Revenues were $26,341,755 in 2000, $25,500,249 in 1999 and $28,752,273 in 1998. The increase in 2000 revenues compared to the 1999 revenues is due primarily to an increase in contract revenues. Earned premiums were $9,215,904 in 2000, $9,414,192 in 1999 and $10,962,663 in 1998. The decrease in earned premiums over the past two years reflects the Company's strategy to avoid the unfavorable pricing in the Company's casualty insurance operations. Contract revenues were $11,790,207 in 2000, $9,223,457 in 1999 and $12,139,924 in 1998. Contract revenue depends greatly on the successful securement of contracts bid.
Other income (expense) was $887,842 in 2000, $1,220,678 in 1999 and ($754,588) in 1998. Other income consists primarily of rental income. Other income in 1999 also included a one-time benefit of approximately $330,000. The fluctuations in other income (expense) are attributable to a pre-tax loss of approximately $1,400,000 in 1998 related to the Company's share of a limited partnership. The Company sold its investment in the limited partnership on December 31, 1998.
Losses and loss adjustment expenses were $1,506,908 in 2000, $1,672,887 in 1999 and $2,186,728 in 1998. The decreases in losses and loss adjustment expenses are attributable to the decline in earned premiums and the release of surety loss reserves on older years that are no longer needed. Amortization of policy acquisition costs were $2,375,038 in 2000, $2,223,918 in 1999 and $2,112,857 in 1998. The increase in amortization of policy acquisition costs is primarily attributable to the increase in commissions paid to agents.
General and administrative expenses were $4,997,849 in 2000, $5,385,409 in 1999 and $5,355,183 in 1998. The decrease in general and administrative expenses in 2000 compared to 1999 is due primarily to the decrease in amortization expense. The increase in general and administrative expenses in 1999 compared to 1998 is due primarily to the increase in salary expense.
General and administrative expenses were $1,594,067 in 2000, $1,476,277 in 1999 and $1,515,840 in 1998. 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. 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. The decrease in general and administrative expenses in 1999 compared to 1998 is due primarily to the decrease in bad debt expense.
Investment income was $3,001,161 in 2000, $3,557,332 in 1999 and $4,430,026 in 1998. 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 ($117,503) in 2000, $200,574 in 1999 and $198,129 in 1998.
Losses and loss adjustment expenses were $1,255,032 in 2000, $1,434,367 in 1999 and $1,955,816 in 1998. The decrease in losses and loss adjustment expenses is attributable to the decrease in earned premiums. Amortization of policy acquisition costs were $1,303,916 in 2000, $1,528,179 in 1999 and $1,852,218 in 1998. The decrease in amortization of policy acquisition costs is primarily attributable to the decrease in earned premiums.
Cost of contract revenues were $11,006,382 in 2000, $8,261,408 in 1999 and $11,635,879 in 1998. The gross profit margin on construction projects was 6.6% in 2000, 10.4% in 1999 and 4.2% in 1998. Gross margin fluctuations each year based upon the profitability of specific projects.
General and administrative expenses were $3,780,797 in 2000, $3,886,117 in 1999 and $3,488,950 in 1998. The decrease in general and administrative expenses in 2000 compared to 1999 is due primarily to the decrease in amortization of intangibles. The increase in general and administrative expenses in 1999 compared to 1998 is due primarily to the increase in salary expense and the amortization of intangibles.
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 16.4%, 17.6% and 19.6% for the years ended December 31, 2000, 1999 and 1998, respectively. These loss ratios are below industry averages and are believed to be the result of conservative underwriting. The decrease in the loss ratios is due to the release of surety reserves. There can be no assurance that such loss ratios can continue. The Company's insurance subsidiaries' expense ratios under GAAP were 58.9%, 56.6% and 51.8% for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in the expense ratios is due to the decline in premiums. The Company's insurance subsidiaries' combined ratios under GAAP were 75.3%, 74.2% and 71.4% for the years ended December 31, 2000, 1999 and 1998, respectively. The increase in the 2000 combined ratio results primarily from the decline in premiums and an increase in commissions paid to agents and brokers.
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. ACMAT has also incurred negative working capital as a result of holding short-term debt related to its operations.
Net cash provided by investing activities was $14,008,674 in 2000, $20,580,662 in 1999 and $21,326,746 in 1998.
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, 2000, except for the ratio of Earnings Before Interest Expense, Taxes, Depreciation and Amortization to Fixed Charges. The Company has received a waiver for this covenant.
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, 2000.
The Company's principal source of cash for repayment of long-term debt is dividends from its two insurance companies. During 2000, ACMAT received $7,780,000 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 2001, the amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic state insurance departments, is limited to approximately $6,900,000.
Consolidated Statements of Earnings for the years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements - December 31, 2000, 1999 and
Consolidated Schedules included in Part II of this Report - Years ended December 31, 2000, 1999 and 1998:
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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 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.
The United Coastal Liability Insurance operating segment offers specific lines of liability insurance as an approved non-admitted excess and surplus lines insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of Columbia. United Coastal offers claims made and occurrence policies for specific specialty lines of liability insurance through certain excess and surplus lines brokers who are licensed and regulated by the state insurance department(s) in the state(s) in which they operate. United Coastal offers general, asbestos, lead, pollution and professional liability insurance nationwide to specialty trade contractors, environmental contractors, property owner, storage and treatment facilities and professionals. United Coastal also offers products liability insurance to manufacturers and distributors.
