Revenues were $31,574,097 in 2002, $26,962,807 in 2001 and $26,341,755 in 2000. The increase in 2002 revenues compared to 2001 revenues reflects the net effect of life insurance proceeds, increased contract revenues offset in part by a decrease in investment income and realized capital gains. The increase in 2001 revenues compared to the 2000 revenues is due primarily to an increase in contract revenues and realized gains offset in part by a decrease in earned premiums and net investment income. Earned premiums were $7,571,725 in 2002, $7,581,276 in 2001 and $9,215,904 in 2000. Contract revenues were $16,289,326 in 2002, $14,074,878 in 2001 and $11,790,207 in 2000. The increase in contract revenue reflects the timing of three large projects.
Life insurance proceeds 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.
Income tax benefit was $2,531,434 in 2002 compared to income tax expense of $907,357 in 2001 and $1,248,437 in 2000, representing effective tax rates of (404.7%), 34.7% and 35.9%, respectively. The fluctuation in the effective tax rate reflects the recognition of net life insurance proceeds during 2002 which are exempt for income tax purposes.
The company has three reportable operating segments: ACSTAR Bonding, United Coastal Liability Insurance and ACMAT Contracting. 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 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.
Earned premiums were $4,001,183 in 2002, $3,808,737 in 2001 and $5,032,465 in 2000. The increase in 2002 earned premiums compared to 2001 reflects the 24% increase in 2002 net written premiums compared to 2001. The decrease in 2001 earned premiums compared to 2000 reflects the 30% decrease in 2001 net written premiums compared to 2000 and the impact of the reinsurance treaty on May 1, 2000.
Investment income was $1,451,169 in 2002, $1,560,080 in 2001 and $1,253,329 in 2001. The 2002 investment income reflects an increase in invested assets offset by a decrease in the effective yield on those invested assets. The increase in 2001 investment income was primarily related to a decrease in investment expenses. Net realized capital gains (losses) were $5,737 in 2002, $191,670 in 2001 and ($5,622) in 2000.
Operating earnings for the ACSTAR Bonding segment were $1,217,718 in 2002, $2,098,548 in 2001 and $2,436,708 in 2000. The decrease in 2002 operating earnings reflect the addition of $500,000, net of recoveries, to loss reserves for a large loss reported in current year and a decrease in investment income and realized
Losses and loss adjustment expenses were $1,300,237 in 2002, $404,260 in 2001 and $251,876 in 2000. The increase in losses and loss adjustment expenses for 2002 reflects a large loss of approximately $500,000 reported in current year and significantly lower net favorable development in prior year. Prior year development benefited primarily from a salvage recovery of $1,677,851 which was partially offset by adverse development. The increase in 2001 losses and loss adjustment expenses compared to 2000 reflects an increase in the loss and loss adjustment expense ratio, offset in part by a decrease in 2001 earned premiums and the release of net favorable development in surety loss reserves relating to older years. Amortization of policy acquisition costs were $1,564,398 in 2002, $1,601,377 in 2001 and $2,001,561 in 2000. The decrease in amortization of policy acquisition costs in 2002 is 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 amortization of policy acquisition costs in 2001 is primarily attributable to the decrease in 2001 earned premiums.
General and administrative expenses were $1,278,518 in 2002, $1,383,498 in 2001 and $1,594,067 in 2000. The decrease in general and administrative expenses is due primarily to no further amortization expense related to intangibles and a one-time rent recovery from an affiliate. The decrease in general and administrative expenses in 2001 is primarily due to reduced funds control expenses in 2001 compared to 2000.
Investment income was $1,845,179 in 2002, $2,385,377 in 2001 and $3,001,161 in 2000. The decrease in investment income was primarily related to a decrease in the effective yield on invested assets and a decrease in invested assets as a result of dividends distributed to the parent company to reduce corporate debt. Net realized capital gains (losses) were $20,234 in 2002, $182,631 in 2001 and ($117,503) in 2000.
Operating earnings for the United Coastal Liability Insurance segment were $677,349 in 2002, $2,810,000 in 2001 and $3,549,472 in 2000. The decrease in 2002 operating earnings compared to 2001 is due primarily to a decrease in earned premiums and investment income, as well as the addition of $1,700,000 to loss reserves for a large loss reported in the current year. The decrease in 2001 operating earnings compared to 2000 is due primarily to a decrease in earned premiums and investment income.
Losses and loss adjustment expenses were $2,771,162 in 2002, $1,131,762 in 2001 and $1,255,032 in 2000. The increase in losses and loss adjustment expenses for 2002 compared to 2001 is attributable to a large loss of approximately $1,700,000 reported in current year. The decrease in losses and loss adjustment expenses for 2001 compared to 2000 is attributable to the decrease in earned premiums.
