We are headquartered at 4 Paragon Way, Freehold, New Jersey. NAHC leases approximately 45,000 square feet of office space for a term ending June 1, 2009. NAHC’s subsidiaries share the cost of this space under the cost sharing agreement that they entered into with NAHC. On September 11, 2004, we leased an additional 16,000 square feet of space at 3 Paragon Way, Freehold, New Jersey for a term ending September 11, 2008.
On April 21, 2005, an initial public offering of 6,650,000 shares of the Company’s common stock (after the 43-for-1 stock split) was completed. The company sold 5,985,000 shares resulting in net proceeds to the Company (after deducting issuance costs and the underwriters’ discount) of $62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory surplus.
We provide property and casualty insurance and insurance-related services to individuals, families and businesses in the State of New Jersey. We have been able to capitalize upon what we consider an attractive opportunity in the New Jersey insurance market through:
In 2007, we made significant progress toward carrying out the business strategies we have set out for National Atlantic as a public company. We continued to capture an increasingly larger share of our Partner Agents’ existing customer base and to diversify our business portfolio of automobile, homeowners and commercial lines policies. Our plan for future growth relates to capturing an increasingly larger share of our Partner Agents business and cross-selling our automobile, homeowners and business insurance products to their existing customers. We also plan to capture more of our Partner Agents’ existing customers by reaching out to additional demographics not currently suited to our HPP packaged product. Our new mono-line automobile product, salesmarked BlueStar Car Insurance, was launched in early 2007 and is targeted to our Partner Agents’ customers who do not require the broader coverage of our HPP product. During the third quarter of 2007 it was determined that our policy related to claims handling procedures and reserving practices was not applied consistently, primarily within the bodily injury claims unit. As part of the resolution of this matter, we retained an independent claims consulting firm. As a result, for the year ended December 31, 2007, we increased reserves for prior years by $19.6 million.
As of December 31, 2007, our insurance subsidiary, Proformance Insurance Company (“Proformance”), was the twelfth largest and one of the fastest growing provider of private passenger auto insurance in New Jersey, based on direct written premiums of companies writing more than $5 million of premiums annually over the past three years, according to A.M. Best. From 2003 through 2007, we experienced a 2.3% compound annual growth rate, as our direct written premiums for all lines of business we write, including homeowners and commercial lines, increased from
As a densely populated state, a coastal state, and a state where automobile insurance has historically been prominent in local politics, New Jersey has historically presented a challenging underwriting environment for automobile and homeowners insurance coverage.
As a result of New Jersey’s “take all comers” requirement, we are obligated to underwrite a broad spectrum of personal automobile insurance risks. To address this potential problem, since 1998 Proformance has utilized a tiered rating system to price its policies, which includes five (5) rating tiers based upon the driving records of the policyholders. The purpose of the rating tiers is to modify the premiums to be charged for each insured vehicle on the personal automobile policy so that the premiums charged accurately reflect the underwriting exposures presented to Proformance.
An evolving set of legal standards by which we are required to pay claims may result in significant variability in our loss reserves over time.
For the years ended December 31, 2007, 2006 and 2005, we paid $0.0 million, $0.6 million and $0.2 million, respectively, in connection with fees paid in consideration of the acquisition of policy renewal rights. Our strategy includes entering into additional replacement carrier transactions as opportunities arise. However, due to improvements in the New Jersey insurance market during 2005, it is not likely that we will enter into replacement carrier transactions which have as significant an impact on our operations or are comparable in size to those entered into prior to 2005.
On September 27, 2005, the Company announced that Proformance had entered into a replacement carrier transaction with The Hartford Financial Services Group, Inc., which we refer to as The Hartford, whereby certain subsidiaries of The Hartford (Hartford Fire Insurance Company, Hartford Casualty Insurance Company, and Twin City Fire Insurance) would transfer their renewal obligations for New Jersey homeowners, dwelling, fire, and personal excess liabilities policies sold through independent agents to Proformance. Under the terms of the transaction, Proformance has offered renewal policies to approximately 8,500 qualified policyholders of The Hartford. We received final approval of this transaction from the NJDOBI on November 22, 2005, the closing date.
