-----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, Itui8c4vX3auU6JKXB9igWVwwSM1R480+Ap25tjqhiwr1PP6e0EyzfEIm50HwsnQ RzyHakmvOTNf10cwAr0/3w== 0000914039-98-000344.txt : 19980817 0000914039-98-000344.hdr.sgml : 19980817 ACCESSION NUMBER: 0000914039-98-000344 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: 98690086 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 June 30, 1998 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 July 31, 1998 - -------------- ---------------- Common Stock 596,357 Class A Stock 2,625,416 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 4.Submission of Matters to a Vote of Security Holders 13 Item 6.Exhibits and Reports on Form 8-K 13 Signatures 14 2 3 Part I Financial Information Item 1 Financial Statements ACMAT CORPORATION AND SUBSIDIARIES Financial Statements Consolidated Balance Sheets
June 30, 1998 December 31, 1997 ------------- ----------------- Assets Investments: Fixed maturities-available for sale, at market (Cost of $107,764,006 in 1998 and 101,523,931 in 1997) $107,974,134 101,852,980 Equity securities, at market value (Cost $1,005,262 in 1998 and $983,074 in 1997) 1,027,702 1,010,927 Short-term investments, at cost which approximates market 8,788,418 32,422,313 ------------- ------------ Total investments 117,790,254 135,286,220 Cash 4,043,523 2,095,449 Accrued interest receivable 1,464,610 1,458,164 Reinsurance recoverable 3,470,313 3,478,121 Receivables, net 7,523,506 7,118,527 Income tax refund receivable 128,595 564,829 Prepaid expenses 180,741 204,642 Deferred income taxes 1,799,503 1,940,936 Limited partnership investment 1,866,913 2,052,475 Property & equipment, net 12,928,465 13,179,337 Deferred policy acquisition costs 1,935,901 2,078,405 Other assets 7,451,666 3,529,634 Intangibles, net 3,058,697 3,222,023 ------------ ------------ 163,642,687 176,208,762 =========== =========== Liabilities & Stockholders' Equity Notes payable to banks 4,000,000 5,000,000 Accounts payable 3,430,216 3,188,554 Reserves for losses and loss adjustment expenses 45,161,443 48,900,713 Unearned premiums 9,407,709 9,804,159 Collateral held 14,574,099 20,275,702 Accrued liabilities 1,332,200 1,249,168 Long-term debt 45,276,860 48,212,727 ---------- ----------- Total liabilities 123,182,527 136,631,023 Stockholders' Equity: Common Stock (No Par Value; 3,500,000 Shares Authorized; 596,357 and 596,857 Shares Issued and Outstanding) 596,357 596,857 Class A Stock (No Par Value; 10,000,000 Shares Authorized; 2,688,380 and 2,712,174 Shares Issued and Outstanding) 2,688,380 2,712,174 Retained earnings 37,021,929 36,033,153 Accumulated other Comprehensive Income 153,494 235,555 ------------ ------------ Total stockholders' equity 40,460,160 39,577,739 ------------ ---------- $163,642,687 176,208,762 ============ ===========
See Notes to Consolidated Financial Statements. 3 4 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings
Three months ended, Six months ended, June 30, June 30, ---------- ---------- ------------- ------------ 1998 1997 1998 1997 ---- ---- ---- ---- Earned premiums $2,939,350 4,633,176 5,787,675 9,110,414 Contract revenues 2,913,692 1,818,381 5,089,384 3,591,515 Investment income, net 1,699,031 1,804,132 3,421,305 3,540,234 Net realized capital gains 1,369 5,396 104,570 40,952 Other income (expense) (590,084) 380,980 (37,079) 622,759 ---------- ---------- ------------- ------------ 6,963,358 8,642,065 14,365,855 16,905,874 --------- --------- ---------- ---------- Losses and loss adjustment expenses 480,378 1,389,953 1,165,115 2,733,124 Amortization of policy acquisition costs 444,824 905,826 965,695 1,768,880 Cost of contract revenues 2,761,769 1,636,391 5,017,222 3,297,053 Selling, general and administrative expenses 1,285,974 1,394,871 2,619,166 2,855,884 Interest expense 1,204,849 1,365,372 2,445,983 2,685,656 --------- --------- ----------- ---------- 6,177,794 6,692,413 12,213,181 13,340,597 --------- --------- ---------- ---------- Earnings before income taxes 785,564 1,949,652 2,152,674 3,565,277 Income taxes Federal 160,310 525,237 521,894 971,636 State 5,000 15,000 7,000 35,000 --------- -------- --------- ---------- 165,310 540,237 528,894 1,006,636 ------- ------- ------- --------- Net earnings $620,254 1,409,415 1,623,780 2,558,641 ======= ========= ========= ========= Basic earnings per share .19 .39 .49 .69 Diluted earnings per share .19 .34 .46 .61
