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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0 - 6234
ACMAT CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-0682460
(State of incorporation) (I.R.S. Employer Identification No.)
233 Main Street
New Britain, Connecticut 06050-2350
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(860) 229-9000
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
Class A Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
The aggregate market value as of March 1, 1999 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $35,709,538.
As of March 1, 1999 there were 592,088 shares of the registrant's Common Stock
and 2,389,808 shares of registrant's Class A Stock, each without par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
Item 1. Business 3
General 3
Financial Information about Operating Segments 3
United Control Liability Insurance 3
ACSTAR Bonding 5
Insurance and Bonding Performance Ratios 5
Underwriting 6
Reinsurance 6
Claims 6
Reserves for Losses and Loss Adjustment Expenses 6
IRIS Ratios 9
A.M. Best Ratings 9
Risk-Based Capital 9
ACMAT Contracting 9
General 9
Backlog 9
Materials 10
Contract Acquisition 10
Warranty 10
Asbestos Abatement Operations 10
Marketing 10
Competition 11
Year 2000 Issue 20
Investments 12
Environmental Compliance 14
Employees 14
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Reserves for Losses and Loss Adjustment Expenses 18
Liquidity and Capital Resources 19
Year 2000 Issue 20
Regulatory Environment 21
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
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PART I
ITEM 1. BUSINESS
General
ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial
insurance and bonding coverages for contractors, architects, engineers and other
professionals in the construction and environmental fields and other specialty
insurance such as products liability. The Company derives its underwriting
expertise from its construction and remediation operations. Through United
Coastal Insurance Company ("United Coastal Insurance"), the Company provides a
broad line of general, professional, environmental and other liability insurance
primarily to environmental contractors and specialty trade contractors and
architects, engineers and other professionals. Through ACSTAR Insurance Company
("ACSTAR Insurance"), the Company provides surety bonds for general building,
specialty trade and environmental contractors and all forms of commercial
surety. Both United Coastal Insurance and ACSTAR Insurance are rated A-
(excellent) by The A.M. Best Co., Inc. ("A.M. Best"). In 1998, insurance
operations accounted for over 64% of the Company's consolidated revenues.
The Company is also engaged in construction contracting which consists of
interior contracting services involving the design and furnishing of building
interiors and asbestos abatement services for commercial, industrial and
institutional buildings.
Financial Information about Operating Segments
Financial information relating to the three business segments is set forth in
Note 16 to the consolidated financial statements on page 41 of this document.
The Company has three reportable operating segments: United Coastal Liability
Insurance, ACSTAR Bonding and ACMAT Contracting. The Company's reportable
segments are primarily the three main legal entities of the Company which offer
different products and services. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
The United Coastal Liability Insurance operating segment offers specific lines
of liability insurance as an approved non-admitted excess and surplus lines
insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of
Columbia. United Coastal offers claims made and occurrence policies for specific
specialty lines of liability insurance through certain excess and surplus lines
brokers who are licensed and regulated by the state insurance department(s) in
the state(s) in which they operate. United Coastal offers general, asbestos,
lead, pollution and professional liability insurance nationwide to specialty
trade contractors, environmental contractors, property owners, storage and
treatment facilities and professionals. United Coastal also offers products
liability insurance to manufacturers and distributors.
The Bonding operating segment provides, primarily through ACSTAR, surety bonds
written for prime, specialty trade, environmental, asbestos and lead abatement
contractors and miscellaneous obligations. ACSTAR also offers other
miscellaneous surety such as workers' compensation bonds, supply bonds,
subdivision bonds and license and permit bonds.
ACMAT Contracting provides construction contracting services to commercial and
governmental customers. ACMAT Contracting also provides underwriting services to
its insurance subsidiaries. In addition, ACMAT Contracting owns a commercial
office building in New Britain, Connecticut and leases office space to its
insurance subsidiaries as well as third parties.
UNITED COASTAL LIABILITY INSURANCE
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The liability insurance lines of the Company, which consist primarily of
contractor policies and professional liability policies, are discussed more
fully below:
Contractors
- General Liability - Policies are offered to general contractors and
specialty trade contractors involved in plumbing, heating, electrical,
framing, roofing, drilling, excavation, demolition, road work, and
other contracting activities. Coverage is also offered for other
specialized non-contractor general liability risks. Coverage is limited
to third-party bodily injury and property damage arising out of covered
operations. General liability insurance is offered on either a
claims-made or occurrence basis.
- Contractor Pollution Liability - Policies are offered to contractors
involved in hazardous waste remediation or cleanup, installation or
removal of storage tanks, or the transportation of hazardous waste.
Coverage is provided for third party-bodily injury or property damage
liability caused by release of, or exposure to, pollutants as a result
of contractors' operations. Contractor pollution liability insurance is
offered on a claims-made basis.
- Asbestos and Lead Abatement Liability - Policies are offered to
contractors involved in the removal or encapsulation of asbestos and/or
lead containing materials from structures or their containment through
appropriate encapsulation or repair. Coverage is provided for
third-party bodily injury and property damage liability as a result of
a release of asbestos or lead which arises out of the contractors'
operations. Asbestos and lead abatement liability insurance is provided
on either a claims-made or occurrence basis.
Professionals
- Architects and Engineers Professional Liability - Policies are offered
to architects and engineers and consultants in the fields of
architecture; civil, electrical, mechanical, structural and process
engineering; construction/property management; design/build services;
laboratory testing and surveying. Project professional liability
policies are also offered for architect and engineer design teams and
owner controlled wrap-ups. All policies are written on a claims-made
basis.
- Environmental Asbestos and/or Lead Consultants Professional Liability -
Policies are offered to consultants involved in providing services such
as environmental assessments, design/build services, asbestos or lead
consulting, remedial investigations and feasibility studies, and
storage tank consulting. Coverage is provided for liability arising out
of the acts, errors or omissions of a consultant in the performance of
professional services. All professional liability coverages are written
on a claims-made basis.
Owners and Lenders
- Hazardous Waste Storage and Treatment Pollution Liability - Policies
are offered on a claims-made basis in response to the insurance
requirements of the Environmental Protection Agency in connection with
facilities subject to the Resource Conservation and Recovery Act of
1976 ("RCRA").
- Site Specific Pollution Liability - These policies cover pollution
claims arising or emanating from a specific site and are provided on a
claims-made basis. Comprehensive site evaluations are required prior to
providing coverage for any site.
- Lenders Pollution Liability - Policies are offered to financial
institutions for pollution occurring at property owned or controlled by
the institution as a result of foreclosure or otherwise. Lender
pollution liability coverage is offered on a claims-made basis.
Products Liability
- Products Liability - Policies are offered on a claims-made or
occurrence basis to manufacturers for a variety of products including
chemicals, fertilizers, pesticides, pollution control devices, storage
tanks and other.
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The Company customizes many of its insurance policies to suit the individual
needs of its insureds. Combined policies insuring multiple exposures under one
policy form and one combined policy limit are available.
ACSTAR Bonding
Surety bonds are written for general, specialty trade, environmental, asbestos
and lead abatement contractors. The Company also offers a wide variety of
miscellaneous bonds. Many bonds are supported by various levels of collateral
based upon the financial condition of the customer.
The Company often requires cash or irrevocable letters of credit to
collateralize a portion of most bonds issued. In addition, the Company will only
accept irrevocable letters of credit from financial institutions which have a
rating of C "sound credit risk" or higher as determined by Thomson BankWatch,
Inc. However, no assurance can be made that such financial institutions will
maintain their financial strength and, thus, that funds guaranteed under letters
of credit will be available, if needed, to offset any potential future claims.
The Company provides the following types of bonds:
- Payment and performance bonds - Bonds are provided for general building
and specialty trade contractors, environmental remediation and asbestos
abatement contractors and consultants, lead abatement contractors and
solid waste disposal contractors. A payment and performance bond
guarantees satisfactory performance and completion of the contractor's
work and payment of the contractor's debts and obligations relating to
the performance of the contract covered by the bond.
- Closure and post-closure bonds - Bonds are provided for owners of solid
and hazardous waste landfills as required to meet certain requirements
under RCRA and remediation bonds in connection with the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). Closure bonds usually guarantee that a property owner will
restore property to a specified level or condition. Post-closure bonds
guarantee cultivation and maintenance of a closed site.
- Supply and other specialty bonds - Bonds are provided for contractors,
manufacturers and other owners in their normal course of operations,
usually to guaranty the supply of equipment and material.
- Miscellaneous surety, license, permit, self insurer, supersedeas and
other bonds - Miscellaneous bonds are provided for applicants based on
those requirements specified in the bond form and the applicant's
financial strength.
The underwriting department and management are responsible for the development
of new insurance products and enhancements. Underwriting profitability is
enhanced by the creation of niche products focused on classes of business which
traditionally have provided underwriting profits.
Insurance and Bonding Performance Ratios
The following table sets forth the combined ratios of the Company, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense.
Year
Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
GAAP Ratios:
Loss ratio 19.6% 28.8% 30.0%
Expense ratio 51.8 48.0 43.5
---- ---- ----
GAAP combined ratio 71.4 76.8 73.5
==== ==== ====
Statutory Ratios:
Loss ratio 19.9 29.5 30.5
Expense ratio 59.2 45.0 42.7
---- ---- ----
Statutory combined ratio 79.1% 74.5% 73.2%
==== ==== ====
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The increase in the combined statutory ratio over the past three years results
primarily from the decline in premiums offset by the release of reserves on
older underwriting years. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Underwriting
The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over forty-nine years of construction contracting.
Accordingly, ACMAT, in addition to its construction contracting operations,
provides risk evaluation, loss adjustment, underwriting, claims handling and
monitoring services for its insurance subsidiaries, United Coastal Insurance and
ACSTAR Insurance. Contractors seeking liability insurance and bonding through
the Company are carefully reviewed with respect to their past practices, claims
history and records. Other factors considered are the contractors' and
professionals' financial conditions, training techniques, safety procedures,
histories of violations, record keeping, supervisory qualifications and
experience. Historically, the Company has issued policies and bonds to fewer
than twenty-five percent of its applicants.
Underwriting procedures for products liability insurance involve conducting an
in-depth review of the product that is being manufactured or distributed. Such
review involves examining an applicant's past record of recalls, claims history
and litigation.
The Company's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio well below 100%.
The Company has a conservative underwriting philosophy which, in the opinion of
management, is one of the primary reasons for the favorable loss ratios relative
to the property and casualty insurance industry over the last three years.
The Company continually monitors financial stability of contractors with surety
bonds outstanding. Work in progress reports and updated financial information
are reviewed by the Company to ensure that the contractor continues to meet the
underwriting guidelines.
Reinsurance
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 $10 million for liability and for individual surety bonds, the
Company reinsures through various layered excess of loss agreements up to $10
million on a $15.6 million bond. 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 of its
excess of loss reinsurers.
The availability and price of reinsurance fluctuates according to market
conditions. Depending on the availability and cost of reinsurance, the Company
may, from time to time, elect to cede greater or lesser portions of its
underwriting risk.
Claims
The Company directly handles substantially all claims of its insureds, except
that independent claims adjusters and/or counsel selected for their experience
and reputation in the locality of the claim are retained to conduct initial
fact-finding investigations. All decisions respecting payment of claims are made
by experienced employees of the Company.
Reserves for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses are estimates at any given
point in time of what the Company may have to ultimately pay 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 losses. Ultimate losses and loss
adjustment expenses are affected by many factors which are difficult to predict,
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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. Management believes that the reserves for losses and loss
adjustment expenses at December 31, 1998 are adequate to cover the unpaid
portion of the ultimate net cost of losses incurred through that date and
related adjustment expenses incurred, including losses incurred but not
reported.
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
In determining appropriate adjustments to reserves historical data is reviewed
and consideration is given to the anticipated impact of various factors such as
legal developments and economic conditions, including the effects of inflation.
Reserves are monitored and recomputed periodically using new information on
reported claims.
The following table sets forth a reconciliation of beginning and ending reserves
for losses and loss adjustment expenses for the periods indicated on a GAAP
basis for the business of the Company.
1998 1997 1996
---- ---- ----
Balance at January 1 $ 48,900,713 $ 47,960,084 $ 45,235,311
Less reinsurance recoverable 3,478,121 3,841,001 3,872,099
------------ ------------ ------------
Net balance at January 1 45,422,592 44,119,083 41,363,212
Incurred related to:
Current year 4,508,667 5,176,030 7,137,183
Prior years (2,321,939) (838,778) (1,167,203)
------------ ------------ ------------
Total incurred 2,186,728 4,337,252 5,969,980
Payments related to:
Current year 18,260 94,398 153,514
Prior years 6,700,114 2,939,345 3,060,595
------------ ------------ ------------
Total Payments 6,718,374 3,033,743 3,214,109
Net balance at December 31 40,890,946 45,422,592 44,119,083
Plus reinsurance recoverable 2,224,116 3,478,121 3,841,001
------------ ------------ ------------
Balance at December 31 $ 43,115,062 $ 48,900,713 $ 47,960,084
============ ============ ============
The decrease of incurred losses and loss adjustment expenses of prior years
represents a reallocation of reserves among accident years. There can be no
assurance, however, that the Company's reserves will be sufficient to cover
ultimate losses and loss adjustment expenses or that future adjustments to
losses and loss adjustment expense reserves will not be required.
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.
As of December 31, 1998, 1997 and 1996 reserves for the combined losses and loss
adjustment expenses of the Company's insurance operations as determined in
accordance with accounting principles and practices prescribed or permitted by
insurance regulatory authorities ("Statutory basis reserves") were $49,758,263,
$57,723,399 and $59,968,945, respectively. As of December 31, 1998, 1997 and
1996 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $43,115,062, $48,900,713 and
$47,960,084, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves
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result from the minimum statutory, or "Schedule P", loss reserves required to be
maintained by the Company's insurance subsidiaries, partially offset by the
netting of reinsurance recoverable against losses and loss adjustment expense
reserves for statutory purposes.
The following losses and loss adjustment expense reserve runoff table is for the
combined insurance operations of the Company's insurance subsidiaries. The data
for 1992 and prior periods are presented on a net basis in the reserve run-off
table. Restatement of prior periods is not practicable.
Each column shows the reserve held at the indicated calendar year-end and
cumulative data on payments and reestimated liabilities for that accident year
and all prior accident years making up that calendar year-end reserve.
Therefore, the redundancy (deficiency) is also a cumulative number for that year
and all prior years. It would not be appropriate to use this cumulative history
to project future performance.
