<PAGE> 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.
<TABLE>
<CAPTION>
Shares outstanding
Title of Class at October 31, 1995
- -------------- -------------------
<S> <C>
Common Stock 647,464
Class A Stock 2,731,837
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION PAGE
----
<S> <C>
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
</TABLE>
2
<PAGE> 3
Part I Financial Information
Item I Financial Statements
ACMAT CORPORATION AND SUBSIDIARIES
Financial Statements
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
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
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Three months ended, Nine months ended
September 30, September 30,
-------------------- --------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Common Class A unrealized
stock stock Additional gains Total
par par paid-in Retained (losses) stockholders'
value value capital earnings on securities equity
----- ----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
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
======== ========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
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
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1995
<CASH> 3,392,294
<SECURITIES> 131,246,145
<RECEIVABLES> 9,415,157
<ALLOWANCES> (194,815)
<INVENTORY> 0
<CURRENT-ASSETS> 150,062,473
<PP&E> 17,832,681
<DEPRECIATION> 3,773,818
<TOTAL-ASSETS> 177,552,893
<CURRENT-LIABILITIES> 84,770,825
<BONDS> 40,847,717
<COMMON> 3,433,413
0
0
<OTHER-SE> 34,928,141
<TOTAL-LIABILITY-AND-EQUITY> 177,552,893
<SALES> 9,470,708
<TOTAL-REVENUES> 11,140,638
<CGS> 5,935,775
<TOTAL-COSTS> 5,935,775
<OTHER-EXPENSES> 1,539,128
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,193,257
<INCOME-PRETAX> 2,472,478
<INCOME-TAX> 656,196
<INCOME-CONTINUING> 1,816,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,459,857
<EPS-PRIMARY> .42
<EPS-DILUTED> .32
</TABLE>