See Notes to Consolidated Financial Statements. 4 5 ACMAT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Class A Accumulated stock stock Additional other Total par par paid-in Retained comprehensive stockholders' value value capital earnings income equity 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 1,900 Shares of Common Stock (1,900) --- (37,396) --- (39,296) Acquisition and retirement of 1,185,868 Shares of Class A Stock --- (1,185,868) (12,800,481) (3,517,839) --- (17,504,188) Issuance of 450,000 Shares --- 450,000 4,050,000 --- --- 4,500,000 of Class A Stock Issuance of 63,500 shares of --- 63,500 380,000 --- --- 443,500 Class A Stock pursuant to stock options Net Unrealized Losses on Debt --- --- --- --- (142,788) (142,788) and Equity Securities Net Earnings --- --- --- 2,558,641 --- 2,558,641 -------- ---------- ------ ----------- -------- ----------- Balance as of June 30, 1997 $598,357 $2,816,492 $ --- $35,935,296 $168,128 $39,518,273 ======== ========== ====== =========== ======== =========== Balance as of December 31, 1997 $596,857 $2,712,174 $ --- $36,033,153 $235,555 $39,577,739 Acquisition and Retirement of 500 Shares of Common Stock (500) --- --- (7,250) --- (7,750) Acquisition and Retirement of (187,500) 53,794 Shares of Class A Stock --- (53,794) (627,754) --- (869,048) Issuance of 15,000 Shares of Class A Stock pursuant to stock options --- 30,000 187,500 --- --- 217,500 Net Unrealized Losses on Debt and Equity Securities --- --- --- --- (82,061) (82,061) Net Earnings --- --- --- 1,623,780 --- 1,623,780 -------- ---------- ------ ----------- -------- ----------- Balance as of June 30, 1998 $596,357 $2,688,380 $ --- $37,021,929 $153,494 $40,460,160 ======== ========== ======= =========== ======== ===========
See Notes to Consolidated Financial Statements. 5 6 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Six Months Ended June 30, 1998 and 1997
1998 1997 ---- ---- Cash flows from operating activities: Net earnings $1,623,780 2,558,641 Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: Depreciation and amortization 720,111 758,386 Net realized capital gains (104,570) (40,952) Limited Partnership Investment Adjustment 185,562 (295,833) Changes in: Accrued interest receivable (6,446) (252,354) Reinsurance recoverable 7,808 419,772 Receivables, net (404,979) (352,564) Deferred policy acquisition costs 142,504 563,271 Prepaid expenses and other assets (1,084,545) 504,975 Accounts payable and accrued liabilities 324,694 (396,965) Reserves for losses and loss adjustment expenses (3,739,270) 506,758 Income taxes, net 619,937 (90,377) Unearned premiums (396,450) (1,992,899) ----------- ----------- Net cash provided by (used for) operating activities (2,211,864) 2,185,692 ---------- ----------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed maturities-sold 15,925,251 17,577,826 Fixed maturities-matured 22,776,102 14,630,000 Equity securities 1,022,466 - Short term investments 47,095,398 104,665,070 Purchases of: Fixed maturities (45,140,729) (55,823,507) Equity securities (1,000,000) (500,000) Short-term investments (23,461,503) (74,880,008) Collateral held (5,701,603) (1,514,384) Capital expenditures (10,279) (73,138) Other (2,750,000) - ----------- ----------- Net cash provided by investing activities 8,755,103 3,786,026 ----------- ----------- Cash flows from financing activities: Borrowings under line of credit 2,000,000 2,000,000 Payments under line of credit (3,000,000) (9,200,000) Repayments on long-term debt (2,935,867) (2,161,208) Issuance of long-term debt - 8,500,000 Issuance of Class A Stock 217,500 443,500 Payments for acquisition & retirement of stock (876,798) (5,543,484) ----------- ----------- Net cash used for financing activities (4,595,165) (5,961,192) ----------- ----------- Net increase in cash 1,948,074 10,526 Cash at beginning of period 2,095,449 2,187,227 --------- --------- Cash at end of period $4,043,523 2,197,753 ========= =========
See Notes to Consolidated Financial Statements. 6 7 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: (1) Financial Statements The consolidated financial statements include the accounts of ACMAT Corporation ("ACMAT" or the "Company") and its subsidiaries. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and are unaudited. The interim financial information contained in this report has been prepared from the books and records of the Company and its subsidiaries and reflects, in the opinion of the management of the Company, all adjustments (consisting of normal and recurring accruals) necessary to fairly present results of operations for the periods indicated. All significant intercompany accounts and transactions have been eliminated in consolidation. These statements should be read in conjunction with the financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. (2) Earnings Per Share The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, on December 31, 1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share, and replaces primary earnings per share and fully diluted earnings per share with basic earnings per share and diluted earnings per share, respectively. The Company has restated earnings per share for all prior periods presented to comply with the provisions of SFAS No. 128. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the six-month periods ended June 30, 1998 and 1997:
