10-Q 1 v05511_10q.txt 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, 2004 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] 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, 2004 -------------- ------------------ Common Stock 545,329 Class A Stock 1,772,978 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 Unaudited Consolidated Financial Statements 7 Item 2.Management's Discussion and Analysis of Financial Conditions and Results of Operations 14 Part II OTHER INFORMATION Item 2.Changes in Securities, Use of Proceeds and Issue Purchases Of Equity Securities 26 Item 4.Submission of Matters to a Vote of Security Holders 26 Item 5.Controls and Procedures 27 Item 6.Exhibits and Reports on Form 8-K 27 Signatures 28 2 Part I Financial Information Item I Financial Statements ACMAT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets

See Notes to Unaudited Consolidated Financial Statements. 3 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings (Unaudited)

See Notes to Unaudited Consolidated Financial Statements. 4 ACMAT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) June 30, 2004 and 2003

See Notes to Unaudited Consolidated Financial Statements. 5 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2004 and 2003

See Notes to Unaudited 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, 2003. Certain reclassifications have been made to prior years 10-Q financial statements to conform to current year presentation. (2) Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the three-month periods ended June 30, 2004 and 2003:

7 The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the six-month periods ended June 30, 2004 and 2003:

(3) Supplemental Cash Flow Information Income taxes refunds received during the six months ended June 30, 2004 was $35,159 compared to income taxes paid of $216,100 for the six months ended June 30, 2003. Interest paid for the six months ended June 30, 2004 and 2003 was $461,167 and $559,451, respectively. (4) Comprehensive Income (Loss) The following table summarizes reclassification adjustments for other comprehensive income (loss) and the related tax effects for the six months ended June 30, 2004 and 2003:

8 (5) Stock-Based Compensation 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 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. The pro forma fair value of stock-based compensation in the Company's Class A Shares for the three and six months ended June 30, 2004 and 2003 is as follows:

The significant assumptions used during the year in estimating the fair value on the date of the grant for options and granted in 2004 were as follows: 2004 ---- Expected life of stock options, in years 9 Expected volatility of ACMAT stock 44% Risk-free interest rate 1.0 Expected annual dividend yield -- Expected annual forfeiture rate -- No options were granted in 2003. (6) Investments The Company's portfolio is comprised primarily of fixed maturity securities rated AA or better by Standard and Poor's and includes mostly U.S. Treasuries and tax-free municipal securities. The Company also makes investments in collateralized mortgage obligations (CMOs). 9 Effective December 31, 2003, the Company adopted FASB Emerging Issues Task Force (EITF) Issue 03-01, "The Meaning of Other-than-Temporary Impairment and Its Application to Certain Investments (EITF 03-01). EITF 03-01 requires that certain quantitative and qualitative disclosures be made for debt and marketable equity securities classified as available for sale or held to maturity that are impaired at the balance sheet date but for which an impairment has not been recognized. An investment in debt or equity security is impaired if its fair value falls below its book value and the decline is considered to be other-than temporary. Factors considered in determining whether a decline is other-than-temporary include the length of time and the extent to which fair value has been below cost, the financial condition and the near-term prospects of the issuer; and the Company's ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. Additionally, for certain securitized financial assets with contractual cash flows (including asset backed securities), EITF 99-20 requires the Company to periodically update its best estimate of cash flows over the life of the security. If management determines that the fair value of its securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, then an other-than-temporary impairment charge is recognized. A debt security is impaired if it is probable that the Company will not be able to collect all amounts due under the security's contractual terms. Equity investments are impaired when it becomes apparent that the Company will not recover its cost over the expected holding period and consideration is given to the financial condition of the issue. Further, for securities expected to be sold, an other-than-temporary impairment charge is recognized if the Company does not expect the fair value of a security to recover the cost prior to the expected date of sale. The Company's process for reviewing invested assets for impairments during any quarter includes the following: o Identification and evaluation of investments which have possible indications of impairment; o Analysis of investments with gross unrealized investment losses that have fair value less than 80% of amortized cost during successive quarterly periods over a rolling one-year period; o Management review of for other-than-temporary impairments based on the investee's current financial condition, liquidity, near term recovery prospects and other factors, as well as consideration of other investments that were not recommended for other-than-temporary impairments; o Consideration of evidential matter, including an evaluation of factors or triggers that would or could cause individual investments to qualify as having other-than-temporary impairment and those that would not support other-than-temporary impairments; o Determination of the status of each analyzed investment as other-than-temporary or not. The gross unrealized investment losses and related fair value for fixed maturities and equity securities at June 30, 2004 were as follows:

For debt securities which are in an unrealized loss position as of June 30, 2004 these are losses generated by the increase in interest rates from the time these securities were acquired. Our primary investment practice is to buy and hold securities for the long term. Due to swings in the interest rate cycle, from time to time we recognize there will be temporary unrealized gains and losses in these fixed rate securities. Due to the positive cash flow nature of our business, we have the ability and intent to hold these securities to maturity and redemption at full par value. The Company has determined that all unrealized losses at June 30, 2004 are temporary impairments. 10 (7) Accounting Changes CONSOLIDATION OF VARIABLE INTEREST ENTITIES In December 2003, the FASB issued Revised Interpretation No. 46R, "Consolidation of Variable Interest Entities" (FIN 46R). FIN 46R clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46R separates entities into two groups: (1) those for which voting interests are used to determine consolidation and (2) those for which variable interests are used to determine consolidation. FIN 46R clarifies how to identify a variable interest entity and how to determine when a business enterprise should include the assets, liabilities, non-controlling interests and results of activities of a variable interest entity in its consolidated financial statements. FIN 46R was effective for public companies that have VIEs or potential VIEs that are special-purpose entities for periods ending after December 15, 2003. Application by public companies for all other types of entities is required for periods ending after March 15, 2004. The Company holds mortgage-backed and asset-backed securities which are considered variable interest entities. The adoption of FIN 46R did not have any impact on the Company's results of operations or financial condition as no consolidation was required. HEDGING INSTRUMENTS In April 2003, the FASB issued Statement of Financial Standards No.149, "Amendment of Statement 133 on Derivative Investments and Hedging Activities" (FAS 149), which amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FAS 133. FAS 149 amends FAS 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendment to FAS 133. FAS 149 also clarifies under what circumstances a contract with an initial net investment and purchases and sales of when-issued securities that do not yet exist meet the characteristics of a derivative. In addition, it clarifies when a derivative contains a Financing Component that warrants special reporting in the statement of cash flows. FAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of FAS 149 did not have an impact on the Company's results of operations, financial condition or liquidity. (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 in the Company's annual report on Form 10-K. 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. 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. 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. 11 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, 2004 and 2003 is summarized as follows:

Identifiable Assets: June 30, 2004 December 31, 2003 ------------ ------------ ACSTAR Bonding $ 86,753,237 73,704,644 United Coastal Liability Insurance 39,963,974 41,015,316 ACMAT Contracting 17,923,234 17,709,897 ------------ ------------ $144,640,445 132,429,857 ============ ============ The components of revenue for each segment for the three and six-month periods ended June 30, 2004 and 2003 are as follows:

12 The following is a reconciliation of segment totals for revenue and operating income to corresponding amounts in the Company's statement of earnings:

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 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, general and administrative expenses. 13 ACMAT CORPORATION Item 2: Management's Discussion and Analysis of Financial Conditions and Results of Operations Management's discussion and analysis (MD&A) reviews our consolidated and segment financial condition as of June 30, 2004 and December 31, 2003, our consolidated results of operations for the three and six-month periods ended June 30, 2004 and 2003 and where appropriate, factors that may affect our future financial performance. The MD&A should be read in conjunction with the consolidated financial statements of the Company and related notes included in the Company's annual report on Form 10-K for the year ended December 31, 2003. EXECUTIVE SUMMARY 2004 Consolidated Results of Operations for the three months ended June 30, 2004 reflect: o Net earnings of $684,711, or $.30 per share basic and $.29 per share diluted. o Earned premiums increased 13%. o Favorable insurance premium rate environment. o Higher interest income and lower interest expense. o Higher construction contract revenues 2004 Financial Condition: o Total assets of $144.6 million, up $12.2 million from the prior year-end. o Total cash and invested assets of $117.4 million, up $15.1 million from the prior year-end. o Stockholders' Equity of $42 million, down $.1 million from the prior year-end reflecting decline in unrealized gains in investment portfolio. o Total debt reduced to $17.6 million from $19.1 million. o Cash flow provided from operations of $18.4 million, up from $10.3 million in the same period last year. CONSOLIDATED OVERVIEW FOR THE THREE MONTHS ENDED JUNE 30, 2004: Three months ended June 30, --------------------------- 2004 2003 -------- -------- Net Earnings $684,711 504,590 Basic Earnings Per Share $ .30 $ .22 Diluted Earnings Per Share $ .29 $ .22 The Company's discussions related to all items, other than net earnings, are presented on a pretax basis, unless otherwise noted. Net earnings were $684,711 or $.30 per share basic and $.29 per share diluted for the three months ended June 30, 2004 compared to $504,590 or $.22 per share basic and $.22 per share diluted for the same period in 2003. The increase in net earnings for 2004 compared to 2003 is primarily due to an increase in earned premiums, contract revenue and investment income. Net earnings for 2004 reflected the continuing favorable environment for the insurance operations in 2003 and 2004. Consolidated revenues were as follows: Three months ended June 30, --------------------------- 2004 2003 ---------- ---------- Contract revenues $2,933,947 286,820 Earned premium 3,527,510 3,118,193 Investment income 766,602 620,919 Net realized capital gains 20,651 22,649 Other income 197,235 303,597 ---------- ---------- Consolidated revenues $7,445,945 4,352,178 ========== ========== 14 Total consolidated revenues increased $3,093,767 or 71% for the three months ended June 30, 2004 compared to the same period in 2003. Contract revenues increased $2,647,127 or 923% for the three months ended June 30, 2004 compared to the same period in 2003 due primarily to the timing of four large projects that were awarded in late 2003. Contract revenue depends greatly on the successful securement of contracts bid and execution. The backlog at June 30, 2004 was $6,500,000 compared to $9,680,000 at December 31, 2003. Earned premiums increased $409,317 or 13% for the three months ended June 30, 2004 compared to the same period in 2003 due to a 24% increase in net written premiums in ACSTAR Bonding, primarily due to new business and strong customer retention, offset by a 31% decrease in 2004 net written premiums in United Coastal liability insurance. Net written premiums for United Coastal liability insurance business for the three months ended June 30, 2004 compared to the same period in 2003 decreased by 31% due to the non-renewal by several insureds with large premium policies in 2004. Investment income increased $145,683 or 23% for the three months ended June 30, 2004 compared to the same period in 2003 due primarily to higher average invested assets resulting from strong cash flows from operations. Net realized capital gains were $20,651 for the three months ended June 30, 2004 compared to $22,649 for the same period in 2003. The unrealized losses on the debt securities as of June 30, 2004 are temporary. These losses are generated by the increase in interest rates from the time these securities were acquired, therefore there are no other than temporary impairments for the three months ended June 30, 2004. Other income decreased $106,362 or 35% for the three months ended June 30, 2004 compared to the same period in 2003. Other revenues consist primarily of rental income and 2003 also included a one-time claim administration fee charged to bonding customers. Consolidated expenses for the three months ended June 30, 2004 were as follows: THREE MONTHS ENDED JUNE 30, --------------------------- 2004 2003 ---------- ---------- Cost of contract revenues $2,895,480 305,244 Losses and loss adjustment expenses 1,407,142 1,077,195 Amortization of policy acquisition costs 616,860 597,346 General and administrative expenses 1,239,823 1,322,413 Interest expense 224,350 267,049 ---------- ---------- $6,383,655 3,569,247 ========== ========== Consolidated expenses increased $2,814,408 or 79% for the three months ended June 30, 2004 compared to the same period in 2003. Cost of contract revenues increased $2,590,236 or 849% for the three months ended June 30, 2004 compared to the same period in 2003. The 923% increase in contract revenues in 2004 is due to the timing of four large projects that were started later in 2003. The gross profit margin on construction projects was 1.3% in 2004 compared to a gross loss of 6.0% in 2003. Gross margins fluctuate each year based upon the profitability of specific projects. Losses and loss adjustment expenses increased $329,947 or 31% for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to the 13% increase in earned premiums and an increase in current year loss trends for liability insurance. Amortization of policy acquisition costs increased $19,514 or 3% for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to the increase in earned premiums offset in part by a decrease in the average commission rate. General and administrative expenses decreased $82,590 or 6% for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to a decrease in salary expense and depreciation expense. Interest expense decreased $42,699 or 16% for the three months ended June 20, 2004 compared to the same period in 2003 primarily due to the decrease in long-term debt. The Company's effective tax rate was 35.5% and 35.6% for the three months ended June 30 2004 and 2003, respectively. 15 Results of Operations by Segment For the Three Months Ended June 30, 2004: The Company has three reportable operating segments: ACSTAR Bonding, United Coastal Liability Insurance and ACMAT Contracting. 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 in the Company's annual report on Form 10-K. 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. Operating earnings for ACMAT contracting are operating revenues less cost of contract revenues and identifiable 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 general and administrative expenses. Three Months Ended June 30, --------------------------- ACSTAR BONDING: 2004 2003 -------- -------- Operating Earnings $745,946 $402,102 -------- -------- GAAP Combined Ratio 78.7% 82.2% -------- -------- Operating earnings for the ACSTAR Bonding segment increased $343,844 or 86% for the three month period ended June 30, 2004 compared to the same period in 2003. The operating earnings in 2004 benefited from an increase in earned premiums, investment income and a 3.5 point improvement in the GAAP combined ratio for the three month period ended June 30, 2004 compared to the same period in 2003. The improvement in the 2004 combined ratio results primarily from the increase in earned premiums. ACSTAR Bonding revenues for the three months ended June 30, 2004 were as follows: Three Months ended June 30, --------------------------- 2004 2003 ----------- ----------- Earned premium $ 1,783,021 1,700,822 Investment income 384,263 248,840 Net realized capital gains 20,651 22,649 Other income (expense) (39,348) (171,485) ----------- ----------- $ 2,148,587 1,800,826 =========== =========== Revenues increased $347,761 or 19% for the three month period ended June 30, 2004 compared to the same period in 2003. Earned premiums increased $82,199 or 5% for the three month period ended June 30, 2004 compared to the same period in 2003 due to a 24% increase in net written premiums primarily due to a growth in new business and strong customer retention. ACSTAR continues to experience an increase in volume from an increase in business opportunities that meet ACSTAR's underwriting requirements. Investment income increased $134,423 or 54% for the three month period ended June 30, 2004 compared to the same period in 2003 primarily as a result of higher average invested assets resulting from strong cash flows from operations. The average invested assets increased 37% to $77.8 million for the three months ended June 30, 2004 compared to the same period in 2003. The increase in investment income also resulted from an increase in investment yields to 1.98% in 2004 from 1.76% in 2003. Net realized capital gains were $20,651 for the three months ended June 30, 2004 compared to $22,649 for the same period in 2003. Other income (expense) relates primarily to fees received from customers related to funds administration services offset by the fees paid ACMAT to administer the Funds Administration services. Funds administration fees, which represent charges to bonding customers for administering payments to subcontractors and vendors, fluctuates depending on the terms and conditions offered and accepted for the bonding programs each year. The Funds Administration fees were $110,998 for the three months ended June 30, 2004 compared to $205,332 for the three months ended June 30, 2003. 