1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-6234
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ACMAT CORPORATION
Connecticut 06-0682460
(State of Incorporation) (I.R.S. Employer Identification No.)
233 Main Street, New Britain, Connecticut 06050-2350
(Address of principal executive offices)
Registrant's telephone number including area code: (860) 229-9000
--------------
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares outstanding
Title of Class at July 31, 2001
-------------- ----------------
Common Stock 557,589
Class A Stock 1,843,019
2
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION PAGE
----
Item 1.Unaudited Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2.Management's Discussion and Analysis of
Financial Conditions and Results of Operations 11
Part II OTHER INFORMATION
Item 4.Submission of Matters to a Vote of Security Holders 16
Item 6.Exhibits and Reports on Form 8-K 16
Signatures 17
2
3
Part I Financial Information
Item I Financial Statements
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Assets 2001 2000
------------- -------------
(Unaudited)
Investments:
Fixed maturities-available for sale at fair value (Cost of $60,305,308 in
2001 and $70,487,764 in 2000) $ 60,452,820 70,370,912
Equity securities, at fair value (Cost of $4,105,540 in 2001 and
$2,561,512 in 2000 3,823,099 2,220,936
Mortgage loan -- 289,625
Short-term investments, at cost which approximates fair value 8,432,770 3,249,065
------------- -------------
Total investments 72,708,689 76,130,538
Cash and cash equivalents 12,537,443 7,446,941
Accrued interest receivable 751,733 1,033,411
Receivables, net 5,333,837 4,140,363
Reinsurance recoverable 2,237,176 2,580,388
Prepaid expenses 167,908 133,018
Deferred income taxes 663,832 833,865
Property & equipment, net 12,443,189 12,624,792
Deferred policy acquisition costs 1,507,592 1,438,747
Other assets 4,156,608 3,612,239
Intangibles, net 2,078,741 2,242,067
------------- -------------
$ 114,586,748 112,216,369
============= =============
Liabilities & Stockholders' Equity
Accounts payable $ 3,077,236 2,407,958
Reserves for losses and loss adjustment expenses 26,927,053 29,310,606
Unearned premiums 5,511,739 5,442,777
Collateral held 13,994,627 8,673,378
Income taxes 67,021 22,582
Other accrued liabilities 983,143 1,178,816
Long-term debt 26,879,752 27,696,587
------------- -------------
Total liabilities 77,440,571 74,732,704
Commitments and contingencies
Stockholders' Equity:
Common Stock (No par value; 3,500,000 shares authorized; 557,589
and 557,589 shares issued and outstanding) 557,589 557,589
Class A Stock (No par value; 10,000,000 shares authorized; 1,843,019
and 2,057,254 shares issued and outstanding) 1,843,019 2,057,254
Retained earnings 34,880,553 35,326,305
Accumulated other comprehensive income (loss) (134,984) (457,483)
------------- -------------
Total Stockholders' Equity 37,146,177 37,483,665
------------- -------------
$ 114,586,748 112,216,369
============= =============
See Notes to Consolidated Financial Statements.
3
4
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
Three months ended Six months ended
June 30 June 30
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Earned premiums $ 1,909,007 2,119,632 3,940,987 4,468,106
Contract revenues 3,774,814 3,197,675 6,439,151 5,710,485
Investment income, net 1,050,933 1,216,594 2,155,118 2,359,148
Net realized capital gains (losses) 242,574 -- 264,715 (108,554)
Other income 217,752 241,812 372,024 427,835
----------- ----------- ----------- -----------
7,195,080 6,775,713 13,171,995 12,857,020
----------- ----------- ----------- -----------
Cost of contract revenues 3,358,804 2,986,343 5,671,614 5,350,573
Losses and loss adjustment expenses 359,198 392,125 771,036 833,785
Amortization of policy acquisition costs 618,918 593,681 976,001 985,360
General and administrative expenses 1,380,289 1,283,344 2,816,881 2,547,892
Interest expense 652,570 731,447 1,343,846 1,477,857
----------- ----------- ----------- -----------
6,369,779 5,986,940 11,579,378 11,195,467
----------- ----------- ----------- -----------
Earnings before income taxes 825,301 788,773 1,592,617 1,661,553
Income taxes 322,337 226,164 570,754 488,637
----------- ----------- ----------- -----------
Net earnings $ 502,964 562,609 1,021,863 1,172,916
=========== =========== =========== ===========
Basic earnings per share $ .21 .20 .41 .41
Diluted earnings per share $ .20 .19 .40 .40
See Notes to Consolidated Financial Statements.