During 2000, 1999 and 1998, customers who individually accounted for more than 10% of consolidated construction contracting revenue are as follows; in 2000 - three customers provided 33%, 22% and 19%, respectively. In 1999 - two customers provided 51% and 24%, respectively. In 1998 - three customers provided 52%, 19% and 17%, respectively. No customers accounted for more than 10% of the consolidated insurance revenues in any year.
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 market value through a charge to income.
Ceded incurred losses and loss adjustment expenses totaled $175,397, $215,292 and $180,553 for the years ended December 31, 2000, 1999 and 1998, respectively.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Deferral of the Effective Date of FASB Statement No. 133", which allows entities which have not yet adopted FAS 133 to defer its effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133", which amends the accounting and reporting standards of FAS 133. FAS 133 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 consolidated balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a recognized asset or liability or of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Upon initial application of FAS 133, hedging relationships must be designated anew and documented pursuant to the provisions of this statement. The Company will adopt FAS 133, as amended, as of January 1, 2001. The Company has determined that the cumulative effect of FAS 133, as amended, will not be significant.
The amortized cost and fair value of fixed maturities at December 31, 2000 and 1999, by effective maturity, follows:
A summary of gross unrealized gains and losses at December 31, 2000 and 1999 follows:
A summary of net investment income for the years ended December 31, 2000, 1999 and 1998 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 2001.
Future minimum rental income to be generated by leasing a portion of the building under non-cancelable operating leases as of December 31, 2000 are estimated to be $545,090 for 2001, $549,890 for 2002, $428,690 for 2003 and $53,200 for 2004. Rental income earned in 2000, 1999 and 1998 was $768,496, $688,102 and $626,730, respectively.
A summary of intangibles, acquired primarily in connection with purchases of the Company's insurance subsidiaries, at December 31, 2000 and 1999 follows:
On September 1, 1999, the Company obtained a $4,500,000 term loan from a financial institution, which is currently payable in quarterly installments of $250,000 which commenced December 1, 1999. The term loan, due 2004 has a balance of $3,250,000 at December 31, 2000. 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 July 1, 1992, the Company issued a 30-year unsecured $16,500,000, 11.5% subordinated debenture 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 a voluntary principal payment of $1,100,000 on July 31, 1998. At December 31, 2000, the Company had reserved 1,400,000 shares of Class A Stock for issuance pursuant to such conversion option.
The fair value at December 31, 2000 of the mortgage, the term loan and the senior notes approximate carrying value. It is not practicable to estimate the fair value of convertible note at December 31, 2000 because of the complex and unique terms associated with this debt instrument.
The effective income tax rate, as a percentage of earnings before income taxes follows:
A valuation allowance is provided for the state net operating loss carryforward and the unrealized loss on investments which is not considered realizable. 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, 2000.
During 2000, 1999 and 1998, ACMAT repurchased, in open market and privately negotiated transactions 27,239, 7,260, and 4,769 respectively, shares of its Common Stock at an average price of $19.08, $20.93 and $20.65 per share, respectively. The Company also repurchased during 2000, 1999 and 1998, in open market and privately negotiated transactions 253,833, 189,221, and 342,366, respectively, shares of its Class A Stock at an average price of $7.29, $12.52 and $15.10 per share, respectively.
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 Company may issue an additional 20,000 shares of Class A Stock if certain performance goals are met by Allied Surety Agency, Inc. The purchase was a non-cash transaction and is not reflected in the Consolidated Statements of Cash Flow.
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 $6,900,000 in 2001.
The NAIC recently completed a process intended to codify statutory accounting practices for certain insurance enterprises. As a result, the NAIC issued a revised statutory Accounting Practices and Procedures Manual - version effective January 1, 2001 (the revised Manual) that will be effective for years beginning January 1, 2001. The States of Illinois and Arizona will require that, effective January 1, 2001, insurance companies domiciled in Illinois and Arizona prepare their statutory basis financial statements in accordance with the revised Manual subject to any deviations prescribed or permitted by the Illinois and Arizona insurance commissioner. The Company has determined the change on the statutory capital and surplus of its insurance subsidiaries will be to increase statutory capital and surplus by approximately $3,900,000.
In accordance with statutory accounting principles, ACMAT's insurance subsidiaries' statutory capital and surplus was $50,646,755 and $49,130,735 at December 31, 2000 and 1999, respectively, and their statutory net income for the years ended December 31, 2000, 1999 and 1998 was $7,641,075, $11,231,410 and $12,078,378, respectively. The primary differences between amounts reported in accordance with GAAP and amounts reported in accordance with statutory accounting principles are excess statutory reserves over statement reserves (Schedule P Liability), 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 and deferred taxes which are recognized for GAAP only.
Many construction projects in which the Company has been engaged have included asbestos exposures which the Company believes to involve a particularly high degree of risk because of the hazardous nature of asbestos. The Company believes it has reduced the risks associated with asbestos through proper training of its employees and by maintaining general liability and workers' compensation insurance. From 1986 to 1996, the Company obtained its general liability insurance from its insurance subsidiaries. Since 1996, the Company obtained its general liability insurance from unaffiliated insurance companies. Since 1989, the Company has obtained its surety bonds from its insurance subsidiary.
A summary of the unaudited quarterly results of operations for 2000 and 1999 follows:
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company's 2000 Annual Report.
As of and for the years ended December 31, 2000, 1999 and 1998