-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gv0OKylVB9NoE824Rbx0u31/9CJTkag9U2krG+mfreCORav4AlVfII4m51wJSWNG 777X348Rz0Pl1Zam4usinA== 0001006196-97-000047.txt : 19970520 0001006196-97-000047.hdr.sgml : 19970520 ACCESSION NUMBER: 0001006196-97-000047 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVEMCO CORP CENTRAL INDEX KEY: 0000008802 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 520733935 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06271 FILM NUMBER: 97606647 BUSINESS ADDRESS: STREET 1: 411 AVIATION WAY CITY: FREDERICK STATE: MD ZIP: 21701 BUSINESS PHONE: 3016945700 MAIL ADDRESS: STREET 1: 411 AVIATION WAY CITY: FREDERICK STATE: MD ZIP: 21701 10-Q 1 FORM 10-Q - FIRST QUARTER 1997 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. 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. 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. 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. 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 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 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. 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. 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 EX-27 2 FINANCIAL DATA SCHEDULE
7 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. 1,000 3-MOS DEC-31-1997 MAR-31-1997 0 0 0 0 0 0 144,202 6,501 9,463 6,069 211,004 41,342 36,305 0 0 56,167 0 0 1,171 61,139 211,004 21,488 2,090 (98) 6,300 14,489 0 12,454 1,575 (53) 1,628 0 0 0 1,628 .19 .19 0 0 0 0 0 0 0
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