-----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, U/Bo54JSB6PgegTsV2FRfRZodleyIOz+5HA0qyuTNiFMZEXJ6XMcN3beJTqnzPsU t3hqvbZpuBYZRSZroKdJEQ== 0000914039-99-000248.txt : 19990517 0000914039-99-000248.hdr.sgml : 19990517 ACCESSION NUMBER: 0000914039-99-000248 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99623410 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 FORM 10-Q 1 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 March 31, 1999 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 April 30, 1999 -------------- ------------------ Common Stock 589,908 Class A Stock 2,389,308 2 TABLE OF CONTENTS
Part I FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Earnings 4 Consolidates Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14
2 3 Part I Financial Information Item I Financial Statements ACMAT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
March 31, December 31, Assets 1999 1998 - ------ ---- ---- Investments: Fixed maturities-available for sale at fair value (Cost of $100,620,235 in 1999 and $98,128,192 in 1998) $101,030,616 98,882,751 Equity securities, at fair value (Cost of $2,065,262 in 1999 and 1998) 2,023,483 2,061,448 Short-term investments, at cost which approximates fair value 8,835,600 12,947,913 ------------ ----------- Total investments 111,889,699 113,892,112 Cash and cash equivalents 8,870,940 2,306,232 Accrued interest receivable 1,265,647 1,352,334 Reinsurance recoverable 2,295,232 2,224,116 Receivables, net 2,939,060 3,737,627 Prepaid expenses 468,665 162,784 Income tax refund receivable -- 207,380 Deferred income taxes 1,939,887 1,733,987 Property & equipment, net 12,779,109 12,894,191 Deferred policy acquisition costs 1,684,422 1,550,089 Other assets 3,240,232 3,170,242 Intangibles, net 2,813,708 2,895,371 ------------ ----------- 150,186,601 146,126,465 ============ =========== Liabilities & Stockholders' Equity - ---------------------------------- Notes payable to banks 2,980,000 -- Accounts payable 2,371,369 3,200,965 Reserves for losses and loss adjustment expenses 43,335,448 43,115,062 Unearned premiums 7,177,281 6,795,435 Collateral held 17,898,870 17,344,376 Income taxes 170,137 -- Accrued liabilities 2,341,713 847,701 Long-term debt 36,812,462 37,200,000 ------------ ----------- Total liabilities 113,087,280 108,503,539 Commitments and contingencies Stockholders' Equity: Common Stock (No par value; 3,500,000 shares authorized; 589,908 and 592,088 shares issued and outstanding) 589,908 592,088 Class A Stock (No par value; 10,000,000 shares authorized; 2,389,808 and 2,460,808 shares issued and outstanding) 2,389,808 2,460,808 Retained earnings 33,876,314 34,074,538 Accumulated other comprehensive income 243,291 495,492 ------------ ----------- Total stockholders' equity 37,099,321 37,622,926 ------------ ----------- $150,186,601 146,126,465 ============ ===========
See Notes to Consolidated Financial Statements. 3 4 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Three Months Ended March 31, 1999 and 1998
1999 1998 ---- ---- Earned premiums $2,389,449 2,848,325 Contract revenues 2,483,676 2,175,692 Investment income, net 1,367,038 1,722,274 Net realized capital gains 159,161 103,201 Other income 176,247 553,005 ---------- --------- 6,575,571 7,402,497 ---------- --------- Cost of contract revenues 2,228,345 2,255,453 Losses and loss adjustment expenses 470,701 684,737 Amortization of policy acquisition costs 357,783 520,871 Selling, general and administrative expenses 1,410,198 1,333,192 Interest expense 913,656 1,241,134 ---------- --------- 5,380,683 6,035,387 ---------- --------- Earnings before income taxes 1,194,888 1,367,110 Income taxes Federal 293,830 361,584 State 20,000 2,000 ---------- --------- 313,830 363,584 ---------- --------- Net earnings $ 881,058 1,003,526 ========== ========= Basic Earnings Per Share $ .30 $ .30 Diluted Earnings Per Share $ .26 $ .27
See Notes to Consolidated Financial Statements. 4 5 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity March 31, 1999 and 1998
