<PAGE> 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, 2000
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.
<TABLE>
<CAPTION>
Shares outstanding
Title of Class at April 30, 2000
- -------------- ---------------
<S> <C>
Common Stock 570,568
Class A Stock 2,288,527
</TABLE>
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I FINANCIAL INFORMATION PAGE
<S> <C>
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 11
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
Part I Financial Information
Item I Financial Statements
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
Assets 2000 1999
- ------ ---- ----
Investments:
<S> <C> <C>
Fixed maturities-available for sale at fair value (Cost of $85,708,449 in 2000
and $89,290,810 in 1999) $ 83,517,852 87,826,920
Equity securities, at fair value (Cost of $2,065,262 in 2000 and 1999) 1,648,992 1,614,763
Short-term investments, at cost which approximates fair value 3,259,798 518,557
------------- -------------
Total investments 88,426,642 89,960,240
Cash and cash equivalents 5,817,113 7,054,911
Accrued interest receivable 1,372,688 1,324,356
Receivables, net 3,995,181 2,823,381
Reinsurance recoverable 820,823 3,924,064
Income tax refund receivable 342,726 173,465
Prepaid expenses 173,200 106,049
Deferred income taxes 1,156,443 1,560,324
Property & equipment, net 12,662,485 12,675,956
Deferred policy acquisition costs 1,711,652 1,323,780
Other assets 2,698,303 2,360,366
Intangibles, net 2,487,056 2,568,719
------------- -------------
121,664,312 $ 125,855,611
============= =============
Liabilities & Stockholders' Equity
Accounts payable 2,106,259 1,923,081
Reserves for losses and loss adjustment expenses 32,841,646 38,544,491
Unearned premiums 6,472,586 5,262,468
Collateral held 11,019,226 11,954,554
Accrued liabilities 2,428,208 1,251,305
Long-term debt 30,397,006 30,792,720
------------- -------------
Total liabilities 85,264,931 89,728,619
Commitments and contingencies
Stockholders' Equity:
Common Stock (No par value; 3,500,000 shares authorized; 570,568 and
584,828 shares issued and outstanding) 570,568 584,828
Class A Stock (No par value; 10,000,000 shares authorized; 2,288,527 and
2,304,587 shares issued and outstanding) 2,288,527 2,304,587
Retained earnings 35,353,023 35,151,966
Accumulated other comprehensive income (loss) (1,812,737) (1,914,389)
------------- -------------
Total stockholders' equity 36,399,381 36,126,992
------------- -------------
$ 121,664,312 125,855,611
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Earned premiums $ 2,348,474 2,389,449
Contract revenues 2,512,810 2,483,676
Investment income, net 1,142,554 1,367,038
Net realized capital gains (losses) (108,554) 159,161
Other income 186,023 176,247
----------- -----------
6,081,307 6,575,571
----------- -----------
Cost of contract revenues 2,364,230 2,228,345
Losses and loss adjustment expenses 441,660 470,701
Amortization of policy acquisition costs 391,679 357,783
General and administrative expenses 1,264,548 1,410,198
Interest expense 746,410 913,656
----------- -----------
5,208,527 5,380,683
----------- -----------
Earnings before income taxes 872,780 1,194,888
Income taxes
Federal 242,473 293,830
State 20,000 20,000
----------- -----------
262,473 313,830
----------- -----------
Net earnings $ 610,307 881,058
=========== ===========
Basic Earnings Per Share $ .21 .30
Diluted Earnings Per Share $ .21 .26
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
March 31, 2000 and 1999
<TABLE>
<CAPTION>
Common Additional
stock par Class A stock paid-in
value par value capital
----- --------- -------
<S> <C> <C> <C>
Balance as of December 31, 1998 $ 592,088 2,460,808 --
Comprehensive income:
Net unrealized losses on debt and
equity securities -- -- --
Net earnings -- -- --
Total comprehensive income
Acquisition and retirement of 2,180 shares
of Common Stock (2,180) -- --
Acquisition and retirement of 89,000 shares
of Class A Stock (89,000) (144,000)
Issuance of 18,000 Shares of Class A Stock
pursuant to stock options -- 18,000 144,000
----------- ----------- -----------
Balance as of March 31, 1999 $ 589,908 2,389,808 --
=========== =========== ===========
Balance as of December 31, 1999 $ 584,828 2,304,587 --
Comprehensive income:
Net unrealized gains on debt and
equity securities -- -- --
Net earnings -- -- --
Total comprehensive income
Acquisition and retirement of 14,260 shares
of Common Stock (14,260) -- --
Acquisition and retirement of 16,060 shares
of Class A Stock -- (16,060) (152,570)
----------- --------- --------
Balance as of March 31, 2000 $ 570,568 2,288,527 --
=========== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other Total
Retained comprehensive stockholders'
earnings income (loss) equity
-------- ------------- ------
<S> <C> <C> <C>
Balance as of December 31, 1998 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 (42,783) (44,963)
Acquisition and retirement of 89,000 shares
of Class A Stock (1,036,499) (1,269,499)
Issuance of 18,000 Shares of Class A Stock
pursuant to stock options -- -- 162,000
---------- ---------- ----------
Balance as of March 31, 1999 33,876,314 243,291 37,099,321
========== ========== ==========
Balance as of December 31, 1999 35,151,966 (1,914,389) 36,126,992
Comprehensive income:
Net unrealized gains on debt and
equity securities -- 101,652 101,652
Net earnings 610,307 -- 610,307
Total comprehensive income 711,959
Acquisition and retirement of 14,260 shares
of Common Stock (256,680) -- (270,940)
Acquisition and retirement of 16,060 shares
of Class A Stock (152,570) -- (168,630)
---------- ---------- ----------
Balance as of March 31, 2000 35,353,023 (1,812,737) 36,399,381
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net earnings $ 610,307 881,058
Adjustments to reconcile net earnings to net cash provided by
(used for) operating activities:
Depreciation and amortization 417,613 434,530
Net realized capital (gains) losses 108,554 (159,161)
Changes in:
Accrued interest receivable (48,332) 86,687
Reinsurance recoverable 3,103,241 (71,116)
Receivables, net (1,171,800) 798,567
Deferred policy acquisition costs (387,872) (134,333)
Prepaid expenses and other assets (431,113) (483,296)
Accounts payable and accrued liabilities 1,360,081 664,416
Cash collateral held (935,328) 554,494
Reserves for losses and loss adjustment expenses (5,702,845) 220,386
Income taxes, net 240,934 301,558
Unearned premiums 1,210,118 381,846
----------- -----------
Net cash provided by (used for) operating activities (1,626,442) 3,475,636
----------- -----------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed maturities-sold 4,986,176 16,652,198
Fixed maturities-matured 1,646,000 430,000
Short-term investments 363,562 50,893,522
Purchases of:
Fixed maturities (2,530,101) (19,523,750)
Short-term investments (3,104,803) (46,781,210)
Capital expenditures (136,906) (21,688)
----------- -----------
Net cash provided by investing activities 1,223,928 1,649,072
----------- -----------
Cash flows from financing activities:
Borrowings under lines of credit -- 2,980,000
Repayments on long-term debt (395,714) (387,538)
Issuance of Class A Stock -- 162,000
Payments for acquisition & retirement of stock (439,570) (1,314,462)
----------- -----------
Net cash provided by (used for) financing activities (835,284) 1,440,000
----------- -----------
Net increase (decrease) in cash and cash equivalents (1,237,798) 6,564,708
Cash and cash equivalents at beginning of period 7,054,911 2,306,232
----------- -----------
Cash and cash equivalents at end of period $ 5,817,113 8,870,940
=========== ===========
</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, 1999.
(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, 2000 and 1999.
<TABLE>
<CAPTION>
Average
Shares Per-Share
2000: Earnings Outstanding Amount
----- -------- ----------- ------
Basic EPS:
<S> <C> <C> <C>
Earnings available to stockholders $ 610,307 2,860,095 $ .21
Effect of Dilutive Securities:
Stock options -- 43,506
---------- ---------
Diluted EPS:
Earnings available to stockholders $ 610,307 2,903,601 $ .21
========== ========= =======
1999:
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
========== ========= =======
</TABLE>
The Convertible Notes were anti-dilutive in 2000.
(3) Supplemental Cash Flow Information
Income tax paid during the three months ended March 31, 2000 and 1999 was
$27,854 and $12,270, respectively. Interest paid for the three months ended
March 31, 2000 and 1999 was $218,234 and $296,532, respectively.