The Hartford is not liable for any fees and or other amounts to be paid to Proformance and as such Proformance will not recognize any replacement carrier revenue from this transaction. The revenue that will be recognized as part of this transaction will be from the premium generated by the policies that renew with Proformance.
For the years ended December 31, 2007, 2006 and 2005, the direct written premium generated from The Hartford renewal business was $4,724,728, $4,134,877 and $0, respectively.
Upon the Closing, Proformance was required to pay to Hanover a one-time fee of $450,000, and within 30 days of the closing, $100,000 was due to reimburse Hanover for its expenses associated with this transaction. In May of 2007, the Company paid $666,129 to Hanover, representing the first of two annual payments equal to 5% of the written premium of the retained business for the preceding twelve months, calculated at the 12 month and 24 month anniversaries.
With respect to our replacement carrier transaction with Sentry Insurance, in the event that the premium-to-surplus ratio for the Sentry Insurance business written by Proformance exceeded 2.5 to 1 during a specified period, Sentry Insurance was obligated to pay to Proformance such additional sums of money as necessary, up to an aggregate limit of $1,250,000, to reduce the premium-to-surplus ratio for the Sentry Insurance business written by Proformance to not less than 2.5 to 1. On February 22, 2005 Proformance notified Sentry Insurance that Sentry Insurance owed Proformance $1,250,000 for the 2004 year in connection with the requirement. On May 16, 2005, we received $1,250,000 from Sentry Insurance in settlement of the amounts owed to us.
In the New Jersey Supreme Court’s decision in June of 2005 in DiProspero v. Penn, et al., the Court eliminated certain restrictions on the ability of plaintiffs to obtain non-economic damages, such as for pain and suffering. As a result of this decision, we have adjusted our reserves to include additional personal injury protection (no-fault) losses and legal defense costs severities because of the potential for an increase in the number of litigated cases.
On March 20, 2007, the Board of Directors of NAHC approved the Compensation Committee’s recommendation to grant 345,000 stock appreciation rights (SARS) to the executive officers and other key employees under the Company’s 2004 Stock and Incentive Plan. The SARS were granted with a base price of $12.88 per share, which was the closing price of the Company’s common stock on the Nasdaq National Market on the date of grant.
thereof (depending upon the percentage of requisite service that has been rendered at the reporting date) based on the Black-Scholes valuation model and will remeasure the liability at each reporting date through the date of settlement; consequently, compensation cost recognized through each period of the vesting period (as well as each period throughout the date of settlement) will vary based on the award’s fair value and the vesting schedule.
The Company has reported, as a component of other liabilities on the consolidated balance sheet, share-based compensation liability at December 31, 2007 and 2006, of $128,285 and $1,066,239, respectively. For the year ended December 31, 2007 and 2006, the Company has reported, as a component of other operating and general expenses on the consolidated statement of income, share-based compensation expense of ($492,864), $1,066,239 and $0, respectively, related to stock appreciation rights.
The revenue we earned from replacement carrier transactions relates to the funds that we received to assume the renewal obligations of those books of business. Revenues from replacement carrier transactions are recognized pro-rata over the period that we complete our obligations under the terms of the agreement, typically ranging from six months to a year, determined by the renewal option period of the policyholders. Certain replacement carrier contracts require additional consideration to be paid to us based on an evaluation of the ratio of premiums written to surplus. The calculation is performed and related revenue is recognized as earned annually, pursuant to the terms of the contract. Certain other transactions, such as the Hanover and Hartford transactions described above, require us to pay additional consideration in the future. We did not record any replacement carrier revenue for the years ended December 31, 2007, 2006 and 2005. Our strategy includes entering into additional replacement carrier transactions as opportunities arise. However, due to improvements in the New Jersey insurance market during 2005, it is not likely that we will enter into replacement carrier transactions which have as significant an impact on the Company’s operations, or are comparable in size to those entered into prior to 2005.
