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
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6271
AVEMCO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-0733935
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
411 Aviation Way
Frederick, Maryland 21701
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (301) 694-5700
N/A
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required by Sections 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 8,611,070 shares of common
stock were outstanding as of March 31, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Note 1)
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 1996, and December 31, 1995
March 31, December 31,
1996 1995
------------ ------------
ASSETS:
Investments...................................... $ 144,305,000 $ 149,544,000
Cash............................................. 5,206,000 3,466,000
Accounts receivable.............................. 26,638,000 24,637,000
Reinsurance recoverable.......................... 16,569,000 14,292,000
Deferred policy acquisition costs................ 5,511,000 5,511,000
Prepaid reinsurance premiums..................... 4,819,000 5,178,000
Net property and equipment....................... 8,342,000 8,051,000
Other assets..................................... 3,379,000 3,123,000
------------ ------------
Total assets.................................. $ 214,769,000 $ 213,802,000
= =========== = ===========
LIABILITIES:
Unpaid losses and loss adjustment expenses....... $ 44,232,000 $ 42,305,000
Unearned premiums................................ 30,783,000 32,363,000
Accounts payable and accrued expenses............ 16,887,000 17,361,000
Ceded reinsurance premiums payable............... 5,910,000 5,047,000
Notes payable to banks........................... 56,967,000 54,967,000
------------ ------------
Total liabilities............................. 154,779,000 152,043,000
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $10.00 per share;
500,000 shares authorized; none issued......... -- --
Common stock, par value, $.10 per share;
20,000,000 shares authorized; 11,565,811 issued
in 1996 and 11,551,161 in 1995................. 1,157,000 1,155,000
Additional paid-in capital....................... 19,140,000 18,293,000
Net unrealized appreciation on investments....... 3,127,000 4,879,000
Foreign currency translation adjustments......... (185,000) (182,000)
Retained earnings................................ 88,230,000 88,184,000
------------ ------------
111,469,000 112,329,000
Treasury stock, at cost, 2,954,741 shares
in 1996 and 2,901,741 in 1995.................. (51,479,000) (50,570,000)
------------ ------------
Total stockholders' equity.................... 59,990,000 61,759,000
------------ ------------
Contingent liabilities
Total liabilities and stockholders' equity.... $ 214,769,000 $ 213,802,000
= =========== = ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1996 1995
------------ ------------
REVENUES:
Premiums earned.................................. $ 19,693,000 $ 18,723,000
Commissions...................................... 1,973,000 1,583,000
Net investment income............................ 2,036,000 2,054,000
Computer products and services................... 2,261,000 1,951,000
Realized investment gains (losses)............... 513,000 (109,000)
Other............................................ 1,902,000 1,802,000
------------ ------------
Total revenues................................ 28,378,000 26,004,000
------------ ------------
EXPENSES:
Losses and loss adjustment expenses.............. 12,997,000 10,522,000
Selling, general, and administrative expenses.... 9,123,000 8,892,000
Commissions...................................... 1,466,000 1,766,000
Cost of computer hardware sold................... 415,000 242,000
Interest......................................... 968,000 1,121,000
------------ ------------
Total expenses................................ 24,969,000 22,543,000
------------ ------------
Earnings before income taxes..................... 3,409,000 3,461,000
Federal and state income taxes................... 722,000 647,000
------------ ------------
Net earnings..................................... $ 2,687,000 $ 2,814,000
= =========== = ===========
Net earnings per share........................... $ .31 $ .32
= =========== = ===========
Weighted average number of common and common
equivalent shares outstanding.................. 8,746,325 8,913,285
============ ============
Dividends per share.............................. $ .12 $ .11
= =========== = ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1996 1995
------------ ------------
OPERATING ACTIVITIES:
Net earnings..................................... $ 2,687,000 $ 2,814,000
Charges (credits) to operations not affecting
cash........................................... (2,382,000) 379,000
------------ ------------
Net cash flows provided from operations.......... 305,000 3,193,000
------------ ------------
INVESTMENT ACTIVITIES:
Proceeds from sale or maturity of investments.... 16,079,000 11,520,000
Purchase of investments.......................... (12,926,000) (15,838,000)
Proceeds from sale of property and equipment..... 12,000 5,000
Purchase of property and equipment............... (104,000) (851,000)
------------ ------------
Net cash flows provided from (used by) investment
activities..................................... 3,061,000 (5,164,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings......................... 4,500,000 5,800,000
Principal payments on debt....................... (2,500,000) (3,833,000)
Exercise of common stock options................. 125,000 54,000
Dividends to stockholders........................ (1,033,000) (974,000)
Repurchase of common stock....................... (2,718,000) (72,000)
------------ ------------
Net cash flows provided from (used by) financing
activities..................................... (1,626,000) 975,000
------------ ------------
Net increase (decrease) in cash.................. 1,740,000 (996,000)
Cash, beginning of year.......................... 3,466,000 5,191,000
------------ ------------
Cash, end of period.............................. $ 5,206,000 $ 4,195,000
= =========== = ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1996, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996. These statements should be read in conjunction with the financial
statements and notes thereto included in the company's annual report to
shareholders and Form 10-K for the year ended December 31, 1995.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Capital Resources
The company's primary sources of operating funds are insurance premiums,
investment income, reinsurance recoveries on paid losses, computer product
sales and other service revenues. Principal uses of operating funds include
claim payments to insureds, commissions, and other operating expenses.
