Revenues were $26,962,807 in 2001, $26,341,755 in 2000 and $25,500,249 in 1999. 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 $7,581,276 in 2001, $9,215,904 in 2000 and $9,414,192 in 1999. The decrease in earned premiums over the past two years reflects the Company's strategy to selectively underwrite during uncertain economic times. Contract revenues were $14,074,878 in 2001, $11,790,207 in 2000 and $9,223,457 in 1999. Contract revenue depends greatly on the successful securement of contracts bid and execution.
Investment income was $4,031,793 in 2001, $4,570,927 in 2000 and $5,389,732 in 1999. 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 $374,301 in 2001, ($123,125) in 2000 and $252,190 in 1999.
Other income was $900,559 in 2001, $887,842 in 2000 and $1,220,678 in 1999. Other income consists primarily of rental income. The increase in 2001 other incomes compared to 2000 reflects an increase in construction administration fees in 2001 offset by a lease termination fee received from a tenant in 2000. Other income in 1999 included a one-time benefit of approximately $330,000.
Amortization of policy acquisition costs were $2,049,946 in 2001, $2,375,038 in 2000 and $2,223,918 in 1999. The decrease in amortization of policy acquisition costs in 2001 is primarily attributable to the decrease in commission rates for agents and decrease in earned premium.
Costs of contract revenues were $13,183,057, in 2001, $11,006,382 in 2000 and $8,261,408 in 1999. The gross profit margins on construction projects were 6.3% in 2001, 6.6% in 2000 and 10.4% in 1999. Gross margins fluctuate each year based upon the profitability of specific projects.
General and administrative expenses were $4,856,785 in 2001, $4,997,849 in 2000 and $5,385,409 in 1999. The decrease in general and administrative expenses in 2001 compared to 2000 is due primarily to a decrease in salary expense offset in part by an increase in depreciation expense. The decrease in general and administrative expenses in 2000 compared to 1999 is due primarily to the decrease in intangible amortization expense.
Revenues for the ACSTAR Bonding segment were $5,487,683 in 2001, $6,284,212 in 2000 and $6,227,462 in 1999. The 2001 decrease in revenue is primarily due to a 24% decrease in earned premiums and partly offset by
General and administrative expenses were $1,383,498 in 2001, $1,594,067 in 2000 and $1,476,277 in 1999. The decrease in general and administrative expenses in 2001 is primarily due to reduced funds control expenses in 2001 compared to 2000. The increase in general and administrative expenses in 2000 compared to 1999 is due primarily to the implementation of a Funds Control Agreement with ACMAT in 2000. Under this agreement, ACMAT collects funds from certain obligees of ACSTAR and makes payments directly to the vendors and subcontractors of selected principals for certain bond obligations for a fee.
Investment income was $2,385,377 in 2001, $3,001,161 in 2000 and $3,557,332 in 1999. The decrease in investment income was primarily related to a decrease in invested assets as a result of dividends distributed to the parent company to reduce corporate debt. Net realized capital gains (losses) were $182,631 in 2001, ($117,503) in 2000 and $200,574 in 1999.
Operating earnings for the United Coastal Liability Insurance segment were $2,810,000 in 2001, $3,549,472 in 2000 and $4,578,802 in 1999. The decrease in operating earnings is due primarily to a decrease in earned premiums and investment income.
Amortization of policy acquisition costs were $1,286,409 in 2001, $1,303,916 in 2000 and $1,528,179 in 1999. The decrease in amortization of policy acquisition costs is primarily attributable to the decrease in earned premiums.
General and administrative expenses were $1,135,221 in 2001, $972,294 in 2000 and $987,931 in 1999. The increase in general and administrative expenses is due primarily to an increase in expenses related to our tri-annual statutory audit in 2001.