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(thousands)
Liability for unpaid losses
and loss adjustment expenses 15,626 21,378 26,234 29,240 30,437 36,726 41,363 44,119 45,423 40,891
Liability reestimated as of:
One year later 15,476 21,378 26,234 29,240 30,437 35,825 40,193 43,282 43,106
Two years later 15,476 21,378 26,234 29,240 28,337 34,659 37,872 40,865
Three years later 15,476 21,378 26,234 26,000 27,170 29,913 35,354
Four years later 14,876 21,378 22,094 24,833 23,550 27,193
Five years later 14,876 16,642 20,927 22,284 20,880
Six years later 6,622 15,475 18,841 19,914
Seven years later 5,455 13,394 16,932
Eight years later 4,411 12,845
Nine years later 4,261
Cumulative Redundancy
(deficiency): 11,365 8,533 9,302 9,326 9,557 9,533 6,009 3,256 2,317
Paid (cumulative) as of:
One year later 565 1,357 3,216 6,142 1,560 2,361 3,067 2,942 6,703
Two years later 743 4,067 8,699 7,574 3,655 4,582 5,256 8,951
Three years later 2,140 8,954 9,576 8,603 5,022 6,412 8,922
Four years later 3,460 10,233 10,488 9,554 6,189 7,969
Five years later 3,924 10,554 10,816 9,818 6,869
Six years later 4,010 10,858 10,856 10,034
Seven years later 4,012 10,874 10,949
Eight years later 4,011 10,874
Nine years later 4,011
Gross liability - end of year 34,730 40,955 45,235 47,960 48,901 43,115
Reinsurance recoverable 4,293 4,229 3,872 3,841 3,478 2,224
------ ------ ------ ------ ------ ------
Net liability - end of year 30,437 36,726 41,363 44,119 45,423 40,891
In 1995, the Company changed its method of reporting estimated liabilities for
claims-made policies which is reflected in the reserve run-off table. For
calendar years 1994 and prior, reserves associated with claims-made policies
were reported based on accident year basis consistent with the Company's
treatment in Schedule P to the Company's Statutory Annual Statement. At the
request of the Arizona Insurance Department, ("Department") the Company was
required to change its method of reporting in Schedule P to the Annual
Statement, reserve and payment data associated with claims-made policies to a
report year basis versus an accident year basis in order to comply with the
National Association of Insurance Commissioners ("NAIC") guidelines. The
Company's prior treatment of claims-made loss data on an accident basis was
approved by the Department during years prior to 1995. For its 1995 statutory
filing, the Company restated loss data reported in Schedule P to comply with the
Department's request. As a result of the change to Schedule P for claims-made
policies, the Company has also changed the method for reporting claims-made loss
payment data in the reserve run-off table to conform to a report year basis for
claims-made policies. Occurrence policies were and continue to be reported on an
accident year basis. The 1995 reestimated liabilities for each calendar year
have been restated to reflect the new method of reporting.
Because of the change in reporting loss data for claims-made policies from an
accident year basis to a report year basis, prior accident year reserves have
been moved forward to fall within the report year resulting in no change to
total reserve amounts or estimates. Management believes that the aggregate
reserves for losses and loss adjustment expenses for all accident years are
adequate.
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IRIS Ratios
The National Association of Insurance Commissioners ("NAIC") has developed the
Insurance Regulatory Information System ("IRIS"), intended to assist state
insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies "usual values" for each
ratio. When an insurance company's ratio falls outside the "usual value," it is
designated an "unusual value," which event alerts state insurance departments to
potential problems. For the year ended December 31, 1998, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value", except
for the change in net writings for United Coastal and the change in surplus and
the investment yield for both insurance companies. The change in net writings
for United Coastal was below the NAIC standard of 33% primarily due to a
continuing soft insurance marketplace and the Company's strategy to avoid
current unfavorable pricing. The investment yield for United Coastal is below
the NAIC standard of 4.5% primarily due to loss related to United Coastal's
share of losses from a limited partnership investment. The investment yield for
ACSTAR is above the NAIC standard of 10% primarily due to dividends received
from ACSTAR's investment in United Coastal. The decrease in surplus is greater
than 10% primarily due to dividends of $18,500,000 paid by United Coastal and
dividends of $6,390,000 paid by ACSTAR during 1998.
A.M. Best Ratings
A.M. Best ratings are indications of the solvency of an insurer based on an
analysis of the financial condition and operations of a company relative to the
industry in general. Occasionally, the requirement for an A.M. Best's-rated
insurer is a condition imposed upon the contractor by the party engaging the
contractor. Certain insurance brokers also restrict the business they will place
with insurers which are not A.M. Best's-rated. The 1998 Best letter ratings
range from A++ (superior) to F (in liquidation). United Coastal Insurance and
ACSTAR Insurance each have an A.M. Best's rating of A- (excellent).
Risk-Based Capital
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, 1998 was significantly above the level which
might require regulatory action.
ACMAT CONTRACTING
General
The Company provides a broad range of general building construction and
coordinated interior contracting services. The Company began to offer asbestos
abatement services in the 1970's and the Company continues to be active in the
asbestos abatement field. The Company provides new and renovation general
construction and installs interiors for office buildings, retail establishments,
schools, colleges, churches, hospitals and other buildings. The Company's
general building construction and interior contracting is provided both in
connection with new buildings and in connection with the remodeling and
renovation of interiors of existing buildings usually under contracts with
building owners and building occupants. The Company provides a broad range of
coordinated interior contracting services, many of which are performed by
subcontractors.
Backlog
The following table sets forth the Company's backlog of unbilled contract
amounts, the total number of contracts and the number of contracts with unbilled
amounts in excess of $400,000 as of December 31, 1998 and 1997:
December 31, 1998 December 31, 1997
----------------- -----------------
Total Number of Contracts. 4 12
Total unbilled contract amounts. $6,000,000 $4,800,000
Number of contracts with unbilled amounts in
excess of $400,000. 2 2
Aggregate unbilled amount of contracts in
excess of $400,000. $5,900,000 $4,000,000
The Company estimates that all of the December 31, 1998 backlog will be
completed prior to December 31, 1999.
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Materials
The Company purchases the materials it installs in the course of its
construction contracting operations from a number of suppliers. Most of the
Company's materials are standard building components which historically have
been readily available from several suppliers. Some components are manufactured
to the Company's specifications. Most of the materials used by the Company are
shipped directly to the job site by the manufacturer.
Contract Acquisition
The Company's work projects are obtained by lump sum fixed price bids, unit
prices or are negotiated. Contract prices are usually determined by competition
with other contractors.
Warranty
Each project usually contains a one-year warranty or guaranty period, wherein
the Company and its subcontractors warrant that the work is free from defects
and was performed in accordance with the plans and specifications. Occasionally,
the Company is required to make minor corrections or adjustments, but has never
incurred any significant costs in connection with any such work.
Asbestos Abatement Operations
Both the Company's insurance and construction contracting operations have
involved risks associated with asbestos. The Company has in the past insured and
continues to insure risks associated with asbestos abatement or containment
operations on both a claims-made and occurrence basis. Since harm from exposure
to asbestos fibers may not be detectable in humans for as much as thirty years,
losses under insurance contracts written on an occurrence basis may not be known
for some time.
The Company's construction contracting operations involve the removal of
asbestos. As asbestos containing materials deteriorate or become disturbed by
incidental or intentional contact, asbestos fibers may enter the air and can
circulate into the breathing zone of building occupants. Exposure to asbestos is
thought by some to be a cause of cancer. In the mid 1970's, the Company became
engaged in the removal of asbestos in addition to its other contracting
operations. Since that time, it has been engaged in hundreds of contracts
involving the removal of asbestos. Claims by non-employees related to asbestos
have been made against the Company from time to time and are pending and there
can be no assurance that claims will not be made in the future.
While the Company currently has claims pending against it by employees, the
Company believes that it is fully covered by workers' compensation insurance
with respect to any claims by current and former employees relating to asbestos
operations. The Company currently obtains its workers' compensation insurance in
those states in which it performs work either from state insurance funds or one
of several insurance companies designated in accordance with the Assigned Risk
Pool. The amount of workers' compensation insurance maintained varies from state
to state but is generally greater than the maximum recovery limits established
by law and is not subject to any aggregate policy limits. In the past, the
Company has received a number of asbestos-related claims from employees, all of
which have been fully covered by its workers' compensation insurance. The
Company believes, although no assurances can be given, that workers'
compensation insurance sufficient to cover all future claims will remain
available in accordance with applicable state laws.
MARKETING
Insurance and Bonding
As an excess and surplus lines carrier, United Coastal Insurance markets its
policies through excess and surplus lines brokers only in those states in which
it is permitted to write coverage. Currently, United Coastal Insurance is
permitted to write excess and surplus lines insurance as a nonadmitted insurer
in forty-six states, the District of Columbia, Puerto Rico and the Virgin
Islands.
ACSTAR Insurance offers payment and performance bonds through carefully selected
insurance agents which specialize in the needs of contractors. All underwriting
approvals and issuance of policies and bonds are performed directly by the
Company's insurance subsidiaries.
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11
The Company's insurance products are marketed in all 50 states primarily through
several of the largest insurance brokers, including J&H Marsh & McLennan, Willis
Corroon, AON, Inc. and Sedgwick.
ACMAT Contracting
The Company markets its construction contracting services directly to building
owners and building occupants. Project opportunities are brought to the
attention of the Company through various sources such as F. W. Dodge Company,
which publishes lists of projects available for bid, architects, owners, general
contractors, or engineers who are familiar with the Company. The Company also
depends upon repeat business and responses to the Company's advertising program
which is intended to emphasize ACMAT's packaged interior renovation capability.
ACMAT's sales force consists of its senior management and project managers, all
of whom function as construction consultants and work closely with owners,
tenants and architects.
COMPETITION
Insurance and Bonding
The property and casualty insurance industry is highly competitive. The Company
competes with large national and smaller regional insurers in each state in
which it operates, as well as monoline specialty insurers. The Company's
principal competitors include certain insurance subsidiaries of American
International Group, Inc. ("AIG"), Reliance Insurance Group, Zurich Insurance
Group, Design Professionals Insurance Company, CNA Insurance Companies and
Lloyd's of London. Many of its competitors are larger and have greater financial
resources than the Company. Among other things, competition may take the form of
lower prices, broader coverage, greater product flexibility, higher quality
services or the insurer's rating by independent rating agencies. The Company
competes with admitted insurers, surplus line insurers, new forms of insurance
organizations such as risk retention groups, and alternative self-insurance
mechanisms.
Competition in the field of surety bonding is intense and many of the Company's
competitors are larger and have greater surplus than the Company, thereby
allowing them to provide bonds with higher limits than those which the Company
is able to provide. The Company's principal competitors include the St. Paul
Companies, Inc., Reliance Insurance Group, AIG, CNA and Frontier Insurance
Company. The Company's insurance subsidiaries hold primary and reinsurance
certificates of authority as acceptable sureties on Federal bonds as do
approximately 250 to 300 other surety companies. The certificates give the
Company an advantage over companies which are not certified by the United States
Treasury Department with respect to surety bonding on Federal projects in that
such certification has become a standard with respect to both Federal and other
bonds. Approximately one-half of the surety bonds written by the Company's
subsidiaries are required to be provided by a Treasury listed company. With
respect to other bonds, the Company faces competition from as many as 1,000
additional non-certified surety companies.
ACMAT Contracting
Competition in the interior construction business serviced by ACMAT generally is
intense. Historically, a majority of the Company's construction business was
performed on projects on which the Company had been in competition with other
contractors. The Company focuses its efforts on privately negotiated contracts
obtained through advertising and its reputation. Quality of service and pricing
are the Company's principal methods of competition.
The economic climate of the Northeast has increased the competitive pressure on
all aspects of the Company's contracting operations. The Company has responded
with marketing efforts seeking to obtain business when the Company's reputation
and experience allow it to privately negotiate contracts at prices which are
sufficiently profitable.
REGULATION
The business of ACMAT's insurance subsidiaries is subject to comprehensive and
detailed regulation and supervision throughout the United States. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative authority which includes, but is not limited to, the power to
regulate licenses, to transact business, trade practices, agent licensing,
policy forms, claim practices, underwriting practices, reserve requirements, the
form and content of required financial statements and the type and amounts of
investments permitted. The insurance companies are required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
they do business, and their operations and accounts are subject to examination
by such agencies at regular intervals.
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As a nonadmitted excess and surplus lines insurer, United Coastal Insurance is
not subject to the comparatively more extensive state regulations to which
ACSTAR Insurance is subject. The regulations and restrictions to which ACSTAR
Insurance and United Coastal Insurance are subject include provisions intended
to assure the solvency of ACSTAR Insurance and United Coastal Insurance and are
primarily for the protection of policyholders and loss claimants rather than for
the benefit of investors.
State insurance regulations impose certain restrictions upon the types of
investments that the Company's insurance subsidiaries can acquire and the
percentage of their capital or assets that may be placed in any particular
investment or type of investment. Certain states also require insurance
companies to furnish evidence of financial security by means of a deposit of
marketable securities with the state insurance regulatory authority. On December
31, 1998, the Company's insurance subsidiaries had securities with an aggregate
book value of approximately $10 million on deposit with various state regulatory
authorities.
The insurance subsidiaries of ACMAT are restricted as to the amount of cash
dividends they may pay. United Coastal Insurance is restricted by the Arizona
Insurance Holding Company Systems Act as to the amount of dividends it may pay
without the prior approval of the Arizona Department. During 1998, United
Coastal Insurance paid $18,500,000 in dividends. At January 1, 1999,
approximately $3,030,000 is available for the payment of dividends by United
Coastal Insurance in 1999 without the prior approval of the Arizona Insurance
Department.
Under applicable insurance regulations in its domicile state of Illinois, ACSTAR
Insurance is also restricted as to the amount of dividends it may pay. ACSTAR
may pay or declare a dividend only up to the amount of any available surplus
funds derived from realized net profits on its business, as determined in
accordance with statutory accounting principles. During 1998, ACSTAR paid
$6,980,000 in dividends to ACSTAR Holdings. At January 1, 1999, approximately
$7,700,000 is available for the payment of dividends by ACSTAR Insurance in 1999
without the prior approval of the Illinois Insurance Department.
New regulations and legislation are being proposed to limit damage awards, to
control plaintiffs' counsel fees, to bring the industry under regulation by the
federal government and to control premiums, policy terminations and other policy
terms. It is not possible to predict whether these proposals will be adopted or
their likely effect, if any, on the Company.
INVESTMENTS
The Company's investment strategy is to maintain a conservative investment
policy by generally acquiring high quality securities, primarily bonds, with
fixed effective maturities of approximately three years or less. The investment
portfolio is well diversified and is in compliance with regulatory requirements.
The Company's bond portfolio is composed primarily of investments rated AA or
better by Standard and Poor's. Management has also decided to avoid long-term
investing at what management believes to be low long-term interest rates.
The Company's investment portfolio is subject to several risks including
interest rate and reinvestment risk. Fixed maturity security values generally
fluctuate inversely with movements in interest rates. The Company's corporate
and municipal bond investments may contain call and sinking fund features which
may result in early redemptions and the Company's mortgage-backed securities
investments held by the Company are subject to prepayment risk. Declines in
interest rates could cause early redemptions or prepayments which would require
the Company to reinvest at lower rates.
Investment securities are classified as held to maturity, available for sale or
trading. The Company currently classifies all investment securities as available
for sale. Investment securities available for sale are carried at fair value
and unrealized gains and losses are included in other comprehensive income, net
of estimated income taxes.
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The Company invests primarily in tax-exempt securities as part of its strategy
to maximize after-tax income. Such strategy considers, among other factors, the
impact of the alternative minimum tax. The following table summaries the fair
value fixed maturity investments portfolio at December 31, 1998 and 1997
(dollars in thousands):
December 31,
----------------------------------------------------------
1998 1997
------------------------- ------------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
Fixed maturities available for sale (1):
U.S. government and government
agencies and authorities $ 19,006 16.7% $ 28,866 21.3%
State and political subdivisions 55,082 48.3 43,976 32.5
Industrial and Miscellaneous -- -- 15,137 11.2
Mortgage-backed securities 24,795 21.8 13,874 10.3
-------- ------- -------- -------
Total fixed maturities available for sale 98,883 86.8 101,853 75.3
Equity securities(2) 2,061 1.8 1,011 .7
Short-term investments (3) 12,948 11.4 32,422 24.0
-------- ------- -------- -------
Total investments $113,892 100.0% $135,286 100.0%
======== ======= ======== =======
(1) Fixed maturities available for sale are carried at fair value. Total
cost of fixed maturities was approximately $98,128,000 at December 31,
1998 and $101,524,000 at December 31, 1997.