Overall, these operating activities produced positive cash flow of $300,000
for the first three months of 1996. Since the level of operating cash flow
is highly affected by premium production, paid loss activity, the sale of
investment securities, and reinsurance recoveries received, operating cash
flow can vary significantly from period to period. In addition, the 1996
first quarter operating cash flow was impacted by one-time refund payments
of $2.4 million related to the settlement of California Proposition 103
matters. The company's insurance subsidiaries had fully provided for such
amounts in prior years.
The company follows investment guidelines, which, in addition to providing
for an acceptable after-tax return on its investments, are structured to
preserve capital, maintain sufficient liquidity to meet anticipated
obligations, and retain an ample margin of capital and surplus to assure
the unimpaired ability to write insurance. The company's fixed income
portfolio holdings consist primarily of high investment grade securities.
Currently, the largest single portion of the investment portfolio is
invested in tax-advantaged securities. Thus far in 1996, there has been a
rising interest rate environment. As a result, the fair value of the
investment porfolio at the end of the quarter declined by $1.7 million, or
slightly above 1%.
In developing its investment strategy, the company establishes a level of
cash and highly liquid short and intermediate term securities which, when
combined with expected cash flow, is believed adequate to meet anticipated
payment obligations.
<PAGE>
The company's common stock repurchase program reflects continued efforts to
effectively manage its capital base and enhance shareholder value. During
1996 through April 15, the company repurchased 352,000 shares of its common
stock. The Board of Directors' current authorization allows the company to
repurchase an additional 373,000 shares.
Results of Operations
Net earnings for the first quarter of 1996 were $2.7 million or $.31 per
share, similar to 1995's first quarter earnings of $2.8 million or $.32 per
share. While the company experienced improved underwriting results in its
short-term health and pleasure marine lines, increased physical damage
claims activity on higher valued aircraft on the aviation business and an
increase of 4% in the loss ratio on the lenders single interest business
prevented the company from having a solid earnings performance.
Gross premiums written for all lines of business in the quarter were $22.2
million, versus $23.2 million in 1995. Included in the 1995 first quarter
premiums were $4.8 million in premiums associated with the acquisition of
the aviation business from Aviation Underwriting Specialists. A substantial
portion of that business, $3.8 million, represented non-recurring premiums.
Therefore, on a going forward basis, gross premiums written in the first
quarter of 1996 of $22.2 million compared to $19.5 million in 1995's first
quarter, an increase of 14%. Gross premiums written on aviation using the
same "apples to apples" comparison were $14.4 million in 1996 versus $13.1
million in 1995, an increase of 10%.
The company is encouraged by new business growth in the aviation sector.
Aviation rates continue to firm in certain categories and classes of
business. Non-aviation premiums written in the quarter were $7.8 million
versus $6.4 million in 1995, or a 22% increase.
The company continued to make progress in its Services Group. During the
first quarter the company completed the acquisition of Hinchcliff
International, Inc., one of the largest and most highly regarded producers
and administrators in the area of short-term health insurance for foreign
students studying in the United States. This acquisition was made through
the issuance of 120,000 shares of the company's common stock in exchange
for 100% of the outstanding shares of Hinchcliff. The company expects to
participate in the short-term health programs managed by Hinchcliff
starting late in 1996.
<PAGE>
AVEMCO CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None, except in the ordinary course of business in connection with the
insurance subsidiaries' operations.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
SIGNATURE
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.
AVEMCO CORPORATION
(Registrant)
Date: May 14, 1996 /s/ William P. Condon
------------------- ------------------------------
William P. Condon
Chairman of the Board and
Chief Executive Officer
Date: May 14, 1996 /s/ John F. Shettle, Jr.
------------------- ------------------------------
John F. Shettle, Jr.
President and
Chief Operating Officer
Date: May 14, 1996 /s/ John R. Yuska
------------------- ------------------------------
John R. Yuska
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
registrant's March 31, 1996 Form 10-Q financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
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