium volume. There was no such arrangement under previous E&O programs, and, as 1994 was a transition year, the 1995 increase was anticipated. As the premium volume under the new program grows, the commission paid to the Affiliates will grow proportionately.
HGC was liquidated in 1995, and there were no activities of HGC to include in the 1995 financial statements. HGC did not generate any significant revenue and incurred an operating loss of $761,000 in 1994, exclusive of the charges recorded by the parent company in writing off the net assets of this subsidiary.
In early September 1994, the Company underwent an organizational restructuring, reducing its total work-force by approximately 20%. This restructuring resulted in annual cost savings of approximately $1,700,000 in 1995, through reductions in salary, benefits and payroll tax expenses, excluding the effects of any other personnel or staffing changes. The 1994 one time charge for severance pay and related benefits, totaling $1,063,000 is included in "Unusual items" in the accompanying consolidated statements of income. Approximately $400,000 of this total relates to an agreement to terminate the employment contract between the Company and its former Chairman of the Board of Directors.
In December 1995, a judgment was awarded against a wholly owned subsidiary of the Company in the amount of $5,156,022. This amount was reported in the other expense line item in the accompanying consolidated statements of income.
The Company's effective tax rate in 1995 was a benefit of 37%, as compared to a benefit of 19.2% on income from continuing operations in 1994.
As a result of the losses generated by the current year Acceleration judgement, the 1994 work-force reduction and termination of its UK operations, combined with the prior year losses generated by the Company's discontinued reinsurance operations, the Company has recognized significant income tax benefits in 1993 and 1994. A portion of the Company's 1993 and 1994 pre-tax losses was carried back for income tax purposes, to offset taxable income earned in the prior three years, generating tax refunds for the Company. The remaining pre-tax losses give rise to significant deferred tax benefits, which will be recognized in future years, as the temporary book to tax differences which create the deferred tax benefits become deductible for tax purposes. The total deferred tax benefit which is expected to be realized in future years approximates $8.1 million at December 31, 1995. Based upon management's estimates of future taxable income and of the positive and negative evidence regarding the likelihood of ultimate recognition of this benefit, it has been determined that no valuation allowance is necessary. This determination was based on the Company's taxable earnings history, exclusive of non-recurring charges, and the period anticipated for full recognition, assuming the Company maintains its current level of taxable income, exclusive of non-recurring charges.
has been unusually mild, resulting in positive experience in the second half of the year. Also impacting 1994 claims experience, in late 1993, the Company introduced in several states, a warranty with a $35 deductible as opposed to the standard $100 deductible, which has contributed somewhat to the increased claims frequency and decreased average severity. Such trends are consistent with industry experience.
Fourth quarter 1994 and preliminary 1995 results thus far reflect some leveling of current warranty production. In 1995, it will be more difficult for the Company to continue to exceed the 1994 record production levels. At this time, management anticipates that production in 1995 will approximate or be less than production levels seen in the comparable periods of the preceding year, as the membership declines begin to more heavily impact warranty production, primarily in the COR.
Membership related revenue of $11,339,000 in 1994 was 32% lower than 1993 revenue of $16,648,000, which is primarily related to the changing mix of the membership base, as a large portion of the Company's membership no longer participates in the Company's E&O program and is exempted from paying the associated marketing/placement fees. Further impacting the membership results, is the 20% decline in the Company's membership base from the prior year level. These factors have caused continuing decreases in related revenue and earnings in 1994, and reflect the continuing effects of the transition to the Company's current E&O program. As a result of this transition and the related increased competitive pressures within the E&O market, the Company has been unable to retain some of its Members as participants in its current E&O program. Additionally, attraction of new full members is more difficult, due to premium quotes which are not competitive for certain brokers and also due to declinations by the Company's primary insurance carrier of certain other brokers.
Throughout 1994, the Company has attempted to attract new members and retain existing members who have either been declined coverage by the new insurance carrier or who have obtained their E&O coverage through another entity, as participants in the Company's warranty and Consumer Reach programs. Originally designed to reduce the effects of the loss in transaction and membership related fees, this strategy has been only marginally effective in regaining that lost revenue, as those members who are retained as participants in the Company's other programs are generally not required to pay any significant membership fees.