(2) Equity securities are carried at fair value. Total cost of equity
securities was approximately $2,065,000 at December 31,1998 and
$983,000 at December 31, 1997.
(3) Short-term investments, consisting primarily of money market
instruments maturing within one year are carried at cost which, along
with accrued interest, approximates fair value.
The following table sets forth the fair value of fixed maturities in the fixed
maturity investment portfolio at December 31, 1998 and 1997 (dollars in
thousands):
December 31,
-------------------------------------------------------------
1998 1997
---------------------------- ------------------------
Percent Percent
of Of
Amount Total Amount Total
------ ----- ------ -----
Due in (1):
One year or less $ 19,805 20.0% $ 46,296 45.5%
After one year through five years 72,805 73.6% 55,149 54.1
After five years through ten years 5,225 5.3% 408 .4
After ten years 1,048 1.1% -- --
-------- -------- -------- -------
$ 98,883 100.0% $101,853 100.0%
======== ======== ======== =======
(1) Based on effective maturity dates. Actual maturities may differ
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
The Company's insurance subsidiaries are subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1998, the Company's
investments complied with such laws and regulations.
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Investment results for the years ended December 31, 1998, 1997 and 1996 are
shown in the following table (dollars in thousands):
1998 1997 1996
---- ---- ----
Invested assets (1) $126,371 $140,029 $139,282
Investment income (2) $ 6,138 $ 6,505 $ 6,536
Average yield 4.86% 4.65% 4.69%
(1) Average of the aggregate invested amounts at the beginning and end of
the period including cash and cash equivalents.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
The yields reflect the Company's investment strategy of acquiring high quality
tax-exempt securities with fixed effective maturities of approximately three
years or less. Invested assets are attributable to the net cash flow generated
by written premiums, cash collateral and the reinvestment of investment income
offset in part by cash used to repay debt and repurchase stock.
ENVIRONMENTAL COMPLIANCE
The Company does not expect that its compliance with federal, state or local
environmental laws or regulations will have any material effect upon its capital
expenditures, earnings or competitive position.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 40 persons, all in
the United States. None of its current employees are employed subject to
collective bargaining agreements. The Company believes that its relations with
all of its employees are excellent.
ITEM 2. PROPERTIES
The Company and its subsidiaries occupy a 7 story office building located at 233
Main Street, in New Britain, Connecticut. ACMAT leases approximately 40% of the
building to unaffiliated tenants. The office building is suitable and adequate
for ACMAT's current and future requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to 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.
The Company has, together with many other defendants, been named as a defendant
in approximately 190 actions brought in Connecticut state courts by injured or
deceased individuals or their representatives based on product liability claims
relating to materials containing asbestos. No specific claims for monetary
damages are asserted in these actions. Although it is early in the litigation
process, the Company does not believe that its exposure in connection with these
cases is significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ACMAT's Class A Stock trades on the Nasdaq Stock Market under the symbol ACMTA.
The Common Stock trades on the over-the-counter market. The following table sets
forth the quarterly high and low closing prices of the Company's Common Stock
and Class A Stock as reported by Nasdaq.
1998 1997
HIGH LOW HIGH LOW
COMMON STOCK
1st Quarter 21-1/4 21-1/4 20 20
2nd Quarter 21 21 20 20
3rd Quarter 21 21 21-1/2 20-1/2
4th Quarter 23 20-1/2 21 21
CLASS A STOCK
1st Quarter 17-7/8 15-3/8 16-1/4 14-1/4
2nd Quarter 15-3/4 15-1/8 16-1/2 15
3rd Quarter 16-1/2 14-9/16 19-3/4 15-1/2
4th Quarter 15-3/4 14-1/4 19-1/2 17
No dividends have been paid in the past five years and there is no intention of
paying dividends in the near future. As of March 18, 1999, there were Common
Stock shareholders of record and Class A Stock shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 28,752,273 $33,552,135 $37,035,305 $41,857,398 $40,755,676
Total Assets 146,126,465 176,208,762 184,359,566 180,402,238 168,494,814
Long-Term Debt 37,200,000 48,212,727 35,807,419 40,127,590 43,405,266
Stockholders' Equity 37,622,926 39,577,739 49,702,404 37,587,259 38,004,935
Net Earnings 2,120,529 4,456,949 5,293,111 5,350,280 4,839,861
Basic Earnings Per Share .66 1.29 1.56 1.49 1.20
Diluted Earnings Per Share .65 1.12 1.22 1.17 1.18
Note: No cash dividends were paid during any of the periods above.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1998 AND 1997:
Earned Premiums
Earned premiums in 1998 were $10,962,663 compared to $15,045,844 in 1997. Net
written premiums were $8,203,617 in 1998 compared to $12,680,197 in 1997. The
decrease in earned premiums in 1998 reflects the 35% decrease in 1998 net
written premiums over 1997 net written premiums primarily due to a continuing
soft insurance market place and the Company's strategy to avoid current
unfavorable pricing in the Company's casualty operations. 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. The Company plans
to maintain its existing pricing strategy and high level of service.
Contract Revenues
Contract revenues were $12,139,924 in 1998 compared to $10,056,322 in 1997. The
increase in contract revenues reflects the Company's securement of an $11
million project in July 1998 which will be completed in August of 1999.
Construction revenue is difficult to predict in 1999 and depends greatly on the
successful securement of contracts bid. The Company's construction backlog at
December 31, 1998 was approximately $6,000,000 compared to $4,800,000 at
December 31, 1997.
Investment Income, Net
Net investment income was $6,138,105 in 1998 compared to $6,504,716 in 1997,
representing effective yields of 4.86% and 4.65%, respectively. The decrease in
investment income in 1998 over 1997 was due primarily to a decrease in total
invested assets. Invested assets, including cash and cash equivalents, were
$116,198,344 and $137,381,669 at December 31, 1998 and 1997, respectively. The
decrease in invested assets is attributable to the net cash flow used to
purchase stock, repay debt, return cash collateral and pay claims offset by net
cash flow generated from written premiums and the reinvestment of investment
income.
Net Realized Capital Gains
Realized capital gains from the sale of investments during 1998 were $266,169
compared to realized capital gains of $282,667 in 1997.
Other Income
Other income (expense) was ($754,588) in 1998 compared to $1,662,586 in 1997.
The fluctuation in other income (expense) is due to a loss of approximately
$1,400,000 for the Company's share of losses from a limited partnership in 1998
which compares to a gain of approximately $965,000 in 1997. The limited
partnership invests in small cap equities and incurred losses in 1998 due to
volatility in the small cap market. The Company sold its investment in the
limited partnership on December 31, 1998.
Cost of Contract Revenues
Cost of contract revenues were $11,635,879 in 1998 compared to $9,331,103 in
1997. The increase in cost of contract revenues during 1998 compared to 1997 is
consistent with the increase in contract revenues. The gross profit margin on
construction contracts was 4.2% and 7.2% in 1998 and 1997, respectively. Gross
margins fluctuate each year based upon the profitability of specific projects.
The decrease in the 1998 profit margin was due primarily to losses on two
projects which were completed in 1998. Cost of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues).
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17
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $2,186,728 in 1998 compared to
$4,337,252 in 1997. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1997 to 1998 and the release
of approximately 1,150,000 of surety loss reserves which compares to a release
of approximately $176,500 in 1997. The reserves released represent the release
of reserves on older underwriting years which are no longer needed. Losses 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
Amortization of policy acquisition costs was $2,112,857 in 1998 as compared to
$2,802,993 in 1997. 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5,355,183 in 1998 compared to
$5,767,808 in 1997. The decrease in selling, general and administrative expenses
from 1998 to 1997 is due primarily to a decrease in bad debt expense.
Interest Expense
Interest expense decreased to $4,621,401 in 1998 from $5,116,414 in 1997. The
decrease in interest expense in 1998 is due to a decrease in long-term and
short-term debt.
Income Taxes
Income tax expense was $719,696 in 1998 compared to $1,739,616 in 1997,
representing effective Federal tax rates of 23.2% and 27.3%, respectively. The
decrease in the Federal effective tax rate is due to tax exempt interest income
and dividends subject to the dividend received deduction making up a larger
portion of taxable income.
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1997 AND 1996:
Earned Premiums
Earned premiums in 1997 were $15,045,844 compared to $19,899,936 in 1996. Net
written premiums were $12,680,197 in 1997 compared to $18,041,488 in 1996. The
decrease in earned premiums in 1997 reflects the 30% decrease in 1997 net
written premiums over 1996 net written premiums primarily due to a continuing
soft insurance market place and the Company's strategy to avoid unfavorable
pricing in the Company's casualty operations. 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.
Contract Revenues
Contract revenues were $10,056,322 in 1997 compared to $9,415,734 in 1996. The
Company's construction backlog at December 31, 1997 was approximately $4,800,000
compared to $8,700,000 at December 31, 1996.
Investment Income, Net
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 was
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.
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18
Net Realized Capital Gains
Realized capital gains from the sale of investments during 1997 were $282,667
compared to realized capital gains of $257,774 in 1996.
Other Income
Other income was $1,662,586 in 1997 compared to $926,289 in 1996. The increase
in other income reflects earnings of $965,845 from the limited partnership
investment in 1997.
Cost of Contract Revenues
Cost of contract revenues were $9,331,103 in 1997 compared to $8,396,344 in
1996. The increase in cost of contract revenues during 1997 compared to 1996
reflects the increase in contract revenues. Costs of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues).
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $4,337,252 in 1997 compared to
$5,969,980 in 1996. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1996 to 1997. Losses 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
Amortization of policy acquisition costs was $2,802,993 in 1997 as compared to
$3,617,308 in 1996. Policy acquisition costs, primarily commissions, are
deferred and amortized over the policy or bond term.
Selling, General and Administrative Expenses
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.
Interest Expense
Interest expense has increased to $5,116,414 in 1997 from $4,946,418 in 1996.
The increase in interest expense in 1997 was due primarily to an increase in
long-term debt issued to purchase stock offset in part by a decrease in
short-term debt.
Income Taxes
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.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal developments
and economic conditions, including the effects of inflation. Reserves are
monitored and evaluated periodically using current information on reported
claims.
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19
Management believes that the reserves for losses and loss adjustment expenses at
December 31, 1998 are adequate to cover the unpaid portion of the ultimate net
cost of losses and loss 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
principal and its indemnitors.
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 19.6%, 28.8% and 30.0% for the years ended December 31, 1998, 1997
and 1996, respectively. These loss ratios are below industry averages and are
believed to be the result of conservative underwriting. The decrease in the loss
ratios is due to the release of Surety reserves in 1998 and 1997. There can be
no assurance that such loss ratios can continue. The Company's insurance
subsidiaries' expense ratios under GAAP were 51.8%, 48.0% and 43.5% for the
years ended December 31, 1998, 1997 and 1996, respectively. The increase in the
expense ratios is due to the decline in premiums. The Company's insurance
subsidiaries' combined ratios under GAAP were 71.4%, 76.8% and 73.5% for the
years ended December 31, 1998, 1997 and 1996, respectively. The decrease in the
1998 combined ratio results primarily from the reduction in loss reserves offset
in part by the decline in premiums.
LIQUIDITY AND CAPITAL RESOURCES:
The Company internally generates sufficient funds for its current operations and
maintains a relatively high degree of liquidity in its investment portfolio. The
primary sources of funds to meet the demands of claim settlements and operating
expenses are premium collections, investment earnings and maturing investments.
The Company has no material commitments for capital expenditures and, in the
opinion of management, has adequate sources of liquidity to fund its operations
over the next 12 months.
ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from
operating activities primarily because of interest expense related to notes
payable and long-term debt incurred by ACMAT to acquire and capitalize its
insurance subsidiaries and to repurchase Company stock. ACMAT has also incurred
negative working capital as a result of holding short-term debt related to its
operations.
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 used cash flow from other sources to support operations in the
amount of $530,977 in 1998, compared to cash flow realized from operations of
$5,585,329 in 1997 and $14,260,264 in 1996. The reduction in cash flows 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 $21,326,746 in 1998, and
$4,993,298 in 1997. Net cash used for investing activities amounted to
$11,392,397 in 1996.
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20
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 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, 1998, except for the ratio of Earnings Before
Income Taxes, Depreciation and Amortization to Fixed Charges. The Company has
received a waiver for this covenant.
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, 1998. Effective December 23, 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 1998, the Company purchased, in the open market and privately negotiated
transactions, 4,769 shares of its Common Stock at an average price of $20.65.
The Company also purchased, in open market and privately negotiated
transactions, 342,366 shares of its Class A Stock at an average price of $15.10
per share.
The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. During 1998, ACMAT received
$18,850,000 as dividends from its subsidiaries. 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 1999, the amount of
dividends ACMAT's insurance subsidiaries may pay, without prior approval of
their domestic state insurance departments, is limited to approximately
$10,730,000.
In 1999, 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 $1,560,000 in
1999.
YEAR 2000 ISSUE
There has been significant public discussion in recent years of the "Year 2000"
issue, which relates to the potential inability of computer programs and systems
to adequately store and process data after December 31, 1999, due to the
inability of such programs and systems to identify correct dates subsequent to
December 31, 1999.
In 1997, the Company began to address the Year 2000 issue. The Company's
financial and operational computer and software systems are approximately 60%
compliant, with all systems expected to be compliant and tested by June 30,
1999. The total cost of the project is estimated to be less than $100,000 and is
being funded through operating cash flows. Management believes that these
systems will be suitable for continued use into and beyond the year 2000. If for
any reason these systems are not suitable for such use, the Year 2000 issue
could have a material adverse impact on the Company's ability to meet financial
and reporting requirements and to support its insurance operations.
The Company's Year 2000 review includes an assessment of "embedded chip" systems
associated with its end-user computing hardware and software (including personal
computers, spreadsheets, word processing and other personal and work group
applications), its corporate facilities (such as security systems, elevators and
climate control systems) and its office equipment (including telephones, fax
machines and similar equipment). The Company is continuing to identify potential
problems associated with its embedded chip systems and to develop corrective
plans to avoid or mitigate such potential problems. Where appropriate, the
Company intends to upgrade or replace non-compliant embedded chip systems to
avoid potential Year 2000 problems. The Company anticipates that the deployment
of corrected systems for its "embedded chip" technology will be completed during
the second quarter of 1999.
The Company is reviewing certain suppliers, business partners, customers and
other parties to determine the extent to which the Company may be vulnerable to
the failure of these parties to address and correct their own Year 2000
problems. However, there can be no guarantee that the systems of other companies
that support the Company's operations will be timely converted or that a failure
by these companies to correct their Year 2000 problems will not have a material
adverse effect on the Company.
20
21
The Company's Year 2000 Review is intended to reduce the level of uncertainty
associated with the Year 2000 issue. As part of this review, the Company plans
to develop contingency plans to address and mitigate the potential impact of
problems that might surface with the approach of the millennium. In light of the
current stage of the Company's review of its core financial and operational
systems and its "embedded chip" technology, the Company is developing
contingency plans that focus on the potential interruption of support services
provided to the Company by business affiliates or public authorities due to
problems these parties may experience in connection with the Year 2000 issue.