Accumulated Common Class A Additional other Total stock par stock paid-in Retained comprehensive stockholders' value par value capital earnings income equity --------- ----------- ----------- ------------ --------- ------------ Balance as of December 31, 1997 $ 596,857 $ 2,712,174 $ -- $ 36,033,153 $ 235,555 $ 39,577,739 Comprehensive income: Net unrealized losses on debt and equity securities -- -- -- -- (146,322) (146,322) Net earnings -- -- -- 1,003,526 -- 1,003,526 ------------ Total comprehensive income 857,204 Acquisition and retirement of 27,400 shares of Class A Stock -- (27,400) -- (433,337) -- (460,737) --------- ----------- ----------- ------------ --------- ------------ Balance as of March 31, 1998 $ 596,857 $ 2,684,774 $ -- $ 36,603,342 $ 89,233 $ 39,974,206 ========= =========== =========== ============ ========= ============ Balance as of December 31, 1998 $ 592,088 $ 2,460,808 $ -- $ 34,074,538 $ 495,492 $ 37,622,926 Comprehensive income: Net unrealized losses on debt and equity securities -- -- -- -- (252,201) (252,201) Net earnings -- -- -- 881,058 -- 881,058 ------------ Total comprehensive income 628,857 Acquisition and retirement of 2,180 shares of Common Stock (2,180) -- -- (42,783) (44,963) Acquisition and retirement of 89,000 shares of Class A Stock (89,000) (144,000) (1,036,499) (1,269,499) Issuance of 18,000 Shares of Class A Stock pursuant to stock options -- 18,000 144,000 -- -- 162,000 --------- ----------- ----------- ------------ --------- ------------ Balance as of March 31, 1999 $ 589,908 $ 2,389,808 $ -- $ 33,876,314 $ 243,291 $ 37,099,321 ========= =========== =========== ============ ========= ============
See Notes to Consolidated Financial Statements. 5 6 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Three Months Ended March 31, 1999 and 1998
1999 1998 ---- ---- Cash flows from operating activities: Net earnings $ 881,058 1,003,526 Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: Depreciation and amortization 434,530 357,051 Net realized capital gains (159,161) (103,201) Limited partnership investment adjustment -- (413,936) Changes in: Accrued interest receivable 86,687 (180,448) Reinsurance recoverable (71,116) 1,098 Receivables, net 798,567 602,103 Deferred policy acquisition costs (134,333) 104,787 Prepaid expenses and other assets (483,296) (925,851) Accounts payable and accrued liabilities 664,416 (606,038) Cash collateral held 554,494 (2,625,110) Reserves for losses and loss adjustment expenses 220,386 (1,291,513) Income taxes, net 301,558 851,125 Unearned premiums 381,846 (675,167) ------------ ----------- Net cash provided by (used for) operating activities 3,475,636 (3,901,574) ------------ ----------- Cash flows from investing activities: Proceeds from investments sold or matured: Fixed maturities-sold 16,652,198 6,498,484 Fixed maturities-matured 430,000 10,545,000 Equity securities -- 1,022,466 Short-term investments 50,893,522 40,154,527 Purchases of: Fixed maturities (19,523,750) (37,565,287) Equity securities -- (1,000,000) Short-term investments (46,781,210) (15,208,188) Capital expenditures (21,688) -- ------------ ----------- Net cash provided by investing activities 1,649,072 4,447,002 ------------ ----------- Cash flows from financing activities: Borrowings under lines of credit 2,980,000 2,000,000 Repayments on long-term debt (387,538) (2,217,628) Issuance of Class A Stock 162,000 -- Payments for acquisition & retirement of stock (1,314,462) (460,737) ------------ ----------- Net cash provided by (used for) financing activities 1,440,000 (678,365) ------------ ----------- Net increase (decrease) in cash and cash equivalents 6,564,708 (132,937) Cash and cash equivalents at beginning of period 2,306,232 2,095,449 ------------ ----------- Cash and cash equivalents at end of period $ 8,870,940 1,962,512 ============ ===========
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, 1998. (2) Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the three-month periods ended March 31, 1999 and 1998.
