Note: No cash dividends were paid during any of the periods above.
Net investment income was $6,138,105 in 1998 compared to $6,504,716 in 1997, representing effective yields of 4.86% and 4.65%, respectively. The decrease in investment income in 1998 over 1997 was due primarily to a decrease in total invested assets. Invested assets, including cash and cash equivalents, were $116,198,344 and $137,381,669 at December 31, 1998 and 1997, respectively. The decrease in invested assets is attributable to the net cash flow used to purchase stock, repay debt, return cash collateral and pay claims offset by net cash flow generated from written premiums and the reinvestment of investment income.
Cost of contract revenues were $11,635,879 in 1998 compared to $9,331,103 in 1997. The increase in cost of contract revenues during 1998 compared to 1997 is consistent with the increase in contract revenues. The gross profit margin on construction contracts was 4.2% and 7.2% in 1998 and 1997, respectively. Gross margins fluctuate each year based upon the profitability of specific projects. The decrease in the 1998 profit margin was due primarily to losses on two projects which were completed in 1998. Cost of contract revenues vary from period to period as a function of contract revenues (See Contract Revenues).
Selling, general and administrative expenses were $5,355,183 in 1998 compared to $5,767,808 in 1997. The decrease in selling, general and administrative expenses from 1998 to 1997 is due primarily to a decrease in bad debt expense.
Earned premiums in 1997 were $15,045,844 compared to $19,899,936 in 1996. Net written premiums were $12,680,197 in 1997 compared to $18,041,488 in 1996. The decrease in earned premiums in 1997 reflects the 30% decrease in 1997 net written premiums over 1996 net written premiums primarily due to a continuing soft insurance market place and the Company's strategy to avoid unfavorable pricing in the Company's casualty operations. Variances in net written premiums have historically occurred due to the fluctuations in size, number and timing of bonds and policies bound by the Company.
Contract revenues were $10,056,322 in 1997 compared to $9,415,734 in 1996. The Company's construction backlog at December 31, 1997 was approximately $4,800,000 compared to $8,700,000 at December 31, 1996.
Net investment income was $6,504,716 in 1997 compared to $6,535,572 in 1996, representing effective yields of 4.65% and 4.69%, respectively. Invested assets, including cash and cash equivalents, were $137,381,669 and $142,677,985 at December 31, 1997 and 1996, respectively. The decrease in invested assets was attributable to the net cash flow used to purchase stock and repay debt offset in part by written premiums, cash collateral and the reinvestment of investment income offset by the purchase of stock and the repayment of debt.
Cost of contract revenues were $9,331,103 in 1997 compared to $8,396,344 in 1996. The increase in cost of contract revenues during 1997 compared to 1996 reflects the increase in contract revenues. Costs of contract revenues vary from period to period as a function of contract revenues (See Contract Revenues).
Amortization of policy acquisition costs was $2,802,993 in 1997 as compared to $3,617,308 in 1996. Policy acquisition costs, primarily commissions, are deferred and amortized over the policy or bond term.
Management believes that the reserves for losses and loss adjustment expenses at December 31, 1998 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.
In 1999, the Company anticipates that internally generated funds and short-term borrowings will be utilized for repayment of long-term debt. Principal repayments on long-term debt is scheduled to be approximately $1,560,000 in 1999.
The Company's Year 2000 review includes an assessment of "embedded chip" systems associated with its end-user computing hardware and software (including personal computers, spreadsheets, word processing and other personal and work group applications), its corporate facilities (such as security systems, elevators and climate control systems) and its office equipment (including telephones, fax machines and similar equipment). The Company is continuing to identify potential problems associated with its embedded chip systems and to develop corrective plans to avoid or mitigate such potential problems. Where appropriate, the Company intends to upgrade or replace non-compliant embedded chip systems to avoid potential Year 2000 problems. The Company anticipates that the deployment of corrected systems for its "embedded chip" technology will be completed during the second quarter of 1999.
The Company is reviewing certain suppliers, business partners, customers and other parties to determine the extent to which the Company may be vulnerable to the failure of these parties to address and correct their own Year 2000 problems. However, there can be no guarantee that the systems of other companies that support the Company's operations will be timely converted or that a failure by these companies to correct their Year 2000 problems will not have a material adverse effect on the Company.
