-----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, PJhs9B1vDV0wlLKLtCzm5k3srjrlLUeEW7qvlauJDq4TsYZJ4jnLddUuFt1/5Peb fx4SLs0YBKhl8Vl+fYNhyQ== 0000914039-97-000372.txt : 19971117 0000914039-97-000372.hdr.sgml : 19971117 ACCESSION NUMBER: 0000914039-97-000372 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACMAT CORP CENTRAL INDEX KEY: 0000002062 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 060682460 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-06234 FILM NUMBER: 97719549 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, 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 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, 1997 - -------------- ------------------- Common Stock 596,857 Class A Stock 2,739,273
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 13 Signatures 14
3 Part I Financial Information Item I Financial Statements
ACMAT CORPORATION AND SUBSIDIARIES Financial Statements Consolidated Balance Sheets September 30, 1997 December 31,1996 ------------------ ---------------- Assets Investments: Fixed maturities-available for sale, at market (Cost of 119,840,897 in 1997 and $93,397,819 in 1996) $120,201,435 93,511,048 Equity securities, at market value (Cost $755,262 in 1997 and $5,262 in 791,399 10,573 1996) Limited partnership investment, at market value (Cost $2,053,655 in 1997 and $1,086,630 in 1996) 2,053,655 1,439,174 Short-term investments, at cost which approximates market 11,573,764 46,969,137 ----------- ----------- Total investments 134,620,253 141,929,932 Cash 2,487,592 2,187,227 Accrued interest receivable 1,721,809 1,567,761 Reinsurance recoverable 3,478,276 3,841,001 Receivables, net 7,277,345 8,381,590 Income tax receivable 241,917 - Prepaid expenses 299,115 206,562 Deferred income taxes 2,211,722 2,285,883 Property & equipment, net 13,281,816 13,553,114 Deferred policy acquisition costs 2,484,811 2,905,875 Other assets 3,375,752 3,951,946 Intangibles, net 3,303,685 3,548,675 ----------- ------------ $174,784,093 184,359,566 =========== ============ Liabilities & Stockholders' Equity Notes payable to banks $ 3,000,000 13,200,000 Accounts payable 2,356,669 1,873,611 Reserves for losses and loss adjustment expenses 49,124,156 47,960,084 Unearned premiums 10,767,440 12,341,642 Collateral held 19,752,635 21,830,566 Accrued liabilities 1,862,310 1,404,821 Income taxes - 239,019 Long-term debt 48,929,759 35,807,419 ----------- ----------- Total liabilities 135,792,969 134,657,162 Stockholders' Equity: Common Stock (No Par Value; 3,500,000 Shares Authorized; 598,157 and 600,257 Shares Issued and Outstanding) 598,157 600,257 Class A Stock (No Par Value; 10,000,000 Shares Authorized; 2,731,274 and 3,488,860 Shares Issued and Outstanding) 2,739,274 3,488,860 Additional paid-in capital - 8,407,877 Retained earnings 35,391,888 36,894,494 Net unrealized gain on securities 261,805 310,916 ----------- ----------- Total stockholders' equity 38,991,124 49,702,404 ----------- ----------- $174,784,093 184,359,566 =========== =========== See Notes to Consolidated Financial Statements.
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ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Three months ended, Nine months ended September 30, September 30, ------------- ------------- 1997 1996 1997 1996 ---- ---- ---- ---- Earned premiums $3,036,664 5,192,105 12,147,078 15,499,937 Contract revenues 2,754,689 2,702,168 6,346,204 7,392,586 Investment income, net 2,126,352 1,619,391 5,962,419 4,846,006 Net realized capital gains (losses) (1,042) 1,870 39,910 6,482 Other income 140,200 142,708 467,126 455,531 --------- --------- ---------- ---------- 8,056,863 9,658,242 24,962,737 28,200,542 --------- --------- ---------- ---------- Losses and loss adjustment expenses 911,000 1,560,632 3,644,124 4,652,981 Amortization of policy acquisition costs 559,125 986,314 2,328,005 2,675,251 Cost of contract revenues 2,601,277 2,300,926 5,898,330 6,669,159 Selling, general and administrative expenses 1,370,509 1,390,840 4,226,393 4,098,693 Interest expense 1,216,514 1,205,593 3,902,170 3,748,891 --------- --------- ---------- ---------- 6,658,425 7,444,305 19,999,022 21,844,975 --------- --------- ---------- ---------- Earnings before income taxes and minority interest 1,398,438 2,213,937 4,963,715 6,355,567 Income taxes Federal 375,367 544,320 1,347,003 1,509,610 State 10,000 15,000 45,000 85,000 ------- ------- ----------- --------- 385,367 559,320 1,392,003 1,594,610 ------- ------- --------- --------- Earnings before minority interest 1,013,071 1,654,617 3,571,712 4,760,957 Minority interest - (252,245) - (888,140) ---------- --------- -------------- --------- Net earnings $1,013,071 1,402,372 3,571,712 3,872,817 ========= ========= ========= ========= Net earnings per share and share equivalent $ .29 .39 .98 1.16 Net earnings per share - assuming full dilution $ .27 .32 .89 .93 Weighted average shares outstanding 3,506,449 3,561,441 3,628,856 3,335,472 See Notes to Consolidated Financial Statements.
