<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1996.
REGISTRATION NO. 333-3143
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ACMAT CORPORATION
(Exact name of company as specified in its charter)
<TABLE>
<S> <C> <C>
CONNECTICUT 635 06-0682460
(State of other jurisdiction of (Primary Standard (I.R.S. Employer Identification
incorporation or organization) Industrial Classification No.)
Number)
</TABLE>
233 MAIN STREET,
NEW BRITAIN, CT 06050-2350
(860) 229-9000
(Name, address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
ROBERT H. FRAZER, ESQ.; VICE PRESIDENT AND GENERAL COUNSEL
ACMAT CORPORATION
233 MAIN STREET, NEW BRITAIN, CT 06050-2350
(860) 229-9000
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
Copy to:
WILLARD F. PINNEY, JR.
MURTHA, CULLINA, RICHTER AND PINNEY
CITYPLACE I, 185 ASYLUM STREET
HARTFORD, CT 06103-3469
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this
Registration Statement becomes effective.
If securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE COMPANY SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
ACMAT CORPORATION
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS 1 THROUGH 19 OF FORM S-4.
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER PROSPECTUS CAPTION
------------------------------------------- -------------------------------------------
<S> <C> <C>
A. Information About the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Front Cover
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.............. Summary; Certain Considerations
4. Terms of the Transaction................... Summary; Merger
5. Pro Forma Financial Information............ Summary Pro Forma Financial Statements;
Company Pro Forma Financial Statements
6. Material Contacts with the Company Being
Acquired................................... Relationship Between the Company and United
Coasts
7. Additional Information Required for
Reoffering By Persons and Parties Deemed to
be Underwriters............................ Not Applicable
8. Interest of Named Experts and Counsel...... Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Not Applicable
B. Information About the Registrant
10. Information With Respect to S-3
Registrants................................ Not Applicable
11. Incorporation of Certain Information by
Reference.................................. Not Applicable
12. Information with Respect to S-2 or S-3
Registrants................................ Summary; The Company; Business of the
Company; Company Selected Consolidated
Financial Data; Company Management's
Discussion and Analysis of Results of
Operations and Financial Condition
13. Incorporation of Certain Information by
Reference.................................. Incorporation of Certain Documents by
Reference
14. Information with Respect to Registrants
Other than S-3 or S-2 Registrants.......... Not Applicable
C. Information About the Company Being
Acquired
15. Information with Respect to S-3
Companies.................................. Not Applicable
16. Information with Respect to S-2 or S-3
Companies.................................. Not Applicable
17. Information with Respect to Companies Other
than S-3 or S-2 Companies.................. Summary; United Coasts; Business of United
Coasts; United Coasts Selected Financial
Data; United Coasts Management's Discussion
and Analysis of Results of Operations and
Financial Condition
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited......... Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER PROSPECTUS CAPTION
------------------------------------------- -------------------------------------------
<S> <C> <C>
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer....................... Management of the Company; Security
Ownership of Certain Beneficial Owners and
Management of the Company; Management of
United Coasts; Security Ownership of
Certain Beneficial Owners and Management of
United Coasts
</TABLE>
<PAGE> 4
UNITED COASTS CORPORATION
233 MAIN STREET
NEW BRITAIN, CONNECTICUT 06050-2350
June 3, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
United Coasts Corporation ("United Coasts") which will be held at the offices of
United Coasts, 233 Main Street, New Britain, Connecticut 06050-2350 on July 11,
1996 at 10:00 a.m., Eastern Daylight Time. At this Special Meeting, you will be
asked to consider and vote on an Agreement and Plan of Liquidation and Merger,
dated May 28, 1996, pursuant to which United Coasts would be merged with and
into ACMAT Corporation. ACMAT currently holds directly and indirectly
approximately 84% of the outstanding common stock of United Coasts.
The Board of Directors of United Coasts has voted unanimously in favor of
the merger and believes that the merger is in the best interest of United Coasts
and its stockholders. The Board recommends a vote FOR approval of the merger.
A formal Notice of Special Meeting of Stockholders follows this letter as
does the Prospectus of ACMAT which discusses the merger and related subjects in
detail. Please consider these materials carefully.
Your vote is important. The merger is conditioned on receipt of the
affirmative vote of holders of a majority of United Coasts shares voted in
connection with the merger by stockholders other than ACMAT and its affiliates.
In order to ensure your vote at the meeting, please sign, date and mail promptly
the enclosed Proxy in the postage-paid envelope provided.
Sincerely,
HENRY W. NOZKO, SR.
Chairman and Co-Chief Executive
Officer
HENRY W. NOZKO, JR.
President and Co-Chief Executive
Officer
<PAGE> 5
UNITED COASTS CORPORATION
233 MAIN STREET
NEW BRITAIN, CONNECTICUT
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 11, 1996
------------------------
A special meeting of Stockholders of United Coasts Corporation ("United
Coasts") will be held at 233 Main Street, New Britain, Connecticut on July 11,
1996 at 10:00 a.m., Eastern Daylight Time for the following purposes:
(1) To consider and vote on a proposal to approve and adopt an
Agreement and Plan of Liquidation and Merger, dated May 28, 1996 (the
"Merger Agreement"), which provides for the merger of United Coasts with
and into ACMAT Corporation, on the terms and subject to the conditions set
forth in the Merger Agreement, a copy of which is attached to and described
in the enclosed Prospectus of ACMAT Corporation; and
(2) To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
Only stockholders of record of United Coasts at the close of business on
May 24, 1996 are entitled to notice of and to vote at the Special Meeting.
EVEN IF YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND
PROMPTLY RETURN YOUR COMPLETED PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO
THAT YOUR VOTE CAN BE COUNTED AT THE MEETING. IF YOU ATTEND THE MEETING, YOU MAY
WITHDRAW YOUR PROXY AND VOTE YOUR SHARES PERSONALLY.
BY ORDER OF THE BOARD OF DIRECTORS
ROBERT H. FRAZER
Secretary
June 3, 1996
<PAGE> 6
PROSPECTUS
1,111,459 SHARES
ACMAT CORPORATION
CLASS A STOCK
This Prospectus relates to a proposed merger (the "Merger") of United
Coasts Corporation ("United Coasts") with and into ACMAT Corporation (the
"Company" or "ACMAT") pursuant to an Agreement and Plan of Liquidation and
Merger between ACMAT and United Coasts (the "Merger Agreement"). The Merger is
contingent upon the affirmative vote of shareholders of United Coasts holding a
majority of the United Coasts Common Stock ("UC Common Stock") outstanding as of
May 24, 1996 (the "Record Date") at a Special Meeting of United Coasts, called
to be held on July 11, 1996 (the "Special Meeting) and upon the affirmative vote
at the Special Meeting of certain United Coasts shareholders unaffiliated with
ACMAT who are record holders of UC Common Stock as of the Record Date (the
"Unaffiliated Holders") holding a majority of the shares of UC Common Stock
voted by the Unaffiliated Holders on the Merger. The Merger is also subject to
certain other conditions (see "The Merger"). Subject to such conditions and the
terms of the Merger, upon the effective date of the Merger (the "Effective
Date"), the Company will issue shares of its Class A Stock (the "Class A Stock")
in exchange for shares of UC Common Stock held by the Unaffiliated Holders as of
the Effective Date. The number of shares of Class A Stock to be received by the
Unaffiliated Holders will be determined under the terms of the Merger Agreement,
after any allocation of Class A Stock, otherwise receivable by the Unaffiliated
Holders, issued to counsel for the Unaffiliated Holders ("Plaintiff's Counsel")
in payment of Plaintiff's Counsel's fees relating to the settlement of certain
shareholder litigation. See "Litigation Settlement." The number of shares of UC
Common Stock to be exchanged for each share of Class A Stock receivable by the
Unaffiliated Holders, net of any shares issued on their behalf to Plaintiff's
Counsel, is hereinafter referred to as the "Exchange Ratio." The minimum number
of shares of Class A Stock receivable by the Unaffiliated Holders net of the
maximum Plaintiff's Counsel's fee will equal one (1) share of Class A Stock for
each approximately 1.536 shares of UC Common Stock held by Unaffiliated Holders,
subject to cash payments in lieu of fractional shares.
INVESTMENT IN THE COMPANY'S CLASS A STOCK INVOLVES CERTAIN RISKS. SEE
"CERTAIN CONSIDERATIONS" FOR A DISCUSSION OF RISK FACTORS AND OTHER FACTORS
WHICH SHOULD BE CONSIDERED IN CONNECTION WITH THE MERGER.
The UC Common Stock is traded in the over-the-counter market under the
symbol UCOA. The Class A Stock is traded on The Nasdaq National Market
("NASDAQ") under the symbol ACMTA. Holders of Class A Stock are entitled to
one-tenth of one vote per share in relation to the Company's Common Stock (the
"Company Common Stock"). See "Description of Class A Stock". As of December 21,
1995, the last trading day prior to the announcement of the Merger, the closing
price of the Class A Stock on NASDAQ was $13.00 and the average of the high bid
and low asked prices of the UC Common Stock in the over-the-counter market was
$7.50. As of May 29, 1996, the closing price of the Class A Stock on NASDAQ was
$12.50, and the average of the high bid and low asked prices of the UC Common
Stock in the over-the-counter market was $7.81.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS JUNE , 1996.
<PAGE> 7
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission pursuant to the informational
requirements of the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048; and Chicago Regional Office, Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated by
reference into this Prospectus:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
3. All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offer shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof from the date of filing of such documents.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
ROBERT H. FRAZER, ESQ., VICE PRESIDENT AND SECRETARY, ACMAT CORPORATION, 233
MAIN STREET, P.O. BOX 2350, NEW BRITAIN, CONNECTICUT 06050-2350, TELEPHONE (860)
229-9000. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST
SHOULD BE MADE BY JULY 3, 1996, FIVE (5) BUSINESS DAYS BEFORE THE SPECIAL
MEETING.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as modified or superseded, to constitute part of this Prospectus.
2
<PAGE> 8
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR INCORPORATED BY REFERENCE
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO PURCHASE ANY
SECURITIES IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHO IT IS
UNLAWFUL TO MAKE SUCH OFFER, OR SOLICITATION OF AN OFFER WITHIN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE DISTRIBUTION OF
SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES HEREOF
OR THEREOF OR THAT THE INFORMATION HEREIN OR IN THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THE DATES THEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Table of Contents..................... 3
Summary............................... 4
Certain Considerations................ 10
The Company........................... 16
United Coasts......................... 16
Purpose and Effects of the Merger..... 16
Litigation Settlement................. 17
Company Pro Forma Financial
Statements.......................... 18
Company Selected Financial Data....... 21
Company Management's Discussion and
Analysis of Results of Operations
and Financial Condition............. 22
United Coasts Selected Financial
Data................................ 30
United Coasts Management's Discussion
and Analysis of Results of
Operations and Financial
Condition........................... 31
Merger................................ 37
Relationship Between the Company and
United Coasts....................... 42
<CAPTION>
PAGE
----
<S> <C>
Business of the Company............... 43
Management of the Company............. 47
Security Ownership of Certain
Beneficial Owners and Management of
the Company......................... 48
Business of United Coasts............. 50
Management of United Coasts........... 50
Security Ownership of Certain
Beneficial Owners and Management of
United Coasts....................... 51
Description of Class A Stock.......... 52
Description of UC Common Stock........ 52
Comparison of Rights of Shareholders
of the Company and United Coasts.... 53
Federal Income Tax Consequences....... 56
Legal Matters......................... 56
Experts............................... 56
Index to Consolidated Financial
Statements -- ACMAT Corporation and
Subsidiaries........................ F-1
Index to Consolidated Financial
Statements -- United Coasts
Corporation and Subsidiary.......... F-29
</TABLE>
3
<PAGE> 9
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and consolidated financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
All financial data for the Company and United Coasts are presented on the basis
of generally accepted accounting principles ("GAAP") unless otherwise stated.
THE COMPANY
The Company conducts operations directly and through subsidiaries in two
business segments: construction contracting and insurance. Construction
contracting operations include the furnishing of building interiors,
renovations, alterations and additions and asbestos abatement services for
commercial, industrial and institutional buildings primarily in the northeastern
United States. Insurance operations include specialty general liability,
environmental liability insurance and surety bonding for specialty trade,
environmental remediation and asbestos abatement contractors and professional
liability for architects, engineers and environmental and specialty trade
consultants and insurance brokerage for commercial property and casualty
insurance.
UNITED COASTS
United Coasts is a majority-owned subsidiary of the Company and a holding
company for United Coastal Insurance Company ("Coastal Insurance") which is an
excess and surplus lines insurer providing specialty general liability and
environmental liability insurance to specialty trade, environmental remediation
and asbestos abatement contractors, as well as professional liability insurance
to architects, engineers and environmental and specialty trade consultants.
Approximately 84% of the outstanding UC Common Stock is owned by the Company.
The remaining 16% is owned by shareholders who are unaffiliated with the
Company.
THE MERGER
Pursuant to the Merger Agreement between ACMAT and United Coasts, as of the
Effective Date, United Coasts will be merged with and into ACMAT. All United
Coasts shareholders, other than the Company and its subsidiaries, will receive
shares of the Company's Class A Stock in exchange for their shares of UC Common
Stock held as of the Effective Date in accordance with the Exchange Ratio. The
Exchange Ratio is set forth in the Merger Agreement and is determined by a
formula under which the maximum number of shares issuable to the Unaffiliated
Holders at the rate of one (1) share of Class A Stock for each one and one-half
(1.5) shares of the UC Common Stock is reduced by the number of shares as may be
approved by the Court, pursuant to the Settlement Agreement described below, in
payment of the fee of Plaintiff's Counsel, and such remainder is divided into
the total number of shares of UC Common Stock held by the Unaffiliated Holders
as of the Effective Date. Their certificates representing their shares of UC
Common Stock will be deemed to represent that number of shares of the Company's
Class A Stock to which such holders may be entitled under the terms of the
Merger until such time as such certificates may be exchanged for certificates of
the Company. No fractional shares will be issued and any United Coasts
shareholder entitled to a fractional share will receive cash in lieu of such
fractional share based on the average price of the Class A Stock on NASDAQ for
the last five days on which the Class A Stock was traded thereon prior to the
Effective Date.
The Merger will be subject to compliance with the laws of the States of
Delaware and Connecticut applicable to United Coasts and ACMAT. The Boards of
Directors of United Coasts and the Company have approved the Merger Agreement
and the Board of Directors of United Coasts recommends the Merger Agreement for
adoption by United Coasts shareholders. Approval of the Merger Agreement by
shareholders of United Coasts will be sought at a Special Meeting called to be
held on July 11, 1996 at which all shareholders of record of United Coasts as of
the Record Date will be entitled to vote. The Merger is contingent upon the
approval of the Merger Agreement by holders of a majority of all shares of UC
Common Stock entitled to vote thereon and by the affirmative vote of the
Unaffiliated Holders holding a majority of all
4
<PAGE> 10
shares of the Unaffiliated Holders voted on the Merger Agreement. The Merger is
also subject to approval of a Stipulation of Settlement discussed below,
pursuant to which the Merger is being proposed, by the Delaware Court of
Chancery for New Castle County and to certain other conditions. See "The
Merger". No vote of the shareholders of the Company is required in connection
with the Merger.
REASONS FOR THE MERGER
The Merger is being proposed under the terms of a settlement resolving
litigation which was initiated in 1993 in connection with an exchange offer (the
"Exchange Offer") then proposed by the Company under which holders of shares of
UC Common Stock other than the Company could elect to exchange their shares of
UC Common Stock for shares of Class A Stock. In addition, management of the
Company believes that the Merger will accomplish the principal goals of the
Company which initially led to the Exchange Offer. These goals include a more
flexible operating structure for the Company and its subsidiaries and an
improved market offering greater liquidity for shareholders of both the Company
and United Coasts.
SETTLEMENT AGREEMENT
On May 2, 1996, the Company entered into a Stipulation of Settlement (the
"Settlement Agreement") in order to resolve an action commenced in 1993 in the
Court of Chancery of the State of Delaware in and for New Castle County (the
"Court") by Donald E. Hamilton, individually and on behalf of the Unaffiliated
Holders, against the Company and the directors of United Coasts, Henry W. Nozko,
Sr., Henry W. Nozko, Jr. and John C. Creasy. This action was commenced on June
10, 1993 with respect to the Exchange Offer proposed by the Company on May 13,
1993 and the Company then withdrew the Exchange Offer on June 15, 1993. The
complaint in this action alleged that the consideration offered by the Company
of one (1) share of Class A Stock for each one and three-quarters (1.75) shares
of United Coasts was unfair and that the offer was coercive because shareholders
of United Coasts who did not elect to accept the Exchange Offer could be left
with no market for their shares. Under the Settlement Agreement, these concerns
are resolved by modifying the exchange ratio so that under the terms of the
Merger one (1) share of the Company's Class A Stock will be exchanged for each
one and one-half (1.5) shares of outstanding UC Common Stock held by persons
other than ACMAT and its subsidiaries, adjusted to reflect any fee payable to
Plaintiff's Counsel, and by structuring the transaction as a merger which, if
consummated, will result in all shareholders of United Coasts, other than ACMAT
and its subsidiaries, receiving shares of the Company's Class A Stock in
exchange for their shares of UC Common Stock such that, upon the Effective Date,
all of the Unaffiliated Holders will become shareholders of the Company holding
shares of its Class A Stock traded on NASDAQ. The Settlement Agreement is
subject to Court approval which the Company will seek promptly upon receiving
the requisite consents to the Merger Agreement at the Special Meeting.
SHARES RECEIVABLE BY THE UNAFFILIATED HOLDERS AFTER EXPENSES
Pursuant to the Settlement Agreement, Plaintiff's Counsel will be entitled
to apply to the Court for a fee of up to a maximum of 26,000 shares of Class A
Stock to be deducted from shares otherwise distributable to the Unaffiliated
Holders, (the "Fee and Expense Request"). Under the terms of the Merger
1,111,459 shares of Class A Stock will be issuable to the Unaffiliated Holders
in exchange for 1,667,189 shares of the outstanding UC Common Stock held by the
Unaffiliated Holders. If the Court grants the Fee and Expense Request in full, a
balance of 1,085,459 shares will be distributable to the Unaffiliated Holders in
exchange for such 1,667,189 shares of outstanding UC Common Stock resulting in
the receipt by each Unaffiliated Holder of one (1) share of the Company's Class
A Stock for each approximately 1.536 shares of UC Common Stock. For example,
under the terms of the Merger and the Settlement Agreement, if the Court grants
the Fee and Expense Request in full, an Unaffiliated Holder holding one-hundred
(100) shares of UC Common Stock as of the Effective Date would receive in
exchange for such shareholder's shares of UC Common Stock 65 shares of Class A
Stock together with cash in an amount equal to the value of .104 share of Class
A Stock, the value of such share of Class A Stock to be the average closing
price of the Class A Stock on NASDAQ for the last five days on which the Class A
Stock was traded thereon prior to the Effective Date.
5
<PAGE> 11
MARKET INFORMATION
The Company's Class A Stock is traded on NASDAQ under the symbol ACMTA. UC
Common Stock is traded in the over-the-counter market under the symbol UCOA.
MARKET VALUE OF SECURITIES
The following table shows the high and low prices for the indicated periods
for the Class A Stock as reported by NASDAQ. NASDAQ prices represent prices
between broker/dealers and do not include retail markups, markdowns or any
commission to the broker/dealer and may not reflect actual transactions. Over-
the-counter market prices are the average of the high bid and low asked prices
for the periods indicated as supplied by NASDAQ.
<TABLE>
<CAPTION>
OVER-THE-COUNTER
NASDAQ UC COMMON
CLASS A STOCK STOCK
-------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1994
1st Quarter........................................ 9 1/2 8 1/4 51/25 44/5
2nd Quarter........................................ 10 8 1/2 5 4 5/8
3rd Quarter........................................ 9 1/2 8 1/2 5 4 1/2
4th Quarter........................................ 9 5/8 8 1/2 5 4 1/2
1995
1st Quarter........................................ 11 5/8 9 3/16 5 1/4 4 1/4
2nd Quarter........................................ 12 7/8 11 5/8 63/16 41 /16
3rd Quarter........................................ 12 3/4 11 3/4 6 1/2 5 3/4
4th Quarter........................................ 13 1/4 11 5/8 7 7/8 6 1/8
1996
1st Quarter........................................ 13 1/2 12 3/4 8 1/8 8 1/8
2nd Quarter (through May 29, 1996)................. 12 3/4 12 7 7/8 7 13/16
</TABLE>
On December 21, 1995, the last full trading day before the public
announcement of the Merger, the closing price of the Class A Stock on NASDAQ was
$13.00 and the average of the high bid and low asked prices of the UC Common
Stock in the over-the-counter market was $7.50.
The closing historical market price per share of the UC Common Stock in the
over-the-counter market and the equivalent per share amount, as of December 21,
1995, follows:
<TABLE>
<CAPTION>
EQUIVALENT
HISTORICAL PER SHARE
---------- -----------
<S> <C> <C>
UC Common Stock.......................................... $ 7.50 $8.67
</TABLE>
The equivalent per share market value assumes the exchange rate of one (1)
share of Class A Stock of the Company with a historical market value of $13.00
on December 21, 1995 for each one and one-half (1.5) shares of UC Common Stock.
6
<PAGE> 12
FEDERAL INCOME TAX CONSEQUENCES
The Company has received an opinion of its accountants substantially to the
effect that, with respect to the Unaffiliated Holders, the Merger should qualify
for federal income tax purposes as a reorganization within the meaning of
section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended, and that
the Unaffiliated Holders should recognize no gain or loss on the exchange of
their UC Common Stock solely for ACMAT stock pursuant to the Merger. Gain (if
any) will be recognized by the Unaffiliated Holders on the receipt of cash in
lieu of fractional shares. The opinion is based upon facts and representations
provided by the Company, which include representations that relate to events
that may occur after the Merger. The opinion is not binding upon any tax
authority or any court and no assurance can be given that a position contrary to
that expressed in the opinion will not be asserted by a tax authority and
ultimately sustained by a court. The opinion relies upon the relevant provisions
of the Internal Revenue Code of 1986, as amended, the regulations thereunder,
and judicial and administrative interpretations thereof in effect as of the
Effective Date, which are subject to change or modification (that may be
retroactive in effect) by subsequent legislative, regulatory, administrative, or
judicial decisions.
BOOK VALUE OF SECURITIES
As of March 31, 1996, the book value of the Class A Stock was $11.40 per
share and the book value of UC Common Stock was $8.49 per share. The pro forma
book value of the Class A Stock is $11.66 per share assuming the Merger had
occurred as of March 31, 1996.
TERMS OF SHARES
Both the Class A Stock and UC Common Stock are common stocks entitling the
holders thereof to share ratably with all holders of the common shares of their
respective issuers in common equity distributions upon liquidation or upon the
payment of dividends or otherwise. Holders of the Class A Stock are entitled to
one-tenth of one vote per share in relation to the Common Stock of ACMAT (the
"Company Common Stock"), holders of which are entitled to one (1) vote per
share. Holders of the UC Common Stock are entitled to one vote per share. The
Class A Stock, of which 2,232,585 shares are outstanding as of April 30, 1996
and 3,344,044 shares of which would be outstanding following the conclusion of
the Merger, and the Company Common Stock vote together as a single class on
matters brought before the Company's shareholders, except as otherwise required
by law, and are identical except for such difference in voting rights. See
"Description of Class A Stock".
7
<PAGE> 13
FINANCIAL DATA
Financial data concerning the Company and United Coasts are located in this
Prospectus under "Company Selected Financial Data" and "United Coasts Selected
Financial Data" in addition to the consolidated financial statements of the
Company and United Coasts appearing elsewhere herein.
