- General economic conditions, including changes in interest rates and the performance of financial markets;
- Additional statement of earnings charges if our loss reserves are insufficient;
- The possibility that claims cost trends that we anticipate in our businesses may not develop as we expect;
- The possibility of downgrades in our ratings significantly adversely affecting us, including, but not limited to, reducing the number of insurance policies we write, generally, or causing clients who require an insurer with a certain rating level to use higher-rated insurers;
- The risk that our subsidiaries may be unable to pay dividends to us in sufficient amounts to enable us to meet our obligations;
- Net earnings of $1,613,994, or $.70 per share basic and $.69 per share diluted.
- Construction contract revenues down significantly, however, resulting in a gross profit of 2.9%.
- No net life insurance proceeds in 2003 compared to $3.3 million in 2002.
- No tax benefit in 2003 compared to a benefit of $2.5 million in 2002.
- Total assets of $132.4 million, up $10.5 million from the prior year.
- Total cash and invested assets of $102.3 million, up $13.8 million from the prior year.
- Cash flow provided from operations of $17.4 million, up from $11.6 million
Net earnings were $3,156,893 or $1.33 per share basic and $1.32 per share diluted in 2002 compared to $1,706,588 or $.70 per share basic and $.68 per share diluted in 2001. The increase in net earnings for 2002 compared to 2001 is primarily due to the one-time benefit from life insurance proceeds, net of related obligations, and the related tax benefits due to the death of the former Chairman and President of the Company in 2002. Construction contracting costs exceeded contract revenues by ($2,050,208) in 2002 compared to contract revenues exceeding the cost of the construction contracts by $891,821 in 2001 due to additional remediation expenses incurred on a construction project that significantly exceeded the original estimate in 2002. Net earnings in 2002 also reflect an increase to loss reserves due to two large losses reported in current year. Investment income was $3,553,565 in 2002 compared to $4,031,793 in 2001 and was offset by the decrease in interest expense of $1,928,084 in 2002 from $2,723,052 in 2001. Realized capital gains were $25,971 in 2002 compared to $374,301 in 2001.
Total consolidated revenues decreased $12,405,449 or 39% in 2003 and increased $4,611,290 or 17% in 2002.
Earned premiums increased $4,699,191 or 62% in 2003 due to a 75% increase in net written premiums in ACSTAR Bonding primarily due to a growth in new business and strong customer retention and a 76% increase in net written premiums in United Coastal liability insurance business due primarily to significant rate increases on new and renewal business and strong customer retention. Earned premium was flat in 2002 compared to 2001 reflecting the Company's strategy to selectively underwrite during uncertain economic times and unfavorable pricing in the casualty insurance market.
Investment income decreased $884,625 or 25% in 2003 despite higher average invested assets resulting from strong cash flows from operations. The decline resulted from a reduction in investment yields to 2.79% in 2003 from 4.21% in 2002. The decrease in yield reflected the lower interest rate environment and the short duration of the Company's portfolio partially offset by the sale of most of the tax-exempt investments during 2003. Investment income decreased $478,228 or 12% in 2002 despite average invested assets remaining relatively flat. The decline resulted from a reduction in investment yields to 4.21% in 2002 from 4.83% in 2001. The decrease in yield reflected the lower interest rate environment and the short duration of the Company's portfolio.
Life insurance proceeds in 2002 reflect the net proceeds of several key-man life insurance policies totaling approximately $8,800,000. In addition, the Company incurred certain obligations, previously approved by the Board of Directors, totaling approximately $5,500,000. These obligations for consulting fees, widow's compensation and unused vacation pay were due only to the extent that sufficient proceeds existed from the life insurance policies at the time of Mr. Nozko's death.
Other income increased $100,446 in 2003 due primarily to increased fees related to funds administration services income offset in part by a decrease in rental income. Other income decreased $115,952 in 2002 primarily due to a decrease in funds administration services income in 2002. Other revenues consist primarily of rental income and funds administration fees charged to bonding customers.
Consolidated expenses decreased $14,307,838 or 46% in 2003 and increased $6,599,776 or 27% in 2002.
