<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, 1996
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)
Registrants'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, 1996
- -------------- -------------------
<S> <C>
Common Stock 602,807
Class A Stock 3,586,632
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I FINANCIAL INFORMATION
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 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</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,
Assets 1996 1995
- ------ ---------- ---------
<S> <C> <C>
Investments:
Fixed maturities-available for sale,
at market (Cost of 125,410,203 in 1996 and
121,612,706 in 1995) $125,608,039 122,387,491
Equity securities, at market value
(Cost $255,262 in 1996 and
$20,000 in 1995) 280,262 20,000
Limited partnership investment, at
market value (Cost $1,108,995 in 1996
and $1,120,354 in 1995) 1,539,365 1,641,763
Short-term investments, at cost which
approximates market 12,399,577 8,359,047
------------ ------------
Total investments 139,827,243 132,408,301
Cash 7,161,060 5,120,375
Accrued interest receivable 1,808,462 2,230,988
Reinsurance recoverable 3,771,686 3,872,099
Receivables, net 10,187,806 9,022,434
Federal income tax recoverable - 233,572
Prepaid expenses 363,595 178,965
Deferred income taxes 2,371,960 1,971,148
Property & equipment, net 13,679,272 13,987,256
Deferred policy acquisition costs 3,311,606 3,459,308
Other assets 3,339,320 3,869,028
Intangibles, net 3,594,591 4,048,764
------------ ------------
$189,416,601 180,402,238
============ ============
Liabilities & Stockholders' Equity
Notes payable to banks $ 12,700,000 7,500,000
Accounts payable 2,148,360 2,189,645
Reserves for losses and loss
adjustment expenses 47,958,737 45,235,311
Unearned premiums 13,747,193 14,302,613
Collateral held 20,969,173 17,767,955
Accrued liabilities 2,313,481 1,861,815
Income taxes 359,534 -
Long-term debt 36,752,205 40,127,590
------------ ------------
Total liabilities 136,948,683 128,984,929
Minority interests - 13,830,050
Stockholders' Equity:
Common Stock (No Par Value; 3,500,000 Shares
Authorized; 614,807 and 642,464
Shares Issued and Outstanding) 614,807 642,464
Class A Stock (No Par Value; 10,000,000
Shares Authorized; 3,727,283 and
2,665,836 Shares Issued and Outstanding) 3,727,283 2,665,836
Additional paid-in capital 12,219,957 1,921,100
Retained earnings 35,474,200 31,601,383
Net unrealized gain on securities 431,671 756,476
------------ ------------
Total stockholders' equity 52,467,918 37,587,259
------------ ------------
$189,416,601 180,402,238
============ ============
</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,
------------------ ---------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Earned premiums $ 5,192,105 6,190,342 15,499,937 18,238,575
Contract revenues 2,702,168 3,280,366 7,392,586 9,022,314
Investment income, net 1,619,391 1,531,607 4,846,006 4,471,058
Net realized capital gains (losses) 1,870 (20,179) 6,482 (27,879)
Other income 142,708 158,502 455,531 529,878
------------ ------------ ------------ ------------
9,658,242 11,140,638 28,200,542 32,233,946
------------ ------------ ------------ ------------
Losses and loss adjustment
expenses 1,560,632 1,847,000 4,652,981 5,511,015
Amortization of policy
acquisition costs 986,314 1,097,789 2,675,251 3,167,319
Cost of contract revenues 2,300,926 2,990,986 6,669,159 8,442,970
Selling, general and
administrative expenses 1,390,840 1,539,128 4,098,693 4,452,432
Interest expense 1,205,593 1,193,257 3,748,891 3,605,830
------------ ------------ ------------ ------------
7,444,305 8,668,160 21,844,975 25,179,566
------------ ------------ ------------ ------------
Earnings before income taxes and
minority interests 2,213,937 2,472,478 6,355,567 7,054,380
Income taxes
Federal 544,320 621,196 1,509,610 1,788,906
State 15,000 35,000 85,000 105,000
------------ ------------ ------------ ------------
559,320 656,196 1,594,610 1,893,906
------------ ------------ ------------ ------------