SUMMARY PRO FORMA FINANCIAL STATEMENTS
The following table presents summary unaudited pro forma financial data
derived from the unaudited pro forma financial statements and notes thereto (the
"Pro Forma Financial Statements") included in this Prospectus and is based upon
the consolidated financial statements of the Company. The pro forma statement of
earnings data adjustments give effect to such adjustments as if the pro forma
transaction occurred as of the beginning of the periods presented and the pro
forma balance sheet data adjustments give effect to such adjustments as if the
pro forma transaction occurred as of March 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, 1996 DECEMBER 31, 1995
----------------------------- ---------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Revenues............................ $ 8,458,973 $ 8,458,973 $41,857,398 $41,857,398
Net earnings........................ $ 1,140,114 $ 1,454,627(a) $ 5,350,280 $ 6,724,998(a)
Net earnings per share and share
equivalent........................ $ .34 $ .32(b) $ 1.46 $ 1.41(b)
Net earnings per share -- assuming
full dilution..................... $ .28 $ .28(b) $ 1.18 $ 1.19(b)
Weighted shares outstanding......... 3,400,691 4,512,150 3,661,577 4,773,036
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
HISTORICAL PRO FORMA
------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................ $184,201,912 $183,916,353(c)
Total long-term debt................ $ 39,140,204 $ 39,140,204
Minority interests.................. $ 14,118,797 -- (d)
Stockholders' equity................ $ 32,685,367 $ 46,368,605(b)
</TABLE>
- ---------------
(a) Reflects the merger of United Coasts into the Company as of the beginning of
the period.
(b) Reflects the issuance of 1,111,459 shares of Class A Stock at $12.375 per
share which represents the market value at April 30, 1996.
(c) Reflects the adjustment to goodwill as a result of the difference between
the fair market value of ACMAT Class A Stock issued and the fair market
value of the UC Common Stock acquired.
(d) Reflects the merger of United Coasts into the Company as of March 31, 1996.
8
<PAGE> 14
COMPARATIVE PER SHARE FINANCIAL INFORMATION
The following table sets forth certain historical and unaudited pro forma
per share financial information for the Company and United Coasts for the
periods indicated in the table. No cash dividends were paid by either the
Company or United Coasts during the periods presented.
The following information should be read in conjunction with the separate
historical financial statements and the related notes thereto of the Company and
United Coasts. Results for the three-month period ended March 31, 1996 are not
necessarily indicative of results expected for the entire year.
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
Book Value per Share:
ACMAT historical............................................. $11.40
United Coasts historical..................................... $ 8.49
ACMAT Pro forma(1)........................................... $11.66
United Coasts pro forma equivalent(2)........................ $ 7.77
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 1995 31, 1996
----------------- --------------
<S> <C> <C>
Net Earnings per Share and Share Equivalent:
ACMAT historical............................ $1.46 $ .34
United Coasts historical.................... $ .81 $ .19
ACMAT Pro forma(1).......................... $1.41 $ .32
United Coasts pro forma equivalent(2)....... $ .94 $ .21
Net Earnings per Share -- Assuming Full
Dilution:
ACMAT historical............................ $1.18 $ .28
United Coasts historical.................... $ .81 $ .19
ACMAT Pro forma(1).......................... $1.19 $ .28
United Coasts pro forma equivalent(2)....... $ .79 $ .19
</TABLE>
- ---------------
(1) The unaudited pro forma per share information assumes an exchange rate of
one (1) share of Class A Stock of the Company for each one and one-half
(1.5) shares of UC Common Stock.
(2) The unaudited pro forma equivalent share information is calculated by
applying the exchange rate to the pro forma net earnings per share and pro
forma book value per share of the Company such that the equivalent per share
amounts are equated to the values for each share of UC Common Stock.
9
<PAGE> 15
CERTAIN CONSIDERATIONS
There are certain risks and other considerations associated with the
Merger. The holders of UC Common Stock are urged to read this Prospectus
carefully and to consider the following factors in addition to other information
appearing in this Prospectus. However, a number of the following considerations
apply to United Coasts as well as to the Company and its subsidiaries as a
whole.
OWNERSHIP OF COMPANY SHARES INVOLVES INVESTMENT RISK
Shareholders of United Coasts who receive Class A Stock pursuant to the
Merger will thereby acquire shareholder interests in the Company as a whole in
lieu of their current interests in United Coasts alone. There can be no
assurance that ownership of Class A Stock received pursuant to the Merger will
prove more beneficial to holders of UC Common Stock. The Company is more
diversified through its construction contracting and insurance bonding
operations than United Coasts and also has greater and more varied operating
risks.
CYCLICALITY
The property and casualty insurance industry is a cyclical industry that is
affected by many factors which cause fluctuations in results of operations. The
cyclical trends in the industry and the industry's profitability can also be
affected significantly by volatile and unpredictable losses; fluctuations in
interest rates and other changes in the investment environment which affect
market prices of insurance companies' investments and the income from those
investments; inflationary pressures that affect the size of losses; trends in
litigation which may result in large awards to claimants; and judicial decisions
regarding the interpretation of policy terms that affect insurers' liabilities.
These cycles and fluctuations can be more pronounced for insurers, such as the
Company, that underwrite business on an excess and surplus lines basis.
PRICING AND PROFITABILITY
One of the distinguishing features of the property and casualty industry is
that its products generally are priced before its costs are known, because
premium rates usually are determined before losses are reported. Premium rate
levels are related to the availability of insurance coverage, which varies
according to the level of surplus in the industry. Increases in surplus have
generally been accompanied by increased price competition among property and
casualty insurers. Changes in case law relating to the interpretation of
insurance contracts can retroactively and dramatically affect the liabilities
associated with known risks after the insurance contract is in place.
The number of competitors and the similarity of products offered, as well
as regulatory constraints, limit the ability of property and casualty insurers
to increase prices in response to declines in profitability. The reported
profits and losses of a property and casualty insurance company are also
determined, in part, by the establishment and adjustment of reserves reflecting
estimates made by management as to the amount of losses and loss adjustment
expenses that will ultimately be incurred in the settlement of claims. The
ultimate liability of the insurer for all losses and loss adjustment expenses
reserved at any given time will likely be greater or less than these estimates,
and material differences in the estimates may have a material adverse effect on
the insurer in future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business of the Company."
ADEQUACY OF LOSS RESERVES
The reserves for losses and loss adjustment expenses established by the
Company are estimates of amounts needed to pay reported and unreported claims
and related losses and loss adjustment expenses based on facts and circumstances
then known. Reserves are based on estimates of trends in claims severity,
judicial theories of liability and other factors.
The establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that ultimate liability, particularly
with respect to latent exposures to liabilities which take
10
<PAGE> 16
substantial time to manifest themselves, will not materially exceed the
Company's losses and loss adjustment expense reserves and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating reserves, particularly with
respect to such latent exposures it has been necessary, and may over time
continue to be necessary, to revise estimated future liabilities as reflected in
the Company's reserves for losses and loss adjustment expenses. Generally, the
Company's exposure is limited to the limits set forth in the policies and bonds
it writes; however, as with other insurance companies, the Company may also be
exposed to claims of bad faith resulting in punitive damage awards in excess of
bond and policy limits. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CREDIT RISK ASSOCIATED WITH COLLATERAL HELD FOR SURETY BONDS
The Company generally requires cash or irrevocable letters of credit to
collateralize a portion or all 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.
RELIANCE UPON REINSURANCE
In order to reduce risk and to increase its underwriting capacity, the
Company obtains reinsurance from reinsurers. The Company is subject to credit
risk with respect to its reinsurers because reinsurance does not relieve the
Company of liability to its insureds for the risks ceded to reinsurers. Although
the Company places its reinsurance with reinsurers it believes to be financially
stable, a reinsurer's subsequent insolvency or inability to make payments under
the terms of a reinsurance treaty could have a material adverse effect on the
Company.
The amount and cost of reinsurance available to companies specializing in
property and casualty insurance are subject, in large part, to prevailing market
conditions beyond the control of the Company. The Company's ability to provide
insurance at competitive premium rates and coverage limits on a continuing basis
depends to a significant extent upon its ability to obtain adequate reinsurance
in amounts and at rates that will not adversely affect its competitive position.
No assurances can be given as to the Company's ability to maintain its
current reinsurance facilities, which generally are subject to eighteen month
renewals. If the Company were unable to maintain or replace such facilities upon
their expiration and were unwilling to bear the associated increase in net
exposures, the Company would need to reduce the levels of its underwriting
commitments.
HIGHLY COMPETITIVE MARKETS
All of the markets in which the Company competes are highly competitive. In
the property and casualty insurance and surety bonding industries, the Company
competes with large national and smaller regional insurers, as well as monoline
specialty insurers. Many of these competitors are larger and have greater
resources than the Company. Certain competitors of the Company have from time to
time decreased their prices in an apparent attempt to gain market share. In
addition to pricing, competition may take several forms, including breadth and
flexibility of coverage, the insurer's rating and the quality and level of
services provided. This competitive environment could result in lower premiums,
less favorable underwriting terms and conditions, loss of underwriting
opportunities and reduced profitability.
Increased public and regulatory concerns regarding the financial stability
of participants in the insurance industry have resulted in greater emphasis
being placed by policyholders upon insurance company ratings and have created
some measure of competitive advantage for insurance carriers with higher
ratings. Both Coastal Insurance and ACSTAR Insurance Company, a subsidiary of
ACMAT ("ACSTAR Insurance"), are currently rated A (excellent) by A.M. Best.
These ratings are based upon factors of concern to policyholders, including
financial condition and solvency, and are not directed to the protection of
investors. Although the
11
<PAGE> 17
Company does not anticipate such action, any downgrade in the ratings of the
Company's subsidiaries could adversely affect the Company's business.
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 in which the Company had been in competition
with other contractors. The Company currently 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
Insurance Regulation. Coastal Insurance and ACSTAR Insurance are subject
to state laws and regulations which cover many aspects of their business,
including licensure, the payment of dividends, the settlement of claims, capital
levels and the transfer of control of Coastal Insurance and ACSTAR Insurance.
Certain changes in such laws and regulations could have a material adverse
effect on the operations of insurance companies. Specific regulatory
developments which could have a material adverse effect on the operations of the
insurance industry include, but are not limited to, the potential repeal of the
McCarran-Ferguson Act (which exempts insurance companies from a variety of
federal regulatory requirements), possible rate rollback legislation and
legislation to control premiums, policy terminations and other policy terms. In
addition, the administration of such regulations is vested in state agencies
which have broad powers and are concerned primarily with the protection of
policyholders. The Company is also subject to compliance with rules and
guidelines of the National Association of Insurance Commissioners (the "NAIC"),
which has recently adopted a new risk-based capital requirement for property and
casualty insurance companies.
Environmental Regulation. The Company insures many environmental
contractors and professionals in the environmental field with respect to
environmental risks. Environmental risks are highly regulated by both federal
and state governments. Environmental regulation is rapidly evolving and changes
in the regulatory patterns at federal and state levels may have a significant
effect upon potential claims against the Company in the future and also may
affect the demand for this type of insurance and the availability or cost of
reinsurance.
RESTRICTIONS ON SUBSIDIARIES DIVIDENDS
Payment of dividends by Coastal Insurance and ACSTAR Insurance is subject
to regulatory restrictions and will depend on the surplus and future earnings of
the subsidiaries. Under applicable insurance regulations, which are subject to
change, ACMAT's insurance subsidiaries are limited, based on specific formulas,
to paying approximately $6,600,000 in dividends in 1996, without prior approval
of any insurance department. From time to time, the NAIC and various state
insurance regulators consider modifying the methods of determining the amount of
dividends that may be paid by an insurance company without regulatory approval.
SHAREHOLDER DIVIDEND RESTRICTIONS
The Company anticipates that it will not pay dividends for the foreseeable
future. Any future decision whether to pay dividends will be made by the Board
of Directors of the Company in light of conditions then existing, including the
Company's results of operations, financial condition and requirements, loan
covenants, business conditions and other factors. Pursuant to various loan
agreements, the Company is restricted from paying dividends on its Class A Stock
and the Company is prohibited under certain debt agreements from paying any
dividends prior to July 1, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
12
<PAGE> 18
CONSTRUCTION CONTRACTING RISKS
The construction industry is subject to many risks. Contract prices are in
part determined on the basis of cost estimates which can be either inaccurate or
rendered inaccurate by reason of unexpected increases in either labor or
material costs which are not recoverable. Additionally, the Company's
profitability can be materially affected by material shortages, weather factors
and the financial insolvency of its customers or subcontractors. Disputes
arising out of differing interpretations of terms of contracts under which the
Company is performing can also adversely affect the Company's business and
profitability.
ASBESTOS EXPOSURES
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 long 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.
SELF INSURANCE
The Company obtains general liability insurance and surety bonds with
respect to its construction contracting from its insurance subsidiaries.
Accordingly, the Company is effectively self-insured because any loss it may
sustain which is covered by liability insurance or a surety bond will be paid by
its insurance subsidiaries. The Company believes that claims of non-employees
and property damage claims for occurrences prior to April 1, 1985 would be
covered under prior general business liability insurance carried with
third-party insurers.
DEBT COVERAGE
The Company's consolidated long-term indebtedness at March 31, 1996 was
$39,140,204. (See the consolidated financial statements included herein and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of the Company's long-term
indebtedness.) The Company relies primarily on the earnings of its insurance
subsidiaries for funds necessary for servicing its indebtedness. The ability of
the Company's insurance subsidiaries to pay dividends is constrained under
applicable law.
13
<PAGE> 19
From time to time, ACMAT has borrowed funds from United Coasts for the
purpose of servicing its outside indebtedness. At March 31, 1996, such
borrowings totalled $21,200,000 and were evidenced by promissory notes payable
on demand and bearing interest at the London Interbank Offer Rate ("LIBOR") plus
2%. This indebtedness will be eliminated upon the effectiveness of the Merger.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of key executive
officers, including Henry W. Nozko, Sr. and Henry W. Nozko, Jr., the loss of
whom could have a material adverse effect on the Company. The Company believes
that its future success will depend in large part on its continued ability to
attract and retain highly skilled and qualified personnel. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
Class A Stock, or the availability of Class A Stock for future sale, will have
on the market price of the Class A Stock prevailing from time to time. Sales of
substantial amounts of Class A Stock (including Class A Stock issued upon the
exercise of stock options or warrants), or the perception that such sales may
occur, could adversely affect prevailing market prices for the Class A Stock.
Furthermore, up to 2,790,000 shares of Class A Stock may be issued in the future
under certain outstanding warrants, options and debt conversion rights, subject
to adjustments provided for in the respective instruments. These shares include
1,500,000 shares issuable to the Sheet Metal Workers' National Pension Fund (the
"Pension Fund") upon conversion of Company indebtedness to the Pension Fund
which is convertible at the rate of $11.00 per share and 900,000 shares issuable
to AIG Insurance Company ("AIG") upon conversion of Company indebtedness to AIG
which is convertible at the rate of $10.00 per share.
TERMS OF SHARES
The Class A Stock and UC Common Stock are common stocks entitling holders
thereof to share ratably with all other common shareholders of their respective
issuer upon liquidation and in dividends or other distributions when and if
declared. The Class A Stock entitles the holders thereof to one-tenth of one
vote per share. See "Description of Class A Stock". Consequently, shareholders
of United Coasts will receive Class A Stock with lesser comparative voting
rights than the shares of UC Common Stock tendered. The Company believes that
the comparative difference in voting privileges between the Class A Stock and
the UC Common Stock is of limited significance to the Unaffiliated Holders in
view of the fact that such shareholders currently own, in the aggregate, only
approximately 16% of the outstanding shares of UC Common Stock. The Company and
its subsidiaries own the balance of approximately 84%. Therefore, the Company
now controls the election of directors of United Coasts and the vote on other
matters coming before its shareholders.
VOTING CONTROL OF THE COMPANY AND OF THE CLASS A STOCK
The Company is controlled by Henry W. Nozko, Sr. and Henry W. Nozko, Jr.,
(the "Nozkos"), who together own shares of the Common Stock and Class A Stock
representing approximately 66% of the total combined voting power of the
Company's capital stock. Therefore, the Nozkos control the election of directors
of the Company and the vote on other routine matters coming before the
stockholders of the Company. Under Connecticut law, the Class A Stock is
entitled to vote as a separate class on certain matters including certain
amendments to the Company's Certificate of Incorporation and merger proposals.
DETERMINATION OF EXCHANGE RATIO
The Exchange Ratio has been determined through negotiations between the
Company and Plaintiff's Counsel. The Company has not engaged the services of any
independent expert or appraiser in connection with the Exchange Ratio. Factors
considered in the course of such negotiations included historical and current
market value and book value of the Class A Stock and UC Common Stock.
14
<PAGE> 20
APPRAISAL RIGHTS
The Merger entitles any holder of UC Common Stock to exercise dissenters or
appraisal rights under applicable Delaware law. See "The Merger -- Appraisal
Rights."
15
<PAGE> 21
THE COMPANY
The Company is a Connecticut corporation organized in 1951. The Company
operates in two business segments: construction contracting, in which the
Company has 46 years of experience as an interior contractor specializing in
renovations and new interiors for commercial, industrial and institutional
buildings primarily in the northeastern United States; and insurance, where the
Company's Insurance Group includes Coastal Insurance, ACSTAR Insurance and
AMINS, Inc. providing specialty general, environmental and professional
liability insurance primarily to specialty trade and environmental contractors,
property owners, storage and treatment facilities and allied professionals as
well as surety bonds for specialty trade, environmental remediation and asbestos
abatement contractors and insurance brokerage for all types of insurance
programs, principally commercial casualty and property lines. The Company
maintains its principal executive offices at 233 Main Street, New Britain,
Connecticut 06050-2350, telephone (860) 229-9000.
UNITED COASTS
United Coasts is a Delaware corporation organized in 1985 which serves as a
holding company for Coastal Insurance, an Arizona insurance company, which
provides specialty general, environmental, asbestos, and professional liability
insurance primarily to specialty trade, environmental remediation and asbestos
abatement contractors, property owners, storage and treatment facilities and
allied professionals and also offers product liability insurance. The principal
executive offices of United Coasts are located at 233 Main Street, New Britain,
Connecticut 06050-2350, telephone (860) 223-5000.
PURPOSE AND EFFECTS OF THE MERGER
The Company has agreed to propose the Merger under the terms of the
Settlement Agreement. In addition, the Company believes that the Merger will
promote a more flexible operating structure for the Company and its subsidiaries
and create an improved market offering greater liquidity for shareholders of
both the Company and of United Coasts.
The Company believes that the Merger will result in a more flexible
corporate structure in which the Company and its subsidiaries may be viewed and
managed as a single diversified enterprise as opposed to distinct and separately
managed businesses. The Company believes that the interests of the Company and
United Coasts are similar, however, the Company also believes that it would be
prudent to achieve an organizational structure in which Management need only be
concerned with the best interests of the Company and its subsidiaries as a
whole.
The Company further believes that the Merger will tend to promote greater
liquidity in the Class A Stock. If consummated, the Merger will increase the
number of outstanding shares of Class A Stock and the number of beneficial
owners of the Class A Stock.
The Boards of Directors of the Company and United Coasts, respectively,
have approved the Merger Agreement by unanimous vote and believe that the terms
of the Merger are fair and in the best interests of the Company and its
subsidiaries, taken as a whole. The Board of Directors of United Coasts
recommends the shareholders of United Coasts approve the Merger Agreement at the
Special Meeting.
In considering the Merger, shareholders of United Coasts should note that
the potential for conflicts of interest may exist by reason of the close
similarity in the managements of the Company and United Coasts. See "Management
of the Company" and "Management of United Coasts". In particular, Henry W.
Nozko, Sr. and Henry W. Nozko, Jr. are co-chief executive officers of United
Coasts as well as being the, Chairman, President and Chief Executive Officer and
the Executive Vice President, respectively, of the Company. Furthermore, the
three directors of United Coasts, Henry W. Nozko, Sr., Henry W. Nozko, Jr. and
John C. Creasy, are also directors of the Company.
The terms of the Merger have been determined through negotiations over a
period of approximately two and one-half years between the Company and
Plaintiff's Counsel, as reflected in the Settlement Agreement. Such negotiations
took into account the relative current market values, historical market values
and book
16
<PAGE> 22
values of the Company's Class A Stock and UC Common Stock in addition to other
factors. See "Summary -- Market Value of Securities"; "Summary -- Book Value of
Securities"; "Company Selected Financial Data"; "United Coasts Selected
Financial Data"; and "Litigation Settlement".
LITIGATION SETTLEMENT
On June 10, 1993, Donald E. Hamilton, acting individually and on behalf of
the Unaffiliated Holders, commenced an action in the Court of Chancery of the
State of Delaware in and for New Castle County against the Company and the
directors of United Coasts, Henry W. Nozko, Sr., Henry W. Nozko, Jr. and John C.
Creasy, seeking to enjoin the Exchange Offer proposed by the Company on May 13,
1993. The complaint in this action alleged that the consideration offered by the
Company of one (1) share of Class A Stock for each 1.75 shares of United Coasts
was unfair and that the offer was coercive because shareholders of United Coasts
who did not elect to accept the Exchange Offer could be left with no market for
their shares. The Company withdrew the Exchange Offer on June 15, 1993, but the
plaintiff continued to seek, among other things, (a) a determination that the
action is a proper class action, (b) a mandatory injunction requiring the
registration of United Coasts common stock under the Securities Exchange Act of
1934, (c) unspecified damages and (d) attorneys' fees and costs.
On December 20, 1995, ACMAT entered into a Memorandum of Understanding with
Plaintiff's Counsel followed by the Settlement Agreement pursuant to which the
Merger is being proposed. Under the terms of the Merger, the Unaffiliated
Holders will receive shares of ACMAT Class A Stock for shares of UC Common
Stock, adjusted to reflect any counsel fees payable to the Plaintiff's Counsel.
The Merger is subject to several conditions, including Court approval of the
Settlement Agreement. Under the Settlement Agreement, the concerns raised by the
plaintiff's complaint are resolved by modifying the Exchange Ratio so as to be
more favorable to the Unaffiliated Holders and by structuring the transaction as
a merger which, if consummated, will result in all of the Unaffiliated Holders
receiving shares of the Company's Class A Stock in exchange for their shares of
UC Common Stock such that, upon the Effective Date, the Unaffiliated Holders
will become shareholders of the Company holding shares of its Class A Stock
tradable on NASDAQ. The Settlement Agreement is subject to Court approval which
the Company will seek promptly upon receiving the requisite consents to the
Merger Agreement at the Special Meeting.
In the event that the Settlement Agreement is not approved by the Court,
the Settlement Agreement shall become null and void in accordance with its terms
and the litigation described herein will continue. The Company would take into
account and be guided by any reasons given by the Court for its disapproval.
However, the Company has no alternative plans in such event to resolicit the
vote of the Unaffiliated Holders with respect to any other proposal.
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<PAGE> 23
COMPANY PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements (the "Pro Forma
Financial Statements") are based upon the consolidated financial statements of
the Company adjusted to give effect to the Merger assuming the United Coasts
shareholders, other than the Company, receive shares of Class A Stock at the
rate of one (1) share of Class A Stock of the Company for each one and one-half
(1.5) shares of UC Common Stock, inclusive of any shares payable to Plaintiff 's
Counsel.
The pro forma adjustments are described in the accompanying notes to the
pro forma consolidated balance sheet and the pro forma consolidated statement of
earnings. The pro forma consolidated statement of earnings gives effect to such
adjustments as if the transaction occurred at the beginning of the periods
presented and the pro forma consolidated balance sheet gives effect to such
adjustments as if such transaction occurred on March 31, 1996. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable. The Pro Forma Financial Statements do not
purport to represent what the Company's results of operations or financial
position would actually have been had the transactions in fact occurred on the
dates presented or to project the Company's results of operations or financial
position for any future period or at any future date. The Pro Forma Financial
Statements should be read in conjunction with the consolidated financial
statements of the Company included elsewhere in the Prospectus and "Company
Management's Discussion and Analysis of Results of Operations and Financial
Conditions".
18
<PAGE> 24
ACMAT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
------------------------------------- ---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $8,458,973 $ 0 $8,458,973 $41,857,398 $ 0 $41,857,398
Costs and expenses:
Cost of sales........... 3,974,341 0 3,974,341 21,829,137 0 21,829,137
Selling, general and
administrative........ 1,319,921 (4,759) 1,315,162(a) 6,097,322 (19,037 ) 6,078,285(a)
---------- ---------- ---------- ------------ ---------- -------------
5,294,262 (4,759) 5,289,503 27,926,459 (19,037 ) 27,907,422
Operating earnings........ 3,164,711 4,759 3,169,470 13,930,939 19,037 13,949,976
Interest expense.......... 1,232,383 0 1,232,383 4,810,578 0 4,810,578
---------- ---------- ---------- ------------ ---------- -------------
Earnings before income
taxes and minority
interests............... 1,932,328 4,759 1,937,087 9,120,361 19,037 9,139,398
Income taxes.............. 482,460 0 482,460 2,414,400 0 2,414,400
---------- ---------- ---------- ------------ ---------- -------------
Earnings before minority
interests............... 1,449,868 4,759 1,454,627 6,705,961 19,037 6,724,998
Minority interests........ (309,754) 309,754 (--)(b) (1,355,681) 1,355,681 (--)(b)
---------- ---------- ---------- ------------ ---------- -------------
Net earnings.............. $1,140,114 $ 314,513 $1,454,627 $ 5,350,280 $1,374,718 $ 6,724,998
========== ========== ========== ============ ========== =============
Net Earnings Per Share and
Share Equivalent........ $ .34 $ .32(c) $ 1.46 $ 1.41(c)
Net Earnings Per Share --
Assuming Full
Dilution................ $ .28 $ .28(c) $ 1.18 $ 1.19(c)
Weighted average shares
outstanding............. 3,400,691 4,512,150 3,661,577 4,773,036(c)
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(a) Reflects the amortization of goodwill over fifteen years.