As a result of the transition to the CNA/Schinnerer E&O program, which is based on anticipated as opposed to actual closings for participants electing an annually funded program, the number of closings by Members reported to the Company is no longer totally indicative of the Company's membership strength or results of operations. Further, Members who do not participate in the Company's E&O program do not report closing information to the Company. Based on the history of its existing Members, and the number of closings reported by transactional participants, the Company believes that its current membership participates in approximately 30% of all transactions nationally, consistent with the 1993 experience.
HGC did not generate any significant revenue and incurred an operating loss of $761,000 in 1994, exclusive of the charges recorded by the parent company in writing off the net assets of the subsidiary, as described below. HGC incurred a loss of $869,000 in the year ended December 31, 1993.
As a result of the losses generated by the 1994 work-force reduction and the termination of its UK operations, combined with the prior year losses generated by the Company's discontinued reinsurance operations, the Company has recognized significant income tax benefits in 1993 and 1994. A portion of the Company's 1993 and 1994 pre-tax losses has been carried back for income tax purposes, to offset taxable income earned in the prior three years, generating tax refunds for the Company. The remaining pre-tax losses give rise to significant deferred tax benefits, which will be recognized in future years, as the temporary book to tax differences which create the deferred tax benefits become deductible for tax purposes. The total deferred tax benefit which is expected to be realized in future years approximates $6.5 million at December 31, 1994. Based upon management's estimates of future taxable income and of the positive and negative evidence regarding the likelihood of ultimate recognition of this benefit, it has been determined that no valuation allowance is necessary. This determination was based on the Company's taxable earnings history, exclusive of non-recurring charges, and the period anticipated for full recognition, assuming the Company maintains its current level of taxable income, exclusive of non-recurring charges.
NATURE CARRYING VALUE ------ -------------- Cash and investments $ 25,700,000 Assumed reinsurance premiums receivable 6,000,000 Reinsurance recoverable 5,000,000 Other receivables 500,000 Accounts payable and accrued expenses (1,000,000) Reinsurance loss and loss adjustment reserve (29,100,000) ------------ Net assets $ 7,100,000 ============
In connection with the transfer of POMG's net assets to CNA, the Company guaranteed the validity of a $5,000,000 reinsurance recoverable, one of the POMG assets transferred to CNA. This asset represents amounts recoverable from a third party insurance company under a reinsurance treaty purchased by POMG to protect it from losses in excess of a predetermined amount. The Company has posted approximately $1,250,000 from its refundable income taxes in November 1994. The balance is due in three instalments of $250,000, $250,000 and $1,250,000, which must be posted in April, June and July of 1995, respectively. The Company has agreed, if necessary, to pay an additional $2,000,000 related to the guarantee out of future commissions. The Company has not recorded a provision for this guarantee, as management, based on the opinion of its special insurance counsel, has determined that the $5,000,000 reinsurance contract is valid.
While the acceptance of any new program is uncertain, management believes that the strategic alliance with CNA and Schinnerer, whose E&O policies provide the most comprehensive coverage available, will ultimately enable the Company to maintain its position in the market, and consequently will benefit the Company's core warranty and membership operations.
Most of the Company's revenue is generated at the time of residential resale closings. These closings generally follow a seasonal pattern. First quarter volume is usually the lowest, third quarter the highest, and second and fourth quarters are about equal. Claims under home warranty contracts are generally higher in the summer and winter months, while general and administrative expenses are usually incurred evenly from quarter to quarter. As a result, the Company's operating results in the second half of a given year are generally better than the results in the first half.
The Company generally receives payment for products and services before disbursing funds for related direct expenses. Fees from Members and from sales of home warranty contracts are received before related marketing commissions are paid out and before claims are made under home warranty contracts. Consequently, cash flow has been adequate to meet current obligations. As a result of decreases in home warranty production growth in 1995 as compared to 1994, cash collected on warranty contracts in 1995 was approximately $2,600,000 below 1994.