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ACMAT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Net Common Class A Additional unrealized Total stock par stock par paid-in Retained gains (losses) stockholders' value value capital earnings on securities equity ----- ----- ------- -------- ------------- ------ Balance as of December 31, 1995 $642,464 $2,665,836 $1,921,100 $31,601,383 $756,476 $37,587,259 Acquisition and Retirement of 27,657 Shares of Common Stock (27,657) --- (475,891) --- --- (503,548) Acquisition and Retirement of 509,552 Shares of Class A Stock --- (509,552) (6,093,773) --- --- (6,603,325) Issuance of 449,999 Shares of Class A Stock --- 449,999 4,049,991 --- --- 4,499,990 Issuance of 10,000 Shares of Class A Stock pursuant to stock option --- 10,000 50,000 --- --- 60,000 Issuance of 1,111,000 Shares of Class A Stock --- 1,111,000 12,984,812 --- --- 14,095,812 Net Unrealized Losses on Debt and Equity Securities, net of tax --- --- --- --- (324,805) (324,805) Other --- --- (216,282) --- --- (216,282) Net Earnings --- --- --- 3,872,817 --- 3,872,817 --------- ----------- ------------- --------- ---------- ------------ Balance as of September 30, 1996 $614,807 $3,727,283 $12,219,957 $35,474,200 $431,671 $52,467,918 ======== ========== =========== =========== ======== ============ Balance as of December 31, 1996 $600,257 $3,488,860 $8,407,877 $36,894,494 $310,916 $49,702,404 Acquisition and retirement of 2,100 Shares of Common Stock (2,100) --- (41,396) --- --- (43,496) Acquisition and retirement of 1,305,586 Shares of Class A Stock --- (1,305,586) (13,065,231) (5,074,318) --- (19,445,135) Issuance of 450,000 Shares of Class A Stock --- 450,000 4,050,000 --- --- 4,500,000 Issuance of 106,000 shares of Class A Stock pursuant to stock options --- 106,000 648,750 --- --- 754,750 Net Unrealized losses on Debt and Equity Securities, net of taxes --- --- --- --- (49,111) (49,111) Net Earnings --- --- --- 3,571,712 --- 3,571,712 --------- ----------- ------------- ------------ ------------ ------------ Balance as of September 30, 1997 $598,157 $2,739,274 $ --- $35,391,888 $ 261,805 $38,991,124 ======== ========== ============= =========== =========== ============ See Notes to Consolidated Financial Statements.
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ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 1997 1996 ---- ---- Cash flows from operating activities: Net earnings $ 3,571,712 3,872,817 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,151,371 1,352,181 Minority interest -- 888,140 Net realized capital gains (39,910) (6,482) Changes in: Accrued interest receivable (154,048) 422,526 Reinsurance recoverable 362,725 100,413 Receivables, net 1,104,245 (1,165,372) Deferred policy acquisition costs 421,064 147,702 Prepaid expenses and other assets 429,020 290,457 Accounts payable and accrued liabilities 940,547 410,381 Collateral held (2,077,931) 3,201,218 Reserves for losses and loss adjustment expenses 1,164,072 2,723,426 Income taxes, net (381,476) 560,438 Unearned premiums (1,574,202) (555,420) ------------- ------------- Net cash provided by operating activities 4,917,189 12,242,425 ------------- ------------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed maturities-sold 19,840,821 9,850,087 Fixed maturities-matured 28,822,511 45,916,500 Equity securities -- 20,000 Short-term investments 124,376,204 61,370,090 Purchases of: Fixed maturities (75,521,830) (60,174,802) Equity securities (750,000) (255,262) Short-term investments (88,880,831) (65,410,620) Limited partnership investment adjustment (967,025) 11,360 Costs associated with merger of United Coasts -- (280,522) Capital expenditures (125,135) (126,386) ------------- ------------- Net cash provided by (used for) investing activities 6,694,715 (9,079,555) ------------- ------------- Cash flows from financing activities: Borrowings under line of credit 3,000,000 8,700,000 Payments under line of credit (13,200,000) (3,500,000) Payments on long-term debt (2,877,658) (1,375,395) Issuance of long-term debt 8,500,000 2,500,000 Issuance of Class A Stock 754,750 60,000 Payments for subsidiary stock -- (399,917) Payments for acquisition & retirement of stock (7,488,631) (7,106,873) ------------- ------------- Net cash used for financing activities (11,311,539) (1,122,185) ------------- ------------- Net increase (decrease) in cash 300,365 2,040,685 Cash at beginning of period 2,187,227 5,120,375 ------------- ------------- Cash at end of period $ 2,487,592 7,161,060 ============= ============= See Notes to Consolidated Financial Statements.
