*Including cumulative effect of a change in accounting principle of $1,127,943 (26(cent) per share) in 1992.
Contract revenues were $11,614,632 in 1995 compared to $8,160,758 in 1994. During the past several years, the Company has focused on fewer projects and devoted more resources to the Insurance Group. Increases for the 1995 period are believed to be temporary and are related to more backlog on hand. Construction revenue is difficult to predict in 1996 and depends greatly on the successful securement of contracts bid.
Net investment income was $6,062,883 in 1995 compared to $4,637,158 in 1994, representing effective yields of 4.58% and 3.72%, respectively. The increase in investment income in 1995 over 1994 was due substantially to higher yields on the portfolio as the result of higher interest rates obtained on reinvested assets as well as an increase in total invested assets. Invested assets, including cash and cash equivalents, were $137,528,676 and $124,757,438 at December 31, 1995 and 1994, 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.
Cost of contract revenues were $10,774,758 in 1995 compared to $7,793,535 in 1994. The increase in cost of contract revenues during 1995 compared to 1994 reflects the increase in contract revenues and the elimination of the gross losses on the construction operations. Costs of contract revenues vary from period to period as a function of contract revenues (See Contract Revenues). The Company's construction backlog at December 31, 1995 was approximately $3,600,000 compared to $9,100,000 at December 31, 1994.
Losses and loss adjustment expenses were $7,115,371 in 1995 compared to $8,209,992 in 1994. The decreases in the losses and loss adjustment expenses are attributable to the decline in earned premiums from 1994 to 1995 without any fluctuations in the loss ratios. Loss and loss adjustment expense reserves represent management's estimate of the ultimate cost of unpaid losses incurred for these periods relative to premiums earned.
Amortization of policy acquisition costs was $3,939,008 in 1995 as compared to $4,260,759 in 1994. Policy acquisition costs, primarily commissions, are deferred and amortized over the policy or bond term.
Selling, general and administrative expenses were $6,097,322 in 1995 compared to $6,964,686 in 1994. The decrease in selling, general and administrative expenses from 1995 to 1994 reflects a decrease in the bad debts expense and a decrease in the amortization of intangible assets. Amortization of intangible assets amounted to approximately $399,000 in 1995 and $747,000 in 1994 due to the expiration, in 1994, of certain covenants not to compete.
Interest expense has decreased to $4,810,578 in 1995 from $4,940,014 in 1994. The decrease in interest expense in 1995 is due primarily to the repayment of notes totaling $11,690,000 on March 31, 1994 offset in part by the issuance on June 30, 1994 of the $8,000,000 term loan.
The Company realized cash flow from operations of $14,226,539 in 1996 compared to $19,312,412 in 1995 and $9,629,444 in 1994. Net cash flows provided by operations in 1996 were derived principally from premium collections and collateral held. Substantially all of the Company's cash flow was used to repay long-term debt, repurchase stock and purchase investments. Purchases of investments are made based upon excess cash available after the payment of losses and loss adjustment expenses and other operating and non-operating expenses. The Company's short term investment strategy coincides with the relatively short maturity of its liabilities which are comprised primarily of reserves for losses covered by claims-made insurance policies, reserves related to surety bonds and collateral held for surety obligations.
The terms of the Company's note agreements contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and minimum net worth levels, including cross default provisions. The Company is prohibited from paying any dividends prior to July 1, 1997. 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, 1996, except for the limitation on the reacquisition of shares which exceeded the Available Fund at December 31, 1996. The Company has received a waiver to exceed this limitation at December 31, 1996.
On November 7, 1995, the Company obtained a $7,500,000 Demand Discretionary Line of Credit with The Bank of Boston Connecticut which expires 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 1997, the amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic state insurance departments, is limited to approximately $7,011,000.
