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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 0-6234
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 April 30, 2002
Common Stock 553,355
Class A Stock 1,827,019
TABLE OF CONTENTS
PAGE
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Earnings 4
Consolidates 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 Condition and Results of Operations 11
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
Part I Financial Information
Item I Financial Statements
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
Assets 2002 2001
------ ------------- -----------
Investments:
Fixed maturities-available for sale at fair value (Cost of $60,957,059 in
2002 and $61,841,391 in 2001) $ 60,984,796 62,210,923
Equity securities, at fair value (Cost of $5,625,262 in 2002 and
$5,065,262 in 2001) 5,373,940 4,916,900
Short-term investments, at cost which approximates fair value 314,546 371,744
------------- -----------
Total investments 66,673,282 67,499,567
Cash and cash equivalents 17,065,006 12,784,806
Accrued interest receivable 691,816 750,078
Receivables, net 6,755,420 4,839,559
Reinsurance recoverable 2,428,186 2,772,668
Prepaid expenses 210,061 125,731
Income tax receivable 377,132 --
Deferred income taxes 595,335 450,303
Property & equipment, net 12,123,455 12,273,656
Deferred policy acquisition costs 1,137,282 1,165,556
Other assets 2,259,536 4,881,172
Intangibles, net 1,920,360 1,920,360
------------- -----------
$ 112,236,871 109,463,456
============= ===========
Liabilities & Stockholders' Equity
Accounts payable 4,651,867 3,480,204
Reserves for losses and loss adjustment expenses 22,677,814 22,585,626
Unearned premiums 3,999,820 4,155,197
Collateral held 17,704,286 15,948,636
Income taxes -- 13,592
Accrued liabilities 829,232 757,665
Long-term debt 24,131,491 24,550,361
------------- -----------
Total liabilities 73,994,510 71,491,281
Commitments and contingencies
Stockholders' Equity:
Common Stock (No par value; 3,500,000 shares authorized; 553,355 and
557,589 shares issued and outstanding) 553,355 557,589
Class A Stock (No par value; 10,000,000 shares authorized; 1,827,019 and
1,827,019 shares issued and outstanding) 1,827,019 1,827,019
Retained earnings 36,104,405 35,460,226
Accumulated other comprehensive income (loss) (242,418) 127,341
------------- -----------
Total stockholders' equity 38,242,361 37,972,175
------------- -----------
$ 112,236,871 109,463,456
============= ===========
See Notes to Consolidated Financial Statements.
3
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings (Unaudited)
Three Months Ended March 31, 2002 and 2001
2002 2001
---- ----
Contract revenues $ 5,167,531 2,664,337
Earned premiums 1,539,536 2,031,980
Investment income, net 884,513 1,104,185
Net realized capital gains (losses) 17,653 22,141
Life insurance proceeds, net 3,348,903 --
Other income 103,000 154,272
------------ ------------
11,061,136 5,976,915
------------ ------------
Cost of contract revenues 5,674,741 2,342,810
Losses and loss adjustment expenses 2,581,543 411,838
Amortization of policy acquisition costs 432,563 357,083
General and administrative expenses 1,440,543 1,406,592
Interest expense 537,214 691,276
------------ ------------
10,666,604 5,209,599
------------ ------------
Earnings before income taxes 394,532 767,316
Income taxes (benefits) (342,777) 248,417
------------ ------------
Net earnings $ 737,309 518,899
============ ============
Basic Earnings Per Share $ .31 $ .21
Diluted Earnings Per Share $ .30 $ .20
See Notes to Consolidated Financial Statements.