Operating earnings for the ACMAT Contracting segment were $912,376 in 2001, $1,111,731 in 2000 and $907,228 in 1999. The decrease in 2001 operating earnings compared to 2000 operating earnings is due primarily to a decrease in funds control income and lower gross profit on contracts in 2001. 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 combined ratio is one means of measuring the underwriting experience of a property and casualty insurer. The combined ratio, consisting of the ratio of losses and loss adjustment expenses to premiums earned (the "loss ratio") plus the ratio of underwriting expenses to premiums written (the "expense ratio") reflects relative underwriting profit or loss. The Company's insurance subsidiaries' loss ratios under generally accepted accounting principles ("GAAP") were 20.3%, 16.4% and 17.6% for the years ended December 31, 2001, 2000 and 1999, respectively. These loss ratios are below industry averages and are believed to be the result of conservative underwriting. The increase in the 2001 loss ratios is due to an increase in surety loss ratio. There can be no assurance that such loss ratios can continue. The Company's insurance subsidiaries' expense ratios under GAAP were 69.3%, 58.9% and 56.6% for the years ended December 31, 2001, 2000 and 1999, respectively. The increase in the expense ratios is due to the decline in premiums. The Company's insurance subsidiaries' combined ratios under GAAP were 89.6%, 75.3% and 74.2% for the years ended December 31, 2001, 2000 and 1999, respectively.
operating expenses are premium collections, investment earnings and maturing investments. The Company has no material commitments for capital expenditures and, in the opinion of management, has adequate sources of liquidity to fund its operations over the next 12 months.
Net cash provided by investing activities was $8,821,721 in 2001, $14,008,674 in 2000 and $20,580,662 in 1999.
The terms of the Company's note agreements contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and minimum net worth levels, including cross default provisions. The payment of future cash dividends and the re-acquisition of shares are restricted each to amounts of an available fund ("Available Fund"). The Available Fund is a cumulative fund which is increased each year by 20% of the Consolidated Net Earnings (as defined). The Company is in compliance with all of these covenants at December 31, 2001, 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.
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, 2001.
During 2001, the Company purchased, in the open market and privately negotiated transactions, 234,235 shares of its Class A Stock at an average price of $7.80.
In 2002, 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 $2,589,256 in 2002.
The Company also has cash collateral of $15,948,636 at December 31, 2001 which it would be required to return at the end of expiration of applicable bond period subject to any claims.
Notes to Consolidated Financial Statements - December 31, 2001, 2000 and 1999
Consolidated Schedules included in Part II of this Report - Years ended December 31, 2001, 2000 and 1999
ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999
These consolidated financial statements have been prepared in conformity with accounting principles generally accepted ("GAAP") in the United States of America. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Bonding operating segment provides, primarily through ACSTAR, surety bonds written for prime, specialty trade, environmental, asbestos and lead abatement contractors and miscellaneous obligations. ACSTAR also offers other miscellaneous surety such as workers' compensation bonds, supply bonds, subdivision bonds and license and permit bonds.
Short-term investments, consisting primarily of money market instruments maturing within one year are carried at cost which, along with accrued interest, approximates fair value. Cash and cash equivalents include cash on hand and short-term highly liquid investments of maturities of three months or less when purchased. These investments are carried at cost plus accrued interest which approximates fair value.
Reinsurance recoverable 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 voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies.
Property and equipment are stated at cost. 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.
Prior to adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", intangibles are stated at amortized cost and are being amortized using the straight-line method. Intangibles include insurance operating licenses and goodwill, which represents the excess of cost over the fair market value of net assets acquired. These intangible assets are amortized over periods ranging from 15 to 25 years. The carrying amounts of these intangibles are regularly reviewed for indicators of other-than-temporary impairments in value. Amortization expense included in the consolidated statement of income was $321,707, $326,652 and $632,339 for the years ended December 31, 2001, 2000 and 1999, respectively.
Effective May 1, 2000, the Company cedes significantly more of its bond exposure than under its previous reinsurance treaties. Such reinsurance is applicable on a per principal basis for losses in excess of $1,000,000 up to $13,000,000. Prior to May 1, 2000, reinsurance was applicable to losses in excess of $2,000,000 on a per bond basis with the Company retaining approximately $5,000,000 of losses up to $13,000,000.
Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $600,174 and $938,797 at December 31, 2001 and 2000, 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 $423,709, $175,397 and $215,292 for the years ended December 31, 2001, 2000 and 1999, respectively.
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.
The following table summarizes reclassification adjustments for other comprehensive income (loss) and the related tax effects for the years ended December 31, 2001, 2000 and 1999:
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", (FAS 133 was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The cumulative effect of adopting FAS 133, as amended, on January 1, 2001 had no effect. There were no derivative transactions during 2001.
