The Company and its subsidiaries occupy a 7 story office building located at 233 Main Street, in New Britain, Connecticut. ACMAT leases approximately 50% of the building to unaffiliated tenants. The office building is suitable and adequate for ACMAT's current and future requirements.
Investment income was $5,389,732 in 1999, $6,138,105 in 1998 and $6,504,716 in 1997. The decrease in investment income was primarily related to a continued decrease in invested assets as the Company continues to reduce long-term debt. Net realized capital gains were $252,190 in 1999, $266,169 in 1998 and $282,667 in 1997.
Losses and loss adjustment expenses were $1,672,887 in 1999, $2,186,728 in 1998 and $4,337,252 in 1997. The decreases in losses and loss adjustment expenses are attributable to the decline in earned premiums and the release of surety loss reserves on older years that are no longer needed. Amortization of policy acquisition costs were $2,223,918 in 1999, $2,112,857 in 1998 and $2,802,993 in 1997. The increase in amortization of policy acquisition costs is primarily attributable to the increase in commissions paid to agents.
Interest expense was $3,738,740 in 1999, $4,621,401 in 1998 and $5,116,414 in 1997. The decrease in interest expense is due to the decrease in long-term debt. During 1999 and 1998, the Company repaid and refinanced long-term debt.
Operating earnings for the ACSTAR Bonding segment were $2,968,882 in 1999, $2,314,485 in 1998 and $2,305,342 in 1997. The increase in 1999 operating earnings compared to 1998 operating earnings is due primarily to an increase in earned premiums and investment income offset in part by an increase in the amortization of policy acquisition costs.
Operating earnings for the United Coastal Liability Insurance segment were $4,578,802 in 1999, $5,176,870 in 1998 and $8,239,017 in 1997. The decrease in 1999 operating earnings compared to 1998 operating earnings is
due primarily to a decrease in earned premiums and investment income. The decrease in 1998 operating earnings compared to 1997 is due to a decrease in earned premiums.
Losses and loss adjustment expenses were $1,434,367 in 1999, $1,955,816 in 1998 and $2,759,486 in 1997. The decrease in losses and loss adjustment expenses are attributable to the decrease in earned premiums. Amortization of policy acquisition costs were $1,528,179 in 1999, $1,852,218 in 1998 and $2,564,959 in 1997. The decrease in amortization of policy acquisition costs is primarily attributable to the decrease in earned premiums.
General and administrative expenses were $987,931 in 1999, $1,330,390 in 1998 and $1,505,741 in 1997. The decrease in general and administrative expenses is due primarily to the overall decrease in business activities.
Revenues for the ACMAT Contracting segment were $13,154,753 in 1999, $15,801,541 in 1998 and $14,218,660 in 1997. The 1999 decrease in revenue reflects a 24% decrease in contract revenues compared to 1998. The increase in 1998 revenue compared to the 1997 revenue is due primarily to a 21% increase in contract revenues in 1998. Contract revenue is difficult to predict and depends greatly on the successful securement of contracts bid.
Operating earnings for the ACMAT Contracting segment were $907,228 in 1999, $501,712 in 1998 and $1,224,579 in 1997. The increase in 1999 operating earnings compared to 1998 operating earnings is due primarily to improved gross margins on the 1999 projects. The decrease in 1998 operating earnings compared to 1997 operating earnings is due to lower gross margins on 1998 projects.
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 ("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 December 31, 1999.
The Company's principal source of cash for repayment of long-term debt is dividends from its two insurance companies. During 1999, ACMAT received $14,000,000 as dividends from its subsidiaries. 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.
For 2000, the amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic state insurance departments, is limited to approximately $9,775,000.
In 2000, 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 $1,600,000 in 2000.
Consolidated Statements of Earnings for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements - December 31, 1999, 1998 and
We have audited the consolidated financial statements of ACMAT Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 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 Stockholders' Equity December 31, 1999, 1998 and 1997
During 1999, 1998 and 1997, customers who individually accounted for more than 10% of consolidated construction contracting revenue are as follows; in 1999 - two customers provided 51% and 24%, respectively. In 1998 - three customers provided 52%, 19% and 17%, respectively. In 1997 - four customers provided 28%, 21%, 19% and 11%, respectively. No customers accounted for more than 10% of the consolidated insurance revenues in any year.
Policy acquisition costs, representing commissions and certain underwriting costs, are deferred and amortized on a straight-line basis over the policy term. During the years ended December 31, 1999, 1998 and 1997, deferrable costs capitalized were $1,997,609, $1,584,541 and $1,975,523, respectively. The amortization of deferred policy acquisition costs charged to operations for the years ended December 31, 1999, 1998 and 1997 was $2,223,918, $2,112,857 and $2,802,993, respectively.
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 $14.5 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 $453,588 and $662,363 at December 31, 1999 and 1998, 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:
The following table summarizes reclassification adjustments for other comprehensive income (loss) and the related tax effects for the years ended December 31, 1999, 1998 and 1997:
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 became 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 did not 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 became 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, are not be adjusted to the amounts that would have been capitalized had this SOP been in effect when those costs were incurred and therefore, the adoption of this SOP did not have a material effect on the Company's result of operations or financial condition.
On December 31, 1999, the Company's insurance subsidiaries had securities with an aggregate book value of approximately $9.9 million on deposit with various state regulatory authorities.