4
5
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
June 30, 2000 and 2001
Accumulated
Common Class A Additional other Total
stock par stock par paid-in Retained comprehensive stockholders'
value value capital earnings income (loss) equity
----------- ----------- ---------- ----------- ----------- -----------
Balance as of December 31, 1999 $ 584,828 2,304,587 -- 35,151,966 (1,914,389) 36,126,992
Comprehensive income:
Net unrealized gains on debt -- -- -- -- 257,791 257,791
and equity securities
Net earnings -- -- -- 1,172,916 -- 1,172,916
-----------
Total comprehensive income 1,430,707
Acquisition and retirement of
17,680 shares of Common Stock (17,680) -- -- (318,240) -- (335,920)
Acquisition and retirement of
18,133 shares of Class A Stock -- (18,133) -- (166,976) -- (185,109)
----------- ----------- ---------- ----------- ----------- -----------
Balance as of June 30, 2000 $ 567,148 2,286,454 -- 35,839,666 (1,656,598) 37,036,670
=========== =========== ========== =========== =========== ===========
Balance as of December 31, 2000 $ 557,589 2,057,254 -- 35,326,305 (457,483) 37,483,665
Comprehensive income:
Net unrealized gains on debt -- -- -- -- 322,499 322,499
and equity securities
Net earnings -- -- -- 1,021,863 -- 1,021,863
-----------
Total comprehensive income 1,344,362
Acquisition and retirement of
214,235 shares of Class A Stock -- (214,235) -- (1,467,615) -- (1,681,850)
----------- ----------- ---------- ----------- ----------- -----------
Balance as of June 30, 2001 $ 557,589 1,843,019 -- 34,880,553 (134,984) 37,146,177
=========== =========== ========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
5
6
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2001 and 2000
2001 2000
------------ ------------
Cash flows from operating activities:
Net earnings $ 1,021,863 1,172,916
Adjustments to reconcile net earnings to net cash used for
operating activities:
Depreciation and amortization 824,156 792,340
Net realized capital (gains) losses (264,715) 108,554
Changes in:
Accrued interest receivable 281,678 81,618
Reinsurance recoverable 343,212 3,034,509
Receivables, net (1,193,474) (206,741)
Deferred policy acquisition costs (68,845) (441,272)
Prepaid expenses and other assets (579,259) (741,150)
Accounts payable and other accrued liabilities 473,605 (23,335)
Reserves for losses and loss adjustment expenses (2,383,553) (6,294,176)
Collateral held 5,321,249 (1,915,155)
Income taxes, net 214,471 194,090
Unearned premiums 68,962 1,166,520
------------ ------------
Net cash provided by (used for) operating activities 4,059,350 (3,071,282)
------------ ------------
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed maturities-sold 21,325,519 5,293,654
Fixed maturities-matured 11,260,000 7,661,000
Equity securities 500,000 --
Short term investments 8,160,064 6,495,204
Mortgages 289,625 --
Purchases of:
Fixed maturities (22,437,429) (7,712,627)
Equity securities (2,000,000) --
Mortgages -- (300,531)
Short-term investments (13,343,769) (10,129,301)
Capital expenditures (224,173) (229,589)
------------ ------------
Net cash provided by investing activities 3,529,837 1,077,810
------------ ------------
Cash flows from financing activities:
Repayments on long-term debt (816,835) (794,054)
Payments for acquisition & retirement of stock (1,681,850) (521,029)
------------ ------------
Net cash used for financing activities (2,498,685) (1,315,083)
------------ ------------
Net change in cash 5,090,502 (3,308,555)
Cash at beginning of period 7,446,941 7,054,911
------------ ------------
Cash at end of period $ 12,537,443 3,746,356
============ ============
See Notes to Consolidated Financial Statements.
