-----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, Wk7iLWVklS5r4cGPyveKb8KIPjRMgxMAX48aOv0aOeBJvsMNO65Tncn/5yKjaprK xe7w1lgbf/d/R7AHatSLLg== 0000914039-98-000467.txt : 19981118 0000914039-98-000467.hdr.sgml : 19981118 ACCESSION NUMBER: 0000914039-98-000467 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98751778 BUSINESS ADDRESS: STREET 1: 233 MAIN ST STREET 2: P O BOX 2350 CITY: NEW BRITAIN STATE: CT ZIP: 06050-2350 BUSINESS PHONE: 2032299000 MAIL ADDRESS: STREET 1: 233 MAIN STREET STREET 2: P O BOX 2350 CITY: NEW BRITAIN STATE: CT ZIP: 06050-2350 10-Q 1 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 1998 - -------------- ------------------- Common Stock 592,088 Class A Stock 2,440,809 2 TABLE OF CONTENTS Part I FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Earnings 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 2 3 Part I Financial Information Item 1 Financial Statements ACMAT CORPORATION AND SUBSIDIARIES Financial Statements Consolidated Balance Sheets
September 30, 1998 December 31, 1997 ------------ ------------ Assets Investments: Fixed maturities-available for sale, at market (Cost of $91,665,191 in 1998 and $101,523,931 in 1997) $ 92,618,719 101,852,980 Equity securities, at market value (Cost $1,005,262 in 1998 and $983,074 in 1997) 1,005,569 1,010,927 Short-term investments, at cost which approximates market 22,145,541 32,422,313 ------------ ------------ Total investments 115,769,829 135,286,220 Cash 7,334,572 2,095,449 Accrued interest receivable 1,135,730 1,458,164 Reinsurance recoverable 2,227,958 3,478,121 Receivables, net 5,479,886 7,118,527 Income tax receivable 83,479 564,829 Prepaid expenses 296,498 204,642 Deferred income taxes 1,916,571 1,940,936 Limited partnership investment 871,346 2,052,475 Property & equipment, net 12,805,894 13,179,337 Deferred policy acquisition costs 1,908,507 2,078,405 Other assets 8,891,422 3,529,634 Intangibles, net 2,977,034 3,222,023 ------------ ------------ $161,698,726 176,208,762 ============ ============ Liabilities & Stockholders' Equity Notes payable to banks $ 5,000,000 5,000,000 Accounts payable 3,843,929 3,188,554 Reserves for losses and loss adjustment expenses 43,459,391 48,900,713 Unearned premiums 8,390,108 9,804,159 Collateral held 17,593,768 20,275,702 Current income taxes 125,227 -- Accrued liabilities 2,683,674 1,249,168 Long-term debt 43,457,854 48,212,727 ------------ ------------ Total liabilities 124,553,951 136,631,023 Stockholders' Equity: Common Stock (No Par Value; 3,500,000 Shares Authorized; 592,088 and 596,857 Shares Issued and Outstanding) 592,088 596,857 Class A Stock (No Par Value; 10,000,000 Shares Authorized; 2,442,809 and 2,712,174 Shares Issued and Outstanding) 2,442,809 2,712,174 Retained earnings 33,480,347 36,033,153 Accumulated Other Comprehensive Income 629,531 235,555 ------------ ------------ Total stockholders' equity 37,144,775 39,577,739 ------------ ------------ $161,698,726 176,208,762 ============ ============
See Notes to Consolidated Financial Statements. 3 4 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings
Three months ended, Nine months ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- Earned premiums $ 2,769,212 3,036,664 8,556,887 12,147,078 Contract revenues 4,056,318 2,754,689 9,145,702 6,346,204 Investment income, net 1,355,145 1,455,160 4,776,450 4,995,394 Net realized capital gains (losses) 157,495 (1,042) 262,065 39,910 Other income (expense) (833,595) 811,392 (870,674) 1,434,151 ----------- ----------- ----------- ------------- 7,504,575 8,056,863 21,870,430 24,962,737 ----------- ----------- ----------- ------------- Losses and loss adjustment expenses 538,416 911,000 1,703,531 3,644,124 Amortization of policy acquisition costs 514,717 559,125 1,480,412 2,328,005 Cost of contract revenues 3,927,494 2,601,277 8,944,716 5,898,330 Selling, general and administrative expenses 1,323,965 1,370,509 3,943,131 4,226,393 Interest expense 1,105,766 1,216,514 3,551,749 3,902,170 ----------- ----------- ----------- ------------- 7,410,358 6,658,425 19,623,539 19,999,022 ----------- ----------- ----------- ------------- Earnings before income taxes 94,217 1,398,438 2,246,891 4,963,715 Income taxes Federal 22,679 375,367 544,573 1,347,003 State 5,000 10,000 12,000 45,000 ----------- ----------- ----------- ------------- 27,679 385,367 556,573 1,392,003 ----------- ----------- ----------- ------------- Net earnings $ 66,538 1,013,071 1,690,318 3,571,712 =========== =========== =========== ============ Basic earnings per share $ .02 .30 .52 1.02 Diluted earnings per share $ .02 .27 .51 .88