16 ACSTAR Bonding expenses for the three months ended June 30, 2004 compared to the same period in 2003 were as follows: Three Months ended June 30, --------------------------- 2004 2003 ---------- ---------- Losses and loss adjustment expenses $ 534,897 510,247 Amortization of policy acquisition costs 541,229 564,737 General and administrative expenses 326,515 323,740 ---------- ---------- $1,402,641 1,398,724 ========== ========== Expenses increased $3,917 or .3% for the three months ended June 30, 2004 compared to the same period in 2003. Losses and loss adjustment expenses increased $24,650 or 5% for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to the increase in earned premiums from higher business volume. Amortization of policy acquisition costs decreased $23,508 or 4% for the three months ended June 30, 2004 compared to the same period in 2003 primarily as a result of the successful underwriting absorbing more of the fixed underwriting costs. General and administrative expenses increased $2,775 or 1% for the three months ended June 30, 2004 compared to the same period in 2003. UNITED COASTAL LIABILITY INSURANCE: Three Months ended June 30, --------------------------- 2004 2003 ---------- ---------- Operating Earnings $ 477,919 $ 457,252 ---------- ---------- GAAP Combined Ratio 91.3% 91.6% ---------- ---------- Operating earnings for the United Coastal Liability Insurance segment increased $20,667 or 5% for the three months ended June 30, 2004 compared to the same period in 2003. The operating earnings in 2004 benefited from a 23% increase in earned premiums offset in part by an increase in current year loss trends. United Coastal Liability Insurance revenues for the three months ended June 30, 2004 compared to the same period in 2003 were as follows: Three months ended June 30, --------------------------- 2004 2003 ---------- ---------- Earned premium $1,714,489 1,417,371 Investment income 320,571 326,008 Other income 6,287 11,589 ---------- ---------- $2,071,347 1,754,968 ========== ========== Revenues increased $316,379 or 18% for the three months ended June 30, 2004 compared to the same period in 2003. Earned premiums increased $327,118 or 23% in 2004 for the three months ended June 30, 2004 compared to the same period in 2003 due to a 73% increase in net written premiums in 2003 offset in part by a 22% decrease in written premiums in the first quarter of 2004. United Coastal business is comprised of insureds with relatively large premium policies and each quarter can be impacted significantly depending on the number of new policies written or non-renewals. Investment income decreased $5,437 or 2% for the three months ended June 30, 2004 compared to the same period in 2003 as a result of lower average invested assets resulting from dividends to the parent company in November 2003. United Coastal Liability Insurance expenses for the three months ended June 30, 2004 were as follows: Three Months ended June 30, --------------------------- 2004 2003 ---------- ---------- Losses and loss adjustment expenses $ 872,245 566,948 Amortization of policy acquisition costs 431,289 400,020 General and administrative expenses 289,894 330,748 ---------- ---------- $1,593,428 1,297,716 ========== ========== Expenses increased $295,712 or 23% for the three months ended June 30, 2004 compared to the same period in 2003. 17 Losses and loss adjustment expenses increased $305,297 or 54% for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to the 23% increase in earned premiums and an increase in current year loss trends for liability insurance. Amortization of policy acquisition costs increased $31,269 or 8% for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to the 23% increase in earned premiums. General and administrative expenses decreased $40,854 or 12% for the three months ended June 30, 2004 compared to the same period in 2003 primarily due to a decrease in depreciation expense. THREE MONTHS ENDED JUNE 30 -------------------------- ACMAT CONTRACTING: 2004 2003 -------- -------- Operating Earnings $ 62,775 $190,626 -------- -------- Operating earnings for the ACMAT Contracting segment decreased $127,851 or 67% for the three months ended June 30, 2004 compared to the same period in 2003. ACMAT Contracting revenues for the three months ended June 30, 2004 were as follows: Three months ended June 30 -------------------------- 2004 2003 ---------- ---------- Contract revenues $2,933,947 286,820 Investment income, net 3,240 1,818 Inter-segment revenue: Rental income 248,247 232,040 Underwriting services, agency commissions and funds administration services 626,818 718,971 Other income 119,298 258,161 ---------- ---------- $3,931,550 1,497,810 ========== ========== Contract revenues increased $2,647,127 or 923% for the three months ended June 30, 2004 compared to the same period a year ago due primarily to the timing of four large projects that were started in late 2003. Contract revenue depends greatly on the successful securement of contracts bid and execution. The backlog at June 30, 2004 was $6,500,000 compared to $9,680,000 at December 31, 2003. Inter-segment revenues consists primarily of rental income and underwriting services, agency commissions and funds administration services. Underwriting services fees and agency commissions decreased $92,153 or 13% for the three months ended June 30, 2004 compared to the same period a year ago primarily due to the decrease in Funds Administration fees. Other income consists primarily of rental income and varies depending on the timing of tenants and their leases. Other income decreased $138,863 or 54% for the three months ended June 30, 2004 compared to the same period a year ago due to the absence of a one-time claim administration fee charged to ACSTA bonding customer. ACMAT Contracting expenses for the three months ended June 30, 2004 were as follows: 2004 2003 ---------- ---------- Cost of contract revenues $2,895,480 305,244 General and administrative expenses 973,295 1,001,940 ---------- ---------- $3,868,775 1,307,184 ========== ========== Expenses increased $2,561,591 or 196% for the three months ended June 30, 2004 compared to the same period a year ago. Cost of contract revenues increased $2,590,236 or 848% for the three months ended June 30, 2004 compared to the same period a year ago primarily due to the 923% increase in contract revenues for the three months ended June 30, 2004 compared to the same period a year ago due to the timing of four large projects that were awarded in late 2003. The gross profit margin on construction projects was 1.3% in 2004 compared to a gross loss of 6.0% in 2003. Gross margins fluctuate each year based upon the profitability of specific projects. General and administrative expenses decreased $28,645 or 3% for the three months ended June 30, 2004 compared to the same period a year ago primarily due to a decrease in salary expense and depreciation expense. 