Investment income was $3,553,565 in 2002, $4,031,793 in 2001 and $4,570,927 in 2000. The decrease in 2002 investment income was primarily related to a decrease in yield on invested assets offset in part by an increase in net invested assets. The decrease in 2001 investment income compared to 2000 investment income was primarily related to a decrease in yield on invested assets and a continued decrease in invested assets as the Company continued to reduce long-term debt. Net realized capital gains (losses) were $25,971 in 2002, $374,301 in 2001 and ($123,125) in 2000.
Other income was $784,607 in 2002, $900,559 in 2001 and $887,842 in 2000. Other income consists primarily of rental income. The decrease in 2002 other income compared to 2001 reflects a reduction in fees related to funds administration. The increase in 2001 other income compared to 2000 reflects an increase in construction administration fees in 2001 offset by a lease termination fee received from a tenant in 2000.
Losses and loss adjustment expenses were $4,071,399 in 2002, $1,536,022 in 2001 and $1,506,908 in 2000. The increase in losses and loss adjustment expenses in 2002 is attributable to two large losses reported in current year of $2.2 million and prior year favorable reserve development was significantly lower due to actual loss experience being closer to estimates. The increase in losses and loss adjustment expenses for 2001 are attributable to an increase in surety loss ratio offset in part by a decrease in current year earned premiums.
Amortization of policy acquisition costs were $1,753,553 in 2002, $2,049,946 in 2001 and $2,375,038 in 2000. The decrease in amortization of policy acquisition costs is primarily attributable to the decrease in commission rates for agents and decrease in earned premium.
Costs of contract revenues were $18,339,534 in 2002, $13,183,057 in 2001 and $11,006,382 in 2000. The gross profit (loss) margins on construction projects were (12.6)% in 2002, 6.3% in 2001 and 6.6% in 2000. The Company incurred additional remediation expenses on a construction project that significantly exceeded the original estimate and cost overruns on several other projects that are now substantially complete. Gross margins fluctuate each year based upon the profitability of specific projects.
General and administrative expenses were $4,856,068 in 2002, $4,856,785 in 2001 and $4,997,849 in 2000. The change in general and administrative expenses in 2002 compared to 2001 is due primarily to the decrease in intangible amortization expense offset by an increase in bad debt expense. 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.
Net written premiums were $4,326,190 in 2002, $3,498,860 in 2001 and $5,024,005 in 2000. The increase in 2002 net written premiums compared to 2001 reflects the impact of the favorable insurance rate market. ACSTAR has experienced a significant increase in business opportunities over the past twelve months that meet ACSTAR's underwriting standards. The decrease in 2001 net written premiums compared to 2000 reflects the impact of ACSTAR's increased reinsurance on a per principal basis which began on May 1, 2000.
capital gains in 2002. The decrease in operating earnings in 2001 is primarily related to lower earned premium and higher loss ratios partially offset by higher net investment income and capital gains.
Revenues for the United Coastal Liability Insurance segment were $5,458,373 in 2002, $6,363,392 in 2001 and $7,080,714 in 2000. The 2002 decrease in revenue reflects a 5% decrease in earned premiums and a 23% decrease in investment income compared to 2001. The 2001 decrease in revenue reflects a 10% decrease in earned premiums and a 21% decrease in investment income compared to 2000. 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 the parent to reduce corporate debt.
Net written premiums were $3,659,805 in 2002, $3,133,460 in 2001 and $3,887,000 in 2000. The increase in 2002 net written premiums compared to 2001 reflects the impact of the favorable insurance rate market. United Coastal has experienced a significant increase in business opportunities over the past twelve months that meet United Coastal's underwriting standards. The decrease in 2001 net written premiums compared to 2000 reflects the Company's strategy toward the unfavorable pricing in the casualty insurance market.
Cost of contract revenues were $18,339,534 in 2002, $13,183,057 in 2001 and $11,006,382 in 2000. The gross profit (loss) margin on construction projects was (12.6%) in 2002, 6.3% in 2001 and 6.6% in 2000. Gross margin fluctuations each year based upon the profitability of specific projects. The gross loss in 2002 reflects significant cost overruns on several projects that are now substantially complete.
General and administrative expenses were $4,008,294 in 2002, $3,444,936 in 2001 and $3,780,797 in 2000. The increase in general and administrative expenses in 2002 compared to 2001 is due primarily to 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. The decrease in general and administrative expenses in 2001 compared to 2000 is due primarily to the decrease in amortization of intangibles.
Management believes that the reserves for losses and loss adjustment expenses at December 31, 2002 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 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.
The Company realized cash flow from operations in the amount of $11,615,814 in 2002 and $1,465,272 in 2001, compared to cash flow used from other sources to support operations of $8,190,436 in 2000. 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.
For 2003, the amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic state insurance departments, is limited to approximately $4,491,000.
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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, 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, 2002, 2001 AND 2000
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DECEMBER 31, 2002, 2001 AND 2000
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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 provides specialty general, environmental and professional liability insurance primarily to general contractors, specialty trade and environmental contractors, property owners, storage and treatment facilities and allied professionals. United Coastal also offers products liability policies to manufacturers. In addition, the company offers professional liability coverage to architects, consultants and engineers.
