-----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, DSUwbnN5Oo8nbNAvl3MEm423vLHruKRA+X0j7zraTkHVZclZ3zRTPtR4hkdeS7wo i+F6l51OEbajf3lpFnqxOA== 0000914039-95-000142.txt : 19951119 0000914039-95-000142.hdr.sgml : 19951119 ACCESSION NUMBER: 0000914039-95-000142 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACMAT CORP CENTRAL INDEX KEY: 0000002062 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 060682460 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-06234 FILM NUMBER: 95589913 BUSINESS ADDRESS: STREET 1: 233 MAIN ST STREET 2: P O BOX 2350 CITY: NEW BRITAIN STATE: CT ZIP: 06050-2350 BUSINESS PHONE: 2032299000 MAIL ADDRESS: STREET 1: 233 MAIN STREET STREET 2: P O BOX 2350 CITY: NEW BRITAIN STATE: CT ZIP: 06050-2350 10-Q 1 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 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 0-6234 ACMAT CORPORATION Connecticut 06-0682460 (State of Incorporation) (I.R.S. Employer Identification No.) 233 Main Street, New Britain, Connecticut 06050-2350 (Address of principal executive offices) Registrant's telephone number including area code: (860) 229-9000 NONE (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 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 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.
Shares outstanding Title of Class at October 31, 1995 - -------------- ------------------- Common Stock 647,464 Class A Stock 2,731,837
2 TABLE OF CONTENTS
Part I FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Earnings 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
2 3 Part I Financial Information Item I Financial Statements ACMAT CORPORATION AND SUBSIDIARIES Financial Statements Consolidated Balance Sheets
September 30, December 31, 1995 1994 ------------- ------------ Assets Investments: Fixed maturities-available for sale, at market (Cost of $123,180,115 in 1995 and $110,647,319 in 1994) $123,634,556 108,911,211 Equity securities, at market value (Cost $20,000 in 1995 and $627,253 in 1994) 20,000 444,109 Limited partnership investment, at market value (Cost $1,154,517 in 1995 and $1,097,261 in 1994) 1,905,653 1,204,914 Short-term investments, at cost which approximates market 5,685,936 8,726,056 ------------ ----------- Total investments 131,246,145 119,286,290 Cash 3,392,294 5,471,148 Accrued interest receivable 2,207,505 1,890,826 Reinsurance recoverable 3,606,842 4,228,879 Receivables, net 9,220,342 9,480,567 Federal income tax recoverable 23,518 23,518 Prepaid expenses 365,827 234,929 Deferred income taxes 2,725,494 2,285,649 Property & equipment, net 14,058,863 14,364,020 Deferred policy acquisition costs 3,502,576 3,661,421 Other assets 3,073,060 3,192,151 Intangibles, net 4,130,427 4,375,416 ------------ ----------- $177,552,893 168,494,814 ============ =========== Liabilities & Stockholders' Equity - ---------------------------------- Notes payable to banks $ 6,000,000 4,300,000 Accounts payable 2,809,132 2,302,202 Reserves for losses and loss adjustment expenses 44,136,873 40,954,783 Unearned premiums 14,074,632 14,977,825 Collateral held 15,209,920 10,403,706 Accrued liabilities 2,226,173 1,681,266 Income taxes 314,095 294,980 Long-term debt 40,847,717 43,405,266 ------------ ----------- Total liabilities 125,618,542 118,320,028 Minority interests 13,572,797 12,169,851 Stockholders' Equity: Common Stock (No Par Value; 3,500,000 Shares Authorized; 647,464 and 652,920 Shares Issued and Outstanding) 647,464 652,920 Class A Stock (No Par Value; 10,000,000 Shares Authorized; 2,785,949 and 3,313,067 Shares Issued and Outstanding) 2,785,949 3,313,067 Additional paid-in capital 3,476,610 9,358,948 Retained earnings 30,363,354 26,251,103 Net unrealized gain (loss) on securities 1,088,177 (1,571,103) ------------ ----------- Total stockholders' equity 38,361,554 38,004,935 ------------ ----------- $177,552,893 168,494,814 ============ ===========
See Notes to Consolidated Financial Statements. 3 4 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings
Three months ended, Nine months ended September 30, September 30, -------------------- -------------------- 1995 1994 1995 1994 ---- ---- ---- ---- Earned premiums $ 6,190,342 6,497,478 18,238,575 19,534,044 Contract revenues 3,280,366 1,153,538 9,022,314 4,847,169 Investment income, net 1,531,607 1,221,662 4,471,058 3,464,173 Net realized capital losses (20,179) (4,927) (27,879) (36,872) Other income 158,502 141,531 529,878 509,447 ------------ --------- ---------- ---------- 11,140,638 9,009,282 32,233,946 28,317,961 ------------ --------- ---------- ---------- Losses and loss adjustment expenses 1,847,000 1,963,659 5,511,015 5,912,713 Amortization of policy acquisition costs 1,097,789 963,980 3,167,319 3,001,908 Cost of contract revenues 2,990,986 1,173,695 8,442,970 4,892,386 Selling, general and administrative expenses 1,539,128 1,407,852 4,452,432 4,610,337 Interest expense 1,193,257 1,233,827 3,605,830 3,720,582 ------------ --------- ---------- ---------- 8,668,160 6,743,013 25,179,566 22,137,926 ------------ --------- ---------- ---------- Earnings before income taxes and minority interests 2,472,478 2,266,269 7,054,380 6,180,035 Income taxes Federal 621,196 520,300 1,788,906 1,494,027 State 35,000 57,000 105,000 94,500 ------------ --------- ---------- ---------- 656,196 577,300 1,893,906 1,588,527 ------------ --------- ---------- ---------- Earnings before minority interests 1,816,282 1,688,969 5,160,474 4,591,508 Minority interests (356,425) (382,646) (1,048,223) (1,155,309) ------------ --------- ---------- ---------- Net earnings $ 1,459,857 1,306,323 4,112,251 3,436,199 ============ ========= ========== ========== Net earnings per share and share equivalent $ .42 .32 1.10 .83 Net earnings per share - assuming full dilution $ .32 -- .88 -- Weighted average shares outstanding 3,512,357 4,143,789 3,750,600 4,138,435
See Notes to Consolidated Financial Statements. 4 5 ACMAT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net Common Class A unrealized stock stock Additional gains Total par par paid-in Retained (losses) stockholders' value value capital earnings on securities equity ----- ----- ------- -------- ------------- ------ Balance as of December 31, 1993 $693,333 $3,392,051 $11,060,773 $21,411,242 $ 128,603 $36,686,002 Acquisition and Retirement of 40,313 Shares of Common Stock (40,313) -- (445,995) -- -- (486,308) Acquisition and Retirement of 194,734 Shares of Class A Stock -- (194,734) (1,437,704) -- -- (1,632,438) Issuance of 379,500 Shares of -- 379,500 2,620,500 -- -- 3,000,000 Class A Stock Issuance of 10,000 Shares of -- 10,000 50,000 -- -- 60,000 Class A Stock pursuant to stock options Effect of Adoption of FAS No. 115, -- -- -- -- 472,000 472,000 Net of Taxes Net Unrealized Losses on Debt and -- -- -- -- (1,325,825) (1,325,825) Equity Securities Other -- -- (238,106) -- -- (238,106) Net Earnings -- -- -- 3,436,199 -- 3,436,199 -------- ---------- ----------- ----------- ----------- ----------- Balance as of September 30, 1994 $653,020 $3,586,817 $11,609,468 $24,847,441 $ (725,222) $39,971,524 ======== ========== =========== =========== =========== =========== Balance as of December 31, 1994 $652,920 $3,313,067 $ 9,358,948 $26,251,103 $(1,571,103) $38,004,935 Acquisition and retirement of 5,456 Shares of Common Stock (5,456) -- (80,579) -- -- (86,035) Acquisition and retirement of 627,116 Shares of Class A Stock -- (627,116) (6,701,741) -- -- (7,328,857) Issuance of 99,998 Shares -- 99,998 899,982 -- -- 999,980 of Class A Stock Net Unrealized Appreciation of Debt and Equity Securities -- -- -- -- 2,659,280 2,659,280 Net Earnings -- -- -- 4,112,251 -- 4,112,251 -------- ---------- ----------- ----------- ----------- ----------- Balance as of September 30, 1995 $647,464 $2,785,949 $ 3,476,610 $30,363,354 $ 1,088,177 $38,361,554 ======== ========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. 5 6 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1995 and 1994
1995 1994 ------------ ----------- Cash flows from operating activities: Net earnings $ 4,112,251 3,436,199 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,658,991 2,305,884 Minority interests 1,048,223 1,155,309 Net realized capital losses 27,879 36,872 Changes in: Accrued interest receivable (316,679) (7,790) Reinsurance recoverable 622,037 695,072 Receivables, net 260,225 (1,812,725) Deferred policy acquisition costs 158,845 (250,331) Prepaid expenses and other assets (66,428) (295,592) Accounts payable and accrued liabilities 1,051,837 (154,543) Collateral held 4,806,214 (3,076,970) Reserves for losses and loss adjustment expenses 3,182,090 3,473,257 Income taxes, net (420,730) 558,020 Unearned premiums (903,193) 736,463 ------------ --------- Net cash provided by operating activities 15,221,562 6,799,125 ------------ --------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed maturities-sold 8,788,372 12,447,495 Fixed maturities-matured 38,525,426 24,300,000 Equity securities 614,340 925,272 Purchases of: Fixed maturities (60,773,475) (33,119,121) Equity securities -- (384,013) Limited Partnership Investment (51,397) (49,836) Short-term