In 1995, net cash used in operating activities totaled $667,000, as compared to cash provided by operations of $3,046,000 in 1994. This increased usage of cash is primarily due to the decline in warranty production in 1995 from the comparable 1994 levels. Also impacting operating cash flows are various payments for claims payable, Affiliate and Member commissions and E&O premium remittances. In 1995, the Company used $2,207,000 in investing activities, as compared to $3,502,000 in 1994, primarily due to increased expenditures for property and equipment, offset by decreases in trading activity in the Company's portfolio of securities available for sale. The increases in property and equipment expenditures relate to investments in the Company's processing environment technology, and also to leasehold improvements made in the Company's new office building. Net cash used in financing activities totaled $2,005,000 in 1995, as compared to $1,038,000 in the comparable 1994 period, due to the additional collateral placed on deposit with CNA, and to increasing debt repayments, primarily on the CNA obligation.
In December 1991, Acceleration National Insurance Companies ("Acceleration"), the insurer of the Company's E&O program through April 1991, brought suit against the Company and HMS. On December 16, 1995, a jury verdict in the amount of $5,156,022 was rendered in favor of the Plaintiff and against HMS, in the following matter: ACCELERATION NATIONAL INSURANCE COMPANY, PLAINTIFF, VS. HOMEOWNERS MARKETING SERVICES, INC., ET AL., DEFENDANTS, in the Court of Common Pleas of Franklin County, Ohio. HMS has filed an appeal of the judgment. Post judgment proceedings have been initiated in Florida and elsewhere, including discovery in aid of execution. Although such actions were initially stayed in Florida, on March 13, 1996, the Circuit Court for Broward County, Florida, dismissed an action by HMS which contested the domestication of the judgment in Florida, and no stay is presently in effect. In the event the judgment creditor proceeds to execute on its judgment, such actions would have a material adverse effect on the business of HMS, and could have a material adverse effect on the liquidity of the Company. The Company's efforts to contest the domestication of the judgment in Florida, appeal the judgment and otherwise prevent the judgment creditor from executing on its judgment have resulted in substantial fees to professionals and other advisors, which have further negatively impacted the Company's liquidity.
Seventeen of the states in which the Company's subsidiaries operate regulate the home warranty business. Certain of these states require that reserves be maintained to cover future repairs for the remaining terms of warranty contracts (generally one year). As of December 31, 1995, approximately $9,900,000 of cash and investments are needed to maintain the regulated subsidiaries' required minimum reserve and surplus levels. Of this amount, approximately $1,200,000 of cash and investments are held by the regulated states to assure the Company's fulfillment of its obligations to contract holders. Increases in warranty production, as seen thus far in the first quarter of 1996, result in increases in the Company's required reserve and surplus levels in the regulated states. In addition, state regulators generally seek reserve balances in excess of the minimum standards. In certain states, withdrawal of any reserves in excess of statutory minimums requires approval from the regulatory authorities. The Company has been advised by certain authorities that such approval will not be granted. Accordingly, the Company maintained reserves of approximately $14,000,000 as of December 31, 1995. The Company is currently in compliance with all applicable surplus requirements.
The Company's 1994 work-force reduction and the closing of the UK operation, both of which took place in September 1994, have had positive impacts on the Company's cash position.
The Company is continuing its efforts to upgrade its current computer and processing environments over the next two years, in an attempt to increase operational efficiency, improve management information, and allow for future growth in the Company's business. This plan is currently expected to have an incremental cost of approximately $1,500,000 in excess of the cost of maintaining, servicing and improving the existing system, over the life of the project. Management expects that sufficient funds will be available to cover the cost of the upgrade. If such funds are not available, this project will be deferred.