Average Per- Shares Share 1999: Earnings Outstanding Amount - ----- -------- ----------- ------ Basic EPS: Earnings available to stockholders $ 881,058 2,985,868 $ .30 Effect of Dilutive Securities: Stock options -- 72,601 Convertible Note $ 292,215 1,400,000 ---------- --------- Diluted EPS: Earnings available to stockholders $1,173,273 4,458,469 $ 26 ========== ========= ====== 1998: - ----- Basic EPS: Earnings available to stockholders $1,003,526 3,300,340 $ .30 Effect of Dilutive Securities: Stock options -- 112,193 Convertible Note $ 313,088 1,500,000 ---------- --------- Diluted EPS: Earnings available to stockholders $1,316,614 4,912,533 $ .27 ========== ========= ======
(3) Supplemental Cash Flow Information Income tax paid during the three months ended March 31, 1999 and 1998 was $12,270 and $487,541, respectively. Interest paid for the three months ended March 31, 1999 and 1998 was $296,532 and $968,289, respectively. 7 8 (4) Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. This statement stipulates that comprehensive income reflect the change in equity of an enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income thus represents the sum of net income and other changes in equity from non-owner sources. The adoption of SFAS No. 130 resulted in the Company reporting unrealized gains and losses on investments as other comprehensive income. The following table summarizes reclassification adjustments for other comprehensive income (loss) and the related tax affects for the three months ended March 31, 1999 and 1998:
1999 1998 ---- ---- Unrealized gains (losses) on investments: Unrealized holding loss arising during period, net of income tax benefit of $75,807 and $40,289 for 1999 and 1998, respectively $(147,155) (78,209) Less reclassification adjustment for gains included in net income, net of income tax expense of $54,115 and $35,088 for 1999 and 1998, respectively 105,046 68,113 --------- -------- Other comprehensive income $(252,201) (146,322) ========= ========
(5) New Accounting Standards Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" was adopted on January 1, 1999. SOP 97-3 provides guidance for determining when an entity should recognize a liability for guaranty-fund and other insurance-related assessments, how to measure that liability, and when an asset may be recognized for the recovery of such assessments through premium tax offsets or policy surcharges. SOP 97-3 became effective for financial statements for fiscal years beginning after December 15, 1998, and the effect of initial adoption is to be reported as a cumulative catch-up adjustment. Restatement of previously issued financial statements is not allowed. The adoption of this SOP did not have an effect on the Company's result of operations or financial condition. SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was adopted on January 1, 1999. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and for determining when specific costs should be capitalized and when they should be expensed. SOP 98-1 became effective for financial statements for fiscal years beginning after December 15, 1998. Costs incurred prior to initial application of this SOP, whether capitalized or not, should not be adjusted to the amounts that would have been capitalized had this SOP been in effect when those costs were incurred and therefore, the adoption of this SOP did not have an effect on the Company's result of operations or financial condition. (6) Future Accounting Standards 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 Company has not completed its evaluation of the effect SFAS No. 133 will have on the Company's results of operations or financial condition. 8 9 (7) Segment Reporting Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that selected information about those operating segments be reported in interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assessing performance. The Company redefined its reportable operating segments as a result of the adoption of SFAS No. 131 and segment information for 1998 has been restated. The Company has three reportable operating segments: ACMAT Contracting, ACSTAR Bonding and United Coastal Liability Insurance. The Company's reportable segments are primarily the three main legal entities of the Company which offer different products and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. ACMAT Contracting provides construction contracting services to commercial and governmental customers. ACMAT Contracting also provides underwriting services to its insurance subsidiaries. In addition, ACMAT Contracting owns a commercial office building in New Britain Connecticut and leases office space to its insurance subsidiaries as well as third