investments, net 3,040,120 (6,242,339) Purchase of 9% interest in ACSTAR Holdings, Inc. -- (3,000,000) Capital expenditures (136,341) (470,016) ------------ --------- Net cash used for investing activities (9,992,955) (5,592,558) ------------ --------- Cash flows from financing activities: Borrowings under line of credit 1,700,000 1,700,000 Payments under line of credit -- (1,700,000) Payments on long-term debt (1,557,569) (13,575,587) Issuance of long-term debt -- 8,000,000 Issuance of Class A Stock -- 2,821,894 Payments for subsidiary stock (35,000) (41,250) Payments for acquisition & retirement of stock (7,414,892) (2,118,746) ------------ --------- Net cash used for financing activities (7,307,461) (4,913,689) ------------ --------- Net decrease in cash (2,078,854) (3,707,122) Cash at beginning of period 5,471,148 8,666,748 ------------ --------- Cash at end of period $ 3,392,294 4,959,626 ============ ===========
See Notes to Consolidated Financial Statements. 6 7 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: (1) Financial Statements The consolidated financial statements include the accounts of ACMAT Corporation ("ACMAT" or the "Company") and its subsidiaries. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and are unaudited. The interim financial information contained in this report has been prepared from the books and records of the Company and its subsidiaries and reflects, in the opinion of the management of the Company, all adjustments (consisting of normal and recurring accruals) necessary to fairly present results of operations for the periods indicated. All significant intercompany accounts and transactions have been eliminated in consolidation. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1994. (2) Earnings Per Share Earnings per share are computed using the weighted average number of Common and Class A shares outstanding for the period and reflect the common stock equivalency of outstanding stock options and warrants, if dilutive. Earnings per share-assuming full dilution were determined on the assumptions that convertible debt were converted on January 1, 1995. Net earnings were adjusted for the interest expense related to the convertible debt, net of its tax effect. In prior periods, there were no significant differences between primary and fully diluted earnings per share. (3) Supplemental Cash Flow Information Income taxes paid during the nine months ended September 30, 1995 and 1994 was $2,314,635 and $1,030,507, respectively, and interest paid for the nine months ended September 30, 1995 and 1994 was $3,113,161 and $3,248,082, respectively. On June 30, 1995 and September 30, 1995, the holders of the 10.5% Convertible Senior Notes elected to convert the principal payments due on June 30, 1995 and September 30, 1995 to shares of Class A Stock. The issuance of 99,998 shares of Class A Stock in the amount of $999,980 is a non-cash transaction that is not reflected in the Statements of Cash Flows. (4) Accounting Change Effective January 1, 1994, the Company adopted Financial Accounting Standards ("FAS") No. 115, Accounting for Certain Investments in Debt and Equity Securities. Under FAS 115, debt securities are classified as held for maturity, available for sale or trading. The Company classified all debt and equity securities as available for sale. As of January 1, 1994, debt securities classified as available for sale, are carried at fair value and unrealized gains and losses are excluded from earnings and recorded as a separate component of stockholders' equity, net of estimated income taxes. Adjustments to minority interests are made as a result of unrealized gains and losses. The effect on stockholders' equity from adoption of the statement resulted in an increase in stockholders' equity of $472,000, net of deferred taxes, due to the revaluation of the Company's debt securities on January 1, 1994. (5) Other Events On September 21, 1994, ACMAT Corporation purchased from The Environmental Venture Fund, a Delaware limited partnership ("EVF"), The Apex Investment Fund, an Illinois limited partnership ("Apex") and The Productivity Fund, a Delaware limited partnership ("PF"), 15, 10 and 5 shares, respectively, of the common stock of ACSTAR Holdings, Inc. ("ACSTAR Holdings"), a subsidiary of the Company, for an aggregate consideration of $3 million. As a result of these transactions, the amount of the outstanding common stock of ACSTAR Holdings owned by the Company has increased from 91% to 100%, thereby making ACSTAR Holdings a wholly-owned subsidiary of the Company. 