The dates on which the Company believes that the various components of its Year 2000 review will be completed are based on management's best estimates, which, in turn, are based upon numerous assumptions regarding future events, including the continued availability of certain resources, third-party compliance plans and other factors. As a result, there can be no guarantee that the Company's schedule of completion dates will be realized or that there will not be increased costs associated with the implementation of the Year 2000 review. Due to the general uncertainty inherent in the Year 2000 issue, resulting in part from the uncertainty of the Year 2000 readiness of third-parties, the Company cannot assure its ability to timely and cost-effectively resolve problems associated with the Year 2000 issue that may effect its operations and business or expose it to third-party liability.
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, 1998 was significantly above the level which might require regulatory action.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACMAT Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Consolidated Statements of Earnings Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996
The consolidated financial statements include ACMAT Corporation ("ACMAT" or the "Company"), its subsidiaries, AMINS, Inc., Geremia Electric Co., ACMAT of Texas, Inc., ACSTAR Holdings, Inc. ("ACSTAR Holdings") and ACSTAR Holdings' wholly-owned subsidiary, ACSTAR Insurance Company ("ACSTAR"); and United Coastal Insurance Company ("United Coastal Insurance").
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP"). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain re- classifications have been made to the 1997 and 1996 financial statements to conform to the classifications in 1998.
ACMAT operates as an insurance holding company and as an interior contractor; designing, supplying, renovating and installing interiors for commercial, industrial and institutional buildings, including asbestos abatement contracting.
During 1998, 1997 and 1996, customers who individually accounted for more than 10% of consolidated construction contracting revenue are as follows; in 1998 - three customers provided 52%, 19% and 17%, respectively. in 1997 - four customers provided 28%, 21%, 19% and 11%, respectively; in 1996 - four customers provided 18%, 15%, 14% and 10%, respectively. No customers accounted for more than 10% of the consolidated insurance revenues in any year.
The limited partnership investment represented an 11.2% participation in a joint venture, Grandview Partners, L.P., which invested primarily in small capitalization stocks traded on national market exchanges. The Company sold the Limited Partnership on December 31, 1998. The limited partnership investment was carried on the equity method of accounting in which the Company's share of the net income of the limited partnership was recognized as income in the Company's income statement and added to the carrying value of the investment and distributions received from the limited partnership are treated as a reduction of the carrying value of the investment.
In the normal course of business, the Company assumes and cedes reinsurance with other companies. Reinsurance ceded primarily represents excess of loss reinsurance with companies with "A" ratings from the insurance rating organization, A.M. Best Company, Inc. Such reinsurance is applicable on a per policy basis generally to those policies with per occurrence limits in excess of $2 million up to $10 million for liability and for individual surety bonds, the Company reinsures through various layered excess of loss agreements up to $10 million on a $15.6 million bond. Reinsurance ceded also includes a facultative reinsurance treaty which is applicable to excess policies written over a primary policy issued by the Company for specific projects. Reinsurance is ceded to limit losses from large exposures and to permit recovery of a portion of direct losses; however, such a transfer does not relieve the originating insurer of its liability. The Company participates in assumed quota share reinsurance arrangements covering marine and property catastrophe risks with one of its excess of loss reinsurers.
Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $662,363 and $912,039 at December 31, 1998 and 1997, respectively, are included in other assets. All reinsurance contracts maintained by the Company qualify as short-duration prospective contracts. A summary of reinsurance premiums written and earned is provided below:
There were no reinsurance recoveries on ceded paid losses and loss adjustment expenses for the years ended December 31, 1998 and 1997. Reinsurance recoveries on ceded paid losses and loss adjustment expenses totaled approximately $98,000 for the year ended December 31, 1996. Ceded incurred losses and loss adjustment expenses totaled $180,553, $364,015 and $421,408 for the years ended December 31, 1998, 1997 and 1996, respectively.