The Company intends to explore these and other "worst case" scenarios in the
coming months to anticipate and limit, wherever possible, the potential impact
of any such scenario on the Company's insurance operations or financial
condition. These plans will include identifying alternate suppliers and vendors,
conducting staff training and developing alternative communication plans.
The Company has made changes in insurance coverage it currently markets in light
of the Year 2000 issue. In the past, judicial interpretations have expanded the
coverage of insurance policies, including those regarding pollution and other
environmental exposures, beyond the scope anticipated by insurers. The Company
will continue to review its reserves in light of evolving developments relating
to the Year 2000 issue.
The dates on which the Company believes that the various components of its Year
2000 review will be completed are based on management's best estimates, which,
in turn, are based upon numerous assumptions regarding future events, including
the continued availability of certain resources, third-party compliance plans
and other factors. As a result, there can be no guarantee that the Company's
schedule of completion dates will be realized or that there will not be
increased costs associated with the implementation of the Year 2000 review. Due
to the general uncertainty inherent in the Year 2000 issue, resulting in part
from the uncertainty of the Year 2000 readiness of third-parties, the Company
cannot assure its ability to timely and cost-effectively resolve problems
associated with the Year 2000 issue that may effect its operations and business
or expose it to third-party liability.
REGULATORY ENVIRONMENT
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, 1998 was significantly above the level which
might require regulatory action.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The carrying value of the Company's investment portfolio as of December 31, 1998
was $113,892,112, 87% of which is invested in fixed maturity securities. The
primary market risk to the investment portfolio is interest rate risk associated
with investments in fixed maturity securities. The Company's exposure to equity
price risk and foreign exchange risk is not significant. The Company has no
direct commodity risk.
For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how those exposures are managed
compared to the year December 31, 1997. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.
The primary market risk for all of the Company's long-term debt is interest rate
risk at the time of refinancing. As the majority of the Company's debt is fixed
rate debt, the Company's exposure to interest rate risk in its long-term debt is
not significant. The Company will continue to monitor the interest rate
environment and to evaluate refinancing opportunities as the maturity dates
approach.
SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the consolidated financial statements.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stocks,
short-term securities, cash, investment income accrued, and long-term debt. The
primary market risk to the Company's market sensitive instruments is interest
rate risk. The sensitivity analysis model uses a 100 basis point change in
interest rates to measure the hypothetical change in fair value of financial
instruments included in the model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1998.
The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $1.7 million based on a 100 basis point
increase in interest rates as of December 31, 1998, which is not considered
material . This loss of value only reflects the impact of an interest rate
increase on the fair value of the Company's financial instruments, which
constitute approximately 78% of total assets. As a result, the loss value
excludes a significant portion of the Company's consolidated balance sheet which
would materially mitigate the impact of the loss in fair value associated with a
100 basis point increase in interest rates.
For example, certain non-financial instruments, primarily insurance accounts for
which the fixed maturity portfolio's primary purpose is to fund future claims
payments related thereto, are not reflected in the development of the above loss
value. These non-financial instruments include premium balances receivable,
reinsurance recoverables, claims and claim adjustment expense reserves and
unearned premium reserves.
21
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Schedules
ACMAT Corporation and Subsidiaries:
The following Consolidated Financial Statements of the Company, related notes
and Independent Auditors' Report are included herein:
Independent Auditors' Report
Consolidated Statements of Earnings for the years ended December 31, 1998,
1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements - December 31, 1998, 1997 and
1996
Consolidated Schedules included in Part II of this Report - Years ended
December 31, 1998, 1997 and 1996:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty
Insurance Operations
22
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ACMAT Corporation:
We have audited the consolidated financial statements of ACMAT Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 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.
KPMG LLP
Hartford, Connecticut
February 26, 1999
23
24
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Earned Premiums $ 10,962,663 15,045,844 19,899,936
Contract Revenues 12,139,924 10,056,322 9,415,734
Investment Income, Net 6,138,105 6,504,716 6,535,572
Net Realized Capital Gains 266,169 282,667 257,774
Other Income (Expense) (754,588) 1,662,586 926,289
------------ ------------ ------------
28,752,273 33,552,135 37,035,305
Losses and Loss Adjustment Expenses 2,186,728 4,337,252 5,969,980
Cost of Contract Revenues 11,635,879 9,331,103 8,396,344
Amortization of Policy Acquisition Costs 2,112,857 2,802,993 3,617,308
Selling, General and Administrative Expenses 5,355,183 5,767,808 5,610,176
Interest Expense 4,621,401 5,116,414 4,946,418
------------ ------------ ------------
25,912,048 27,355,570 28,540,226
------------ ------------ ------------
Earnings Before Income Taxes and Minority Interest 2,840,225 6,196,565 8,495,079
Income Taxes 719,696 1,739,616 2,313,828
------------ ------------ ------------
Earnings Before Minority Interest 2,120,529 4,456,949 6,181,251
Minority Interest -- -- (888,140)
------------ ------------ ------------
Net Earnings $ 2,120,529 4,456,949 5,293,111
============ ============ ============
Basic Earnings Per Share $ .66 1.29 1.56
------------ ------------ ------------
Diluted Earnings Per Share $ .65 1.12 1.22
------------ ------------ ------------
See Notes to Consolidated Financial Statements.
24
25
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
---- ----
Investments:
Fixed Maturities - Available for Sale at Fair Value
(Cost of $98,128,192 in 1998 and $101,523,931 in 1997) $ 98,882,751 101,852,980
Equity Securities - Available for Sale at Fair Value
(Cost of $2,065,262 in 1998 and $983,074 in 1997) 2,061,448 1,010,927
Short-term Investments, at Cost which Approximates Fair Value 12,947,913 32,422,313
------------ ------------
Total Investments 113,892,112 135,286,220
Cash and Cash Equivalents 2,306,232 2,095,449
Accrued Interest Receivable 1,352,334 1,458,164
Receivables, Net of Allowance for Doubtful Accounts of
$257,617 in 1998 and $309,746 in 1997 3,737,627 7,118,527
Reinsurance Recoverable 2,224,116 3,478,121
Income Tax Refund Receivable 207,380 564,829
Prepaid Expenses 162,784 204,642
Deferred Income Taxes 1,733,987 1,940,936
Limited Partnership Investment -- 2,052,475
Property and Equipment, Net 12,894,191 13,179,337
Deferred Policy Acquisition Costs 1,550,089 2,078,405
Other Assets 3,170,242 3,529,634
Intangibles, Net 2,895,371 3,222,023
------------ ------------
$146,126,465 176,208,762
============ ============
Liabilities & Stockholders' Equity
Notes Payable to Banks $ -- 5,000,000
Accounts Payable 3,200,965 3,188,554
Reserves for Losses and Loss Adjustment Expenses 43,115,062 48,900,713
Unearned Premiums 6,795,435 9,804,159
Collateral Held 17,344,376 20,275,702
Other Accrued Liabilities 847,701 1,249,168
Long-term Debt 37,200,000 48,212,727
------------ ------------
Total Liabilities 108,503,539 136,631,023
Commitments and Contingencies
Stockholders' Equity:
Common Stock (No Par Value; 3,500,000 Shares Authorized;
592,088 and 596,857 Shares Issued and Outstanding) 592,088 596,857
Class A Stock (No Par Value; 10,000,000 Shares Authorized;
2,460,808 and 2,712,174 Shares Issued and Outstanding) 2,460,808 2,712,174
Retained Earnings 34,074,538 36,033,153
Accumulated Other Comprehensive Income 495,492 235,555
------------ ------------
Total Stockholders' Equity 37,622,926 39,577,739
------------ ------------
$146,126,465 176,208,762
============ ============
See Notes to Consolidated Financial Statements.
25
26
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
December 31, 1998, 1997 and 1996
Common
stock par Class A Additional Retained
value stock par paid-in earnings
value capital
---------- ---------- ---------- ---------
Balance as of December 31, 1995 $642,464 2,665,836 1,921,100 31,601,383
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment - - - -
Net earnings - - - 5,293,111
Total comprehensive income
Acquisition and retirement of 42,207
shares of Common Stock $(42,207) - (751,865) -
Acquisition and retirement of 872,975
shares of Class A Stock - (872,975) (10,633,162) -
Issuance of 499,999 Shares of Class A
Stock - 499,999 4,499,991 -
Issuance of 85,000 Shares of Class A
Stock pursuant to stock options - 85,000 644,150 -
Issuance of 1,111,000 Shares of
Class A Stock - 1,111,000 12,727,663 -
-------- --------- ----------- ----------
Balance as of December 31, 1996 $600,257 3,488,860 8,407,877 36,894,494
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment - - - -
Net earnings - - - 4,456,949
Total comprehensive income
Acquisition and retirement of
3,400 shares of Common Stock $ (3,400) - (66,096) -
Acquisition and retirement of
1,347,686 shares of Class A Stock - (1,347,686) (13,522,491) (5,318,290)
Issuance of 450,000 shares
of Class A Stock - 450,000 4,050,000 -
Issuance of 121,000 shares of Class A Stock
pursuant to stock options - 121,000 1,130,710
-------- --------- ----------- ----------
Balance as of December 31, 1997 $596,857 2,712,174 - 36,033,153
Comprehensive income:
Net unrealized appreciation of debt and
equity securities, net of reclassification
adjustment - - -
Net earnings - - - 2,120,529
Total comprehensive income
Acquisition and retirement of
4,769 shares of Common Stock $ (4,769) - - (93,697)
Acquisition and retirement of
342,366 shares of Class A Stock - (342,366) (841,980) (3,985,447)
Issuance of 91,000 shares of Class A Stock
pursuant to stock options - 91,000 841,980 -
-------- --------- ----------- ----------
-
Balance as of December 31, 1998 $592,088 2,460,808 - 34,074,538
======== ========= =========== ==========
Accumulated
other Total
comprehensive stockholders'
income equity
------------- -------------
Balance as of December 31, 1995 756,476 37,587,259
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment (445,560) (445,560)
Net earnings - 5,293,111
-----------
Total comprehensive income 4,847,551
Acquisition and retirement of 42,207
shares of Common Stock - (794,072)
Acquisition and retirement of 872,975
shares of Class A Stock - (11,506,137)
Issuance of 499,999 Shares of Class A
Stock - 4,999,990
Issuance of 85,000 Shares of Class A
Stock pursuant to stock options - 729,150
Issuance of 1,111,000 Shares of
Class A Stock - 13,838,663
-------- -----------
Balance as of December 31, 1996 310,916 49,702,404
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment (75,361) (75,361)
Net earnings 4,456,949
-----------
Total comprehensive income 4,381,588
Acquisition and retirement of
3,400 shares of Common Stock - (69,496)
Acquisition and retirement of
1,347,686 shares of Class A Stock - (20,188,467)
Issuance of 450,000 shares
of Class A Stock - 4,500,000
Issuance of 121,000 shares of Class A Stock
pursuant to stock options - 1,251,710
-------- -----------
Balance as of December 31, 1997 235,555 39,577,739
Comprehensive income:
Net unrealized appreciation of debt and
equity securities, net of reclassification
adjustment 259,937 259,937
Net earnings - 2,120,529
-----------
Total comprehensive income 2,380,466
Acquisition and retirement of
4,769 shares of Common Stock - (98,466)
Acquisition and retirement of
342,366 shares of Class A Stock - (5,169,793)
Issuance of 91,000 shares of Class A Stock
pursuant to stock options - 932,980
-------- -----------
Balance as of December 31, 1998 495,492 37,622,926
======== ===========
See Notes to Consolidated Financial Statements.
26
27
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Cash Flows From Operating Activities:
Net Earnings $ 2,120,529 4,456,949 5,293,111
Adjustments to Reconcile Net Earnings to Net
Cash Provided by (Used for) Operating Activities:
Depreciation and Amortization 1,412,004 1,506,013 1,787,061
Minority Interests -- -- 888,140
Net Realized Capital Gain (266,169) (282,667) (257,774)
Limited Partnership Investment 1,429,288 (966,315) 33,725
Deferred Income Taxes 73,041 383,771 (34,197)
Changes In:
Accrued Interest Receivable 105,830 109,597 663,227
Receivables, Net 3,380,900 1,263,063 640,844
Reinsurance Recoverable 1,254,005 362,880 31,098
Deferred Policy Acquisition Costs 528,316 827,470 553,433
Prepaid Expenses and Other Assets 951,605 351,384 (183,343)
Accounts Payable and Other Liabilities (389,056) 1,159,290 (773,028)
Collateral Held (2,931,326) (1,554,864) 4,062,611
Reserves for Losses and Loss Adjustment Expenses (5,785,651) 940,629 2,724,773
Income Taxes 594,431 (434,388) 791,554
Unearned Premiums (3,008,724) (2,537,483) (1,960,971)
------------ ------------ ------------
Net Cash Provided by (Used for) Operating Activities (530,977) 5,585,329 14,260,264
------------ ------------ ------------
Cash Flows From Investing Activities:
Proceeds From Investments Sold or Matured:
Fixed Maturities - Sold 40,118,160 41,501,401 39,094,153
Fixed Maturities - Matured 38,383,281 35,221,999 61,896,825
Equity Securities 1,022,466 774,349 298,568
Short-Term Investments 79,604,384 155,255,106 95,826,099
Purchases Of:
Fixed Maturities (75,373,107) (85,168,980) (73,340,147)
Equity Securities (2,060,000) (1,727,812) (255,262)
Short-term Investments (60,129,984) (140,708,282) (134,436,189)
Capital Expenditures (238,454) (154,483) (140,838)
Other -- -- (335,606)
------------ ------------ ------------
Net Cash Provided by (Used for) Investing Activities 21,326,746 4,993,298 (11,392,397)
------------ ------------ ------------
Cash Flows From Financing Activities:
Borrowings Under Line of Credit 7,000,000 5,000,000 9,200,000
Repayments Under Line of Credit (12,000,000) (13,200,000) (3,500,000)
Repayments on Long-term Debt (23,812,727) (3,594,692) (1,820,181)
Issuance of Long-term Debt 12,800,000 8,500,000 2,500,000
Issuance of Class A Stock 696,000 882,250 560,000
Payments for Subsidiaries' Stock -- -- (440,625)
Payments for Acquisition and Retirement of Stock (5,268,259) (8,257,963) (12,300,209)
------------ ------------ ------------
Net Cash Used For Financing Activities (20,584,986) (10,670,405) (5,801,015)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 210,783 (91,778) (2,933,148)
Cash and Cash Equivalents, Beginning of Year 2,095,449 2,187,227 5,120,375
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 2,306,232 2,095,449 2,187,227
============ ============ ============
See Notes to Consolidated Financial Statements.
27
28
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include ACMAT Corporation
("ACMAT" or the "Company"), its subsidiaries, AMINS, Inc., Geremia
Electric Co., ACMAT of Texas, Inc., ACSTAR Holdings, Inc. ("ACSTAR
Holdings") and ACSTAR Holdings' wholly-owned subsidiary, ACSTAR
Insurance Company ("ACSTAR"); and United Coastal Insurance Company
("United Coastal Insurance").
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 1997 and 1996 financial statements to conform to the
classifications in 1998.
