Net earnings were $2,224,317 in 2000, $3,013,723 in 1999 and $2,120,529 in 1998. The decrease in 2000 net earnings compared to the 1999 net earnings was due in part to realized capital losses in 2000 compared with capital gains in 1999. The increase in 1999 net earnings compared to the 1998 net earnings was due to the improved gross margins in the contracting business, the elimination of the limited partnership in 1998 and the reduction in interest expense related to the reduction of long-term debt partially offset by the decrease in investment income. Net earnings included approximately $1,000,000 of loss in 1998 related to the Company's share of a limited partnership. The limited partnership invested in small cap equities and incurred the loss in 1998 due to volatility in the small cap market. The Company sold its investment in the limited partnership on December 31, 1998.
Investment income was $4,570,927 in 2000, $5,389,732 in 1999 and $6,138,105 in 1998. The decrease in investment income was primarily related to a continued decrease in invested assets as the Company continues to reduce long-term debt. Net realized capital gains (losses) were ($123,125) in 2000, $252,190 in 1999 and $266,169 in 1998.
Costs of contract revenues were $11,006,382 in 2000, $8,261,408 in 1999 and $11,635,879 in 1998. The gross profit margins on construction projects were 6.6% in 2000, 10.4% in 1999 and 4.2% in 1998. Gross margins fluctuate each year based upon the profitability of specific projects.
Income tax expense was $1,248,437 in 2000, $1,204,164 in 1999 and $719,696 in 1998, representing effective tax rates of 35.9% 28.6% and 25.3%, respectively. The fluctuation in the effective tax rate reflects a one-time charge related to an IRS examination completed in 2000.
Revenues for the ACSTAR Bonding segment were $6,284,212 in 2000, $6,227,462 in 1999 and $5,286,955 in 1998. The 2000 increase in revenue reflects a slight increase in earned premium. The 1999 increase in revenue reflects a slight increase in earned premiums and investment income compared to 1998. Included in 1998 revenues is a pre-tax loss of approximately $570,000 for net loss of the limited partnership investment.
Investment income was $1,253,329 in 2000, $1,268,175 in 1999 and $1,169,977 in 1998. The slight decrease in 2000 investment income was primarily related to a continued decrease in invested assets offset in part by an increase in the effective yield on those invested assets. Net realized capital gains (losses) were $5,622 in 2000, $51,616 in 1999 and $68,040 in 1998.
Operating earnings for the ACSTAR Bonding segment were $2,436,708 in 2000, $2,968,882 in 1999 and $2,314,485 in 1998. The decrease in 2000 operating earnings compared to 1999 operating earnings reflects the Company's new reinsurance program and an increase in the amortization of policy acquisition costs. The increase in 1999 operating earnings compared to 1998 operating earnings is due primarily to an increase in earned premiums and investment income offset in part by an increase in the amortization of policy acquisition costs.
Losses and loss adjustment expenses were $251,876 in 2000, $238,520 in 1999 and $230,912 in 1998. Amortization of policy acquisition costs were $2,001,561 in 2000, $1,543,783 in 1999 and $1,225,718 in 1998. The increase in amortization of policy acquisition costs in 2000 compared to 1999 is primarily attributable to the increase in direct written premiums and commissions paid to agents.
Revenues for the United Coastal Liability Insurance segment were $7,080,714 in 2000, $8,529,279 in 1999 and $10,315,294 in 1998. The 2000 decrease in revenue reflects a 12% decrease in earned premiums and a 16% decrease in investment income compared to 1999. The 1999 decrease in revenue reflects a 27% decrease in earned premiums and a 20% decrease in investment income compared to 1998. Included in 1998 revenues is a pre-tax loss of approximately $830,000 for net loss of the limited partnership investment. The decrease in revenues over the past two years reflects the Company's strategy to avoid the unfavorable pricing in the Company's casualty insurance market.
Operating earnings for the United Coastal Liability Insurance segment were $3,549,472 in 2000, $4,578,802 in 1999 and $5,176,870 in 1998. The decrease in 2000 operating earnings compared to 1999 operating earnings is due primarily to a decrease in earned premiums and investment income. The decrease in 1999 operating earnings compared to 1998 is due to a decrease in earned premiums.
