Contract revenues were $10,056,322 in 1997 compared to $9,415,734 in 1996. Construction revenue is difficult to predict in 1998 and depends greatly on the successful securement of contracts bid. The Company's construction backlog at December 31, 1997 was approximately $4,800,000 compared to $8,700,000 at December 31, 1996.
Net investment income was $6,504,716 in 1997 compared to $6,535,572 in 1996, representing effective yields of 4.65% and 4.69%, respectively. Invested assets, including cash and cash equivalents, were $137,381,669 and $142,677,985 at December 31, 1997 and 1996, respectively. The decrease in invested assets is attributable to the net cash flow used to purchase stock and repay debt offset in part 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 $5,767,808 in 1997 compared to $5,610,176 in 1996. The increase in selling, general and administrative expenses from 1997 to 1996 reflects an increase in the bad debts expense.
Income tax expense was $1,739,616 in 1997 compared to $2,313,828 in 1996, representing effective Federal tax rates of 27.3% and 26.5%, respectively. The Federal effective tax rate fluctuates according to the mix of tax exempt and taxable securities held by the Company.
Contract revenues were $9,415,734 in 1996 compared to $11,614,632 in 1995. In 1996, the Company has focused on fewer, more profitable projects.
Realized capital gains from the sale of investments during 1996 were $257,774 compared to realized capital gains of $7,897 in 1995. In December, 1996, the Company sold fixed maturity securities with a book value of approximately $34,000,000 resulting in a realized gain of approximately $204,000.
Cost of contract revenues were $8,396,344 in 1996 compared to $10,774,758 in 1995. The decrease in cost of contract revenues during 1996 compared to 1995 reflects the decrease in contract revenues. Cost 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, 1996 was approximately $8,700,000 compared to $3,600,000 at December 31, 1995.
Income tax expense was $2,313,828 in 1996 compared to $2,414,400 in 1995, representing effective Federal tax rates of 26.5% and 25.1%, respectively. The Federal effective tax rate fluctuates according to the mix of tax exempt and taxable securities held by the Company.
The combined ratio is one means of measuring the underwriting experience of a property and casualty insurer. The combined ratio, consisting of the ratio of losses and loss adjustment expenses to premiums earned (the "loss ratio") plus the ratio of underwriting expenses to premiums written (the "expense ratio") reflects relative underwriting profit or loss. The Company's insurance subsidiaries' loss ratios under generally accepted accounting principles ("GAAP") were 28.8%,30.0% and 30.0% for the years ended December 31, 1997, 1996 and 1995, respectively. These loss ratios are below industry averages and are believed to be the result of conservative underwriting. There can be no assurance that such loss ratios can continue. The Company's insurance subsidiaries' expense ratios under GAAP were 48.0%, 43.5% and 41.4% for the years ended
December 31, 1997, 1996 and 1995, respectively. The Company's insurance subsidiaries' combined ratios under GAAP were 76.8%, 73.5% and 71.4% for the years ended December 31, 1997, 1996 and 1995, respectively. The increase in the 1997 combined ratio results primarily from the decline in premiums.
ACMAT's principal sources of funds are dividends from its wholly-owned subsidiaries, intercompany and short-term borrowings, insurance underwriting fees from its subsidiaries, construction contracting operations and rental income. Management believes that these sources of funds are adequate to serve its indebtedness. ACMAT has recently utilized short-term borrowings to repurchase its stock. ACMAT has also relied on dividends from its insurance subsidiaries to repay debt.
The Company realized cash flow from operations of $5,585,329 in 1997 compared to $14,260,264 in 1996 and $19,289,320 in 1995. Net cash flows provided by operations in 1997 were derived principally from premium collections and collateral held. Substantially all of the Company's cash flow was 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 $4,993,298 in 1997. Net cash used for investing activities amounted to $11,392,397 in 1996 and $11,431,882 in 1995.
The Company maintains a short-term unsecured bank credit line of $10 million to fund interim cash requirements. There was $5,000,000 outstanding under this line of credit as of December 31, 1997. 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.
Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995
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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 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.
Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996, 1995
Securities are classified in one of three categories, held to maturity, trading or available for sale. Debt securities for which the Company has the ability and intent to hold to maturity are classified as held to maturity and are stated at amortized cost. Securities bought in anticipation of short-term market movements, if any, are classified as trading securities and are carried at market value with unrealized gains or losses reflected in the statement of income. Securities that are not classified as either held-to maturity securities or trading securities are classified as available for sale and are carried at market value with unrealized gains or losses reported as a separate component of stockholders' equity, net of income taxes.