See Notes to Consolidated Financial Statements. 4 5 ACMAT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Common Class A Additional other Total stock par stock 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 2,100 Shares of Common Stock (2,100) -- (41,396) -- -- (43,496) Acquisition and retirement of 1,305,586 Shares of Class A Stock -- (1,305,586) (13,065,231) (5,074,318) -- (19,445,135) Issuance of 450,000 Shares of Class A Stock -- 450,000 4,050,000 -- -- 4,500,000 Issuance of 106,000 shares of Class A Stock pursuant to stock options -- 106,000 648,750 -- -- 754,750 Net Unrealized losses on Debt and Equity Securities, net of taxes -- -- -- -- (49,111) (49,111) Net Earnings -- -- -- 3,571,712 -- 3,571,712 ------------ ------------ ------------ ------------ ------------ ------------ Balance as of September 30, 1997 $ 598,157 $ 2,739,274 $ ---- $ 35,391,888 $ 261,805 $ 38,991,124 ============ ============ ============ ============ ============ ============ Balance as of December 31, 1997 $ 596,857 $ 2,712,174 $ - $ 36,033,153 $ 235,555 $ 39,577,739 Acquisition and Retirement of 4,769 Shares of Common Stock (4,769) -- (93,697) -- (98,466) Acquisition and Retirement of 340,365 Shares of Class A Stock -- (340,365) (650,000) (4,149,427) -- (5,139,792) Issuance of 71,000 Shares of Class A Stock pursuant to stock option -- 71,000 650,000 -- -- 721,000 Net Unrealized Losses on Debt and Equity Securities, net of tax -- -- -- -- 393,976 393,976 Net Earnings -- -- -- 1,690,318 -- 1,690,318 ------------ ------------ ------------ ------------ ------------ ------------ Balance as of September 30, 1998 $ 592,088 $ 2,442,809 $ --- $ 33,480,347 $ 629,531 $ 37,144,775 ============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements. 5 6 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine Months Ended September 30, 1998 and 1997
1998 1997 ------------ ------------ Cash flows from operating activities: Net earnings $ 1,690,318 3,571,712 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,060,009 1,151,371 Net realized capital gains (262,065) (39,910) Limited partnership investment adjustment 1,181,129 (967,025) Changes in: Accrued interest receivable 322,434 (154,048) Reinsurance recoverable 1,250,163 362,725 Receivables, net 1,638,641 1,104,245 Deferred policy acquisition costs 169,898 421,064 Prepaid expenses and other assets 952,343 429,020 Accounts payable and accrued liabilities 2,089,881 940,547 Reserves for losses and loss adjustment expenses (5,441,322) 1,164,072 Income taxes, net 622,978 (381,476) Unearned premiums (1,414,051) (1,574,202) ------------ ------------ Net cash provided by operating activities 3,860,356 6,028,095 ------------ ------------ Cash flows from investing activities: Proceeds from investments sold or matured: Fixed maturities-sold 40,068,436 19,840,821 Fixed maturities-matured 32,178,943 28,822,511 Equity securities 1,022,466 -- Short-term investments 57,922,542 124,276,204 Purchases of: Fixed maturities (62,538,545) (75,521,830) Equity securities (1,000,000) (750,000) Short-term investments (47,645,770) (88,880,831) Collateral held (2,681,934) (2,077,931) Capital expenditures (19,632) (125,135) Other (6,460,608) -- ------------ ------------ Net cash provided by investing activities 10,845,898 5,583,809 ------------ ------------ Cash flows from financing activities: Borrowings under line of credit 5,000,000 3,000,000 Payments under line of credit (5,000,000) (13,200,000) Payments on long-term debt (4,754,873) (2,877,658) Issuance of long-term debt -- 8,500,000 Issuance of Class A Stock 526,000 754,750 Payments for acquisition & retirement of stock (5,238,258) (7,488,631) ------------ ------------ Net cash used for financing activities (9,467,131) (11,311,539) ------------ ------------ Net increase in cash 5,239,123 300,365 Cash at beginning of period 2,095,449 2,187,227 ------------ ------------ Cash at end of period $ 7,334,572 2,487,592 ============ ============
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 nine-month periods ended September 30, 1998 and 1997. The convertible note at September 30, 1998 was antidilutive and as a result is not included in the 1998 calculation.