4
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Unaudited)
March 31, 2002 and 2001
Accumulated
Common Additional other Total
stock par Class A stock paid-in Retained comprehensive stockholders'
value par value capital earnings income (loss) equity
----- --------- ------- -------- ------------- ------
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 and
equity securities -- -- - -- 1,230,790 1,230,790
Net earnings -- -- - 518,899 -- 518,899
----------
Total comprehensive income 1,749,689
Acquisition and retirement of 105,000
shares of Class A Stock -- (105,000) - (697,500) -- (802,500)
----------- --------- ------- ---------- --------- ----------
Balance as of March 31, 2001 $ 557,589 1,952,254 - 35,147,704 773,307 38,430,854
=========== ========= ======= ========== ========= ==========
Balance as of December 31, 2001 $ 557,589 1,827,019 - 35,460,226 127,341 37,972,175
Comprehensive income:
Net unrealized losses on debt and
equity securities -- -- - -- (369,759) (369,759)
Net earnings -- -- - 737,309 -- 737,309
----------
Total comprehensive income 367,550
Acquisition and retirement of 4,234 shares
of Common Stock (4,234) -- - (76,255) -- (80,489)
Acquisition and retirement of 7,500 shares
of Class A Stock -- (7,500) - (63,750) -- (71,250)
Exercise of 7,500 shares of Class A
Stock pursuant to Stock options -- 7,500 - 46,875 -- 54,375
----------- --------- ------- ---------- --------- ----------
Balance as of March 31, 2002 $ 553,355 1,827,019 - 36,104,405 (242,418) 38,242,361
=========== ========= ======= ========== ========= ==========
See Notes to Consolidated Financial Statements.
5
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2002 and 2001
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 737,309 518,899
Adjustments to reconcile net earnings to net cash provided by (used for) operating
activities:
Depreciation and amortization 293,584 405,321
Net realized capital (gains) losses (17,653) (22,141)
Changes in:
Accrued interest receivable 58,262 (13,721)
Reinsurance recoverable 344,482 (26,314)
Receivables, net (1,915,861) 102,321
Deferred policy acquisition costs 28,274 (340,950)
Prepaid expenses and other assets 2,537,306 (441,774)
Accounts payable and accrued liabilities 1,243,230 518,749
Cash collateral held 1,755,650 187,077
Reserves for losses and loss adjustment expenses 92,188 (200,046)
Income taxes, net (460,949) 153,141
Unearned premiums (155,377) 1,052,536
------------ -----------
Net cash provided by (used for) operating activities 4,540,445 1,893,097
------------ -----------
Cash flows from investing activities: Proceeds from investments sold or matured:
Fixed maturities-sold 2,571,465 7,920,409
Fixed maturities-matured 6,160,000 2,080,000
Equity securities 636,490 500,000
Mortgages -- 10,826
Short-term investments 3,920,669 7,059,565
Purchases of:
Fixed maturities (7,912,546) (10,848,719)
Equity securities (1,185,000) --
Short-term investments (3,863,471) (4,724,520)
Capital expenditures (71,817) (74,254)
------------ -----------
Net cash provided by investing activities 255,790 1,923,307
------------ -----------
Cash flows from financing activities:
Repayments on long-term debt (418,870) (407,665)
Issuance of Class A Stock 54,375 --
Payments for acquisition & retirement of stock (151,540) (802,500)
------------ -----------
Net cash used for financing activities (516,035) (1,210,165)
------------ -----------
Net change in cash and cash equivalents 4,280,200 2,606,239
Cash and cash equivalents at beginning of period 12,784,806 7,446,941
------------ -----------
Cash and cash equivalents at end of period $ 17,065,006 10,053,180
============ ===========
See Notes to Consolidated Financial Statements.
6
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, 2001.
(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 three-month
periods ended March 31, 2002 and 2001.
Average
Shares Per-Share
2002: Earnings Outstanding Amount
----- -------- ----------- ------
Basic EPS:
Earnings available to stockholders $ 737,309 2,382,043 $ .31
Effect of Dilutive Securities:
Stock options
-- 54,343
--------- ---------
Diluted EPS:
Earnings available to stockholders $ 737,309 2,436,386 $ .30
========= ========= ==========
2001:
Basic EPS:
Earnings available to stockholders $ 518,899 2,527,343 $ .21
Effect of Dilutive Securities:
Stock options -- 52,073
--------- ---------
Diluted EPS:
Earnings available to stockholders $ 518,899 2,579,417 $ .20
========= ========= ==========
The Convertible Notes were anti-dilutive in 2001.