6
7
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
(1) Financial Statements
The consolidated financial statements include the accounts of ACMAT Corporation
("ACMAT" or the "Company") and its subsidiaries. The consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and are unaudited.
The interim financial information contained in this report has been prepared
from the books and records of the Company and its subsidiaries and reflects, in
the opinion of the management of the Company, all adjustments (consisting of
normal and recurring accruals) necessary to fairly present results of operations
for the periods indicated. All significant intercompany accounts and
transactions have been eliminated in consolidation.
These statements should be read in conjunction with the financial statements and
notes thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 2000.
(2) Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations for the six-month
periods ended June 30, 2001 and 2000:
Average
Shares Per-Share
2001: Earnings Outstanding Amount
---------- ---------- ---------
Basic EPS:
Earnings available to stockholders $1,021,863 2,480,523 $.41
Effect of Dilutive Securities:
Stock options -- 58,074
---------- ----------
Diluted EPS:
Earnings available to stockholders $1,021,863 2,538,597 $.40
========== ========== ====
2000:
Basic EPS:
Earnings available to stockholders $1,172,916 2,859,508 $.41
Effect of Dilutive Securities:
Stock options -- 41,904
---------- ----------
Diluted EPS:
Earnings available to stockholders $1,172,916 2,901,412 $.40
========== ========== ====
The Convertible Notes were anti-dilutive in 2001 and 2000.
7
8
(3) Supplemental Cash Flow Information
Income taxes paid during the six months ended June 30, 2001 and 2000 was
$356,280 and $294,547, respectively. Interest paid for the six months ended June
30, 2001 and 2000 was $541,065 and $1,302,508, respectively.
(4) Comprehensive Income
The following table summarizes reclassification adjustments for other
comprehensive income (loss) and the related tax effects for the six months ended
June 30, 2001 and 2000:
2001 2000
--------- ---------
Unrealized gains (losses) on investments:
Unrealized holding gain (loss) arising during period $ 497,211 $ 186,145
Less reclassification adjustment for gains (losses) included in
net income, net of income tax expense (benefit) of $90,003 and
$(36,908) for 2001 and 2000, respectively
174,712 (71,646)
--------- ---------
Other comprehensive income $ 322,499 $ 257,791
========= =========
(5) New Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
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 the first six months of 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. FAS 142 is
required to be applied starting with fiscal years beginning after December 15,
2001 and is required to be applied at the beginning of an entity's fiscal year.
The statement is to be applied to all goodwill and other intangible assets
recognized in an entity's financial statements at that date. Impairment losses
for goodwill and indefinite lived intangible assets that arise due to the
initial application of FAS 142 (resulting from an impairment test) are to be
reported as a change in accounting principle. Retroactive application is not
permitted. The Company has not yet determined the impact that FAS 142 will have
on its consolidated financial statements.
(6) Segment Reporting
The Company has three reportable operating segments: ACMAT Contracting, ACSTAR
Bonding and United Coastal Liability Insurance. The Company's reportable
segments are primarily the three main legal entities of the Company, which
offer different products and services. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies.
The 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.
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, professional, products, pollution, asbestos and lead liability
insurance 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.
ACMAT Contracting provides construction contracting services to commercial and
governmental customers. ACMAT Contracting also provides underwriting services
to its insurance subsidiaries. In addition, ACMAT Contracting owns a
commercial office building in New Britain Connecticut and leases office space
to its insurance subsidiaries as well as third parties.