Average Shares Per-Share 1998: Earnings Outstanding Amount ----- -------- ----------- ------ Basic EPS: Earnings available to stockholders $1,623,780 3,290,583 $.49 Effect of Dilutive Securities: Stock options - 110,492 Convertible Note $ 626,175 1,500,000 -------- --------- Diluted EPS: Earnings available to stockholders $2,249,955 4,901,075 $.46 ========= ========= === 1997: ----- Basic EPS: Earnings available to stockholders $2,558,641 3,549,008 $.69 Effect of Dilutive Securities: Stock options - 120,737 Convertible Senior Notes $ 29,903 87,017 Convertible Note $ 626,175 1,500,000 ---------- --------- Diluted EPS: Earnings available to stockholders $3,214,719 5,256,762 $.61 ========== ========= ====
7 8 (3) Supplemental Cash Flow Information Income taxes received during the six months ended June 30, 1998 was $91,043 and income taxes paid during the six months ended June 30, 1997 was $1,097,012. Interest paid for the six months ended June 30, 1998 and 1997 was $2,408,260 and $2,201,064 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. 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 Consolidated Statement of Cash Flows. (4) Stock Transaction On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of Class A Stock which AIG Life Insurance Company (366,663 shares) and American International Life Assurance Company of New York, (733,333) had acquired over the last three years through conversion options. 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 annual payments of $1,500,000 which commenced January 31, 1998, with interest at prime rate (8-1/2%). 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. (5) Comprehensive Income The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components (such as changes in net unrealized investment gains and losses). Comprehensive income includes net income and any changes in equity from non-owner sources that bypass the income statement. The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. Application of SFAS No. 130 will not impact amounts previously reported for net income or affect the comparability of previously issued financial statements. The following table summarizes comprehensive income for the six months ended June 30, 1998 and 1997:
1998 1997 ---- ---- Net income $ 1,623,780 $ 2,558,641 Other comprehensive income, net of tax Unrealized gains (losses) on investments: Unrealized holding gain (loss) arising during period net of income tax benefit of $6,720 and $59,634 for 1998 and 1997, respectively (13,045) (115,760) Less reclassification adjustment for gains included in net income net of income tax expense of ($35,554) and ($13,924) for 1998 and 1997, respectively 69,016 27,028 ----------- ----------- Other comprehensive income (82,061) (142,788) ----------- ----------- Comprehensive income $ 1,541,719 $ 2,415,853 =========== ===========
(6) Future Accounting Standards 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 request 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 SFAS No. 131 will significantly impact the composition of its current operating segments which are consistent with the management approach. The Company anticipates that the current insurance segment will be further disclosed as two segments as a result of SFAS No. 131. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, earlier application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. This Statement should not be applied retroactively to financial statements of prior periods. The adoption of this statement is not expected to have a material effect on the Company's results of operations or financial condition. 8 9 ACMAT CORPORATION Item 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations RESULTS OF OPERATIONS: Overview Net earnings were $620,254 for the three months ended June 30, 1998 compared to $1,409,415 for the same period a year ago. Net earnings for the six months ended June 30, 1998 were $1,623,780 compared to $2,558,641 for the six months ended June 30, 1997. The decrease in net earnings for the three and six-month periods reflects a decrease in earned premiums, investment income and a loss in the limited partnership investment. Earned Premiums Net written premiums were $2,614,892 for the three months ended June 30, 1998 compared to $3,555,254 for the three months ended June 30, 1997. Net written premiums for the six months ended June 30, 1998 were $4,874,899 compared to $7,296,614 for the six months ended June 30, 1997. Premiums earned for the three months ended June 30, 1998 were $2,939,350 as compared to $4,633,176 for the three months ended June 30, 1997. Premiums earned for the six months ended June 30, 1998 were $5,787,675 as compared to $9,110,414 for the six months ended June 30, 1997. The decrease in net written premiums and earned premiums for the three and six months ended June 30, 1998 compared to the same periods in 1997 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 operation. Variances in net premiums written 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 $2,913,692 