parties. The United Coastal Liability Insurance operating segment offers specific lines of liability insurance as an approved non-admitted excess and surplus lines insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of Columbia. United Coastal offers claims made and occurrence policies for specific specialty lines of liability insurance through certain excess and surplus lines brokers who are licensed and regulated by the state insurance department(s) in the state(s) in which they operate. United Coastal offers general, asbestos, lead, pollution and professional liability insurance nationwide to specialty trade contractors, environmental contractors, property owner, storage and treatment facilities and professionals. United Coastal also offers products liability insurance to manufacturers and distributors. The Bonding operating segment provides, primarily through ACSTAR, surety bonds written for prime, specialty trade, environmental, asbestos and lead abatement contractors and miscellaneous obligations. ACSTAR also offers other miscellaneous surety such as workers' compensation bonds, supply bonds, subdivision bonds and license and permit bonds. The Company evaluates performance based on earnings before income taxes and excluding interest expense. The Company accounts for intersegment revenue and expenses as if the products/services were to third parties. Information relating to the three segments for the three-month periods ended March 31, 1999 and 1998 is summarized as follows:
1999 1998 ------------ ------------ Revenues: ACMAT Contracting $ 3,558,776 3,123,984 United Coastal Liability Insurance 2,429,098 3,313,011 ACSTAR Bonding 1,328,393 1,634,557 ------------ ------------ $ 7,316,267 8,072,222 ============ ============ Operating Earnings: ACMAT Contracting $ 330,883 33,574 United Coastal Liability Insurance 1,259,444 1,965,956 ACSTAR Bonding 616,454 706,951 ------------ ------------ $ 2,206,781 5,365,741 ============ ============ Depreciation and Amortization: ACMAT Contracting 268,343 172,946 United Coastal Liability Insurance 71,326 64,236 ACSTAR Bonding 94,881 119,866 ------------ ------------ 434,530 357,051 ============ ============ Identifiable Assets: ACMAT Contracting $ 15,590,422 20,908,452 United Coastal Liability Insurance 82,704,627 99,400,420 ACSTAR Bonding 51,891,552 51,021,735 ------------ ------------ $150,186,601 171,330,607 ============ ============
9 10 The components of revenue for each segment for the three-month periods ended March 31, 1999 and 1998 are as follows:
1999 1998 ---------- ---------- ACMAT Contracting: Contract revenues $2,483,676 2,175,692 Investment income, net 20,766 9,908 Intersegment revenue: Rental income 506,252 467,412
Underwriting services and agency commissions 548,082 470,417 Capital losses -- -- Other -- 555 ---------- ---------- $3,558,776 3,123,984 ---------- ---------- United Coastal Liability Insurance: Premiums $1,404,916 1,716,584 Investment income, net 856,140 1,279,963 Equity income (loss) from limited partnership investment -- 249,049 Capital gains 159,161 61,841 Other 8,881 6,244 ---------- ---------- $2,429,098 3,313,681 ========== ========== ACSTAR Bonding: Premiums $ 984,533 1,131,741 Investment income, net 340,132 296,569 Equity income (loss) from limited partnership investment -- 164,887 Capital gains/(losses) -- 41,360 Other 3,728 -- ---------- ---------- $1,328,393 1,634,557 ========== ==========
The following is a reconciliation of segment totals for revenue and operating income to corresponding amounts in the Company's statement of earnings:
Revenue: 1999 1998 ----------- ----------- Total revenue for reportable segments $ 7,316,267 8,072,222 Intersegment eliminations (740,696) (669,725) ----------- ----------- $ 6,575,571 7,402,497 =========== ========= Operating Earnings: Total operating earnings for reportable segments $ 2,206,781 2,706,481 Interest expense (913,656) (1,241,134) Other operating expenses (98,237) (98,237) ----------- ----------- $ 1,194,888 1,367,110 =========== ===========
Operating earnings for ACMAT contracting are operating revenues less cost of contract revenues and identifiable selling, general and administrative expenses. Operating earnings for the bonding and liability insurance segments are revenues less losses and loss adjustment expenses, amortization of policy acquisition costs and identifiable selling, general and administrative expenses. The adjustments and eliminations required to arrive at consolidated amounts shown above consist principally of the elimination of the intersegment revenues related to the performance of certain services and rental charges. Identifiable assets are those assets that are used by each segment's operations. Foreign revenues are not