Our expenses consist primarily of three types: losses and loss adjustment expenses, including estimates for losses and loss adjustment expenses incurred during the period and changes in estimates from prior periods, less the portion of those insurance losses and loss adjustment expenses that we cede to our reinsurers; and acquisition expenses, which consist primarily of commissions we pay our agents. In addition, underwriting, acquisition and insurance related expenses include premium taxes and company expenses related to the production and underwriting of insurance policies, less ceding commissions that we receive under the terms of our reinsurance contracts, and other operating and general expenses which include general and administrative expenses.
The provision for unpaid losses and loss adjustment expenses includes: individual case estimates, principally on the basis of reports received from claim adjusters employed by Proformance, losses reported prior to the close of the period, and estimates with respect to incurred but not reported losses and loss adjustment expenses, net of anticipated salvage and subrogation. The method of making such estimates and for establishing the resulting reserves is continually reviewed and updated, and adjustments are reflected in current operations. The estimates are determined by management and are based upon industry data relating to loss and loss adjustment expense ratios as well as Proformance’s historical data.
Underwriting, acquisition and insurance related expenses include policy acquisition expenses which consist of commissions and other underwriting expenses, which are costs that vary with and are directly related to the underwriting of new and renewal policies and are deferred and amortized over the period in which the related premiums are earned. Also included in underwriting, acquisition and related insurance expenses are NJAIRE assessments, professional fees and other expenses relating to insurance operations.
Other operating and general expenses consist primarily of professional fees, stock based compensation expense and other general expenses which are not directly associated with insurance operations and relate primarily to costs incurred by our holding company.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in our consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. We have identified below two accounting policies that we consider to be critical due to the amount of judgment and uncertainty inherent in the application of these policies.
When reviewing reserves, we analyze historical data and estimate the impact of various loss development factors, such as our historical loss experience and that of the industry, trends in claims frequency and severity, our mix of business, our claims processing procedures, legislative enactments, judicial decisions, legal developments in imposition of damages, and changes and trends in general economic conditions, including the effects of inflation. A change in any of these factors from the assumptions implicit in our estimate can cause our actual loss experience to be better or worse than our reserves, and the difference can be material. There is no precise method, however, for evaluating the impact of any specific factor on the adequacy of reserves, because the eventual development of reserves and currently established reserves may not prove adequate in light of subsequent actual experience. To the extent that reserves are inadequate and are strengthened, the amount of such increase is treated as a charge to earnings in the period that the deficiency is recognized. To the extent that reserves are redundant and are released, the amount of the release is a credit to earnings in the period that redundancy is recognized.
For the year ended December 31, 2007, we increased reserves for prior years by $19.6 million. This increase was primarily due to increases in the prior year reserves for auto bodily injury coverage which increased by $22.2 million.
For the year ended December 31, 2005, we increased reserves for prior years by $10.1 million. This increase was due to increases in average severity for Personal Injury Protection (No-fault) losses of $9.4 million, Commercial Auto Liability projected loss ratios for 2002-2004 due to the fact that actual loss development was higher than expected for those years, resulting in an increase of $1.8 million, Homeowners losses of $0.6 million and Other Liability losses of $1.6 million. This development was partially offset by continued favorable trends in loss development for Property Damage losses ($1.6 million), Auto Physical Damage losses ($1.2 million), and Bodily Injury losses of ($0.5 million), as reported claims frequency has dropped significantly and we reduced our projected loss ratios in recognition of this trend.
In establishing our net reserves as of December 31, 2007, our Chief Actuarial Officer has determined that the range of reserve estimates on a net basis, at that date, was between $163.8 million and $195.3 million. The amount of net reserves at December 31, 2007, which represents the best estimate of management and our actuaries within that range, was $179.4 million. There are two major factors that could result in ultimate losses below management’s best estimate:
Claims for uninsured motorists generally have a longer development period than other liability losses. If the frequency of uninsured motorist claims increases beyond our current estimated levels, loss emergence could be greater than what we projected in our loss development analysis.
We believe that the claims department has improved its claims handling practices with regard to claims reserving and settlement. These improvements, if not effectively implemented, could result in adverse loss development.
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and how to measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments.