Consolidated Statements of Operations - Years Ended December 31, 1995, 1994 and 1993 26
We have audited the accompanying consolidated balance sheets of Homeowners Group, Inc. and its subsidiaries (the "Company") as of December 31, 1995 and 1994 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. The Company - --------------------------------------------------------------------------------
Although the Company's home warranty contracts are generally not considered to be insurance products, the Company is subject to insurance-type regulations in many of the states in which the home warranty contracts are sold. Certain of these states require that reserves be maintained to cover future repairs for the remaining terms of the warranty contracts (generally one year). As of December 31, 1995, approximately $9,900,000 of cash and securities were needed to maintain the regulated subsidiaries' minimum reserve and surplus levels. Increases in warranty production, as seen thus far in the first quarter of 1996, result in increases in the Company's required reserve and surplus levels in the regulated states. In addition, state regulators generally seek reserve balances in excess of the minimum standards. In certain states, withdrawal of any reserves in excess of statutory minimums requires approval from the regulatory authorities. The Company has been advised by certain authorities that such approval will not be granted. Accordingly, the Company maintained reserves of approximately $14,000,000 as of December 31, 1995. The Company is currently in compliance with all applicable surplus requirements.
As warranty production increases, the Company's required reserve and surplus levels increase, which reduces the cash available to the Company to fund its operations. During 1995, the Company's membership and related revenues continued to be negatively impacted by the 1993 change in insurance carriers, both in terms of numbers of new and renewal members, and in the fees generated by the Company's membership. Throughout 1995 and 1994, the Company provided its Affiliates with various discounted membership options to ease the transition, and to maintain competitiveness in the marketplace. As a result of these factors, the Company's cash flow from membership operations has been significantly impacted. However, the Company expects that cash flow generated from warranty and other operations will be sufficient to meet its needs on an ongoing basis. See also Note 2, for discussion of the Company's cash collateral requirements relative to the 1993 transfer of its discontinued reinsurance operations and Note 10 for discussion of other commitments and contingencies impacting cash flow.
In December 1992, the Company formed its own reinsurance subsidiary, POMG Insurance Company, Ltd. ('POMG'), which acquired certain net assets from Meridian Insurance Company, Ltd. ('Meridian'), the previous reinsurer of the Company's E&O program. The acquisition was accounted for as a purchase, and there was no monetary consideration given and no loss recorded on the transaction. Through this transaction, POMG replaced Meridian as the reinsurer of all E&O policies written beginning May 1, 1991. In December 1992, the subsidiary purchased a $5,000,000 aggregate stop loss reinsurance policy to further protect it from the risk of loss in excess of a predetermined amount on the first two E&O policy years.
under the LOC's. Pursuant to the formation of POMG, the $7,000,000 LOC issued in 1991 to Meridian was reissued by POMG to a subsidiary of American International Group, Inc. ('AIG'), the insurer of the Company's E&O program at that time. In December 1992, AIG raised the LOC amount to $16,000,000 based on their periodic evaluation of underwriting performance and premium volume. Concurrent with the agreement reached with Continental Casualty Company ('CNA'), which is discussed further below, the LOC was canceled, and the Company is no longer obligated under any LOC's. As a result, the Company is not subject to any insurance risk in relation to the CNA E&O program.
In the second and third quarters of 1993, the E&O program experienced significant losses. Effective December 1, 1993, CNA replaced POMG as the reinsurer of the E&O policies issued through November 30, 1993 to the Company's Members by certain subsidiaries of AIG. This transaction took place through a novation of previous reinsurance agreements in effect. For policies issued from December 1, 1993 forward, CNA became the insurer, and the Company began marketing CNA policies to its Members through Victor O. Schinnerer and Company, Inc. ('Schinnerer'), CNA's exclusive program and underwriting manager. Pursuant to the agreement with CNA, the Company discontinued POMG's operations. The Company, through its HOMS Insurance Agency, Inc. ('HOMS') subsidiary acts solely in the capacity of an insurance broker. Under the terms of the agreements, the Company receives a fixed percentage of the E&O premiums collected as a commission. The Company pays a portion of these commissions to the Affiliates generating the premium volume. In February 1994, the Company, CNA and AIG entered into definitive agreements, effective as of December 1, 1993, setting forth the terms described above.