(b) Reflects the merger of United Coasts into the Company as of the beginning of
the period.
(c) Reflects the issuance of 1,111,459 shares of ACMAT Class A Stock for the
remaining shares of UC Common Stock at the beginning of the period.
19
<PAGE> 25
ACMAT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PROFORMA
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Investments...................................... $136,863,931 $ 0 $136,863,931
Cash and cash equivalents........................ 3,417,271 0 3,417,271
Receivables, net................................. 10,379,749 0 10,379,749
Property and equipment, net...................... 13,883,156 0 13,883,156
Other assets..................................... 15,690,704 0 15,690,704
Intangibles, net................................. 3,967,101 (285,559) 3,681,542(a)
------------ ------- --------------
$184,201,912 $ (285,559) $183,916,353
============ ======= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable to bank............................ $ 16,200,000 $ 0 $ 16,200,000
Reserves for losses and loss adjustment
expenses....................................... 45,928,421 0 45,928,421
Unearned premiums................................ 14,873,786 0 14,873,786
Collateral held.................................. 17,054,794 0 17,054,794
Other liabilities................................ 4,200,543 150,000 4,350,543(b)
Long-term debt................................... 39,140,204 0 39,140,204
------------ ------- --------------
Total liabilities...................... 137,397,748 150,000 137,547,748
Minority interests............................... 14,118,797 (14,118,797) 0(c)
Stockholders' Equity:
Common Stock................................... 634,340 0 634,340
Class A Stock.................................. 2,232,585 1,111,459 3,344,044(d)
Additional paid-in capital..................... -- 12,492,846 12,492,846(d)
Retained earnings.............................. 29,188,725 0 29,188,725
Net unrealized gain on securities.............. 629,717 78,933 708,650
------------ ------- --------------
Total stockholders' equity............. 32,685,367 13,683,238 46,368,605
------------ ------- --------------
$184,201,912 $ (285,559) $183,916,353
============ ======= ==============
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(a) Reflects the adjustment to goodwill as a result of the difference between
the fair market value of the ACMAT Class A Stock issued and the fair market
value of the UC Common Stock acquired.
(b) Reflects estimated costs associated with the Merger.
(c) Reflects the merger of United Coasts into the Company.
(d) Reflects the issuance of 1,111,459 shares of Class A Stock at $12.375 per
share, net of costs associated with the Merger, which represents the market
value at April 30, 1996.
20
<PAGE> 26
COMPANY SELECTED FINANCIAL DATA
The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 31, 1995 are derived from the
consolidated financial statements of the Company, which financial statements
have been audited and reported upon by KPMG Peat Marwick LLP, independent
certified public accountants. The consolidated financial statements as of
December 31, 1995 and 1994 and for each of the years in the three-year period
ended December 31, 1995 and the independent auditors' report thereon are
included elsewhere in this Prospectus. The selected consolidated financial data
presented below for, and as of the end of, each of the three-month periods ended
March 31, 1996 and 1995 are derived from the unaudited consolidated financial
statements of the Company included elsewhere in this Prospectus. The results of
operations of the Company for the three months ended March 31, 1996 are not
necessarily indicative of the results of operations that may be expected for the
full year. In the opinion of management, the unaudited information includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for such
periods. The information set forth below should be read in conjunction with the
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31, AS OF DECEMBER 31,
-------------- ------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets........................ $ 184,201,912 $180,402,238 $168,494,814 $174,609,667 $159,674,290 $142,426,091
Long-Term Debt...................... 39,140,204 40,127,590 43,405,266 49,832,463 51,396,504 34,954,654
Stockholders' Equity................ 32,685,367 37,587,259 38,004,935 36,686,002 34,029,931 32,208,221
Book Value Per Share................ 11.40 11.36 9.58 8.98 8.02 7.36
</TABLE>
OPERATING DATA
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------ -------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 8,458,973 $9,965,835 $41,857,398 $40,755,676 $40,193,622 $39,697,632 $35,017,632
Net Earnings*.................. 1,140,114 1,203,425 5,350,280 4,839,861 3,909,117 2,826,870 2,650,259
Net Earnings Per Share*........ .34 .30 1.46 1.17 .91 .65 .60
Net Earnings Per Share --
Assuming Full Dilution....... .28 -- 1.18 -- -- -- --
Average Shares outstanding..... 3,400,691 3,965,165 3,661,577 4,134,110 4,289,206 4,348,241 4,429,392
</TABLE>
- ---------------
* Including cumulative effect of change in accounting principle of $1,127,943
(26 cents per share) in 1992.
Note: No cash dividends were paid during any of the periods above.
21
<PAGE> 27
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Overview
Net earnings were $1,140,114 for the three months ended March 31, 1996
compared to $1,203,425 for the same period a year ago. The decrease in net
earnings for the quarter ended March 31, 1996 reflects a decrease in earned
premiums and contract revenues partially offset by an increase in interest
income.
Earned Premiums
Earned premiums for the three months ended March 31, 1996 decreased to
$4,644,032 compared to $5,702,614 for the same period in 1995. The decrease in
earned premiums is a result of some insurance policies issued with policy
durations in excess of twelve months. Net written premiums were $5,165,081 for
the three months ended March 31, 1996 compared to $5,102,114 for the three
months ended March 31, 1995. 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 $1,986,682 for the three-month period ended March
31, 1996 compared to $2,720,521 for the same period in 1995. During the past
several years, the Company has focused on fewer more profitable projects.
Construction revenue is difficult to predict and depends greatly on the
successful securement of contracts bid. However, since the backlog at March 31,
1996 was lower than the backlog a year ago, the Company expects contract
revenues to be lower in 1996.
Investment Income, Net
Net investment income increased to $1,649,027 for the three-month period
ended March 31, 1996 compared to $1,376,886 for the same period in 1995,
representing effective yields of 4.75% and 4.27%, respectively. The increase in
investment income in 1996 over 1995 was due substantially to higher yields on
the portfolio as the result of higher interest rates obtained on reinvested
assets as well as an increase in the total invested assets. Invested assets,
including cash, were $140,281,205 and $137,528,676 at March 31, 1996 and
December 31, 1995, respectively. The increase in invested assets is attributable
to the net cash flow generated by written premiums and the reinvestment of
investment income offset by the repayment of debt and the repurchase of stock.
Net Realized Capital Losses
Realized capital losses from the sale of investments in the three-month
period ended March 31, 1996 were $7,788 compared to realized capital losses of
$120 for the same period in 1995.
Costs of Contract Revenues
Costs of contract revenues decreased to $1,906,875 for the three-month
period ended March 31, 1996 compared to $2,529,468 for the same period in 1995.
The decrease in costs of contract revenues reflects the decrease in contract
revenues. Costs of contract revenues vary from period to period as a function of
contract revenues. (See Contract Revenues). The Company's construction backlog
was approximately $3,400,000 at March 31, 1996 compared to $7,700,000 a year
ago.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $1,393,210 for the three-month
period ended March 31, 1996 compared to $1,710,784 for the same period in 1995.
The decrease in losses and loss adjustment expenses are
22
<PAGE> 28
attributable to the decrease in earned premiums from 1996 to 1995 without any
fluctuations in the loss ratios. Losses and loss adjustment expense reserves
represent management's estimate of the ultimate costs of unpaid losses incurred
for these periods relative to premiums earned.
Amortization of policy acquisition costs
Amortization of policy acquisition costs was $674,256 for the three-month
period ended March 31, 1996 as compared to $1,088,831 for the same period in
1995. The decrease in amortization of policy acquisition costs is primarily
attributable to the decrease in premiums earned. Policy acquisition costs,
primarily commissions, are deferred and amortized over the policy or bond term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,319,921 for the
three-month period ended March 31, 1996 compared to $1,366,390 for the same
period in 1995. The decrease in the selling, general and administrative expenses
during 1996 is due primarily to a decrease in salary expense.
Interest Expense
Interest expense increased to $1,232,383 for the three-month period ended
March 31, 1996 compared to $1,210,835 for the same period in 1995. The increase
in interest expense in 1996 is due primarily to the increase in short-term
borrowings offset in part by the repayment of long-term debt.
Income Taxes
Income tax expense was $482,460 for the three-month period ended March 31,
1996 compared to $521,985 for the same period in 1995, representing effective
Federal tax rates of 23.2% and 23.4%, respectively. The Federal effective tax
rate fluctuates according to the mix of tax exempt and taxable securities held
by the Company.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Earned Premiums
Earned premiums in 1995 were $23,492,905 compared to $27,141,639 in 1994.
Net written premiums were $22,856,791 in 1995 compared to $27,216,453 in 1994.
The decrease in earned premiums in 1995 reflects the 16% decrease in 1995 net
written premiums over 1994 net written premiums. The Company has written fewer
new accounts as a result of what is believed to be a temporary inadequate
pricing environment in the market. Variances in net written premiums have
historically occurred due to the fluctuations in size, number and timing of
bonds and policies bound by the Company.
Contract Revenues
Contract revenues were $11,614,632 in 1995 compared to $8,160,758 in 1994.
During the past several years, the Company has focused on fewer projects and
devoted more resources to the Insurance Group. Increases for the 1995 period are
believed to be temporary and are related to more backlog on hand. Construction
revenue is difficult to predict and depends greatly on the successful securement
of contracts bid. However, since the backlog at December 31, 1995 was lower than
the backlog a year ago, the Company expects contract revenues to be lower in
1996.
Management has implemented several strategies designed to improve the
results of its construction contracting operations. First, the Company has
focused advertising to attract privately negotiated contracts which generally
produce higher gross margins. Second, the Company has increased its prices on
publicly bid contracts. The market for privately negotiated contracts is
significantly smaller than the market for publicly bid contracts. Finally, the
Company has focused on controlling both fixed and variable costs, primarily by
selectively using its own labor force and subcontracting many of the trades
involved in contract performance. Although the Company believes that these
strategies have improved the results of its construction contracting
23
<PAGE> 29
operations, such results will continue to be influenced by factors beyond the
Company's control, such as the state of the economy in the Northeast, and there
can be no assurance that these strategies will continue to improve the Company's
construction contracting operations.
Investment Income, Net
Net investment income was $6,062,883 in 1995 compared to $4,637,158 in
1994, representing effective yields of 4.58% and 3.72%, respectively. The
increase in investment income in 1995 over 1994 was due substantially to higher
yields on the portfolio as the result of higher interest rates obtained on
reinvested assets as well as an increase in total invested assets. Invested
assets, including cash and cash equivalents, were $137,528,676 and $124,757,438
at December 31, 1995 and 1994, respectively. The increase in invested assets is
attributable to the net cash flow generated by written premiums, cash collateral
and the reinvestment of investment income offset by the purchase of stock and
the repayment of debt.
Net Realized Capital Gains (Losses)
Realized capital gains from the sale of investments during 1995 were $7,897
compared to realized capital losses of $34,238 in 1994.
Costs of Contract Revenues
Costs of contract revenues were $10,774,758 in 1995 compared to $7,793,535
in 1994. The increase in costs of contract revenues during 1995 compared to 1994
reflects the increase in contract revenues and the elimination of the gross
losses on the construction operations. Costs of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues). The
Company's construction backlog at December 31, 1995 was approximately $3,600,000
compared to $9,100,000 at December 31, 1994.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $7,115,371 in 1995 compared to
$8,209,992 in 1994. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1994 to 1995 without any
fluctuations in the loss ratios. Losses and loss adjustment expense reserves
represent management's estimate of the ultimate costs of unpaid losses incurred
for these periods relative to premiums earned.
Amortization of Policy Acquisition Costs
Amortization of policy acquisition costs was $3,939,008 in 1995 as compared
to $4,260,759 in 1994. Policy acquisition costs, primarily commissions, are
deferred and amortized over the policy or bond term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $6,097,322 in 1995
compared to $6,964,686 in 1994. The decrease in selling, general and
administrative expenses from 1995 to 1994 reflects a decrease in the bad debts
expense and a decrease in the amortization of intangible assets. Amortization of
intangible assets amounted to approximately $399,000 in 1995 and $747,000 in
1994 due to the expiration, in 1994 of certain covenants not to compete.
Interest Expense
Interest expense has decreased to $4,810,578 in 1995 from $4,940,014 in
1994. The decrease in interest expense in 1995 is due primarily to the repayment
of notes totaling $11,690,000 on March 31, 1994 offset in part by the issuance
on June 30, 1994 of the $8,000,000 term loan.
24
<PAGE> 30
Income Taxes
Income tax expense was $2,414,400 in 1995 compared to $2,245,300 in 1994,
representing effective Federal tax rates of 25.1% and 24.6%, respectively. The
Federal effective tax rate fluctuates according to the mix of tax exempt and
taxable securities held by the Company.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Earned Premiums
Earned premiums in 1994 increased 6.8% to $27,141,639 compared to
$25,422,187 in 1993. Net written premiums were $27,216,453 in 1994 compared to
$27,312,152 in 1993. The increase in earned premiums in 1994 reflects the 16.8%
increase in 1993 net written premiums over 1992 net written premiums. 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 $8,160,758 in 1994 compared to $8,532,260 in 1993.
The decrease in contract revenues during 1994 compared to 1993 was the result of
fewer construction projects in progress. During the past several years, the
Company has focused on fewer more profitable projects and devoted more resources
to the Insurance Group.
Management has implemented several strategies designed to improve the
results of its construction contracting operations. First, the Company has
focused advertising to attract privately negotiated contracts which generally
produce higher gross margins. Second, the Company has increased its prices on
publicly bid contracts. The market for privately negotiated contracts is
significantly smaller than the market for publicly bid contracts. Finally, the
Company has focused on controlling both fixed and variable costs, primarily by
minimizing the use of its own labor force in favor of subcontracting many of the
trades involved in contract performance. Although the Company believes that
these strategies have improved, and will continue to improve the results of its
construction contracting operations, such results will continue to be influenced
by factors beyond the Company's control, such as the state of the economy in the
Northeast, and there can be no assurance that these strategies will further
improve the Company's construction contracting operations.
Investment Income, Net
Net investment income was $4,637,158 in 1994 compared to $4,563,514 in
1993, representing effective yields of 3.72% and 3.65%, respectively. The
increase in investment income in 1994 over 1993 was due substantially to higher
yields on the portfolio as the result of rising interest rates during 1994. The
rise in short-term interest rates has begun to impact the portfolio for the year
ended December 31, 1994. Invested assets, including cash, were $124,757,438 and
$130,877,552 at December 31, 1994 and 1993, respectively. The decrease in
invested assets is attributable to the repayment of debt and cash collateral
offset by the net cash flow generated by written premiums, cash collateral and
the reinvestment of investment income.
Net Realized Capital Gains
Realized capital losses from the sale of investments during 1994 were
$34,238 compared to realized capital gains of $721,601 in 1993. In 1993, fixed
maturity investments totaling $93,433,751 were sold to realize gains available
based on market conditions at the time of the sale.
Costs of Contract Revenues
Costs of contract revenues were $7,793,535 in 1994 compared to $9,327,616
in 1993. The decrease in costs of contract revenues during 1994 compared to 1993
reflects the decrease in contract revenues and the elimination of the gross
losses on the construction operations. The gross loss in 1993 was primarily
attributable to unexpected costs overruns on two renovation contracts and two
asbestos abatement contracts. The
25
<PAGE> 31
Company's construction backlog at December'31, 1994 was approximately $9,100,000
compared to $3,900,000 at December 31, 1993.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $8,209,992 in 1994 compared to
$7,623,178 in 1993. The increases in the losses and loss adjustment expenses are
attributable to the growth in earned premiums from 1993 to 1994 without any
fluctuations in the loss ratios. 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 $4,260,759 in 1994 as compared
to $3,407,104 in 1993. 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 $6,964,686 in 1994
compared to $6,873,217 in 1993. The slight increase in selling, general and
administrative expenses from 1993 to 1994 reflects normal increases in operating
expenses and an increase in the allowance for bad debts offset by a decrease in
the amortization of intangible assets. Amortization of intangible assets
amounted to approximately $747,000 in 1994 and $1,557,000 in 1993 due to the
expiration of certain covenants not to compete in May of 1994 and July of 1993.
Interest Expense
Interest expense has decreased to $4,940,014 in 1994 from $5,609,893 in
1993. The decrease in interest expense in 1994 is due primarily to the repayment
of notes totaling $11,690,000 on March 31, 1994 offset in part by the issuance
on June 30, 1994 of the $8,000,000 term loan.
Income Taxes
Income tax expense was $2,245,300 in 1994 compared to $1,888,000 in 1993,
representing effective Federal tax rates of 24.6% and 24.3%, 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.
Management believes that the reserves for losses and loss adjustment
expenses at December 31, 1995 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.
26
<PAGE> 32
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 30.0% for each of the years ended December 31, 1995, 1994 and
1993. These loss ratios are below industry averages and are believed to be the
result of conservative underwriting. There can be no assurance that such loss
ratios can continue. The Company's insurance subsidiaries' expense ratios under
GAAP were 41.4%, 39.6% and 38.6% for the years ended December 31, 1995, 1994 and
1993, respectively. The Company's insurance subsidiaries' combined ratios under
GAAP were 71.4%, 69.6% and 68.6% for the years ended December 31, 1995, 1994 and
1993, respectively. The increase in the 1995 combined ratio results primarily
from the decline in premiums.
Effect of Change in Accounting Principle
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 115, Accounting for Certain Investments in Debt
and Equity Securities issued by the Financial Accounting Standards Board
("FASB"). Under FAS No. 115, debt securities are classified as held to maturity,
available for sale, or trading. The Company classified all debt securities as
available for sale. Consequently, such securities are carried at fair value and
unrealized gains and losses are excluded from earnings and recorded as a
separate component of stockholders' equity, net of estimated income taxes. The
effect on stockholders' equity from adoption of the statement resulted in an
increase in stockholders' equity of $472,000, net of deferred taxes, due to the
revaluation of the Company's debt securities on January 1, 1994.
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 it 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 and its construction contracting operations without regard to
any dividends from ACMAT's insurance holding company subsidiaries, United Coasts
and ACSTAR Holdings. ACMAT has recently utilized short-term borrowings to
repurchase its stock. On a long-term basis, ACMAT could rely, if necessary, on
dividends from its insurance holding company subsidiaries to improve its working
capital.
The Company realized cash flow from operations of $19,312,412 in 1995
compared to $9,629,444 in 1994 and $16,312,287 in 1993. Net cash flows provided
by operations in 1995 were derived principally from premium collections and
collateral held. The Company's cash flow was used to repay long-term debt,
repurchase stock and purchase investments. Purchases of investments are made
based upon excess cash available after the payment of losses and loss adjustment
expenses and other operating and non-operating expenses. The Company's short
term investment strategy coincides with the relatively short maturity of its
liabilities which are comprised primarily of reserves for losses covered by
claims-made insurance policies, reserves related to surety bonds and collateral
held for surety obligations.
Substantially all of the Company's cash flow was used to increase its
investment portfolio, repay debt and repurchase stock. Purchases of investments
are made based upon excess cash available after the payment of
27
<PAGE> 33
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 comprise primarily reserves
for losses covered by claims-made insurance policies, reserves related to surety
bonds and collateral held for surety obligations.
Net cash used for investing activities amounted to $11,454,974 in 1995,
$4,535,375 in 1994 and $15,819,101 in 1993. In 1993, fixed maturity investments
totalling $93,434,000 were sold to realize gains available based on market
conditions at the time of the sale. Proceeds from the sale of these securities
were reinvested in U.S. Treasury and high grade municipal securities.
The terms of the Company's note agreements contain limitations on payment
of cash dividends, re-acquisition of shares, borrowings and investments and
require maintenance of specified ratios and minimum net worth levels, including
cross default provisions. The Company is prohibited from paying any dividends
prior to July 1, 1997. The payment of future cash dividends and the
re-acquisition of shares are restricted each to amounts of an available fund
("Available Fund"). The Available Fund is a cumulative fund which is increased
each year by 20% of the Consolidated Net Earnings (as defined). The Company is
in compliance with all covenants at March 31, 1996, except for the limitation on
the reacquisition of shares which exceeded the Available Fund at March 31, 1996.
The Company has received a waiver to exceed this limitation at March 31, 1996.
The Company maintains a short-term unsecured bank credit line of $10
million to fund interim cash requirements. There was $10,000,000 outstanding
under this line of credit as of March 31, 1996. Effective June 30, 1994, this
credit line was renewed and modified to include an additional $8,000,000,
six-year, term loan which is repayable in quarterly installments commencing
September 30, 1994. Portions of the proceeds of such term loan were applied to
the repayment of intercompany debt and to the reduction of the Company's
short-term credit line.
On November 7, 1995, the Company obtained a $7,500,000 Demand Discretionary
Line of Credit with The Bank of Boston Connecticut which expires on November 6,
1996. Under the terms of the line of credit, interest on the outstanding balance
is calculated based upon the LIBOR plus 160 basis points in effect during the
borrowing period. There was $6,200,000 outstanding under this line of credit at
March 31, 1996.
During 1995, the Company purchased, in the open market and privately
negotiated transactions, 10,456 shares of its Common Stock at an average price
of $15.52. The Company also repurchased, in the open market and privately
negotiated transactions, 797,228 shares of its Class A Stock at an average price
of $11.83 per share.
During the three-month period ended March 31, 1996, the Company purchased
in the open market and privately negotiated transactions, 8,124 shares of its
Common Stock at an average price of $16.62 per share. The Company also
repurchased, in the open market and privately negotiated transactions, 483,250
shares of its Class A Stock at an average price of $13.00 per share.
The Company's principal source of cash for repayment of long-term debt is
borrowings from its two insurance holding companies. Under applicable insurance
regulations, ACMAT's insurance subsidiaries are restricted as to the amount of
dividends they may pay to their respective holding companies, without the prior
approval of their domestic state insurance department. For 1996, the amount of
dividends ACMAT's insurance subsidiaries may pay are limited to approximately
$6,600,000.
In 1996, 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 will be approximately $3,500,000 in 1996.
Regulatory Environment
The National Association of Insurance Commissioners has adopted a
risk-based capital formula for property and casualty companies which will be
used by insurance regulators in assessing the capital adequacy of insurance
companies. The risk-based capital formula, effective December 31, 1995, is a
regulatory tool
28
<PAGE> 34
designed to identify weakly capitalized companies. The formula determines a
required amount of capital based on the risks that the insurer assumes. Various
regulatory actions are then prescribed if a company's ratio falls below the
minimum required ratio. These actions range from requiring the insurer to submit
a comprehensive plan to the insurance commissioner in the event its statutory
surplus falls below its Company Action Level which is 200% of its Authorized
Control Level, as calculated under the formula, to placing the insurer under
regulatory control if its statutory surplus falls below 70% of its Authorized
Control Level. The ratio for each of the Company's insurance subsidiaries as of
December 31, 1995 was significantly above the level which might require
regulatory action.