(b) Business
ACMAT operates as an insurance holding company and as an interior
contractor; designing, supplying, renovating and installing
interiors for commercial, industrial and institutional buildings,
including asbestos abatement contracting.
ACMAT's Insurance Group includes United Coastal Insurance, ACSTAR
and AMINS, Inc. United Coastal Insurance is an excess and surplus
lines property and casualty insurer providing specialty general and
environmental liability insurance to specialty trade and
environmental contractors, property owners, storage and treatment
facilities and allied professionals, as well as professional
liability insurance to architects, engineers and consultants.
ACSTAR is licensed as an admitted insurer in 49 states and the
District of Columbia and provides surety bonding for specialty
trade, environmental remediation and asbestos abatement
contractors. AMINS, Inc. is an insurance agency which acts
primarily as a general agent for ACSTAR and United Coastal
Insurance. United Coastal Insurance participates in a number of
reinsurance arrangements with other companies on a quota share
basis. These arrangements primarily cover marine and other property
catastrophic risks.
During 1998, 1997 and 1996, customers who individually accounted
for more than 10% of consolidated construction contracting revenue
are as follows; in 1998 - three customers provided 52%, 19% and
17%, respectively. in 1997 - four customers provided 28%, 21%, 19%
and 11%, respectively; in 1996 - four customers provided 18%, 15%,
14% and 10%, respectively. No customers accounted for more than 10%
of the consolidated insurance revenues in any year.
(c) Investments
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 included in other comprehensive income, net of
income taxes.
The fair value of investment securities are based on quoted market
prices. Premiums and discounts on debt securities are amortized
into interest income over the term of the securities in a manner
that approximates the interest method. Realized gains and losses on
sales of securities are computed using the specific identification
method. Any security which management believes has experienced a
decline in value which is other than temporary is written down to
its market value through a charge to income.
Short-term investments, consisting primarily of money market
instruments maturing within one year are carried at cost which,
along with accrued interest, approximates fair value. Cash and cash
equivalents include cash on hand and short-term highly liquid
investments of maturities of three months or less when purchased.
These investments are carried at cost plus accrued interest which
approximates fair value.
(d) Limited Partnership Investment
The limited partnership investment represented an 11.2%
participation in a joint venture, Grandview Partners, L.P., which
invested primarily in small capitalization stocks traded on
national market exchanges. The Company sold the Limited Partnership
on December 31, 1998. The limited partnership investment was
carried on the equity method of accounting in which the Company's
share of the net income of the limited partnership was recognized
as income in the Company's income statement and added to the
carrying value of the investment and distributions received from
the limited partnership are treated as a reduction of the carrying
value of the investment.
28
29
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Policy Acquisition Costs
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,
1998, 1997 and 1996, deferrable costs capitalized were $1,584,541,
$1,975,523 and $3,063,875, respectively. The amortization of
deferred policy acquisition costs charged to operations for the
years ended December 31, 1998, 1997 and 1996 was $2,112,857,
$2,802,993 and $3,617,308, respectively.
(f) Property and Equipment
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.
(g) Intangibles
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.
(h) Insurance Reserve Liabilities
Reserves for losses and loss adjustment expenses are established
with respect to both reported and incurred but not reported claims
for insured risks. The amount of loss reserves for reported claims
is primarily based upon a case-by-case evaluation of the type of
risk involved, knowledge of the circumstances surrounding the claim
and the policy provisions relating to the type of claim. As part of
the reserving process, historical data are reviewed and
consideration is given to the anticipated impact of various factors
such as legal developments and economic conditions, including the
effects of inflation. Reserves are monitored and recomputed
periodically using new information on reported claims.
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 losses.
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. 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 incurred, including losses incurred but not
reported.
(i) Collateral Held
The carrying amount of collateral held approximates its fair value
because of the short maturity of these instruments. Collateral held
represents cash and investments retained by the Company for surety
bonds issued by the Company.
(j) Reinsurance
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 $10 million for liability and for individual surety
bonds, the Company reinsures through various layered excess of loss
agreements up to $10 million on a $15.6 million bond. 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 of its excess of loss
reinsurers.
29
30
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance recoverables include ceded reserves for losses and loss
adjustment expenses. Ceded unearned premiums of $662,363 and $912,039
at December 31, 1998 and 1997, respectively, are included in other
assets. All reinsurance contracts maintained by the Company qualify as
short-duration prospective contracts. A summary of reinsurance premiums
written and earned is provided below:
Premiums Written Premiums Earned
------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Direct $ 8,324,506 12,851,647 17,954,271 11,211,803 15,164,588 19,834,586
Assumed 528,220 686,935 1,516,988 656,023 1,144,017 1,470,043
Ceded (649,109) (858,385) (1,429,771) (905,163) (1,262,761) (1,404,693)
----------- ----------- ----------- ----------- ----------- -----------
Totals $ 8,203,617 12,680,197 18,041,488 10,962,663 15,045,844 19,899,936
=========== =========== =========== =========== =========== ===========
There were no reinsurance recoveries on ceded paid losses and loss
adjustment expenses for the years ended December 31, 1998 and 1997.
Reinsurance recoveries on ceded paid losses and loss adjustment
expenses totaled approximately $98,000 for the year ended December 31,
1996. Ceded incurred losses and loss adjustment expenses totaled
$180,553, $364,015 and $421,408 for the years ended December 31, 1998,
1997 and 1996, respectively.
(k) Revenue Recognition
Revenue on construction contracts is recorded using the percentage of
completion method. Under this method revenues with respect to
individual contracts are recognized in the proportion that costs
incurred to date relate to total estimated costs. Revenues and cost
estimates are subject to revision during the terms of the contracts,
and any required adjustments are made in the periods in which the
revisions become known. Provisions are made, where applicable, for the
entire amount of anticipated future losses on contracts in progress.
Claims are recorded as revenue at the time of settlement and profit
incentives and change orders are included in revenues when their
realization is reasonably assured. Selling, general and administrative
expenses are not allocated to contracts.
Insurance premiums are recognized over the coverage period. Unearned
premiums represent the portion of premiums written that is applicable
to the unexpired terms of policies in force, calculated on a prorata
basis.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
reported results using those estimates.
(n) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise
during a period from transactions and other events and circumstances
from non-owner sources. Comprehensive income thus represents the sum of
net income and other changes in equity from non-owner sources. The
adoption of SFAS No. 130 resulted in the Company reporting unrealized
gains and losses on investments as other comprehensive income.
30
31
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes reclassification adjustments for other
comprehensive income (loss) and the related tax effects for the years
ended December 31, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Unrealized gains (losses) on investments:
Unrealized holding gain (loss) arising during period net of income tax
expense of $224,405 and $57,163 for 1998 and 1997, respectively and
income tax benefit of $141,888 in 1996 $435,609 111,199 (275,429)
Less reclassification adjustment for gains included in net earnings, net of
income tax expense of $90,497, $96,107 and $87,643 for 1998, 1997
and 1996, respectively 175,672 186,560 170,131
-------- -------- --------
Other comprehensive income (loss) $259,937 (75,361) (445,560)
======== ======== ========
(o) Future Accounting Standards
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 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, earlier
application is encouraged, but it is permitted only as of the beginning
of any fiscal quarter that begins after issuance of this statement.
This Statement should not be applied retroactively to financial
statements of prior periods. The Company has not completed its
evaluation of the effect SFAS No. 133 will have on the Company's
results of operations or financial condition.
Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments", was issued in December
1997 and provides guidance for determining when an entity should
recognize a liability for guaranty-fund and other insurance-related
assessments, how to measure that liability, and when an asset may be
recognized for the recovery of such assessments through premium tax
offsets or policy surcharges. SOP 97-3 is effective for financial
statements for fiscal years beginning after December 15, 1998, and the
effect of initial adoption is to be reported as a cumulative catch-up
adjustment. Restatement of previously issued financial statements is
not allowed. The adoption of this SOP is not expected to have a
material effect on the Company's results of operations or financial
condition.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued
in March 1998 and provides guidance on accounting for the costs of
computer software developed or obtained for internal use and for
determining when specific costs should be capitalized and when they
should be expensed. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Costs incurred prior to
initial application of this SOP, whether capitalized or not, should not
be adjusted to the amounts that would have been capitalized had this
SOP been in effect when those costs were incurred. The adoption of this
SOP is not expected to have a material effect on the Company's result
of operations or financial condition.
(2) ACQUISITIONS
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, became a wholly owned
subsidiary of ACMAT and its affiliates. The merger was a non-cash
transaction that is not reflected in the Consolidated Statements of
Cash Flow.
31
32
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTMENTS
INVESTMENTS AT DECEMBER 31, 1998 AND 1997 FOLLOWS: AMORTIZED ESTIMATED CARRYING
COST FAIR VALUE VALUE
---- ---------- -----
1998
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political Subdivisions $ 54,679,758 55,081,641 55,081,641
United States Government and Government Agencies 18,809,228 19,005,763 19,005,763
Mortgage-Backed Securities 24,639,206 24,795,347 24,795,347
------------ ------------ ------------
Total Fixed Maturities 98,128,192 98,882,751 98,882,751
Equity Securities - Common Stocks:
Banks, Trusts and Insurance 5,262 18,948 18,948
Equity Securities - Redeemable Preferred Stocks:
Banks, Trusts and Insurance 1,060,000 1,060,000 1,060,000
Industrial and Miscellaneous 1,000,000 982,500 982,500
------------ ------------ ------------
Total Equity Securities 2,065,262 2,061,448 2,061,448
Short-Term Investments 12,947,913 12,947,913 12,947,913
------------ ------------ ------------
Total Investments $113,141,367 113,892,112 113,892,112
============ ============ ============
1997
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political Subdivision $ 43,928,817 43,975,620 43,975,620
United States Government and Government Agencies 28,747,121 28,866,243 28,866,243
Industrial and Miscellaneous 15,057,614 15,136,895 15,136,895
Mortgage-Backed Securities 13,790,379 13,874,222 13,874,222
------------ ------------ ------------
Total Fixed Maturities 101,523,931 101,852,980 101,852,980
Equity Securities - Common Stocks:
Banks, Trusts and Insurance 5,262 15,927 15,927
Equity Securities - Redeemable Preferred Stocks:
Industrial and Miscellaneous 977,812 995,000 995,000
------------ ------------ ------------
Total Equity Securities 983,074 1,010,927 1,010,927
Short-Term Investments 32,422,313 32,422,313 32,422,313
------------ ------------ ------------
Total Investments $134,929,318 135,286,220 135,286,220
============ ============ ============
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. 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.
On December 31, 1998, the Company's insurance subsidiaries had
securities with an aggregate book value of approximately $10 million on
deposit with various state regulatory authorities.
32
33
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of fixed maturities at December 31,
1998 and 1997, by effective maturity, follows:
1998 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due In One Year or Less $19,661,604 19,804,671 46,284,844 46,296,200
Due After One Year Through Five Years 72,227,199 72,805,247 54,904,724 55,148,780
Due After Five Years Through Ten Years 5,198,529 5,225,378 334,363 408,000
Due After Ten Years 1,040,860 1,047,455 -- --
----------- ----------- ----------- -----------
Total $98,128,192 98,882,751 101,523,931 101,852,980
=========== =========== =========== ===========
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, 1998 and
1997 follows:
1998 1997
Gains Losses Gains Losses
----- ------ ----- ------
States, Municipalities and
Political Subdivisions $413,730 (11,847) 71,667 (24,864)
United States Government and
Government Agencies 232,849 (36,314) 137,462 (18,340)
Industrial and Miscellaneous -- -- 79,280 --
Mortgage-Backed Securities 156,767 (626) 83,884 (40)
-------- -------- -------- --------
Total 803,346 (48,787) 372,293 (43,244)
Equity Securities 13,686 (17,500) 27,853 --
-------- -------- -------- --------
Total $817,032 (66,287) 400,146 (43,244)
======== ======== ======== ========
(4) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES
A summary of net investment income for the years ended December 31,
1998, 1997 and 1996 follows:
1998 1997 1996
---- ---- ----
Tax-Exempt Interest $ 2,045,722 1,996,969 2,912,844
Taxable Interest 4,080,814 4,639,758 3,768,102
Dividends on Equity Securities 56,603 10,283 750
Other -- -- (33,725)
Investment Expenses (45,034) (142,294) (112,399)
----------- ----------- -----------
Net Investment Income $ 6,138,105 6,504,716 6,535,572
=========== =========== ===========
Realized capital gains (losses) for the years ended December 31, 1998,
1997 and 1996 follows:
1998 1997 1996
---- ---- ----
Fixed Maturities $ 225,701 258,318 209,918
Equity Securities 44,653 24,349 48,568
Other (4,185) -- (712)
--------- --------- ---------
Net Realized Capital Gains $ 266,169 282,667 257,774
========= ========= =========
33
34
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross gains of $229,063, $261,005 and $237,726 and gross losses of
$3,362, $2,687 and $27,808 were realized on fixed maturity sales for
the years ended December 31, 1998, 1997 and 1996, respectively. Gross
gains of $44,653, $24,349 and $48,568 were realized on sale of equity
securities for the years ended December 31, 1998, 1997 and 1996,
respectively. There were no losses realized on equity security sales
for the years ended December 31, 1998, 1997 and 1996.
(5) RECEIVABLES
A summary of receivables at December 31, 1998 and 1997 follows:
1998 1997
---- ----
Insurance Premiums Due From Agents $ 2,440,836 4,469,243
Receivables Under Construction Contracts:
Amounts Billed 2,662,501 1,834,994
Recoverable Costs in Excess of Billings on Uncompleted Contracts 173,324 588,009
Billings in Excess of Costs on Uncompleted Contracts (1,957,000) (5,400)
Retainage, Due on Completion of Contracts 504,857 264,067
----------- -----------
Total Receivables Under Construction Contracts 1,383,682 2,681,670
Other 170,726 277,360
----------- -----------
Total Receivables 3,995,244 7,428,273
Less Allowances for Doubtful Accounts (257,617) (309,746)
----------- -----------
Total Receivables, Net $ 3,737,627 7,118,527
=========== ===========
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 1999.
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.
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1998 and 1997
follows:
1998 1997
---- ----
Building $14,843,201 14,657,155
Land 800,000 800,000
Equipment and Vehicles 1,008,966 1,073,059
Furniture and Fixtures 892,663 914,187
----------- -----------
17,544,830 17,444,401
Less Accumulated Depreciation 4,650,639 4,265,064
----------- -----------
$12,894,191 13,179,337
=========== ===========
Future minimum rental income to be generated by leasing a portion of
the building under non-cancelable operating leases as of December 31,
1998 are estimated to be $654,548 for 1999, $591,845 for 2000, $570,944
for 2001, $570,944 for 2002 and $486,944 for 2003. Rental income earned
in 1998, 1997 and 1996 was $626,730, $561,852 and $504,063,
respectively.
(7) INTANGIBLES
A summary of intangibles, acquired primarily in connection with
purchases of the Company's insurance subsidiaries, at December 31, 1998
and 1997 follows:
1998 1997
---- ----
Insurance Licenses $4,188,926 4,188,926
Goodwill 2,524,872 2,524,872
---------- ----------
6,713,798 6,713,798
Less Accumulated Amortization 3,818,427 3,491,775
---------- ----------
$2,895,371 3,222,023
========== ==========
Intangible assets are written off when they become fully amortized.
