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 $144,117,159 and $137,528,676 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.
Losses and loss adjustment expenses were $5,969,980 in 1996 compared to $7,115,371 in 1995. The decreases in the losses and loss adjustment expenses are attributable to the decline in earned premiums from 1995 to 1996 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 $3,617,308 in 1996 as compared to $3,939,008 in 1995. The decrease in amortization of policy acquisition costs is primarily attributable to the decrease in premiums earned. Policy acquisition costs, primarily commissions, are deferred and amortized over the policy or bond term.
Earned premiums in 1995 were $23,492,905 compared to $27,141,639 in 1994. Net written premiums were $22,856,791 in 1995 compared to $27,216,453 in 1994. The decrease in earned premiums in 1995 reflects the 16% decrease in 1995 net written premiums over 1994 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.
Realized capital gains from the sale of investments during 1995 were $7,897 compared to realized capital losses of $34,238 in 1994.
Income tax expense was $2,414,400 in 1995 compared to $2,245,300 in 1994, representing effective Federal tax rates of 25.1% and 24.6%, respectively. The Federal effective tax rate fluctuates according to the mix of tax exempt and taxable securities held by the Company.
Management believes that the reserves for losses and loss adjustment expenses at December 31, 1996 are adequate to cover the unpaid portion of the ultimate net cost of losses and lost 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 contractor and its indemnitors.
The Company maintains a short-term unsecured bank credit line of $10 million to fund interim cash requirements. There was $8,000,000 outstanding under this line of credit as of December 31, 1996. Effective June 30, 1994, this credit line was renewed and modified to include an additional $8,000,000, six-year, term loan which is repayable in quarterly installments 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.
In 1997, 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 $6,300,000 in 1997.
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, 1996 was significantly above the level which might require regulatory action.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - December 31, 1996, 1995 and 1994
I - Condensed Financial Information of Registrant II - Valuation and Qualifying Accounts and Reserves V - Supplemental Information Concerning Property-Casualty Insurance Operations
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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 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.
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 reclassifications have been made to the 1995 and 1994 financial statements to conform with the classifications in 1996.
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, 1996, 1995 and 1994, deferrable costs capitalized were $3,063,875, $3,736,895 and 4,216,421, respectively. The amortization of deferred policy acquisition costs charged to operations for the years ended December 31, 1996, 1995 and 1994 was $3,617,308, $3,939,008 and $4,260,759, respectively.
Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $1,083,877 and $1,186,401 at December 31, 1996 and 1995, respectively, are included in other assets. All reinsurance contracts maintained by the Company qualify as short-duration prospective contracts under the provisions of FAS No. 113. A summary of reinsurance premiums written and earned is provided below:
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (FAS 121). This statement establishes accounting standards for the impairment of long-lived assets and certain identifiable intangibles to be disposed of. This statement requires a write down to fair value when long-lived assets to be held and used are impaired. The adoption of this statement did not have any effect on results of operations, financial condition or liquidity as no adjustments were required.
Also effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123", "Accounting for Stock-Based Compensation" (FAS 123). This statement addresses alternative accounting treatments for stock-based compensation, such as stock options and restricted stock. FAS 123 permits disclosing in the financial statement footnotes the pro forma impact to net income as if the value of stock-based compensation awards had been expensed. The value of awards are measured at the grant date based upon estimated fair value, using option pricing models. The Company has selected the alternative which provides for pro forma disclosure in the footnotes to the consolidated financial statements (See Note 13).
The merger of United Coasts Corporation into ACMAT has been accounted for by the purchase method and, accordingly, the purchase price was allocated to the net assets of United Coasts Corporation based on the fair value of the assets purchased and liabilities assumed on September 16, 1996.
In a separate transaction, EVF, Apex and PF exercised warrants to purchase 189,750, 126,500 and 63,250 shares, respectively, of Class A Stock of the Company for an aggregate consideration of $3,000,000.
The amortized cost and fair value of fixed maturities at December 31, 1996 and 1995, by effective maturity, follows:
Gross gains of $237,726, $25,235 and $17,076 and gross losses of $27,808, $24,425 and $89,866 were realized on fixed maturity sales for the years ended December 31, 1996, 1995, and 1994, respectively. Gross gains of $48,568, $56,926 and $41,247 and gross losses of $0, $49,839 and $0 were realized on sale of equity securities for the years ended December 31, 1996, 1995 and 1994, respectively.
A summary of property and equipment at December 31, 1996 and 1995 follows:
The decrease in 1996 and 1995 of incurred losses and loss adjustment expenses of prior years represents a reallocation of reserves among accident years. The increases in claim payments are also attributable to an increase in earned premiums during the development of the Company's insurance operations and the conversion of related loss reserves to loss payments in the normal course of business. 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.