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<PAGE> 35
UNITED COASTS SELECTED
FINANCIAL DATA
The selected data of United Coasts and its subsidiary, Coastal Insurance,
presented below under the captions "Financial Condition Data" and "Operating
Data" for, and as of the end of, each of the years in the five-year period ended
December 31, 1995 are derived from the consolidated financial statements of
United Coasts and its subsidiary, which financial statements have been audited
and reported upon by KPMG Peat Marwick LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1995 and
1994 and for each of the years in the three-year period ended December 31, 1995
and the independent auditors' report thereon are included elsewhere in this
Prospectus. The selected consolidated financial data presented below for, and as
of the end of, each of the three-month periods ended March 31, 1996 and 1995 are
derived from the unaudited consolidated financial statements of United Coasts
included elsewhere in this Prospectus. The results of operations of United
Coasts and its subsidiary for the three months ended March 31, 1996 are not
necessarily indicative of the results of operations that may be expected for the
full year. In the opinion of management, the unaudited information includes all
adjustments consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and results of operations for such
periods. The operating data and financial condition data set forth below should
be read in conjunction with the consolidated financial statements and the notes
thereto and "United Coasts Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
UNAUDITED AS OF DECEMBER 31,
MARCH 31, -----------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total assets.............. $ 133,728,330 $ 131,087,509 $ 118,606,445 $ 112,146,765 $ 100,583,598 $ 89,771,839
Total investments......... 95,044,354 92,551,189 86,234,513 90,914,194 80,080,381 77,499,366
Long-term debt............ -- -- -- 3,065,000 3,065,000 3,065,000
Reserves for losses and
loss adjustment
expenses*............... 35,044,814 34,618,951 31,629,263 27,121,203 26,293,963 24,496,855
Stockholders' equity...... 86,502,008 84,732,035 74,408,732 68,096,253 60,805,317 52,867,214
Per Common Share:
Stockholders' equity.... 8.49 8.32 7.30 6.68 5.91 5.05
</TABLE>
- ---------------
* Reserves for losses and loss adjustment expense prior to 1993 were reported
net of ceded reserves for losses and loss adjustment expenses.
OPERATING DATA
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums
written......... $ 3,966,631 $ 3,900,781 $ 17,081,234 $ 20,925,872 $ 20,809,638 $ 17,384,279 $ 17,158,071
Premiums earned... 3,456,664 4,425,620 17,992,149 21,008,544 19,343,348 16,133,234 17,130,267
Net investment
income.......... 1,247,376 1,053,388 4,487,628 3,264,875 3,293,924 4,120,045 4,299,053
Net income........ 1,892,718 2,041,570 8,283,722 7,953,109 7,651,701 8,433,830 7,342,868
Per Common Share:
Net income*....... .19 .20 .81 .78 .74 .81 .70
Weighted average
number of shares
of common stock
outstanding..... 10,187,189 10,187,189 10,239,543 10,241,247 10,279,553 10,408,583 10,512,719
</TABLE>
- ---------------
* Includes cumulative effect of change in accounting principle of $.06 per share
in 1992.
Note: No cash dividends were paid during any of the periods above.
30
<PAGE> 36
UNITED COASTS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Premiums Earned
Premiums earned for the three months ended March 31, 1996 were $3,456,664
as compared to $4,425,620 for the same period in 1995. Net written premiums were
$3,966,631 for the three months ended March 31, 1996 as compared to $3,900,781
for the same period in 1995. The decrease in premiums earned is primarily the
result of the issuance of several insurance policies with policy durations in
excess of twelve months. Variances in net written premiums have historically
occurred due to the fluctuation in size, number and timing of policies bound by
the Company.
Net Investment Income
Net investment income for the three months ended March 31, 1996 was
$1,247,376 in 1996 compared to $1,053,388 for the same period in 1995. The
increase in net investment income in 1996 is due primarily to an increase in the
overall yield on the portfolio as a result of the reinvestment of the proceeds
of maturing investments at higher interest rates as well as an increase in
invested assets. A significant portion of the maturing investments were
reinvested in the last quarter of 1994 and the first quarter of 1995 when short
term interest rates were rising. The increase in overall yield is also due to an
increase in U.S. government security holdings which generate higher yields than
tax exempt securities due to the taxability of the interest on such securities
as well as an increase in total invested assets. Invested assets were
$95,044,354 at March 31, 1996 as compared to $92,551,189 at December 31, 1995.
The increase in invested assets is attributable to the net cash flow generated
by written premiums and the reinvestment of investment income after the payment
of losses and loss adjustment expenses and other generating expenses.
Net Realized Capital Losses
Realized capital losses for the three months ended March 31, 1996 were
$7,788 as compared to $120 for the same period in 1995.
Income on Intercompany Notes Receivable
Income on intercompany notes receivable increased to $384,104 for the three
months ended March 31, 1996 as compared to $250,803 for the same period in 1995.
The increase is attributable to an increase in notes receivable from ACMAT which
totalled $21,201,128 including accrued interest at March 31, 1996 compared to
$13,152,657 including accrued interest at March 31, 1995. Such notes are
callable on demand and bear interest at the London Inter-Bank Offering Rate
(LIBOR) plus 200 basis points. The applicable LIBOR rate, inclusive of the
additional 200 basis points, was approximately 7.7% at March 31, 1996 and
December 31, 1995, respectively.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $1,036,999 for the three months
ended March 31, 1996 as compared to $1,327,686 for the same period in 1995. The
decreases in the losses and loss adjustment expenses is attributable to the
decline in earned premiums in 1996 without any fluctuation in the loss ratios.
Losses and loss adjustment expenses represent management's estimate of the
ultimate costs of unpaid losses incurred for these periods relative to premiums
earned.
Amortization of Policy Acquisition Costs
Amortization of policy acquisition costs were $942,212 for the three months
ended March 31, 1996 as compared to $1,196,650 for the same period in 1995. The
decrease in amortization of policy acquisition costs
31
<PAGE> 37
is primarily attributable to the decrease in premiums earned. Policy acquisition
costs consisting primarily of commissions, are deferred and amortized over the
policy term using the straight line method.
Other Expenses
Other expenses were $512,351 for the three months ended March 31, 1996 as
compared to $440,351 for the same period in 1995. The increase in other expenses
is attributable primarily to the inclusion in 1996 of costs associated with a
routine examination in 1995 by the Arizona Insurance Department.
Provisions for Income Tax
Provision for income tax was $715,460 for the three months ended March 31,
1996 as compared to $747,485 for the same period in 1995, representing effective
Federal tax rates of 27.4% and 26.8%, respectively. The increase in the Federal
effective tax rate for 1996 was due primarily to a greater percentage of
investment income being derived from U.S. government securities which generate
taxable investment income.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Premiums Earned
Premiums earned in 1995 were $17,992,149 as compared to $21,008,544 in
1994. Net written premiums were $17,081,234 in 1995 as compared to $20,925,872
in 1994. The decrease in premiums earned in 1995 as compared to 1994 primarily
reflects the decrease in premiums written in 1995. The decrease in premiums
written from 1994 to 1995 is attributable primarily to Coastal Insurance
accepting fewer new accounts as a result of what is believed to be a temporary
inadequate pricing environment in the market. Variances in net written premiums
have historically occurred due to the fluctuation in size, number and timing of
policies bound by Coastal Insurance.
Net Investment Income
Net investment income was $4,487,628 in 1995 compared to $3,264,875 in
1994. The increase in net investment income is due primarily to an increase in
the overall yield on the portfolio as a result of the reinvestment of the
proceeds of maturing investments at higher interest rates as well as an increase
in invested assets. A significant portion of the maturing investments were
reinvested in the last quarter of 1994 and the first quarter of 1995 when short
term interest rates were rising. The increase in overall yield is also due to an
increase in U.S. government security holdings which generate higher yields than
tax exempt securities due to the taxability of the interest on such securities.
Invested assets were $92,551,189 at December 31, 1995 as compared to $86,234,513
at December 31, 1994. The increase in invested assets is attributable to the net
cash flow generated by written premiums and the reinvestment of investment
income after the payment of losses and loss adjustment expenses and other
generating expenses.
Net Realized Capital Gains (Losses)
Realized capital gains during 1995 were $3,238 as compared to realized
capital losses of $25,749 in 1994.
Income on Intercompany Notes Receivable
Income on intercompany notes receivable increased to $1,278,032 in 1995
from $558,072 in 1994. The increase is attributable to an increase in notes
receivable, including accrued interest, from ACMAT which totalled $20,300,112 at
December 31, 1995 compared to $12,901,854 at December 31, 1994. Such loans are
callable on demand and bear interest at the London Inter-Bank Offering Rate
(LIBOR) plus 200 basis points. The applicable LIBOR rate, inclusive of the
additional 200 basis points, was approximately 7.7% and 8.0% at December 31,
1995 and 1994, respectively.
32
<PAGE> 38
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $5,397,645 in 1995 compared to
$6,302,563 in 1994. The decreases in the losses and loss adjustment expenses is
attributable to the decline in earned premiums in 1994 and 1995 without any
fluctuation in the loss ratios. Losses and loss adjustment expenses 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 were $4,891,952 in 1995 compared
to $5,300,806 in 1994. The decrease in amortization of policy acquisition costs
is primarily attributable to a decrease in commission expense paid to brokers
placing business with Coastal Insurance as a result of the decrease in premiums
written. The decrease was offset, in part, by an increase in the commission rate
paid to ACMAT for underwriting, loss control, inspection and audit services and
to AMINS for general agency services. The portion of the ACMAT underwriting
commission deferred and amortized relates to policies ultimately written.
Other Expenses
Other expenses were $2,110,930 in 1995 compared to $2,513,156 in 1994. The
decrease in other expenses is attributable primarily to the inclusion of
approximately $291,000 of amortization of non-compete payments to former
stockholders in 1994. These agreements expired in 1994.
Interest Expense
Interest expense was $0 in 1995 compared to $74,912 in 1994. The decrease
in interest expense is attributable to the repayment in full in March, 1994 of
long-term debt due to former stockholders.
Provisions for Income Tax
Provision for income tax was $3,173,900 in 1995 compared to $2,913,430 in
1994, representing effective Federal tax rates of 27.7% and 26.8%, respectively.
The increase in the Federal effective tax rate for 1995 was due primarily to a
greater percentage of investment income being derived from U.S. government
securities which generate taxable investment income.
YEARS ENDED DECEMBER 31, 1994 AND 1993
Premiums Earned
Premiums earned in 1994 were $21,008,544 as compared to $19,343,348 in
1993. Net written premiums were $20,925,872 in 1994 as compared to $20,809,638
in 1993. The increase in premiums earned in 1994 as compared to 1993 primarily
reflects the increase in premiums written in 1993 and 1994, both of which had an
effect on premiums earned in 1994. The increase in premiums written from 1993 to
1994 is attributable to an increase in new business written as a result of the
introduction of new insurance products. Variances in net written premiums have
historically occurred due to the fluctuation in size, number and timing of
policies bound by Coastal Insurance.
Net Investment Income
Net investment income was $3,264,875 in 1994 compared to $3,293,924 in
1993. The decrease in net investment income is due primarily to a reduction in
invested assets to $86,234,513 at December 31, 1994 from $90,914,194 at December
31, 1993 as a result of the increase in Notes Receivable from Affiliate and
repayment of long-term debt. The decrease in net investment income was offset,
in part, by an increase in short term market interest rates which occurred
during the latter half of 1994.
33
<PAGE> 39
Net Realized Capital Gains (Losses)
Realized capital losses during 1994 were $25,749 as compared to realized
capital gains of $720,498 in 1993. In 1993, fixed maturity investments totalling
$90,703,288 were sold to realize gains available based on market conditions
existing at the time of the sale.
Income on Intercompany Notes Receivable
Income on intercompany notes receivable increased to $558,072 in 1994 from
$43,238 in 1993. The increase is attributable to an increase in notes
receivable, including accrued interest, from ACMAT which totalled $12,901,854 at
December 31, 1994 compared to $3,168,400 at December 31, 1993. Such loans are
callable on demand and bear interest at the London Inter-Bank Offering Rate
(LIBOR) plus 200 bases points. The applicable LIBOR rate, inclusive of the
additional 200 bases points, was approximately 8.0% and 5.3% at December 31,
1994 and 1993, respectively.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $6,302,563 in 1994 compared to
$5,783,662 in 1993. The increase in the losses and loss adjustment expenses is
attributable to the growth in earned premiums in 1993 and 1994 without any
fluctuation in the loss ratios. Losses and loss adjustment expenses 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 were $5,300,806 in 1994 compared
to $4,381,880 in 1993. The increase in amortization of policy acquisition costs
is primarily attributable to an increase in commission expense paid to brokers
placing business with Coastal Insurance as a result of the increase in premiums
written. The increase in amortization of policy acquisition expenses is also
attributable to an increase in commissions paid to ACMAT for underwriting, loss
control, inspection and audit services and to AMINS for general agency services.
The increase in the commissions paid to ACMAT and AMINS is due to an increase in
premiums written, the basis for the calculation of the commission, as well as an
increase in the commission rate paid in 1994. The portion of the ACMAT
underwriting commission deferred and amortized relates to policies ultimately
written.
Other Expenses
Other expenses were $2,513,156 in 1994 compared to $2,532,281 in 1993. The
decrease in other expenses is attributable primarily to the inclusion of
approximately $673,000 of amortization of non-compete payments to former
stockholders in 1993 as compared to $291,177 in 1994. These agreements expired
in 1994 and no payments were required under these agreements in 1994. The
decrease in other expenses was offset, in part, by an increase in bad debt
expenses from approximately $72,000 in 1993 to $360,000 in 1994 due to the
write-off of uncollectible accounts.
Interest Expense
Interest expense was $74,912 in 1994 compared to $299,650 in 1993. The
decrease in interest expense is attributable to the repayment in full in March,
1994 of long-term debt due to former stockholders.
Provisions for Income Tax
Provision for income tax was $2,913,430 in 1994 compared to $2,876,817 in
1993, representing effective Federal tax rates of 26.8% and 27.3%, respectively.
The decrease in the Federal effective tax rate for 1994 was due primarily to an
increase in tax-exempt investment income.
34
<PAGE> 40
Reserves for Losses and Loss Adjustment Expense
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.
Management believes that the reserves for losses and loss adjustment
expenses at December 31, 1995 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 Coastal Insurance may have to pay
ultimately on incurred losses, including related settlement costs based on facts
and circumstances then known. The Coastal Insurance 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.
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 ("loss ratio") plus the
ratio of underwriting expenses to premiums written (the "expense ratio")
reflects relative underwriting profit or loss. Coastal Insurance's loss ratios
under generally accepted accounting principles ("GAAP") were 30.1%, 30.0% and
29.9% for the years ended December 31,1995,1994 and 1993, respectively. These
loss ratios are below industry averages and are believed to be the result of
conservative underwriting. There can be no assurance that such loss ratios can
continue. Coastal Insurance's expense ratios under GAAP were 38.9%, 36.8% and
36.0% for the years ended December 31, 1995, 1994 and 1993, respectively. The
increase in the expense ratio in 1995 is principally due to the decrease in
written premiums in 1995 and the increase in the commission rate paid to ACMAT
for underwriting, loss control and inspection services and to AMINS for general
agency services. Coastal Insurance's combined ratios under GAAP were 69%, 66.8%
and 65.2% for the years ended December 31, 1995, 1994 and 1993, respectively.
Effect of Changes in Accounting Principle
Effective January 1, 1994, Coastal Insurance adopted Statement of Financial
Accounting Standards ("FAS") No. 115, Accounting for Certain Investments in Debt
and Equity Securities, issued by the Financial Accounting Standards Board
("FASB"). Under FAS No. 115, debt securities are classified as held to maturity,
available for sale, or trading. Coastal Insurance classified all debt securities
as available for sale. Consequently, such securities are carried at fair value
and unrealized gains and losses are excluded from earnings and recorded as a
separate component of stockholders' equity, net of estimated income taxes. The
effect on stockholders' equity from adoption of the statement resulted in an
increase in stockholders' equity of $271,240, net of deferred taxes, due to the
revaluation of Coastal Insurance's debt securities on January 1, 1994.
Liquidity and Capital Resources
As a holding company, United Coasts' principal source of funds is expected
to be dividends from Coastal Insurance. Coastal Insurance's funds are, in turn,
derived primarily from its own operations. The insurance regulations of the
state of Arizona, the state of domicile of Coastal Insurance, restrict the
amount of dividends it may pay to United Coasts without the prior approval of
the Arizona Insurance Department. Based on these restrictions, $4,047,500 is
available for the payment of dividends to United Coasts in 1996 without the
prior approval of the Arizona Insurance Department. The amount Coastal Insurance
may dividend can be increased through the use of extraordinary dividends which
require the prior approval of the Arizona Insurance Department. During 1995,
1994 and 1993, Coastal Insurance paid dividends of $5,181,000, $5,500,000 and
35
<PAGE> 41
$5,622,750, respectively. All of the dividends paid in 1994 and a portion of the
dividends paid in 1995 and 1993 were considered extraordinary. Coastal Insurance
applied for and received approval from the Arizona Insurance Department for the
extraordinary dividends paid.
United Coasts and Coastal Insurance generate 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
settlement and operating expenses are premium collections, investment earnings
and maturing investments. United Coasts and Coastal Insurance have 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.
United Coasts and Coastal Insurance realized cash flow from operations of
$3,315,067 in 1995, compared to $965,485 in 1994 and $8,390,120 in 1993. Net
cash flows provided by operations for those periods were derived principally
from premium collections. The increase in cash flow provided by operations in
1995 as compared to 1994 is principally due to a decrease in new amounts loaned
to ACMAT in 1995. The decline in net cash flow provided by operations in 1994 as
compared to 1993 was attributable primarily to the increase in amounts loaned to
ACMAT in 1994. These notes are callable on demand and pay interest semi-annually
based upon the London Interbank Offering Rate plus 200 basis points.
A significant portion of United Coasts' and Coastal Insurance's cash flow
was used to increase its investment portfolio with the exception of the increase
in notes receivable from affiliate and the repayment of long-term debt in 1994.
Purchases of investments are made based upon excess cash available after the
payment of losses, loss adjustment expenses and other operating and nonoperating
expenses. United Coasts' and Coastal Insurance's short term investment strategy
coincides with the relatively short maturity of the liabilities which are
comprised primarily of reserves for losses covered by claims-made insurance
policies.
Net cash used by investing activities totalled $4,790,646 in 1995, and
$11,227,992 in 1993. Net cash provided by investing activities was $1,882,350 in
1994. In 1993, fixed maturity investments totalling $90,703,288 were sold to
realize gains available based on market conditions at the time of the sale.
Net cash used in financing activities amounted to $35,000 in 1995 compared
to $3,106,250 in 1994 and $567,656 in 1993. In March 1994, United Coasts repaid,
in full $3,065,000 of notes due to former stockholders. In 1993, United Coasts
acquired and retired 133,580 shares of common stock, including 40,000 shares of
restricted common stock.
Under the terms of certain note agreements, ACMAT may require United Coasts
and Coastal Insurance to pay dividends to the extent of funds legally available
therefor in order to enable ACMAT to have funds to pay on a timely basis, all
amounts due with respect to these notes or to act as a guarantor in the event of
default. In addition, these note agreements place certain restrictions on the
reacquisition of shares, borrowings and types of investments ACMAT and its
subsidiaries may hold. At March 31, 1996, ACMAT satisfied all but one of the
restrictions set forth in the agreements and ACMAT has received a waiver
relative to the noncompliance with such restriction.
Regulatory Environment
The National Association of Insurance Commissioners has adopted a
risk-based capital formula for property and casualty companies which will be
used by insurance regulators in assessing the capital adequacy of insurance
companies. The risk-based capital formula, effective December 31, 1994, is a
regulatory tool designed to identify weakly capitalized companies. The formula
determines a required amount of capital based on the risks that the insurer
assumes. Various regulatory actions are then prescribed if a company's ratio
falls below the minimum required ratio. These actions range from requiring the
insurer to submit a comprehensive plan to the insurance commissioner in the
event its statutory surplus falls below its Company Action Level which is 200%
of its Authorized Control Level, as calculated under the formula, to placing the
insurer under regulatory control if its statutory surplus falls below 70% of its
Authorized Control Level. The ratio for Coastal Insurance as of December 31,
1995 was significantly above the level which might require regulatory action.
36
<PAGE> 42
THE MERGER
Pursuant to the Settlement Agreement and subject to certain approvals
discussed below, the Company proposes a merger of United Coasts with and into
ACMAT, pursuant to the Merger Agreement, also discussed below. Under the Merger
Agreement, each one and one-half (1.5) outstanding shares of UC Common Stock
held of record as of the Effective Date by United Coasts shareholders other than
the Company and its subsidiaries will, without any necessary further action on
the part of United Coasts shareholders, become one share of the Company's Class
A Stock. The actual number of shares allocated to each Unaffiliated Holder will
be reduced to the extent that shares allocated to the Unaffiliated Holders are
issued to Plaintiff's Counsel in payment of such counsel's fee. The following
discussion of provisions set forth in the Settlement Agreement and Merger
Agreement is qualified in its entirety by reference to such documents.
SUMMARY OF MERGER AGREEMENT
Introduction. If the Merger Agreement is approved by the holders of UC
Common Stock at the Special Meeting, the Company and United Coasts will execute
the Merger Agreement, a copy of which is included herein as Appendix A to this
Prospectus. Pursuant to the Merger Agreement, United Coasts will merge with and
into the Company, with the Company to be the surviving corporation. On the
Effective Date, the separate corporate existence of United Coasts will cease and
all holders of record of UC Common Stock shall automatically become shareholders
of the Company.
Conditions to the Merger. The obligations of the Company and United Coasts
to consummate the Merger are subject to the satisfaction of certain conditions,
including (a) shareholder approval of the Merger Agreement, (b) the receipt of
all necessary governmental approvals, permits and consents, and (c) the approval
of the Settlement Agreement by the Court of Chancery of the State of Delaware.
Shareholder approval of the Merger Agreement will be sought at the Special
Meeting. Under Delaware law, the Merger Agreement must be approved by holders of
the majority of all shares of UC Common Stock entitled to vote on the Merger.
All holders of UC Common Stock of record on the Record Date will be entitled to
a vote at the Special Meeting, including the Company which holds approximately
84% of the outstanding UC Common Stock. In addition to the shareholder vote
required by law and pursuant to the Settlement Agreement, the Merger is also
conditioned upon the receipt of the favorable vote of the Unaffiliated Holders
holding a majority of shares of UC Common Stock held by the Unaffiliated Holders
which are voted in connection with the Merger. For this purpose, shares held by
any of the Unaffiliated Holders who abstain in the voting will not be included
in the total number of shares voted by the Unaffiliated Holders. Furthermore,
for this purpose, Mr. John C. Creasy, a director of United Coasts and a
defendant in the litigation concerning the Exchange Offer, will not be deemed an
Unaffiliated Holder. Approval of the Merger Agreement in accordance with
Delaware law is assured in view of the voting power held by the Company.
However, approval of the Merger Agreement by the Unaffiliated Holders cannot be
assured and, in the event that the Unaffiliated Holders shall not approve the
Merger Agreement, the Merger would be abandoned and the litigation concerning
the Exchange Offer would be withdrawn in accordance with the terms of the
Settlement Agreement.
Effective Date of the Merger. It is intended that the Merger be
consummated as soon as practicable following the Special Meeting and the
satisfaction of the conditions set forth in the Merger Agreement. The Company
intends to apply to the Delaware Court of Chancery for approval of the
Settlement Agreement promptly following the Special Meeting, assuming
shareholder approval of the Merger Agreement. Assuming approval is received from
the Court, the Company and United Coasts intend to implement the Merger
promptly. However, the Company cannot accurately predict the amount of time
which may be necessary to secure the approval of the Court and the Merger will
not be completed until such approval is obtained. The Merger will become
effective upon the filing of Certificates of Merger in Delaware and Connecticut.
Conversion of Shares; Exchange Ratio. On the Effective Date, the shares of
UC Common Stock held by persons other than the Company and its subsidiaries will
automatically be converted in accordance with the Exchange Ratio into shares of
Class A Stock. As of the Effective Date, the certificates representing shares of
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UC Common Stock will be deemed to represent the appropriate number of shares of
Class A Stock, as determined in accordance with the Exchange Ratio. It will not
be necessary for holders of UC Common Stock to exchange their certificates for
new ACMAT certificates, however, any such holder, if desired, may exchange his
or her certificate for a new ACMAT certificate, without charge. The procedures
required to exchange old UC Common Stock certificates for new ACMAT certificates
will be included in a notice to all United Coasts shareholders when and if the
Merger is consummated.