In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 142 addresses the initial recognition and measurement of intangible assets acquired either singly or with a group of other assets, as well as the measurement of goodwill and other intangible assets subsequent to their initial acquisition. FAS 142 changes the accounting for goodwill and intangible assets that have indefinite useful lives from an amortization approach to an impairment-only approach that requires that those assets be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without an arbitrary ceiling on their useful lives.
Upon adoption of SFAS No. 142, on January 1, 2002 the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle.
As of January 1, 2002, the Company has an unamortized intangible asset in the amount of $1,920,360 which will be subject to the transition provisions of SFAS No. 142. Amortization expense related to goodwill was $321,707 for the year ended December 31, 2001. the Company will cease amortization of goodwill, effective January 1, 2002. This would reduce general and administrative expenses and increase earnings before tax by $152,290 in 2002. In addition, the Company has performed the transitional impairment tests using the fair value approach required by the new standard. Based on these tests, the Company did not impair any intangible asset.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143 changes the measurement of an asset retirement obligation from a cost-accumulation approach to a fair value approach, where the fair value (discounted value) of an asset retirement obligation is recognized as a liability in the period in which it is incurred and accretion expense is recognized using the credit-adjusted risk-free interest rate in effect when the liability was initially recognized. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently amortized into expense. The pre-FAS 143 prescribed practice of reporting a retirement obligation as a contra-asset will no longer be allowed. The Company is in the process of assessing the impact that will take effect on January 1, 2003.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale. A long lived asset classified as held for sale is to be measured at the lower of its carrying amount or fair value less cost to sell and depreciation (amortization) is to cease. Impairment is recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset. Long-lived assets to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off are considered held and used until disposed of. Accordingly, discontinued operations are no longer to be measured on a net realizable value basis, and future operating losses are no longer recognized before they occur.
On January 13, 2002, the Founder, Chairman, President and Chief Executive Officer of the Corporation died at the age of 82. At the time of his death, Mr. Nozko, Sr. owned of record or beneficially shares of the Corporation's Common Stock and Class A Stock having approximately 53% of the total voting power of the Corporation's voting capital stock. During the pendency of Mr. Nozko's estate, such voting power has been vested in the executors of the estate who are his son, Henry W. Nozko, Jr., the current Chairman, President and Chief Executive Officer of the Corporation, and his daughter Pamela N. Cosmas.
In connection with the passing of Henry W. Nozko, Sr., the Company incurred certain obligations to his estate and spouse that are payable only from the proceeds of several key-man life insurance policies held by the Company. ACMAT Corporation is the beneficiary of approximately $8,900,000 from these life insurance policies.
After payment of such obligations, the Company expects that earnings for the quarter ending March 31, 2002 will reflect a one-time, net after-tax benefit of approximately $3,100,000 attributable to the portion of such insurance proceeds which the Company will retain.
On December 31, 2001, the Company's insurance subsidiaries had securities with an aggregate book value of approximately $10.4 million on deposit with various state regulatory authorities.
A summary of net investment income for the years ended December 31, 2001, 2000 and 1999 follows:
Realized capital gains (losses) for the years ended December 31, 2001, 2000 and 1999 follows:
Gross gains of $314,351, $14,162 and $349,413 and gross losses of $11,973, $137,287 and $97,223 were realized on fixed maturity sales for the years ended December 31, 2001, 2000 and 1999, respectively. Gross gains of $71,923 were realized on the sale of equity securities and no losses were realized on equity security sales for the year ended December 31, 2001. There were no gross gains or losses realized on equity security sales for the years ended December 31, 2000 and 1999.
A summary of receivables at December 31, 2001 and 2000 follows:
Equipment and vehicles 5 years Building 40 years Furniture and fixtures 15 years
The following table sets forth a reconciliation of beginning and ending reserves for unpaid losses and loss adjustment expenses for the periods indicated on a GAAP basis for the business of the Company.
The decrease in loss and loss adjustment expense reserves continues 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 large surety losses which occurred during the year. While management continually evaluates the potential for changes in loss estimates, due to the uncertainty inherent in the surety business, the emergence of net favorable development may or may not continue to 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.