34
35
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid losses and loss adjustment expenses for the periods
indicated on a GAAP basis for the business of the Company.
1998 1997 1996
---- ---- ----
Balance at January 1 $ 48,900,713 47,960,084 45,235,311
Less reinsurance recoverable 3,478,121 3,841,001 3,872,099
------------ ------------ ------------
Net balance at January 1 45,422,592 44,119,083 41,363,212
Incurred related to:
Current year 4,508,667 5,176,030 7,137,183
Prior years (2,321,939) (838,778) (1,167,203)
------------ ------------ ------------
Total incurred 2,186,728 4,337,252 5,969,980
Payments related to:
Current year 18,260 94,398 153,514
Prior years 6,700,114 2,939,345 3,060,595
------------ ------------ ------------
Total payments 6,718,374 3,033,743 3,214,109
Net balance at December 31 40,890,946 45,422,592 44,119,083
Plus reinsurance recoverable 2,224,116 3,478,121 3,841,001
------------ ------------ ------------
Balance at December 31 $ 43,115,062 48,900,713 47,960,084
============ ============ ============
The decrease of incurred losses and loss adjustment expenses of prior
years represents a reallocation of reserves among accident years.
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 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.
(9) NOTES PAYABLE TO BANKS
At December 31, 1998, 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, 1998. Borrowings
outstanding at December 31, 1997 under a previous line of credit were
$5,000,000.
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.
The fair value of notes payable to banks approximates cost.
(10) LONG-TERM DEBT
A summary of long-term debt at December 31, 1998 and 1997 follows:
1998 1997
---- ----
Mortgage Note Due 2009 $ 7,800,000 --
Term Loan Due 2003 5,000,000 --
Senior Notes Due 2005 9,000,000 12,000,000
Term Loan Due 2004 -- 6,690,000
Term Loan Due 2003 -- 1,874,998
Term Loan Due 2000 -- 3,333,333
Mortgage Note Due 2000 -- 7,814,396
Convertible Note Due 2022 15,400,000 16,500,000
----------- -----------
$37,200,000 48,212,727
=========== ===========
35
36
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 23, 1998, the Company obtained a permanent mortgage loan
from a financial institution. The $7,800,000 mortgage note, with
interest fixed at 6.95% is payable in monthly installments of principal
and interest over 10 years. The loan agreements contain certain
limitations on borrowings, minimum statutory capital levels and require
maintenance of specified ratios. The proceeds were used to repay the
existing mortgage note.
On December 9, 1998, the Company obtained a $5,000,000, five-year term
loan from a financial institution, which is currently payable in
quarterly installments of $250,000 commencing March 1, 1999. The
interest rate is fixed at 7.25%. The loan agreements contain certain
limitations on borrowings, minimum statutory capital levels and require
maintenance of specified ratios. The proceeds, along with internal
funds, were used to refinance existing debt which existed at December
31, 1998.
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of
Class A Stock which AIG Life Insurance Company (366,663 shares) and
American International Life Assurance Company of New York, (733,333)
had acquired over the last three years through conversion options (See
Note 13). The shares were purchased at an average price of $14.70 per
share, for a total purchase price of $16,174,942. 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 annual payments of $1,500,000
which commenced on January 31, 1998, with interest at prime rate
(7-3/4%). The Company voluntarily prepaid the principal payment of
$1,500,000 due January 31, 1999 on December 31, 1998. The interest rate
is equal to the prime rate, however, the interest rate shall not exceed
9-1/4% and it shall not be less than 7-1/4%. The purchase of stock in
1997 with the $12,000,000 promissory notes is a non-cash transaction
that is not reflected in the Consolidated Statement of Cash Flows.
The terms of the note agreements with AIG Life Insurance Company and
American International Life Assurance Company of New York 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 therefore, 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,
1998, except for the ratio of Earnings Before Interest expense, Taxes,
Depreciation and Amortization to Fixed Charges. The Company has
received a waiver for this covenant
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 issuance. The Company can prepay
the note and the Fund has the option to accept the prepayment or
convert the note to stock. The Company made a voluntary principal
payment of $1,100,000 on July 31, 1998. At December 31, 1998, the
Company had reserved 1,400,000 shares of Class A Stock for issuance
pursuant to such conversion option.
Principal payments on long-term debt are $1,559,871, $3,100,052,
$3,143,108, $3,189,256 and $3,238,716 the years 1999 through 2003,
respectively. Interest expense paid in 1998, 1997 and 1996 amounted to
$5,121,093, $4,630,502 and $4,980,833, respectively.
The fair value at December 31, 1998 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, 1998
because of the complex and unique terms associated with this debt
instrument.
36
37
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) INCOME TAXES
The components of income tax expense for each year follows:
1998 1997 1996
---- ---- ----
Current Taxes:
Federal $ 584,655 1,310,845 2,288,025
State 62,000 45,000 60,000
---------- ---------- ----------
646,655 1,355,845 2,348,025
---------- ---------- ----------
Deferred Taxes (Credits):
Federal 73,041 383,771 (34,197)
State -- -- --
---------- ---------- ----------
73,041 383,771 (34,197)
---------- ---------- ----------
Total $ 719,696 1,739,616 2,313,828
========== ========== ==========
The effective Federal income tax rate, as a percentage of earnings before
income taxes and minority interest follows:
1998 1997 1996
---- ---- ----
Federal Statutory Tax Rate 34.0% 34.0% 34.0%
State Income Tax Benefit (.7) (.3) (.2)
Effect of Tax-Exempt Interest (20.8) (9.4) (9.9)
Dividend Received Deduction (4.8) -- --
Amortization of Goodwill 3.9 1.8 1.3
Officers Life Insurance Premiums 2.8 1.2 .8
Other, Net 8.8 .- .5
----- ---- ----
Effective Federal Income Tax Rate 23.2% 27.3% 26.5%
===== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are presented below:
1998 1997
---- ----
Deferred Tax Assets:
Reserves for Losses and Loss Adjustment Expenses,
Principally Due to Reserve Discounting $2,455,519 2,848,237
Unearned Premiums 417,049 604,664
Accounts Receivable, Principally Due to Allowance for Doubtful Accounts 87,590 105,314
State Net Operating Loss Carryforward 1,365,900 1,442,000
Other 22,073 26,505
---------- ----------
Total Gross Deferred Tax Assets 4,348,131 5,026,720
Less Valuation Allowance 1,365,900 1,442,000
---------- ----------
Net Deferred Tax Assets $2,982,231 3,584,720
Deferred Tax Liabilities:
Plant and Equipment 461,970 461,118
Deferred Policy Acquisition Costs 527,030 706,658
Unrealized Gains on Investments 255,254 121,346
Limited Partnership Investment -- 352,659
Other 3,990 2,003
---------- ----------
Total Gross Deferred Tax Liabilities 1,248,244 1,643,784
---------- ----------
Net Deferred Tax Assets $1,733,987 1,940,936
========== ==========
A valuation allowance is provided for the state net operating loss
carryforward which is not considered realizable. 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 temporary differences, net of the valuation
allowance, at December 31, 1998.
Taxes paid in 1998, 1997 and 1996 were $52,227, $1,790,253 and
$1,556,471, respectively.
37
38
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) PENSION AND PROFIT SHARING PLANS
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, $85,000 and
$100,000 for 1998, 1997 and 1996, respectively.
The Company participated in various multi-employer defined contribution
plans for its union employees. 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, 1998.
(13) STOCKHOLDERS' EQUITY
The Company has two classes of common stock; the Common Stock and the
Class A Stock, each without par value. The rights of the Common Stock
and the Class A Stock are identical, except with respect to voting
rights. Holders of the Class A Stock are entitled to one-tenth vote per
share in relation to the Common Stock, holders of which are entitled to
one vote per share.
During 1998, 1997 and 1996, ACMAT repurchased, in open market and
privately negotiated transactions 4,769, 3,400 and 42,207 respectively,
shares of its Common Stock at an average price of $20.65, $20.44 and
$18.81 per share, respectively. The Company also repurchased during
1998, 1997 and 1996, in open market and privately negotiated
transactions 342,366, 1,347,686 and 872,975, respectively, shares of
its Class A Stock at an average price of $15.10, $14.98 and $13.18 per
share, respectively.
During 1997 and 1996, the Company issued 450,000 and 499,999,
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 stockholders have periodically approved the distribution of
non-qualified stock options to certain officers and directors giving
such individuals the right to purchase restricted shares of the
Company's Common and Class A Stock. Transactions regarding these stock
options are summarized below:
1998 1997 1996
---- ---- ----
Options outstanding at December 31 292,000 383,000 504,000
Weighted average price per share of
options outstanding $10.20 $9.59 $9.04
Expiration dates 1/2001-7/2006 1/2001-7/2006 1/2001-7/2006
Options exercisable at December 31 292,000 383,000 405,000
Options granted - - 99,000
Options exercised or surrendered 91,000 121,000 85,000
Price ranges of options exercised or surrendered $6.00-$8.50 $6.00-$8.50 $6.00-$8.50
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.
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, compensation
expense is recognized only if the fair value of the underlying stock at
the grant date exceeds the exercise price of the option. Accordingly,
no compensation cost has been recognized for stock options. Had
compensation cost for the Company's stock options issued in 1996 been
determined consistent with SFAS No. 123, "Accounting for Stock Based
Compensation" 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 1998 or 1997.
1996
----
Net Earnings As Reported $5,293,111
Pro Forma $4,946,617
Basic Earnings per share As Reported $ 1.56
Pro Forma $ 1.46
Diluted Earnings per share As Reported $ 1.22
Pro Forma $ 1.16
38
39
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for the options granted in 1996: no dividend yield;
expected volatility of 20%; risk free interest rate of 6.7%; and
expected life of ten years for the options. The weighted average fair
value of options granted in 1996 was $5.99 per share.
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 $10,730,000 in 1999.
The Company's insurance subsidiaries, United Coastal Insurance and
ACSTAR, are domiciled in 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, 1998, 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 $55,124,801, and
$70,989,140 at December 31, 1998 and 1997, respectively, and their
statutory net income for the years ended December 31, 1998, 1997 and
1996 was $12,078,378, $12,383,045 and $8,778,843, respectively. The
primary differences between amounts reported in accordance with GAAP
and amounts reported in accordance with statutory accounting principles
are excess statutory reserves over statement reserves (Schedule P
Liability), carrying value of fixed maturity investments; assets not
admitted for statutory purposes such as agents balances over 90 days,
furniture and fixtures and certain notes receivable; and deferred
acquisition costs and deferred taxes which are recognized for GAAP
only.
Pursuant to various debt covenants, previously described, ACMAT is
restricted from purchasing treasury stock and paying dividends greater
than 20% of consolidated net earnings.
(14) EARNINGS PER SHARE
The Company adopted SFAS No. 128, Earnings per Share, on December 31,
1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share,
and replaces primary earnings per share and fully diluted earnings per
share with basic earnings per share and diluted earnings per share,
respectively. The Company has restated earnings per share for all prior
periods presented to comply with the provisions of SFAS No. 128.
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, 1998, 1997 and 1996:
Average
Shares Per-Share
1998: Earnings Outstanding Amount
-------- ----------- ------
Basic EPS:
Earnings available to stockholders $2,120,529 3,199,906 $ .66
Effect of Dilutive Securities:
Stock options -- 79,029
---------- ----------
Diluted EPS:
Earnings available to stockholders $2,120,529 3,278,935 $ .65
========== ========== ========
1997:
Basic EPS:
Earnings available to stockholders $4,456,949 3,443,976 $ 1.29
Effect of Dilutive Securities:
Stock options -- 128,917
Convertible Senior Notes $ 29,903 43,150
Convertible Note $1,252,350 1,500,000
---------- ---------
Diluted EPS:
Earnings available to stockholders $5,739,202 5,116,043 $ 1.12
========== ========== ========
39
40
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average
Shares Per-Share
1996: Earnings Outstanding Amount
-------- ----------- ------
Basic EPS:
Earnings available to stockholders $5,293,111 3,397,197 $ 1.56
Effect of Dilutive Securities:
Stock options -- 132,333
Convertible Senior Notes $ 502,425 725,000
Convertible Note $1,252,350 1,500,000
---------- ----------
Diluted EPS:
Earnings available to stockholders $7,047,886 5,754,530 $ 1.22
========== ========== ========
The Convertible notes were anti-dilutive in 1998.
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to 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. From 1986 to
1996, the Company obtained its general liability insurance from its
insurance subsidiaries. Since 1989, the Company has obtained its surety
bonds from its insurance subsidiary.
The Company has, together with many other defendants, been named as a
defendant in approximately 190 actions brought in Connecticut state
courts by injured or deceased individuals or their representatives
based on product liability claims relating to materials containing
asbestos. No specific claims for monetary damages are asserted in these
actions. Although it is early in the litigation process, the Company
does not believe that its exposure in connection with these cases is
significant.
(16) SEGMENT REPORTING
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for the way that public enterprises
report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate
resources and assessing performance. The Company redefined its
reportable operating segments as a result of the adoption of SFAS No.
131 and segment information for 1997 and 1996 has been restated.
The Company has three reportable operating segments: ACMAT Contracting,
ACSTAR Bonding and United Coastal Liability Insurance. The Company's
reportable segments are primarily the three main legal entities of the
Company which offer different products and services. The accounting
policies of the segments are the same as those described in the summary
of significant accounting policies.
ACMAT Contracting provides construction contracting services to
commercial and governmental customers. ACMAT Contracting also provides
underwriting services to its insurance subsidiaries. In addition, ACMAT
Contracting owns a commercial office building in New Britain
Connecticut and leases office space to its insurance subsidiaries as
well as third parties.
The United Coastal Liability Insurance operating segment offers
specific lines of liability insurance as an approved non-admitted
excess and surplus lines insurer in forty-six states, Puerto Rico, the
Virgin Islands and the District of Columbia. United Coastal offers
claims made and occurrence policies for specific specialty lines of
liability insurance through certain excess and surplus lines brokers
who are licensed and regulated by the state insurance department(s) in
the state(s) in which they operate. United Coastal offers general,
asbestos, lead, pollution and professional liability insurance
nationwide to specialty trade contractors, environmental contractors,
property owner, storage and treatment facilities and professionals.
United Coastal also offers products liability insurance to
manufacturers and distributors.
The Bonding operating segment provides, primarily through ACSTAR,
surety bonds written for prime, specialty trade, environmental,
asbestos and lead abatement contractors and miscellaneous obligations.
ACSTAR also offers other miscellaneous surety such as workers'
compensation bonds, supply bonds, subdivision bonds and license and
permit bonds.
40
41
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates performance based on earnings before income taxes
and excluding interest expense. The Company accounts for intersegment
revenue and expenses as if the products/services were to third parties.