The Exchange Ratio is set forth in the Merger Agreement and is determined
by a formula under which the maximum number of shares issuable to the
Unaffiliated Holders at the rate of one (1) share of Class A Stock for each one
and one-half (1.5) shares of the UC Common Stock is reduced by the number of
shares as may be approved by the Court pursuant to the Settlement Agreement in
payment of the fees and expenses of Plaintiff's Counsel, and such remainder is
divided into the total number of shares of UC Common Stock held by the
Unaffiliated Holders as of the Effective Date. Pursuant to the Settlement
Agreement, Plaintiff's Counsel will submit the Fee and Expense Request for the
approval of the Court. Under the terms of the Merger, an aggregate total of
1,111,459 shares of Class A Stock will be issuable to the Unaffiliated Holders
in exchange for all of their 1,667,189 shares of the outstanding UC Common
Stock. If the Court grants the Fee and Expense Request in full, a balance of
1,085,459 shares will be distributable to the Unaffiliated Holders in exchange
for such 1,667,189 shares of outstanding UC Common Stock resulting in the
receipt by each Unaffiliated Holder of one (1) share of the Company's Class A
Stock for each approximately 1.536 shares of UC Common Stock. For example, under
the terms of the Merger and the Settlement Agreement, if the Court grants the
Fee and Expense Request in full, an Unaffiliated Holder holding one-hundred
(100) shares of UC Common Stock as of the Effective Date would receive in
exchange for such shareholder's shares of UC Common Stock 65 shares of Class A
Stock together with cash in an amount equal to the value of .104 of one (1)
share of Class A Stock, the value of such share of Class A Stock to be the
average closing price of the Class A Stock on NASDAQ for the last five days on
which the Class A Stock was traded thereon prior to the Effective Date. In the
event that any Unaffiliated Holders exercise appraisal rights (see "The
Merger -- Appraisal Rights") the number of shares of Class A Stock issuable
under the terms of the Merger Agreement would be reduced but the Exchange Ratio
would not be affected.
Under the terms of the Settlement Agreement, Plaintiff's Counsel may apply
for fees and expenses payable only in shares of Class A Stock otherwise
distributable to the Unaffiliated Holders up to a maximum of 26,000 shares. The
value of these shares determined at the current market price of $12.50 per share
is $325,000. The exact range of the Exchange Ratio will be from one (1) share of
Class A Stock for each one and one-half (1.5) shares of UC Common Stock, if no
fee or expenses of Plaintiff's Counsel is approved, to one (1) share of Class A
Stock for each 1.53593 shares of UC Common Stock if the maximum fee and expenses
of Plaintiff's Counsel is approved.
Pursuant to the Merger Agreement, immediately prior to consummation of the
Merger, ACSTAR Insurance will exchange its shares of UC Common Stock for shares
of common stock of Coastal Insurance having a substantially equal aggregate fair
market value. All shares of UC Common Stock held directly by the Company will be
cancelled upon the Effective Date and no additional shares of Class A Stock will
be issued pursuant to the terms of the Merger except in exchange for shares of
UC Common Stock held as of the Effective Date by the Unaffiliated Holders.
Prior to the consummation of the Merger, all outstanding options to
purchase shares of UC Common Stock which consist of options entitling each of
Messrs. Henry W. Nozko, Sr., Henry W. Nozko, Jr. and Robert H. Frazer to
purchase 25,000 shares of UC Common Stock at an exercise price of $2.00 per
share, will be settled for cash.
Termination. The Merger may be terminated at any time prior to the
Effective Date by the Board of Directors of United Coasts or ACMAT.
FRACTIONAL SHARES
No fractional interests in shares of Class A Stock are permitted under
Connecticut law and no such fractional interests will be issued. In the event a
holder of UC Common Stock is entitled to a fractional share of Class A Stock,
then in lieu thereof such holder shall receive the value of such fractional
interest in cash
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based on the average closing price of a full share of the Class A Stock as
reported on NASDAQ for the last five days on which the Class A Stock was traded
thereon prior to the Effective Date.
SHAREHOLDER VOTE
The Merger is contingent upon shareholder approval, which will be sought at
the Special Meeting to be held on July 11, 1996. At the Special Meeting, all
shareholders of record of United Coasts as of the Record Date will be entitled
to vote. The Merger Agreement must be approved by the holders of a majority of
all shares of UC Common Stock entitled to vote thereon and by the affirmative
vote of the Unaffiliated Holders holding a majority of all shares of the
Unaffiliated Holders voted on the Merger Agreement. The Merger is also subject
to approval of a Settlement Agreement pursuant to which the Merger is being
proposed by the Delaware Court of Chancery for New Castle County. No vote of the
shareholders of the Company is required in connection with the Merger.
APPRAISAL RIGHTS
If the Merger is consummated, the Unaffiliated Holders are entitled to
appraisal rights under Section 262 of the Delaware General Corporation Law
("Section 262"), provided that they comply with the conditions established by
Section 262.
Section 262 is reprinted in its entirety as Appendix B to this Prospectus.
The following discussion is not a complete statement of the law relating to
appraisal rights and is qualified in its entirety by reference to Appendix B.
This discussion and Appendix B should be reviewed carefully by any holder who
wishes to exercise statutory appraisal rights or who wishes to preserve the
right to do so, as failure to comply with the procedures set forth herein or
therein will result in the loss of appraisal rights.
A record holder of shares of UC Common Stock who makes the demand described
below with respect to such shares, who continuously is the record holder of such
shares through the Effective Date, who otherwise complies with the statutory
requirements of Section 262, and who neither votes in favor of the Merger
Agreement nor consents thereto in writing will be entitled to an appraisal by
the Delaware Court of Chancery (the "Delaware Court") of the fair value of his
or her shares of UC Common Stock. All references in this summary of appraisal
rights to a "stockholder" of "holders of shares of UC Common Stock" are to the
record holder or holders of shares of UC Common Stock.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, such as the Special Meeting, not less than 20 days
prior to the meeting a constituent corporation must notify each of the holders
of its stock for whom appraisal rights are available that such appraisal rights
are available and include in each such notice a copy of Section 262. This
Prospectus shall constitute such notice to the record holders of UC Common
Stock.
Holders of shares of UC Common Stock who desire to exercise their appraisal
rights must not vote in favor of the Merger Agreement and must deliver a
separate written demand for appraisal to United Coasts prior to the vote by the
stockholders of United Coasts on the Merger Agreement. A demand for appraisal
must be executed by or on behalf of the stockholder of record and must
reasonably inform United Coasts of the identity of the stockholder of record and
that such stockholder intends thereby to demand appraisal of the UC Common
Stock. A proxy or vote against the Merger Agreement will not by itself
constitute such a demand. Within ten days after the Effective Date, United
Coasts must provide notice of the Effective Date to all stockholders who have
complied with Section 262.
A stockholder who elects to exercise appraisal rights should mail or
deliver his or her written demand to:
Mr. Robert H. Frazer, Secretary
United Coasts Corporation
233 Main Street
New Britain, CT 06050-2350
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A person having a beneficial interest in shares of UC Common Stock that are
held of record in the name of another person, such as a broker, fiduciary,
depositary or other nominee, must act promptly to cause the record holder to
follow the steps summarized herein properly and in a timely manner to perfect
appraisal rights. If the shares of UC Common Stock are owned of record by a
person other than the beneficial owner, including a broker, fiduciary (such as a
trustee, guardian or custodian), depositary or other nominee, such demand must
be executed by or for the record owner. If the shares of UC Common Stock are
owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by or for all joint owners. An authorized
agent must identify the record owner and expressly disclose the fact that, in
exercising the demand, such person is acting as agent for the record owner. If a
stockholder holds shares of UC Common Stock through a broker who in turn holds
shares of UC Common Stock through a central securities depository nominee such
as Cede & Co., a demand for appraisal of such shares must be made by or on
behalf of the depository nominee and must identify the depository nominee as a
record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of UC Common Stock as a nominee for others, may exercise
appraisal rights with respect to the shares held for all or less than all
beneficial owners of shares as to which such person is the record owner. In such
case, the written demand must set forth the number of shares covered by such
demand. Where the number of shares is not expressly stated, the demand will be
presumed to cover all shares of UC Common Stock outstanding in the name of such
record owner.
Within 120 days after the Effective Date, either United Coasts or any
stockholder who has complied with the required conditions of Section 262 may
file a petition in the Delaware Court, with a copy served on United Coasts in
the case of a petition filed by a stockholder, demanding a determination of the
fair value of the shares of all dissenting stockholders. There is no present
intent on the part of United Coasts to file an appraisal petition and
stockholders seeking to exercise appraisal rights should not assume that United
Coasts will file such a petition or that United Coasts will initiate any
negotiations with respect to the fair value of such shares. Accordingly, holders
of UC Common Stock who desire to have their shares appraised should initiate any
petitions necessary for the perfection of their appraisal rights within the time
periods and in the manner prescribed in Section 262. Within 120 days after the
Effective Date, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from United Coasts a statement setting forth the aggregate number of shares of
UC Common Stock not voting in favor of the Merger Agreement and with respect to
which demands for appraisal were received by United Coasts and the number of
holders of such shares. Such statement must be mailed within 10 days after the
written request therefor has been received by United Coasts.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Court will determine which stockholders are entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificate to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder. Where proceedings are not dismissed, the Court will appraise the
shares of UC Common Stock owned by such stockholders, determining the fair value
of such shares exclusive of any element of value arising from the accomplishment
or expectation of the Merger, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value.
Although United Coasts believes that the Exchange Ratio is fair, no
representation is made as to the outcome of the appraisal of fair value as
determined by the Court and stockholders should recognize that such an appraisal
could result in a determination of a value higher or lower than, or the same as,
the value received by the Unaffiliated Holders who participate in the Merger
(the "Merger Consideration"). Moreover, United Coasts does not anticipate
offering more than the Merger Consideration to any stockholder exercising
appraisal rights and reserves the right to assert in any appraisal proceeding
that, for purposes of Section 262, the "fair value" of a share of UC Common
Stock is less than the Merger Consideration. In determining "fair value", the
Court is required to take into account all relevant factors. In Weinberger v
UOP, Inc., 457 A.2d 701 (Del. 1983), the Delaware Supreme Court stated, among
other things, that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in
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court" should be considered in an appraisal proceeding. Section 262 provides
that "fair value" is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In Weinberger, the Delaware
Supreme Court held that "elements of future value, including the nature of the
enterprise, which are known or susceptible of proof as of the date of the merger
and not the product of speculation, may be considered."
Holders of shares of UC Common Stock considering seeking appraisal should
recognize that the fair value of their shares determined under Section 262 could
be more than, the same as, or less than the consideration they are entitled to
receive pursuant to the Merger Agreement if they do not seek appraisal of their
shares. The cost of the appraisal proceeding may be determined by the Court and
taxed against the parties as the Court deems equitable in the circumstances.
Upon application of a dissenting stockholder of United Coasts, the Court may
order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including without
limitation, reasonable attorneys' fees and expenses and the fees and expenses of
experts, be charged pro rata against the value of all shares of UC Common Stock
entitled to appraisal.
Any holder of shares of UC Common Stock who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Date, be entitled to
vote for any purpose any shares subject to such demand or to receive payment of
dividends or other distributions on such shares, except for dividends or
distributions payable to stockholders of record at a date prior to the Effective
Date.
At any time within 60 days after the Effective Date, any stockholder will
have the right to withdraw such demand for appraisal and to accept the terms
offered in the Merger. After this period, the stockholder may withdraw such
demand for appraisal only with the consent of United Coasts. If no petition for
appraisal is filed with the Court within 120 days after the Effective Date,
stockholders' rights to appraisal shall cease, and all holders of shares of UC
Common Stock will be entitled to receive the consideration offered pursuant to
the Merger. Inasmuch as United Coasts has no obligation to file such a petition,
and United Coasts has no present intention to do so, any holder of shares of UC
Common Stock who desires such a petition to be filed is advised to file it on a
timely basis. Any stockholder may withdraw such stockholder's demand for
appraisal by delivering to United Coasts a written withdrawal of his or her
demand for appraisal and acceptance of the Merger Consideration, except (i) that
any such attempt to withdraw made more than 60 days after the Effective Date
will require written approval of the Delaware Court, and such approval may be
conditioned upon such terms as the Delaware Court deems just.
Pursuant to the Settlement Agreement, the Company may elect to abandon the
Merger in the event that Unaffiliated Holders holding more than 25% of all
shares of UC Common Stock held by the Unaffiliated Holders exercise their
appraisal rights in accordance with the procedures described herein.
THE FOREGOING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE APPLICABLE LAW
IN THE STATE OF DELAWARE RELATING TO APPRAISAL RIGHTS, AND THE UNAFFILIATED
HOLDERS WHO WISH TO EXERCISE STATUTORY APPRAISAL RIGHTS SHOULD CAREFULLY REVIEW
APPENDIX B TO THIS PROSPECTUS.
FEES AND EXPENSES
Except for the payment of the fees and expenses of Plaintiff's Counsel, the
Company will pay all fees and expenses, including printing, accounting and legal
costs, in connection with the Merger. The fees and expenses of Plaintiff's
Counsel will be paid out of shares otherwise issuable to the Unaffiliated
Holders and, if approved by the Court in accordance with the Settlement
Agreement, will amount to up to 26,000 shares of Class A Stock. The market value
of 26,000 shares of Class A Stock as of May 29, 1996 determined at a price per
share of $12.50, would be $325,000. The additional fees and expenses of the
Merger to be borne by the Company are estimated to be approximately $150,000.
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RELATIONSHIP BETWEEN THE COMPANY AND UNITED COASTS
United Coasts is a majority owned subsidiary of the Company. Approximately
84% of the outstanding common stock of United Coasts is held by the Company
directly and indirectly through other subsidiaries. The Company was instrumental
in the organization of United Coasts in 1985. The Company's initial ownership
position was approximately 17% of the then outstanding UC Common Stock. In
subsequent years the Company increased its ownership position through the
exercise of certain contractual rights and through purchase transactions with
other stockholders of United Coasts and the Company has directly and indirectly
through other subsidiaries held a majority of the outstanding UC Common Stock
since May, 1989. In July, 1992, the Company acquired three million shares of UC
Common Stock from the Sheet Metal Workers' National Pension Fund in return for a
subordinated, unsecured, thirty-year note in the original principal amount of
$16,500,000 which is convertible into 1,500,000 shares of the Company's Class A
Stock at a conversion price of $11 per share, subject to adjustment.
Certain officers and directors of the Company also serve as officers and
directors of United Coasts. See "Management of the Company" and "Management of
United Coasts".
The Company has also maintained a business relationship with United Coasts
for which the Company has performed underwriting, inspection, loss adjustment
and general agent services pertaining to risks underwritten by United Coasts'
subsidiary, United Coastal Insurance Company. ACMAT provides investment advisory
services to United Coasts which include the purchase and sale of investments,
collection of interest and dividend income, safekeeping of investments and
development and implementation of portfolio strategies. Coastal Insurance also
leases certain office and storage space from the Company and also provides
general liability insurance coverage to the Company.
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BUSINESS OF THE COMPANY
GENERAL
ACMAT provides specialized commercial insurance and bonding coverages for
contractors, architects, engineers and other professionals in the construction
and environmental fields. The Company derives its underwriting expertise from
its construction and remediation operations. Through Coastal Insurance, the
Company provides a broad line of environmental, professional, general and other
liability insurance primarily to environmental and specialty trade contractors
and architects, engineers and other professionals. Through ACSTAR Insurance, the
Company provides surety bonds for general building, specialty trade and
environmental contractors and others. Coastal Insurance and ACSTAR Insurance are
rated A (excellent) by A.M. Best. The Best's ratings are based upon factors of
concern to policyholders and are not directed toward the protection of
investors. In 1995, insurance operations accounted for over 70% of the Company's
consolidated revenues.
Construction contracting was the Company's original business. The Company's
construction operations currently consist of interior contracting services
involving the design and furnishing of building interiors and asbestos abatement
services for commercial, industrial and institutional buildings.
COMPANY HISTORY
The Company was organized in 1951 to provide acoustic materials for
building interiors and later expanded its construction operations to include a
broad range of coordinated interior contracting services, which it continues to
provide today. During the 1970's, when the hazards of asbestos became widely
known, the Company became one of the first companies in the United States to
specialize in the abatement or containment of asbestos. By 1984, asbestos
abatement operations accounted for a majority of the Company's revenues.
However, in that year, the Company's insurer stopped writing liability insurance
for asbestos contractors. The absence of adequate alternate sources of insurance
and its high cost severely curtailed the Company's operations.
These conditions lead directly to the Company's entry into the insurance
field. In 1985, the Company, based on its extensive knowledge in the asbestos
abatement field, co-founded United Coasts. Through its subsidiary, Coastal
Insurance, United Coasts initially offered only general liability insurance on a
claims-made basis covering third-party bodily injury and property damage claims
to contractors engaged in asbestos abatement activities.
During the past several years, the Company has expanded the insurance
operations from serving only the asbestos abatement marketplace to now serving
the specialty trade, environmental and professional liability and surety
marketplace. As a result, the contribution of the insurance segment of the
Company's operations has increased significantly in relation to the operations
of the Company's construction contracting segment.
INSURANCE AND SURETY BONDING
General. The Company's insurance subsidiaries primarily provide liability
insurance and surety bonding for specialty trade, environmental remediation,
asbestos and lead abatement contractors, as well as professional liability for
architects, engineers, environmental consultants and others. This highly
specialized insurance market includes general liability, pollution liability,
environmental consulting liability, hazardous waste storage and treatment
pollution liability and other related liabilities. Few property and casualty
insurers serve these markets due to the technical skills required in the
underwriting process and the high degree and intensive amount of service
required to tailor coverages to the special needs of policyholders and to
provide timely responses to individual contract requirements.
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Liability Insurance. 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 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 limited to third-party bodily injury
and property damage arising out of the contractors' operations. General
liability insurance is offered on either a claims-made or an occurrence
basis.
- Contractor Pollution Liability -- Policies 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 a release of, or exposure to, pollutants as a result
of the contractors' operations. The liability exposure commences with
the remediation or cleanup activities and ends when a hazard has been
removed. Contractors pollution liability insurance is offered only on a
claims-made basis.
- Asbestos and Lead Abatement Liability -- Policies offered to contractors
involved in the removal 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
attributable to 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 offered to
architects and engineers and consultants in the fields of architecture;
civil, electrical, mechanical, structural and process engineering;
construction/property management; laboratory testing and surveying. All
policies are written on a claims-made basis.
- Environmental, Asbestos and/or Lead Consultants Professional
Liability -- Policies offered to consultants involved in 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 and 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
offered 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"), which are provided on a
claims-made basis.
- Site Specific Pollution Liability -- Policies which cover pollution
claims arising or emanating from a specific site are provided on a
claims-made basis. Comprehensive site evaluations are required prior to
providing coverage for any site.
- Lenders Pollution Liability -- Policies 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 offered to manufacturers for a variety of
products including chemicals, fertilizers, pesticides, pollution control
devices and storage tanks, which are provided on a claims-made basis.
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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 under
favorable pricing terms.
Surety Bonding. Surety bonds are written for specialty trade,
environmental, asbestos and lead abatement contractors. Most bonds are supported
by various levels of collateral based upon the financial condition of the
contractor. Collateral consists of cash, liquid investments or letters of credit
from financial institutions acceptable to the Company.
The Company generally requires cash or irrevocable letters of credit to
collateralize a portion or all 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 to 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 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 bonds and other specialty bonds -- Bonds required by contractors,
manufacturers and other owners in their normal course of operations.
- Miscellaneous surety, license, permit, self-insurer, supersedeas and
other bonds -- Miscellaneous bonds issued to applicants based on bond
form and applicant financial strength.
CONSTRUCTION CONTRACTING
General
The Company provides a broad range of 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 installs interiors including mechanical systems and electrical systems
in office buildings, retail establishments, schools, colleges, churches,
hospitals and other buildings. The Company's 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 interior design, construction and asbestos abatement industries are
highly fragmented. Many interior contractors, in contrast to the Company,
specialize in a particular interior component such as ceilings or partitions.
The Company provides a broad range of coordinated interior contracting services,
many of which are performed by subcontractors. Both the interior construction
and asbestos abatement markets have, in recent years, reflected the economic
recession in the Northeast. The asbestos abatement market has also declined as
many of the intensive abatement programs mandated in recent years with respect
to public buildings have been completed.
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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 long 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 involved 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.
46
<PAGE> 52
MANAGEMENT OF THE COMPANY
The following table sets forth the names and certain information concerning
the directors and executive officers of the Company.
Henry W. Nozko, Sr., age 76. Mr. Nozko, Sr., has been Chairman of the
Board, President and Chief Executive Officer of the Company since 1951. He also
has been a Director of United Coasts Corporation since 1985, a Director of
Coastal Insurance since 1986 and a Director of ACSTAR Holdings, Inc. and ACSTAR
Insurance since 1988, and Chairman and Co-Chief Executive Officer of United
Coasts and Coastal Insurance since 1989. He is the husband of Victoria C. Nozko
and the father of Henry W. Nozko, Jr.
Henry W. Nozko, Jr., age 49. Mr. Nozko, Jr. is Executive Vice President,
Chief Operating Officer, and Treasurer of the Company. He is a member of the
Audit Committee. Mr. Nozko, Jr. also has been President, Co-Chief Executive
Officer and Treasurer of United Coasts and Coastal Insurance since 1989, and
President and Treasurer of ACSTAR Holdings, Inc. and ACSTAR Insurance since
1988. He is also a member of the Boards of Directors of United Coasts, Coastal
Insurance, ACSTAR Holdings, Inc., ACSTAR Insurance and Three D Departments, Inc.
He is the son of Henry W. Nozko, Sr. and Victoria C. Nozko.
Victoria C. Nozko, age 77. Mrs. Nozko is a member of the Audit Committee
and has been a housewife during the past five years. She is the wife of Henry W.
Nozko, Sr. and the mother of Henry W. Nozko, Jr.
John C. Creasy, age 76. Mr. Creasy is a member of the Compensation
Committee and Audit Committee. He is the retired Chief Executive Officer of
Danbury Hospital, and is a member of the Board of Directors of United Coasts and
Coastal Insurance.
Michael J. Sullivan, age 51. Mr. Sullivan is the Business Manager and
Financial Secretary/Treasurer of the Sheet Metal Workers' Local Union No. 20 and
the General Secretary/Treasurer of the Sheet Metal Workers' International
Association.
Robert H. Frazer, age 50. Mr. Frazer is currently Vice President, Secretary
and General Counsel of the Company and an Officer and a Director of ACSTAR
Insurance Company and ACSTAR Holdings, Inc. Mr. Frazer has also served as Vice
President, Secretary and General Counsel of United Coasts and Coastal Insurance
since 1989 and as a Director of United Coastal Insurance Company since September
1992.
Michael P. Cifone, age 37. Mr. Cifone has been the Vice
President -- Finance of the Company since 1990 and Corporate Controller from
1989 to 1990.
47
<PAGE> 53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF THE COMPANY
As of April 30, 1996, no person was known to the Company to be the
beneficial owner of more than 5% of its outstanding shares of Company 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 stock of the Company
beneficially owned, by each director and executive officer of the Company and by
all directors and executive officers of the Company, as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL
VOTING POWER
(15)
PERCENTAGE ---------------
CLASS NUMBER OF SHARES OF CLASS BEFORE AFTER
BENEFICIAL OWNER OF STOCK BENEFICIALLY OWNED(1) OUTSTANDING(%) MERGER MERGER
- --------------------------------- -------- --------------------- -------------- ------ ------
<S> <C> <C> <C> <C> <C>
Henry W. Nozko, Sr............... Common 456,000(2)(5) 68.09 51.64 46.03
Class A 55,000(2)(4) 2.40
Henry W. Nozko, Jr............... Common 189,274(2)(3)(5) 27.66 22.70 20.24
Class A 179,824(2)(3)(4) 7.86
Victoria C. Nozko................ Class A 29,000 1.30 .34 .30
John C. Creasy................... Common 3,300 .52 .67 .60
Class A 25,000(6) 1.11
Michael J. Sullivan.............. Class A 15,000(7) .67 .17 .15
Robert H. Frazer................. Class A 81,000(8) 3.50 .94 .83
Michael P. Cifone................ Class A 65,650(9) 2.86 .76 .67
Sheet Metal Workers' National
Pension Fund................... Class A 1,500,000(10) 40.19 14.89 13.41
AIG.............................. Class A 1,099,996(11) 35.11 11.61 10.39
Franklin Resources, Inc.......... Class A 495,000(12) 22.17 5.77 5.11
First Manhattan Co............... Class A 304,950(13) 13.66 3.56 3.15
Investment Counselor of Maryland,
Inc............................ Class A 190,000(14) 8.51 2.22 1.96
All Directors and Officers (7
persons) as a Group............ Common 658,574 89.68 71.28 64.07
Class A 450,474 17.82
</TABLE>
- ---------------
(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 21,200 shares of Class A Stock and 5,500 shares of Common
Stock held by Mr. Nozko, Jr. as custodian for his minor children nor 2,800
shares of Class A Stock and 2,750 shares of Common Stock held by his wife,
Gloria C. Nozko.