Direct written premiums for the year ended December 31, 2007 increased by $7.6 million, or 4.4%, to $178.7 million from $171.1 million in the comparable 2006 period. For the year ended December 31, 2007, the increase is primarily due to the following: new business generated by our partner agents increased by $3.0 million to $34.4 million from $31.4 million in the comparable 2006 period, including new business from our Blue Star auto insurance product in the amount of $8.7 million. This was offset by attrition of existing business of $9.5 million as well as a $17.3 million decrease in premium as a result of decreases in renewal premiums during the period and a reduction in closed agents business as a result of the continued increase in the competitive nature of the New Jersey auto insurance marketplace.
Direct Written Premiums. Direct written premiums for the year ended December 31, 2007 increased by $7.6 million, or 4.4%, to $178.7 million from $171.1 million in the comparable 2006 period.
Net Written Premiums. Net written premiums for the year ended December 31, 2007 increased by $5.1 million, or 3.2%, to $166.2 million from $161.1 million in the comparable 2006 period. Ceded premiums as a percentage of direct written premium for the year ended December 31, 2007 was 7.2%, as compared to 6.5%, in the same period in the prior year. The increase in net written premiums for the year ended December 31, 2007 was due to the increase in direct written premiums for the same period.
Investment Income. Investment income for the year ended December 31, 2007 increased by $1.2 million, or 7.5%, to $17.3 million from $16.1 million in the comparable 2006 period. The increase was primarily due to an increase in average invested assets. Average invested assets for the year ended December 31, 2007 increased $11.6 million, or 3.7%, to $323.1 million from $311.4 million for the same period in the prior year.
Net Realized Investment Gains. Net realized investment gains for the years ended December 31, 2007 and 2006 were $0.1 million and $1.0 million, respectively.
Losses and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred for the year ended December 31, 2007 increased by $41.3 million, or 39.8%, to $145.1 million from $103.8 million in the comparable 2006 period. This increase can be attributed to an increase in claim frequency in private passenger automobile coverage and strengthening of prior year reserves by $19.6 million, due to the inconsistent implementation of a revised claim reserving policy that was uncovered in the third quarter of 2007. As a percentage of net earned premiums, losses and loss adjustment expenses incurred for the year ended December 31, 2007 were 87.8% compared to 66.0% for the year ended December 31, 2006. The ratio of net incurred losses, excluding loss adjustment expenses, to net earned premiums during 2007 was 76.3% compared to 61.5% for the comparable 2006 period.
Other Operating and General Expenses. Other operating and general expenses for the year ended December 31, 2007 decreased by $1.8 million, or 78.3%, to $0.5 million from $2.3 million in the comparable 2006 period. The decrease in other operating and general expenses for the year ended December 31, 2007 is primarily related to a decrease in share based compensation expense. For the years ended December 31, 2007 and 2006, share based compensation expense was ($0.5) million and $1.1 million, respectively.
Income Tax (Benefit) Expense. Income tax (benefit) expense for the year ended December 31, 2007 and 2006 was ($4.8) million and $7.1 million, respectively. The decrease in tax expense for the year ended December 31, 2007, as compared to the same period in the prior year was due to a decrease in income before income taxes.
Net (Loss) Income. Net (loss) income for the years ended December 31, 2007 and 2006 was ($6.2) million and $14.4 million, respectively. The decrease in net income for the year ended December 31, 2007 as compared to the same period in the prior year is a result of the factors discussed above.
Direct Written Premiums. Direct written premiums for the year ended December 31, 2006 decreased by $26.9 million, or 13.6%, to $171.1 million from $198.0 million in the comparable 2005 period.
Net Realized Investment Gains. Net realized investment gains for the year ended December 31, 2006 and 2005 were $1.0 million and $0.4 million, respectively.
Losses and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred for the year ended December 31, 2006 decreased by $29.0 million, or 21.8%, to $103.8 million from $132.8 million in the comparable 2005 period. This decrease can be attributed to a decline in earned premium, a reduction in claim frequency in private passenger automobile coverage and significant growth in commercial lines business which exhibit lower loss ratios. As a percentage of net earned premiums, losses and loss adjustment expenses incurred for the year ended December 31, 2006 were 66.0% compared to 76.9% for the year ended December 31, 2005. The ratio of net incurred losses, excluding loss adjustment expenses, to net earned premiums during 2006 was 61.5% compared to 65.6% for the comparable 2005 period.