Consolidated Statements of Earnings for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994
Consolidated Schedules included in Part II of this Report - Years ended December 31, 1996, 1995 and 1994:
Consolidated Statements of Earnings Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995, 1994
During 1996, 1995 and 1994, customers who individually accounted for more than 10% of consolidated construction contracting revenue for the respective years are as follows: 1996 - four customers provided 18%, 15%, 14% and 10%, respectively; in 1995 - three customers provided 28%, 24% and 18%, respectively; in 1994 - three customers provided 17%, 13% and 11%, respectively. No customers accounted for more than 10% of the consolidated insurance revenues in any year.
Investment securities are classified as held to maturity, available for sale or trading. The Company classifies all investment securities as available for sale. Investment securities available for sale are carried at fair value and unrealized gains and losses are excluded from earnings and recorded as a separate component of stockholders' equity, net of estimated income taxes. Adjustments to minority interests are made as a result of unrealized gains and losses.
Investment in limited partnership, which represents participation in a joint venture which invests primarily in small capitalization stocks traded on national market exchanges, is carried at fair value.
Realized gains and losses are determined on a specific identification basis. The fair values of investment securities were based on quoted market prices.
The Company continually evaluates its investment portfolio and establishes reserves for impairment in value deemed to be other than temporary.
All intangibles are stated at amortized cost and are being amortized using the straight-line method. Intangibles include insurance operating licenses and goodwill, which represents the excess of cost over the fair market value of net assets acquired. These intangible assets are amortized over periods ranging from 15 to 25 years.
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 $5 million for liability and in excess of $1.5 million up to $15.8 million for surety bonds. Effective April 1, 1995, the Company secured additional treaty excess of loss reinsurance which provides limits on a per policy basis of $5,000,000 per occurrence or claim made and in the aggregate excess of $5,000,000 per occurrence or claim made and in the aggregate. 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 ot its excess of loss reinsurers.
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, has become a wholly-owned subsidiary of ACMAT and its affiliates. The merger is a non-cash transaction that is not reflected in the Statements of Cash Flow.
The following table presents the unaudited pro forma results of operations as if the merger of United Coasts Corporation had been consummated at the beginning of the periods presented. These unaudited pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations that would have occurred had the merger actually been made at the beginning of the periods presented, or of results which may occur in the future.
On September 21, 1994, ACMAT purchased from The Environmental Venture Fund, a Delaware limited partnership ("EVF"), The Apex Investment Fund, an Illinois limited partnership ("Apex") and The Productivity Fund, a Delaware limited partnership ("PF"), 15, 10 and 5 shares, respectively, of the common stock of ACSTAR Holdings, a subsidiary of the Company, for an aggregate consideration of $3,000,000. As a result of these transactions, the amount of the outstanding common stock of ACSTAR Holdings owned by the Company has increased from 91% to 100%, thereby making ACSTAR Holdings a wholly-owned subsidiary of the Company.
Fair value estimates are made at a specific point in time, based on quoted market prices and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. In addition, the tax ramifications related to the realization of the unrealized gains and losses have not been considered in any of the estimates. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The Company's portfolio is comprised primarily of fixed maturity securities rated AA or better by Standard and Poor's and includes mostly U.S. Treasuries and tax-free municipal securities.
A summary of gross unrealized gains and losses at December 31, 1996 and 1995 follows:
A summary of net investment income for the years ended December 31, 1996, 1995 and 1994 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 1997.
Recoverable costs in excess of billings on uncompleted contracts are comprised principally of amounts of revenue recognized on contracts for which billings had not been presented to the contract owners as of the balance sheet date. These amounts will be billed in accordance with the contract terms.
Future minimum rental income to be generated by leasing a portion of the building under noncancelable operating leases as of December 31, 1996 are estimated to be $528,548 for 1997, $528,548 for 1998, $465,845 for 1999, $444,944 for 2000, and $444,944 for 2001. Rental income earned in 1996, 1995 and 1994 was $504,063, $543,507 and $561,825, respectively.
