UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
411 Aviation Way, Frederick, Maryland 21701
(Address of principal executive offices)
(Zip Code)
(301) 694-5700
(Registrant's telephone number, including area code)
Former name, former address and former fiscal year, if changed since last
report: N/A
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: 8,393,287 shares of common
stock were outstanding as of March 31, 1997.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Note 1)
AVEMCO Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, 1997, and December 31, 1996
March 31, December 31,
1997 1996
------------- -------------
Assets:
Investments....................................... $ 144,202,000 $ 149,238,000
Cash.............................................. 6,501,000 5,959,000
Accounts receivable............................... 27,953,000 29,608,000
Reinsurance recoverable........................... 9,463,000 9,503,000
Deferred policy acquisition costs................. 6,069,000 6,071,000
Prepaid reinsurance premiums...................... 5,190,000 5,913,000
Net property and equipment........................ 7,803,000 7,886,000
Other assets...................................... 3,823,000 3,488,000
------------- -------------
Total assets........................... $ 211,004,000 $ 217,666,000
============= =============
Liabilities:
Unpaid losses and loss adjustment expenses........ $ 41,342,000 $ 43,227,000
Unearned premiums................................. 36,305,000 37,201,000
Accounts payable and accrued expenses............. 14,325,000 17,797,000
Ceded reinsurance premiums payable................ 698,000 1,549,000
Notes payable to banks............................ 56,167,000 56,667,000
Federal and state income taxes payable............ (143,000) 653,000
------------- -------------
Total liabilities...................... 148,694,000 157,094,000
------------- -------------
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; 11,708,086 issued
in 1997 and 11,565,811 in 1996................. 1,171,000 1,157,000
Additional paid-in capital........................ 20,882,000 19,140,000
Net unrealized appreciation on investments........ 1,032,000 2,320,000
Foreign currency translation adjustments.......... (252,000) (218,000)
Retained earnings................................. 96,471,000 94,843,000
------------- -------------
119,304,000 117,242,000
Treasury stock, at cost, 3,314,799 shares
in 1997 and 3,301,741 in 1996.................. (56,994,000) (56,670,000)
------------- -------------
Total stockholders' equity............. 62,310,000 60,572,000
------------- -------------
Contingent liabilities
Total liabilities and stockholders'
equity................................. $ 211,004,000 $ 217,666,000
============= ==============
See accompanying notes to condensed consolidated financial statements.
<PAGE>
AVEMCO Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
----------------------------
1997 1996
------------- -------------
Revenues:
Premiums earned................................... $ 21,488,000 $ 19,693,000
Commissions....................................... 1,915,000 1,973,000
Net investment income............................. 2,090,000 2,036,000
Computer products and services.................... 1,907,000 2,261,000
Realized investment gains......................... (98,000) 513,000
Other............................................. 2,478,000 1,902,000
------------- -------------
Total revenues......................... 29,780,000 28,378,000
------------- -------------
Expenses:
Losses and loss adjustment expenses............... 14,489,000 12,997,000
Selling, general, and administrative expenses..... 10,692,000 9,123,000
Commissions....................................... 1,762,000 1,466,000
Cost of computer hardware sold.................... 261,000 415,000
Interest.......................................... 1,001,000 968,000
------------- -------------
Total expenses......................... 28,205,000 24,969,000
------------- -------------
Earnings before income taxes...................... 1,575,000 3,409,000
Federal and state income taxes (benefit).......... (53,000) 722,000
------------- -------------
Net earnings...................................... $ 1,628,000 $ 2,687,000
============= =============
Net earnings per share............................ $ .19 $ .31
============= =============
Weighted average number of common and common
equivalent shares outstanding................... 8,542,000 8,746,325
============= =============
Dividends per share............................... $ -- $ .12
============= =============
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,
----------------------------
1997 1996
------------- -------------
Operating Activities:
Net earnings...................................... $ 1,628,000 $ 2,687,000
Charges (credits) to operations not affecting cash (4,751,000) (2,382,000)
------------- -------------
Net cash flows provided from (used by) operations. (3,123,000) 305,000
------------- -------------
Investment Activities:
Proceeds from sale or maturity of investments..... 26,620,000 16,079,000
Purchase of investments........................... (23,675,000) (12,926,000)
Proceeds from sale of property and equipment...... 2,000 12,000
Purchase of property and equipment................ (215,000) (104,000)
------------- -------------
Net cash flows provided from investment activities 2,732,000 3,061,000
------------- -------------
Financing Activities:
Proceeds from borrowings.......................... -- 4,500,000
Principal payments on debt........................ (500,000) (2,500,000)
Exercise of common stock options.................. 1,457,000 125,000
Dividends to stockholders......................... -- (1,033,000)
Repurchase of common stock........................ (24,000) (2,718,000)
------------- -------------
Net cash flows provided from (used by)
financing activities........................... 933,000 (1,626,000)
------------- -------------
Net increase (decrease) in cash................... 542,000 1,740,000
Cash, beginning of year........................... 5,959,000 3,466,000
------------- -------------
Cash, end of period............................... $ 6,501,000 $ 5,206,000
============= =============
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, 1997, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. These statements should be read in conjunction with the financial
statements and notes thereto included in the company's Form 10-K for the
year ended December 31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Recent Development
On January 17, 1997, AVEMCO Corporation ("AVEMCO"), Registrant, and HCC
Insurance Holdings, Inc., ("HCCH") jointly announced that they had signed a
Letter of Intent to merge AVEMCO with a wholly-owned subsidiary of HCCH in
a stock-for-stock transaction, with AVEMCO becoming a wholly-owned
subsidiary of HCCH. On February 28, 1997, AVEMCO and HCCH jointly announced
that the Boards of Directors of AVEMCO and HCCH had executed an Agreement
and Plan of Reorganization (the "Agreement"). Pursuant to the terms of the
Agreement, each share of AVEMCO's common stock will be exchanged for one
share of HCCH's common stock.