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, 1996. (2) Earnings Per Share The earnings per share and share equivalent were computed by dividing net earnings by the weighted average number of Common and Class A shares outstanding for the period and includes the common stock equivalency of outstanding options, if dilutive. The number of shares was also increased by the number of shares issuable on the exercise of options when the market price of the stock exceeded the exercise price of the option. This increase in the number of shares was reduced by the number of shares which are assumed to have been purchased with the proceeds from the exercise of the option; these purchases were assumed to have been made at the average price of the common stock during that part of the period when the market price of the common stock exceeded the exercise price of the option. Earnings per share - assuming full dilution was determined on the assumptions that the convertible notes were converted and the options were exercised at the beginning of the period. As to the debentures, net earnings were adjusted for the interest expense, net of its tax effect. As to the options, outstanding shares were increased as described above, except that purchases were assumed to have been made at the period-end price of the shares as it was higher than the average price during the period. (3) Supplemental Cash Flow Information Income taxes paid during the nine months ended September 30, 1997 and 1996 was $1,773,479 and $1,034,172, respectively, and interest paid for the nine months ended September 30, 1997 and 1996 was $3,190,792 and $3,315,349, respectively. On February 5, 1997, the Company issued 450,000 shares of Class A stock at $10 per share pursuant to the conversion options of the Convertible Senior Notes to AIG Life Insurance Company and American International Life Assurance Company of New York. During the first nine months of 1996, the Company issued 449,999 shares of Class A Stock at $10 per share pursuant to the conversion options of the Convertible Senior Notes to AIG Life Insurance Company and American International Life Assurance Company of New York. The issuance of stock pursuant to the conversion option of the Convertible Senior Notes is a non-cash transaction that is not reflected in the Statements of Cash Flows. (4) Merger with United Coasts Corporation Effective September 16, 1996, the Company completed the merger of United Coasts Corporation into ACMAT. United Coasts Corporation shareholders received one share of ACMAT Class A stock for each approximately 1.536 shares of United Coasts Corporation stock. As a result of the merger, ACMAT issued approximately 1,100,000 shares of its Class A stock amounting to a purchase price of approximately $14 million for the 16% minority interest in the insurance holding company subsidiary. As a result, United Coastal Insurance Company, formerly a subsidiary of United Coasts, has become a wholly-owned subsidiary of ACMAT and its affiliates. The merger is a non-cash transaction that is not reflected in the Statements of Cash Flows. 8 (5) Stock Transaction On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its own Class A Stock from AIG Life Insurance Company (366,663 shares) and American International Life Assurance Company of New York, (733,333). The shares were purchased at an average price of $14.70 per share for a total purchase price of $16,174,942. The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory notes totaling $12,000,000. The promissory notes are with AIG Life Insurance Company and American International Life Assurance Company of New York and are payable over eight years with interest at prime rate (8-1/4%). The interest rate is equal to the prime rate, however, it shall not exceed 9-1/4% and it shall not be less than 7-1/4%. The purchase of stock with the $12,000,000 promissory notes is a non-cash transaction that is not reflected in the Consolidated Statement of Cash Flows. The 1,099,996 shares of Class A Stock were acquired throughout the past two years by AIG Life Insurance Company and American International Life Assurance Company of New York pursuant to the conversion options of the Convertible Senior Notes. (6) Application of New Accounting Standards The Financial Accounting Standards Board (FASB) has recently issued SFAS No. 128, "Earnings per Share". This statement simplifies the computation of earnings per share (EPS) by replacing the presentation of primary EPS with basic EPS. Under the new statement, dual presentation of basic and diluted EPS is required on the face of the income statement for entities with complex capital structures. A reconciliation of the numerator and denominator used in the basic EPS computation's numerator and denominator is also required. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company believes that the effect of the adoption of SFAS No. 128 will not be material to its disclosure of earnings per share. In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income". The objective of SFAS No. 130 is to report comprehensive income which is defined as all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods, provided for comparative purposes, is required. The Company is currently evaluating the presentation alternatives provided by the statement. In June 1997, FASB issued SFAS No. 131, "Financial Reporting for Segments of a Business Enterprise". SFAS No. 131 was developed jointly by the FASB and the Accounting Standards Board of the Canadian Institute of Charted Accountants in response to requests from financial statement users for additional and better segment information. This statement is effective for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated, unless it is impracticable to do so. The Company does not anticipate that the adoption of this Statement will significantly impact the composition of its current operating segments which are consistent with the management approach. 