significant 10 11 ACMAT CORPORATION AND SUBSIDIARIES Item 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations RESULTS OF OPERATIONS: Overview Net earnings were $881,058 for the three months ended March 31, 1999 compared to $1,003,526 for the same period a year ago. Included in 1998 earnings were pre-tax earnings of approximately $400,000 from a limited partnership investment which was accounted for on the equity method. The limited partnership was sold on December 31, 1998. The 1999 net earnings also reflect an increase in gross profits on construction projects and decreasing interest expense offset in part by a decrease in interest income. Earned Premiums Earned premiums for the three months ended March 31, 1999 were $2,389,449 compared to $2,848,325 for the same period in 1998. Net written premiums were $2,614,124 for the three months ended March 31, 1999 compared to $2,260,007 for the three months ended March 31, 1998. Variances in net written premiums have historically occurred due to the fluctuations in size, number and timing of bonds and policies bound by the Company. The Company will maintain its existing pricing strategy and high level of service . Contract Revenues Contract revenues were $2,483,676 for the three-month period ended March 31, 1999 compared to $2,175,692 for the same period in 1998. The increase in contract revenues reflects the Company's securement of an $11 million project in July 1998 which will be completed in September 1999. Construction revenue is difficult to predict and depends greatly on the successful securement of contracts bid. The Company's construction backlog was approximately $11,000,000 at March 31, 1999 compared to $2,750,000 a year ago. Investment Income, Net Net investment income was $1,367,038 for the three-month period ended March 31, 1999 compared to $1,722,274 for the same period in 1998, representing effective yields of 4.62% and 5.11%, respectively. Invested assets, including cash, were $120,760,639 and $116,198,344 at March 31, 1999 and December 31, 1998, respectively. The increase in invested assets is attributable to the collection of premiums and collateral offset in part by the net cash flow used to repay debt and repurchase stock. Net Realized Capital Gains Realized capital gains from the sale of investments in the three-month period ended March 31, 1999 were $159,161 compared to $103,201 for the same period in 1998. Other Income Other income was $176,247 for the three-month period ended March 31, 1999 compared to $553,005 for the same period in 1998. Other income in 1998 includes earnings of approximately $400,000 from the limited partnership investment which was sold on December 31, 1998. Costs of Contract Revenues Costs of contract revenues were $2,228,345 for the three-month period ended March 31, 1999 compared to $2,255,453 for the same period in 1998. The gross profit margin on construction contracts was 10% in 1999 compared to a loss of 3.7% in 1998. Gross margins fluctuate each year based upon the profitability of specific projects. The loss in 1998 was due primarily to losses on two projects which were completed in 1998. 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 $470,701 for the three-month period ended March 31, 1999 compared to $684,737 for the same period in 1998. The decrease in losses and loss adjustment expenses is attributable to the decrease in earned premiums from 1999 to 1998 and the release of approximately $246,000 of surety loss reserves in 1999 which compares to a release of approximately $170,000 in 1998. The reserves released represent the release of reserves on older underwriting years which are no longer needed. Losses and loss adjustment 11 12 expense reserves represent management's estimate of the ultimate costs of unpaid losses incurred for these periods relative to premiums earned. Amortization of Policy Acquisition Costs Amortization of policy acquisition costs was $357,783 for the three-month period ended March 31, 1999 as compared to $520,871 for the same period in 1998. The decrease in amortization of policy acquisition costs is primarily attributable to the decrease in premiums earned. Policy acquisition costs, primarily commissions, are deferred and amortized over the policy or bond term. Selling, General and Administrative Expenses Selling, general and administrative expenses were $1,410,198 for the three-month period ended March 31, 1999 compared to $1,333,192 for the same period in 1998. The increase in the selling, general and administrative expenses during 1999 is due primarily to an increase in salary expense. Interest Expense Interest expense decreased to $913,656 for the three-month period ended March 31, 1999 compared to $1,241,134 for the same period