Net earnings were $3,013,723 in 1999, $2,120,529 in 1998 and $4,456,949 in 1997. Net earnings included approximately $1,000,000 of loss in 1998 and approximately $700,000 of gain in 1997 related to the Company's share of a limited partnership. The limited partnership invested in small cap equities and incurred the loss in 1998 due to volatility in the small cap market. The Company sold its investment in the limited partnership on December 31, 1998. The increase in 1999 net earnings compared to the 1998 net earnings was due to the improved gross margins in the contracting business, the elimination of the limited partnership in 1998 and the reduction in interest expense related to the reduction of long-term debt partially offset by the decrease in investment income.
Revenues were $25,500,249 in 1999, $28,752,273 in 1998 and $33,552,135 in 1997. The decrease in revenues over the past two years reflects the Company's strategy to avoid the current unfavorable pricing in the Company's casualty insurance operations. Earned premiums were $9,414,192 in 1999, $10,962,663 in 1998 and $15,045,844 in 1997. Contract revenue is difficult to predict and depends greatly on the successful securement of contracts bid. Contract revenues were $9,223,457 in 1999, $12,139,924 in 1998 and $10,056,322 in 1997.
Other income (expense) was $1,220,678 in 1999, ($754,588) in 1998 and $1,662,586 in 1997. The fluctuations in other income (expense) are attributable to a pre-tax loss of approximately $1,400,000 in 1998 and a pre-tax gain of approximately $965,000 in 1997 related to the Company's share of a limited partnership. The Company sold its investment in the limited partnership on December 31, 1998.
Costs of contract revenues were $8,261,408 in 1999, $11,635,879 in 1998 and $9,331,103 in 1997. The gross profit margin on construction projects was 10.4% in 1999, 4.2% in 1998 and 7.2% in 1997. Gross margin fluctuations each year based upon the profitability of specific projects.
General and administrative expenses were $5,385,409 in 1999, $5,355,183 in 1998 and $5,767,808 in 1997. The increase in general and administrative expenses in 1999 compared to 1998 is due primarily to the increase in salary expense. The decrease in general and administrative expenses in 1998 compared to 1997 is due primarily to the decrease in bad debt expense.
Income tax expense was $1,204,164 in 1999, $719,696 in 1998 and $1,739,616 in 1997, representing effective tax rates of 28.6%, 25.3% and 28.1%, respectively. The fluctuation in the effective tax rate is due to tax exempt interest income making up a larger portion of taxable income in 1998.
Revenues for the ACSTAR Bonding segment were $6,227,462 in 1999, $5,286,955 in 1998 and $7,209,863 in 1997. The 1999 increase in revenue reflects a slight increase in earned premiums and investment income compared to 1998. Included in 1998 revenues is a pre-tax loss of approximately $570,000 for net loss of the limited partnership investment. The decrease in 1998 revenue compared to the 1997 revenue is due primarily to a decrease in earned premiums in 1998.
Investment income was $1,268,175 in 1999, $1,169,977 in 1998 and $962,815 in 1997. The increase in investment income was primarily related to a continued increase in invested assets and an increase in the effective yield on those invested assets. Net realized capital gains were $51,616 in 1999, $68,040 in 1998 and $25,380 in 1997.
Losses and loss adjustment expenses were $238,520 in 1999, $230,912 in 1998 and $1,577,766 in 1997. The lower losses and loss adjustment expenses for 1999 and 1998 compared to 1997 are attributable to the release of surety loss reserves on older years that are no longer needed and a reallocation of reserves among accident years. Amortization of policy acquisition costs were $1,543,783 in 1999, $1,225,718 in 1998 and $1,605,140 in 1997. The increase in amortization of policy acquisition costs in 1999 compared to 1998 is primarily attributable to the increase in commissions paid to agents. The decrease in amortization of policy acquisition costs in 1998 compared to 1997 is primarily attributable to the decrease in earned premiums.
Revenues for the United Coastal Liability Insurance segment were $8,529,279 in 1999, $10,315,294 in 1998 and $15,043,823 in 1997. The 1999 decrease in revenue reflects a 27% decrease in earned premiums and a 20% decrease in investment income compared to 1998. Included in 1998 revenues is a pre-tax loss of approximately $830,000 for net loss of the limited partnership investment. The decrease in 1998 revenue compared to the 1997 revenue is due primarily to a 29% decrease in earned premiums in 1998. The decrease in revenues over the past two years reflects the Company's strategy to avoid the current unfavorable pricing in the Company's casualty insurance market.
Investment income was $3,557,332 in 1999, $4,430,026 in 1998 and $4,859,805 in 1997. The decrease in investment income was primarily related to a decrease in invested assets as a result of dividends distributed to the parent company to reduce corporate debt. Net realized capital gains were $200,574 in 1999, $198,129 in 1998 and $257,287 in 1997.
Cost of contract revenues were $8,261,408 in 1999, $11,635,879 in 1998 and $9,331,103 in 1997. The gross profit margin on construction projects was 10.4% in 1999, 4.2% in 1998 and 7.2% in 1997. Gross margin fluctuations each year based upon the profitability of specific projects.
General and administrative expenses were $3,886,117 in 1999, $3,488,950 in 1998 and $3,662,978 in 1997. The increase in general and administrative expenses in 1999 compared to 1998 is due primarily to the increase in salary expense and the amortization of intangibles. The decrease in general and administrative expenses in 1998 compared to 1997 is due primarily to the decrease in salary expense.