7
<PAGE> 8
(4) Comprehensive Income
The following table summarizes reclassification adjustments for other
comprehensive income (loss) and the related tax effects for the three months
ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
Unrealized gains (losses) on investments:
<S> <C> <C>
Unrealized holding gain (loss) arising during period, net of income tax (benefit)
of ($75,807) for 1999. $ 30,006 (147,155)
Less reclassification adjustment for gains (losses) included in net income, net of
income tax expense (benefit) of ($36,908) and $54,115 for 2000 and 1999, (71,646) 105,046
--------- --------
respectively
Other comprehensive income (loss) $ 101,652 (252,201)
========= ========
</TABLE>
(5) Future Accounting Standard
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 was to be effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. However, in June 1999,
SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133" was
issued. SFAS No. 137 allows entities which have not adopted SFAS No. 133 to
defer its effective date to all fiscal quarters of all fiscal years beginning
after June 15, 2000. This Statement should not be applied retroactively to
financial statements of prior periods. The Company adopted the deferral
provisions of SFAS No. 137, effective January 1, 2000 and has not completed its
evaluation of the effect SFAS No. 133 will have on the Company's results of
operations or financial condition.
(6) Segment Reporting
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.
8
<PAGE> 9
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,
2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
Revenues:
<S> <C> <C>
ACSTAR Bonding $ 1,647,636 1,328,393
United Coastal Liability Insurance 1,654,626 2,429,098
ACMAT Contracting 3,602,710 3,558,776
------------ ------------
$ 6,904,972 7,316,267
============ ============
Operating Earnings:
ACSTAR Bonding $ 710,218 616,454
United Coastal Liability Insurance 688,062 1,259,444
ACMAT Contracting 329,011 330,883
------------ ------------
$ 1,727,291 2,206,781
============ ============
Depreciation and Amortization:
ACSTAR Bonding $ 133,425 94,881
United Coastal Liability Insurance 102,294 71,326
ACMAT Contracting 181,894 268,343
------------ ------------
$ 417,613 434,530
============ ============
Identifiable Assets:
ACSTAR Bonding $ 43,013,935 51,891,552
United Coastal Liability Insurance 61,434,386 82,704,627
ACMAT Contracting 17,215,991 15,590,422
------------ ------------
$121,664,312 150,186,601
============ ============
</TABLE>
The components of revenue for each segment for the three-month periods ended
March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
ACSTAR Bonding:
<S> <C> <C>
Premiums $ 1,284,806 984,533
Investment income, net 344,529 340,132
Other 18,301 3,728
----------- -----------
$ 1,647,636 1,328,393
=========== ===========
United Coastal Liability Insurance:
Premiums $ 1,063,668 1,404,916
Investment income, net 697,522 856,140
Capital gains (losses) (108,554) 159,161
Other 1,990 8,881
----------- -----------
$ 1,654,626 2,429,098
=========== ===========
ACMAT Contracting:
Contract revenues $ 2,512,810 2,483,676
Investment income, net 33,557 20,766
Intersegment revenue:
Rental income 339,015 342,614
Underwriting services and agency commissions 551,596 548,082
Other 165,732 163,638
----------- -----------
$ 3,602,710 3,558,776
=========== ===========
</TABLE>
9
<PAGE> 10
The following is a reconciliation of segment totals for revenue and operating
income to corresponding amounts in the Company's statement of earnings:
<TABLE>
<CAPTION>
Revenue: 2000 1999
---- ----
<S> <C> <C>
Total revenue for reportable segments $ 6,904,972 7,316,267
Intersegment eliminations (823,665) (740,696)
----------- -----------
$ 6,081,307 6,575,571
=========== ===========
Operating Earnings:
Total operating earnings for reportable segments $ 1,727,291 2,206,781
Interest expense (746,410) (913,656)
Other operating expenses (108,101) (98,237)
----------- -----------
$ 872,780 1,194,888
=========== ===========
</TABLE>
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
<PAGE> 11
ACMAT CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis of
Financial Conditions and Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS:
Net earnings were $610,307 for the three months ended March 31, 2000 compared to
$881,058 for the same period a year ago. The decrease in 2000 net earnings
compared to the 1999 net earnings was due primarily to the realized capital
losses of $108,554 in 2000 compared with capital gains of $159,161 in 1999
offset by the decrease in interest expense related to the reduction of long-term
debt partially offset by the decrease in investment income.
Revenues were $6,081,307 for the three months ended March 31, 2000 compared to
$6,575,571 for the same period in 1999. The decrease in revenues over the past
year reflects the Company's strategy to avoid the unfavorable pricing in the
Company's casualty insurance operations. Earned premiums were $2,348,474 for the
three months ended March 31, 2000 compared to $2,389,449 for the same period a
year ago. Contract revenue is difficult to predict and depends greatly on the
successful securement of contracts bid. Contract revenues were $2,512,810 for
the three months ended March 31, 2000 compared to $2,483,676 for the same period
a year ago.