for the three-month period ended June 30, 1998 compared to $1,818,381 for the same period in 1997. Contract revenues were $5,089,384 for the six-month period ended June 30, 1998 compared to $3,591,515 for the same period in 1997. Construction revenue is difficult to predict and depends greatly on the successful securement of contracts bid. The Company's construction backlog was approximately $12,500,000 at June 30, 1998 compared to $9,965,000 a year ago. Investment Income, Net Net investment income was $1,699,031 for the three-month period ended June 30, 1998 compared to $1,804,132 for the same period in 1997, representing effective yields of 5.34% and 5.17%, respectively. Net investment income was $3,421,305 for the six-month period ended June 30, 1998 compared to $3,540,234 for the same period in 1997, representing effective yields of 5.28% and 5.07%, respectively. Invested assets, including cash, were $121,833,777 and $137,381,669 at June 30, 1998 and December 31, 1997, respectively. The decrease in invested assets is attributable to net cash flow used to repay debt, repurchase stock and return cash collateral offset by net cash flow generated from written premiums and the reinvestment of investment income. Net Realized Capital Gains Realized capital gains were $1,369 for the three-month period ended June 30, 1998 compared to $5,396 for the same period in 1997. Realized capital gains in the six-month period ended June 30, 1998 were $104,570 compared to $40,952 for the same period in 1997. Other Income Other income (expense) was ($590,084) for the three-month period ended June 30, 1998 compared to $380,980 for the same period in 1997. Other income (expense) was ($37,079) for the six-month period ended June 30, 1998 compared to $622,759 for the same period in 1997. The fluctuations in other income (expense) reflects earnings of approximately $400,000 from the limited partnership investment in the first quarter of 1998 and a loss of approximately $600,000 in the second quarter. The earnings from the limited partnership investment, which invests primarily in small capitalization stocks, fluctuate as those stocks are traded on the national market exchanges. 9 10 Costs of Contract Revenues Costs of contract revenues were $2,761,769 for the three-month period ended June 30, 1998 compared to $1,636,391 for the same period a year ago. Costs of contract revenues increased to $5,017,222 for the six-month period ended June 30, 1998 compared to $3,297,053 for the same period in 1997. Costs of construction revenues vary from period to period as a function of contract revenues (See Contract Revenues). Losses and Loss Adjustment Expenses Losses and loss adjustment expenses were $480,378 for the three-month period ended June 30, 1998 compared to $1,389,953 for the same period in 1997. Losses and loss adjustment expenses were $1,165,115 for the six months ended June 30, 1998 compared to $2,733,124 for the six months ended June 30, 1997. The decrease in losses and loss adjustment expenses are attributable to the decline in earned premiums from 1997 to 1998. 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 $444,824 for the three-month period ended June 30, 1998 as compared to $905,826 for the same period in 1997. For the six months ended June 30, 1998, amortization of policy acquisition costs was $965,695 compared to $1,768,880 for the same period a year ago. Policy acquisition costs, primarily commissions, are deferred and amortized over the policy term Selling, General and Administrative Expenses Selling, general and administrative expenses were $1,285,974 for the three-month period ended June 30, 1998 compared to $1,394,871 for the same period in 1997. Selling, general and administrative expenses were $2,619,166 for the six-month period ended June 30, 1998 compared to $2,855,884 for the same period in 1997. The decrease in the selling, general and administrative expenses during the three and six-month periods ended June 30, 1998 is due primarily to an decrease in bad debt expense and salary expense. Interest Expense Interest expense decreased to $1,204,849 for the three-month period ended June 30, 1998 compared to $1,365,372 for the same period in 1997. Interest expense decreased to $2,445,983 for the six-month period ended June 30, 1998 compared to $2,685,656 for the same period in 1997. The decrease in interest expense for the three and six-month periods is due primarily to the decrease in short-term and long-term debt. Income Taxes Income tax expense was $165,310 for the three-month period ended June 30, 1998 compared to $540,237 for the same period in 1997, representing effective Federal tax rates of 20.4% and 26.9%, respectively. Income tax expense was $528,894 for the six-month period ended June 30, 1998 compared to $1,006,636 for the same period in 1997, representing effective Federal tax rates of 24.2% and 27.3%, respectively. The Federal 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 