The Company and its subsidiaries occupy a 7 story office building located at 233 Main Street, in New Britain, Connecticut. ACMAT leases approximately 67% of the building to unaffiliated tenants. The office building is suitable and adequate for ACMAT's current and future requirements.
Net earnings were $1,706,588 in 2001, $2,224,317 in 2000 and $3,013,723 in 1999. The decrease in 2001 net earnings compared to the 2000 net earnings was due primarily to a decrease in earned premiums and an increase in the loss ratio partially offset by an increase in realized capital gains. 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.
Interest expense was $2,723,052 in 2001, $2,982,824 in 2000 and $3,738,740 in 1999. The decrease in interest expense is due to the decrease in long-term debt.
Income tax expense was $907,357 in 2001, $1,248,437 in 2000 and $1,204,164 in 1999, representing effective tax rates of 34.7%, 35.9% and 28.6%, respectively. The fluctuation in the effective tax rate reflects a one-time charge related to an IRS examination completed in 2000.
an increase in investment income and realized gains. The 2000 increase in revenue reflects a slight increase in earned premium compared to 1999.
Investment income was $1,560,080 in 2001, $1,253,329 in 2000 and $1,268,175 in 1999. The increase in 2001 investment income was primarily related to a decrease in investment expenses. 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 $191,670 in 2001, ($5,622) in 2000 and $51,616 in 1999.
Losses and loss adjustment expenses were $404,260 in 2001, $251,876 in 2000 and $238,520 in 1999. The increase in 2001 losses and loss adjustment expense compared to 2000 reflects an increase in the loss and loss adjustment expense ratio, offset in part by a decrease in current year earned premiums and the release of net favorable development in surety loss reserves relating to older years.
Amortization of policy acquisition costs were $1,601,377 in 2001, $2,001,561 in 2000 and $1,543,783 in 1999. The change in amortization of policy acquisition costs is primarily attributable to the change in direct written premiums and a change in the average commissions paid to agents.
Revenues for the United Coastal Liability Insurance segment were $6,363,392 in 2001, $7,080,714 in 2000 and $8,529,279 in 1999. The 2001 decrease in revenue reflects a 10% decrease in earned premiums and a 21% decrease in investment income compared to 2000. The 2000 decrease in revenue reflects a 12% decrease in earned premiums and a 16% decrease in investment income compared to 1999. The decrease in revenues over the past two years reflects the Company's strategy to selectively underwrite during uncertain economic times and a reduction in invested assets to pay dividends to pay parent to reduce corporate debt.
Losses and loss adjustment expenses were $1,131,762 in 2001, $1,255,032 in 2000 and $1,434,367 in 1999. The decrease in losses and loss adjustment expenses is attributable to the decrease in earned premiums.
Revenues for the ACMAT Contracting segment were $17,540,369 in 2001, $15,898,910 in 2000 and $13,154,753 in 1999. The 2001 increase in revenue reflects a 19% increase in contract revenues compared to 2000. The 2000 increase in revenue reflects a 28% increase in contract revenues compared to 1999. Contract revenue depends greatly on the successful securement of contracts bid and execution.
Cost of contract revenues were $13,183,057 in 2001, $11,006,382 in 2000 and $8,261,408 in 1999. The gross profit margin on construction projects was 6.3% in 2001, 6.6% in 2000 and 10.4% in 1999. Gross margin fluctuations each year based upon the profitability of specific projects.
Management believes that the reserves for losses and loss adjustment expenses at December 31, 2001 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.
The Company internally generates sufficient funds for its current 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
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.
The Company realized cash flow from operations in the amount of $1,465,272 in 2001, compared to cash flow used from other sources to support operations of $8,190,436 in 2000 and $7,065,427 in 1999. The cash flow from operations is due primarily to the increase of cash collateral partially offset by 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.
The Company's principal source of cash for repayment of long-term debt is dividends from its two insurance companies. During 2001, ACMAT received $6,460,000 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. For 2002, the amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic state insurance departments, is limited to approximately $5,930,000.
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, 2001 was above the level which might require regulatory action.