Average Shares Per-Share Earnings Outstanding Amount -------- ----------- ------ 1998: Basic EPS: Earnings available to stockholders $1,690,318 3,251,748 $.52 Effect of Dilutive Securities: Stock options $ - 85,674 Diluted EPS: Earnings available to stockholders $1,690,318 3,337,422 $.51 ========== ========= ===== 1997: Basic EPS: Earnings available to stockholders $3,571,712 3,485,190 $1.02 Effect of Dilutive Securities: Stock options - 121,733 Convertible Senior Notes $ 29,903 57,692 Convertible Note $ 939,263 1,500,000 ---------- --------- Diluted EPS: Earnings available to stockholders $4,455,490 5,164,615 $.88 ========== ========= =====
(3) Supplemental Cash Flow Information Income taxes received during the nine months ended September 30, 1998 was $66,406 and income taxes paid during the nine months ended September 30, 1997 was $1,773,479. Interest paid for the nine months ended September 30, 1998 and 1997 was $3,363,155 and $3,190,792 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. 7 8 (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 nine months ended September 30, 1998 and 1997:
1998 1997 ---- ---- Net income $ 1,690,318 $ 3,571,712 Other comprehensive income, net of tax Unrealized gains (losses) on investments: Unrealized holding gain (loss) arising during period net of income tax expense of $292,059 for 1998 and income tax benefit of $11,730 in 1997 566,939 (22,770) Less reclassification adjustment for gains included in net income net of income tax expense of $89,102 and $13,569 for 1998 and 1997, respectively 172,963 26,341 ----------- ----------- Other comprehensive income 393,976 (49,111) ----------- ----------- Comprehensive income $ 2,084,294 $ 3,522,601 =========== ===========
(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 $66,538 for the three months ended September 30, 1998 compared with $1,013,071 for the same period a year ago. Net earnings for the nine months ended September 30, 1998 were $1,690,318 compared with $3,571,712 for the nine months ended September 30, 1997. The decrease in net earnings for the three and nine month periods is primarily the result of a decrease in the carrying value of the Company's stake in a limited partnership that invests in small cap common stock equities. The decrease in earnings for the three and nine-month periods also reflects a decrease in earned premiums and investment income offset in part by an increase in realized capital gains. Earned Premiums Net written premiums were $2,500,314 for the three months ended September 30, 1998 compared with $3,362,906 for the three months ended September 30, 1997. Net written premiums for the nine months ended September 30, 1998 were $7,375,213 compared with $10,659,520 for the nine months ended September 30, 1997. Premiums earned for the three months ended September 30, 1998 were $2,769,212 as compared with $3,036,664 for the three months ended September 30, 1997. Premiums earned for the nine months ended September 30, 1998 were $8,556,887 as compared with $12,147,078 for the nine months ended September 30, 1997. The decrease in net written premiums and earned premiums for the three and nine month periods ended September 30, 1998 compared with 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 operations. Variances in net written premiums have historically occurred due to the fluctuations in size, number and timing of bonds and policies bound by the Company. The Company will maintain its existing pricing strategy and high level of service. Contract Revenues Contract revenues were $4,056,318 for the three-month period ended September 30, 1998 compared with $2,754,689 for the same period in 1997. Contract revenues were $9,145,702 for the nine-month period ended September 30, 1998 compared with $6,346,204 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 $8,700,000 at September 30, 1998 compared to $8,100,000 a year ago. Investment Income, Net Net investment income was $1,355,145 for the three-month period ended September 30, 1998 compared with $1,455,160 for the same period in 1997, representing effective yields of 4.42% and 4.29%, respectively. Net investment income was $4,776,450 for the nine-month period ended September 30, 1998 compared with $4,995,394 for the same period in 1997, representing effective yields of 4.89% and 4.80%, respectively. The decrease in investment income for 1998 over 1997 was due substantially to a decrease in invested assets. Invested assets, including cash, were $123,104,401 and $137,381,669 at September 30, 1998 and December 31, 1997, respectively. The decrease in invested assets is attributable to net cash flow used to repay debt, repurchase stock, return collateral and pay claims offset by net cash flow generated from written premiums and the reinvestment of investment income. Net Realized Capital Gains Realized capital gains were $157,495 for the