Information relating to the three segments is summarized as follows:
1998 1997 1996
---- ---- ----
Revenues:
ACSTAR Bonding $ 5,286,955 7,209,863 6,948,365
United Coastal Liability Insurance 10,315,294 15,043,823 20,288,641
ACMAT Contracting 15,801,541 14,218,660 14,609,901
----------- ---------- ----------
$ 31,403,790 36,472,346 41,846,907
=========== ========== ==========
Operating Earnings:
ACSTAR Bonding $ 2,314,485 2,305,342 2,282,168
United Coastal Liability Insurance 5,176,870 8,239,017 10,105,725
ACMAT Contracting 501,712 1,224,579 2,631,958
----------- ---------- ----------
$ 7,993,067 11,768,938 15,019,851
=========== ========== ==========
Depreciation and Amortization:
ACSTAR Bonding $ 442,457 307,453 511,585
United Coastal Liability Insurance 279,422 512,769 573,444
ACMAT Contracting 690,125 685,791 702,032
----------- ---------- ----------
$ 1,412,004 1,506,013 1,787,061
=========== ========== ==========
Identifiable Assets:
ACSTAR Bonding $ 50,312,769 53,220,508
United Coastal Liability Insurance 78,888,156 100,524,851
ACMAT Contracting 16,925,540 20,463,403
------------ -----------
$146,126,465 176,208,762
============ ===========
Capital Expenditures:
ACSTAR Bonding $ 3,364 652
United Coastal Liability Insurance 49,044 93,709
ACMAT Contracting 186,046 60,122
------------ -----------
$ 238,454 154,483
============ ===========
The components of revenue for each segment are as follows:
1998 1997 1996
---- ---- ----
ACMAT Contracting:
Contract revenues $ 12,139,924 10,056,322 9,415,734
Investment income, net 65,342 55,071 76,800
Intersegment revenue:
Rental income 1,251,299 1,251,955 1,201,725
Underwriting services and agency commissions 1,697,978 2,295,371 3,089,567
Capital losses - - (712)
Other 646,998 559,941 826,787
------------ ---------- ----------
$15,801,541 14,218,660 14,609,901
------------ ---------- ----------
ACSTAR Bonding:
Premiums $ 4,618,281 5,847,558 5,837,254
Investment income, net 1,169,977 962,815 1,128,896
Equity income (loss) from limited partnership investment (569,343) 244,302 (22,365)
Capital gains/(losses) 68,040 25,380 (6,788)
Other - 129,808 11,368
------------ ---------- ----------
$ 5,286,955 7,209,863 6,948,365
------------ ---------- ----------
United Coastal Liability Insurance:
Premiums $ 6,519,382 9,198,286 14,062,682
Investment income, net 4,430,026 4,859,805 5,885,793
Equity income (loss) from limited partnership investment (832,243) 591,735 (11,360)
Capital gains 198,129 257,287 265,274
Other - 136,710 86,252
------------ ---------- ----------
$ 10,315,294 15,043,823 20,288,641
------------ ---------- ----------
41
42
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of segment totals for revenue and
operating income to corresponding amounts in the Company's statement of
earnings:
Revenue: 1998 1997 1996
---- ---- ----
Total revenue for reportable segments $ 31,403,790 36,472,346 41,846,907
Intersegment eliminations (2,651,517) (2,920,211) (4,811,602)
------------ ------------ ------------
$ 28,752,273 33,552,135 37,035,305
============ ============ ============
Operating Earnings:
Total operating earnings for reportable segments $ 7,993,067 11,768,938 15,019,851
Interest expense (4,621,401) (5,116,414) (4,946,418)
Intersegment interest expense (52,774) -- (1,118,546)
Other operating expenses (478,667) (455,959) (459,808)
------------ ------------ ------------
$ 2,840,225 6,196,565 8,495,079
============ ============ ============
Operating earnings for ACMAT contracting are operating revenues less
cost of contract revenues and identifiable selling, general and
administrative expenses. Operating earnings for the bonding and
liability insurance segments are revenues less losses and loss
adjustment expenses, amortization of policy acquisition costs and
identifiable selling, general and administrative expenses. The
adjustments and eliminations required to arrive at consolidated amounts
shown above consist principally of the elimination of the intersegment
revenues related to the performance of certain services and rental
charges. Identifiable assets are those assets that are used by each
segment's operations. Foreign revenues are not significant
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results of operations for 1998 and
1997 follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1998
Operating Revenues $7,402,497 6,963,358 7,504,575 6,881,843
---------- ---------- ---------- ----------
Operating Earnings $2,608,244 1,990,413 1,199,983 1,662,986
---------- ---------- ---------- ----------
Net Earnings $1,003,526 620,254 66,538 430,211
---------- ---------- ---------- ----------
Basic Earnings Per Share $ .30 .19 .02 .14
---------- ---------- ---------- ----------
Diluted Earnings Per Share $ .27 .19 .02 .14
---------- ---------- ---------- ----------
1997
Operating Revenues $8,263,809 8,642,065 8,056,863 8,589,398
---------- ---------- ---------- ----------
Operating Earnings $2,935,909 3,315,024 2,614,952 2,447,094
---------- ---------- ---------- ----------
Net Earnings $1,149,226 1,409,415 1,013,071 885,237
---------- ---------- ---------- ----------
Basic Earnings Per Share $ .31 .41 .30 .27
---------- ---------- ---------- ----------
.31
Diluted Earnings Per Share $ .27 .34 .27 .24
---------- ---------- ---------- ----------
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.
42
43
Schedule I
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant
As of December 31, 1998 and 1997 and for the
years ended December 31, 1998, 1997 and 1996
The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 1998 and 1997 and its condensed
statements of earnings and cash flows for the years ended December 31, 1998,
1997 and 1996.
BALANCE SHEETS
Assets 1998 1997
---- ----
Current assets:
Cash $ 396,430 822,100
Receivables 1,549,013 2,953,635
Other current assets 150,984 192,842
----------- -----------
Total current assets 2,096,427 3,968,577
Property and equipment, net 12,671,837 12,927,465
Investments in and advance from subsidiaries 61,652,491 76,576,942
Intangibles 518,135 692,495
Other assets 1,731,203 2,549,472
----------- -----------
$78,670,093 96,714,951
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ -- 5,000,000
Current portion of long-term debt 1,559,871 4,365,381
Other current liabilities 3,847,167 3,924,485
----------- -----------
Total current liabilities 5,407,038 13,289,866
Long-term debt 35,640,129 43,847,346
----------- -----------
Total liabilities 41,047,167 57,137,212
Commitments and contingencies
Stockholders' equity 37,622,926 39,577,739
----------- -----------
$78,670,093 96,714,951
=========== ===========
See Notes to Condensed Financial Statements.
43
44
Schedule I, continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENT OF EARNINGS
1998 1997 1996
---- ---- ----
Contract revenues $ 12,139,924 10,056,322 9,415,734
Cost of contract revenues 11,810,879 9,331,103 8,396,344
------------ ------------ ------------
Gross profit 329,045 725,219 1,019,390
Selling, general and administrative expenses 3,841,623 3,982,916 3,896,182
------------ ------------ ------------
Operating loss (3,512,578) (3,257,697) (2,876,792)
Interest expense (4,674,175) (5,116,414) (6,064,964)
Interest income 46,854 43,101 52,999
Underwriting fees 1,260,399 1,718,281 2,132,685
Other income 1,898,297 1,811,896 2,027,800
------------ ------------ ------------
Loss before income taxes and equity in net
earnings of subsidiaries (4,981,203) (4,800,833) (4,728,272)
Income tax benefit (1,435,000) (1,500,000) (1,473,000)
------------ ------------ ------------
Loss before equity in net earnings of subsidiaries (3,546,203) (3,300,833) (3,255,272)
Equity in net earnings of subsidiaries 5,666,732 7,757,782 8,548,383
------------ ------------ ------------
Net earnings $ 2,120,529 4,456,949 5,293,111
============ ============ ============
See Notes to Condensed Financial Statements.
44
45
Schedule I, Continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENTS OF CASH FLOWS
Cash flows from operating activities: 1998 1997 1996
---- ---- ----
Net earnings $ 2,120,529 4,456,949 5,293,111
Depreciation and amortization 688,862 684,521 682,166
Equity in undistributed earnings of subsidiaries (5,666,732) (7,757,782) (8,548,383)
(Increase) decrease in accounts receivable 1,404,622 (839,594) (174,311)
(Increase) decrease in other assets 787,299 149,711 (182,424)
Increase (decrease) in other liabilities 159,662 122,424 (587,169)
------------ ------------ ------------
Net cash used for operating activities (505,758) (3,183,771) (3,517,010)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (186,046) (60,122) (85,108)
Decrease in investment in subsidiaries 20,851,120 13,714,452 9,834,721
Other -- -- (335,606)
------------ ------------ ------------
Net cash provided by investing activities 20,665,074 13,654,330 9,414,007
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under lines of credit 7,000,000 5,000,000 9,200,000
Repayments of lines of credit (12,000,000) (13,200,000) (3,500,000)
Repayment of long-term debt (23,812,727) (3,594,692) (1,820,181)
Issuance of long-term debt 12,800,000 8,500,000 2,500,000
Issuance of Class A stock, net of taxes 696,000 882,250 560,000
Payments for acquisition and retirement of stock (5,268,259) (8,257,963) (12,300,209)
------------ ------------ ------------
Net cash used for financing activities (20,584,986) (10,670,405) (5,360,390)
------------ ------------ ------------
Net increase (decrease) in cash (425,670) (199,846) 536,607
Cash, beginning of year 822,100 1,021,946 485,339
------------ ------------ ------------
Cash, end of year $ 396,430 822,100 1,021,946
============ ============ ============
See Notes to Condensed Financial Statements.
45
46
Schedule I, Continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Company's
1998 Annual Report.
(1) SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes received from subsidiaries during the years ended December
31, 1998, 1997 and 1996 were $2,355,403, $112,995, and $1,990,201,
respectively. Interest paid during the years ended December 31, 1998,
1997 and 1996 was $5,173,867 $4,630,502, and $6,099,379, respectively.
Interest paid in 1998 and 1996 included $52,774 and $1,118,546,
respectively, paid to subsidiaries for intercompany loans.
On February 5, 1997, ACMAT Corporation purchased the 1,099,996 shares
of Class A Stock which AIG Life Insurance Company (366,663 shares) and
American International Life Assurance Company of New York, (733,333)
had acquired over the last three years through conversion options. The
shares were purchased at an average price of $14.70 per share for a
total purchase price of $16,174,942. The purchase price of $16,174,942
consisted of $4,174,942 in cash and promissory notes totaling
$12,000,000. The purchase of stock with the $12,000,000 promissory
notes is a non-cash transaction that is not reflected in the
Consolidated Statement of Cash Flows.
(2) LONG-TERM DEBT
A summary of long-term debt at December 31, 1998 and 1997 follows:
1998 1997
---- ----
Term Loan Due 2003 $ 5,000,000 --
Mortgage Note Due 2008 7,800,000 --
Senior Notes Due 2005 9,000,000 12,000,000
Term Loan Due 2004 -- 6,690,000
Term Loan Due 2003 -- 1,874,998
Term Loan Due 2000 -- 3,333,333
Mortgage Note Due 2000 -- 7,814,396
Convertible Note Due 2022 15,400,000 16,500,000
----------- -----------
$37,200,000 48,212,727
=========== ===========
See Note 10 to the Consolidated Financial Statements in the Annual
Report for a description of the long-term debt and aggregate maturities
for 1999 to 2003 and thereafter.
(3) INCOME TAXES
See Note 11 to the Consolidated Financial Statements in the Annual
Report for a description of income taxes.
(4) COMMITMENTS AND CONTINGENCIES
See Note 15 to the Consolidated Financial Statements in the Annual
Report for a description of the commitments and contingencies.
46
47
SCHEDULE II
ACMAT CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1998, 1997 and 1996
Balance Additions
at charged Balance
beginning to costs at
of and end of
Description period expenses Deductions(a) period
----------- ------ -------- ------------- ------
Allowance for
doubtful accounts:
1998 $309,746 293,149 345,278 257,617
======== ======== ======== ========
1997 $322,406 620,000 632,660 309,746
======== ======== ======== ========
1996 $340,844 400,904 419,342 322,406
======== ======== ======== ========
(a) Deductions represent accounts written off.
47
48
ACMAT CORPORATION AND SUBSIDIARIES Schedule V
Supplemental Information concerning property-casualty insurance operations
As of and for the years ended December 31, 1998, 1997 and 1996
Discount Ded.
Reserves for from Unpaid
Deferred Unpaid Losses Losses
Affiliation Policy and Loss and Loss Net
with Acquisition Adjustment Adjustment Unearned Earned Investment
Registrant Costs Expenses Expenses Premiums Premiums Income
---------- ----- -------- -------- -------- -------- ------
United
Coastal
Liability
Insurance:
1998 $1,004,850 31,471,445 -- 4,650,438 6,519,382 4,430,026
=========== =========== ========== ========== ========== =========
1997 $1,432,358 35,994,240 -- 6,846,846 9,198,286 4,859,805
========== ========== ========== ========== ========== =========
1996 $2,056,166 36,097,543 -- 9,230,566 14,062,682 4,711,440
========== ========== ========== ========== ========== =========
Losses & Loss Adjustment Amortization Paid
Expenses Incurred of Deferred Losses
Affiliation Related to Policy and Loss
with --------------------------- Acquisition Adjustment Premiums
Registrant Current Year Prior Years Costs Expenses Written
---------- ------------ ----------- ----- -------- -------
United
Coastal
Liability
Insurance:
1998 3,123,183 (1,167,367) 1,852,218 6,572,054 4,351,983
========= =========== ========= ========= ==========
1997 3,421,762 (662,276) 2,569,959 3,011,873 7,026,051
========== ========== ========= ========= ==========
1996 5,386,007 (1,167,203) 3,860,129 2,959,515 12,227,735
========= =========== ========= ========= ==========
Discount Ded.
Reserves for from Unpaid
Deferred Unpaid Losses Losses
Affiliation Policy and Loss and Loss Net
with Acquisition Adjustment Adjustment Unearned Earned Investment
Registrant Costs Expenses Expenses Premiums Premiums Income
---------- ----- -------- -------- -------- -------- ------
ACSTAR
BONDING:
1998 $ 545,239 14,512,333 -- 2,889,186 4,618,281 1,169,977
=========== =========== ========== ========== ========== =========
1997 $ 646,047 16,093,222 -- 3,587,126 5,847,558 962,815
=========== =========== ========== ========== ========== =========
1996 $ 849,709 14,781,134 -- 4,100,310 5,837,254 1,106,531
=========== =========== ========== ========== ========== =========
Losses & Loss Adjustment Amortization Paid
Expenses Incurred of Deferred Losses
Affiliation Related to Policy and Loss
with ---------------------------- Acquisition Adjustment Premiums
Registrant Current Year Prior Years Costs Expenses Written
---------- ------------ ----------- ----- -------- -------
ACSTAR
BONDING:
1998 1,385,484 $(1,154,572) 1,225,718 146,320 4,026,634
========= =========== =========== ========== ==========
1997 1,754,268 $ (176,502) 1,605,140 21,870 5,654,146
========= =========== =========== ========== ==========
1996 1,751,176 $ -- 1,724,096 254,594 5,813,753
========= =========== =========== ========== ==========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows for each director (a) his or her age, (b) the year in
which the director first served as a director of the Company, (c) position with
the Company and business experience during the past five years, including
principal occupation, (d) his or her committee assignments, and (e) his or her
other directorships. Each director is elected for a term of one year and until
his or her successor shall be elected.
NAME AGE DIRECTOR POSITION WITH THE COMPANY AND BUSINESS EXPERIENCE
SINCE DURING LAST FIVE YEARS, INCLUDING OCCUPATION
HENRY W. NOZKO, SR. (1) 79 1951 Chairman of the Board, President and Chief Executive
Officer of the Company. Chairman of the Board and
Director of United Coastal Insurance Company, ACSTAR
Holdings, Inc. and ACSTAR Insurance Company.