9 ACMAT CORPORATION Item 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations RESULTS OF OPERATIONS: Overview Net earnings were $1,013,071 for the three months ended September 30, 1997 compared with $1,402,372 for the same period a year ago. Net earnings for the nine months ended September 30, 1997 were $3,571,712 compared with $3,872,817 for the nine months ended September 30, 1996. The decrease in net earnings for the three and nine month periods is a result of a decrease in earned premiums and contract revenues partially offset by an increase in investment income. Earned Premiums Net written premiums were $3,362,906 for the three months ended September 30, 1997 compared with $4,538,447 for the three months ended September 30, 1996. Net written premiums for the nine months ended September 30, 1997 were $10,659,520 compared with $15,009,830 for the nine months ended September 30, 1996. Premiums earned for the three months ended September 30, 1997 were $3,036,664 as compared with $5,192,105 for the three months ended September 30, 1996. Premiums earned for the nine months ended September 30, 1997 were $12,147,078 as compared with $15,499,937 for the nine months ended September 30, 1996. The decrease in net written premiums and earned premiums for the three and nine-month periods ended September 30, 1997 compared with the same periods in 1996 is primarily due to a continuing soft insurance market place and the Company's strategy to avoid current unfavorable pricing in the Company's casualty operations. 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. The Company will maintain its existing pricing strategy and high level of service. Contract Revenues Contract revenues were $2,754,689 for the three-month period ended September 30, 1997 compared with $2,702,168 for the same period in 1996. Contract revenues decreased to $6,346,204 for the nine-month period ended September 30, 1997 compared with $7,392,586 for the same period in 1996. Construction revenue is difficult to predict and depends greatly on the successful securement of contracts bid. The Company's construction backlog was approximately $8,100,000 at September 30, 1997 compared to $5,800,000 a year ago. Investment Income, Net Net investment income was $2,126,352 for the three-month period ended September 30, 1997 compared with $1,619,391 for the same period in 1996, representing effective yields of 6.18% and 4.46%, respectively. Net investment income was $5,962,419 for the nine-month period ended September 30, 1997 compared with $4,846,006 for the same period in 1996, representing effective yields of 5.65% and 4.55%, respectively. The increase in investment income for 1997 over 1996 was due substantially to higher yields on the portfolio as the result of higher interest rates obtained on reinvested assets and the increased earnings from the limited partnership investments. Invested assets, including cash, were $137,107,845 and $144,117,159 at September 30, 1997 and December 31, 1996, respectively. The decrease in invested assets is attributable to net cash flow used to repay debt and repurchase stock offset by net cash flow generated from written premiums and the reinvestment of investment income. Net Realized Capital Gains Realized capital losses were $1,042 for the three-month period ended September 30, 1997 compared with realized capital gains of $1,870 for the same period in 1996. Realized capital gains in the nine-month period ended September 30, 1997 were $39,910 compared with realized capital gains of $6,482 for the same period in 1996. Cost of Contract Revenues Cost of contract revenues were $2,601,277 for the three-month period ended September 30, 1997 compared with $2,300,954 for the same period a year ago. Cost of contract revenues were $5,898,330 for the nine-month period ended September 30, 1997 compared with $6,669,187 for the same period in 1996. Costs of contract revenues vary from period to period as a function of contract revenues (See Contract Revenues). 10 Losses and Loss Adjustment Expenses Losses and loss adjustment expenses were $911,000 for the three-month period ended September 30, 1997 compared with $1,560,632 for the same period in 1996. Losses and loss adjustment expenses were $3,644,124 for the nine months ended September 30, 1997 compared with $4,652,981 for the nine months ended September 30, 1996. The decrease in losses and loss adjustment expenses for the three and nine months ended September 30, 1997 are attributable to the decline in earned premiums from 1996 to 1997 without any fluctuations in the loss ratios. Losses 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 $559,125 for the three-month period ended September 30, 1997 as compared with $986,314 for the same period in 1996. For the nine months ended September 30, 1997, amortization of policy acquisition cost was $2,328,005 compared with $2,675,251 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 47.8% in 1997 from 42.9% in 1996 due primarily to a decrease in earned premiums. Selling, General and Administrative Expenses Selling, general and administrative expenses