7 8 In a separate transaction, EVF, Apex and PF exercised their warrants to purchase 189,750, 126,500 and 63,250 shares, respectively, of Class A Stock of the Company for an aggregate consideration of $3 million. 8 9 ACMAT CORPORATION Item 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations RESULTS OF OPERATIONS: Overview Net earnings increased 12% to $1,459,857 for the three months ended September 30, 1995 compared to $1,306,323 for the same period a year ago. Net earnings for the nine months ended September 30, 1995 were $4,112,251 compared to $3,436,199 for the nine months ended September 30, 1994. The increase in net earnings for the quarter ended September 30, 1995 reflects the elimination of the construction contracting gross losses and an increase in interest income. Earned Premiums Net written premiums were $5,237,706 for the three months ended September 30, 1995 compared to $7,196,512 for the three months ended September 30, 1994. Net written premiums for the nine months ended September 30, 1995 were $17,801,329 compared to $20,436,689 for the nine months ended September 30, 1994. Premiums earned for the three months ended September 30, 1995 were $6,190,342 as compared to $6,497,478 for the three months ended September 30, 1994. Premiums earned for the nine months ended September 30, 1995 were $18,238,575 as compared to $19,534,044 for the nine months ended September 30, 1994. The decrease in premiums earned for the three and nine-month periods ended September 30, 1995 compared to the same period in 1994 reflects the fluctuations in net written premiums from quarter to quarter. The Company has accepted fewer new accounts as a result of what is believed to be inadequate pricing in the market. Variances in net written premiums have historically occurred due to the fluctuations in size, number and timing of bonds and policies bound by the Company. Contract Revenues Contract revenues increased to $3,280,366 for the three-month period ended September 30, 1995 compared to $1,153,538 for the same period in 1994. Contract revenues increased to $9,022,314 for the nine-month period ended September 30, 1995 compared to $4,847,169 for the same period in 1994. During the past several years, the Company has controlled its volume of construction business in an effort to focus on more profitable projects and to devote more resources to the Insurance Group. Increases for the 1995 periods are believed to be temporary and relate to two multi-million dollar projects that are in progress. The increase in construction revenue is expected to decline upon completion of these projects in the first quarter of 1996. Management has implemented several strategies designed to improve the results of its construction contracting operations. First, the Company has focused advertising to attract privately negotiated contracts which generally produce higher gross margins. Second, the Company has increased its prices on publicly bid contracts. The market for privately negotiated contracts is significantly smaller than the market for publicly bid contracts. Finally, the Company has focused on controlling both fixed and variable costs, primarily by minimizing the use of its own labor force in favor of subcontracting many trades involved in contract performance. Although the Company believes that these strategies have improved, and will continue to improve, the results of its construction contracting operations, such results will continue to be influenced by factors beyond the Company's control, such as the state of the economy in the Northeast, and there can be no assurance that these strategies will assure the Company's construction contracting operations profitability. 9 10 Investment Income, Net Net investment income was $1,531,607 for the three-month period ended September 30, 1995 compared to $1,221,662 for the same period in 1994, representing effective yields of 4.59% and 3.99%, respectively. Net investment income was $4,471,058 for the nine-month period ended September 30, 1995 compared to $3,464,173 for the same period in 1994, representing effective yields of 4.60% and 3.71%, respectively. The increase in investment income for 1995 over 1994 was due substantially to higher yields on the portfolio as the result of rising interest rates in 1994 as well as an increase in total invested assets. Invested assets, including cash, were $134,638,439 and $124,757,438 at September 30, 1995 and December 31, 1994, respectively. The increase in invested assets is attributable to net cash flow generated by