Earnings before minority
interests 1,654,617 1,816,282 4,760,957 5,160,474
Minority interests (252,245) (356,425) (888,140) (1,048,223)
------------ ------------ ------------ ------------
Net earnings $ 1,402,372 1,459,857 3,872,817 4,112,251
============ ============ ============ ============
Net earnings per share and share
equivalent $ .39 .42 1.16 1.10
Net earnings per share -
assuming full dilution $ .32 .32 .93 .88
Weighted average shares
outstanding 3,561,441 3,512,357 3,335,472 3,750,600
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Class A
stock stock Additional
par par paid-in Retained
value value capital earnings
----- ----- ------- --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1994 $ 652,920 $ 3,313,067 $ 9,358,948 $ 26,251,103
Acquisition and retirement of 5,456
Shares of Common Stock (5,456) --- (80,579) ---
Acquisition and retirement of 627,116
Shares of Class A Stock --- (627,116) (6,701,741) ---
Issuance of 99,998 Shares
of Class A Stock --- 99,998 899,982 ---
Net Unrealized Appreciation of Debt
and Equity Securities --- --- --- ---
Net Earnings --- --- --- 4,112,251
------------ ------------ ------------ ------------
Balance as of September 30, 1995 $ 647,464 $ 2,785,949 $ 3,476,610 $ 30,363,354
============ ============ ============ ============
Balance as of December 31, 1995 $ 642,464 $ 2,665,836 $ 1,921,100 $ 31,601,383
Acquisition and Retirement of 27,657
Shares of Common Stock (27,657) --- (475,891) ---
Acquisition and Retirement of
509,552 Shares of Class A Stock --- (509,552) (6,093,773) ---
Issuance of 449,999 Shares of
Class A Stock --- 449,999 4,049,991 ---
Issuance of 10,000 Shares of
Class A Stock pursuant to stock
options --- 10,000 50,000 ---
Issuance of 1,110,000 Shares of
Class A Stock --- 1,111,000 12,984,812 ---
Net Unrealized Losses on Debt and
Equity Securities, net of taxes --- --- --- ---
Other --- --- (216,282) ---
Net Earnings --- --- --- 3,872,817
------------ ------------ ------------ ------------
Balance as of September 30, 1996 $ 614,807 $ 3,727,283 $ 12,219,957 $ 35,474,200
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Net
unrealized
gains Total
(losses) stockholders'
on securities equity
------------- ------
<S> <C> <C>
Balance as of December 31, 1994 $ (1,571,103) $ 38,004,935
Acquisition and retirement of 5,456
Shares of Common Stock --- (86,035)
Acquisition and retirement of 627,116
Shares of Class A Stock --- (7,328,857)
Issuance of 99,998 Shares
of Class A Stock --- 999,980
Net Unrealized Appreciation of Debt
and Equity Securities, net of taxes 2,659,280 2,659,280
Net Earnings --- 4,112,251
------------ ------------
Balance as of September 30, 1995 $ 1,088,177 $ 38,361,554
============ ============
Balance as of December 31, 1995 $ 756,476 $ 37,587,259
Acquisition and Retirement of 27,657
Shares of Common Stock --- (503,548)
Acquisition and Retirement of
509,552 Shares of Class A Stock --- (6,603,325)
Issuance of 449,999 Shares of
Class A Stock --- 4,499,990
Issuance of 10,000 Shares of
Class A Stock pursuant to stock
options --- 60,000
Issuance of 1,110,000 Shares of
Class A Stock --- 14,095,812
Net Unrealized Losses on Debt and
Equity Securities (324,805) (324,805)
Other --- (216,282)
Net Earnings --- 3,872,817
------------ ------------
Balance as of September 30, 1996 $ 431,671 $ 52,467,918
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 3,872,817 4,112,251
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,352,181 1,658,991
Minority interests 888,140 1,048,223
Net realized capital (gains) losses (6,482) 27,879
Changes in:
Accrued interest receivable 422,526 (316,679)
Reinsurance recoverable 100,413 622,037
Receivables, net (1,165,372) 260,225
Deferred policy acquisition costs 147,702 158,845
Prepaid expenses and other assets 290,457 (66,428)
Accounts payable and accrued liabilities 410,381 1,051,837
Collateral held 3,201,218 4,806,214
Reserves for losses and loss
adjustment expenses 2,723,426 3,182,090
Income taxes, net 560,438 (420,730)
Unearned premiums (555,420) (903,193)