Investment income was $1,142,554 compared to $1,367,038 for the same period in
1999. The decrease in investment income was primarily related to a decrease in
invested assets which were used to reduce long-term debt. Net realized capital
losses were $108,554 for the three months ended March 31, 2000 compared to
realized capital gains of $159,161 for the same period a year ago.
Other income was $186,023 for the three months ended March 31, 2000 compared to
$176,247 for the same period in 1999
Losses and loss adjustment expenses were $441,660 for the three months ended
March 31, 2000 compared to $470,701 for the same period a year ago. The
decreases in losses and loss adjustment expenses are attributable to the decline
in earned premiums. Amortization of policy acquisition costs were $391,679 for
the three months ended March 31, 2000 compared to $357,783 for the same period
in 1999. The increase in amortization of policy acquisition costs is primarily
attributable to the increase in commissions paid to agents.
Costs of contract revenues were $2,364,230 for the three months ended March 31,
2000 compared to $2,228,345 for the same period a year ago. The gross profit
margin on construction projects was 6% in 2000 compared to 10% in 1999. Gross
margin fluctuations each year based upon the profitability of specific projects.
General and administrative expenses were $1,264,548 for the three months ended
March 31, 2000 compared to $1,410,198 for the same period a year ago. The
decrease in general and administrative expenses in 2000 compared to 1999 is due
primarily to the decrease in amortization of intangibles and a decrease in bad
debt expense.
Interest expense was $746,410 for the three months ended March 31, 2000 compared
to $913,656 for the same period in 1999. The decrease in interest expense is due
to the decrease in long-term debt. During 1999, the Company repaid and
refinanced long-term debt.
Income tax expense was $262,473 for the three months ended March 31, 2000
compared to $313,830 for the same period a year ago representing effective tax
rates of 30.1% and 26.3%, respectively. The fluctuation in the effective tax
rate is due to tax exempt interest income making up a smaller portion of taxable
income in 2000.
11
<PAGE> 12
Results of Operations by Segment:
ACSTAR BONDING:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue $1,647,636 1,328,393
Operating Earnings $ 710,218 616,454
</TABLE>
Revenues for the ACSTAR Bonding segment were $1,647,636 for the three months
ended March 31, 2000 compared to $1,328,393 for the same period in 1999. Net
written premiums were $1,369,629 for the three months ended March 31, 2000
compared to $1,016,694 for the three months ended March 31, 1999. Earned
premiums increased 30% to $1,284,806 for the three months ended March 31, 2000
compared to $984,533 for the three months ended March 31, 1999.
Investment income was $344,529 for the three months ended March 31, 2000
compared to $340,132 for the same period a year ago. The increase in investment
income was primarily related to a slight increase in invested assets and an
increase in the effective yield on those invested assets.
Operating earnings for the ACSTAR Bonding segment were $710,218 for the three
months ended March 31, 2000 compared to $616,454 for the same period in 1999.
The increase in 2000 operating earnings compared to 1999 operating earnings is
due primarily to an increase in earned premiums offset in part by an increase in
the amortization of policy acquisition costs.
Losses and loss adjustment expenses were $76,200 for the three months ended
March 31, 2000 compared to $49,227 for the same period a year ago. Amortization
of policy acquisition costs were $465,407 for the three months ended March 31,
2000 compared to $262,964 for the same period in 1999. The increase in
amortization of policy acquisition costs in 2000 compared to 1999 is primarily
attributable to the increase in commissions paid to agents.
General and administrative expenses were $395,811 for the three months ended
March 31, 2000 compared to $399,748 for the same period a year ago. The decrease
in general and administrative expenses is due primarily to the decrease in bad
debt expense offset in part by an increase in salary expense.
UNITED COASTAL LIABILITY
INSURANCE:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue $1,654,626 2,429,098
Operating Earnings 688,062 1,259,444
</TABLE>
Revenues for the United Coastal Liability Insurance segment were $1,654,626 for
the three months ended March 31, 2000 compared to $2,429,098 for the same period
in 1999. The 2000 decrease in revenue reflects a decrease in earned premiums and
investment income compared to 1999. Net written premiums were $1,653,638 for the
three months ended March 31, 2000 compared to $1,597,430 for the three months
ended March 31, 1999. Earned premiums decreased 24% to $1,063,668 for the three
months ended March 31, 2000 compared to $1,404,916 for the three months ended
March 31, 1999. The decrease in revenues reflect the Company's strategy to avoid
the unfavorable pricing in the Company's casualty insurance market and use of
invested assets to reduce Company debt.