8
9
The Company evaluates performance based on earnings before income taxes and
excluding interest expense. The Company accounts for intersegment revenue and
expenses as if the products/services were to third parties. Information
relating to the three segments for the three and six-month periods ended June
30, 2001 and 2000 is summarized as follows:
Three Months ended Six Months ended
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
ACSTAR Bonding $1,595,462 1,375,302 2,975,051 3,022,938
United Coastal Liability Insurance 1,563,468 1,796,108 3,281,977 3,450,734
ACMAT Contracting 4,528,667 4,460,496 8,239,498 8,063,206
---------- ---------- ---------- ----------
$7,687,597 7,631,906 14,496,526 14,536,878
========== ========== ========== ==========
Operating Earnings:
ACSTAR Bonding $ 684,830 280,239 1,149,645 990,457
United Coastal Liability Insurance 734,606 873,337 1,476,389 1,561,399
ACMAT Contracting 176,032 477,354 552,566 806,365
---------- ---------- ---------- ----------
$1,595,468 1,630,930 3,178,600 3,358,221
========== ========== ========== ==========
Depreciation and Amortization:
ACSTAR Bonding $ 154,929 127,159 306,126 260,584
United Coastal Liability Insurance 75,306 98,435 162,423 200,729
ACMAT Contracting 188,600 149,217 355,607 331,111
---------- ---------- ---------- ----------
$ 418,835 374,811 824,156 792,424
========== ========== ========== ==========
Identifiable Assets: June 30, 2001 December 31, 2000
------------- -----------------
ACSTAR Bonding $ 46,820,242 41,801,164
United Coastal Liability Insurance 49,378,938 52,781,561
ACMAT Contracting 18,387,568 17,633,644
------------ ------------
$114,586,748 112,216,369
============ ============
The components of revenue for each segment for the three and six-month
periods ended June 30, 2001 and 2000 are as follows:
Three Months ended Six Months ended
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
ACSTAR Bonding:
Premiums $1,078,062 1,076,284 2,060,366 2,361,090
Investment income, net 391,304 299,018 779,273 643,547
Capital gains 126,096 -- 129,846 --
Other -- -- 5,566 18,301
---------- ---------- ---------- ----------
$1,595,462 1,375,302 2,975,051 3,022,938
========== ========== ========== ==========
United Coastal Liability Insurance:
Premiums $ 830,945 1,043,348 1,880,621 2,107,016
Investment income, net 612,118 748,384 1,262,009 1,445,906
Capital gains/(losses) 116,478 -- 134,869 (108,554)
Other 3,927 4,376 4,478 6,366
---------- ---------- ---------- ----------
$1,563,468 1,796,108 3,281,977 3,450,734
========== ========== ========== ==========
ACMAT Contracting:
Contract revenues $3,774,814 3,197,675 6,439,151 5,710,485
Investment income, net 5,273 13,455 26,602 47,012
Intersegment revenue:
Rental income 305,341 310,737 667,112 649,752
Underwriting services, agency
commissions and funds
administration services 229,414 701,193 744,653 1,252,789
Other 213,825 237,436 361,980 403,168
---------- ---------- ---------- ----------
$4,528,667 4,460,496 8,239,498 8,063,206
========== ========== ========== ==========
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10
The following is a reconciliation of segment totals for revenue and operating
income to corresponding amounts in the Company's statement of earnings:
Three Months ended Six Months ended
---------------------------- ----------------------------
Revenue: 2001 2000 2001 2000
----------- ----------- ----------- -----------
Total revenue for reportable segments $ 7,687,597 7,631,906 14,496,526 14,536,878
Intersegment eliminations (492,517) (856,193) (1,324,531) (1,679,858)
----------- ----------- ----------- -----------
$ 7,195,080 6,775,713 13,171,995 12,857,020
=========== =========== =========== ===========
Operating Earnings:
Total operating earnings for reportable
segments $ 1,595,468 1,630,930 3,178,600 3,358,221
Interest expense (652,570) (731,447) (1,343,846) (1,477,857)
Other operating expenses (117,597) (110,710) (242,137) (218,811)
----------- ----------- ----------- -----------
$ 825,301 788,773 1,592,617 1,661,553
=========== =========== =========== ===========
Operating earnings for ACMAT contracting are operating revenues less cost of
contract revenues and identifiable selling, general and administrative
expenses. Operating earnings for the bonding and liability insurance segments
are revenues less losses and loss adjustment expenses, amortization of policy
acquisition costs and identifiable selling, general and administrative
expenses. The adjustments and eliminations required to arrive at consolidated
amounts shown above consist principally of the elimination of the intersegment
revenues related to the performance of certain services and rental charges.
