Realized capital gains from the sale of investments during 1997 were $282,667 compared to realized capital gains of $257,774 in 1996.
Other income was $1,662,586 in 1997 compared to $926,289 in 1996. The increase in other income reflects earnings of $965,845 from the limited partnership investments in 1997.
Interest expense has increased to $5,116,414 in 1997 from $4,946,418 in 1996. The increase in interest expense in 1997 is due primarily to an increase in long-term debt issued to purchase stock offset in part by a decrease in short-term debt.
Earned premiums in 1996 were $19,899,936 compared to $23,492,905 in 1995. Net written premiums were $18,041,488 in 1996 compared to $22,856,791 in 1995. The decrease in earned premiums in 1996 reflects the 21% decrease in 1996 net written premiums over 1995 net written premiums. The Company has written fewer new accounts as a result of what is believed to be an inadequate pricing environment in the market. 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.
Net investment income was $6,535,572 in 1996 compared to $6,062,883 in 1995, representing effective yields of 4.64% and 4.58%, respectively. The increase in investment income in 1996 over 1995 was due substantially to an increase in total invested assets. Invested assets, including cash and cash equivalents, were $142,677,985 and $135,886,913 at December 31, 1996 and 1995, respectively. The increase in invested assets is attributable to the net cash flow generated by written premiums, cash collateral and the reinvestment of investment income offset by the purchase of stock and the repayment of debt.
Selling, general and administrative expenses were $5,610,176 in 1996 compared to $6,097,322 in 1995. The decrease in selling, general and administrative expenses from 1996 to 1995 reflects a decrease in salary expense.
Management believes that the reserves for losses and loss adjustment expenses at December 31, 1997 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.
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, 1997.
On November 7, 1995, the Company obtained a $7,500,000 Demand Discretionary Line of Credit with The Bank of Boston Connecticut which expired on November 6, 1997. Under the terms of the line of credit, interest on the outstanding balance is calculated based upon the LIBOR plus 160 basis points in effect during the borrowing period. There was $5,200,000 outstanding under this line of credit at December 31, 1996.
The Company's principal source of cash for repayment of long-term debt is 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. For 1998, the amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic state insurance departments, is limited to approximately $10,032,000.
In 1998, 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 $4,365,000 in 1998.
In 1997, the Company began converting its computer systems to be Year 2000 compliant (e.g. to recognize the difference between '99 and '00 as one year instead of negative 99 years). The total cost of the project is estimated to be less than $100,000 and is being funded through operating cash flows. The Company is expensing all costs associated with these system changes. At December 31, 1997, approximately 35% of the Company's systems were compliant, with all systems expected to be compliant by the end of 1998. However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems.
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, 1997 was significantly above the level which might require regulatory action.
Notes to Consolidated Financial Statements - December 31, 1997, 1996 and 1995
Consolidated Schedules included in Part II of this Report - Years ended December 31, 1997, 1996 and 1995:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995
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 1996 and 1995 financial statements to conform with the classifications in 1997.
During 1997, 1996 and 1995, customers who individually accounted for more than 10% of consolidated construction contracting revenue for the respective years are as follows: 1997 - four customers provided 28%, 21%, 19% and 11%, respectively; in 1996 - four customers provided 18%, 15%, 14% and 10%, respectively; in 1995 - three customers provided 28%, 24% and 18%, respectively. No customers accounted for more than 10% of the consolidated insurance revenues in any year.
The limited partnership investment represents participation in a joint venture, Grandview Partners, L.P., which invests primarily in small capitalization stocks traded on national market exchanges. The Company owns 11.2% of the Limited Partnership. The limited partnership investment is carried on the equity method of accounting in which the Company's share of the net income of the limited partnership is 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.
Reserves for losses and loss adjustment expenses are established with respect to both reported and incurred but not reported claims for insured risks. The amount of loss reserves for reported claims is primarily based upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding the claim and the policy provisions relating to the type of claim. As part of the reserving process, historical data are 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 recomputed periodically using new information on reported claims.
Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $912,039 and $1,083,877 at December 31, 1997 and 1996, 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:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income". The objective of Statement of Financial Accounting Standards ("SFAS") No. 130 is to report comprehensive income which is defined as all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is currently evaluating the presentation alternatives provided by the Statement.
On December 31, 1997, the Company's insurance subsidiaries had securities with an aggregate book value of approximately $9.9 million on deposit with various state regulatory authorities.