(4) Includes options to purchase 55,000 shares of Class A Stock.
(5) Includes options to purchase 50,000 shares of Common Stock.
(6) Includes options to purchase 25,000 shares of Class A Stock.
(7) Includes options to purchase 15,000 shares of Class A Stock.
(8) Includes options to purchase 80,000 shares of Class A Stock.
(9) Includes options to purchase 65,000 shares of Class A Stock.
(10) Assumes the full conversion of $16,500,000 principal amount of 11.5%
Convertible Note into 1,500,000 shares of Class A Stock. The Address of the
Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314.
48
<PAGE> 54
(11) Includes an assumption that the full conversion of 10.5% Convertible Senior
Notes held by AIG Life Insurance Company ($3,000,000) and American
International Life Assurance Company of New York ($6,000,000) into 900,000
shares of Class A Stock. The address of each such noteholder is One Chase
Manhattan Place, New York, New York 10005.
(12) Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San Mateo,
CA 94404
(13) Address of First Manhattan Co. is 437 Madison Avenue, New York, NY 10022.
(14) Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
Street, Baltimore, Maryland 21201.
(15) Based upon one vote for each share of Company Common Stock and one-tenth
vote for each share of Class A Stock.
49
<PAGE> 55
BUSINESS OF UNITED COASTS
GENERAL
The business of United Coasts is discussed generally under "Business of the
Company" inasmuch as United Coasts is a majority-owned subsidiary of the
Company. United Coasts is a holding company for United Coastal Insurance
Company, an Arizona corporation ("Coastal Insurance"), which provides liability
insurance for specialty trade, environmental remediation, asbestos and lead
abatement contractors, as well as professional liability for architects,
engineers, environmental consultants and others. This highly specialized
insurance market includes general liability, pollution liability, environmental
consulting liability, hazardous waste storage and treatment pollution liability
and other related liabilities.
MANAGEMENT OF UNITED COASTS
The following table sets forth the names and certain information concerning
the directors and executive officers of United Coasts.
HENRY W. NOZKO, SR., age 76. Mr. Nozko, Sr., was elected Chairman and
Co-Chief Executive Officer of United Coasts and Coastal Insurance in September
1989. He has served as a Director of United Coasts since 1985, and a Director of
Coastal Insurance since 1986. He has been Chairman of the Board, President,
Chief Executive Officer and a Director of ACMAT Corporation since 1951. Mr.
Nozko also serves as a Director of AMINS, ACSTAR Holdings, Inc. and ACSTAR
Insurance Company. Mr. Nozko is the father of Henry W. Nozko, Jr.
HENRY W. NOZKO, JR., age 49. Mr. Nozko, Jr., was elected President and
Co-Chief Executive Officer of United Coasts and Coastal Insurance in September
1989 and was also elected Treasurer of United Coasts and Coastal Insurance in
June 1990. He has served as a Director of United Coasts since 1985 and as a
director of Coastal Insurance since 1986. He served as Executive Vice President
and Secretary of United Coasts and Coastal Insurance from February 1988 to
September 1989 and served as Executive Vice President, Secretary and Treasurer
of United Coasts and Coastal Insurance from April 1987 to February 1988. He is
also a member of United Coasts' Audit Committee and the Compensation Committee
of Coastal Insurance. He is currently Executive Vice President, Chief Operating
Officer and a Director of ACMAT Corporation and an Officer and Director of
AMINS, and has held various positions with those companies for in excess of 5
years. He is the President and a Director of ACSTAR Holdings, Inc. and ACSTAR
Insurance Company. He is a Director of Three D Departments, Inc. He is the son
of Henry W. Nozko, Sr.
JOHN C. CREASY, age 76. Mr. Creasy has been a director of United Coasts and
Coastal Insurance since 1989. He is also a director of the Company and a member
of the Company's Compensation Committee and Audit Committee. Mr. Creasy is the
retired Chief Executive Officer of Danbury Hospital.
JOSEPH D. SCOLLO, JR., age 32. Mr. Scollo has served as Senior Vice
President -- Operations of United Coasts and Coastal Insurance since February
1991 and as a Director of Coastal Insurance since September 1992. He served as
Vice President -- Finance of United Coasts and Coastal Insurance from October
1989 to February 1991.
ROBERT H. FRAZER, age 50. Mr. Frazer has served as Vice President,
Secretary and General Counsel of United Coasts and Coastal Insurance since 1989
and as a Director of Coastal Insurance since September 1992. Mr. Frazer is
currently Vice President, Secretary and General Counsel of ACMAT Corporation and
an Officer and a Director of ACSTAR Insurance Company and ACSTAR Holdings, Inc.
50
<PAGE> 56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF UNITED COASTS
As of April 30, 1996, no person was known to United Coasts to be the
beneficial owner of more than 5% of its outstanding shares of UC Common Stock
except as set forth in the following table which also shows, as of that date,
the total number of shares of UC Common Stock beneficially owned, by each
director and executive officer of United Coasts and by all directors and
executive officers of United Coasts, as a group:
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF NUMBER OF SHARES UC COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED(1) OUTSTANDING(%)
- ----------------------------------------------------- --------------------- ---------------
<S> <C> <C>
ACMAT Corporation.................................... 8,520,000(2) 83.6
233 Main Street
P.O. Box 2350
New Britain, CT 06050-2350
ACSTAR Insurance Company............................. 2,070,000(2) 20.3
233 Main Street
P.O. Box 2350
New Britain, CT 06050-2350
John C. Creasy....................................... 3,000 .3
Henry W. Nozko, Sr................................... 8,545,000(2)(3)(4) 83.6
Henry W. Nozko, Jr................................... 8,545,000(2)(3)(4) 83.6
Robert H. Frazer..................................... 25,000(4) .2
Joseph D. Scollo, Jr................................. 100 --
All Directors and Executive Officers as a Group
(5 persons)........................................ 8,644,100 83.8
</TABLE>
- ---------------
(1) The person listed has the sole power to vote the shares of common stock
listed above as beneficially owned by such person and has sole investment
power with respect to such shares.
(2) ACSTAR Insurance Company ("ACSTAR Insurance") is a wholly-owned subsidiary
of ACSTAR Holdings, Inc., which in turn is a wholly-owned subsidiary of
ACMAT. Consequently, ACMAT may be deemed to be a beneficial owner of shares
held by ACSTAR Insurance Company. ACMAT owns directly 6,450,000 shares or
64% of the UC Common Stock outstanding. Also, Messrs. Nozko, Sr. and Nozko,
Jr. may each be deemed to own beneficially an aggregate of approximately 88%
of the outstanding shares of ACMAT Common Stock and approximately 6% of the
outstanding shares of ACMAT Class A Stock. Consequently, each of them also
may be deemed to be a beneficial owner of the shares held by ACSTAR and
ACMAT. Messrs. Nozko, Sr. and Nozko, Jr. each disclaim beneficial ownership
of any shares of UC Common Stock owned by ACMAT or ACSTAR Insurance.
(3) Henry W. Nozko, Sr. and his son, Henry W. Nozko, Jr., are Directors of
ACSTAR Insurance Company and are Officers, Directors and the principal
stockholders of ACMAT Corporation. Together, the Company and ACSTAR own an
aggregate of approximately 84% of the total shares of UC Common Stock
outstanding.
(4) Includes options to purchase 25,000 shares of UC Common Stock.
51
<PAGE> 57
DESCRIPTION OF CLASS A STOCK
The Class A Stock is one of two classes of common stock of the Company, the
other class being the Common Stock, each without par value. Except with respect
to voting rights, as discussed below, the rights of the Class A Stock and Common
Stock are identical. Each share of Class A Stock and Common Stock is entitled to
share ratably in distributions by the Company upon liquidation or otherwise and
in dividends when and as declared and paid.
The Company is authorized to issue up to 10,000,000 shares of Class A Stock
of which 2,232,585 shares were issued and outstanding on April 30, 1996 and an
additional 2,790,000 shares were reserved for issuance pursuant to certain
options, warrants and conversion rights, and 3,500,000 shares of Common Stock of
which 634,340 shares were issued and outstanding on April 30, 1996 and an
additional 100,000 shares were reserved for issuance pursuant to certain
options.
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. Both the Class A Stock and Common Stock vote together as a single class
on a matters brought before the shareholders of the Company except as may
otherwise be required under Connecticut law. Connecticut law requires that with
respect to certain amendments to the Certificate of Incorporation of the Company
and in connection with proposals for merger or liquidation, the Class A Stock
and Common Stock will vote as separate classes.
The Company has not paid any dividends on either the Class A Stock or
Common Stock and does not intend to pay dividends on either such class in the
foreseeable future. Dividends on both the Class A Stock and Common Stock are
restricted under certain agreements between the Company and holders of debt
securities of the Company, the most restrictive provision of which limits the
Company's ability to pay dividends.
Although not directly affecting the Company's ability to pay dividends, the
Company's insurance subsidiaries are restricted by applicable state regulations
in their ability to pay dividends, such restrictions limit total dividends of
such subsidiaries to approximately $6,600,000 in 1996.
DESCRIPTION OF UC COMMON STOCK
The UC Common Stock is common stock, with a par value of $.01 per share,
all shares of which are entitled to share ratably in distributions to
shareholders of United Coasts upon liquidation or otherwise and in dividends
when and as declared paid. Each share of UC Common Stock is entitled to one vote
with respect to matters brought before the shareholders.
United Coasts is authorized to issue up to 20,000,000 shares of UC Common
Stock of which 10,187,189 shares were outstanding on April 30, 1996 and an
additional 75,000 shares were reserved for issuance pursuant to certain options
and warrants.
United Coasts has not paid any dividends since 1987. Although not directly
restricting the ability of United Coasts to pay dividends to its shareholders,
United Coasts' insurance subsidiary, United Coastal Insurance Company, is
restricted under regulations of the state of Arizona in its ability to pay
dividends to $4,047,500 in 1996, without the prior approval of the Arizona
Insurance Department.
The rights and privileges of UC Common Stock are subordinate to the rights
and preferences of a class of Preferred Stock, par value $.01 per share of
United Coasts, of which 1,000,000 shares are authorized and none of which are
issued or outstanding.
52
<PAGE> 58
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND UNITED COASTS
The rights of holders of UC Common Stock are substantially the same as
those of the Company's shareholders except for certain important variations
discussed below between (i) the Connecticut Stock Corporation Act ("Connecticut
Law") and the Delaware General Corporation Law ("Delaware Law") and (ii) the
Certificates of Incorporation and By-Laws of the Company and United Coasts.
The following is a summary of certain such differences.
PREEMPTIVE RIGHTS
The Company. Under Connecticut Law, the holders of common stock, in
general, have preemptive rights unless the certificate of incorporation
specifically provides to the contrary or unless the shareholders waive such
rights with respect to specific issuances of common stock or securities
convertible into common stock. The Company's Certificate of Incorporation
provides that holders of the Company's securities shall not have preemptive
rights.
United Coasts. Under Delaware Law, preemptive rights are not available to
stockholders unless specifically authorized by the certificate of incorporation.
The Certificate of Incorporation of United Coasts does not authorize any
preemptive rights.
VOTING RIGHTS
The Company. Connecticut Law requires the affirmative vote of a majority
of the Board of Directors plus the affirmative vote of the holders of at least
two-thirds of the outstanding shares to approve certain mergers or
consolidations involving the Company, a dissolution of the Company or a sale of
all or substantially all of the Company's assets. Furthermore, according to the
Connecticut Law these "fundamental change" must be approved by each class of
outstanding shareholders voting independently. Although Connecticut law provides
that any amendment to the Company's Certificate of Incorporation needs the
affirmative vote of a majority of its Board of Directors and only a majority of
its outstanding shares, the Certificate of Incorporation of the Company provides
that the approval of not less than two-thirds of the voting power of all classes
of stock entitled to vote in elections of directors is required for any
amendments of the Certificate of Incorporation.
In general, no shareholder vote is required to approve a merger in which
the Company is the survivor if no amendment to the Certificate of Incorporation
is involved and if the shares to be issued under the plan of merger could have
been issued by the Company's board without any shareholder authorization.
The Company's shareholders have no cumulative voting rights in the election
of directors.
United Coasts. Generally, except as discussed below, under Delaware Law,
only the affirmative vote of the holders of a majority of the outstanding shares
entitled to vote will be required to approve an amendment to the Certificate of
Incorporation, certain mergers or a consolidation involving United Coasts, a
dissolution of United Coasts or a sale of all or substantially all of United
Coasts' assets.
CALL OF SPECIAL MEETINGS OF SHAREHOLDERS
The Company. Connecticut Law requires that special meetings of
shareholders may be called by the Board of Directors or by such person or
persons as may be authorized by the Certificate of Incorporation or the By-Laws.
Upon the written request of the holders of not less than one-tenth of the voting
power of all shares entitled to vote at a meeting, the President shall call a
special shareholders' meeting for the purposes specified in such request and
cause notice thereof to be given except that if the corporation has a class of
voting stock registered pursuant to Section 12 of the Securities Exchange Act of
1934, as the same has been or hereafter may be amended from time to time, and no
person held ten per cent or more of the voting power of all shares of the
corporation on February 1, 1988, the president need not call such meeting except
upon the written request of the holders of not less than thirty-five per cent of
such voting power. If the president shall not, within fifteen days after the
receipt of such shareholders' request, so call such meeting, such shareholders
may call the same.
53
<PAGE> 59
United Coasts. Delaware Law permits the Board of Directors or any other
person or persons authorized in the By-Laws to call special meetings of the
stockholders. Delaware Law does not require, as does Connecticut Law, that
holders of at least 10% of the issued and outstanding shares of stock be
permitted to call special meetings of stockholders. The By-Laws of United Coasts
require that special meetings of stockholders may be called by the Chairman of
the Board, President, the Board of Directors or on the petition by one or more
stockholders holding at least 10% of the issued and outstanding shares of stock.
CORPORATE ACTION WITHOUT A SHAREHOLDERS' MEETING
The Company. Connecticut Law provides that actions which would otherwise
require shareholder approval at a meeting of shareholders may be taken without a
shareholder meeting (1) by written consent of all persons entitled to vote on
the action, or (2) if the certificate of incorporation so provides, and the
action to be taken is not an election of directors, by the written consent of
persons holding shares sufficient under the certificate of incorporation to
approve the action (but in no case less than a majority of all shares entitled
to vote). The Company's Certificate of Incorporation does not so provide.
United Coasts. Delaware Law provides that, unless prohibited by the
certificate of incorporation, corporate actions may be authorized without a vote
or a meeting through the written consent of holders of voting shares sufficient
to approve the action at a meeting where all holders of voting shares were
present and voted. United Coasts Certificate of Incorporation does not prohibit
such action.
DIVIDENDS
The Company. Connecticut Law provides that the Company may pay dividends
on its outstanding shares in cash, property or its own shares, except when the
corporation is insolvent or when such payment would render the corporation
insolvent. Connecticut Law permits a corporation to redeem or repurchase its
shares out of earned surplus and, under certain circumstances, out of capital
surplus.
United Coasts. Under Delaware Law, a corporation may, unless otherwise
restricted by its certificate of incorporation, declare and pay dividends out of
surplus (the excess, if any, at any given time, of the net assets of the
corporation over its legal capital), or if no surplus exists, out of net profits
for the current or preceding fiscal year, provided that the amount of the
capital following the declaration and payment of the dividend is not less than
the aggregate amount of capital represented by the issued and outstanding stock
of all classes having a preference upon the distribution of the assets of the
corporation. Additionally, Delaware law provides that a corporation may redeem
or repurchase its shares of common stock only out of surplus.
APPRAISAL RIGHTS
The Company. Objecting shareholders who follow prescribed statutory
procedures are entitled to appraisal rights in connection with amendments to the
certificate of incorporation which would have specified adverse effects on the
rights of the holders (e.g., elimination of preemptive rights), mergers or
consolidations involving the corporation (except for certain mergers in which
the corporation is the survivor) or certain sales of all or substantially all of
the assets of the corporation.
United Coasts. Under Delaware law, subject to certain exceptions that do
not apply to the Merger, any stockholder of a Delaware corporation who holds
shares of stock on the date that a meeting of stockholders is called to vote on
a merger proposal with respect to such shares of stock, who continuously holds
such shares through the effective date of the merger, who has otherwise complied
with Section 262(d) of the Delaware Corporation Law, and who has neither voted
in favor of the merger nor consented thereto in writing shall be entitled to
appraisal by the Court of Chancery of the fair value of his shares of stock. See
"The Merger -- Appraisal Rights".
PERSONAL LIABILITY OF DIRECTORS
In recent years both Connecticut and Delaware adopted similar though not
identical statutes permitting a corporation to limit the personal liability of
its directors by including limited liability language in the
54
<PAGE> 60
corporation's certificate of incorporation. Both the Company and United Coasts
have amended their certificates of incorporation to include such director
limited liability provisions.
Both Connecticut and Delaware law prohibit limiting director liability
under certain circumstances as described below.
Connecticut. Connecticut Law allows a corporation to include in its
certificate of incorporation a provision limiting personal liability for a
director to the corporation or its shareholders for monetary damages for breach
of duty as a director to an amount that is not less than the compensation
received by the director for serving the corporation during the year of the
violation if such breach did not (a) involve a knowing and culpable violation of
law by the director, (b) enable the director or an associate to receive an
improper personal economic gain, (c) show a lack of good faith and a conscious
disregard for the duty of the director to the corporation under circumstances in
which the director was aware that his conduct or omission created an
unjustifiable risk of serious injury to the corporation, (d) constitute a
sustained and unexcused pattern of inattention that amounted to an abdication of
the director's duty to the corporation, or (e) create liability under Section
33-321 of the Connecticut Law concerning improper distributions and other
improper actions. No such provision shall limit or preclude the liability of a
director for any act or omission occurring prior to the effective date of such
provision.
Delaware. Delaware law allows a corporation to include in its certificate
of incorporation a provision limiting personal liability for a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit
the liability of a director (a) for any breach of the director's duty of loyalty
to the corporation or its stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, (c)
under Section 174 of the Delaware Law concerning unlawful dividends and stock
repurchases and redemptions, or (d) for any transaction from which the director
derived an improper personal benefit. No such provision shall eliminate or limit
the liability of a director for any act or omission occurring prior to the date
when such provision becomes effective. All references in this subsection to a
director shall also be deemed to refer to a member of the governing body of a
corporation which is not authorized to issue capital stock.
55
<PAGE> 61
FEDERAL INCOME TAX CONSEQUENCES
The Company has received an opinion of its accountants substantially to the
effect that, with respect to the Unaffiliated Holders, the Merger should qualify
for federal income tax purposes as a reorganization within the meaning of
section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended.
Accordingly, (a) the Unaffiliated Holders should recognize no gain or loss on
the exchange of their UC Common Stock solely for ACMAT stock pursuant to the
Merger, (b) the Unaffiliated Holders will recognize gain (if any) on the receipt
of cash in lieu of fractional shares, and (c) the basis of the ACMAT stock
(including any fractional share interest to which they may be entitled) to be
received by the Unaffiliated Holders should be the same as the basis of the UC
Common Stock surrendered in exchange therefor. The opinion is based upon facts
and representations provided by the Company, which include representations that
relate to events that may occur after the Merger. The opinion is not binding
upon any tax authority or any court and no assurance can be given that a
position contrary to that expressed in the opinion will not be asserted by a tax
authority and ultimately sustained by a court. The opinion relies upon the
relevant provisions of the Internal Revenue Code of 1986, as amended, the
regulations thereunder, and judicial and administrative interpretations thereof
in effect as of the Effective Date, which are subject to change or modification
(that may be retroactive in effect) by subsequent legislative, regulatory,
administrative, or judicial decisions.
THE FOREGOING SUMMARY DOES NOT DISCUSS ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF UC COMMON STOCK IN
LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES. EACH HOLDER OF UC COMMON
STOCK SHOULD CONSULT WITH SUCH HOLDER'S TAX ADVISOR AS TO THE SPECIFIC TAX
CONSEQUENCES TO SUCH HOLDER OF THE MERGER, INCLUDING THE APPLICATION AND
EFFECT OF STATE, LOCAL AND OTHER TAX LAWS.
LEGAL MATTERS
The legality of the Class A Stock to be issued in connection with the
Merger will be passed upon for the Company by Murtha, Cullina, Richter and
Pinney, Hartford, Connecticut.
EXPERTS
The consolidated financial statements and schedules of ACMAT and
subsidiaries, and the consolidated financial statements of United Coasts and
subsidiary, included in or incorporated by reference in this Prospectus and
elsewhere in this Registration Statement, to the extent and for the periods
indicated in its reports, have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, and are included in reliance upon the
authority of said firm as experts in accounting and auditing. The reports of
KPMG Peat Marwick LLP covering both ACMAT and subsidiaries and United Coasts and
subsidiary, refer to a change in the method of accounting for investments in
1994.
The discussions included under the headings "Federal Income Tax
Consequences" were prepared for the Company by KPMG Peat Marwick LLP,
independent certified public accountants, and have been included herein upon the
authority of said firm as experts in tax accounting.