Identifiable assets are those assets that are used by each segment's
operations. Foreign revenues are not significant.
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ACMAT CORPORATION
Item 2: Management's Discussion and Analysis of
Financial Conditions and Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS:
----------------------------------
Net earnings were $502,964 for the three months ended June 30, 2001 compared to
$562,609 for the same period a year ago. Net earnings for the six months ended
June 30, 2001 were $1,021,863 compared to $1,172,916 for the six months ended
June 30, 2000. The decrease in 2001 net earnings compared to the 2000 net
earnings was due primarily to a reduction in earned premiums resulting from a
new reinsurance treaty effective May 1, 2000.
Revenues were $7,195,080 for the three months ended June 30, 2001 compared to
$6,775,713 for the same period in 2000. Revenues were $13,171,995 for the six
months ended June 30, 2001 compared to $12,857,020 for the same period in 2000.
Earned premiums were $1,909,007 for the three months ended June 30, 2001
compared to $2,119,632 for the same period a year ago. Earned premiums were
$3,940,987 for the six months ended June 30, 2001 compared to $4,468,106 for the
same period in 2000. Contract revenues were $3,774,814 for the three months
ended June 30, 2001 compared to $3,197,675 for the same period a year ago.
Contract revenues were $6,439,151 for the six months ended June 30, 2001
compared to $5,710,485 for the six months ended June 30, 2000. Contract revenue
is difficult to predict and depends greatly on the successful securement of
contracts bid.
Investment income was $1,050,933 for the three months ended June 30, 2001
compared to $1,216,594 for the same period in 2000. Investment income was
$2,155,118 for the six months ended June 30, 2001 compared to $2,359,148 for the
same period in 2000. The decrease in investment income was primarily related to
a decrease in invested assets which were used to reduce long-term debt and
purchase Company stock. Net realized capital gains for the three months ended
June 30, 2001 were $242,574 compared to no realized capital gains or losses for
the same period a year ago. Net realized capital gains were $264,715 for the six
months ended June 30, 2001 compared to net realized capital losses of $108,554
for the same period a year ago.
Other income was $217,752 for the three months ended June 30, 2001 compared to
$241,812 for the same period in 2000. Other income was $372,024 for the six
months ended June 30, 2001 compared to $427,835 for the six months ended June
30, 2000. Other income consists primarily of rental income.
Losses and loss adjustment expenses were $359,198 for the three months ended
June 30, 2001 compared to $392,125 for the same period a year ago. Losses and
loss adjustment expenses were $771,036 for the six months ended June 30, 2001
compared to $833,785 for the same period a year ago. The decreases in losses and
loss adjustment expenses are attributable to the decline in earned premiums.
Amortization of policy acquisition costs were $618,918 for the three months
ended June 30, 2001 compared to $593,681 for the same period in 2000.
Amortization of policy acquisition costs were $976,001 for the six months ended
June 30, 2001 compared to $985,360 for the six months ended June 30, 2000.
Costs of contract revenues were $3,358,804 for the three months ended June 30,
2001 compared to $2,986,343 for the same period a year ago, representing gross
profit margin 11.0% and 6.6%, respectively. Costs of contract revenues were
$5,671,614 for the six months ended June 30, 2001 compared to $5,350,573 for the
same period a year ago, representing gross profit margins of 11.9% and 6.3%,
respectively. Gross margin fluctuates each year based upon the profitability of
specific projects.
General and administrative expenses were $1,380,289 for the three months ended
June 30, 2001 compared to $1,283,344 for the same period a year ago. General and
administrative expenses were $2,816,881 for the six months ended June 30, 2001
compared to $2,547,892 for the six months ended June 30, 2000. The increase in
general and administrative expenses in 2001 compared to 2000 is due primarily to
the increase in depreciation expense and a salary expense and an increase in
utility costs associated with operating the Company headquarters.