The Company is further obligated to pay CNA $5,000,000 (the 'CNA Obligation') over a period estimated to be five years, toward the ultimate settlement of the transferred losses and expenses. CNA is maintaining a separate accounting for the POMG net assets. Additionally, a separate fund, the 'Holdback Fund,' has been established to accumulate the aforementioned $5,000,000 from the Company, additional funds to be contributed by Schinnerer and CNA over the same period, and investment income earned on these funds, to pay claims and expenses related to the reinsured policies in excess of the POMG net assets. If the ultimate reinsured losses and related expenses are less than the transferred net assets of POMG, combined with the assets in the Holdback Fund, CNA will distribute the remaining assets among the Company, Schinnerer and itself according to a predetermined formula. However, management believes that a refund is unlikely.
In connection with the transfer of POMG's net assets to CNA, the Company guaranteed the validity of a $5,000,000 reinsurance recoverable, one of the POMG assets transferred to CNA. This asset represents amounts recoverable from a third party insurance company under the reinsurance treaty purchased by POMG. This guarantee is secured by $3,000,000 cash collateral posted by the Company. This amount is reported as restricted cash in the accompanying consolidated balance sheet. The Company has agreed, if necessary, to pay an additional $2,000,000, related to the guarantee, out of future commissions. The Company has not recorded a provision for this guarantee, based on the opinion of its special insurance counsel, that the cover note relating to the reinsurance contract is a binding agreement, enforceable in accordance with its terms, and the objections voiced by the reinsurer do not support a material basis for it to successfully deny coverage.
Revenue, including investment earnings, of the discontinued operation approximated $16,571,000 through September 30, 1993, the discontinued operations measurement date. Losses incurred by POMG through September 30, 1993 totaled approximately $6,200,000, net of income tax benefits of $3,800,000. Additionally, the transaction resulted in a loss, including a provision for POMG operating losses during the phase out period, of approximately $9,000,000. This loss is comprised of the following:
Property And Equipment -- Property and equipment is carried at cost and depreciated on the straight-line method over their estimated useful lives, which range from three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the improvements.
Discontinued Operations -- The Company reviews the liabilities recorded in association with its 1993 discontinued reinsurance operations annually, and adjusts the balances as necessary. In 1995 and 1994, the Company revised its estimate of the net present value of the CNA obligation, based upon the actual payments remitted, and in 1994, to reflect an estimated
repayment term of five years, as opposed to the original estimated term of three years. This change in estimate resulted in an increase in the discount on the obligation, which will be amortized to interest expense over the life of the obligation. Further, in both years, the Company revised its estimate of expenses incurred relative to the reinsurance portfolio transfer, and recorded an adjustment for the additional balances due. The net effect of these two adjustments had no impact on the Company's consolidated results of operations.
New Accounting Pronouncements -- The Company has not adopted SFAS No. 123, 'Accounting for Stock-Based Compensation,' which established financial accounting and reporting standards for employee stock-based compensation plans, including stock options, stock purchase plans, restricted stock and stock appreciation rights. SFAS No. 123 defines and encourages the use of fair value method of accounting for employee stock-based compensation. The Company has not determined whether it will adopt the method of measuring stock-based employee compensation prescribed in SFAS No. 123 or continue to use the method prescribed in Accounting Principles Board Opinion No. 25, with the disclosures required by SFAS No. 123. SFAS No. 123 is effective for transactions entered into in fiscal years that begin after December 15, 1995.
Reclassifications -- Certain amounts in the accompanying 1995, 1994 and 1993 consolidated financial statements have been reclassified from amounts previously reported to conform to the current presentation.
1995 1994 ---- ---- Office furnishings and equipment $1,497,939 $1,403,682 Leasehold improvements 713,970 367,266 Computer equipment and software 3,985,487 2,333,972 Automobiles 47,533 47,533 Assets held under capital lease 499,032 474,359 ---------- ---------- Total 6,743,961 4,626,812 Accumulated depreciation and amortization (3,162,068) (2,617,647) ---------- ---------- Property & equipment--net $3,581,893 $2,009,165 ---------- ---------- Depreciation and amortization expense on property and equipment for the years ended December 31, 1995, 1994 and 1993 approximated $602,000, $749,000 and $537,000, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of income.