(3) Supplemental Cash Flow Information
Income tax paid during the three months ended March 31, 2002 and 2001 was
$117,985 and $95,276, respectively. Interest paid for the three months ended
March 31, 2002 and 2001 was $282,344 and $372,402, respectively.
7
(4) Comprehensive Income
The following table summarizes reclassification adjustments for other
comprehensive income (loss) and the related tax effects for the three months
ended March 31, 2002 and 2001:
2002 2001
---- ----
Unrealized gains (losses) on investments:
Unrealized holding gain (loss) arising during period, net of income tax $(381,410) 1,245,403
Less reclassification adjustment for gains (losses) included in net income, net of income
tax expense of $6,001 and $7,528 for 2002 and 2001, respectively 11,651 14,613
--------- ---------
Other comprehensive income (loss) $(369,759) 1,230,790
========= =========
(5) Accounting Changes
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 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 SFAS 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 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 had an unamortized intangible asset in the
amount of $1,920,360 which was subject to the transition provisions of SFAS No.
142. The Company stopped amortizing intangibles on January 1, 2002. Net earnings
and earnings per share adjusted to exclude intangible amortization for the three
months ended March 31, 2001 are as follows:
March 31,
For the three months ended 2001
---------
Net Earnings $518,899
Intangible Amortization 38,073
-------
Adjusted Net Earnings 556,972
=======
Basic earnings per share:
Reported earnings per share $ .21
Intangible amortization .02
-------
Adjusted earnings per share .23
=======
Diluted earnings per share:
Reported earnings per share $ .20
Intangible amortization .01
-------
Adjusted earnings per share .21
=======
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.
(6) Accounting Standards Not Yet Adopted
8
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.
(7) Life Insurance Proceeds, net
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.
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 during the three-month period ended March 31, 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.
(8) 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.
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 to third parties.
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.
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.
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-month periods ended March 31, 2002 and 2001
is summarized as follows:
2002 2001
---- ----
Revenues:
ACSTAR Bonding $ 1,132,867 1,379,589
United Coastal Liability Insurance 1,238,216 1,718,509
ACMAT Contracting 5,871,677 3,710,831
------------- -----------
$ 8,242,760 6,808,929
============= ===========
Operating Earnings (Loss):
ACSTAR Bonding ($238,180) 464,815
United Coastal Liability Insurance (1,263,153) 741,783
ACMAT Contracting (915,824) 376,534
------------- -----------
$ (2,417,157) 1,583,132
============= ===========
Depreciation and Amortization:
ACSTAR Bonding $ 99,141 151,197
United Coastal Liability Insurance 49,703 87,117
ACMAT Contracting 144,740 167,007
------------- -----------
$ 293,584 405,321
============= ===========
Identifiable Assets:
ACSTAR Bonding $ 51,619,183 43,220,493
United Coastal Liability Insurance 39,458,825 54,114,409
ACMAT Contracting 21,158,863 17,023,005
------------- -----------
$ 112,236,871 114,357,907
============= ===========
The components of revenue for each segment for the three-month periods ended
March 31, 2002 and 2001 are as follows:
2002 2001
---- ----
ACSTAR Bonding:
Premiums $ 803,178 982,304
Investment income, net 330,380 387,969
Capital gains (losses) (237) 3,750
Other (454) 5,566
----------- -----------
$ 1,132,867 1,379,589
=========== ===========
United Coastal Liability Insurance:
Premiums $ 736,358 1,049,676
Investment income, net 481,360 649,891
Capital gains (losses) 17,890 18,391
Other 2,608 551
----------- -----------
$ 1,238,216 1,718,509
=========== ===========
ACMAT Contracting:
Contract revenues $ 5,167,531 2,664,337
Investment income, net 42,773 21,329
Intersegment revenue:
Rental income 369,979 361,771
Underwriting services and agency commissions 191,731 515,239
Other 99,663 148,155
----------- -----------
$ 5,871,677 3,710,831
=========== ===========
10
The following is a reconciliation of segment totals for revenue and operating
income to corresponding amounts in the Company's statement of earnings:
Revenue: 2002 2001
-------- ---- ----
Total revenue for reportable segments $ 8,242,760 6,808,929
Life insurance proceeds, net 3,348,903 --
Intersegment eliminations (530,527) (832,014)
------------ ---------
$ 11,061,136 5,976,915
============ =========
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.