18 CONSOLIDATED OVERVIEW FOR THE SIX MONTHS ENDED JUNE 30, 2004: Six months ended June 30, ------------------------- 2004 2003 ---------- ---------- Net Earnings $1,204,035 882,177 Basic Earnings Per Share $ .52 $ .38 Diluted Earnings Per Share $ .51 $ .38 Net earnings were $1,204,035 or $.52 per share basic and $.51 per share diluted for the six months ended June 30, 2004 compared to $882,177 or $.38 per share basic and $.38 per share diluted for the same period in 2003. The increase in net earnings for 2004 compared to 2003 is primarily due to an increase in earned premiums, contract revenue and investment income. Net earnings for 2004 reflected the continuing favorable rate environment for the insurance operations in 2003 and 2004. Consolidated revenues for the six months ended June 30, 2004 were as follows: Six months ended June 30, ------------------------- 2004 2003 ----------- ----------- Contract revenues $ 5,258,474 1,011,113 Earned premium 6,927,094 5,377,996 Investment income 1,518,317 1,255,238 Net realized capital gains 20,651 248,771 Other income 363,561 464,253 ----------- ----------- Consolidated revenues $14,088,097 8,357,371 =========== =========== Total consolidated revenues increased $5,730,726 or 69% for the six months ended June 30, 2004 compared to the same period in 2003. Contract revenues increased $4,247,361 or 420% for the six months ended June 30, 2004 compared to the same period in 2003 due primarily to the timing of four large projects that were awarded in late 2003. Contract revenue depends greatly on the successful securement of contracts bid and execution. The backlog at June 30, 2004 was $6,500,000 compared to $9,680,000 at December 31, 2003. Earned premiums increased $1,549,098 or 29% for the six months ended June 30, 2004 compared to the same period in 2003 due to a 24% increase in net written premiums in ACSTAR Bonding primarily due to a growth in new business and strong customer retention offset by a 26% decrease in 2004 net written premiums in United Coastal liability insurance. Net written premiums for United Coastal liability insurance business for the six months ended June 30, 2004 compared to the same period in 2003 decreased by 26% due to the non-renewal by several insureds with large premium policies in 2004. Investment income increased $263,079 or 21% for the six months ended June 30, 2004 compared to the same period in 2003 due primarily to higher average invested assets resulting from strong cash flows from operations. Net realized capital gains were $20,651 for the six months ended June 30, 2004 compared to $248,771 for the same period in 2003. During 2003, the Company sold most of its tax-exempt investments in order to accelerate the use of an alternative minimum tax credit carryforward generated with the recognition of net life insurance proceeds in 2002 that were exempt for income tax purposes. Other income decreased $100,692 or 22% for the six months ended June 30, 2004 compared to the same period in 2003. Other revenues consist primarily of rental income and funds administration fees charged to bonding customers. 19 Consolidated expenses for the six months ended June 30, 2004 were as follows: SIX MONTHS ENDED JUNE 30, ------------------------- 2004 2003 ----------- ----------- Cost of contract revenues $ 5,205,496 943,629 Losses and loss adjustment expenses 2,789,432 1,863,319 Amortization of policy acquisition costs 1,266,116 1,024,696 General and Administrative expenses 2,490,247 2,617,290 Interest expense 458,708 554,429 ----------- ----------- $12,209,999 7,003,363 =========== =========== Consolidated expenses increased $5,206,636 or 74% for the six months ended June 30, 2004 compared to the same period in 2003. Cost of contract revenues increased $4,261,867 or 452% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to the 420% increase in contract revenues in 2004 due to the timing of four large projects that were awarded later in 2003. The gross profit margin on construction projects was 1.0% in 2004 compared to a gross loss of 7.2% in 2003. Gross margins fluctuate each year based upon the profitability of specific projects. Losses and loss adjustment expenses increased $926,113 or 50% for the six month ended June 30, 2004 compared to the same period in 2003 primarily due to the 29% increase in earned premiums and an increase in current year loss trends for liability insurance. Amortization of policy acquisition costs increased $241,420 or 24% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to the increase in earned premiums offset in part by a decrease in the average commission rate. General and administrative expenses decreased $127,043 or 5% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to a decrease in salary expense and depreciation expense. Interest expense decreased $95,721 or 17% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to the decrease in long-term debt. The Company's effective tax rate was 35.9% and 34.8% for the six months ended June 30 2004 and 2003, respectively. The 2004 increase in the effective tax rate principally reflects the elimination of tax-exempt securities during the first quarter of 2003. Results of Operations by Segment For the Six Months Ended June 30, 2004: Six Months Ended June 30, ---------------------------- ACSTAR BONDING: 2004 2003 ------------ ------------ Operating Earnings $ 1,381,511 $ 1,073,820 ------------ ------------ GAAP Combined Ratio 79.0% 86.0% ------------ ------------ Operating earnings for the ACSTAR Bonding segment increased $307,691 or 29% for the six months ended June 30, 2004 compared to the same period in 2003. The operating earnings in 2004 benefited from an increase in earned premiums, investment income and a 7.0 point improvement in the GAAP combined ratio for the six months ended June 30, 2004 compared to the same period in 2003. The improvement in the 2004 combined ratio results primarily from the increase in earned premiums. Operating earnings for the six months ended June 30, 2004 also included realized capital gains of $20,651 compared to $202,794 for the same period in 2003. ACSTAR Bonding revenues for the six months ended June 30, 2004 were as follows: Six Months ended June 30, -------------------------- 2004 2003 ----------- ----------- Earned premium $ 3,370,604 2,878,796 Investment income 724,494 572,326 Net realized capital gains 20,651 202,794 Other income (expense) (73,126) (105,239) ----------- ----------- $ 4,042,623 3,548,677 =========== =========== 20 Revenues increased $493,946 or 14% for the six months ended June 30, 2004 compared to the same period in 2003. Earned premiums increased $491,808 or 17% for the six months ended June 30, 2004 compared to the same period in 2003 due to a 24% increase in net written premiums primarily due to a growth in new business and strong customer retention. ACSTAR continues to experience an increase in volume from an increase in business opportunities that meet ACSTAR's underwriting requirements. Investment income increased $152,168 or 27% for the six months ended June 30, 2004 compared to the same period in 2003 as a result of higher average invested assets resulting from strong cash flows from operations. The average invested assets increased 37% to $74.3 million for the six months ended June 30, 2004 compared to the same period in 2003. The increase in investment income was offset by a decrease in investment yields to 1.95% in 2004 from 2.11% in 2003. Net realized capital gains were $20,651 for the six months ended June 30, 2004 compared to $202,794 for the same period in 2003. During 2003, the Company sold most of its tax-exempt investments in order to accelerate the use of an alternative minimum tax credit carryforward generated with the recognition of net life insurance proceeds in 2002 that were exempt for income tax purposes. The unrealized losses on the debt securities as of June 30, 2004 are temporary. Those losses are generated by the increase in interest rates from the time these securities were acquired, therefore there are no other than temporary impairments for the six months ended June 30, 2004. Other income (expense) relates primarily to fees related to funds administration services. Funds administration fees charged to bonding customers for administering payments to subcontractors and vendors fluctuates, depending on the terms and conditions offered and accepted for the bonding programs each year. ACSTAR Bonding expenses for the six months ended June 30, 2004 compared to the same period in 2003 were as follows: Six Months ended June 30, ------------------------- 2004 2003 ---------- ---------- Losses and loss adjustment expenses $1,011,187 863,639 Amortization of policy acquisition costs 1,035,778 996,905 General and administrative expenses 614,147 614,313 ---------- ---------- $2,661,112 2,474,857 ========== ========== ACSTAR Bonding expenses increased $186,255 or 8% for the six months ended June 30, 2004 compared to the same period in 2003. Losses and loss adjustment expenses increased $147,548 or 17% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to the increase in earned premiums from higher business volume. Amortization of policy acquisition costs increased $38,873 or 4% for the six months ended June 30, 2004 compared to the same period in 2003. General and administrative expenses decreased $166 for the six months ended June 30, 2004 compared to the same period in 2003. UNITED COASTAL LIABILITY INSURANCE: Six Months ended June 30, ---------------------------- 2004 2003 ------------ ------------ Operating Earnings $ 1,042,778 $ 892,301 ------------ ------------ GAAP Combined Ratio 89.8% 90.5% ------------ ------------ Operating earnings for the United Coastal Liability Insurance segment increased $150,477 or 17% for the six months ended June 30, 2004 compared to the same period in 2003. The operating earnings in 2004 benefited from a 42% increase in earned premiums offset in part by an increase in current year loss trends. United Coastal Liability Insurance revenues for the six months