------------ ------------
Net cash provided by operating
activities 12,242,425 15,221,562
------------ ------------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed maturities-sold 9,850,087 8,788,372
Fixed maturities-matured 45,916,500 38,525,426
Equity securities 20,000 614,340
Purchases of:
Fixed maturities (60,174,802) (60,773,475)
Equity securities (255,262) -
Limited Partnership Investment 11,360 (51,397)
Short-term investments, net (4,040,530) 3,040,120
Costs associated with merger of United Coasts (280,522) -
Capital expenditures (126,386) (136,341)
------------ ------------
Net cash used for investing activities (9,079,555) (9,992,955)
------------ ------------
Cash flows from financing activities:
Borrowings under line of credit 8,700,000 1,700,000
Payments under line of credit (3,500,000) -
Payments on long-term debt (1,375,395) (1,557,569)
Issuance of long-term debt 2,500,000 -
Issuance of Class A Stock 60,000 -
Payments for subsidiary stock (399,917) (35,000)
Payments for acquisition & retirement
of stock (7,106,873) (7,414,892)
------------ ------------
Net cash used for financing activities (1,122,185) (7,307,461)
------------ ------------
Net increase (decrease) in cash 2,040,685 (2,078,854)
Cash at beginning of period 5,120,375 5,471,148
------------ ------------
Cash at end of period $ 7,161,060 3,392,294
============ ============
</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, 1995.
(2) Earnings Per Share
The earnings per share and share equivalent for the nine month periods 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, 1996 and 1995 was
$1,034,172 and $2,314,635, respectively, and interest paid for the nine months
ended September 30, 1996 and 1995 was $3,315,349 and $3,113,161, respectively.
During the first nine months of 1996 and 1995, the Company issued 449,999 and
99,998 shares, respectively, 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.
The merger of United Coasts into ACMAT has been accounted for by the purchase
method and, accordingly, the purchase price was allocated to the net assets of
United Coasts based on the fair value of the assets purchased and liabilities
assumed on September 16, 1996.
7
<PAGE> 8
The following table presents the pro forma results of operations as if the
merger of United Coasts had been consummated at the beginning of the periods
presented. These pro forma results have been prepared for comparative purposes
only and are not necessarily indicative of the actual results of operations that
would have occurred had the merger actually been made at the beginning of the
periods presented, or of results which may occur in the future.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues $9,658,242 11,140,638 28,200,542 32,233,946
Net earnings $1,654,617 1,816,282 4,760,957 5,160,474
Net earnings per share and
share equivalent .37 .39 1.08 1.06
Net earnings per share -- assuming
full dilution .31 .32 .91 .89
</TABLE>
(5) Application of New Accounting Standards
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (FAS 121). This statement establishes
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles to be disposed of. This statement requires a write down
to fair value when long-lived assets to be held and used are impaired. The
adoption of this statement did not have any effect on results of operations,
financial condition or liquidity as no adjustments were required.
Also, effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123). This statement addresses alternative accounting treatments for stock-based
compensation, such as stock options and restricted stock. FAS 123 permits
disclosing in the financial statement footnotes the proforma impact to net
earnings as if the value of stock-based compensation awards had been expensed.
The value of awards are measured at the grant date based upon estimated fair
value, using option pricing models. The Company has selected the alternative
method which provides for pro forma disclosure in the footnotes to the year-end
financial statements only.