Co-Chief Executive Officer of United Coastal
Insurance Company.
HENRY W. NOZKO, JR. (1) 52 1971 Executive Vice President, Chief Operating Officer,
and Treasurer of the Company. Member of the Audit
Committee. President, Co-Chief Executive Officer and
Treasurer of United Coastal Insurance Company.
President and Treasurer of ACSTAR Holdings, Inc. and
ACSTAR Insurance Company. Member, Boards of
Directors of United Coastal Insurance Company, ACSTAR
Holdings, Inc., ACSTAR Insurance Company.
VICTORIA C. NOZKO (1) 80 1982 Housewife during past five years. Member of the
Audit Committee.
JOHN C. CREASY 79 1987 Retired Chief Executive Officer of Danbury Hospital,
Member, Board of United Coastal Insurance Company.
Member of the Compensation Committee and Audit
Committee.
MICHAEL J. SULLIVAN (2) 54 1993 Business Manager, Financial Secretary/Treasurer of
Sheet Metal Workers' Local Union No. 20; General
Secretary-Treasurer of Sheet Metal Workers'
International Association.
(1) Mr. Henry W. Nozko, Sr. and Mrs. Victoria C. Nozko are husband and wife
and Mr. Henry W. Nozko, Jr. is their son.
(2) Mr. Michael J. Sullivan resigned from the Board of Directors effective
February 28, 1999. The Pension Fund will nominate a new Director to be
voted upon at the upcoming Annual Meeting of Shareholders.
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Executive Officers of the Registrant:
The following are the Company's Executive Officers, their age, and offices
held. Officers are appointed to serve until the meeting of the Board of
Directors following the next Annual Meeting of Stockholders and until their
successors have been elected.
NAME AGE OFFICES HELD
---- --- ------------
Henry W. Nozko, Sr. 79 President, Chief Executive
Officer, Director and
Chairman of the Board
since 1951.
Henry W. Nozko, Jr. 52 Executive Vice President since
1982. Treasurer since 1973.
Director since 1971, and Chief
Operating Officer since 1985.
Robert H. Frazer 52 Vice President since 1982.
Secretary since 1992. General
Counsel since 1977.
Michael P. Cifone 40 Vice President-Finance since
1990. Corporate Controller
since 1989.
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ITEM 11. EXECUTIVE COMPENSATION
Directors who are not employees of the Company are paid an annual fee of $4,000.
The following table provides certain summary information regarding compensation
of the Company's Chief Executive Officer and each of the four most highly
compensated executive officers of the Company for the periods indicated.
NAME AND PRINCIPAL ANNUAL COMPENSATION (A) LONG-TERM ALL OTHER
POSITION COMPENSATION (B) COMPENSATION (C)
YEAR SALARY BONUS CLASS A OPTIONS
Henry W. Nozko, Sr. 1998 $447,200 - - $12,238
Chairman, President 1997 $430,000 $ 86,000 - $10,591
And Chief Executive Officer 1996 $428,292 $172,000 $46,000 $10,345
Henry W. Nozko, Jr. 1998 $322,500 - - $12,120
Executive Vice President and Chief 1997 $310,000 $ 62,000 - $10,488
Operating Officer 1996 $334,500 $124,000 $26,000 $10,238
Robert H. Frazer, Esq. 1998 $171,600 - - $12,075
Vice President, Secretary and 1997 $165,000 $33,000 - $10,450
General Counsel 1996 $164,375 $49,500 - $10,198
Michael P. Cifone 1998 $114,400 - - $10,202
Vice President-Finance 1997 $110,000 $22,000 - $ 9,253
1996 $109,583 $33,000 - $10,090
(A) Amounts shown include cash compensation earned and received by the executive
officers. There are no other forms of non-cash compensation or other perquisites
for any executive officer.
The Company has a Management Compensation Plan based upon earnings of the
Company. As a guideline, the plan provides that participants may share in an
incentive fund equal to 12% of pretax earnings, provided such pretax earnings
amount to at least a 10% return on the Company's equity. However, both the
participants and the amount of bonus are discretionary, provided the total
amount of bonuses paid do not exceed the total incentive fund available. In
addition, the Company may offer separate incentives and commissions on an
individual basis.
(B) Options were granted for ACMAT Class A Stock.
(C) The amounts shown in this column represent contributions made by the Company
to the Company's Thrift, Profit Sharing and Retirement Plan ("Plan"). The Plan
provides that all nonunion employees employed on a full time or part time
salaried basis are eligible to participate on the first day of January or July
after twelve consecutive months of employment. The Company contributes amounts,
as determined by the Board of Directors, to be allocated among the participants
according to a formula based upon the employee's years of service and
compensation. A participant becomes vested at the rate of 20% per year
commencing after two years of service.
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The following table provides information on options exercised during 1998 by the
named Executive Officers and the value of their unexercised options at December
31, 1998. No options were granted in 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR END 1998 OPTION VALUES
Number of
Shares Unexercised Value of Unexercised
Acquired Value Options at In-the-Money Options
Name on Exercise Realized 12/31/98 (1) at 12/31/98 (2)
----------- -------- ------------ ---------------
Henry W. Nozko, Sr.
- ACMAT Class A Stock Options 15,000 $105,000 46,000 $172,500
- ACMAT Common Stock Options - - 50,000 $550,000
Henry W. Nozko, Jr.
- ACMAT Class A Stock Options 16,000 $152,000 45,000 $235,750
- ACMAT Common Stock Options - - 50,000 $550,000
Robert H. Frazer
- ACMAT Class A Stock Options 15,000 $142,500 35,000 $236,250
Michael P. Cifone
- ACMAT Class A Stock Options - - 10,000 $ 67,500
(1) Represents the number of options held at year end. All options
were exercisable at December 31, 1998.
(2) Represents the total gain which would have been realized if
all options for which the year-end stock price was greater
than the exercise price were exercised on the last day of the
year.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
As of March 1, 1999, no person was known to the Company to be the beneficial
owner of more than five percent of its outstanding shares of Common Stock or
Class A Stock except as set forth in the following table which also shows, as of
that date, the total number of shares of each class of stock of the Company
beneficially owned, and the percent of the outstanding class of stock so owned,
by each director, and by all directors and officers of the Company, as a group:
PERCENTAGE PERCENTAGE
CLASS NUMBER OF SHARES OF CLASS OF TOTAL
BENEFICIAL OWNER OF STOCK BENEFICIALLY OWNED (1) OUTSTANDING VOTING POWER (17)
---------------- -------- ---------------------- ----------- -----------------
Henry W. Nozko, Sr. Common 438,000 (2)(5) 68.21% 50.13%
Class A 60,000 (2)(4) 2.46
Henry W. Nozko, Jr. Common 190,274 (2)(3)(5) 29.63 23.37
Class A 167,574 (2)(3)(6) 6.86
Victoria C. Nozko Class A 42,000 (7) 1.75 .50
John C. Creasy Common 3,300 .56 .62
Class A 18,453 (8) .77
Michael J. Sullivan Class A 18,390 (9) .76 .22
Sheet Metal Workers'
National Pension Fund Class A 1,400,000 (10) 36.94 14.42
Franklin Resources, Inc. Class A 495,000 (11) 20.71 5.96
First Manhattan Co. Class A 307,816 (12) 12.88 3.70
Queensway Financial
Holdings Limited Class A 349,100 (13) 14.61 4.20
Investment Counselor of
Maryland, Inc. Class A 190,000 (14) 7.95 2.29
EQSF Advisors, Inc. Class A 189,978 (15) 7.95 2.29
U.S. Bancorp Class A 179,800 (16) 7.52 2.16
All Directors and
Officers (7 persons)
as a Group Common 631,574 91.26 70.21
Class A 351,632 13.65
(1) The person listed has the sole power to vote the shares of Common Stock
and Class A Stock listed above as beneficially owned by such person and
has sole investment power with respect to such shares.
(2) Does not include 14,260 shares of Common Stock nor 16,060 shares of
Class A Stock held of record by ACMAT's qualified Thrift, Profit
Sharing & Retirement Plan, of which Messrs. Nozko, Sr. and Nozko, Jr.
are trustees. Address is 233 Main Street, New Britain, Connecticut
06050-2350.
(3) Does not include 24,250 shares of Class A Stock and 6,500 shares of
Common Stock held by Mr. Nozko, Jr. as custodian for his minor child
nor 900 shares of Class A Stock and 3,750 shares of Common Stock held
by his wife, Gloria C. Nozko.
(4) Includes options to purchase 46,000 shares of Class A Stock.
(5) Includes options to purchase 50,000 shares of Common Stock.
(6) Includes options to purchase 45,000 shares of Class A Stock.
(7) Includes options to purchase 15,000 shares of Class A Stock.
(8) Includes options to purchase 16,500 shares of Class A Stock.
(9) Includes options to purchase 18,000 shares of Class A Stock.
(10) Assumes the full conversion of $15,400,000 principal amount of 11.5%
Convertible Note into 1,400,000 shares of Class A Stock. The Address of
the Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314.
(11) Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
Mateo, CA 94404
(12) Address of First Manhattan Co. is 437 Madison Avenue, New York, NY
10022.
(13) Address of Queensway Financial Holdings Limited is 90 Adelaide Street
West, Toronto, Ontario M5H3V9.
(14) Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
Street, Baltimore, MD 21201.
(15) Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
10017-2023.
(16) Address of U.S. Bancorp is 601 2nd Avenue South, Minneapolis, MN
55402-4302.
(17) Based upon one vote for each share of Common Stock and one-tenth vote
for each share of Class A Stock.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Sheet Metal Workers' National Pension Fund
The Pension Fund has the right to convert indebtedness of ACMAT to the Pension
Fund in the principal amount of $15,400,000 into shares of Class A Stock at the
current conversion price of $11.00 per share pursuant to the terms of a 30-year
unsecured, subordinated debenture dated July 1, 1992 and bearing interest at the
annual rate of 11.5%.
Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a
voting agreement pursuant to which the parties have agreed to vote their
respective shares of Class A Stock in favor of the Pension Fund's nominees to
the ACMAT Board of Directors. Michael J. Sullivan has resigned from the Board of
Directors effective February 28, 1999. The Pension Fund will nominate a new
Director to be voted upon at the upcoming Annual Meeting of Shareholders.
AIG Life Insurance Company
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 shares). 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. The shares
were purchased by the Company at an average price of $14.70 per share for a
total purchase price of $16,174,942.
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 (7-3/4%). 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%.
American International Group, Inc., a holding company for AIG Life Insurance
Company and American International Life Assurance Company of New York, is a
substantial owner of Transatlantic Reinsurance Company, a reinsurer to which the
Company, through Coastal Insurance and ACSTAR Insurance, ceded approximately
$265,000 in reinsurance premiums in the year ended December 31, 1998.
Other Relationships
During the year ended December 31, 1998, the Company paid to Dr. Arthur Cosmas
$128,780 in fees in connection with consulting services rendered by Dr. Cosmas
with respect to inspection and engineering services relating to ACMAT's asbestos
abatement activities. Dr. Cosmas is the son-in-law of Henry W. Nozko, Sr. and
Victoria C. Nozko and the brother-in-law of Henry W. Nozko, Jr.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
Included in Part II of this Report:
Independent Auditors' Report
Consolidated Statements of Earnings for the years ended
December 31, 1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements - December 31,
1998, 1997 and 1996
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2. Financial Statement Schedules
Consolidated Schedules included in Part II of this
Report-Years ended December 31, 1998, 1997 and 1996:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty
Insurance Operations
All other schedules are omitted as the required information is not
applicable or the information is presented in the Consolidated
Financial Statements or related notes.
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during
the fourth quarter of 1998.
(c) Exhibits
(3) Certificate Amending and Restating the Company's
Bylaws as filed as an Exhibit to the Company's Form
10-Q for the Quarter ended March 31, 1989 is
incorporated herein by reference.
(3a) Certificate Amending and Restating the Company's
Certificate of Incorporation as amended May 1, 1991
as filed as an Exhibit to the Company's Form 10-Q for
the Quarter ended March 31, 1991 is incorporated by
reference.
(4b) Promissory Note between ACMAT Corporation and Webster
Bank is attached hereto as Exhibit 4(b).
(4c) Open-end Mortgage Deed and Security Agreement between
ACMAT Corporation and Webster Bank is attached hereto
as Exhibit 4(c).
(4d) Commercial Credit Agreement between ACMAT Corporation
and BankBoston, N.A. is attached hereto as Exhibit
4(d).
(4e) Revolving Credit Note between ACMAT Corporation and
BankBoston, N.A. is attached hereto as Exhibit 4(e).
(4f) Term Note between ACMAT Corporation and BankBoston,
N.A. is attached hereto as Exhibit 4(f).
(10a) Annual Management Compensation Plan filed as an
Exhibit to the Company's 1984 Form 10-K is
incorporated herein by reference.
(10b) Stock Purchase Agreement dated as of July 1, 1992
between ACMAT Corporation and the Sheet Metal
Workers' National Pension Fund together with Note
Agreement Re: 11 1/2% Convertible Subordinated Notes
due 2012 filed as Exhibit 10g to the Company's Form
10-K for the year ended December 31, 1992 is
incorporated herein by reference.
(21) Subsidiaries of ACMAT.
(27) Financial Data Schedule.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ACMAT CORPORATION
Dated: March 30, 1999 By: /s/ Henry W. Nozko, Sr.
--------------------------------
Henry W. Nozko, Sr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chairman of the Board,
President, Chief Executive
/s/ Henry W. Nozko, Sr Officer and Director March 30, 1999
-----------------------
Henry W. Nozko, Sr.
Chief Operating Officer,
Executive Vice President
/s/ Henry W. Nozko, Jr. Treasurer and Director March 30, 1999
-----------------------
Henry W. Nozko, Jr.
Vice President - Finance
(Principal Financial and
/s/ Michael P. Cifone Accounting Officer) March 30, 1999
-----------------------
Michael P. Cifone
/s/ Victoria C. Nozko Director March 30, 1999
-----------------------
Victoria C. Nozko
/s/ John C. Creasy Director March 30, 1999
-----------------------
John C. Creasy
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INDEX TO EXHIBITS
Regulation S-K Exhibit Page Number
---------------------- -----------
Exhibit 3 - Bylaws Incorporated by Reference
Exhibit 3a - Certificate of Incorporation
as amended May 1, 1991 Incorporated by Reference
Exhibit 4b - Promissory Note between ACMAT
and Webster Bank Incorporated Herein
Exhibit 4c - Open-end Mortgage Deed/Security
Agreement between ACMAT and
Webster Bank. Incorporated Herein
Exhibit 4d - Commercial Credit Agreement between
ACMAT and BankBoston, N.A. Incorporated Herein
Exhibit 4e - Revolving Credit Note between ACMAT
and BankBoston, N.A. Incorporated Herein
Exhibit 4f - Term Note between ACMAT and BankBoston, N.A. Incorporated Herein
Exhibit 10a - Annual Management Incorporated by Reference
Compensation Plan
Exhibit 10b - Stock Purchase and Note Agreement Incorporated by Reference
between ACMAT Corporation
and The Sheet Metal Workers'
National Pension Fund
Exhibit 21 - Subsidiaries of ACMAT Incorporated Herein
Exhibit 27 - Financial Data Schedule Incorporated Herein
57