ended June 30, 2004 compared to the same period in 2003 were as follows: Six Months ended June 30, ------------------------- 2004 2003 ---------- ---------- Earned premium $3,556,490 2,499,200 Investment income 665,752 591,923 Net realized capital gains -- 45,977 Other income 12,837 17,283 ---------- ---------- $4,235,079 3,154,383 ========== ========== 21 Revenues increased $1,080,696 or 34% for the six months ended June 30, 2004 compared to the same period in 2003. Earned premiums increased $1,057,290 or 42% in 2004 for the six months ended June 30, 2004 compared to the same period in 2003 due to a 73% increase in net written premiums in 2003 offset in part by a 26% decrease in written premiums in the first quarter of 2004 due to the non-renewal by several insureds with large premium policies in 2004. Investment income increased $73,829 or 12% for the six months ended June 30, 2004 compared to the same period in 2003 as a result of an increase in investment yield offset in part by lower average invested assets resulting from dividends to the parent company in November 2003. Investment yields increased to 3.91% for the six months ended June 30, 2004 from 3.29% for the same period a year ago. United Coastal Liability Insurance expenses for the six months ended June 30, 2004 were as follows: Six Months ended June 30, ------------------------- 2004 2003 ---------- ---------- Losses and loss adjustment expenses $1,778,245 999,680 Amortization of policy acquisition costs 877,365 693,733 General and administrative expenses 536,691 568,669 ---------- ---------- $3,192,301 2,262,082 ========== ========== Expenses increased $930,219 or 41% for the six months ended June 30, 2004 compared to the same period in 2003. Losses and loss adjustment expenses increased $778,565 or 78% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to the 42% increase in earned premiums and an increase in current year loss trends for liability insurance. Amortization of policy acquisition costs increased $183,632 or 26% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to the 42% increase in earned premiums. General and administrative expenses decreased $31,978 or 6% for the six months ended June 30, 2004 compared to the same period in 2003 primarily due to a decrease in depreciation expense. SIX MONTHS ENDED JUNE 30 ------------------------ ACMAT CONTRACTING: 2004 2003 --------- --------- Operating Earnings (Loss) $ (87,483) $ (57,684) --------- --------- Operating losses for the ACMAT Contracting segment increased $29,799 or 52% for the six months ended June 30, 2004 compared to the same period in 2003. ACMAT Contracting revenues for the six months ended June 30, 2004 were as follows: Six Months ended June 30 ------------------------ 2004 2003 ---------- ---------- Contract revenues $5,258,474 1,011,113 Investment income, net 6,956 7,232 Inter-segment revenue: Rental income 426,949 410,742 Underwriting services, agency commissions and funds administration services 1,134,101 1,133,997 Other income 218,084 346,877 ---------- ---------- $7,061,214 2,909,961 ========== ========== Contract revenues increased $4,247,361 or 420% for the six months ended June 30, 2004 compared to the same period a year ago due primarily to the timing of four large projects that were awarded in late 2003. Contract revenue depends greatly on the successful securement of contracts bid and execution. The backlog at June 30, 2004 was $6,500,000 compared to $9,680,000 at December 31, 2003. Inter-segment revenues consists primarily of rental income and underwriting services fees, agency commissions and funds administration services. Underwriting services fees, agency commissions and funds administration services increased $104 for the six months ended June 30, 2004 compared to the same period a year ago. Other income consists primarily of rental income and varies depending on the timing of tenants and their leases. Other income decreased $128,359 or 23% for the six months ended June 30, 2004 compared to the same period a year ago due to the absence of a one-time claim administration fee charged to ACSTAR bonding customers. 22 ACMAT Contracting expenses for the six months ended June 30, 2004 were as follows: 2004 2003 ---------- ---------- Cost of contract revenues $5,205,496 943,629 General and administrative expenses 1,943,201 2,024,016 ---------- ---------- $7,148,697 2,967,645 ========== ========== Expenses increased $4,181,052 or 141% for the six months ended June 30, 2004 compared to the same period a year ago. Cost of contract revenues increased $4,261,867 or 452% for the six months ended June 30, 2004 compared to the same period a year ago primarily due to the 420% increase in contract revenues for the three months ended June 30, 2004 compared to the same period a year ago due to the timing of four large projects that were started in late 2003. The gross profit margin on construction projects was 0.2% in 2004 compared to 0.7% in 2003. The gross profit of the four current projects was offset by costs associated with closing out older projects. Gross margins fluctuate each year based upon the profitability of specific projects. General and administrative expenses decreased $80,815 or 4% for the six months ended June 30, 2004 compared to the same period a year ago primarily due to a decrease in salary expense and depreciation expense. CRITICAL ACCOUNTING ESTIMATES The Company considers its most significant accounting estimates to be those applied to reserves for losses and loss adjustment expenses and revenue recognition on construction projects using the percentage of completion method. Reserves for losses and loss adjustment expenses were $22,392,221 at June 30, 2004. The Company maintains reserves to cover estimated ultimate unpaid liability for losses and loss adjustment expenses with respect to both reported and incurred but not reported claims for insured risks incurred as of the end of each accounting period. 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. This is a critical accounting policy for the insurance operations. Management believes that the reserves for losses and loss adjustment expenses at June 30, 2004 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. Revenue on construction contracts is recorded using the percentage of completion method. Under this method revenues with respect to individual contracts are recognized in the proportion that costs incurred to date relate to total estimated costs. Revenues and cost estimates are subject to revision during the terms of the contracts, and any required adjustments are made in the periods in which the revisions become known. Provisions are made, where applicable, for the entire amount of anticipated future losses on contracts in progress. Construction claims are recorded as revenue at the time of settlement and profit incentives and change orders are included in revenues when their realization is reasonably assured. General and administrative expenses are not allocated to contracts. This is a critical accounting policy for the ACMAT construction segment. 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. 23 ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from operating activities primarily because of interest expense related to 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, 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 relied on dividends from its insurance subsidiaries to repay debt. The Company had net cash flow inflows from operations of $18,426,789 and $10,338,203 for the six-month period ended June 30, 2004 and 2003, respectively. The cash flow from operations is due primarily to the increase in cash collateral. The Company's cash flow was used to repay long-term debt and repurchase stock and purchase investments. Net cash used for investing activities in the first six-months of 2004 amounted to $18,842,730 compared to $17,863,243 for the same period in 2003. Purchases of investments are made based upon excess cash available after the payment of losses and loss adjustment expenses and other 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. 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 re-acquisition of shares are restricted. The Company was in compliance with the covenants at June 30, 2004. 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, 2004. During the six-month period ended June 30, 2004, the Company purchased, in the open market and privately negotiated transactions, 4,026 shares of its Common Stock at an average price of $11.58 per share. During the six-month period ended June 30, 2004, the Company also purchased, in the open market and privately negotiated transactions, 53,727 shares of its Class A Stock at an average price of $13.13 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 $3,920,000 in 2004. 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 December 31, 2003 was above the level which might require regulatory action. CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS: Contractual obligations at June 30, 2004 include the following:

The Company also has cash collateral of $52,257,201 at June 30, 2004, which it would be required to return at the end of expiration of applicable bond period subject to any claims. FORWARD-LOOKING STATEMENT DISCLOSURE AND CERTAIN RISKS This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical information or statements of current condition. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", or "estimates", or variations of such words, and similar expressions are intended to identify forward-looking statements. In light of the risks and uncertainties inherent in future projections, many of which are beyond our control, actual results could differ materially from those in forward-looking statements. These statements should not be regarded as a 24 representation that anticipated events will occur or that expected objectives will be achieved. Risks and uncertainties include, but are not limited to, the following: o Changes in the demand for, pricing of, or supply of our products; o Performance of the Company's investment portfolios which could be adversely impacted by adverse developments in the financial markets, interest rates and rates of inflation; o Additional statement of earnings charges if our loss reserves are insufficient; o The possibility that claims cost trends that we anticipate in our businesses may not develop as we expect; o The possibility of downgrades in our ratings significantly adversely affecting us, including, but not limited to, reducing the number of insurance policies we write, generally, or causing clients who require an insurer with a certain rating level to use higher-rated insurers; o The risk that our subsidiaries may be unable to pay dividends to us in sufficient amounts to enable us to meet our obligations; o The cyclicality of the property-liability insurance industry causing fluctuations in our results. o The adverse developments in the cost and availability of reinsurance; o The adverse developments in the ability to collect from reinsurers. 25 Part II - Other Information Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities e. The following table provides information about purchases by the Company during the six months ended June 30, 2004 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act. ISSUER PURCHASE OF EQUITY SECURITIES