The amortized cost and fair value of fixed maturities at December 31, 1999 and 1998, by effective maturity, follows:
Gross gains of $349,413, $229,063 and $261,005 and gross losses of $97,223, $3,362 and $2,687 were realized on fixed maturity sales for the years ended December 31, 1999, 1998 and 1997, respectively. Gross gains of $0, $44,653 and $24,349 were realized on sale of equity securities for the years ended December 31, 1999, 1998 and 1997, respectively. There were no losses realized on equity security sales for the years ended December 31, 1999, 1998 and 1997.
A summary of receivables at December 31, 1999 and 1998 follows:
The balances billed but not paid by customers pursuant to retainage provisions in construction contracts will be due upon completion of the contracts and acceptance by the owner. In management's opinion, the majority of contract retainage is expected to be collected in 2000.
A summary of property and equipment at December 31, 1999 and 1998 follows:
Future minimum rental income to be generated by leasing a portion of the building under non-cancelable operating leases as of December 31, 1999 are estimated to be $651,344 for 2000, $656,144 for 2001, $660,944 for 2002 $581,744 for 2003 and $99,600 for 2004. Rental income earned in 1999, 1998 and 1997 was $688,102, $626,730 and $561,852, respectively.
A summary of intangibles, acquired primarily in connection with purchases of the Company's insurance subsidiaries, at December 31, 1999 and 1998 follows:
The decrease of incurred losses and loss adjustment expenses of prior years represents a release of surety loss reserves on older years that are no longer needed and 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, 1999 and 1998 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 12). 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 (8-1/2%). The Company voluntarily prepaid the installments due January 31 on December 31 in both 1999 and 1998. The Company also made a voluntary prepayment of $3,600,000 on December 31, 1999. 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, 1999.
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, 1999, the Company had reserved 1,400,000 shares of Class A Stock for issuance pursuant to such conversion option.
A valuation allowance is provided for the state net operating loss carryforward and the unrealized loss on investments 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, 1999.
Taxes paid in 1999, 1998 and 1997 were $703,081, $52,227 and $1,790,253, respectively.
The Company participated in various multi-employer defined contribution plans for its union employees. Upon withdrawal from these plans, the Company may be liable for its share of the unfunded vested liabilities of the plans. Such obligations, if any, of the Company are not determinable at December 31, 1999.
During 1997, the Company issued 450,000 shares of Class A Stock at $10 per share pursuant to the conversion options of the Convertible Senior Notes to AIG Life Insurance Company and American International Life Assurance Company of New York, all of which was repurchased by the Company in 1997 (see Note 9). The issuance of stock pursuant to the conversion option of the Convertible Senior Notes is a non-cash transaction that is not reflected in the Consolidated Statement of Cash Flows.
Under applicable insurance regulations, ACMAT's insurance subsidiaries are restricted as to the amount of dividends they may pay, without the prior approval of any insurance department and are limited to approximately $9,775,000 in 2000.
The Company's insurance subsidiaries, United Coastal Insurance and ACSTAR, are domiciled in Arizona and Illinois, respectively. The statutory financial statements of United Coastal Insurance and ACSTAR are prepared in accordance with accounting practices prescribed by the Arizona Department of Insurance and the Illinois Department of Insurance, respectively. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as the state laws, regulations, and general administrative rules. As of December 31, 1999, the Company does not utilize any statutory accounting practices which are not prescribed by insurance regulators that individually or in the aggregate materially affect statutory shareholders' equity.
The NAIC recently completed a process intended to codify statutory accounting practices for certain insurance enterprises. As a result, the NAIC issued a revised statutory Accounting Practices and Procedures Manual - version effective January 1, 2001 (the revised Manual) that will be effective for years beginning January 1, 2001. The States of Illinois and Arizona will require that, effective January 1, 2001, insurance companies domiciled in Illinois and Arizona prepare their statutory basis financial statements in accordance with the revised Manual subject to any deviations prescribed or permitted by the Illinois and Arizona insurance commissioner. The Company has not yet determined the impact that this change will have on the statutory capital and surplus of its insurance subsidiaries.
In accordance with statutory accounting principles, ACMAT's insurance subsidiaries' statutory capital and surplus was $49,130,735 and $55,124,801 at December 31, 1999 and 1998, respectively, and their statutory net income for the years ended December 31, 1999, 1998 and 1997 was $11,231,410, $12,078,378 and $12,383,045, respectively. The primary differences between amounts reported in accordance with GAAP and amounts reported in accordance with statutory accounting principles are excess statutory reserves over statement reserves (Schedule P Liability), carrying value of fixed maturity investments; assets not admitted for statutory purposes such as agents balances over 90 days, furniture and fixtures and certain notes receivable; and deferred acquisition costs and deferred taxes which are recognized for GAAP only.
A summary of the unaudited quarterly results of operations for 1999 and 1998 follows:
Income taxes received from subsidiaries during the years ended December 31, 1999, 1998 and 1997 were $1,157,813, $2,355,403, and $112,995, respectively. Interest paid during the years ended December 31, 1999, 1998 and 1997 was $3,751,313, $5,173,867, and $4,630,502, respectively. Interest paid in 1998 included $52,774 paid to subsidiaries for intercompany loans.
See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of income taxes.
As of and for the years ended December 31, 1999, 1998 and 1997