Net Income. Net income for the year ended December 31, 2006 and 2005 was $14.4 million and $6.4 million, respectively. The increase in net income for the year ended December 31, 2006 as compared to the same period in the prior year is a result of the factors discussed above.
On April 21, 2005, an initial public offering of 6,650,000 shares of the Company’s common stock (after the 43-for-1 stock split) was completed. The Company sold 5,985,000 shares resulting in net proceeds to the Company (after deducting issuance costs and the underwriters’ discount) of $62,198,255. The Company contributed $43,000,000 to Proformance, which increased its statutory surplus. The additional capital will permit the Company to reduce its reinsurance purchases and to retain more of the direct written premiums produced by its Partner Agents. On May 8, 2006 and May 16, 2007, the Company contributed an additional $9,000,000 and $4,100,000, respectively, to Proformance, thereby further increasing its statutory surplus. The remainder of the capital raised will be used for general corporate purposes, including but not limited to possible additional increases to the capitalization of the existing subsidiaries.
For the years ended December 31, 2007, 2006 and 2005, our consolidated cash flows provided by (used in) investing activities were $4.4 million, ($19.2) million and ($66.5) million, respectively. The increase in cash provided by investing activities for the year ended December 31, 2007 as compared to the same period in the prior year is related primarily to the sale of fixed maturity investments. The decrease in cash used in investing activities for the year ended December 31, 2006 as compared to the same period in the prior year is related primarily due to the conversion of our private passenger automobile business from six month to twelve month policies which began on January 1, 2005. This conversion process led to an increase in premium writings for the year ended December 31, 2005, which was subsequently invested by the Company along with the continued investment of the capital received as part of the initial public offering which was completed on April 21, 2005. Direct written premiums for the year ended December 31, 2006 decreased by $26.9 million, or 13.6%, to $171.1 million from $198.0 million in the comparable 2005 period. In addition, for the year ended December 31, 2006 our consolidated cash flow used in investing activities was in excess of our cash provided by operations as Proformance invested the $9 million which was contributed by the Company during the period.
The effective duration of our investment portfolio was 2.91 years as of December 31, 2007. By contrast, our liability duration was approximately 3.5 years as of December 31, 2007. We do not believe this difference in duration adversely affects our ability to meet our current obligations because we believe our cash flows from operations are sufficient to meet those obligations. Pursuant to our tax planning strategy, we invested the $40.6 million received from the OCIC replacement carrier transaction in long-term bonds in accordance with Treasury Ruling Regulation 1.362-2, which allows us to defer the payment of income taxes on the associated replacement carrier revenue until the underlying securities are either sold or mature. The effective duration of our investment portfolio, when excluding these securities, is reduced from 2.91 years to 2.45 years.
There are no restrictions on the payment of dividends by our non-insurance subsidiaries other than customary state corporation laws regarding solvency. Dividends from Proformance are subject to restrictions relating to statutory surplus and earnings. Proformance may not make an “extraordinary dividend” until 30 days after the Commissioner of the NJDOBI (which we refer to as the Commissioner) has received notice of the intended dividend and has not objected or has approved it in such time. An extraordinary dividend is defined as any dividend or distribution whose fair market value together with that of other distributions made within the preceding twelve months exceeds the greater of 10% of the insurer’s surplus as of the preceding December 31, or the insurer’s net income (excluding realized capital gains) for the twelve-month period ending on the preceding December 31, in each case determined in accordance with statutory accounting practices. Under New Jersey law, an insurer may pay dividends that are not considered extraordinary only from its unassigned funds, also known as its earned surplus. The insurer’s remaining surplus must be both reasonable in relation to its outstanding liabilities and adequate to its financial needs following payment of any dividend or distribution to stockholders. As of December 31, 2007, Proformance was not permitted to pay dividends without the approval of the Commissioner. Proformance has not paid any dividends in the past and we do not anticipate that Proformance will pay dividends in the foreseeable future because we wish to reduce our reinsurance
The Company has entered into a seven-year lease agreement for the use of office space and equipment. The most significant obligations under the lease terms other than the base rent are the reimbursement of the Company’s share of the operating expenses of the premises, which include real estate taxes, repairs and maintenance, utilities, and insurance. Net rent expense for 2007, 2006 and 2005 was $973,655, $958,279 and $945,391, respectively.