A summary of gross unrealized gains and losses at December 31, 1997 and 1996 follows:
A summary of net investment income for the years ended December 31, 1997, 1996 and 1995 follows:
Realized capital gains (losses) for the years ended December 31, 1997, 1996 and 1995 follows:
Gross gains of $261,005, $237,726 and $25,235 and gross losses of $2,687, $27,808 and $24,425 were realized on fixed maturity sales for the years ended December 31, 1997, 1996, and 1995, respectively. Gross gains of $24,349, $48,568 and $56,926 and gross losses of $0, $0 and $49,839 were realized on sale of equity securities for the years ended December 31, 1997, 1996 and 1995, respectively.
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 1998.
A summary of intangibles, acquired primarily in connection with purchases of the Company's insurance subsidiaries, at December 31, 1997 and 1996 follows:
Under the terms of the line of credit, interest on the outstanding balance is calculated based upon the London Inter-Bank Offering Rate (LIBOR) plus 160 basis points in effect during the borrowing period (7.2% and 7.4% at December 31, 1997 and 1996, respectively).
The Company had available a $7,500,000 Demand Discretionary Line of Credit with The Bank of Boston Connecticut which expired on November 6, 1997. Under the terms of the line of credit, interest on the outstanding balance is calculated based upon the LIBOR plus 160 basis points in effect during the borrowing period (7.4% at December 31, 1996). Borrowings outstanding under this line was $5,200,000 at December 31, 1996.
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 commencing January 31, 1998, with interest at prime rate (8-1/2%). 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 with the $12,000,000 promissory notes is a non-cash transaction that is not reflected in the Consolidated Statement of Cash Flows.
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's. At December 31, 1995, the Company had reserved 1,500,000 shares of Class A Stock for issuance pursuant to such conversion option.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
Taxes paid in 1997, 1996 and 1995 were $1,790,253, $1,556,471 and $3,045,627, respectively.
The Company participated in various multi-employer defined contribution plans for its union employees. Charges to expense with respect to the Company's contributions to the various plans were approximately $13,593 in 1996 and $42,000 in 1995. No payments were made in 1997. 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, 1997.
During 1997, 1996 and 1995, ACMAT repurchased, in open market and privately negotiated transactions 3,400, 42,207 and 10,456, respectively, shares of its Common Stock at an average price of $20.44, $18.81 and $15.52 per share, respectively. The Company also repurchased during 1997, 1996 and 1995, in open market and privately negotiated transactions 1,347,686, 872,975 and 797,228, respectively, of its Class A Stock at an average price of $14.98, $13.18 and $11.83 per share, respectively.
The stockholders have periodically approved the distribution of nonstatutory stock options to certain officers and directors giving such individuals the right to purchase restricted shares of the Company's Common and Class A Stock. Transactions regarding these stock options are summarized below:
The exercise price of each option equals the market price of the Company's stock on the date of grant and the option's term is ten years. The options vest six months after the date of grant.
The Company accounts for stock options in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, which requires compensation expense to be recognized only if the fair value of the underlying stock at the grant date exceeds the exercise price of the option. Accordingly, no compensation cost has been recognized for stock options. Had compensation cost for the Company's stock options issued in 1996 been determined consistent with SFAS No. 123, "Accounting for Stock Based Compensation" the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below: There were no stock options granted in 1997 or 1995.
In accordance with statutory accounting principles, ACMAT's insurance subsidiaries' statutory capital and surplus was $70,989,140 and $70,109,199 at December 31, 1997 and 1996, respectively, and their statutory net income for the years ended December 31, 1997, 1996 and 1995 was $12,383,045, $8,778,843 and $9,072,104, 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.
Operating earnings for construction contracting is operating revenues less cost of contract revenues and identifiable selling, general and administrative expenses. Operating earnings for the insurance segment is operating revenues less losses and loss adjustment expenses, amortization of policy acquisition costs and identifiable selling, general and administrative expenses. Interest expense has not been included in the computation of operating 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.
Note: The Company adopted SFAS No. 128, Earnings per Share, on December 31, 1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share, and replaces primary earnings per share and fully diluted earnings per share with basic earnings per share and diluted earnings per share, respectively. The Company has restated earnings per share for all prior periods presented to comply with the provisions of SFAS No. 128. Annual earnings per share for 1996 does not equate to the sum of the quarters due to the timing of stock purchases during the year.
During 1997, 1996 and 1995, the Company issued 450,000, 499,999 and 149,997 shares of Class A Stock respectively 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. 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.
See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 1998 to 2002 and thereafter.