Insurance premiums are recognized over the coverage period. Unearned premiums represent the portion of premiums written that is applicable to the unexpired terms of policies in force, calculated on a prorata basis.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This statement stipulates that comprehensive income reflect the change in equity of an enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income thus represents the sum of net income and other changes in equity from non-owner sources. The adoption of SFAS No. 130 resulted in the Company reporting unrealized gains and losses on investments as other comprehensive income.
The following table summarizes reclassification adjustments for other comprehensive income (loss) and the related tax effects for the years ended December 31, 1998, 1997 and 1996:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, earlier application is encouraged, but it is permitted only as of the beginning of any fiscal quarter that begins after issuance of this statement. This Statement should not be applied retroactively to financial statements of prior periods. The Company has not completed its evaluation of the effect SFAS No. 133 will have on the Company's results of operations or financial condition.
Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments", was issued in December 1997 and provides guidance for determining when an entity should recognize a liability for guaranty-fund and other insurance-related assessments, how to measure that liability, and when an asset may be recognized for the recovery of such assessments through premium tax offsets or policy surcharges. SOP 97-3 is effective for financial statements for fiscal years beginning after December 15, 1998, and the effect of initial adoption is to be reported as a cumulative catch-up adjustment. Restatement of previously issued financial statements is not allowed. The adoption of this SOP is not expected to have a material effect on the Company's results of operations or financial condition.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued in March 1998 and provides guidance on accounting for the costs of computer software developed or obtained for internal use and for determining when specific costs should be capitalized and when they should be expensed. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. Costs incurred prior to initial application of this SOP, whether capitalized or not, should not be adjusted to the amounts that would have been capitalized had this SOP been in effect when those costs were incurred. The adoption of this SOP is not expected to have a material effect on the Company's result of operations or financial condition.
Effective September 16, 1996, the Company completed the merger of United Coasts Corporation into ACMAT. United Coasts Corporation shareholders received one share of ACMAT Class A stock for each approximately 1.536 shares of United Coasts Corporation stock. As a result of the merger, ACMAT issued approximately 1,100,000 shares of its Class A Stock amounting to a purchase price of approximately $14 million for the 16% minority interest in the insurance holding company subsidiary. As a result, United Coastal Insurance, formerly a subsidiary of United Coasts Corporation, became a wholly owned subsidiary of ACMAT and its affiliates. The merger was a non-cash transaction that is not reflected in the Consolidated Statements of Cash Flow.
On December 31, 1998, the Company's insurance subsidiaries had securities with an aggregate book value of approximately $10 million on deposit with various state regulatory authorities.
Gross gains of $229,063, $261,005 and $237,726 and gross losses of $3,362, $2,687 and $27,808 were realized on fixed maturity sales for the years ended December 31, 1998, 1997 and 1996, respectively. Gross gains of $44,653, $24,349 and $48,568 were realized on sale of equity securities for the years ended December 31, 1998, 1997 and 1996, respectively. There were no losses realized on equity security sales for the years ended December 31, 1998, 1997 and 1996.
A summary of receivables at December 31, 1998 and 1997 follows:
The decrease of incurred losses and loss adjustment expenses of prior years represents a reallocation of reserves among accident years. Management believes that the reserves for losses and loss adjustment expenses are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses, including losses incurred but not reported.
A summary of long-term debt at December 31, 1998 and 1997 follows:
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of Class A Stock which AIG Life Insurance Company (366,663 shares) and American International Life Assurance Company of New York, (733,333) had acquired over the last three years through conversion options (See Note 13). The shares were purchased at an average price of $14.70 per share, for a total purchase price of $16,174,942. The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory notes totaling $12,000,000. The promissory notes are with AIG Life Insurance Company and American International Life Assurance Company of New York and are payable over eight years with annual payments of $1,500,000 which commenced on January 31, 1998, with interest at prime rate (7-3/4%). The Company voluntarily prepaid the principal payment of $1,500,000 due January 31, 1999 on December 31, 1998. The interest rate is equal to the prime rate, however, the interest rate shall not exceed 9-1/4% and it shall not be less than 7-1/4%. The purchase of stock in 1997 with the $12,000,000 promissory notes is a non-cash transaction that is not reflected in the Consolidated Statement of Cash Flows.