Investment income was $697,522 for the three months ended March 31, 2000
compared to $856,140 for the same period a year ago. The decrease in investment
income was primarily related to a decrease in invested assets as a result of
dividends distributed to the parent company to reduce corporate debt. Net
realized capital losses were $108,554 for the three months ended March 31, 2000
as compared to realized capital gains of $159,161 for the same period a year
ago.
Operating earnings for the United Coastal Liability Insurance segment were
$688,062 for the three months ended March 31, 2000 as compared to $1,259,444 for
the same period in 1999. The decrease in 2000 operating earnings compared to
1999 operating earnings is due primarily to a decrease in earned premiums and
investment income offset in part by a reduction in amortization of policy
acquisition costs and losses and loss adjustment expenses.
Losses and loss adjustment expenses were $365,460 for the three months ended
March 31, 2000 compared to $421,474 for the same period a year ago. The decrease
in losses and loss adjustment expenses are attributable to the decrease in
earned premiums. Amortization of policy acquisition costs were $326,026 for the
three months ended March 31, 2000 as compared to $420,052 for the same period in
1999. The decrease in amortization of policy acquisition costs is primarily
attributable to the decrease in earned premiums.
General and administrative expenses were $275,078 for the three months ended
March 31, 2000 compared to $328,128 for the same period a year ago. The decrease
in general and administrative expenses is due primarily to the overall decrease
in business activities.
12
<PAGE> 13
ACMAT CONTRACTING:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenue $3,602,710 3,558,776
Operating Earnings $ 329,011 330,883
</TABLE>
Revenues for the ACMAT Contracting segment were $3,602,710 for the three months
ended March 31, 2000 compared to $3,558,776 for the same period in 1999. The
2000 increase in revenue reflects a slight increase in contract revenues
compared to 1999. Contract revenue is difficult to predict and depends greatly
on the successful securement of contracts bid.
Operating earnings for the ACMAT Contracting segment were $329,011 for the three
months ended March 31, 2000 compared to $330,883 for the same period a year ago.
The decrease in 2000 operating earnings compared to 1999 operating earnings is
due primarily to reduced gross margins on the 2000 projects offset by a decrease
in general and administrative expenses.
Cost of contract revenues were $2,364,230 for the three months ended March 31,
2000 compared to $2,228,345 for the same period in 1999. The gross profit margin
on construction projects was 6% in 2000 and 10% in 1999. Gross margin
fluctuations each year based upon the profitability of specific projects.
General and administrative expenses were $909,469 for the three months ended
March 31, 2000 compared to $999,548 for the same period a year ago. The decrease
in general and administrative expenses in 2000 compared to 1999 is due primarily
to the decrease in the amortization of intangibles.
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, 2000 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 18.8% and 19.7% for the three-month periods
ended March 31, 2000 and 1999, 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 60.6% and 57.5%
for the three-month period ended March 31, 2000 and 1999, respectively. The
Company's insurance subsidiaries' combined ratios under GAAP were 79.4% and
77.2% for the three-month period ended March 31, 2000 and 1999, respectively.
The increase in the 2000 combined ratio results primarily from the increase in
commissions paid.
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.
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.
13
<PAGE> 14
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 used cash flow for operations of $1,626,442 for the three-month
period ended March 31, 2000 compared to the cash flow provided from operations
of $3,475,636 for the same period in 1999. Net cash flows used for operations in
2000 were used principally for payment of losses and loss adjustment expenses.
Substantially all of the Company's cash flow was used to repay long-term debt,
repurchase stock and purchase investments. 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 2000 amounted
to $1,223,928 compared to $1,649,072 for the same period in 1999. 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 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, 2000.
The Company maintains a short-term unsecured bank credit line totaling $10
million to fund interim cash requirements. There were no borrowings under this
line of credit as of March 31, 2000.
During the three-month period ended March 31, 2000, the Company purchased in the
open market and privately negotiated transactions, 14,260 shares of its Common
Stock at an average price of $19.00. During the three-month period ended March
31, 2000, the Company also purchased, in the open market and privately
negotiated transactions, 16,060 shares of its Class A Stock at an average price
of $10.50 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 $9,775,000 in 2000.
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, 2000 was above the level which might require
regulatory action.
14
<PAGE> 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
<PAGE> 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 12, 2000 /S/ Henry W. Nozko, Sr.
-------------------------------------------
Henry W. Nozko, Sr., President and Chairman
Date: May 12, 2000 /S/ Henry W. Nozko, Jr.
---------------------------------------------
Henry W. Nozko, Jr., Executive Vice President
Chief Operating Officer, and Treasurer
16
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