1995 1994 ---- ---- Trading securities, at fair value $9,250,349 $8,244,409 Current securities available for sale 1,811,624 17,506
UNREALIZED UNREALIZED HOLDING GAINS HOLDING LOSSES ------------- -------------- Trading securities $302,791 $22,404 Securities available for sale 87,961 -- -------- -------- Total $390,752 $22,404 -------- -------- Trading securities $ -- $371,509 Securities available for sale 22,931 37,744 -------- -------- Total $ 22,931 $409,253 -------- --------
Gross realized gains from sales of securities available for sale totaled $106,139 for the year ended December 31, 1995. Gross
1995 1994 1993 ---- ---- ---- Domestic ($3,036,656) ($269,582) $6,189,952 Foreign -- (760,957) (870,546) ----------- --------- ---------- Total ($3,036,656) ($1,030,539) $5,319,406
Discontinued Operation: Tax benefit from loss on operation of discontinued reinsurance segment -- -- (3,757,377) Tax benefit from estimated loss on reinsurance portfolio transfer -- -- (5,435,664) ----------- ----------- ----------- Total provision (benefit) for income taxes ($1,128,000) ($198,004) ($7,064,514) ----------- ----------- -----------
The Company historically has provided deferred income taxes primarily on deferred home warranty contract revenues and acquisition costs, which are recognized for tax purposes before recognition in the financial statements. The Company also provides deferred income taxes on deferred marketing fee revenue and expenses under the annually funded E&O programs. The major portion of these benefits reverse within one year. In 1993, the Company also provided deferred income tax benefits on the provision for loss on disposal of its discontinued reinsurance subsidiary. The operating losses incurred by the reinsurance subsidiary prior to its disposal generated a net operating loss carryback for the Company of approximately $2,300,000. The components of the net deferred income tax assets are as follows:
1995 1994 ---- ---- Deferred home warranty revenue $6,414,575 $6,381,809 Deferred home warranty acquisition costs (2,238,425) (2,247,974) Litigation accrual 2,036,628 -- Deferred marketing fee revenue 314,326 424,972 Deferred marketing fee commissions (145,403) (205,344) Miscellaneous (106,157) (176,492) Current portion of provision for loss on disposal of reinsurance subsidiary 493,750 703,810 ---------- ---------- Current portion of deferred income tax asset 6,769,294 4,880,781 Non-current portion of provision for loss on disposal of reinsurance subsidiary 991,855 1,246,805 NOL tax carryforward 342,292 298,000 Capitalized software (659,554) -- AMT credit 699,015 34,540 ---------- ---------- Total deferred income tax asset $8,142,902 $6,460,126 ---------- ----------
The provision (benefit) for income taxes on income from continuing operations included in the accompanying consolidated statements of income differs from the provision (benefit) computed using the statutory federal income tax rate (34%), due to the effects of the following items:
1995 1994 ---- ---- Net present value of obligation to CNA, discounted at 6% $3,601,513 $4,045,671 Obligations under capital leases 319,166 336,661 Other notes payable, due in monthly installments of $13,802 plus interest 208,507 -- ---------- ---------- Total 4,129,186 4,382,332
Less current portion (1,537,257) (1,065,487) ---------- ---------- Long term debt, net of current portion $2,591,929 $3,316,845 ---------- ----------
YEAR MATURITIES ---- ---------- 1996 $1,537,257 1997 1,136,640 1998 1,056,747 1999 398,542
In connection with the CNA program, the Company is obligated to pay CNA $5 million. The Company makes payments against this obligation through reductions in the commission it earns on the premiums generated under the program (see Note 2). Accordingly, the Company has agreed to meet certain minimum premium volume levels, on an annualized basis, which will ensure that the obligation is paid in full over the term of the agreement, with scheduled minimum repayments. If E&O premiums fall below the specified minimum levels, CNA may review the program, give the Company an opportunity to address the issue and then, at its option, may stop the program and take ownership of the Company's expiration list. If, on an annual basis, premium volume falls below the specified level, a cash payment equal to 5% of the difference between the actual premium volume and minimum premium volume must be made to CNA. In 1995, the Company did not meet all of the specified financial and production requirements. However, in March 1996, the Company and CNA entered into an amendment of the agreement, modifying the specified minimum premium volume levels to $12 million in 1995, $13 million in 1996, $15 million in 1997 and $20 million thereafter. The agreement to market CNA insurance exclusively to its membership has been extended through December 31, 1999. If, on an annual basis, premium volume falls below the premium volume quotas of $17 million in 1995, $18 million in 1996, and $20 million for each year thereafter, but is above the specified minimum premium volume previously disclosed, a cash payment equal to 5% of the difference between the actual premium volume and the premium volume quota must be made to CNA, to be applied against the obligation to CNA. As of December 31, 1995, the balance due CNA totaled approximately $3.6 million. The cash payment due for the 1995 shortfall totals $250,000, and must be made in equal monthly instalments between March 1996 and December 1996. The Company is currently in compliance with the terms of the agreements as modified.