Operating Earnings:
Total operating earnings (loss) for reportable segments $ (2,417,157) 1,583,132
Interest expense (537,214) (691,276)
Life insurance proceeds, net 3,348,903 --
Other operating expenses -- (124,540)
------------ ---------
$ 394,532 767,316
============ =========
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.
11
ACMAT CORPORATION AND SUBSIDIARIES
Item 2: Management's Discussion and Analysis of Financial Conditions and
Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS:
Net earnings were $737,309 for the three months ended March 31, 2002 compared to
$518,899 for the same period a year ago. The increase in 2002 net earnings
reflects the net affect of life insurance proceeds, net of the related
obligations, due to the death of the Chairman and President of the Company and
the related tax benefits. Net earnings were also negatively impacted by an
increase to loss reserves due to adverse development in prior years and
additional remediation expenses incurred on a construction project that
significantly exceeded the original estimate.
Revenues were $11,061,136 for the three months ended March 31, 2002 compared to
$5,976,915 for the same period in 2001. The increase in 2002 revenues reflects
the net affect of life insurance proceeds and related obligations due to the
death of the Chairman and President of the Company and an increase in
construction revenues. Earned premiums were $1,539,536 for the three months
ended March 31, 2002 compared to $2,031,980 for the same period a year ago.
Contract revenues were $5,167,531 for the three months ended March 31, 2002
compared to $2,664,337 for the same period a year ago. Contract revenue is
difficult to predict and depends greatly on the successful securement of
contracts bid.
Investment income was $884,513 compared to $1,104,185 for the same period in
2001. The decrease in investment income was primarily related to a decrease in
invested assets which were used to reduce long-term debt. Net realized capital
gains were $17,653 for the three months ended March 31, 2002 compared to $22,141
for the same period a year ago.
Life insurance proceeds reflect the net proceeds of several key-man life
insurance policies totaling approximately $8,800,000. In addition, the Company
incurred certain obligations, previously approved by the Board of Directors,
totaling approximately $5,500,000. 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.
Other income was $103,000 for the three months ended March 31, 2002 compared to
$154,272 for the same period in 2001. Other income is primarily comprised of
rental income.
Losses and loss adjustment expenses were $2,581,543 for the three months ended
March 31, 2002 compared to $411,838 for the same period a year ago. The increase
in losses and loss adjustment expenses is attributable to the strengthening of
loss reserves due to adverse development in prior years. During the three-month
period ended March 31, 2002, the Company increased reserves by a net amount of
$2,200,000. Amortization of policy acquisition costs were $432,563 for the three
months ended March 31, 2002 compared to $357,083 for the same period in 2001.
Costs of contract revenues were $5,674,741 for the three months ended March 31,
2002 compared to $2,342,810 for the same period a year ago. The gross loss
margin on construction projects was (10%) in 2002 compared to 12% in 2001. The
Company incurred additional remediation expenses incurred on a construction
project that significantly exceeded the original estimate. Gross margin
fluctuations each year based upon the profitability of specific projects.
General and administrative expenses were $1,440,543 for the three months ended
March 31, 2002 compared to $1,406,592 for the same period a year ago.
Interest expense was $537,214 for the three months ended March 31, 2002 compared
to $691,276 for the same period in 2001. The decrease in interest expense is due
to the decrease in long-term debt.
Income tax benefit was $342,777 for the three months ended March 31, 2002
compared to income tax expense $248,417 for the same period a year ago
representing effective tax rates of (87)% and 32.4%, respectively. The change
in the effective rate is primarily due to the recognition of net life insurance
proceeds during the three months ended March 31, 2002 which are exempt for
income tax purposes.
12
Results of Operations by Segment:
ACSTAR BONDING:
2002 2001
---- ----
Revenue $1,132,867 1,379,589
Operating Earnings (loss) $ (238,180) 464,815
Revenues for the ACSTAR Bonding segment were $1,132,867 for the three months
ended March 31, 2002 compared to $1,379,589 for the same period in 2001. Net
written premiums were $667,132 for the three months ended March 31, 2002
compared to $840,433 for the three months ended March 31, 2001. Earned premiums
were $803,178 for the three months ended March 31, 2002 compared to $982,304 for
the three months ended March 31, 2001.