Interest expense was $652,570 for the three months ended June 30, 2001 compared
to $731,447 for the same period in 2000. Interest expense was $1,343,846 for the
six months ended June 30, 2001 compared to $1,477,857 for the same period a year
ago. The decrease in interest expense is due to the decrease in long-term debt.
11
12
Income tax expense was $322,337 for the three months ended June 30, 2001
compared to $226,164 for the same period a year ago representing effective tax
rates of 39.1% and 28.7%, respectively. Income tax expense was $570,754 for the
six months ended June 30, 2001 compared to $488,637 for the same period a year
ago, representing effective tax rates of 35.8% and 29.4%, respectively. The
fluctuation in the effective tax rate is due to tax exempt interest income
making up a smaller portion of taxable income in 2001 and an increase in state
taxes in 2001.
Results of Operations by Segment:
ACSTAR BONDING: Three Months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenue $1,595,462 1,375,302 $2,975,051 3,022,938
Operating Earnings $ 684,830 280,239 $1,149,645 990,457
Revenues for the ACSTAR Bonding segment were $1,595,462 for the three months
ended June 30, 2001 compared to $1,375,302 for the same period in 2000. Revenues
for the ACSTAR Bonding segment were $2,975,051 for the six months ended June 30,
2001 compared to $3,022,938 for the six months ended June 30, 2000. Net written
premiums were $986,518 for the three months ended June 30, 2001 compared to
$1,044,616 for the three months ended June 30, 2000. Net written premiums were
$1,826,951 for the six months ended June 30, 2001 compared to $2,414,245 for the
same period a year ago. Earned premiums were $1,078,062 for the three months
ended June 30, 2001 compared to $1,076,284 for the three months ended June 30,
2000. Earned premiums were $2,060,366 for the six months ended June 30, 2001
compared to $2,361,090 for the six months ended June 30, 2000.
The lower net written premiums and earned premiums for the three months ended
June 30, 2001 as compared to the three months ended June 30, 2000 reflect the
Company's new reinsurance treaty. Effective May 1, 2000, the Company ceded
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.
Investment income was $391,304 for the three months ended June 30, 2001 compared
to $299,018 for the same period a year ago. Investment income was $779,273 for
the six months ended June 30, 2001 compared to $643,547 for the six months ended
June 30, 2000. The investment income reflects an increase in invested assets and
an increase in the effective yield on those invested assets.
Operating earnings for the ACSTAR Bonding segment were $684,830 for the three
months ended June 30, 2001 compared to $280,239 for the same period in 2000.
Operating earnings for the six months ended June 30, 2001 were $1,149,645
compared to $990,457 for the six months ended June 30, 2000. The 2000 operating
earnings reflect the Company's implementation of a Funds Administration
Agreement with ACMAT.
Losses and loss adjustment expenses were $109,916 for the three months ended
June 30, 2001 compared to $55,288 for the same period a year ago. Losses and
loss adjustment expenses were $206,851 for the six months ended June 30, 2001
compared to $131,488 for the same period a year ago. Amortization of policy
acquisition costs were $467,471 for the three months ended June 30, 2001
compared to $462,841 for the same period in 2000. Amortization of policy
acquisition were $876,659 for the six months ended June 30, 2001 compared to
$928,248 for the same period a year ago.
General and administrative expenses were $333,245 for the three months ended
June 30, 2001 compared to $576,934 for the same period a year ago. General and
administrative expenses were $741,896 for the six months ended June 30, 2001
compared to $972,745 for the same period a year ago. The decrease in general and
administrative expenses is due primarily to reduced fee expense from a Funds
Administration Agreement implemented with ACMAT during 2000. ACMAT collects
funds from certain obligees of ACSTAR and makes payments directly to the vendors
and subcontractors of selected principals for certain bond obligations.