General and administrative expenses were $972,294 in 2000, $987,931 in 1999 and $1,330,390 in 1998. The decrease in general and administrative expenses is due primarily to the overall decrease in business activities.
Revenues for the ACMAT Contracting segment were $15,898,910 in 2000, $13,154,753 in 1999 and $15,801,541 in 1998. The 2000 increase in revenue reflects a 28% increase in contract revenues compared to 1999. The decrease in 1999 revenue compared to the 1998 revenue is due primarily to a 24% decrease in contract revenues in 1999. Contract revenue depends greatly on the successful securement of contracts bid.
Operating earnings for the ACMAT Contracting segment were $1,111,731 in 2000, $907,228 in 1999 and $501,712 in 1998. The increase in 2000 operating earnings compared to 1999 operating earnings is due to implementation of the Funds Administration Agreement with ACSTAR offset in part by lower gross margins on 2000 projects. The increase in 1999 operating earnings compared to 1998 operating earnings is due primarily to improved gross margins on the 1999 projects.
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.
The Company used cash flow from other sources to support operations in the amount of $8,190,436 in 2000, compared to cash flow realized from operations of $7,065,427 in 1999 and $530,977 in 1998. The cash flow from operations is due primarily to the return of cash collateral and the payment of claims. Substantially all of the Company's cash flow is used to repay short-term and 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.
During 2000, the Company purchased, in the open market and privately negotiated transactions, 27,239 shares of its Common Stock at an average price of $19.08. The Company also purchased, in open market and privately negotiated transactions, 253,833 shares of its Class A Stock at an average price of $7.29 per share.
In 2001, the Company anticipates that internally generated funds and short-term borrowings will be utilized for repayment of long-term debt. Principal repayments on long-term debt is scheduled to be $3,143,108 in 2001.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998
ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). All significant intercompany accounts and transactions have been eliminated in consolidation.
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.
Policy acquisition costs, representing commissions and certain underwriting costs, are deferred and amortized on a straight-line basis over the policy term. During the years ended December 31, 2000, 1999 and 1998, deferrable costs capitalized were $2,490,005, $1,997,609, and $1,584,541, respectively. The amortization of deferred policy acquisition costs charged to operations for the years ended December 31, 2000, 1999 and 1998 was $2,375,038, $2,223,918 and $2,112,857, respectively.
The carrying amount of collateral held approximates its fair value because of the short maturity of these instruments. Collateral held represents cash and investments retained by the Company for surety bonds issued by the Company.
Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $938,797 and $453,588 at December 31, 2000 and 1999, respectively, are included in other assets. All reinsurance contracts maintained by the Company qualify as short-duration prospective contracts. A summary of reinsurance premiums written and earned is provided below:
The following table summarizes reclassification adjustments for other comprehensive income (loss) and the related tax effects for the years ended December 31, 2000, 1999 and 1998:
On December 31, 2000, the Company's insurance subsidiaries had securities with an aggregate book value of approximately $10 million on deposit with various state regulatory authorities.
Realized capital gains (losses) for the years ended December 31, 2000, 1999 and 1998 follows:
Gross gains of $14,162, $349,413 and $229,063 and gross losses of $137,287, $97,223 and $3,362 were realized on fixed maturity sales for the years ended December 31, 2000, 1999 and 1998, respectively. There were no gross gains realized on the sale of equity securities for the years ended December 31, 2000 and 1999. Gross gains of $44,653 were realized on sale of equity securities for the year ended December 31, 1998. There were no losses realized on equity security sales for the years ended December 31, 2000, 1999 and 1998.
A summary of receivables at December 31, 2000 and 1999 follows:
A summary of property and equipment at December 31, 2000 and 1999 follows:
At December 31, 2000, the Company has a $10,000,000 bank line of credit with a financial institution. The line of credit does not require the Company to maintain a compensating balance. There were no outstanding borrowings under this line of credit at December 31, 2000 and 1999. Under the terms of the line of credit, interest on the outstanding balance is calculated based upon the London Inter-Bank Offering Rate (LIBOR) plus 160 basis points in effect during the borrowing period.