Cost of contract revenues decreased $15,441,017 or 84% in 2003 primarily due to the 82% decrease in contract revenues in 2003 due to the timing of three large projects that were completed in 2002. The gross profit margin on construction projects improved to 2.9% in 2003 compared to a gross loss margin of (12.6%) in 2002. The Company incurred additional remediation expenses on a construction project in 2002 that significantly exceeded the original estimate. Cost of contract revenues increased $5,156,477 or 39% in 2002 due primarily to the 15.7% increase in contract revenues in 2002 due to the timing of three large projects that were completed in 2002. The gross profit (loss) margin on construction projects was (12.6%) in 2002 compared to a gross profit margin of 6.3% in 2001. Gross margins fluctuate each year based upon the profitability of specific projects.
development in prior accident years. The Company strengthened reserves by a net amount of $750,000 in 2003 and $2,200,000 in 2002.
General and administrative expenses increased $485,348 or 10% in 2003 primarily due to an increase in salary expense. General and administrative expenses remained relatively unchanged in 2002 primarily due to a decrease in amortization of intangibles offset by an increase in bad debt expense.
Interest expense decreased $868,110 or 45% in 2003 and $794,968 or 29% in 2002 primarily due to the decrease in long-term debt and the replacement of high interest-bearing debt with lower interest-bearing debt during the fourth quarter of 2002.
The Company's effective tax rate was 36.2%, (404.7%) and 34.7% in 2003, 2002 and 2001, respectively. The 2003 increase in the effective tax rate reflected the elimination of tax-exempt investments in 2003 and the one-time recognition of net life insurance proceeds during 2002 that were exempt for income tax purposes. The 2002 decrease in effective tax rate reflected the one-time recognition of net life insurance proceeds of several key-man life insurance policies as well as the effect of tax-exempt investments.
The decrease in the 2003 GAAP combined ratio is due to the absence of large losses reported in the 2002 loss year and improved expense management. In addition, prior year favorable development is significantly lower due to actual loss experience being closer to estimates. The increase in the 2002 GAAP combined ratio results primarily from a large loss of approximately $500,000 reported in 2002.
Revenues increased $2,506,473 or 47% in 2003 and decreased $126,812 or 2% in 2002.
Earned premiums increased $2,577,141 or 64% in 2003 due to a 75% increase in net written premiums primarily due to a growth in new business and strong customer retention. Earned premiums increased $192,446 or 5% in 2002 due to a 24% increase in written premiums reflecting the impact of a favorable insurance rate market. Beginning in 2002, ACSTAR has experienced a significant increase in business opportunities that meet ACSTAR's underwriting standards.
Investment income decreased $274,078 or 19% in 2003 despite higher average invested assets resulting from strong cash flows from operations. The decline resulted from a reduction in investment yields to 2.2% in 2003 from 3.3% in 2002. The decrease in yield reflected the lower interest rate environment and the short duration of the Company's portfolio partially offset by the sale of most of the tax-exempt investments during 2003. Investment income decreased $108,911 or 7% in 2002 despite average invested assets remaining relatively flat. The decline resulted from a reduction in investment yields to 3.3% in 2002 from 4.0% in 2001. The decrease in yield reflected the lower interest rate environment and the short duration of the Company's portfolio.
Expenses increased $1,092,401 or 26% in 2003 and $754,018 or 22% in 2002.
Amortization of policy acquisition costs increased $571,717 or 37% in 2003 primarily due to the increase in earned premiums offset in part by a decrease in commissions paid. Amortization of policy acquisition costs decreased $36,979 or 2% in 2002 primarily attributable to a decrease in the average commissions paid to agents offset in part by the increase in 2002 earned premiums.
The decrease in the 2003 GAAP combined ratio is due to the absence of large losses reported in the 2002 loss year and improved expense management. In addition, prior year favorable development is significantly lower due to actual loss experience being closer to estimates. The increase in the 2002 GAAP combined ratio results primarily from a large loss of approximately $1,700,000 reported in 2002.
Earned premiums increased $2,122,050 or 59% in 2003 due to a 76% increase in net written premiums primarily due to significant rate increases on new and renewal business and strong customer retention. Earned premiums decreased $201,997 or 5% in 2002 despite a 17% increase in written premiums reflecting the impact and timing of a favorable insurance rate market.
Investment income decreased $573,567 or 31% in 2003 despite higher average invested assets resulting from strong cash flows from operations. The decline resulted from a reduction in investment yields to 3.6% in 2003 from 4.8% in 2002. The decrease in yield reflected the lower interest rate environment and the short duration of the Company's portfolio partially offset by the sale of most of the tax-exempt investments during 2003. Investment income decreased $540,198 or 23% in 2002 despite average invested assets remaining relatively flat. The decline resulted from a reduction in investment yields to 4.8% in 2002 from 5.4% in 2001. The decrease in yield reflected the lower interest rate environment and the short duration of the Company's portfolio.