Property and equipment are reported at depreciated cost. Depreciation is computed using the straight-line method at rates based upon the respective estimated useful lives of the assets. Maintenance and repairs are expensed as incurred.
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 was a non-cash transaction that is not reflected in the Statements of Cash Flow.
The amortized cost and fair value of fixed maturities at December 31, 1997 and 1996, by effective maturity, follows:
A summary of receivables at December 31, 1997 and 1996 follows:
A summary of property and equipment at December 31, 1997 and 1996 follows:
Future minimum rental income to be generated by leasing a portion of the building under noncancelable operating leases as of December 31, 1997 are estimated to be $612,548 for 1998, $654,548 for 1999, $591,845 for 2000, $570,944 for 2001, and $570,944 for 2002. Rental income earned in 1997, 1996 and 1995 was $561,852, $504,063 and $543,507, respectively.
The Company has available a $10,000,000 bank line of credit with Fleet Bank, N.A. which expires in June 1999. 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 $5,000,000 at December 31, 1997 and $8,000,000 at December 31, 1996.
A summary of long-term debt at December 31, 1997 and 1996 follows:
On February 3, 1997, the Company obtained a $7,500,000, seven-year term loan from a financial institution, which is payable in quarterly installments of $270,000 commencing March 31, 1997 with a final payment of $210,000 on March 31, 2004. The interest rate is equal to the LIBOR plus 160 basis points for each 90-day interest period. The proceeds were used to purchase shares of Class A Stock.
The terms of the note agreements with AIG and American International Life contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and a minimum tangible net worth of $12,000,000. ACMAT may also require its insurance subsidiaries to pay dividends to the extent of funds legally available therefor, in order to enable ACMAT to have funds to pay on a timely basis all amounts due with respect to the notes. The Company is in compliance with all of these covenants at December 31, 1997.
On April 1, 1996, the Company obtained a $2,500,000, seven-year term loan from a financial institution, which is repayable in quarterly installments of $89,286 commencing June 30, 1996. The Term Loan shall bear interest as follows: (a) sixty percent (60%) of the outstanding principal balance of the Term Loan shall bear interest at a fixed rate of 8.22% and (b) forty percent (40%) of the outstanding principal balance of the Term Loan shall bear interest at LIBOR plus 180 basis points for each 90-day interest period (7.34%). The proceeds were used to repay the line of credit.
On June 30, 1994, the Company obtained an $8,000,000, six-year term loan from a financial institution, which is repayable in quarterly installments of $333,333 commencing September 30, 1994. The Term Loan shall bear interest as follows: (a) sixty percent (60%) of the outstanding principal balance of the Term Loan shall bear interest at a fixed rate of 8.51% and (b) forty percent (40%) of the outstanding principal balance of the Term Loan shall bear interest at LIBOR plus 180 basis points for each 90-day interest period (7.32%). Portions of the proceeds of this term loan were applied to the repayment of intercompany debt and to the reduction of the Company's line of credit.
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 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 $4,365,381, $4,375,894, $11,191,393, $2,928,287 and $2,660,421 the years 1998 through 2002, respectively. Interest expense paid in 1997, 1996 and 1995 amounted to $4,630,502, $4,980,833 and $4,791,005, respectively.
It is not practicable to estimate the fair value of long-term debt at December 31, 1997 because of the complex and unique terms associated with these debt instruments.
The effective Federal income tax rate, as a percentage of earnings before income taxes and minority interest follows:
There was no valuation allowance for deferred income tax assets as of December 31, 1997 and 1996. 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, 1997.
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, $100,000 and $100,000, for 1997, 1996 and 1995, respectively.
During 1997, 1996 and 1995, the Company issued 450,000, 499,999 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, all of which was repurchased by the Company in 1997, see note 10. 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 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, 1997, 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.
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the years ended December 31, 1997, 1996 and 1995:
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 subsidiary. Since 1989, the Company has obtained its surety bonds from its insurance subsidiary.
A summary of the unaudited quarterly results of operations for 1997 and 1996 follows:
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, 1997 and 1996 and its condensed statements of earnings and cash flows for the years ended December 31, 1997, 1996 and 1995.
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company's 1997 Annual Report.
Income taxes received from subsidiaries during the years ended December 31, 1997, 1996 and 1995 were $112,995, $1,990,201 and $2,214,656, respectively. Interest paid during the years ended December 31, 1997, 1996 and 1995 was $4,630,502, 6,099,379 and $5,769,404, respectively. Interest paid in 1996 and 1995 included $1,118,546 and $978,399, respectively, paid to subsidiaries for intercompany loans.
See Note 11 to the Consolidated Financial Statements in the Annual Report for a description of income taxes.