The Company has available a $10,000,000 bank line of credit with Fleet Bank, N.A. which expires in June 1997. The line of credit requires the Company to maintain, on deposit with the bank, a compensating balance equal to 5% of the line of credit. Borrowings outstanding under this line were $8,000,000 at December 31, 1996 and $7,500,000 at December 31, 1995.
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 180 basis points in effect during the borrowing period (7.4% and 7.7% at December 31, 1996 and 1995, respectively).
On April 1, 1996, the Company obtained a $2,500,000, seven-year, term loan, which is repayable in quarterly installments of $89,286 commencing June 30, 1996. The proceeds were used to repay the line of credit.
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 issuances. At December 31, 1995, the Company had reserved 1,500,000 shares of Class A Stock for issuance pursuant to such conversion option.
On July 18, 1989, the Company issued $15,000,000, 10.5% Convertible Senior Notes due June 30, 1999 to AIG Life Insurance Company and American International Life Assurance Company of New York. Quarterly principal repayments of $500,000 began on June 30, 1993. The notes are convertible, at any time prior to their payment date, into shares of ACMAT Class A Stock at $10 per share. The conversion price of $10 per share would be adjusted at the time of conversion to reflect any stock dividends, recapitalizations or additional stock issuances. At December 31, 1996, the Company had reserved 450,000 shares of Class A Stock for issuance pursuant to such conversion option.
During 1996 and 1995, the Company issued 499,999 and 149,997 shares, respectively 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.
It is not practicable to estimate the fair value of long-term debt at December 31, 1996 because of the complex and unique terms associated with these debt instruments.
Taxes paid in 1996, 1995 and 1994 were $1,556,471, $3,045,627 and $1,685,362, respectively.
The Company participates 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, $42,000 in 1995 and $19,000 in 1994. 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, 1996.
On September 21, 1994, EVF, Apex and PF exercised warrants to purchase 189,750, 126,500 and 63,250 shares, respectively, of Class A Stock of the Company for an aggregate consideration of $3,000,000.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for its stock options. Had compensation cost for the Company's stock options issued in 1996 been determined consistent with FASB Statement No. 123, 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 1995.
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 $7,011,000 in 1997.
The Company's insurance subsidiaries, United Coastal Insurance and ACSTAR, are domiciled in the States of 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, 1996, 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.
In accordance with statutory accounting principles, ACMAT's insurance subsidiaries' statutory capital and surplus was $70,109,199 and $66,382,683 at December 31, 1996 and 1995, respectively, and their statutory net income for the years ended December 31, 1996, 1995 and 1994 was $8,778,843, $9,072,104 and $ 8,860,484, respectively.
Earnings per share - assuming full dilution for 1996 and 1995 were determined on the assumptions that the convertible notes were converted and the options were exercised at the beginning of the year. As to the debentures, net earnings were adjusted for the interest expense, net of its tax effect. As to the options, outstanding shares were increased as described above, except that purchases were assumed to have been made at the year-end price of the shares. Earnings per share - assuming full dilution was not presented for 1994 because the effects are not material.
The Company is a party to a number of legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses respecting those actions where the Company is a defendant, has appropriate insurance reserves recorded, and does not believe that their settlement will materially affect the Company's operations or financial position.
Many construction projects in which the Company has been engaged have included asbestos exposures which the Company believes to involve a particularly high degree of risk because of the hazardous nature of asbestos. The Company believes it has reduced the risks associated with asbestos through proper training of its employees and by maintaining general liability and workers' compensation insurance. Since 1986, the Company has obtained its general liability insurance and surety bonds from its insurance subsidiaries.
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 interest at prime rate (8-1/4%). The interest rate is equal to the prime rate, however, it shall not exceed 9-1/4% and it shall not be less than 7-1/4%.
The following presents the condensed financial position of ACMAT Corporation (parent company only) as of December 31, 1996 and 1995 and its condensed statements of earnings and cash flows for the years ended December 31, 1996, 1995 and 1994.
Income taxes received from subsidiaries during the years ended December 31, 1996, 1995 and 1994 were $1,990,201, $2,214,656 and $1,962,126, respectively. Interest paid during the years ended December 31, 1996, 1995 and 1994 was $6,099,379 $5,769,404 and $5,566,037, respectively. Interest paid in 1996 and 1995 included $1,118,546 and $978,399, respectively, paid to subsidiaries for intercompany loans.
During 1996 and 1995, the Company issued 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.
As of and for the years ended December 31, 1996, 1995 and 1994