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UNITED COASTAL LIABILITY INSURANCE:
Three Months ended June 30, Six Months ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenue $1,563,468 1,796,108 $3,281,977 3,450,700
Operating Earnings $ 734,606 873,337 $1,476,389 1,561,399
Revenues for the United Coastal Liability Insurance segment were $1,563,468 for
the three months ended June 30, 2001 compared to $1,796,108 for the same period
in 2000. Revenues for the United Coastal Liability Insurance segment were
$3,281,977 for the six months ended June 30, 2001 compared to $3,450,734 for the
six months ended June 30, 2000. The 2001 decrease in revenue reflects a decrease
in earned premiums and investment income compared to 2000. Net written premiums
were $245,691 for the three months ended June 30, 2001 compared to $1,013,921
for the three months ended June 30, 2000. Net written premiums were $1,947,232
for the six months ended June 30, 2001 compared to $2,667,559 for the same
period a year ago. Earned premiums were $830,945 for the three months ended June
30, 2001 compared to $1,043,348 for the three months ended June 30, 2000. Earned
premiums were $1,880,621 for the six months ended June 30, 2001 compared to
$2,107,017 for the six months ended June 30, 2000. The decrease in revenues
result primarily from the use of invested assets to reduce Company debt.
Investment income was $612,118 for the three months ended June 30, 2001 compared
to $748,384 for the same period a year ago. Investment income was $1,262,009 for
the six months ended June 30, 2001 compared to $1,445,906 for the six months
ended June 30, 2000. 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 for the three
months ended June 30, 2001 were $116,478 as compared to no realized capital
gains or losses for the same period a year ago.
Operating earnings for the United Coastal Liability Insurance segment were
$734,606 for the three months ended June 30, 2001 as compared to $873,337 for
the same period in 2000. Operating earnings for the six months ended June 30,
2001 were $1,476,389 compared to $1,561,399 for the six months ended June 30,
2000. The decrease in 2001 operating earnings compared to 2000 operating
earnings is due primarily to a decrease in earned premiums and investment income
offset in part by a reduction in amortization of policy acquisition costs and
losses and loss adjustment expenses.
Losses and loss adjustment expenses were $249,282 for the three months ended
June 30, 2001 compared to $336,837 for the same period a year ago. Losses and
loss adjustment expenses were $564,185 for the six months ended June 30, 2001
compared to $702,297 for the same period a year ago. The decrease in losses and
loss adjustment expenses are attributable to the decrease in earned premiums.
Amortization of policy acquisition costs were $301,833 for the three months
ended June 30, 2001 as compared to $333,770 for the same period in 2000.
Amortization of policy acquisition were $642,670 for the six months ended June
30, 2001 compared to $659,796 for the same period a year ago. The amortization
of policy acquisition costs is impacted by the new reinsurance treaty.
General and administrative expenses were $277,747 for the three months ended
June 30, 2001 compared to $252,164 for the same period a year ago. General and
administrative expenses were $598,733 for the six months ended June 30, 2001
compared to $527,242 for the same period a year ago.
ACMAT CONTRACTING: Three Months ended June 30 Six Months ended June 30,
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenue $4,528,667 4,460,496 8,239,498 8,063,206
Operating Earnings $ 176,032 477,354 552,566 806,365
Revenues for the ACMAT Contracting segment were $4,528,667 for the three months
ended June 30, 2001 compared to $4,460,496 for the same period in 2000. Revenues
were $8,239,498 for the six months ended June 30, 2001 compared to $8,063,206
for the same period a year ago. The 2001 increase in revenue reflects an
increase in contract revenues compared to 2000. Contract revenue is difficult to
predict and depends greatly on the successful securement of contracts bid.
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Operating earnings for the ACMAT Contracting segment were $176,032 for the three
months ended June 30, 2001 compared to $477,354 for the same period a year ago.
Operating earnings were $552,566 for the six months ended June 30, 2001 compared
to $806,365 for the six months ended June 30, 2000. The decrease in 2001
operating earnings compared to 2000 operating earnings is due primarily to
reduced fee income from the Funds Administration Agreement implemented with
ACSTAR during the second quarter of 2000 and lower gross margins on the 2000
projects.