Net realized capital gains were $88,977 in 2003 compared to $20,234 in 2002. During 2003, the Company sold most of its tax-exempt investments in order to accelerate the use of an alternative minimum tax credit carryforward generated with the recognition of net life insurance proceeds by the parent company in 2002 that were exempt for income tax purposes. Net realized gains of $182,631 were generated in 2001 as a result of selling primarily fixed maturity investments.
Losses and loss adjustment expenses increased $255,874 or 9% in 2003 primarily due to the 59% increase in earned premiums offset in part by a 33.6 point decrease in the GAAP combined ratio for 2003. Losses and loss adjustment expenses increased $1,639,400 or 145% in 2002 primarily due to the strengthening of loss reserves due to adverse development in prior years. During 2002, the Company increased reserves by $1,700,000 due to a large loss reported in current year.
Amortization of policy acquisition costs increased $604,128 or 64% in 2003 primarily due to the 59% increase in earned premiums. Amortization of policy acquisition costs decreased $335,386 or 26% in 2002 primarily attributable to a decrease in earned premiums and the significant reduction in ceded premiums.
General and administrative expenses increased $66,193 or 6% in 2003 primarily due to an increase in bad debt expense and salary expense offset in part by a decrease in rental expense. General and administrative expenses decreased by $76,382 or 7% in 2002 due primarily to a reduction in rent expense from a one-time rent recovery from an affiliate.
Operating earnings for the ACMAT Contracting segment improved $2,232,043 or 83% in 2003. The gross profit margin on construction projects improved to 2.8% in 2003 compared to a gross loss margin of (12.6%) in 2002. The Company incurred additional remediation expenses on a construction project in 2002 that significantly exceeded the original estimate. However, the gross profit margin of 2.8% in 2003 was not sufficient to cover the fixed costs in ACMAT Contracting resulting in an operating loss of $458,384. The Company expects future gross margins to be sufficient to cover fixed costs in 2004. The gross profit (loss) margin on construction projects was (12.6%) in 2002 compared to a gross profit margin of 6.2% in 2001. Gross margins fluctuate each year based upon the profitability of specific projects.
Expenses decreased $15,246,667 or 68% in 2003 and $5,720,835 or 34% in 2002.
Cost of contract revenues decreased $15,441,017 or 84% in 2003 primarily due to the 82% decrease in contract revenues in 2003 due to the timing of three large projects that were completed in 2002. The gross profit margin on construction projects improved to 2.9% in 2003 compared to a gross loss margin of (12.6%) in 2002. The Company incurred additional remediation expenses on a construction project in 2002 that significantly exceeded the original estimate. Cost of contract revenues increased $5,156,477 or 39% in 2002 due primarily to the 39% increase in contract revenues in 2002 due to the timing of three large projects that were completed in 2002. The gross profit (loss) margin on construction projects was (12.6%) in 2002 compared to a gross profit margin of 6.3% in 2001. Gross margins fluctuate each year based upon the profitability of specific projects.
General and administrative expenses increased $194,350 or 5% in 2003 primarily due to an increase in salary expense offset in part by a decrease in bad debt expense, rental expense and amortization of intangibles. General and administrative expenses increased by $564,358 or 16% in 2002 due primarily an increase in bad debt expense and a one-time return of rental income to affiliates collected on their behalf offset in part by a decrease in salary expense in 2002.
Management believes that the reserves for losses and loss adjustment expenses at December 31, 2003 are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses, including losses incurred but not reported. Reserves for losses and loss adjustment expenses are estimates at any given point in time of what the Company may have to pay ultimately on incurred losses, including related settlement costs based on facts and circumstances then known. The Company also reviews its claims reporting patterns, past loss experience, risk factors and current trends and considers their effect in the determination of estimates of incurred but not reported 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.
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 serve its indebtedness. ACMAT has relied on dividends from its insurance subsidiaries to repay debt.
The Company realized cash flow from operations in the amount of $17,393,270 in 2003, $11,615,814 in 2002 and $1,465,272 in 2001. The cash flow from operations is due primarily to the increase of cash collateral. Substantially all of the Company's cash flow is 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 was $4,140,298 in 2003 compared to net cash used for investing activities of $1,918,242 in 2002 and to net cash provided by investing activities was $8,821,721 in 2001.
