<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended 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
<PAGE> 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
<PAGE> 3
Part I Financial Information
Item 1 Financial Statements
ACMAT CORPORATION AND SUBSIDIARIES
Financial Statements
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
Assets
<S> <C> <C>
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
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Three months ended, Six months ended,
June 30, June 30,
---------- ---------- ------------- ------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
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
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Class A Accumulated
stock stock Additional other Total
par par paid-in Retained comprehensive stockholders'
value value capital earnings income equity
<S> <C> <C> <C> <C> <C> <C>
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
======== ========== ======= =========== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE> 7
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
(1) Financial Statements
The consolidated financial statements include the accounts of ACMAT Corporation
("ACMAT" or the "Company") and its subsidiaries. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and are unaudited.
The interim financial information contained in this report has been prepared
from the books and records of the Company and its subsidiaries and reflects, in
the opinion of the management of the Company, all adjustments (consisting of
normal and recurring accruals) necessary to fairly present results of operations
for the periods indicated. All significant intercompany accounts and
transactions have been eliminated in consolidation.
These statements should be read in conjunction with the financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 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:
<TABLE>
<CAPTION>
Average
Shares Per-Share
1998: Earnings Outstanding Amount
----- -------- ----------- ------
<S> <C> <C> <C>
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
========== ========= ====
</TABLE>
7
<PAGE> 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:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
(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
<PAGE> 9
ACMAT CORPORATION
Item 2: Management's Discussion and Analysis of
Financial Conditions and Results of Operations
RESULTS OF OPERATIONS:
Overview
Net earnings were $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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 13
Part II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Stockholders of ACMAT Corporation was held on
Thursday, June 25, 1998.
b. Directors elected at the meeting:
<TABLE>
<CAPTION>
Votes Votes Brokers
For Against Non-Votes
<S> <C> <C> <C>
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
</TABLE>
c. Other matters voted upon:
<TABLE>
<CAPTION>
Brokers
For Against Abstain Non-Votes
<S> <C> <C> <C> <C>
1. Appointment of
Independent Auditors 756,998 0 160 0
</TABLE>
Item 6 - Exhibits and Reports on Form 8-K
a. 27-Financial Data Schedule
b. Report on Form 8-K - None
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ACMAT CORPORATION
Date: 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 4,043,523
<SECURITIES> 117,790,254
<RECEIVABLES> 7,833,252
<ALLOWANCES> (309,746)
<INVENTORY> 0
<CURRENT-ASSETS> 138,267,958
<PP&E> 17,454,680
<DEPRECIATION> 4,526,215
<TOTAL-ASSETS> 163,642,687
<CURRENT-LIABILITIES> 77,905,667
<BONDS> 45,276,860
0
0
<COMMON> 3,284,737
<OTHER-SE> 37,175,423
<TOTAL-LIABILITY-AND-EQUITY> 163,642,687
<SALES> 5,853,042
<TOTAL-REVENUES> 6,963,358
<CGS> 3,686,971
<TOTAL-COSTS> 3,686,971
<OTHER-EXPENSES> 1,285,974
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,204,849
<INCOME-PRETAX> 785,564
<INCOME-TAX> 165,310
<INCOME-CONTINUING> 620,254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 620,254
<EPS-PRIMARY> .19<F1>
<EPS-DILUTED> .19<F2>
<FN>
<F1>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.
<F2>Diluted earnings per share for the quarter ended June 30, 1997 was restated
to $.34.
</FN>
</TABLE>