The decrease in net written premiums and earned premiums for the three months
ended March 31, 2002 as compared to the three months ended March 31, 2001
reflect the Company's strategy to selectively underwrite principals during these
uncertain economic times.
Investment income was $330,380 for the three months ended March 31, 2002
compared to $387,969 for the same period a year ago. The decrease in investment
income was primarily related to a decrease in invested assets.
ACSTAR Bonding segment incurred an operating loss of ($238,180) for the three
months ended March 31, 2002 compared to operating earnings of $464,815 for the
same period in 2001. The operating loss in 2002 is due primarily to the addition
of $500,000, net of recoveries, to loss reserves for adverse development in
prior years.
Losses and loss adjustment expenses were $660,636 for the three months ended
March 31, 2002 compared to $96,934 for the same period a year ago. The increase
in losses and loss adjustment expenses is attributable to the strengthening of
loss reserves due to adverse development in prior years and also reflects the
emergence of adverse loss trends in the current year. During the three-month
period ended March 31, 2002, the Company increased ACSTAR reserves by a net
amount of $500,000. Amortization of policy acquisition costs were $338,028 for
the three months ended March 31, 2002 compared to $409,188 for the same period
in 2001.
General and administrative expenses were $372,383 for the three months ended
March 31, 2002 compared to $408,651 for the same period a year ago. The decrease
in general and administrative expenses is due primarily to no further
amortization expense related to intangibles.
UNITED COASTAL LIABILITY
INSURANCE:
2002 2001
---- ----
Revenue $ 1,238,216 1,718,509
Operating Earnings $ (1,263,153) 741,783
Revenues for the United Coastal Liability Insurance segment were $1,238,216 for
the three months ended March 31, 2002 compared to $1,718,509 for the same period
in 2001. Net written premiums were $804,755 for the three months ended March 31,
2002 compared to $1,701,541 for the three months ended March 31, 2001. Earned
premiums were $736,358 for the three months ended March 31, 2002 compared to
$1,049,676 for the three months ended March 31, 2001.
Investment income was $481,360 for the three months ended March 31, 2002
compared to $649,891 for the same period a year ago. 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 were $17,890 for the three months ended March 31, 2002 as
compared to realized capital gains of $18,391 for the same period a year ago.
United Coastal Liability Insurance segment incurred an operating loss of
($1,263,153) for the three months ended March 31, 2002 as compared to operating
earnings of $741,783 for the same period in 2001. The operating loss in 2002 is
due primarily to the addition of $1,700,000 to loss reserves for adverse
development in prior years.
Losses and loss adjustments were $1,920,907 for the three months ended March
31, 2002 compared to $314,903 for the same period a year ago. The increase in
losses and loss adjustment expenses is attributable to the strengthening of
loss reserves due to adverse development in prior years. During the three-month
period ended March 31, 2002, the Company increased Untied Coastal reserves by a
real amount of $1,700,000. Amortization of policy acquisition costs were
$219,879 for the three months ended March 31, 2002 as compared to $383,901 for
the same period in 2001. The decrease in amortization of policy acquisition
costs is primarily attributable to the decrease in earned premiums.
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General and administrative expenses were $360,583 for the three months ended
March 31, 2002 compared to $277,922 for the same period a year ago. The increase
in general and administrative expenses is due primarily to expenses related to
the statutory audit by The Arizona Insurance Department.
ACMAT CONTRACTING:
2002 2001
---- ----
Revenue $5,871,677 3,710,831
Operating Earnings (Loss) $ (915,824) 376,534
Revenues for the ACMAT Contracting segment were $5,871,677 for the three months
ended March 31, 2002 compared to $3,710,831 for the same period in 2001. The
2002 increase in revenue reflects a increase in contract revenues compared to
2001 due to the timing of three large projects in 2002.