written premiums, cash collateral and the reinvestment of investment income offset by the repayment of debt and the repurchase of stock. Net Realized Capital Gains Realized capital losses were $20,179 for the three-month period ended September 30, 1995 compared to $4,927 for the same period in 1994. Realized capital losses in the nine-month period ended September 30, 1995 were $27,879 compared to realized capital losses of $36,872 for the same period in 1994. Cost of Contract Revenues Cost of contract revenues were $2,990,986 for the three-month period ended September 30, 1995 compared to $1,173,695 for the same period a year ago. Cost of contract revenues increased to $8,442,970 for the nine-month period ended September 30, 1995 compared to $4,892,386 for the same period in 1994. Costs of contract revenues vary from period to period as a function of contract revenues (See Contract Revenues). The Company's construction backlog was approximately $3,150,000 at September 30, 1995 compared to $7,400,000 a year ago. Losses and Loss Adjustment Expenses Losses and loss adjustment expenses were $1,847,000 for the three-month period ended September 30, 1995 compared to $1,963,659 for the same period in 1994. Losses and loss adjustment expenses were $5,511,015 for the nine months ended September 30, 1995 compared to $5,912,713 for the nine months ended September 30, 1994. The decrease in losses and loss adjustment expenses for the three and nine months ended September 30, 1995 are attributable to the decline in earned premiums from 1995 to 1994 without any fluctuations in the loss ratios. Loss and loss adjustment expense reserves represent management's estimate of the ultimate cost of unpaid losses incurred for these periods relative to premiums earned. Amortization of policy acquisition costs Amortization of policy acquisition costs was $1,097,789 for the three-month period ended September 30, 1995 as compared to $963,980 for the same period in 1994. For the nine months ended September 30, 1995, amortization of policy acquisition cost was $3,167,319 compared to $3,001,908 for the same period a year ago. Policy acquisition costs, primarily commissions, are deferred and amortized over the policy term. The Company's acquisition expense ratio increased to 41.1% in 1995 from 39.7% in 1994 due primarily to an increase in contingent commissions earned. Selling, General and Administrative Expenses Selling, general and administrative expenses were $1,539,128 for the three-month period ended September 30, 1995 compared to $1,407,852 for the same period in 1994. Selling, general and administrative expenses were $4,452,432 for the nine-month period ended September 30, 1995 compared to $4,610,337 for the same period in 1994. The increase in the selling, general and administrative expenses during the third quarter of 1995 is due primarily to an increase in salary expense. The decrease in the selling, general and administrative expenses during the nine-month period ended September 30, 1995 compared to the same period a year ago is due primarily to a decrease in amortization expense related to intangible assets offset, in part, by an increase in salary expense. Amortization of intangible assets was $99,870 for the three-month period ended September 30, 1995 compared to $107,112 for the same period in 1994. Amortization of intangible assets was approximately $299,610 for the nine-month period ended September 30, 1995 compared to $647,487 for the same period a year ago. 10 11 Interest Expense Interest expense decreased to $1,193,257 for the three-month period ended September 30, 1995 compared to $1,233,827 for the same period in 1994. Interest expense decreased to $3,605,830 for the nine-month period ended September 30, 1995 compared to $3,720,582 for the same period in 1994. The decrease in interest expense in 1995 is due primarily to the repayment of principal relating to the $15,000,000 10.5% Convertible Senior Notes offset in part by issuance of the $8,000,000 term loan on June 30, 1994. Income Taxes Income tax expense was $656,196 for the three-month period ended September 30, 1995 compared to $577,300 for the same period in 1994, representing effective Federal tax rates of 26.5% and 25.5%, respectively. Income tax expense was $1,893,906 for the nine-month period ended September 30, 1995 compared to $1,588,527 for the same period in 1994, representing effective Federal tax rates of 26.8% and 25.7%, respectively. The fluctuation in the Federal effective tax rate for 1995 is due primarily to the changes in the amount of tax-exempt investment income. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES: Reserves for losses and loss adjustment expenses are established with respect to both reported and incurred but not reported claims for insured risks. The amount of loss reserves for reported claims is primarily based upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the policy provisions relating to the type of claim. As part of the reserving process, historical data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments and economic conditions, including the effects of inflation. Reserves are monitored and evaluated periodically using current information on reported claims. Management believes that the reserves for losses and loss adjustment expenses at September 30, 1995 are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses, including losses incurred but not reported. Reserves for losses and loss adjustment expenses are estimates at any given point in time of what the Company may have to pay ultimately on incurred losses, including related settlement costs, based on facts and circumstances then known. The Company also reviews its claims reporting patterns, past loss experience, risk factors and current trends and considers their effect in the determination of estimates of incurred but not reported reserves. Ultimate losses and loss adjustment expenses are affected by many factors which are difficult to predict, such as claim severity and frequency, inflation levels and unexpected and unfavorable judicial rulings. The Company's insurance subsidiaries' loss ratio under generally accepted accounting principles ("GAAP") was 30.0% for the nine-month periods ended September 30, 1995 and 1994. These loss ratios are below industry averages and are believed to be the result of conservative underwriting. There can be no assurance that such loss ratios can continue. The Company's insurance subsidiaries' expense ratios under GAAP were 41.1% and 39.7% for the nine-month period ended September 30, 1995 and 1994, respectively. The Company's insurance subsidiaries' combined ratios under GAAP were 71.1% and 69.7% for the nine-month period ended September 30, 1995 and 1994, respectively. LIQUIDITY AND CAPITAL RESOURCES: The Company generates sufficient funds from its operations and maintains a relatively high degree of liquidity in its investment portfolio. The primary source of funds to meet the demands of claim settlements and operating expenses are premium collections, investment earnings and maturing investments. As of September 30, 1995, the Company had no material commitments for capital expenditures and, in the opinion of management of the Company, the Company currently has adequate sources of liquidity to fund its operations over the next 12 months. 11 12 ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from operating activities primarily because of operating losses in its construction contracting operations and interest expense related to notes payable and long-term debt incurred by it to acquire and capitalize its insurance subsidiaries. ACMAT has also incurred negative working capital as a result of holding short-term debt related to its operations. ACMAT's principal sources of funds are dividends from its wholly-owned subsidiaries, intercompany and short-term borrowings, insurance underwriting fees from its subsidiaries, construction contracting operations and rental income. Management believes that these sources of funds are adequate to service its indebtedness and its construction contracting operations without regard to any dividends from ACMAT's insurance holding company subsidiaries, United Coasts and ACSTAR Holdings. On a long-term basis, ACMAT could rely, if necessary, on dividends from its insurance holding company subsidiaries to improve its working capital. The Company anticipates that internally generated funds and short-term borrowings will be utilized for repayment of long-term debt and stock repurchases. The Company realized cash flow from operations of $15,221,542 for the nine-month period ended September 30, 1995, compared to $6,799,125 for the same period in 1994. Net cash flows provided by operations in 1995 were derived principally from premium collections and receipt of collateral held. The decrease in 1994 of net cash flow provided by operating activities results primarily from the repayment of collateral held. Substantially all of the Company's cash flow in 1994 was used to repay $12,207,000 of debt on March 31, 1994. Purchases of investments are made based upon excess cash