three-month period ended September 30, 1998 compared with realized capital losses of $1,042 for the same period in 1997. Realized capital gains in the nine-month period ended September 30, 1998 were $262,065 compared with realized capital gains of $39,910 for the same period in 1997. Other Income Other income (expense) was ($833,595) for the three-month period ended September 30, 1998 compared to $811,392 for the same period in 1997. Other income (expense) was ($870,674) for the nine-month period ended September 30, 1998 compared to $1,434,151 for the same period in 1997. The fluctuations in other income (expense) reflects a loss of approximately $995,000 from the limited partnership that invests in small cap common stock equities in the third quarter of 1998 and a loss of approximately $1,180,000 for the nine-month period ended September 30, 1998. The limited partnership investment is carried on the equity method of accounting in which the Company's share of net income or loss is recognized as income or loss in the Company's income statement. The investment in the limited partnership invests primarily in small capitalization stocks carried at fair value. The earnings from the limited partnership investment fluctuate as those stocks are traded on the national market exchanges. 9 10 Cost of Contract Revenues Cost of contract revenues were $3,927,494 for the three-month period ended September 30, 1998 compared with $2,601,277 for the same period a year ago. Cost of contract revenues were $8,944,716 for the nine-month period ended September 30, 1998 compared with $5,898,330 for the same period in 1997. Costs of contract 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 $538,416 for the three-month period ended September 30, 1998 compared with $911,000 for the same period in 1997. Losses and loss adjustment expenses were $1,703,531 for the nine months ended September 30, 1998 compared with $3,644,124 for the nine months ended September 30, 1997. The decrease in losses and loss adjustment expenses for the three and nine months ended September 30, 1998 are attributable to lower 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 $514,717 for the three-month period ended September 30, 1998 as compared with $559,125 for the same period in 1997. For the nine months ended September 30, 1998, amortization of policy acquisition cost was $1,480,412 compared with $2,328,005 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 51.3% in 1998 from 47.8% in 1997 due primarily to a decrease in earned premiums. Selling, General and Administrative Expenses Selling, general and administrative expenses were $1,323,965 for the three-month period ended September 30, 1998 compared with $1,370,509 for the same period in 1997. Selling, general and administrative expenses were $3,943,131 for the nine-month period ended September 30, 1998 compared with $4,226,393 for the same period in 1997. The decrease in the selling, general and administrative expenses for the three and nine-month periods ended September 30, 1998 are due primarily to a decrease in bad debt expense. Interest Expense Interest expense decreased to $1,105,766 for the three-month period ended September 30, 1998 compared with $1,216,514 for the same period in 1997. Interest expense decreased to $3,551,749 for the nine-month period ended September 30, 1998 compared with $3,902,170 for the same period in 1997. The decrease in interest expense is due to a decrease in long-term debt. Income Taxes Income tax expense was $27,679 for the three-month period ended September 30, 1998 compared with $385,367 for the same period in 1997, representing effective tax rates of 29.3% and 27.6%, respectively. Income tax expense was $556,573 for the nine-month period ended September 30, 1998 compared with $1,392,003 for the same period in 1997, representing effective tax rates of 25.2% and 28.0%, respectively. The effective tax rate fluctuates according to the mix of tax-exempt and taxable securities held by the Company. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Reserves for losses and loss adjustment expenses are established with respect to both reported and incurred but not reported claims for insured risks. The amount of loss reserves for reported claims is primarily based upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the policy provisions relating to the type of claim. As part of the reserving process, historical data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments and economic conditions, including the effects of inflation. Reserves are monitored and evaluated periodically using current information on reported claims. Management believes that the reserves for losses and loss adjustment expenses at September 30, 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 incurred but not reported 10 11 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 19.9% and 30.0% for the nine-month periods ended September 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 51.3% and 47.8% for the nine-month period ended September 30, 1998 and 1997, respectively. The Company's insurance subsidiaries' combined ratios under GAAP were 71.2% and 77.8% for the nine-month periods ended September 30, 1998 and 1997, 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, 1998, the Company had no material commitments for capital expenditures and, in the opinion of management of the Company, the Company currently has adequate sources of liquidity to fund its operations over the next year. ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from operating activities primarily because of interest expense related to notes payable and long-term debt incurred by 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 operation. 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 borrowings to repurchase its stock. ACMAT has also relied on dividends from its insurance subsidiaries to repay debt. The Company realized cash flow from operations of $3,860,356 for the nine-month period ended September 30, 1998, compared to $6,028,095 for the same period in 1997. Net cash flows provided by operations were derived principally from premium collections. 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 $10,845,898 compared to $5,583,809 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 September 30, 1998, except for the ratio of Earnings Before Income Taxes, Depreciation and Amortization to Fixed Charges. The Company has applied for and expects 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 $5,000,000 outstanding under this line of credit at September 30, 1998. During the nine-month period ended September 30, 1998, the Company purchased, in the open market and in privately negotiated transactions, 4,769 shares of its Common Stock at an average price of $20.65. The Company also purchased, in open market and privately negotiated transactions, 340,365 shares of its Class A Stock at an average price of $15.10 per share. The Company's principal source of cash for repayment of long-term debt is dividends from its two insurance subsidiaries. Under applicable insurance regulations, ACMAT's insurance subsidiaries are restricted as to the amount of dividends they may pay to their respective holding company, without the prior approval of their domestic state insurance department. The amount of dividends ACMAT's insurance subsidiaries may pay without prior insurance department approval, is limited to approximately $10,032,000 in 1998. 11 12 YEAR 2000 ISSUE There has been significant public discussion in recent years of the "Year 2000" issue, which relates to the potential inability of computer programs and systems to adequately store and process data after December 31, 1999, due to the inability of such programs and systems to identify correct dates subsequent to December 31, 1999. In 1997, the Company began to address the Year 2000 issue. The Company's financial and operational computer and software systems are approximately 60% compliant, with all systems expected to be compliant and tested by June 30, 1999. The total cost of the project is estimated to be less than $100,000 and is being funded through operating cash flows. Management believes that these systems will be suitable for continued use into and beyond the year 2000. If for any reason these systems are not suitable for such use, the Year 2000 problem could have a material adverse impact on the Company's ability to meet financial and reporting requirements and to support its insurance operations. The Company's Year 2000 review includes an assessment of "embedded chip" systems associated with its end-user computing hardware and software (including personal computers, spreadsheets, word processing and other personal and work group applications), its corporate facilities (such as security systems, elevators and climate control systems) and its office equipment (including telephones, fax machines and similar equipment). The Company is continuing to identify potential problems associated with its embedded chip systems and to develop corrective plans to avoid or mitigate such potential problems. Where