(1) During the six-months ended June 30, 2004, the Company purchased, in the open market and privately negotiated transactions, 4,026 shares of its Common Stock at an average price of $11.58 per share. In addition, the Company purchased, in the open market and privately negotiated transactions, 53,727 shares of its Class A Stock at an average price of $13.13 per share during the six-month period ended June 30, 2004. (2) The Company does not have any stock repurchase plans or programs. Shares were purchased in the open market and privately negotiated transactions and as a result disclosure requirements in columns (c) and (d) are not applicable (N/A). 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 24, 2004. b. Directors elected at the meeting: Votes Votes Brokers For Against Non-Votes Henry Nozko III 686,761 11,509 -- Henry Nozko, Jr 686,781 11,489 -- Victoria Nozko 686,541 11,729 -- John Creasy 686,581 11,689 -- Arthur Moore 697,450 810 -- Andrew Sullivan, Jr 697,463 807 -- c. Other matters voted upon: Brokers For Against Abstain Non-Votes 1. Appointment of Independent Auditors 697,561 610 316 -- 2. Approval of stock options 579,363 82,604 316 -- 26 Item 5 - Controls and Procedures The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. Within the 90-day period prior to the date of this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Principal Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to ACMAT Corporation (including its consolidated subsidiaries) required to be included in this quarterly report on Form 10-Q. There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date that we carried out our evaluation. Item 6 - Exhibits and Reports on Form 8-K a. Exhibits: 31.1 Certification of Chief Executive Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 b. Report on Form 8-K - None 27 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: August 13, 2004 /S/ Henry W. Nozko, Jr. ----------------------------------------- Henry W. Nozko, Jr., President, Chairman, Chief Operating Officer, and Treasurer Date: August 13, 2004 /S/ Michael P. Cifone ----------------------------------------- Michael P. Cifone, Senior Vice President, Chief Financial Officer (Principal Financial & Accounting Officer) 28

ACMAT CORP 10-Q