In early September 1994, the Company underwent an organizational restructuring, reducing its total work force by approximately 20%. This restructuring is expected to result in annual cost savings of approximately $1,700,000, through reductions in salary, benefits and payroll tax expenses. The charge, included in the `Unusual items' caption in the accompanying consolidated statements of income, totaled approximately $1,063,000. Approximately $400,000 of this
The Company currently rents office space in Sunrise, Florida, under a lease which expires on December 31, 2005. The lease requires annual increases of 3% of the base rent per square foot through the end of the lease term plus actual maintenance expenses and property tax increases. The Company also leases office space in certain of the Corporate-Owned Regions for remaining terms of up to three years. Future minimum annual rental payments approximate $266,000 in 1996, $313,000 in 1997, $307,000 in 1998, $304,000 in 1999, $313,000 in 2000, and $1,652,764 thereafter. Rental expense for 1995, 1994 and 1993 approximated $563,000, $601,000 and $567,000, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of income.
In connection with the transfer of POMG's net assets to CNA, the Company guaranteed the validity of a $5,000,000 reinsurance recoverable, one of the POMG assets transferred to CNA. The Company has not recorded a provision for this guarantee, based upon the opinion of its special insurance counsel, that the cover note relating to the reinsurance contract is a binding agreement, enforceable in accordance with its terms, and the objections voiced by the reinsurer do not support a material basis for it to successfully deny coverage. See also Note 2.
At December 31, 1992 $5.00 - $9.75 388,050 207,550 208,950 ------------- -------- -------- -------- Granted 4.00 200,000 28,000 (200,000) Canceled 5.00 - 9.75 (29,500) (29,500) 29,500 ------------- -------- -------- -------- At December 31, 1993 4.00 - 9.75 558,550 206,050 38,450 ------------- -------- -------- -------- Granted 2.00 80,000 (80,000) Became exercisable 5.75 75,900 Canceled 4.00 - 9.75 (156,250) (43,650) 156,250 ------------- -------- -------- -------- At December 31, 1994 2.00 - 9.00 482,300 238,300 114,700
Granted 2.00 240,000 (240,000) Became exercisable 2.00 203,000 Canceled 2.00 - 3.00 (286,600) (224,600) 286,600 ------------- -------- -------- -------- At December 31, 1995 $2.00 435,700 216,700 161,300 ------------- -------- -------- --------
In May 1992, effective September 1991, the Company adopted a non-employee directors' stock option plan authorizing issuance of up to 300,000 shares of common stock. Options under this plan become exercisable annually over the five years following the date of grant and expire no later than ten years after the date of grant. Options for 75,000 shares were granted at $6.50 per share on September 26, 1991; options for 25,000 shares were granted at $5.50 per share on January 28, 1993; options for 25,000 shares were granted at $3.375 per share on September 23, 1993; and options for 25,000 shares were granted at $2.00 per share on December 22, 1995. The options issued prior to 1995 were repriced in December 1994, to $2.00 per share. All of these options remain outstanding at December 31, 1995. Options for 80,000 shares are exercisable at December 31, 1995.
The rights are intended to enable all of the Company's stockholders to realize the long term value of their investment in HOMG. They will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board of Directors prior to attempting the takeover. The rights will expire at the close of business November 1, 2000.