The proposed transaction is intended to be accounted for as a pooling of
interests and to be a nontaxable exchange to AVEMCO's shareholders. It is
subject to various conditions, including receipt of required regulatory
approvals and the approval of the transaction by shareholders of both
AVEMCO and HCCH. A special shareholders' meeting is anticipated to be held
in the second quarter of 1997, and a proxy statement describing the
transaction in detail is expected to be submitted to the shareholders
shortly. There can be no assurance that the conditions to the proposed
merger will be satisfied or that the shareholders will approve the
transaction.
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. Cash flows used by operations for the first three months of 1997
were $3.1 million, principally due to an increase in paid losses and other
selling, general, and administrative expenses. Cash flows provided from
operations for the first quarter of 1996 were $305,000. The 1996 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.
Since the level of operating cash flow is highly affected by
<PAGE>
premium production, paid loss activity, the sale of investment securities,
and reinsurance recoveries received, operating cash flow can vary
significantly from period to period.
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-exempt securities. Because of a rising interest rate
environment during the first quarter, the fair value of the investment
portfolio at the end of the quarter declined by $1.3 million.
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.
During the 1997 first quarter, the Board of Directors discontinued the
company's common stock repurchase program and cancelled all shares
remaining authorized for repurchase. In connection with the pending merger
between AVEMCO and HCC Insurance Holdings, Inc. (HCCH), more fully
described in the Recent Development section of this report, AVEMCO has
covenanted in the merger agreement not to declare another dividend with a
record date before June 1, 1997, and not to declare such dividend with a
record date after such date if a Proxy Statement/Prospectus has been
distributed to its shareholders before June 1, 1997.
Results of Operations
Earnings from operations in the quarter were $.28 per share, compared to
$.27 per share for the first quarter of 1996. Net earnings for the first
quarter of 1997 were $1.6 million or $.19 per share compared to 1996's
first quarter earnings of $2.7 million or $.31 per share. Net earnings were
less due primarily to the expensing of pending merger-related costs,
restructuring costs associated with the consolidation of AVEMCO's St.
Peters, Missouri, operations to reduce expenses on a going-forward basis,
and the recognition of some small realized investment losses compared to
recognition of larger realized investment gains in the first quarter last
year. The composition of net earnings was as follows:
1997 1996
-------- --------
Operations $ .28 $ .27
Realized investment gains (losses) (.01) .04
Restructuring costs (.02) --
Pending merger related costs (.06) --
-------- --------
Net earnings per share $ .19 $ .31
======== ========
Gross premiums written for all lines of business in the 1997 first quarter
were $24.0 million, increasing by 8% over that of 1996's first quarter. As
a result, earned premiums in the quarter increased to $21.5 million versus
$19.7 million for the similar period of 1996. Net incurred losses for
1997's first quarter were $14.5 million compared to $12.9 million for 1996.
The
<PAGE>
loss ratio was 67.4% versus 66.0% for the similar period of 1996. The
increased losses were principally due to the strengthening of loss
reserves. There were no significant weather-related losses during the 1997
and 1996 first quarters. The 1997 first quarter underwriting ratio was
94.4% compared to 1996's 94.0%.
There were realized investment losses of $98,000 in the 1997 first quarter
compared to realized investment gains of $513,000 for the 1996 first
quarter. Selling, general, and administrative expenses for the first
quarter were $10.7 million versus $9.1 million for the 1996 first quarter.
The increase is principally due to the pending merger and costs associated
with restructuring and consolidating the company's operating activities.
Costs related to the pending AVEMCO and HCCH merger incurred in the first
quarter resulted in an after-tax earnings reduction of $507,000 or $.06 per
share. Such costs included legal, investment banking, and accounting fees.
The company also incurred restructuring costs associated with the
consolidation of AVEMCO's St. Peters, Missouri, operations to reduce
expenses on a going-forward basis. Such costs amounted to an after-tax
earnings reduction of $163,000 or $.02 per share.
<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
Letter of Intent........................ AVEMCO Corporation Report on
Form 8-K, filed on January
22, 1997.
Agreement and Plan of Reorganization.... AVEMCO Corporation Report on
Form 8-K, filed on March 6,
1997, and Exhibit 1 thereto.
<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 15, 1997 /s/ William P. Condon
------------------------ ------------------------------
William P. Condon
Chairman of the Board
Date: May 15, 1997 /s/ John F. Shettle, Jr.
------------------------ ------------------------------
John F. Shettle, Jr.
President and
Chief Executive Officer
Date: May 15, 1997 /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, 1997, Form 10-Q financial statements and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 144,202
<CASH> 6,501
<RECOVER-REINSURE> 9,463
<DEFERRED-ACQUISITION> 6,069
<TOTAL-ASSETS> 211,004
<POLICY-LOSSES> 41,342
<UNEARNED-PREMIUMS> 36,305
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 56,167
0
0
<COMMON> 1,171
<OTHER-SE> 61,139
<TOTAL-LIABILITY-AND-EQUITY> 211,004
21,488
<INVESTMENT-INCOME> 2,090
<INVESTMENT-GAINS> (98)
<OTHER-INCOME> 6,300
<BENEFITS> 14,489
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 12,454
<INCOME-PRETAX> 1,575
<INCOME-TAX> (53)
<INCOME-CONTINUING> 1,628
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,628
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