were $1,370,509 for the three-month period ended September 30, 1997 compared with $1,390,840 for the same period in 1996. Selling, general and administrative expenses were $4,226,393 for the nine-month period ended September 30, 1997 compared with $4,098,693 for the same period in 1996. The increase in the selling, general and administrative expenses during the nine-month period ended September 30, 1997 is due primarily to an increase in bad debt expense. Interest Expense Interest expense increased to $1,216,514 for the three-month period ended September 30, 1997 compared with $1,205,593 for the same period in 1996. Interest expense increased to $3,902,170 for the nine-month period ended September 30, 1997 compared with $3,748,891 for the same period in 1996. The increase in interest expense is due to an increase in long-term debt issued to purchase stock offset in part by a decrease in short-term debt. Income Taxes Income tax expense was $385,367 for the three-month period ended September 30, 1997 compared with $559,320 for the same period in 1996, representing effective tax rates of 27.6% and 25.3%, respectively. Income tax expense was $1,392,003 for the nine-month period ended September 30, 1997 compared with $1,594,610 for the same period in 1996, representing effective tax rates of 28.0% and 25.1%, respectively. The effective tax rate fluctuates according to the mix of tax-exempt and taxable securities held by the Company. 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, 1997 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. Reserves for surety claims also consider the amount of collateral held as well as the financial strength of the principal and its indemnitors. 11 The Company's insurance subsidiaries' loss ratio under generally accepted accounting principles ("GAAP") were 30.0% for the nine-month periods ended September 30, 1997 and 1996. 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 47.8% and 42.9% for the nine-month period ended September 30, 1997 and 1996, respectively. The Company's insurance subsidiaries' combined ratios under GAAP were 77.8% and 72.9% for the nine-month periods ended September 30, 1997 and 1996, 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, 1997, 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 year. ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from operating activities primarily because of interest expense related to notes payable and long-term debt incurred by it to acquire and capitalize its insurance subsidiaries and to repurchase stock. 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 subsidiaries. ACMAT has recently utilized borrowings to repurchase its stock. On a long-term basis, ACMAT could rely, if necessary, on dividends from its insurance companies to improve working capital. The Company realized cash flow from operations of $4,917,189 for the nine-month period ended September 30, 1997, compared to $12,242,425 for the same period in 1996. Net cash flows provided by operations in 1996 were derived principally from premium collections and receipt of collateral held. 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 provided by investing activities in 1997 amounted to $6,694,715, compared to net cash used for investing activities of $9,079,555 for the same period in 1996. 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 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, 1997. The Company maintains a short-term unsecured bank credit line totaling $10.0 million to fund interim cash requirements. There was $3,000,000 outstanding under this line of credit at September 30, 1997. During the nine-month period ended September 30, 1997, the Company purchased, in the open market and in privately negotiated transactions, 2,100 shares of its Common Stock at an average price of $20.71. The Company also purchased, in open market and privately negotiated transactions, 1,305,586 shares of its Class A Stock at an average price of $14.89 per share. The Company's principal source of cash for repayment of long-term debt is dividends from its two insurance subsidiaries. Under applicable insurance regulations, ACMAT's insurance subsidiaries are restricted as to the amount of dividends they may pay to their respective holding company, 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 $7,011,000 in 1997. 12 REGULATORY ENVIRONMENT Risk-based capital requirements are used as early warning tools by the National Association of Insurance Commissioners and the states to identify Companies that require further regulatory action. The ratio for each of the Company's insurance subsidiaries as of September 30, 1997 was significantly above the level which might require regulatory action. 13 Part II - Other Information Item - Exhibits and Reports on Form 8-K a. Exhibits - 27. Financial Data Schedule b. Report on Form 8-K - None 14 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 14, 1997 s/ Henry W. Nozko, Sr. ---------------------- Henry W. Nozko, Sr., President and Chairman Date: November 14, 1997 /s/ Henry W. Nozko, Jr. ----------------------- Henry W. Nozko, Jr., Executive Vice President Chief Operating Officer, and Treasurer EX-27 2 EX-27
5 1 3-MOS DEC-31-1996 SEP-30-1997 2,487,592 134,620,253 7,302,345 (25,000) 0 152,338,029 17,686,065 4,404,249 174,784,093 86,863,210 48,929,759 0 0 3,337,431 35,653,693 174,784,093 5,791,353 8,056,863 4,071,402 4,071,402 1,370,509 0 1,216,514 1,398,438 385,367 1,013,071 0 0 0 1,013,071 .29 .27
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