56
<PAGE> 62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ACMAT CORPORATION AND SUBSIDIARIES:
The following Consolidated Financial Statements of the Company, related
notes and Independent Auditors' Report are included herein:
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Statements of Earnings for the years ended December 31, 1995, 1994 and
1993................................................................................ F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994.......................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995,
1994 and 1993....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993................................................................................ F-6
Notes to Consolidated Financial Statements -- December 31, 1995, 1994 and 1993........ F-7
Unaudited Consolidated Statements of Earnings for the three-month periods ended March
31, 1996 and 1995................................................................... F-23
Unaudited Consolidated Balance Sheet as of March 31, 1996............................. F-24
Unaudited Consolidated Statements of Stockholders' Equity for the three-month period
ended March 31, 1996 and 1995....................................................... F-25
Unaudited Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 1996 and 1995............................................................. F-26
Notes to Unaudited Consolidated Financial Statements.................................. F-27
</TABLE>
F-1
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ACMAT Corporation:
We have audited the accompanying consolidated balance sheets of ACMAT
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of earnings, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements 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, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 1994
the Company changed its method of accounting for investments.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 24, 1996
F-2
<PAGE> 64
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Earned Premiums....................................... $23,492,905 27,141,639 25,422,187
Contract Revenues..................................... 11,614,632 8,160,758 8,532,260
Investment Income, Net................................ 6,062,883 4,637,158 4,563,514
Net Realized Capital Gains (Losses)................... 7,897 (34,238) 721,601
Other Income.......................................... 679,081 850,359 954,060
----------- ---------- ----------
41,857,398 40,755,676 40,193,622
----------- ---------- ----------
Losses and Loss Adjustment Expenses................... 7,115,371.. 8,209,992 7,623,178
Cost of Contract Revenues............................. 10,774,758 7,793,535 9,327,616
Amortization of Policy Acquisition Costs.............. 3,939,008 4,260,759 3,407,104
Selling, General and Administrative Expenses.......... 6,097,322 6,964,686 6,873,217
Interest Expense...................................... 4,810,578 4,940,014 5,609,893
----------- ---------- ----------
32,737,037 32,168,986 32,841,008
----------- ---------- ----------
Earnings Before Income Taxes and Minority Interests... 9,120,361 8,586,690 7,352,614
Income Taxes.......................................... 2,414,400 2,245,300 1,888,000
----------- ---------- ----------
Earnings Before Minority Interests.................... 6,705,961 6,341,390 5,464,614
Minority Interests.................................... (1,355,681) (1,501,529) (1,555,497)
----------- ---------- ----------
Net Earnings.......................................... $ 5,350,280 4,839,861 3,909,117
=========== ========== ==========
Net Earnings Per Share and Share Equivalent........... $ 1.46 1.17 .91
----------- ---------- ----------
Net Earnings Per Share -- Assuming Full Dilution...... $ 1.18 -- --
----------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 65
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities -- Available for Sale at Fair Value (Cost of
$121,612,706 in 1995 and $110,647,319 in 1994)......................... $122,387,491 108,911,211
Equity Securities, at Fair Value (Cost of $20,000 in 1995 and $627,252 in
1994).................................................................. 20,000 444,109
Limited Partnership Investment, at Fair Value (Cost of $1,120,354 in 1995
and $1,097,261 in 1994)................................................ 1,641,763 1,204,914
Short-term Investments, at Cost Which Approximates Fair Value............ 8,359,047 8,726,056
Total Investments...................................................... 132,408,301 119,286,290
Cash and Cash Equivalents.................................................. 5,120,375 5,471,148
Accrued Interest Receivable................................................ 2,230,988 1,890,826
Receivables, Net of Allowance for Doubtful Accounts of $254,825 in 1995 and
$194,815 in 1994......................................................... 9,022,434 9,480,567
Reinsurance Recoverable.................................................... 3,872,099 4,228,879
Income Tax Refund Receivable............................................... 233,572 23,518
Prepaid Expenses........................................................... 178,965 234,929
Deferred Income Taxes...................................................... 1,971,148 2,285,649
Property and Equipment, Net................................................ 13,987,256 14,364,020
Deferred Policy Acquisition Costs.......................................... 3,459,308 3,661,421
Other Assets............................................................... 3,869,028 3,192,151
Intangibles, Net........................................................... 4,048,764 4,375,416
------------ -----------
$180,402,238 168,494,814
============ ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes Payable to Banks..................................................... $ 7,500,000 4,300,000
Accounts Payable........................................................... 2,189,645 2,302,202
Reserves for Losses and Loss Adjustment Expenses........................... 45,235,311 40,954,783
Unearned Premiums.......................................................... 14,302,613 14,977,825
Collateral Held............................................................ 17,767,955 10,403,706
Other Accrued Liabilities.................................................. 1,861,815 1,681,266
Income Taxes............................................................... -- 294,980
Long-term Debt............................................................. 40,127,590 43,405,266
------------ -----------
Total Liabilities........................................................ 128,984,929 118,320,028
Minority Interests......................................................... 13,830,050 12,169,851
Stockholders' Equity:
Common Stock (No Par Value; 3,500,000 Shares Authorized; 642,464 and
652,920 Shares Issued and Outstanding)................................. 642,464 652,920
Class A Stock (No Par Value; 10,000,000 Shares Authorized; 2,665,836 and
3,313,067 Issued and Outstanding)...................................... 2,665,836 3,313,067
Additional Paid-in Capital............................................... 1,921,100 9,358,948
Retained Earnings........................................................ 31,601,383 26,251,103
Unrealized gain (loss) on Securities, Net of Deferred Taxes of $389,685
in 1995................................................................ 756,476 (1,571,103)
------------ -----------
Total Stockholders' Equity............................................... 37,587,259 38,004,935
------------ -----------
Commitments and Contingencies.............................................. $180,402,238 168,494,814
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 66
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON CLASS A ADDITIONAL GAINS TOTAL
STOCK STOCK PAID-IN RETAINED (LOSSES) ON STOCKHOLDERS'
PAR VALUE PAR VALUE CAPITAL EARNINGS SECURITIES EQUITY
---------- --------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1992......... $714,275 3,529,505 12,347,677 17,502,125 (63,651 ) 34,029,931
Acquisition and retirement of 20,942
shares of Common Stock................ $(20,942) -- (199,215) -- -- (220,157)
Acquisition and retirement of 137,454
shares of Class A Stock............... -- (137,454) (1,087,689) -- -- (1,225,143)
Net unrealized appreciation of equity
securities............................ -- -- -- -- 192,254 192,254
Net earnings............................ -- -- -- 3,909,117 -- 3,909,117
---------- --------- ---------- ---------- ----------- -------------
Balance as of December 31, 1993......... $693,333 3,392,051 11,060,773 21,411,242 128,603 36,686,002
Acquisition and retirement of 40,413
shares of Common Stock................ $(40,413) -- (447,343) -- -- (487,756)
Acquisition and retirement of 478,484
shares of Class A Stock............... -- (478,484) (3,736,514) -- -- (4,214,998)
Issuance of 379,500 shares of Class A
Stock................................. -- 379,500 2,620,500 -- -- 3,000,000
Issuance of 20,000 shares of Class A
Stock pursuant to stock options....... -- 20,000 100,000 -- -- 120,000
Effect of adoption of FAS No. 115, net
of taxes.............................. -- -- -- -- 472,000 472,000
Net unrealized losses on debt and equity
securities............................ -- -- -- -- (2,171,706 ) (2,171,706)
Deferred tax benefit on net unrealized
losses on debt and equity
securities............................ -- -- -- -- 619,862 619,862
Deferred tax valuation allowance........ -- -- -- -- (619,862 ) (619,862)
Other................................... -- -- (238,468) -- -- (238,468)
Net earnings............................ -- -- 4,839,861 -- 4,839,861
---------- --------- ---------- ---------- ----------- -------------
Balance as of December 31, 1994......... $652,920 3,313,067 9,358,948 26,251,103 (1,571,103 ) 38,004,935
Acquisition and retirement of 10,456
shares of Common Stock................ $(10,456) -- (151,829) -- -- (162,285)
Acquisition and retirement of 797,228
shares of Class A Stock............... -- (797,228) (8,635,992) -- -- (9,433,220)
Issuance of 149,997 shares of Class A
Stock................................. -- 149,997 1,349,973 -- -- 1,499,970
Net unrealized appreciation of debt and
equity securities..................... -- -- -- -- 2,717,264 2,717,264
Deferred taxes on net unrealized gains
on debt and equity securities......... -- -- -- -- (389,685 ) (389,685)
Net earnings............................ -- -- -- 5,350,280 -- 5,350,280
---------- --------- ---------- ---------- ----------- -------------
Balance as of December 31, 1995......... $642,464 2,665,836 1,921,100 31,601,383 756,476 37,587,259
========= ======== ========= ========= ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 67
ACMAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Earnings.................................. $ 5,350,280 4,839,861 3,909,117
Adjustments to Reconcile Net Earnings to Net
Cash Provided by Operating Activities:
Depreciation and Amortization.............. 2,224,897 2,953,146 3,809,883
Minority Interests......................... 1,355,681 1,501,529 1,555,497
Net Realized Capital (Gains) Losses........ (7,897) 34,238 (721,601)
Changes In:
Accrued Interest Receivable.............. (340,162) (204,588) 81,591
Receivables, Net......................... 458,133 (1,230,342) 589,369
Reinsurance recoverable.................. 356,780 64,170 (4,293,049)
Deferred Policy Acquisition Costs........ 202,113 44,338 (1,133,633)
Prepaid Expenses and Other Assets........ (693,741) (184,745) (1,082,524)
Accounts Payable and Other Liabilities... 67,992 (114,872) 184,733
Collateral Held.......................... 7,364,249 (4,811,215) 4,408,845
Reserves for Losses and Loss Adjustment
Expenses.............................. 4,280,528 6,225,140 5,489,385
Income Taxes............................. (631,229) 559,938 739,123
Unearned Premiums........................ (675,212) (47,154) 2,775,551
------------ ----------- ------------
Net Cash Provided by Operating
Activities.......................... 19,312,412 9,629,444 16,312,287
------------ ----------- ------------
Cash Flows From Investing Activities:
Proceeds From Investments Sold or Matured:
Fixed Maturities -- Sold................... 12,902,187 12,832,799 93,433,751
Fixed Maturities -- Matured................ 42,485,000 27,569,700 10,468,000
Equity Securities.......................... 614,340 925,272 484,405
Purchases Of:
Fixed Maturities........................... (67,587,026) (38,382,662) (118,533,382)
Equity Securities.......................... -- (384,013) --
Limited Partnership Investment............. (23,092) (49,836) (553,284)
Short-term Investments, Net................... 367,009 (3,260,509) (502,343)
Purchase of 9% interest in ACSTAR Holdings,
Inc........................................ -- (3,000,000) --
Payments for Covenants Not-To-Compete......... -- -- (300,000)
Capital Expenditures.......................... (213,392) (786,126) (316,248)
------------ ----------- ------------
Net Cash Used for Investing
Activities.......................... (11,454,974) (4,535,375) (15,819,101)
------------ ----------- ------------
Cash Flows From Financing Activities:
Borrowings Under Line of Credit............... 4,200,000 1,700,000 --
Repayments Under Line of Credit............... (1,000,000) (1,700,000) --
Repayments on Long-term Debt.................. (1,777,706) (14,427,197) (1,564,041)
Issuance of Long-term Debt.................... -- 8,000,000 --
Issuance of Class A Stock..................... -- 2,881,532 --
Payments for Subsidiaries' Stock.............. (35,000) (41,250) (567,655)
Payments for Acquisition and Retirement of
Stock...................................... (9,595,505) (4,702,754) (1,445,300)
------------ ----------- ------------
Net Cash Used For Financing
Activities.......................... (8,208,211) (8,289,669) (3,576,996)
------------ ----------- ------------
Net Decrease in Cash and Cash Equivalents....... (350,773) (3,195,600) (3,083,810)
Cash and Cash Equivalents, Beginning of Year.... 5,471,148 8,666,748 11,750,558
------------ ----------- ------------
Cash and Cash Equivalents, End of Year.......... $ 5,120,375 5,471,148 8,666,748
=========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 68
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include ACMAT Corporation ("ACMAT" or
the "Company"), its wholly-owned 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 its
84% owned subsidiary, United Coasts Corporation ("United Coasts") and United
Coasts' wholly-owned subsidiary, United Coastal Insurance Company ("Coastal
Insurance").
On September 21, 1994, ACMAT purchased 30 shares of ACSTAR Holdings stock
for $3,000,000. As a result of the stock purchase, ACMAT's ownership of ACSTAR
Holdings increased to 100%.
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1994 and 1993 financial
statements to conform with the classifications in 1995.
(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. 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 50 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 1995, 1994 and 1993, customers who individually accounted for more
than 10% of consolidated construction contracting revenue for the respective
years are as follows: 1995 -- three customers provided 28%, 24% and 18%,
respectively; in 1994 -- three customers provided 17%, 13% and 11%,
respectively; 1993 -- two customers provided 26% and 22%, respectively. No
customers accounted for more than 10% of the consolidated insurance revenues in
any year.
(c) Investments
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Under FAS 115, debt securities are classified as held to
maturity, available for sale or trading. The Company classifies all debt and
equity securities as available for sale. As of January 1, 1994, debt securities
classified as available for sale, are carried at fair value and unrealized gains
and losses are excluded from earnings and recorded as a separate component of
stockholders' equity, net of estimated income taxes. Adjustments to minority
interests are made as a result of unrealized gains and losses. The effect on
stockholders' equity from adoption of the statement resulted in an
F-7
<PAGE> 69
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increase in stockholders' equity of $472,000, net of deferred taxes, due to the
revaluation of the Company's debt securities on January 1, 1994.
Investments in equity securities, which are comprised of common stocks, are
classified as available for sale and carried at fair value based on quoted
market values.
Investment in limited partnership, which represents participation in a
joint venture which invests primarily in small capitalization stocks traded on
national market exchanges, is carried at fair value, which is determined based
upon the market value of the investments held by the partnership.
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.
Realized gains and losses are determined on a specific identification
basis. Unrealized gains and losses on debt and equity securities and limited
partnership gains and losses, net of deferred taxes, if applicable, are included
in stockholders' equity.
The Company continually evaluates its investment portfolio and establishes
reserves for impairment in value deemed to be other than temporary.
(d) 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, 1995, 1994 and 1993, deferrable costs
capitalized were $3,736,895, 4,216,421 and $4,540,737 respectively. The
amortization of deferred policy acquisition costs charged to operations for the
years ended December 31, 1995, 1994 and 1993 was 3,939,008, $4,260,759 and
$3,407,104 respectively.
(e) 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.
(f) 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.
(g) 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.
F-8
<PAGE> 70
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(h) 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.
(i) 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 $5 million for liability and in excess of $1.5 million up to
$15.3 million for surety bonds. Effective April 1, 1995, the Company secured
additional treaty excess of loss reinsurance which provides limits on a per
policy basis of $5,000,000 per occurrence or claim made and in the aggregate
excess of $5,000,000 per occurrence or claim made and in the aggregate.
Reinsurance ceded also includes a facultative reinsurance treaty which is
applicable to excess policies written over a primary policy issued by the
Company for specific projects. Reinsurance is ceded to limit losses from large
exposures and to permit recovery of a portion of direct losses; however, such a
transfer does not relieve the originating insurer of its liability. The Company
participates in assumed quota-share reinsurance arrangements covering marine and
property catastrophe risks with one of its excess of loss reinsurers.
Reinsurance recoverables include ceded reserves for losses and loss
adjustment expenses and ceded unearned premiums are included in other assets.
All reinsurance contracts maintained by the Company qualify as short-duration
prospective contracts under the provisions of FAS No. 113. A summary of
reinsurance premiums written and earned is provided below:
<TABLE>
<CAPTION>
PREMIUMS WRITTEN PREMIUMS EARNED
------------------------------------- ------------------------------------
1995 1994 1993 1995 1994 1993
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Direct..................... $22,810,600 26,307,031 28,514,995 23,171,614 26,177,153 26,402,116
Assumed.................... 1,427,542 2,509,377 613,365 1,582,138 2,480,330 775,544
Ceded...................... (1,381,351) (1,599,953) (1,816,208) (1,260,847) (1,515,844) (1,755,473)
-------- -------- -------- -------- -------- --------
Totals..................... $22,856,791 27,216,455 27,312,152 23,492,905 27,141,639 25,422,187
======== ======== ======== ======== ======== ========
</TABLE>
Reinsurance recoveries on ceded paid losses and loss adjustment expenses
totalled approximately $30,000 and $388,000 for the year ended December 31, 1995
and 1993, respectively. There were no ceded paid losses and loss adjustment
expenses for the year ended December 31, 1994. Ceded incurred losses and loss
adjustment expenses totalled $425,458 and $638,554 for the years ended December
31, 1995 and 1994, respectively.
F-9
<PAGE> 71
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(j) 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 terms of the respective policy
contracts. Unearned premiums represent the portion of premiums written that is
applicable to the unexpired terms of policies in force, calculated on a prorata
basis.
(k) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, 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.
(l) 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.
(m) Future Application of Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
(FAS 121). This statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed of. This
statement requires a write down to fair value when long-lived assets to be held
and used are impaired. The adoption of this statement effective January 1, 1996
will not have a material effect on results of operations, financial condition or
liquidity.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123", "Accounting for Stock-Based Compensation" (FAS 123). This
statement addresses alternative accounting treatments for stock-based
compensation, such as stock options and restricted stock. FAS 123 permits either
expensing the value of stock-based compensation over the period earned or
disclosing in the financial statement footnotes the pro forma impact to net
income as if the value of stock-based compensation awards had been expensed. The
value of awards would be measured at the grant date based upon estimated fair
value, using option pricing models. The requirements of this statement will be
effective for 1996 financial statements, although earlier adoption is
permissible if an entity elects to expense the cost of stock-based compensation.
The Company is currently evaluating the disclosure requirements and expense
recognition alternatives addressed by this statement. However, the Company
expects to adopt the alternative which would provide for proforma disclosure in
the footnotes to the consolidated financial statements.
F-10
<PAGE> 72
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) ACQUISITIONS
On September 21, 1994, ACMAT purchased from The Environmental Venture Fund,
a Delaware limited partnership ("EVF"), The Apex Investment Fund, an Illinois
limited partnership ("Apex") and The Productivity Fund, a Delaware limited
partnership ("PF"), 15, 10 and 5 shares, respectively, of the common stock of
ACSTAR Holdings, a subsidiary of the Company, for an aggregate consideration of
$3,000,000. As a result of these transactions, the amount of the outstanding
common stock of ACSTAR Holdings owned by the Company has increased from 91% to
100%, thereby making ACSTAR Holdings a wholly-owned subsidiary of the Company.
In a separate transaction, EVF, Apex and PF exercised warrants to purchase
189,750, 126,500 and 63,250 shares, respectively, of Class A Stock of the
Company for an aggregate consideration of $3,000,000.
F-11
<PAGE> 73
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENTS
Investments at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED CARRYING
COST FAIR VALUE VALUE
------------ ----------- -----------
<S> <C> <C> <C>
1995
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political
Subdivision................................. $ 78,052,947 78,237,674 78,237,674
United States Government and Government
Agencies.................................... 43,156,415 43,749,435 43,749,435
Industrial and Miscellaneous.................. 403,344 400,382 400,382
------------ ----------- -----------
Total Fixed Maturities................... 121,612,706 122,387,491 122,387,491
------------ ----------- -----------
Equity Securities:
Common Stocks:
Industrial and Miscellaneous.................. 20,000 20,000 20,000
------------ ----------- -----------
Total Equity Securities.................. 20,000 20,000 20,000
------------ ----------- -----------
Limited Partnership Investment................ 1,120,354 1,641,763 1,641,763
Short-Term Investments........................ 8,359,047 8,359,047 8,359,047
------------ ----------- -----------
Total Investments........................ $131,112,107 132,408,301 132,408,301
============ =========== ===========
1994
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political
Subdivisions................................ $ 90,483,496 88,960,649 88,960,649
United States Government and Government
Agencies.................................... 19,161,595 18,957,597 18,957,597
Industrial and Miscellaneous.................. 1,002,228 992,965 992,965
------------ ----------- -----------
Total Fixed Maturities................... 110,647,319 108,911,211 108,911,211
------------ ----------- -----------
Equity Securities:
Common Stocks:
Banks, Trusts and Insurance................... 223,240 163,749 163,749
Industrial and Miscellaneous.................. 404,012 280,360 280,360
------------ ----------- -----------
Total Equity Securities.................. 627,252 444,109 444,109
------------ ----------- -----------
Limited Partnership Investment................... 1,097,261 1,204,914 1,204,914
Short-Term Investments........................... 8,726,056 8,726,056 8,726,056
------------ ----------- -----------
Total Investments........................ $121,097,888 119,286,290 119,286,290
============ =========== ===========
</TABLE>
Fair value estimates are made at a specific point in time, based on quoted
market prices and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses have not been considered in any of the estimates. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-12
<PAGE> 74
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1995
and 1994, by effective maturity, follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due In One Year or Less................. $ 65,835,788 66,127,246 46,454,143 46,175,371
Due After One Year Through
Five Years............................ 54,091,310 54,480,413 61,498,609 59,961,850
Due After Five Years Through
Ten Years............................. 1,007,381 1,096,708 837,833 817,000
Due After Ten Years..................... 678,227 683,124 1,856,734 1,956,990
------------ ------------ ------------ ------------
Total.............................. $121,612,706 122,387,491 110,647,319 108,911,211
============ ============ ============ ============
</TABLE>
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, 1995 and
1994 follows:
<TABLE>
<CAPTION>
1995 1994
---------------------- ----------------------
GAINS LOSSES GAINS LOSSES
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
Fixed Maturities:
States, Municipalities and Political
Subdivisions.............................. $ 240,670 (55,943) -- (1,522,847)
United States Government and Government
Agencies.................................. 595,921 (2,901) -- (203,998)
Industrial and Miscellaneous................. -- (2,962) -- (9,263)
---------- -------- -------- -----------
Total Fixed Maturities.................... 836,591 (61,806) -- (1,736,108)
Equity Securities.............................. -- -- -- (183,143)
Limited Partnership Investment................. 521,409 -- 121,830 (14,177)
---------- -------- -------- -----------
Total..................................... $1,358,000 (61,806) 121,830 (1,933,428)
========== ======== ======== ===========
</TABLE>
(4) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES
A summary of net investment income for the years ended December 31, 1995,
1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Tax-exempt Interest.............................. $3,317,887 3,439,654 2,983,133
Taxable Interest................................. 2,769,577 1,202,619 1,531,716
Dividends on Equity Securities................... 7,617 24,749 77,943
Limited Partnership Income....................... 23,094 49,836 53,284
Investment Expenses.............................. (55,292) (79,700) (82,562)
---------- ---------- ----------
Net Investment Income....................... $6,062,883 4,637,158 4,563,514
========== ========== ==========
</TABLE>
F-13
<PAGE> 75
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Realized capital gains (losses) for the years ended December 31, 1995, 1994
and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Fixed Maturities....................................... $ 810 (72,790) 762,701
Equity Securities...................................... 7,087 41,247 (41,100)
Sales of Property and Equipment........................ -- (2,695) --
------ -------- --------
Net Realized Capital Gains (Losses)............... $7,897 (34,238) 721,601
====== ======== ========
</TABLE>
Gross gains of $25,235, 17,076 and $813,755 and gross losses of $24,425,
$89,866 and $51,054 were realized on fixed maturity sales for the years ended
December 31, 1995, 1994, and 1993, respectively.
(5) RECEIVABLES
A Summary of receivables at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Insurance Premiums Due From Agents................................... $7,081,648 7,496,893
Receivables Under Long-term Contracts:
Amounts Billed..................................................... 973,882 1,062,600
Recoverable Costs in Excess of Billings on Uncompleted Contracts... 221,827 340,124
Billings in Excess of Costs on Uncompleted Contracts............... (290,785) (117,694)
Retainage, Due on Completion of Contracts.......................... 637,102 225,543
---------- ----------
Total Receivables Under Long-term Contracts................... 1,542,026 1,510,573
Other.............................................................. 653,585 667,916
---------- ----------
Total Receivables............................................. 9,277,259 9,675,382
Less Allowances for Doubtful Accounts.............................. (254,825) (194,815)
---------- ----------
Total Receivables, Net........................................ $9,022,434 9,480,567
========== ==========
</TABLE>
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 1996.
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, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Building................................................... $14,538,942 14,409,487
Land....................................................... 800,000 800,000
Equipment and Vehicles..................................... 1,307,942 1,334,594
Furniture and Fixtures..................................... 886,639 864,530
----------- -----------
17,533,523 17,408,611
Less Accumulated Depreciation.............................. 3,546,267 3,044,591
----------- -----------
$13,987,256 14,364,020
=========== ===========
</TABLE>
F-14
<PAGE> 76
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental income to be generated by leasing a portion of the
building under noncancelable operating leases as of December 31, 1995 are
estimated to be $529,000 for 1996, $84,000 for 1997, $84,000 for 1998 and
$21,000 for 1999. Rental income earned in 1995, 1994 and 1993 was $543,507,
$561,825, $512,731, respectively.
(7) INTANGIBLES
A summary of intangibles, acquired primarily in connection with the
purchases of ACSTAR and United Coasts, at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Insurance Licenses........................................... $4,188,926 4,188,926
Goodwill..................................................... 2,698,309 2,698,309
---------- ----------
6,887,235 6,887,235
Less Accumulated Amortization................................ 2,838,471 2,511,819
---------- ----------
$4,048,764 4,375,416
========== ==========
</TABLE>
Intangible assets are written off when they become fully amortized.
(8) RESERVES FOR LOSS 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.
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1.......................... $40,954,783 34,729,643 35,963,164
Less reinsurance recoverable................ 4,228,879 4,293,049 6,722,906
----------- ----------- -----------
Net balance at January 1...................... 36,725,904 30,436,594 29,240,258
Incurred related to:
Current year................................ 8,015,877 8,209,992 7,623,178
Prior years................................. (900,506) -- --
----------- ----------- -----------
Total incurred................................ 7,115,371 8,209,992 7,623,178
Payments related to:
Current year................................ 111,989 284,736 155,513
Prior years................................. 2,366,074 1,635,946 6,271,329
----------- ----------- -----------
Total payments................................ 2,478,063 1,920,682 6,426,842
Net balance at December 31.................... 41,363,212 36,725,904 30,436,594
Plus reinsurance recoverable................ 3,872,099 4,228,879 4,293,049
----------- ----------- -----------
Balance at December 31........................ $45,235,311 40,954,783 34,729,643
=========== =========== ===========
</TABLE>
The decrease in 1995 of incurred losses and loss adjustment expenses of
prior years represents a reallocation of reserves among accident years. The 1993
claim payments are partially a result of payments relating to settlement of
losses reserved in prior periods. These increases are also attributable to an
increase in earned premiums during the development of the Company's insurance
operations and the conversion of related loss reserves to loss payments in the
normal course of business. Based on lower payments made in 1995 and 1994, as
well as an evaluation of case reserves, the Company does not believe that the
claim payouts in 1993 represent a trend. Management believes that the reserves
for losses and loss adjustment expenses are
F-15
<PAGE> 77
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adequate to cover the unpaid portion of the ultimate net cost of losses and loss
adjustment expenses, including losses incurred but not reported.
(9) NOTES PAYABLE TO BANKS
The Company has available a $10,000,000 bank line of credit with Shawmut
Bank, N.A. which expires in June 1997. The line of credit requires the Company
to maintain, on deposit with the bank, a compensating balance equal to 5% of the
line of credit. Borrowings outstanding under the lines were $7,500,000 at
December 31, 1995 and $4,300,000 at December 31, 1994.