Consolidated Statements of Earnings for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACMAT Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Consolidated Statements of Earnings Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999
During 2001, 2000 and 1999, customers who individually accounted for more than 10% of consolidated construction contracting revenue are as follows; in 2001 - three customers provided 33%, 27%, and 20%, respectively. In 2000 - three customers provided 33%, 22% and 19%, respectively. In 1999 - two customers provided 51% and 24%, respectively. One customer accounted for more than 10% of the United Coastal insurance revenues in 2001.
Investments are classified as "available for sale" and are reported at fair value, with unrealized gains or losses charged or credited directly to stockholders' equity.
Upon adoption of SFAS No. 142, the Company will stop amortizing intangible assets related to licenses which is deemed to have an indefinite useful life. Instead, this asset will be subject to an annual review for impairment. See Note 1, Summary of Significant Accounting Policies, Accounting Standards Not Yet Adopted.
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 losses. 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 contractor and its indemnitors. Management believes that the reserves for losses and loss adjustment 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.
Collateral held represents cash and investments retained by the Company for surety bonds issued by the Company. The carrying amount of collateral held approximates its fair value because of the short maturity of these instruments.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates.
The Company is required to adopt FAS 144 effective January 1, 2002. The provisions of the new standard are generally to be applied prospectively and are not expected to significantly affect the Company's results of operations, financial condition or liquidity.
Fair value estimates are made based on quoted market prices and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The amortized cost and fair value of fixed maturities at December 31, 2001 and 2000, by effective maturity, follows:
A summary of gross unrealized gains and losses at December 31, 2001 and 2000 follows:
The balances billed but not paid by customers pursuant to retainage provisions in construction contracts will be due upon completion of the contracts and acceptance by the owner. In management's opinion, the majority of contract retainage is expected to be collected in 2002.
A summary of property and equipment at December 31, 2001 and 2000 follows:
Future minimum rental income to be generated by leasing a portion of the building under non-cancelable operating leases as of December 31, 2001 are estimated to be $549,890 for 2002, $428,690 for 2003 and $53,200 for 2004. Rental income earned in 2001, 2000 and 1999 was $593,573, $768,496 and $688,102, respectively.
A summary of intangibles, acquired primarily in connection with purchases of the Company's insurance subsidiaries, at December 31, 2001 and 2000 follows:
At December 31, 2001, 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, 2001 and 2000. 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.
On December 17, 2001, the Company obtained a $5,000,000 term loan from a financial institution, which is payable in quarterly installments of $250,000 which is to commence March 1, 2004. The term loan, due 2009 has a balance of $5,000,000 at December 31, 2001. The interest rate varies based on LIBOR plus 190 basis points in effect during the borrowing period. The interest rate cannot exceed 5.5%. The loan agreement contains certain limitations on borrowings, minimum statutory capital levels and requires maintenance of certain ratios. The proceeds were used to prepay $5,005,000 of the Convertible Notes due 2022.
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 (7-1/4%). The Company voluntarily prepaid the installments due January 31 on December 31 in 2001, 2000 and 1999. 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 $900,000 at December 31, 2001.
State net operating loss carryforwards as of December 31, 2001, 2000 and 1999 are $17,727,650, $15,634,692 and $13,448,084 expiring through 2021, 2020 and 2003, respectively.
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, 2001.
On April 1, 1999, the Company purchased a 40% interest in Allied Surety Agency, Inc. The Company issued 15,000 shares of Class A Stock for the ownership interest. The purchase was a non-cash transaction and is not reflected in the Consolidated Statements of Cash Flow.
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 2001, United Coastal Insurance paid dividends of $6,000,000, 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 is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the years ended December 31, 2001, 2000 and 1999:
The Company has, together with many other defendants, been named as a defendant in actions by injured or deceased individuals or their representatives based on product liability claims relating to materials containing asbestos. No specific claims for monetary damages are asserted in these actions. Although it is early in the litigation process, the Company does not believe that its exposure in connection with these cases is significant.
A summary of the unaudited quarterly results of operations for 2001 and 2000 follows:
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company's 2001 Annual Report.