Amortization of policy acquisition costs were $951,023 in 2002, $1,286,409 in 2001 and $1,303,916 in 2000. The decrease in amortization of policy acquisition costs for 2002 compared to 2001 is primarily attributable to the decrease in earned premiums and the significant reduction in ceded premiums. The decrease in amortization of policy acquisition costs for 2001 compared to 2000 is primarily attributable to the decrease in earned premiums.
General and administrative expenses were $1,058,839 in 2002, $1,135,221 in 2001 and $972,294 in 2000. The decrease in 2002 general and administrative expenses compared to 2001 is due primarily to a reduction in rent expense from a one-time rent recovery from an affiliate. The increase in 2001 general and administrative expenses compared to 2000 is due primarily to an increase in expenses related to the Company's tri-annual statutory audit in 2001.
Revenues for the ACMAT Contracting segment were $19,658,401 in 2002, $17,540,369 in 2001 and $15,898,910 in 2000. The 2002 increase in revenue reflects a 16% increase in contract revenues compared to 2001 due to the timing of three large projects in 2002. The 2001 increase in revenue reflects a 19% increase in contract revenues compared to 2000. Contract revenue depends greatly on the successful securement of contracts bid and execution. The Company is substantially complete with its current projects and its current backlog relates to primarily one profitable project. The backlog at December 31, 2002 was $430,000 compared to $13,946,000 at December 31, 2001. The significant decrease in backlog reflects the significant number of contractors competing for a limited number of projects available in our market place.
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. This is a critical accounting policy for the insurance operations.
Revenue on construction contracts is recorded using the percentage of completion method. Under this method revenues with respect to individual contracts are recognized in the proportion that costs incurred to date relate to total estimated costs. Revenues and cost estimates are subject to revision during the terms of the contracts, and any required adjustments are made in the periods in which the revisions become known. Provisions are made, where applicable, for the entire amount of anticipated future losses on contracts in progress. Construction claims are recorded as revenue at the time of settlement and profit incentives and change orders are included in revenues when their realization is reasonably assured. Selling, general and administrative expenses are not allocated to contracts. This is a critical accounting policy for the ACMAT construction segment.
Net cash used for investing activities was $1,918,242 in 2002 compared to net cash provided by investing activities was of $8,821,721 in 2001 and $14,008,674 in 2000.
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 Company is in compliance with all of these covenants at December 31, 2002.
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, 2002.
During 2002, the Company purchased, in the open market and privately negotiated transactions, 78,114 shares of its Class A Stock at an average price of $8.88. During 2002, the Company also purchased 4,234 shares of its Common Stock at an average price of $19.01.
The Company's principal source of cash for repayment of long-term debt is dividends from its two insurance companies. During 2002 ACMAT received $3,990,000 as dividends from its subsidiaries. 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.
In 2003, 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 $2,405,388 in 2003.
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 December 31, 2002 was above the level which might require regulatory action.
The Company also has cash collateral of $25,991,045 at December 31, 2002 which it would be required to return at the end of expiration of applicable bond period subject to any claims.
The following Consolidated Financial Statements of the Company, related notes and Independent Auditors' Report are included herein:
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements -- December 31, 2002, 2001 and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000
The consolidated financial statements include ACMAT Corporation ("ACMAT" or the "Company"), its subsidiaries, including AMINS, Inc., ACSTAR Holdings, Inc. ("ACSTAR Holdings") and ACSTAR Holdings' wholly-owned subsidiary, ACSTAR Insurance Company ("ACSTAR"); and United Coastal Insurance Company ("United Coastal Insurance").
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 to third parties.
The Bonding operating segment provides, primarily through ACSTAR, surety bonds written for general building, specialty trade, environmental contractors and others. ACSTAR also offers other miscellaneous surety such as workers' compensation bonds, supply bonds, subdivision bonds and license and permit bonds.
Fixed maturities include bonds, notes and redeemable preferred stocks. Equity securities reflect investment in common stock, non-redeemable preferred stock and mutual funds.
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 through a charge to income.
Intangible assets relate to insurance operating licenses and are deemed to have an indefinite useful life. The Company has performed the transitional impairment tests using the fair value approach. Based on these tests, the Company did not impair any intangible assets.
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 the 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 recomputed periodically using new information on reported claims.
expenses are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses incurred, including losses incurred but not reported.
Effective November 1, 2002, the Company cedes 80% of its exposure in excess of $1,000,000 up to $5,000,000 on a per principal/insured basis. Prior to October 31, 2002, reinsurance was applicable on a per principal/insured basis for 100% of the losses in excess of $1,000,000 up to $8,000,000. From May 1, 2000 to April 30, 2002, the Company also reinsured surety losses on a per principal basis for losses in excess of $8,000,000 up to $13,000,000.
Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $690,902 and $600,174 at December 31, 2002 and 2001, 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:
Ceded incurred losses and loss adjustment expenses totaled $6,549,843, $148,557 and $4,301,295 for the years ended December 31, 2002, 2001 and 2000, respectively.
The pro forma fair value of stock-based compensation in the Company's Class A Shares for the year ended December 31, 2002, 2001 and 2000 is as 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, 2002 and 2001, the Company held CMOs classified as available for sale with a fair value of $33,057,515 and $17,012,201, respectively. Approximately 47% and 86% of the Company's CMO holdings are fully collateralized by GNMA, FNMA or FHLMC securities at December 31, 2002 and 2001, respectively. In addition, the Company held $3,091,914 and $4,175,164 of GNMA, FNMA, FHLMC or FHA mortgage-backed pass-through securities classified as available for sale at December 31, 2002 and 2001, respectively. Virtually all of these securities are rated AAA or implied AAA.
A summary of gross unrealized gains and losses at December 31, 2002 and 2001 follows:
A summary of net investment income for the years ended December 31, 2002, 2001 and 2000 follows:
Gross gains of $36,482, $314,351 and $14,162 and gross losses of $15,971, $11,973 and $137,287 were realized on fixed maturity sales for the years ended December 31, 2002, 2001 and 2000, respectively. Gross gains of $11,490 and $71,923 were realized on the sale of equity securities for the years ended December 31, 2002 and 2001, respectively, and gross losses of $6,030 were realized on equity security sales for the year ended
Useful lives for depreciation purposes are five years for equipment and vehicles, fifteen years for furniture and fixtures and forty years for the building.
Intangibles of $1,920,360, consists primarily of the Company's insurance licenses, have a indefinite useful life and are not amortized. At December 31, 2002 and 2001, the insurance licenses of $4,188,926 had accumulated amortization of $2,268,566.
The decrease in net loss and loss adjustment expense reserves in 2002 from 2001 was primarily due to payments on surety and general liability policies for prior years net of subrogation and ceded recoveries. The reduction was partially offset by loss and loss adjustment expenses incurred primarily in the current year which reflects two large losses of approximately $2.2 million. Also, the favorable development observed previously in prior years reduced significantly as the actual loss experience came in closer to the estimates. The increase in reinsurance recoverable in 2002 from 2001 is primarily due to one liability claim, which exceeded the limits retained by the Company.
The decrease in net loss and loss adjustment expense reserves in 2001 from 2000 is due to significant loss payments for surety and general liability claims, the release of net favorable development in surety loss reserves relating to older years that are no longer required partially offset by an increase in current year incurred loss and loss adjustment expenses. This increase reflects largely surety losses, which occurred during the year.
The Company has no exposure to any asbestos or environmental claims associated with general liability policies issued with the pre-1986 pollution exclusion. Policies written with the exclusion are typically associated with mass tort environmental and asbestos claims. The Company has never issued a policy with the pre-1986 pollution exclusion. The Company's exposure to asbestos and environmental liability claims is
primarily limited to asbestos and environmental liability insurance for contractors and consultants involved in the remediation, removal, storage, treatment and/or disposal of environmental and asbestos hazards.
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 $9,944,444 at December 31, 2002. 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.
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 $5,317,477 at December 31, 2002. The
On July 1, 1992, the Company issued a 30-year unsecured $16,500,000, 11.5% subordinated Convertible Note to the Sheet Metal Workers' National Pension Fund ("Fund") to purchase 3,000,000 shares of United Coasts Corporation's outstanding common stock held by the Fund. The note was convertible into ACMAT Class A stock at $11 per share. The Company prepaid the note by making voluntary principal payments of $1,100,000 in 1998, $5,005,000 in 2001 and the balance of $10,395,00 in 2002.
Principal payments on long-term debt are $2,405,388, $2,708,396, $2,515,208, $2,576,097 and $2,641,354 for the years 2003 through 2007, respectively. Interest expense paid in 2002, 2001 and 2000 amounted to $1,977,661, $2,804,927 and $2,815,876, respectively.
The fair value at December 31, 2002 of the mortgage and the term loans approximate carrying value.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are presented below:
The federal net operating loss carryforward as of December 31, 2002 is $525,578 and expires in 2021. The alternative minimum tax credit carryforward as of December 31, 2002 is $2,416,391 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, 2002 and 2001.
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, 2002.
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
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 $4,491,000 in 2003.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the years ended December 31, 2002, 2001 and 2000:
The following is a reconciliation of segment totals for revenue and operating income to corresponding amounts in the Company's statement of earnings:
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.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY) AS OF DECEMBER 31, 2002 AND 2001 AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
A summary of long-term debt at December 31, 2002 and 2001 follows:
See Note 16 to the Consolidated Financial Statements in the Annual Report for a description of the commitments and contingencies.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000