The Company maintains a short-term unsecured bank credit line of $10 million to fund interim cash requirements. There were no borrowings outstanding under this line of credit as of December 31, 2003.
During 2003, the Company purchased, in the open market and privately negotiated transactions, 13,700 shares of its Class A Stock at an average price of $8.89. During 2003, the Company also purchased 4,000 shares of its Common Stock at an average price of $10.93.
In 2004, the Company anticipates that internally generated funds will be utilized for repayment of long-term debt. Principal repayments on long-term debt is scheduled to be $2,708,396 in 2004.
The Company also has cash collateral of $41,718,225 at December 31, 2003 which it would be required to return at the end of expiration of applicable bond period subject to any claims.
Consolidated Statements of Earnings for the years ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements - December 31, 2003, 2002 and 2001
Consolidated Statements of Earnings Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows Years ended December 31, 2003, 2002 and 2001
ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003, 2002 AND 2001
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.
The fair value of investment securities are based on quoted market prices. Premiums and discounts on debt securities are amortized into interest income over the term of the securities in a manner that approximates the interest method. Realized gains and losses on sales of securities are computed using the specific identification method. Any security which management believes has experienced a decline in value which is other than temporary is written down to its fair value and a charge is recorded in net realized capital gains.
Deferred policy acquisition costs, representing commissions and certain pre-tax underwriting costs, are deferred and amortized pro rata over the contract periods in which the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Future investment income attributable to related premiums is taken into account in measuring the recoverable of the carrying value of this asset.
Property and equipment are stated at costs, net of depreciation. Depreciation is computed using the straight-line method at rates based upon the respective estimated useful lives of the assets. Maintenance and repairs are expensed as incurred.
Intangible assets relate to insurance operating licenses and are deemed to have an indefinite useful life. The Company performs an impairment test at least annually or more frequently if events or conditions indicate that the asset might be impaired. Based on these tests, the Company did not impair any intangible assets.
Collateral held represents cash and investments retained by the Company for surety bonds issued by the Company to cover costs of claims or unpaid premiums. The carrying amount of collateral held approximates its fair value because of the short maturity of these instruments.
Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The Company evaluates and monitors the financial condition of reinsurers under reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies.
Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $621,805 and $690,902 at December 31, 2003 and 2002, 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 Company uses interest rate swaps as a means of hedging exposure to interest rate on its long-term debt. The Company does not hold or issue derivative instruments for trading purposes. The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. Where applicable, hedge accounting is used to account for derivatives. To qualify for hedge accounting, the changes in value of the derivative must be expected to substantially offset the changes in value of the hedged item. Hedges are monitored to ensure that there is a high correlation between the derivative instruments and the hedged investment. Derivatives that do not qualify for hedge accounting, if any, would be marked to market with the changes in fair value reflected in the consolidated statement of earnings.
The following table summarizes reclassification adjustments for other comprehensive income and the related tax effects for the years ended December 31, 2003, 2002 and 2000:
Upon adoption of FAS No. 142, on January 1, 2002 the Company evaluated its existing intangible asset that was acquired in a purchase business combination to make any necessary reclassifications in order to conform with the new classification criteria in FAS No. 141 for recognition separate from goodwill. The Company reassessed the useful lives and residual values of all intangible assets acquired. If an intangible asset is identified as having an indefinite useful life, the Company is required to test the intangible asset for impairment in accordance with the provisions of FAS No. 142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life.
Effective December 31, 2003, the Company adopted FASB Emerging Issues Task Force (EITF) Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). EITF 03-01 requires that certain quantitative and qualitative disclosures be made for debt and marketable equity securities classified as available for sale or held to maturity that are impaired at the balance sheet date but for which an impairment has not been recognized.
In April 2003, the FASB issued Statement of Financial Standards No.149, "Amendment of Statement 133 on Derivative Investments and Hedging Activities" (FAS 149), which amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133. FAS 149 amends FAS 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendment to FAS 133. FAS 149 also clarifies under what circumstances a contract with an initial net investment and purchases and sales of when-issued securities that do not yet exist meet the characteristics of a derivative. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. FAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of FAS 149 did not have an impact on the Company's results of operations, financial condition or liquidity.