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 were $1,402,372 for the three months ended September 30, 1996
compared to $1,459,857 for the same period a year ago. Net earnings for the nine
months ended September 30, 1996 were $3,872,817 compared to $4,112,251 for the
nine months ended September 30, 1995. 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 $4,538,447 for the three months ended September 30,
1996 compared to $5,237,706 for the three months ended September 30, 1995. Net
written premiums for the nine months ended September 30, 1996 were $15,009,830
compared to $17,801,329 for the nine months ended September 30, 1995. Premiums
earned for the three months ended September 30, 1996 were $5,192,105 as compared
to $6,190,342 for the three months ended September 30, 1995. Premiums earned for
the nine months ended September 30, 1996 were $15,499,937 as compared to
$18,238,575 for the nine months ended September 30, 1995. The decrease in net
written premiums and earned premiums for the three and nine-month periods ended
September 30, 1996 compared to the same periods in 1995 is primarily due to a
continuing soft insurance market place. 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 decreased to $2,702,168 for the three-month period ended
September 30, 1996 compared to $3,280,366 for the same period in 1995. Contract
revenues decreased to $7,392,586 for the nine-month period ended September 30,
1996 compared to $9,022,314 for the same period in 1995. During the past several
years, the Company has focused on more profitable projects. Construction revenue
is difficult to predict and depends greatly on the successful securement of
contracts bid.
Investment Income, Net
Net investment income was $1,619,391 for the three-month period ended September
30, 1996 compared to $1,531,607 for the same period in 1995, representing
effective yields of 4.46% and 4.59%, respectively. Net investment income was
$4,846,006 for the nine-month period ended September 30, 1996 compared to
$4,471,058 for the same period in 1995, representing effective yields of 4.55%
and 4.60%, respectively. The increase in investment income for 1996 over 1995
was due substantially to an increase in total invested assets. Invested assets,
including cash, were $146,988,303 and $137,528,676 at September 30, 1996 and
December 31, 1995, 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 gains were $1,870 for the three-month period ended September
30, 1996 compared to realized capital losses of $20,179 for the same period in
1995. Realized capital gains in the nine-month period ended September 30, 1996
were $6,482 compared to realized capital losses of $27,879 for the same period
in 1995.
Cost of Contract Revenues
Cost of contract revenues were $2,300,954 for the three-month period ended
September 30, 1996 compared to $2,990,986 for the same period a year ago. Cost
of contract revenues were $6,669,187 for the nine-month period ended September
30, 1996 compared to $8,442,970 for the same period in 1995. Costs of contract
revenues vary from period to period as a
9
<PAGE> 10
function of contract revenues (See Contract Revenues). The Company's
construction backlog was approximately $5,800,000 at September 30, 1996 compared
to $3,150,000 a year ago.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $1,560,632 for the three-month period
ended September 30, 1996 compared to $1,847,000 for the same period in 1995.
Losses and loss adjustment expenses were $4,652,981 for the nine months ended
September 30, 1996 compared to $5,511,015 for the nine months ended September
30, 1995. The decrease in losses and loss adjustment expenses for the three and
nine months ended September 30, 1996 are attributable to the decline in earned
premiums from 1995 to 1996 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 $986,314 for the three-month period
ended September 30, 1996 as compared to $1,097,789 for the same period in 1995.
For the nine months ended September 30, 1996, amortization of policy acquisition
cost was $2,675,251 compared to $3,167,319 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 42.9% in
1996 from 40.4% in 1995 due primarily to a decrease in earned premiums.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,390,840 for the three-month
period ended September 30, 1996 compared to $1,539,128 for the same period in
1995. Selling, general and administrative expenses were $4,098,693 for the
nine-month period ended September 30, 1996 compared to $4,452,432 for the same
period in 1995. The decrease in the selling, general and administrative expenses
during the three and nine-month periods ended September 30, 1996 is due
primarily to a decrease in salary expense.
Interest Expense
Interest expense increased to $1,205,593 for the three-month period ended
September 30, 1996 compared to $1,193,257 for the same period in 1995. Interest
expense increased to $3,748,891 for the nine-month period ended September 30,
1996 compared to $3,605,830 for the same period in 1995.
Income Taxes
Income tax expense was $559,320 for the three-month period ended September 30,
1996 compared to $656,196 for the same period in 1995, representing effective
tax rates of 25.3% and 26.5%, respectively. Income tax expense was
$1,594,610 for the nine-month period ended September 30, 1996 compared to
$1,893,906 for the same period in 1995, representing effective Federal tax rates
of 25.1% and 26.8%, respectively. The effective tax rate for 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, 1996 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
10
<PAGE> 11
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.