available after the payment of losses and loss adjustment expenses and other operating and non-operating expenses. The Company's short term investment strategy coincides with the relatively short maturity of its liabilities which are comprised primarily of reserves for losses covered by claims-made insurance policies, reserves related to surety bonds and collateral held for surety obligations. Net cash used for investing activities in 1995 amounted to $9,992,955, compared to net cash used for investing activities of $5,592,558 for the same period in 1994. The terms of the Company's note agreements contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and minimum net worth levels, including cross default provisions. The Company is prohibited from paying any dividend prior to July 1, 1997. The payment of future cash dividends and the re-acquisition of shares are restricted each to amounts of an Available Fund. The Available Fund is a cumulative fund which is increased each year by 20% of the Consolidated Net Earnings (as defined). The Company is in compliance with all covenants at September 30, 1995, except for the limitation on the reacquisition of shares which exceeded the Available Fund at September 30, 1995. The Company does not consider this a significant event of default and expects to receive a waiver from the note holders, as in prior years. The Company maintains a short-term unsecured bank credit line of $10,000,000 to fund interim cash requirements. Effective June 30, 1995, this credit line was renewed until June 30, 1997. There was $6,000,000 outstanding under this line of credit at September 30, 1995. During the nine-month period ended September 30, 1995, the Company purchased, on the open market and in privately negotiated transactions, 5,456 shares of its Common Stock at an average price of $15.77. The Company also repurchased, in open market and privately negotiated transactions, 627,116 shares of its Class A Stock at an average price of $11.69 per share. The Company's principal source of cash for repayment of long-term debt is borrowings from United Coasts and dividends from ACSTAR Holdings. Under applicable insurance regulations, ACMAT's insurance subsidiaries are restricted as to the amount of dividends they may pay to their respective holding companies, without the prior approval of their domestic state insurance department. The amount of dividends ACMAT's insurance subsidiaries may pay without prior insurance department approval, are limited to approximately $5,654,000 in 1995. 12 13 REGULATORY ENVIRONMENT The National Association of Insurance Commissioners has recently adopted a risk-based capital formula for property and casualty companies which will be used by insurance regulators in assessing the capital adequacy of insurance companies. The risk-based capital formula, effective December 31, 1994, is a regulatory tool designed to identify weakly capitalized companies. The formula determines a required amount of capital based on the risks that the insurer assumes. Various regulatory actions are then prescribed if a company's ratio falls below the minimum required ratio. These actions range from requiring the insurer to submit a comprehensive plan to the insurance commissioner in the event its statutory surplus falls below its Company Action Level which is 200% of it Authorized Control Level, as calculated under the formula, to placing the insurer under regulatory control if its statutory surplus falls below 70% of its Authorized Control Level. The ratio for each of the Company's insurance subsidiaries as of December 31, 1994 was significantly above the level which might require regulatory action. 13 14 Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K a. Exhibits - 27. Financial Data Schedule b. Report on Form 8-K - None 14 15 SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACMAT CORPORATION Date: November 10, 1995 /s/ Henry W. Nozko, Sr. --------------------------------------------- Henry W. Nozko, Sr., President and Chairman Date: November 10, 1995 /s/ Henry W. Nozko, Jr. --------------------------------------------- Henry W. Nozko, Jr., Executive Vice President Chief Operating Officer, and Treasurer 15 EX-27 2 EX-27
5 1 3-MOS DEC-31-1994 SEP-30-1995 3,392,294 131,246,145 9,415,157 (194,815) 0 150,062,473 17,832,681 3,773,818 177,552,893 84,770,825 40,847,717 3,433,413 0 0 34,928,141 177,552,893 9,470,708 11,140,638 5,935,775 5,935,775 1,539,128 0 1,193,257 2,472,478 656,196 1,816,282 0 0 0 1,459,857 .42 .32
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