June 30, 1998 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 10 11 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") was 20.1% and 30.0% for the six-month periods ended June 30, 1998 and 1997, 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 51.2% and 45.4% for the six-month period ended June 30, 1998 and 1997, respectively. The Company's insurance subsidiaries' combined ratios under GAAP were 71.3% and 75.4% for the six-month period ended June 30, 1998 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCE: The Company internally generates sufficient funds for its operations and maintains a relatively high degree of liquidity in its investment portfolio. The primary sources of funds to meet the demands of claim settlements and operating expenses are premium collections, investment earnings and maturing investments. The Company has no material commitments for capital expenditures and, in the opinion of management, 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 ACMAT to acquire and capitalize its insurance subsidiaries and to repurchase Company stock. 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. ACMAT has recently utilized short-term borrowing to repurchase its stock. ACMAT has also relied on dividends from its insurance subsidiaries to repay debt. The Company used cash flow for operations of $2,211,864 for the six-month period ended June 30, 1998 compared to cash flow provided by operations of $2,185,692 for the same period in 1997. Net cash flows used for operations in 1998 were primarily for payment of claims. 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 1998 amounted to $8,755,103, compared to net cash provided by investing activities of $3,786,026 for the same period in 1997. 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 June 30, 1998, except for the ratio of Earnings Before Income Taxes, Depreciation and Amortization to Fixed Charges. We have applied for and expect to receive a waiver for this covenant. The Company maintains a short-term unsecured bank credit line totaling $10.0 million to fund interim cash requirements. There was $4,000,000 outstanding under this line of credit at June 30, 1998. During the six-month period ended June 30, 1998, the Company purchased, on the open market and in privately negotiated transactions, 500 shares of its Common Stock at an average price of $15.50. The Company also purchased, in open market and privately negotiated transactions, 53,794 shares of its Class A Stock at an average price of $16.16 per share. The Company's principal source of cash for repayment of long-term debt is from dividends from its two insurance companies. 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 $10,032,000 in 1998. 11 12 YEAR 2000 ISSUE In 1997, the Company began converting its computer systems to be Year 2000 compliant (e.g. to recognize the difference between '99 and '00 as one year instead of negative 99 years). The total cost of the project is estimated to be less than $100,000 and is being funded through operating cash flows. The Company is expensing all costs associated with these system changes. At June 30, 1998, approximately 50% of the Company's systems were compliant, with all systems expected to be compliant by the end of 1998. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. 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 June 30, 1998 was significantly above the level which might require regulatory action. 12 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, June 25, 1998. b. Directors elected at the meeting:
Votes Votes Brokers For Against Non-Votes Henry Nozko, Sr. 756,668 490 0 Henry Nozko, Jr. 757,028 330 0 Victoria Nozko 756,775 382 0 John Creasy 756,808 350 0 Michael Sullivan 757,028 130 0
c. Other matters voted upon:
Brokers For Against Abstain Non-Votes 1. Appointment of Independent Auditors 756,998 0 160 0
Item 6 - Exhibits and Reports on Form 8-K a. 27-Financial Data Schedule b. Report on Form 8-K - None 13 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: August 13, 1998 /S/ Henry W. Nozko, Sr. ----------------------- Henry W. Nozko, Sr. President and Chairman Date: August 13, 1998 /S/ Henry W. Nozko, Jr. ----------------------- Henry W. Nozko, Jr., Executive Vice President Chief Operating Officer, and Treasurer 14 EX-27 2 EX-27
5 1 3-MOS DEC-31-1997 JUN-30-1998 4,043,523 117,790,254 7,833,252 (309,746) 0 138,267,958 17,454,680 4,526,215 163,642,687 77,905,667 45,276,860 0 0 3,284,737 37,175,423 163,642,687 5,853,042 6,963,358 3,686,971 3,686,971 1,285,974 0 1,204,849 785,564 165,310 620,254 0 0 0 620,254 .19 .19 The company has restated earnings per share to comply with the provisions of SFAS No. 128. Basic earnings per share for the quarter ended June 30, 1997 was restated to $.39. Diluted earnings per share for the quarter ended June 30, 1997 was restated to $.34.
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