The Company's insurance subsidiaries' loss ratio under generally accepted
accounting principles ("GAAP") were 30.0% and 29.9% for the nine-month periods
ended September 30, 1996 and 1995, respectively. 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 42.9% and 40.4%
for the nine-month period ended September 30, 1996 and 1995, respectively. The
Company's insurance subsidiaries' combined ratios under GAAP were 72.9% and
70.3% for the nine-month period ended September 30, 1996 and 1995, 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, 1996, 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.
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. On a long-term
basis, ACMAT could rely, if necessary, on dividends from its insurance
companies 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 $12,242,425 for the nine-month
period ended September 30, 1996, compared to $15,221,542 for the same period in
1995. 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 used for investing activities in 1996 amounted to $9,079,555, compared
to net cash used for investing activities of $9,992,955 for the same period in
1995.
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, 1996, except for the limitation on the reacquisition of shares
which exceeded the Available Fund at September 30, 1996. The Company does not
consider this a significant event of default and expects to receive a waiver
from the note holders.
11
<PAGE> 12
The Company maintains two short-term unsecured bank credit lines totaling $17.5
million to fund interim cash requirements. There was $12,700,000 outstanding
under these lines of credit at September 30, 1996.
During the nine-month period ended September 30, 1996, the Company purchased, on
the open market and in privately negotiated transactions, 27,657 shares of its
Common Stock at an average price of $18.21. The Company also purchased, in
open market and privately negotiated transactions, 509,552 shares of its Class A
Stock at an average price of $12.96 per share.
The Company's principal source of cash for repayment of long-term debt is
dividends from ACSTAR Holdings and United Coastal Insurance Company. 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
$6,600,000 in 1996.
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, 1996 was significantly above the level which
might require regulatory action.
12
<PAGE> 13
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Stockholders of ACMAT Corporation was held on
Thursday, July 11, 1996
b. Directors elected at the meeting:
<TABLE>
<CAPTION>
Votes Votes Brokers
For Against Non-Votes
<S> <C> <C> <C>
Henry Nozko, Sr. 795,634 130 0
Henry Nozko, Jr. 795,584 180 0
Victoria Nozko 795,414 350 0
John Creasy 795,424 340 0
Michael Sullivan 795,144 620 0
</TABLE>
c. Other matters voted upon:
<TABLE>
<CAPTION>
Brokers
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
1. Appointment of Independent
Auditors 795,949 165 50 0
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits -
27. Financial Data Schedule
b. Report on Form 8-K - None
13
<PAGE> 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, 1996 /s/ Henry W. Nozko, Sr.
------------------------
Henry W. Nozko, Sr., President and Chairman
Date: November 14, 1996 /s/ Henry W. Nozko, Jr.
------------------------
Henry W. Nozko, Jr., Executive Vice President
Chief Operating Officer, and Treasurer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 7,161,060
<SECURITIES> 139,827,243
<RECEIVABLES> 10,442,631
<ALLOWANCES> (254,825)
<INVENTORY> 0
<CURRENT-ASSETS> 163,119,852
<PP&E> 17,652,202
<DEPRECIATION> 3,972,930
<TOTAL-ASSETS> 189,416,601
<CURRENT-LIABILITIES> 100,196,478
<BONDS> 36,752,205
0
0
<COMMON> 4,342,090
<OTHER-SE> 48,125,828
<TOTAL-LIABILITY-AND-EQUITY> 189,416,601
<SALES> 7,894,273
<TOTAL-REVENUES> 9,658,242
<CGS> 4,847,872
<TOTAL-COSTS> 4,847,872
<OTHER-EXPENSES> 1,390,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,205,593
<INCOME-PRETAX> 2,213,937
<INCOME-TAX> 559,320
<INCOME-CONTINUING> 1,654,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,402,372
<EPS-PRIMARY> .39
<EPS-DILUTED> .32
</TABLE>