A summary of intangibles, acquired primarily in connection with purchases of the Company's insurance subsidiaries, at December 31, 1996 and 1995 follows:
The Company has available a $7,500,000 Demand Discretionary Line of Credit with The Bank of Boston Connecticut which expires 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. There were no borrowings outstanding under this line of credit at December 31, 1995.
On June 30, 1994, the Company obtained an $8,000,000, six-year, term loan, which is repayable in quarterly installments of $333,333 commencing September 30, 1994. Portions of the proceeds of such term loan were applied to the repayment of intercompany debt and to the reduction of the Company's short-term credit line.
On April 18, 1990, the Company obtained a permanent mortgage loan from The Manufacturer's Life Insurance Company. The $8,350,000 mortgage note, with interest at 9.69%, is payable in monthly installments over 10 years based on a thirty year amortization schedule. The remaining outstanding principal balance is payable on April 1, 2000. The proceeds were used to repay an existing construction loan and to fund completion of the Company's headquarters.
Principal payments on long-term debt are $6,284,692, $1,794,238, $1,804,751, $8,620,250 and $357,144 for the years 1997 through 2001, respectively. Interest expense paid in 1996, 1995 and 1994 amounted to $4,980,833, $4,791,005 and $4,911,392, respectively.
There was no valuation allowance for deferred income tax assets as of December 31, 1996 and 1995. 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 differences at December 31, 1996.
The Company and its subsidiaries maintain, for the benefit of non-union employees, a qualified thrift, profit sharing and retirement plan. Participants are required to contribute three percent of their compensation to the plan annually. The Company's contributions, established by the Board of Directors, were $100,000, $100,000 and $90,600, for 1996, 1995 and 1994, respectively.
The Class A Stock has one-tenth voting privilege but has all the other rights and privileges pertaining to the Common Stock.
During 1996, 1995 and 1994, ACMAT repurchased, in open market and privately negotiated transactions 42,207, 10,456, and 40,413, respectively, shares of its Common Stock at an average price of $18.81, $15.52 and $12.07 per share, respectively. The Company also repurchased during 1996, 1995 and 1994, in open market and privately negotiated transactions 872,975, 797,228 and 478,484, respectively, of its Class A Stock at an average price of $13.18, $11.83 and $8.81 per share, respectively.
During 1996 and 1995, the Company issued 449,999 and 149,997, respectively, 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. 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.
The earnings per share and share equivalent were computed by dividing net earnings by the weighted average number of Common and Class A shares outstanding of 3,559,367, 3,661,577 and 4,134,110 for 1996, 1995 and 1994, respectively, and includes the common stock equivalency of outstanding options, if dilutive. The number of shares was also increased by the number of shares issuable on the exercise of options when the market price of the stock exceeded the exercise price of the option. This increase in the number of shares was reduced by the number of shares which are assumed to have been purchased with the proceeds from the exercise of the option; these purchases were assumed to have been made at the average price of the common stock during that part of the year when the market price of the common stock exceeded the exercise price of the option.
The Company operates in two industry segments: Construction contracting and insurance. Information relating to the two segments is summarized as follows:
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its own Class A Stock from AIG Life Insurance Company (366,663 shares) and American International Life Assurance Company of New York, (733,333). The shares were purchased at an average price of $14.70 per share for a total purchase price of $16,174,942.
The 1,099,996 shares of Class A Stock were acquired throughout the past two years by AIG Life Insurance Company and American International Life Assurance Company of New York pursuant to the conversion options of the Convertible Senior Notes.
A summary of the unaudited quarterly results of operations for 1996 and 1995 follows:
Note: Earnings per common share are based on the weighted average number of Common and Class A Stock and equivalent shares outstanding during each of the quarters and at year end. 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.
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company's 1996 Annual Report.
A summary of long-term debt at December 31, 1996 and 1995 follows:
See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 1997 to 2001 and thereafter.