The terms of the note agreements with AIG Life Insurance Company and American International Life Assurance Company of New York contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and a minimum tangible net worth of $12,000,000. ACMAT may also require its insurance subsidiaries to pay dividends to the extent of funds legally available therefore, in order to enable ACMAT to have funds to pay on a timely basis all amounts due with respect to the notes. The Company is in compliance with all of these covenants at December 31, 1998, except for the ratio of Earnings Before Interest expense, Taxes, Depreciation and Amortization to Fixed Charges. The Company has received a waiver for this covenant
On July 1, 1992, the Company issued a 30-year unsecured $16,500,000, 11.5% subordinated debenture to the Sheet Metal Workers' National Pension Fund ("Fund") to purchase 3,000,000 shares of United Coasts Corporation's outstanding common stock held by the Fund. Annual principal payments of $1,650,000 per year for ten years are due beginning on July 1, 2012. The note is convertible into ACMAT Class A stock at $11 per share. The conversion price of $11 per share would be adjusted at the time of conversion to reflect any stock dividends, recapitalizations or additional stock issuance. The Company can prepay the note and the Fund has the option to accept the prepayment or convert the note to stock. The Company made a voluntary principal payment of $1,100,000 on July 31, 1998. At December 31, 1998, the Company had reserved 1,400,000 shares of Class A Stock for issuance pursuant to such conversion option.
Principal payments on long-term debt are $1,559,871, $3,100,052, $3,143,108, $3,189,256 and $3,238,716 the years 1999 through 2003, respectively. Interest expense paid in 1998, 1997 and 1996 amounted to $5,121,093, $4,630,502 and $4,980,833, respectively.
A valuation allowance is provided for the state net operating loss carryforward which is not considered realizable. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not the Company will realize the benefits of its deductible temporary differences, net of the valuation allowance, at December 31, 1998.
During 1998, 1997 and 1996, ACMAT repurchased, in open market and privately negotiated transactions 4,769, 3,400 and 42,207 respectively, shares of its Common Stock at an average price of $20.65, $20.44 and $18.81 per share, respectively. The Company also repurchased during 1998, 1997 and 1996, in open market and privately negotiated transactions 342,366, 1,347,686 and 872,975, respectively, shares of its Class A Stock at an average price of $15.10, $14.98 and $13.18 per share, respectively.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for the options granted in 1996: no dividend yield; expected volatility of 20%; risk free interest rate of 6.7%; and expected life of ten years for the options. The weighted average fair value of options granted in 1996 was $5.99 per share.
The Company has, together with many other defendants, been named as a defendant in approximately 190 actions brought in Connecticut state courts by injured or deceased individuals or their representatives based on product liability claims relating to materials containing asbestos. No specific claims for monetary damages are asserted in these actions. Although it is early in the litigation process, the Company does not believe that its exposure in connection with these cases is 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 selling, general and administrative expenses. The adjustments and eliminations required to arrive at consolidated amounts shown above consist principally of the elimination of the intersegment revenues related to the performance of certain services and rental charges. Identifiable assets are those assets that are used by each segment's operations. Foreign revenues are not significant
Income taxes received from subsidiaries during the years ended December 31, 1998, 1997 and 1996 were $2,355,403, $112,995, and $1,990,201, respectively. Interest paid during the years ended December 31, 1998, 1997 and 1996 was $5,173,867 $4,630,502, and $6,099,379, respectively. Interest paid in 1998 and 1996 included $52,774 and $1,118,546, respectively, paid to subsidiaries for intercompany loans.
On February 5, 1997, ACMAT Corporation purchased the 1,099,996 shares of Class A Stock which AIG Life Insurance Company (366,663 shares) and American International Life Assurance Company of New York, (733,333) had acquired over the last three years through conversion options. The shares were purchased at an average price of $14.70 per share for a total purchase price of $16,174,942. The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory notes totaling $12,000,000. The purchase of stock with the $12,000,000 promissory notes is a non-cash transaction that is not reflected in the Consolidated Statement of Cash Flows.
See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 1999 to 2003 and thereafter.
See Note 15 to the Consolidated Financial Statements in the Annual Report for a description of the commitments and contingencies.
As of and for the years ended December 31, 1998, 1997 and 1996