appropriate, the Company intends to upgrade or replace non-compliant embedded chip systems to avoid potential Year 2000 problems. The Company anticipates that the deployment of corrected systems for its "embedded chip" technology will be completed during the second quarter of 1999. The Company has initiated discussions with certain suppliers, business partners, customers and other parties to determine the extent to which the Company may be vulnerable to the failure of these parties to address and correct their own Year 2000 problems. However, there can be no guarantee that the systems of other companies that support the Company's operations will be timely converted or that a failure by these companies to correct their Year 2000 problems will not have a material adverse effect on the Company. The Company's Year 2000 Review is intended to reduce significantly the level of uncertainty associated with the Year 2000 issue. As part of this review, the Company plans to develop contingency plans to address and mitigate the potential impact of problems that might surface with the approach of the millennium. In light of the current stage of the Company's review of its core financial and operational systems and its "embedded chip" technology, the Company is developing contingency plans that focus on the potential interruption of support services provided to the Company by business affiliates or public authorities due to problems these parties may experience in connection with the Year 2000 issue. The Company intends to explore these and other "worst case" scenarios in the coming months to anticipate and limit, wherever possible, the potential impact of any such scenario on the Company's insurance operations or financial condition. These plans will include identifying alternate suppliers and vendors, conducting staff training and developing alternative communication plans. The Company is currently assessing what changes may be appropriate in insurance coverages it currently markets in light of the Year 2000 issue. In this connection, management is considering possible modifications and/or exclusions to policy forms that could be implemented in connection with future insurance policies that will extend coverage beyond December 31, 1999. In the past, judicial interpretations have expanded the coverage of insurance policies, including those regarding pollution and other environmental exposures, beyond the scope anticipated by insurers. The Company will continue to review its reserves in light of evolving developments relating to the Year 2000 issue. The dates on which the Company believes that the various components of its Year 2000 review will be completed are based on management's best estimates, which, in turn, are based upon numerous assumptions regarding future events, including the continued availability of certain resources, third-party compliance plans and other factors. As a result, there can be no guarantee that the Company's schedule of completion dates will be realized or that there will not be increased costs associated with the implementation of the Year 2000 review. Due to the general uncertainty inherent in the Year 2000 problems, resulting in part from the uncertainty of the Year 2000 readiness of third-parties, the Company cannot assure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may effect its operations and business or expose it to third-party liability. 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, 1998 was significantly above the level which might require regulatory action. 12 13 Part II - Other Information Item - Exhibits and Reports on Form 8-K a. Exhibits - 27. Financial Data Schedule b. Report on Form 8-K - None 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: November 13, 1998 /s/ Henry W. Nozko, Sr. ---------------------------------------------- Henry W. Nozko, Sr., President and Chairman Date: November 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 3-MOS DEC-31-1997 JUN-30-1998 7,334,572 115,769,829 5,789,632 (309,746) 0 135,115,869 17,448,593 4,642,699 161,698,726 81,096,097 43,457,854 0 0 3,034,897 34,109,878 161,698,726 6,825,530 7,504,575 4,980,627 4,980,627 1,323,965 0 1,105,766 94,217 27,679 66,538 0 0 0 66,538 .02 .02 THE COMPANY HAS RESTATED EARNINGS PER SHARE TO COMPLY WITH THE PROVISIONS OF SFAS NO. 128. BASIC EARNINGS PER SHARE FOR THE QUARTER ENDED SEPTEMBER 30, 1997 WAS RESTATED TO $.30. DILUTED EARNINGS PER SHARE FOR THE QUARTER ENDED SEPTEMBER 30, 1997 WAS RESTATED TO $.27.
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