Life insurance proceeds reflect the net proceeds of several key-man life
insurance policies totaling approximately $8,800,000. In addition, the Company
incurred certain obligations, previously approved by the Board of Directors,
totaling approximately $5,500,000. 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.
Operating losses for the ACMAT Contracting segment were $(915,824) for the three
months ended March 31, 2002 compared to operating earnings of $376,534 for the
same period a year ago. The decrease in 2002 operating earnings compared to 2001
operating earnings is due primarily to additional remediation expenses incurred
on a construction project that significantly exceeded original estimate.
Cost of contract revenues were $5,674,741 for the three months ended March 31,
2002 compared to $2,342,810 for the same period in 2001. The gross loss margin
on construction projects was 10 % in 2002 compared to gross profit margin of 12%
in 2001. Gross margin fluctuations each year based upon the profitability of
specific projects.
General and administrative expenses were $1,112,760 for the three months ended
March 31, 2002 compared to $1,142,027 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
March 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 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 167.7% and 20.3% for the three-month periods
ended March 31, 2002 and 2001, respectively. The increase in losses and loss
adjustment expenses is attributable to the strengthening of loss reserves due to
adverse development in prior years and emergence of loss trends in the current
year. During the three-month period ended March 31, 2002, the Company increased
reserves by a net amount of $2,200,000. The Company's insurance subsidiaries'
expense ratios under GAAP were 83.8% and 72.8% for the three-month period ended
March 31, 2002 and 2001, respectively. The increase in the 2002 expense ratio
results primarily from the decrease in earned premiums. The Company's insurance
subsidiaries' combined ratios under GAAP were 251.5% and 93.1% for the
three-month period ended March 31, 2002 and 2001, respectively.
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.
14
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 and repurchase Company Stock.
The Company provided cash flow from operations of $4,540,445 for the three-month
period ended March 31, 2002 compared to the cash flow used for operations of
$1,893,097 for the same period in 2001. Net cash flows provided from operations
in 2002 were provided from net life insurance proceeds and cash collateral.
Substantially all of the Company's cash flow was used to repay long-term debt,
repurchase stock and purchase investments. 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 quarter of 2002 amounted
to $255,790 compared to $1,923,307 for the same period in 2001. 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 March 31, 2002.
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 March 31, 2002.
During the three-month period ended March 31, 2002, the Company purchased, in
the open market and privately negotiated transactions, 4,234 shares of its
Common Stock at an average price of $19 per share. In addition, the Company
purchased, in a privately negotiated transaction, 7500 shares of its Class A
Stock at an average price of $9.50 per share during the three-month period ended
March 31, 2002.
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 $5,930,000 in 2002.
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 March 31, 2002 was above the level which might require
regulatory action.
CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS:
Contractual obligations at March 31, 2002 include the following:
Less than 1
Payment due by Period Total Year 1 to 3 Years 4 to 5 Years After 5 Years
--------------------- ----- ---- ------------ ------------ -------------
Long-Term Debt (principal) $24,131,491 $2,170,386 $3,780,440 3,757,961 14,422,704
The Company also has cash collateral of $17,704,286 at March 31, 2002, which it
would be required to return at the end of expiration of applicable bond period
subject to any claims.
15
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
a. Exhibits - None
b. Report on Form 8-K -
On January 18, 2002, the Company filed a Form 8-K regarding the death
of Henry W. Nozko, Sr., the Founder, Chairman, President and Chief
Executive Officer of the Corporation. 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 is 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.
On January 25, 2002, the Company filed a Form 8-K regarding certain
obligations that are payable from the proceeds of several key-man life
insurance policies held by Company. ACMAT Corporation was the beneficiary
of approximately $8,800,000 from these life insurance policies.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ACMAT CORPORATION
Date: May 14, 2002 /S/ Henry W. Nozko, Jr.
------------------------------------------
Henry W. Nozko, Jr., President, Chairman,
Chief Operating Officer, and Treasurer
Date: May 14, 2002 /S/ Michael P. Cifone
------------------------------------------
Michael P. Cifone, Senior Vice President,
Chief Financial Officer
(Principal Financial & Accounting Officer)
17