The Company used cash flow from other sources to support operations in the amount of $7,065,427 in 1999, compared to cash flow realized from operations of $530,977 in 1998 and $5,585,329 in 1997. The reduced cash flow from operations is due primarily to the return of cash collateral and the payment of claims. Substantially all of the Company's cash flow is used to repay short-term and 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.
Net cash provided by investing activities was $20,580,662 in 1999, $21,326,746 in 1998 and $4,993,298 in 1997.
The Company maintains a short-term unsecured bank credit line of $10 million to fund interim cash requirements. There were no borrowings outstanding under this line of credit as of December 31, 1999. Effective December 9, 1998, the Company obtained a $5,000,000, five-year, term loan which is repayable in quarterly installments commencing March 1, 1999. Portions of the proceeds of such term loan were applied to the repayment of term debt and to the reduction of the Company's short-term credit line.
During 1999, the Company purchased, in the open market and privately negotiated transactions, 7,260 shares of its Common Stock at an average price of $20.93. The Company also purchased, in open market and privately negotiated transactions, 189,221 shares of its Class A Stock at an average price of $12.52 per share.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Earnings Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows Years ended December 31, 1999, 1998 and 1997
ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997
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 1998 and 1997 financial statements to conform to the classifications in 1999.
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. The carrying amounts of these intangibles are regularly reviewed for indicators of other-than-temporary impairments in value.
Ceded incurred losses and loss adjustment expenses totaled $215,292, $180,553 and $364,015 for the years ended December 31, 1999, 1998 and 1997, respectively.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement was to be effective for all fiscal quarters of fiscal years beginning after June 15, 1999. However, in June 1999, SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133" was issued. SFAS No 137 allows entities which have not adopted SFAS No. 133 to defer its effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. This Statement should not be applied retroactively to financial statements of prior periods. The Company adopted the deferral provisions of SFAS No. 137, effective January 1, 2000 and has not completed its evaluation of the effect SFAS No. 133 will have on the Company's results of operations or financial condition.
A summary of gross unrealized gains and losses at December 31, 1999 and 1998 follows:
A summary of net investment income for the years ended December 31, 1999, 1998 and 1997 follows:
The Company has no exposure to any asbestos or environmental claims associated with general liability policies issued with the pre-1986 pollution exclusion. Policies written with the exclusion are typically associated with mass tort environmental and asbestos claims. The Company has never issued a policy with the pre-1986 pollution exclusion. The Company's exposure to asbestos and environmental liability claims is primarily limited to asbestos and environmental liability insurance for contractors and consultants involved in the remediation, removal, storage, treatment and/or disposal of environmental and asbestos hazards.
At December 31, 1999, the Company has a $10,000,000 bank line of credit with a financial institution. The line of credit does not require the Company to maintain a compensating balance. There were no outstanding borrowings under this line of credit at December 31, 1999 and 1998. 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.
On September 1, 1999, the Company obtained a $4,500,000 term loan from a financial institution, which is currently payable in quarterly installments of $250,000 which commenced December 1, 1999. The interest rate is fixed at 7.25%. The loan agreement contains certain limitations on borrowings, minimum statutory capital levels and requires maintenance of certain ratios. The proceeds were used to replace the term loan obtained on December 9, 1998.
Principal payments on long-term debt are $1,600,052, $3,143,108, $3,189,256, $2,638,716 and $1,041,724 for the years 2000 through 2004, respectively. Interest expense paid in 1999, 1998 and 1997 amounted to $3,751,313, $5,121,093 and $4,630,502, respectively.
The fair value at December 31, 1999 of the mortgage, the term loan and the senior notes approximate carrying value. It is not practicable to estimate the fair value of convertible note at December 31, 1999 because of the complex and unique terms associated with this debt instrument.
The effective income tax rate, as a percentage of earnings before income taxes and minority interest follows:
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 $85,000 in 1999, 1998 and 1997.
During 1999, 1998 and 1997, ACMAT repurchased, in open market and privately negotiated transactions 7,260, 4,769, and 3,400 respectively, shares of its Common Stock at an average price of $20.93, $20.65 and $20.44 per share, respectively. The Company also repurchased during 1999, 1998 and 1997, in open market and privately negotiated transactions 189,221, 342,366 and 1,347,686, respectively, shares of its Class A Stock at an average price of $12.52, $15.10 and $14.98 per share, respectively.
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. There were no stock options granted in 1999, 1998 or 1997, however, the exercise price of the Class A Stock options were re-priced at $7.25 on December 16, 1999.
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 From 1986 to 1996, the Company obtained its general liability insurance from its insurance subsidiaries. Since 1996, the Company obtained its general liability insurance from unaffiliated insurance companies. Since 1989, the Company has obtained its surety bonds from its insurance subsidiary.
Note: Operating earnings represent operating revenues less the cost of contract revenues, losses and loss adjustment expenses and amortization of policy acquisition costs and selling, general and administrative expenses.
The following presents the condensed financial position of ACMAT Corporation (parent company only) as of December 31, 1999 and 1998 and its condensed statements of earnings and cash flows for the years ended December 31, 1999, 1998 and 1997.