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
In the normal course of business, the Company assumes and cedes reinsurance with other companies. Reinsurance ceded primarily represents excess of loss reinsurance with companies with "A" ratings from the insurance rating organization, A.M. Best Company, Inc. Reinsurance ceded also includes a facultative reinsurance treaty which is applicable to excess policies written over a primary policy issued by the Company for specific projects. Reinsurance is ceded to limit losses from large exposures and to permit recovery of a portion of direct losses; however, such a transfer does not relieve the originating insurer of its liability. The Company participates in assumed quota share reinsurance arrangements covering marine and property catastrophe risks with one of its excess of loss reinsurers.
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.
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 follows FAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. FAS 133 requires that an entity
recognize 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 provision for taxes comprises two components, current income taxes and deferred income-taxes. Deferred income taxes arise from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The following table summarizes reclassification adjustments for other comprehensive income and the related tax effects for the years ended December 31, 2002, 2001 and 2000:
In July 2001, the Financial Accounting Standards Board (FASB) issued FAS 142, "Goodwill and Other Intangible Assets". 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 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 will be 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. 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 had an unamortized asset in the amount of $1,920,360 which was subject to the transition provisions of FAS No. 142. The Company stopped amortizing intangibles on January 1, 2002. Net earnings and earnings per share adjusted to exclude intangible amortization for the year ended December 31, 2001 and 2000 are as follows:
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 December, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" (FAS 148), an amendment to FASB Statement No. 123 "Accounting for Stock-Based Compensation" (FAS 123). It amends the disclosure provisions of FAS 123 to require prominent annual disclosure about the effects on reported net earnings in the
The Company accounts for stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", and related interpretations.
The stock options were awarded at an exercise price equal to the market value of the underlying common stock on the date of the grant. Accordingly, there has been no employee compensation cost recognized in earnings for the stock options.
FAS 123 provides an alternative to APB 25 whereby fair values may be ascribed to options using a valuation model and amortized to compensation cost over the vesting period of the options. The following tables illustrate the pro forma effect on net income (loss) and earnings per share for each period indicated as if the Company applied the fair value recognition provisions of FAS 123 to its stock option program. See Note 15 for a description of the method and fair value assumptions used in estimating the fair value of options.
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146). FAS 146 requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred. Existing generally accepted accounting principles provide for the recognition of such costs at the date of management's commitment to an exit plan. In addition, FAS 146 requires that the liability be measured at fair value and be
adjusted for changes in estimated cash flows. The provisions of the new standard are effective for exit or disposal activities initiated after December 31, 2002. The Company does not expect the impact of this new standard to be significant.
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, 2002, the Company's insurance subsidiaries had securities with an aggregate book 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, 2002 and 2001, by effective maturity, follows:
Realized capital gains (losses) for the years ended December 31, 2002, 2001 and 2000 follows:
A summary of receivables at December 31, 2002 and 2001 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 2003.
Future minimum rental income to be generated by leasing a portion of the building under non-cancelable operating leases as of December 31, 2002 are estimated to be $512,690 for 2003, $179,200 for 2004 and $126,000 for 2005 through 2007. Rental income earned in 2002, 2001 and 2000 was $607,097, $593,573 and $768,496, respectively.
At December 31, 2002, the Company has a $10,000,000 bank line of credit with two financial institutions. 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, 2002 and 2001. 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, 2002. 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.
loan agreements contain certain limitations on borrowings, minimum statutory capital levels and require maintenance of certain ratios.
The components of income tax expense (benefit) for the years ended December 31, 2002, 2001 and 2000 follows:
The most significant component of the state gross deferred asset is the net operating loss carryforward for the State of Connecticut which amounted to $27,219,742 as of December 31, 2002. Of this amount, $15,634,692 expires through 2003 while $11,585,050 expires in 2020 and 2021. In 2002 and 2001, 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.
Federal net operating loss carryforward as of December 31, 2002 is $525,578 and expires in 2021.
Taxes paid in 2002, 2001 and 2000 were $180,392, $626,625 and $320,405, 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 2002, 2001 and 2000.
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, 2002 and 2001, the amounts included in AOCI for these changes were losses of $117,142 and 0, 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 ended December 31, 2003, 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 2002 and 2000, ACMAT repurchased, in open market and privately negotiated transactions, 4,234 and 27,239, respectively, shares of its Common Stock at an average price of $19.01 and $19.08 per share, respectively. The Company also repurchased during 2002, 2001 and 2000, in open market and privately negotiated transactions, 78,114, 234,235 and 253,833, respectively, shares of its Class A Stock at an average price of $8.88, $7.80 and $7.29 per share, respectively.
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.
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 accordance with statutory accounting principles, ACMAT's insurance subsidiaries' statutory capital and surplus was $48,423,319 and $50,735,332 at December 31, 2002 and 2001, respectively, and their statutory net income for the years ended December 31, 2002, 2001 and 2000 was $1,988,493, $6,048,222 and $7,641,075, 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 fair value effect of stock options reported in Note 1, Stock-Based Compensation, is derived by application of a variation of the Black-Scholes option pricing model. No options were granted in 2001.
The significant assumptions used during the year in estimating the fair value on the date of the grant for original options and reload options granted in 2002 and 2000 were as follows:
A summary of the unaudited quarterly results of operations for 2002 and 2001 follows:
Operating earnings represent operating revenues less the cost of contract revenues, losses and loss adjustment expenses and amortization of policy acquisition costs and selling, general and administrative expenses. Annual earnings per share for 2002 does not equate to the sum of the quarters due to the timing of stock purchases.
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company's 2002 Annual Report.
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 2003 to 2007 and thereafter.
See Note 12 to the Consolidated Financial Statements in the Annual Report for a description of the derivative financial instruments.