A summary of long-term debt at December 31, 2001 and 2000 follows:
On September 1, 1999, the Company obtained a $4,500,000 term loan from a financial institution, which is payable in quarterly installments of $250,000 which commenced December 1, 1999. The term loan, due 2004 has a balance of $2,250,000 at December 31, 2001. The interest rate is fixed at 7.25%. The loan agreement contains certain limitations on borrowings, minimum statutory capital levels and requires maintenance of certain ratios. The proceeds were used to replace a $5,000,000, five year term loan obtained on December 9, 1998.
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 $6,005,361 at December 31, 2001. The loan agreements contain certain limitations on borrowings, minimum statutory capital levels and require maintenance of certain ratios. The proceeds were used to repay the existing mortgage note.
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, 2001, 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.
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. Annual principal payments of $1,650,000 per year for ten years are due beginning on July 1, 2012. The note is convertible into ACMAT Class A stock at $11 per share. The conversion price of $11 per share would be adjusted at the time of conversion to reflect any stock dividends, recapitalizations or additional stock issuance. The Company can prepay the note and the Fund has the option to accept the prepayment or convert the note to stock. The Company made voluntary principal payment of $1,100,000 on July 31, 1998 and $5,005,000 on December 31, 2001. At December 31, 2001, the Company had reserved 945,000 shares of Class A Stock for issuance pursuant to such conversion option. The unsecured debenture has a balance of $10,395,000 at December 31, 2001.
Principal payments on long-term debt are $2,589,256, $1,738,716, $2,041,724, $1,848,536, $1,909,425 and $1,974,682 for the years 2002 through 2006, respectively. Interest expense paid in 2001, 2000 and 1999 amounted to $2,804,927, $2,815,876 and $3,751,313, respectively.
In 2001 and 2000, a valuation allowance is provided to offset the deferred tax asset related to the state net operating loss carryforward as management believes it is more likely than not that the deferred tax asset is unrealizable. Also, in 2000, a valuation allowance was provided to offset the deferred tax asset related to net unrealized losses which are a component of stockholders' equity. Due to the reversal of net unrealized losses during 2001, this valuation allowance has been eliminated. 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 difference 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, 2001.
Taxes paid in 2001, 2000 and 1999 were $626,625, $320,405 and $703,081, 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 2001 and 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.
During 2000 and 1999, ACMAT repurchased, in open market and privately negotiated transactions, 27,239 and 7,260, respectively, shares of its Common Stock at an average price of $19.08 and $20.93 per share, respectively. The Company also repurchased during 2001, 2000 and 1999, in open market and privately negotiated transactions 234,235, 253,833 and 189,221, respectively, shares of its Class A Stock at an average price of $7.80, $7.29 and $12.52 per share, respectively.
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 2001 or 1999, however, the exercise price of the Class A Stock options were re-priced at $7.25 on December 16, 1999.
In accordance with statutory accounting principles, ACMAT's insurance subsidiaries' statutory capital and surplus was $50,735,332, and $50,646,755 at December 31, 2001 and 2000, respectively, and their statutory net income for the years ended December 31, 2001, 2000 and 1999 was $6,048,222, $7,641,075 and $11,231,410, respectively. Effective January 1, 2001, the insurance subsidiaries began preparing its statutory basis financial statements in accordance with the revised manual subject to any deviation prescribed or permitted by its domicilary insurance commissioner. The impact of this change was an increase to the statutory capital and surplus of approximately $3.9 million. The primary differences between amounts reported in accordance with GAAP and amounts reported in accordance with statutory accounting principles 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.
The following presents the condensed financial position of ACMAT Corporation (parent company only) as of December 31, 2001 and 2000 and its condensed statements of earnings and cash flows for the years ended December 31, 2001, 2000 and 1999.
Income taxes received from subsidiaries during the years ended December 31, 2001, 2000 and 1999 were $516,173, $118,150, and $1,157,813, respectively. Interest paid during the years ended December 31, 2001, 2000 and 1999 was $2,933,115, $3,023,070 and $3,751,313, respectively. Interest paid in 2001 and 2000 included $128,188 and $207,194, respectively, paid to subsidiaries for intercompany loans.
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 2002 to 2006 and thereafter.
See Note 14 to the Consolidated Financial Statements in the Annual Report for a description of the commitments and contingencies.
As of and for the years ended December 31, 2001, 2000 and 1999