The Company holds mortgage-backed and asset-backed securities which are considered variable interest entities. The Company has assessed the impact that the provisions of FIN 46R may have on the consolidated financial statements. The provisions of the new standard is not expected to impact the Company.
On January 13, 2002, the Founder, Chairman, President and Chief Executive Officer of the Corporation died at the age of 82. The Company was the owner and beneficiary of several key-man life insurance policies totaling approximately $11.9 million. After consideration of the cash-surrender value of the policies, the Company reported a gross gain of approximately $8.8 million in 2002. In connection with the passing of Henry W. Nozko, Sr., the Company incurred certain obligations, previously approved by the Board of Directors, totaling approximately $5.5 million. These obligations for consulting fees, widow's compensation and unused vacation pay were due only to the extent that sufficient proceeds existed from the life insurance policies at the time of Mr. Nozko's death.
On December 31, 2003, the Company's insurance subsidiaries had securities with an aggregate fair value of approximately $10.5 million on deposit with various state regulatory authorities.
The amortized cost and fair value of fixed maturities at December 31, 2003, by effective maturity, follows:
The Company makes investments in collateralized mortgage obligations (CMOs). CMOs typically have high credit quality, offer good liquidity, and provide a significant advantage in yield and total return compared to U.S. Treasury securities. The Company's investment strategy is to purchase CMO tranches which offer the most favorable return given the risks involved. One significant risk evaluated is prepayment sensitivity. This drives the investment process to generally favor prepayment protected CMO tranches including planned amortization classes and last cash flow tranches. The Company does invest in other types of CMO tranches if a careful assessment indicates a favorable risk/return tradeoff. The Company does not purchase residual interests in CMOs.
At December 31, 2003 and 2002, the Company held CMOs classified as available for sale with a fair value of $27,024,674 and $33,057,515, respectively. Approximately 69% and 47% of the Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2003 and 2002, respectively. In addition, the Company held $1,925,092 and $3,091,914 of GNMA, FNMA, FHLMC or FHA mortgage-backed pass-through securities classified as available for sale at December 31, 2003 and 2002, respectively. Virtually all of these securities are rated Aaa.
A summary of gross unrealized gains and losses at December 31, 2003 and 2002 follows:
- - Consideration of evidential matter, including an evaluation of factors or triggers that would or could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairments;
Realized capital gains (losses) for the years ended December 31, 2003, 2002 and 2001 follows:
Proceeds from sales of fixed maturities classified as available for sale were $42,957,167, $31,933,298 and $53,938,741 in 2003, 2002 and 2001, respectively. Gross gains of $226,122, $36,482 and $314,351 and gross losses of $756, $15,971 and $11,973 were realized on fixed maturity sales for the years ended December 31, 2003, 2002 and 2001, respectively. Proceeds from sales of equity securities were $5,711,774, $2,145,444 and $3,568,173 in 2003, 2002 and 2001, respectively. Gross gains of $136,176, $11,490 and $71,923 were realized on the sale of equity securities for the years ended December 31, 2003, 2002 and 2001, respectively, and gross losses of $6,030 were realized on equity security sales for the year ended December 31, 2002. There were no gross losses realized on equity security sales for the year ended December 31, 2003 and 2001.
While management continually evaluates the potential for changes in loss estimates, due to the uncertainty inherent in the liability and surety business, the emergence of net favorable development may or may not occur. Management believes that the reserves for losses and loss adjustment expense are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses, including losses incurred but not reported.
On November 22, 2002, the Company obtained a $10,000,000 term loan from two financial institutions, which is payable in monthly installments of $55,556 with a balloon payment of $5,388,888 due on November 22, 2009. The term loan has a balance of $9,277,778 at December 31, 2003. The interest rate for this term loan varies based on LIBOR plus 200 basis points in effect during the borrowing period. In connection with this term loan, the Company also entered into an interest rate swap that establishes a fixed interest rate for half of the loaned amount at 6.08%. The loan agreement contains certain limitations on borrowing, minimum statutory capital levels and requires maintenance of certain ratios. The proceeds were used to prepay the balance of the Convertible Notes due 2022.
Principal payments on long-term debt are $2,708,396, $2,515,208, $2,576,097, $2,641,354 and $2,717,812 for the years 2004 through 2008, respectively. Interest expense paid in 2003, 2002 and 2001 amounted to $1,068,514, $1,977,661 and $2,804,927, respectively.