Cost of contract revenues were $3,358,804 for the three months ended June 30,
2001 compared to $2,986,343 for the same period in 2000 representing gross
profit margin of 11.0% and 6.6%, respectively. Cost of contract revenues were
$5,671,614 for the six months ended June 30, 2001 compared to $5,350,573 for the
same period a year ago, representing gross profit margins of 11.9% and 6.3%,
respectively. Gross margin fluctuates each year based upon the profitability of
specific projects.
General and administrative expenses were $993,831 for the three months ended
June 30, 2001 compared to $996,799 for the same period a year ago. General and
administrative expenses were $1,952,041 for the six months ended June 30, 2001
compared to $1,906,268 for the same period a year ago.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal developments
and economic conditions, including the effects of inflation. Reserves are
monitored and evaluated periodically using current information on reported
claims.
Management believes that the reserves for losses and loss adjustment expenses at
June 30, 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 claim reporting patterns, 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's insurance subsidiaries' loss ratios under generally accepted
accounting principles ("GAAP") were 19.6% and 18.7% for the six-month periods
ended June 30, 2001 and 2000, respectively. These loss ratios are below industry
averages and are believed to be the result of conservative underwriting. There
can be no assurance that such loss ratios can continue. The Company's insurance
subsidiaries' expense ratios under GAAP were 71.6% and 60.9% for the six-month
period ended June 30, 2001 and 2000, respectively. The Company's insurance
subsidiaries' combined ratios under GAAP were 91.2% and 79.6% for the six-month
period ended June 30, 2001 and 2000, respectively. The increase in the 2001
combined ratio results primarily from the decrease in earned premiums.
LIQUIDITY AND CAPITAL RESOURCES:
The Company internally generates sufficient funds for its 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 year.
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's principal sources of funds are dividends from its wholly-owned
subsidiaries, intercompany and short-term borrowings, insurance underwriting
fees from its subsidiaries, construction contracting operations and rental
income. Management believes that these sources of funds are adequate to service
its indebtedness. ACMAT has recently relied on dividends from its insurance
subsidiaries to repay debt.
The Company generated cash flow from operations of $4,059,350 for the six-month
period ended June 30, 2001 compared to cash flow used for operations of
$3,071,282 for the same period in 2000. Net cash flows used for operations in
2001 resulted primarily from
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cash flow used for operation of collateral. The Company's cash flow was used to
repay long-term debt and repurchase stock. 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.
Net cash provided by investing activities in the first six-months of 2001
amounted to $3,529,837 compared to $1,077,810 for the same period in 2000.
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 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. 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
covenants at June 30, 2001.
The Company maintains a short-term unsecured bank credit line totaling $10
million to fund interim cash requirements. There were no borrowings under this
line of credit as of June 30, 2001.
During the six-month period ended June 30, 2001, the Company also purchased, in
the open market and privately negotiated transactions, 214,235 shares of its
Class A Stock at an average price of $7.85 per share.
The Company's principal source of cash for repayment of long-term debt is from
dividends from its two insurance companies. 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. The amount of dividends
ACMAT's insurance subsidiaries may pay, without prior approval of their domestic
State insurance departments, are limited to approximately $6,900,000 in 2001.
REGULATORY ENVIRONMENT
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 June 30, 2001 was above the level which might require
regulatory action.
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Part II - Other Information
Item 4. - Submission of Matters to a Vote of Security Holders
a. The Annual Meeting of Stockholders of ACMAT Corporation was held on
Thursday, June 21, 2001.
b. Directors elected at the meeting:
Votes Votes Brokers
For Against Non-Votes
Henry Nozko, Sr. 649,180 2,706
Henry Nozko, Jr. 694,450 2,376
Victoria Nozko 695,510 1,306
John Creasy 695,510 1,306
Arthur Moore 695,771 1,055
Alfred T. Zlotopolski 695,761 1,065
c. Other matters voted upon:
Brokers
For Against Abstain Non-Votes
1. Appointment of
Independent Auditors 696,756 70
Item 6 - Exhibits and Reports on Form 8-K
b. Report on Form 8-K - None
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