in 1998. The decrease in interest expense in 1999 is due primarily to the decrease in short and long-term borrowings which were paid down in the fourth quarter of 1998. Income Taxes Income tax expense was $313,830 for the three-month period ended March 31, 1999 compared to $363,584 for the same period in 1998, representing effective Federal tax rates of 24.6% and 26.5%, 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 March 31, 1999 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 claim reporting patterns, 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 ratios under generally accepted accounting principles ("GAAP") were 19.7% and 24.0% for the three-month periods ended March 31, 1999 and 1998, respectively. These loss ratios are below industry averages and are believed to be the result of conservative underwriting. The decrease in loss ratios is due to the release of surety reserves in 1999. There can be no assurance that such loss ratios can continue. The Company's insurance subsidiaries' expense ratios under GAAP were 57.5% and 54.5% for the three-month period ended March 31, 1999 and 1998, respectively. The Company's insurance subsidiaries' combined ratios under GAAP were 77.2% and 78.5% for the three-month period ended March 31, 1999 and 1998, respectively. The decrease in the 1999 combined ratio results primarily from the reduction in loss reserves offset in part by the decline in premiums. LIQUIDITY AND CAPITAL RESOURCES: 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. 12 13 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'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 relied on dividends from its insurance subsidiaries to repay debt. The Company provided cash flow from operations of $3,475,636 for the three-month period ended March 31, 1999 compared to the cash flow used for operations of $3,901,574 for the same period in 1998. Net cash flows provided by operations in 1999 were derived principally from premium collections and collateral held. Substantially all of the Company's cash flow was used to repay long-term debt, repurchase stock and purchase investments. 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 the first quarter of 1999 amounted to $1,649,072 compared to $4,447,002 for the same period in 1998. 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 March 31, 1999. The Company maintains a short-term unsecured bank credit line totaling $10 million to fund interim cash requirements. There was $2,980,000 outstanding under this line of credit as of March 31, 1999. During the three-month period ended March 31, 1999, the Company purchased in the open market and privately negotiated transactions, 2,180 shares of its Common Stock at an average price of $20.63. During the three-month period ended March 31, 1999, the Company also purchased, in the open market and privately negotiated transactions, 89,000 shares of its Class A Stock at an average price of $14.26 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 companies, without the prior approval of their domestic State insurance department. The amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic State insurance departments, are limited to approximately $10,730,000 in 1999. 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 70% compliant, with all systems expected to be compliant and tested by September 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 issue 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- 13 14 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 third quarter of 1999. The Company is reviewing 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 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 has made changes in insurance coverage it currently markets in light of the Year 2000 issue. 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 March 31, 1999 was significantly above the level which might require regulatory action. 14 15 Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K a. Exhibits -27. Financial Data Schedule b. Report on Form 8-K - None 15 16 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: May 14, 1999 /S/ Henry W. Nozko, Sr. ----------------------- Henry W. Nozko, Sr., President and Chairman Date: May 14, 1999 /S/ Henry W. Nozko, Jr. ----------------------- Henry W. Nozko, Jr., Executive Vice President Chief Operating Officer, and Treasurer 17 EX-27 2 EXHIBIT 27
5 1 3-MOS DEC-31-1998 MAR-31-1999 8,870,940 111,889,699 3,196,677 (257,617) 0 127,729,243 17,566,518 4,787,409 150,186,601 76,274,818 36,812,462 0 0 2,979,716 34,119,605 150,186,601 4,873,125 6,575,571 3,056,829 3,056,829 1,410,198 0 913,656 1,194,888 313,830 881,058 0 0 0 881,058 .30 .26
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