A summary of long-term debt at December 31, 2000 and 1999 follows:
On December 23, 1998, the Company obtained a permanent mortgage loan from a financial institution. The $7,800,000 mortgage note, with interest fixed at 6.95% is payable in monthly installments of principal and interest over 10 years. The mortgage note, due 2009, has a balance of $6,646,587 at December 31, 2000. The loan agreements contain certain limitations on borrowings, minimum statutory capital levels and require maintenance of specified ratios. The proceeds were used to repay the existing mortgage note.
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 (See Note 12). 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 on January 31, 1998, with interest at prime rate (8-1/2%). The Company voluntarily prepaid the installments due January 31 on December 31 in 2000, 1999 and 1998. The Company also made a voluntary prepayment of $3,600,000 on December 31, 1999. The interest rate is equal to the prime rate, however, the interest rate shall not exceed 9-1/4% and it shall not be less than 7-1/4%. The senior notes have a balance of $2,400,000 at December 31, 2000.
The terms of the note agreements with AIG Life Insurance Company and American International Life Assurance Company of New York contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and a minimum tangible net worth of $12,000,000. ACMAT may also require its insurance subsidiaries to pay dividends to the extent of funds legally available therefore, in order to enable ACMAT to have funds to pay on a timely basis all amounts due with respect to the notes. The Company is in compliance with all of these covenants at December 31, 2000, except for the ratio of Earnings Before Interest Expense, Taxes, Depreciation and Amortization to Fixed Charges. The Company has received a waiver for this covenant.
Principal payments on long-term debt are $3,143,108, $2,589,256, $1,738,716, $1,041,724 and $848,536 for the years 2001 through 2005, respectively. Interest expense paid in 2000, 1999 and 1998 amounted to $2,815,876, $3,751,313, and $5,121,093, respectively.
State net operating loss carryforwards as of December 31, 2000, 1999 and 1998 were $19,756,132, $23,081,405 and $25,615,231 expiring through 2020, 2003 and 2002, respectively.
Taxes paid in 2000, 1999 and 1998 were $320,405, $703,081 and $52,227, respectively.
Effective January 1, 2000, the Company adopted the ACMAT 401(k) plan for the benefit of non-union employees. The Company contributed $75,000 to the ACMAT 401(k) Plan in 2000. The thrift, profit sharing and retirement plan was terminated on February 29, 2000. The Company's contributions, established by the Board of Directors, were $85,000 in 1999 and 1998.
The Company participated in various multi-employer defined contribution plans for its union employees. Upon withdrawal from these plans, the Company may be liable for its share of the unfunded vested liabilities of the plans. Such obligations, if any, of the Company are not determinable at December 31, 2000.
The exercise price of each option equals the market price of the Company's stock on the date of grant and the option's term is ten years. The options vest six months after the date of grant. The Board of Directors granted 70,000 options to certain directors and officers on December 16, 2000. There were no stock options granted in 1999 or 1998, however, the exercise price of the Class A Stock options were re-priced at $7.25 on December 16, 1999.
The Company's insurance subsidiaries, United Coastal Insurance and ACSTAR, are domiciled in Arizona and Illinois, respectively. The statutory financial statements of United Coastal Insurance and ACSTAR are prepared in accordance with accounting practices prescribed by the Arizona Department of Insurance and the Illinois Department of Insurance, respectively. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as the state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. In 2000, United Coastal Insurance paid dividends of $8,000,000, a portion of which is considered extraordinary. United Coastal Insurance applied and received approval from the Arizona Insurance Department for the extraordinary portion of dividends paid.
The following presents the condensed financial position of ACMAT Corporation (parent company only) as of December 31, 2000 and 1999 and its condensed statements of earnings and cash flows for the years ended December 31, 2000, 1999 and 1998.
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 2001 to 2005 and thereafter.