Aggregate minimum rental commitments of the Company as of December 31, 2007 are as follows:
Proformance’s historic trends of net paid losses compared to net premiums collected for calendar years 2007, 2006 and 2005 reflect ratios of 81.9%, 75.8% and 60.8%, respectively.
The asset/liability match of the revenue generated in the OCIC replacement carrier transaction was contemplated based on the premiums to surplus leverage it was intended to support. We do not anticipate that the payment of claims will be affected by these longer-term investments based on sufficient cash flow provided from the collection of premiums and therefore we do not intend to sell any securities in such surplus funds prior to maturity. Future liquidity and operating income could be impacted if the fixed income securities are sold prior to maturity exposing them to market rate risk.
and 57 available for sale securities in the greater than twelve months category. The unrealized losses reflect changes in interest rates subsequent to the acquisition of specific securities. Management believes that the unrealized losses represent temporary impairment of the securities, as the Company has the intent and ability to hold these investments until maturity or market price recovery.
Unrealized losses on held-to-maturity securities, aged less than and greater than twelve months, as of December 31, 2006 were as follows:
As of December 31, 2007 and as of December 31, 2006, our fixed income portfolio was 64.9% and 63.5% and respectively, concentrated in U.S. government securities and securities of government agencies and authorities that carry an “Aaa” rating from Moody’s, respectively.
There were no securities that were considered other-than-temporarily impaired as of December 31, 2007 or 2006. The following summarizes our unrealized losses by designated category as of December 31, 2007.
The following table summarizes our long-term contractual obligations and credit-related commitments as of December 31, 2007.
As of December 31, 2007 we had unpaid loss and loss adjustment expenses of $197.1 million. The amounts and timing of these obligations are not set contractually. Nonetheless, based on cumulative property and casualty claims paid over the last ten years, we anticipate that approximately 52.0% will be paid within a year, an additional 33.5% between one and three years, 13.0% between three and five years and 1.5% in more than five years. While we believe that historical performance of loss payment patterns is a reasonable source for projecting future claim payments, there is inherent uncertainty in this payment estimate because of the potential impact from changes in:
In September 2005, the AICPA issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs in connection with modifications or exchanges of insurance contracts other than those specifically described in FASB 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. The Company has complied with the requirements of SOP 05-1, which were effective for periods which began after December 15, 2006.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 123R requires all share-based payments to employees, including grants of employee stock options and stock appreciation rights, to be recognized in the financial statements based on their fair values and the recording of such expense in the consolidated statements of operations. In March 2005, the SEC issued Staff Accounting Bulletin (SAB) 107, which expresses views of the SEC staff regarding the application of SFAS 123R. SAB 107 provides interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC amended compliance dates for SFAS 123R to allow companies to implement SFAS 123R at the beginning of their next fiscal year, instead of the next fiscal reporting period that began after June 15, 2005. The Company adopted the provisions of SFAS 123R effective January 1, 2006 at which time the pro forma disclosures previously permitted under SFAS 123 were no longer an alternative to financial statement recognition. Under SFAS 123R, the Company was required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. For further details, please refer to Note 9 Share-based Compensation.
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and how to measure such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 supersedes Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Applications of Certain Investments” (“EITF 03-1”) and EITF Topic D-44, Recognition of Other-Than-Temporary Impairment on the Planned Sale of a Security Whose Cost Exceeds Fair Value (“Topic D-44”) and nullifies the accounting guidance on the determination of whether an investment is other-than-temporarily impaired as set forth in EITF 03-1. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005 and management has determined that the effect of adopting FSP 115-1 did not have a material impact on the Company’s
consolidated financial statements. The Company has complied with the disclosure requirements of EITF-03-1, which were effective December 31, 2003 and remain in effect.