The components of income tax expense (benefit) for the years ended December 31, 2003, 2002 and 2001 follows:
The effective income tax rate, as a percentage of earnings before income taxes for the years ended December 31, 2003, 2002 and 2001 follows:
The alternative minimum tax credit carryforward as of December 31, 2003 is $2,128,529 and has an indefinite life. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not the Company will realize the benefits of its deductible temporary differences, net of the valuation allowance, at December 31, 2003 and 2002.
The most significant component of the state gross deferred asset is the net operating loss carryforward for the State of Connecticut which amounted to $19,617,404 as of December 31, 2003. Of this amount, $12,166,096 expires in 2020 and 2023. In 2003 and 2002, a valuation allowance is provided to offset the deferred tax asset related to the state deferred tax assets as management believes it is more likely than not that these deferred tax assets are unrealizable.
Taxes paid in 2003, 2002 and 2001 were $300,727, $180,392 and $626,625, respectively.
The Company uses interest rate swaps as a means of hedging exposure to interest rate risk on its long-term debt. To qualify as a hedge, the hedge relationship must be designated and documented at inception and be highly effective in accomplishing the objective of offsetting the changes in cash flows for the risk being hedged. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value are not be included in current earnings but are reported in accumulated other comprehensive income ("AOCI"). For the years ended December 31, 2003 and 2002, the amounts included in AOCI for these changes were losses of $73,097 and $117,142, respectively, and would be included in the earnings of future periods when those earnings are also affected by the variability of the hedged cash flows.
During the year ending December 31, 2004, the amount of losses the Company expects to reclassify from AOCI into interest expense for its cash flow hedges is not significant. To the extent these hedges are not effective, changes in their fair value would be immediately included in earnings.
During 2003 and 2002, ACMAT repurchased, in open market and privately negotiated transactions, 4,000 and 4,234, respectively, shares of its Common Stock at an average price of $10.93 and $19.01 per share, respectively. The Company also repurchased during 2003, 2002 and 2001, in open market and privately negotiated transactions, 13,700, 78,114 and 234,235, respectively, shares of its Class A Stock at an average price of $8.89, $8.88 and $7.80 per share, respectively.
The Board of Directors has periodically approved the grant of non-qualified stock options to certain officers and directors giving such individuals the right to purchase restricted shares of the Company's Common Stock and Class A Stock. Transactions regarding these stock options are summarized below:
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. On June 20, 2002 the Board of Directors granted 174,500 options to certain directors and officers which generally vest over a ten-year period for employees. The Board of Directors granted 70,000 options to certain directors and officers on December 16, 2000 which vested on June 14, 2001.
Under applicable insurance regulations, ACMAT's insurance subsidiaries are restricted as to the amount of dividends they may pay, without the prior approval of any insurance department and are limited to approximately $3,920,000 in 2004.
In accordance with statutory accounting practices, ACMAT's insurance subsidiaries' statutory capital and surplus was $47,863,948 and $48,423,319 at December 31, 2003 and 2002, respectively, and their statutory net income for the years ended December 31, 2003, 2002 and 2001 was $2,845,372, $1,988,493 and $6,048,222, respectively. The primary differences between amounts reported in accordance with GAAP and amounts reported in accordance with statutory accounting practices are carrying value of fixed maturity investments; assets not admitted for statutory purposes such as agents balances over 90 days, furniture and fixtures and certain notes receivable; and deferred acquisition costs recognized for GAAP only.
A summary of the unaudited quarterly results of operations for 2003 and 2002 follows:
ACMAT CORPORATION AND SUBSIDIARIES Condensed Financial Information (Parent Company Only) Notes to Condensed Financial Statements
Income taxes received from subsidiaries during the years ended December 31, 2003, 2002 and 2001 were $1,226,055, $694,197, and $516,173, respectively. Interest paid during the years ended December 31, 2003, 2002 and 2001 was $1,068,514, $1,977,661 and $2,933,115, respectively. Interest paid in 2001 included $128,188, paid to subsidiaries for intercompany loans.
A summary of long-term debt at December 31, 2003 and 2002 follows:
See Note 8 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 2004 to 2008 and thereafter.
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of income taxes.
See Note 11 to the Consolidated Financial Statements in the Annual Report for a description of the derivative financial instruments.
As of and for the years ended December 31, 2003, 2002 and 2001