Under the terms of the line of credit, interest on the outstanding balance
is calculated based upon the London Inter-Bank Offering Rate (LIBOR) plus 180
basis points in effect during the borrowing period (7.7% and 8.0% at December
31, 1995 and 1994, respectively).
On November 7, 1995, the Company obtained a $7,500,000 Demand Discretionary
Line of Credit with The Bank of Boston Connecticut which expires on November 6,
1996. Under the terms of the line of credit, interest on the outstanding balance
is calculated based upon the LIBOR plus 160 basis points in effect during the
borrowing period. There were no borrowings outstanding under this line of credit
at December 31, 1995.
(10) LONG-TERM DEBT
A summary of long-term debt at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Term Loan Due 2000......................................... $ 6,133,333 7,333,334
10.5% Convertible Senior Notes Due 1999.................... 9,500,000 11,500,000
9.69% Mortgage Note Due 2000............................... 7,994,257 8,071,932
11.5% Convertible Note Due 2022............................ 16,500,000 16,500,000
----------- ----------
$40,127,590 43,405,266
=========== ==========
</TABLE>
On June 30, 1994, the Company obtained an $8,000,000, six-year, term loan,
which is repayable in quarterly installments of $333,333 commencing September
30, 1994. Portions of the proceeds of such term loan were applied to the
repayment of intercompany debt and to the reduction of the Company's short-term
credit line.
On July 1, 1992, the Company issued a 30-year unsecured $16,500,000, 11.5%
subordinated debenture to the Sheet Metal Workers' National Pension Fund
("Fund") to purchase 3,000,000 shares of United Coasts Corporation's outstanding
common stock held by the Fund. Annual principal payments of $1,650,000 per year
for ten years are due beginning on July 1, 2012. The note is convertible into
ACMAT Class A stock at $11 per share. The conversion price of $11 per share
would be adjusted at the time of conversion to reflect any stock dividends,
recapitalizations or additional stock issuances. At December 31, 1995, the
Company had reserved 1,500,000 shares of Class A Stock for issuance pursuant to
such conversion option.
On April 18, 1990, the Company obtained a permanent mortgage loan from The
Manufacturer's Life Insurance Company. The $8,350,000 mortgage note, with
interest at 9.69%, is payable in monthly installments over 10 years based on a
thirty year amortization schedule. The remaining outstanding principal balance
is payable on April 1, 2000. The proceeds were used to repay an existing
construction loan and to fund completion of the Company's headquarters.
On July 18, 1989, the Company issued $15,000,000, 10.5% Convertible Senior
Notes due June 30, 1999 to AIG Life Insurance Company and American International
Life Assurance Company of New York. Quarterly principal repayments of $500,000
began on June 30, 1993. The notes are convertible, at any time prior to their
payment date, into shares of ACMAT Class A Stock at $10 per share. The
conversion price of
F-16
<PAGE> 78
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$10 per share would be adjusted at the time of conversion to reflect any stock
dividends, recapitalizations or additional stock issuances. At December 31,
1995, the Company had reserved 950,000 shares of Class A Stock for issuance
pursuant to such conversion option.
During 1995, the Company issued 149,997 shares of Class A Stock at $10 per
share pursuant to the conversion options of the Convertible Senior Notes to AIG
Life Insurance Company and American International Life Assurance Company of New
York. The issuance of stock pursuant to the conversion option of the Convertible
Senior Notes is a non-cash transaction that is not reflected in the Consolidated
Statement of Cash Flows.
The terms of the note agreements contain limitations on payment of cash
dividends, re-acquisition of shares, borrowings and investments and require
maintenance of specified ratios and a minimum tangible net worth of $12,000,000.
ACMAT may also require its insurance subsidiaries to pay dividends to the extent
of funds legally available therefor, in order to enable ACMAT to have funds to
pay on a timely basis all amounts due with respect to the notes. The Company is
in compliance with all but one of these covenants at December 31, 1995 and the
Company has received a waiver relative to the covenant with which the Company
was not in compliance.
Principal payments on long-term debt are $9,062,751, $3,417,108,
$1,437,094, $1,447,607 and $8,263,106 for the years 1996 through 2000,
respectively. Interest expense paid in 1995, 1994 and 1993 amounted to
$4,791,005, $4,911,392 and $5,609,893, respectively.
It is not practicable to estimate the fair value of long-term debt at
December 31, 1995 because of the complex and unique terms associated with these
debt instruments.
(11) INCOME TAXES
The components of income tax expense for each year follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Current Taxes:
Federal........................................ $2,415,594 1,900,110 979,328
State.......................................... 125,000 135,800 104,200
---------- --------- ---------
2,540,594 2,035,910 1,083,528
---------- --------- ---------
Deferred Taxes (Credits):
Federal........................................ (126,194) 209,390 804,472
State.......................................... -- -- --
---------- --------- ---------
(126,194) 209,390 804,472
---------- --------- ---------
Total.................................. $2,414,400 2,245,300 1,888,000
========== ========= =========
</TABLE>
F-17
<PAGE> 79
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective Federal income tax rate, as a percentage of earnings before
income taxes and minority interests follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Federal Statutory Tax Rate.................................. 34.0% 34.0% 34.0%
State Income Tax Benefit.................................... (.5) (.5) (.5)
Effect of Tax-Exempt Interest............................... (10.5) (11.6) (11.7)
Dividends Received Deduction................................ -- (.1) (.3)
Amortization of Goodwill.................................... 1.2 1.5 1.8
Officers Life Insurance Premiums............................ .7 .7 .8
Other, Net.................................................. .2 .6 .2
---- ---- ----
Effective Federal Income Tax Rate...................... 25.1% 24.6% 24.3%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Deferred Tax Assets:
Reserves for Losses and Loss Adjustment Expenses,
Principally Due to Reserve Discounting.......... $2,972,570 2,820,042
Unearned Premiums.................................. 891,902 950,458
Accounts Receivable, Principally Due to Allowance
For Doubtful Accounts........................... 115,887 94,373
Contract Accounting Adjustment..................... -- 6,800
Unrealized losses on investments................... -- 619,862
Other.............................................. 22,073 31,657
---------- ---------
Total Gross Deferred Tax Assets................. 4,002,432 4,523,192
Less Valuation Allowance........................ -- (619,862)
---------- ---------
Net Deferred Tax Assets......................... $4,002,432 3,903,330
Deferred Tax Liabilities:
Plant and Equipment................................ 411,498 372,798
Deferred Policy Acquisition Costs.................. 1,176,165 1,244,883
Unrealized Gains on Investments.................... 440,696 --
Other.............................................. 2,925 --
---------- ---------
Total Gross Deferred Tax Liabilities............ 2,031,284 1,617,681
---------- ---------
Net Deferred Tax Assets......................... $1,971,148 2,285,649
========== =========
</TABLE>
The valuation allowance of $619,862 at January 1, 1995 has been eliminated
during 1995. The valuation allowance at December 31, 1994 relates to the
deferred taxes on the unrealized losses on debt and equity securities. In
assessing the realization of deferred tax assets, management considers whether
it is more likely than not that the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, tax planning strategies and anticipated future taxable income in
making this assessment and believes it is more likely than not the Company will
realize the benefits of its deductible differences at December 31, 1995.
Taxes paid in 1995, 1994 and 1993 were $3,045,627, $1,685,362 and
$1,150,655, respectively.
F-18
<PAGE> 80
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 $100,000, $90,600 and $107,500, for 1995, 1994 and 1993, respectively.
The Company participates in various multi-employer defined contribution
plans for its union employees. Charges to expense with respect to the Company's
contributions to the various plans were approximately $42,000 in 1995, $19,000
in 1994 and $7,000 in 1993. 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, 1995.
(13) STOCKHOLDERS' EQUITY
The Class A Stock has one-tenth voting privilege but has all the other
rights and privileges pertaining to the Common Stock.
During 1995, 1994 and 1993, ACMAT repurchased, in open market and privately
negotiated transactions, 10,456, 40,413 and 20,942, respectively, shares of its
Common Stock at an average price of $15.52, $12.07 and $10.51 per share,
respectively. The Company also repurchased during 1995, 1994 and 1993, in open
market and privately negotiated transactions, 797,228, 478,484 and 137,454
shares, respectively, of its Class A Stock at an average price of $11.83, $8.81
and $8.91 per share, respectively.
During 1995, the Company issued 149,997 shares of Class A Stock at $10 per
share pursuant to the conversion options of the Convertible Senior Notes to AIG
Life Insurance Company and American International Life Assurance Company of New
York. The issuance of stock pursuant to the conversion option of the Convertible
Senior Notes is a non-cash transaction that is not reflected in the Consolidated
Statement of Cash Flows.
On September 21, 1994, EVF, Apex and PF exercised warrants to purchase
189,750, 126,500 and 63,250 shares, respectively, of Class A Stock of the
Company for an aggregate consideration of $3,000,000.
The stockholders have periodically approved the distribution of
nonstatutory 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:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- --------------- ----------
<S> <C> <C> <C>
Options outstanding at December 31... 490,000 505,000 220,000
Weighted average price per share of
options outstanding................ $8.12 $8.13 $6.00
Expiration dates..................... 1/2001-9/2004 1/2001-9/2004 1/2001
Options exercisable at December 31... 490,000 165,000 160,000
Options granted...................... -- 340,000 60,000
Options exercised or surrendered..... 15,000 55,000 10,000
Price ranges of options exercised or
surrendered........................ $8.50 $6.00 $6.00
</TABLE>
At its May 1, 1991, June 16, 1992 and December 29, 1992 meetings, the Board
of Directors of United Coasts approved the granting of nonstatutory common stock
options to certain officers and directors of ACMAT and United Coasts giving such
individuals the option to purchase a total of 40,000, 40,000 and 60,000 shares,
respectively, of restricted common stock of the United Coasts at an exercise
price of $2 per share. The option to purchase such shares must be exercised
within 10 years of the date of grant. In July 1993,
F-19
<PAGE> 81
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 1994 and June 1995, 40,000, 15,000 and 10,000 shares, respectively, were
exercised which resulted in the United Coasts issuance of 40,000, 15,000 and
10,000 shares of restricted common stock in 1993, 1994 and 1995, respectively.
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
$6,600,000 in 1996.
The Company's insurance subsidiaries, United Coastal Insurance and ACSTAR,
are domiciled in the State of Arizona and Illinois, respectively. The statutory
financial statements of United Coastal Insurance and ACSTAR are prepared in
accordance with accounting practices prescribed by the Arizona Department of
Insurance and the Illinois Department of Insurance. 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, 1995, 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 $66,382,683 and $63,072,338 at
December 31, 1995 and 1994, respectively, and their statutory net income for the
years ended December 31, 1995, 1994 and 1993 was $9,072,104, $8,860,484 and
$8,630,734, respectively.
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 AND SHARE EQUIVALENT
The earnings per share and share equivalent were computed by dividing net
earnings by the weighted average number of Common and Class A shares outstanding
of 3,661,577, 4,134,110 and 4,289,206 for 1995, 1994 and 1993, respectively, and
includes the common stock equivalency of outstanding options, if dilutive. The
number of shares was also increased by the number of shares issuable on the
exercise of options when the market price of the stock exceeded the exercise
price of the option. This increase in the number of shares was reduced by the
number of shares which are assumed to have been purchased with the proceeds from
the exercise of the option; these purchases were assumed to have been made at
the average price of the common stock during that part of the year when the
market price of the common stock exceeded the exercise price of the option.
Earnings per share -- assuming full dilution for 1995 was determined on the
assumptions that the convertible notes were converted and the options were
exercised on January 1, 1995. As to the debentures, net earnings were adjusted
for the interest expense, net of its tax effect. As to the options, outstanding
shares were increased as described above, except that purchases were assumed to
have been made at the year-end price of the shares. Earnings per share assuming
full dilution was not presented for 1994 and 1993 because the effects are not
material.
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of legal actions arising in the ordinary
course of its business. In management's opinion, the Company has adequate legal
defenses respecting those actions where the Company is a defendant, has
appropriate insurance reserves recorded, and does not believe that their
settlement will materially affect the Company's operations or financial
position.
Many construction projects in which the Company has been engaged have
included asbestos exposures which the Company believes to involve a particularly
high degree of risk because of the hazardous nature of
F-20
<PAGE> 82
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
asbestos. The Company believes it has reduced the risks associated with asbestos
through proper training of its employees and by maintaining general liability
and workers' compensation insurance. Since 1986, the Company has obtained its
general liability insurance and surety bonds from its insurance subsidiaries.
(16) SEGMENT REPORTING
The Company operates in two industry segments: Construction contracting and
insurance. Information relating to the two segments is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ----------
<S> <C> <C> <C>
Operating Revenues:
Insurance..................................... $ 30,715,995 33,318,620 32,081,441
Construction Contracting...................... 15,787,715 12,359,565 12,453,945
Eliminations and Adjustments.................. (4,646,312) (4,922,509) (4,341,764)
------------ ----------- ----------
$ 41,857,398 40,755,676 40,193,622
============ =========== ==========
Operating Earnings (Loss):
Insurance..................................... $ 13,398,956 13,908,822 13,867,642
Construction Contracting...................... 531,983 (382,118) (905,135)
------------ ----------- ----------
13,930,939 13,526,704 12,962,507
Interest Expense................................ (4,810,578) (4,940,014) (5,609,893)
------------ ----------- ----------
Earnings Before Income Taxes, Minority Interests
and Cumulative Effect of Change in Accounting
Principle..................................... $ 9,120,361 8,586,690 7,352,614
============ =========== ==========
Depreciation and Amortization:
Insurance..................................... $ 1,547,490 2,213,260 3,073,320
Construction Contracting...................... 677,407 739,886 736,563
------------ ----------- ----------
$ 2,224,897 2,953,146 3,809,883
============ =========== ==========
Identifiable Assets:
Insurance..................................... $161,954,513 148,406,401
Construction Contracting...................... 18,447,725 20,088,413
------------ -----------
$180,402,238 168,494,814
============ ===========
Capital Expenditures:
Insurance..................................... $ 57,690 92,955
Construction Contracting...................... 155,702 693,171
------------ -----------
$ 213,392 786,126
============ ===========
</TABLE>
Operating earnings for construction contracting is operating revenues less
cost of contract revenues and identifiable selling, general and administrative
expenses. Operating earnings for the insurance segment is operating revenues
less losses and loss adjustment expenses, amortization of policy acquisition
costs and identifiable selling, general and administrative expenses. Interest
expense has not been included in the computation of operating earnings. 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.
F-21
<PAGE> 83
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results of operations for 1995 and
1994 follows:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
1995
Operating Revenues..................... $9,965,835 11,127,473 11,140,638 9,623,452
Operating Earnings..................... $3,270,362 3,724,113 3,665,735 3,270,729
Net Earnings........................... $1,203,425 1,448,969 1,459,857 1,238,029
Net Earnings Per Share and Share
Equivalent........................... $ .30 .38 .42 .36
Net Earnings Per Share -- Assuming Full
Dilution............................. $ -- .31 .32 .29
1994
Operating Revenues..................... $9,734,433 9,574,246 9,009,282 12,437,715
Operating Earnings..................... $3,083,693 3,316,828 3,500,096 3,626,087
Net Earnings........................... $ 903,759 1,226,117 1,306,323 1,403,662
Net Earnings Per Share................. $ .22 .30 .32 .34
</TABLE>
- ---------------
Note: Earnings per common share are based on the weighted average number of
Common and Class A Stock and equivalent shares outstanding during each of
the quarters and at year end. Annual earnings per share for 1994 does not
equate to the sum of the quarters due to the timing of stock purchases
during the year. 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.
F-22
<PAGE> 84
ACMAT CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Earned premiums..................................................... $4,644,032 5,702,614
Contract revenues................................................... 1,986,682 2,720,521
Investment income, net.............................................. 1,649,027 1,376,886
Net realized capital losses......................................... (7,788) (120)
Other income........................................................ 187,020 165,934
---------- ---------
8,458,973 9,965,835
---------- ---------
Cost of contract revenues........................................... 1,906,875 2,529,468
Losses and loss adjustment expenses................................. 1,393,210 1,710,784
Amortization of policy acquisition costs............................ 674,256 1,088,831
Selling, general and administrative expenses........................ 1,319,921 1,366,390
Interest expense.................................................... 1,232,383 1,210,835
---------- ---------
6,526,645 7,906,308
---------- ---------
Earnings before income taxes and minority interests................. 1,932,328 2,059,527
Income taxes
Federal........................................................... 447,460 481,985
State............................................................. 35,000 40,000
---------- ---------
482,460 521,985
---------- ---------
Earnings before minority interests.................................. 1,449,868 1,537,542
Minority interests.................................................. (309,754) (334,117)
---------- ---------
Net earnings........................................................ $1,140,114 1,203,425
========== =========
Net earnings per share and share equivalent......................... .34 .30
Net earnings per share -- assuming full dilution.................... .28 --
Weighted average shares outstanding................................. 3,400,691 3,965,165
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-23
<PAGE> 85
ACMAT CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1996
------------
<S> <C>
ASSETS:
Investments:
Fixed maturities -- available for sale, at market (Cost of
$123,618,913)............................................................ $123,993,476
Equity securities, at market value (Cost $5,262).......................... 5,262
Limited partnership investment, at market value (Cost $1,108,995)......... 1,806,762
Short-term investments, at cost which approximates market................. 11,058,431
------------
Total investments.................................................... 136,863,931
Cash and cash equivalents.................................................... 3,417,271
Accrued interest receivable.................................................. 2,215,558
Reinsurance recoverable...................................................... 3,942,899
Receivables, net............................................................. 10,379,749
Prepaid expenses............................................................. 250,120
Deferred income taxes........................................................ 1,986,794
Property & equipment, net.................................................... 13,883,156
Deferred policy acquisition costs............................................ 3,623,280
Other assets................................................................. 3,672,053
Intangibles, net............................................................. 3,967,101
------------
$184,201,912
============
LIABILITIES & STOCKHOLDERS' EQUITY:
Notes payable to banks....................................................... $ 16,200,000
Accounts payable............................................................. 2,098,339
Reserves for losses and loss adjustment expenses............................. 45,928,421
Unearned premiums............................................................ 14,873,786
Cash collateral held......................................................... 17,054,794
Accrued liabilities.......................................................... 1,947,312
Income taxes................................................................. 154,892
Long-term debt............................................................... 39,140,204
------------
Total liabilities.................................................... 137,397,748
Minority interests........................................................... 14,118,797
STOCKHOLDERS' EQUITY:
Common Stock (No par value; 3,500,000 shares authorized; 634,340 shares
issued and outstanding).................................................. 634,340
Class A Stock (No par value; 10,000,000 shares authorized; 2,232,585
shares issued and outstanding)........................................... 2,232,585
Additional paid-in capital................................................ --
Retained earnings......................................................... 29,188,725
Net unrealized gain on securities......................................... 629,717
------------
Total stockholders' equity........................................... 32,685,367
Commitments and contingencies.............................................
------------
$184,201,912
============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-24
<PAGE> 86
ACMAT CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
COMMON CLASS A ADDITIONAL UNREALIZED TOTAL
STOCK STOCK PAID-IN RETAINED GAINS (LOSSES) STOCKHOLDERS'
PAR VALUE PAR VALUE CAPITAL EARNINGS ON SECURITIES EQUITY
--------- --------- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994.............. $652,920 3,313,067 9,358,948 26,251,103 (1,571,103) 38,004,935
Acquisition and Retirement of 1,106 Shares of
Common Stock............................... (1,106 ) -- (15,484) -- -- (16,590)
Acquisition and Retirement of 88,500 Shares
of Class A Stock........................... -- (88,500) (747,750) -- -- (836,250)
Net Unrealized Appreciation of Debt and
Equity Securities.......................... -- -- -- -- 1,209,872 1,209,872
Net Earnings................................. -- -- -- 1,203,425 -- 1,203,425
-------- ---------- ---------- ----------- ----------- -----------
Balance as of March 31, 1995................. $651,814 3,224,567 8,595,714 27,454,528 (361,231) 39,565,392
======== ========== ========== =========== =========== ===========
Balance as of December 31, 1995.............. $642,464 2,665,836 1,921,100 31,601,383 756,476 37,587,259
Acquisition and Retirement of 8,124 Shares of
Common Stock............................... (8,124 ) -- (63,925) (63,000) -- (135,049)
Acquisition and Retirement of 483,250 Shares
of Class A Stock........................... -- (483,250) (2,307,166) (3,489,772) -- (6,280,188)
Issuance of 49,999 Shares of Class A Stock... -- 49,999 449,991 -- -- 499,990
Net Unrealized Losses on Debt and Equity
Securities................................. -- -- -- -- (126,759) (126,759)
Net Earnings................................. -- -- -- 1,140,114 -- 1,140,114
-------- ---------- ---------- ----------- ----------- -----------
Balance as of March 31, 1996................. $634,340 2,232,585 -- 29,188,725 629,717 32,685,367
======== ========== ========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-25
<PAGE> 87
ACMAT CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1996 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................... $ 1,140,114 1,203,425
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization............................... 504,163 591,295
Minority interests.......................................... 309,754 334,117
Net realized capital losses................................. 7,788 120
Changes in:
Accrued interest receivable............................... 15,430 (247,089)
Reinsurance recoverable................................... (70,800) 612,577
Receivables, net.......................................... (1,357,315) 1,082,359
Deferred policy acquisition costs......................... (163,972) 137,139
Prepaid expenses and other assets......................... 107,613 (363,780)
Accounts payable and accrued liabilities.................. (5,809) (262,657)
Cash collateral held...................................... (713,161) 5,882,729
Reserves for losses and loss adjustment expenses.......... 693,110 849,223
Income taxes, net......................................... 448,930 280,056
Unearned premiums......................................... 571,173 (807,566)
----------- -----------
Net cash provided by operating activities.............. 1,487,018 9,291,948
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Fixed maturities -- sold.................................... 1,305,893 130,802
Fixed maturities -- matured................................. 10,636,500 17,848,750
Equity securities........................................... -- --
Purchases of:
Fixed maturities............................................ (14,194,921) (24,090,180)
Equity securities........................................... (5,262) --
Limited Partnership Investment adjustment...................... 11,360 --
Short-term investments, net.................................... (2,699,384) (3,403,800)
Capital expenditures........................................... (41,675) (54,120)
----------- -----------
Net cash used for investing activities................. (4,987,489) (9,568,548)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under lines of credit............................... 8,700,000 --
Repayments on long-term debt................................... (487,396) (852,055)
Payments for acquisition & retirement of stock................. (6,415,237) (852,840)
----------- -----------
Net cash provided by (used for) financing activities... 1,797,367 (1,704,895)
----------- -----------
Net decrease in cash and cash equivalents........................ (1,703,104) (1,981,495)
Cash and cash equivalents at beginning of period................. 5,120,375 5,471,148
----------- -----------
Cash and cash equivalents at end of period....................... $ 3,417,271 3,489,653
=========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
F-26
<PAGE> 88
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of ACMAT
Corporation ("ACMAT" or the "Company") and its subsidiaries. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles and are unaudited.
The interim financial information contained in this report has been
prepared from the books and records of the Company and its subsidiaries and
reflects, in the opinion of the management of the Company, all adjustments
(consisting of normal and recurring accruals) necessary to fairly present
results of operations for the periods indicated. All significant intercompany
accounts and transactions have been eliminated in consolidation.
These statements should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
(2) EARNINGS PER SHARE AND SHARE EQUIVALENT
The earnings per share and share equivalent were computed by dividing net
earnings by the weighted average number of Common and Class A shares outstanding
of 3,400,691 and 3,965,165 for 1996 and 1995, respectively, and includes the
common stock equivalency of outstanding options, if dilutive. The number of
shares was also increased by the number of shares issuable on the exercise of
options when the market price of the stock exceeded the exercise price of the
option. This increase in the number of shares was reduced by the number of
shares which are assumed to have been purchased with the proceeds from the
exercise of the option; these purchases were assumed to have been made at the
average price of the common stock during that part of the period when the market
price of the common stock exceeded the exercise price of the option.
Earnings per share -- assuming full dilution was determined on the
assumptions that the convertible notes for 1996 were converted and the options
were exercised at the beginning of the period. As to the debentures, net
earnings were adjusted for the interest expense, net of its tax effect. As to
the options, outstanding shares were increased as described above, except that
purchases were assumed to have been made at the period-end price of the shares
as it was higher than the average price during the period. Earnings per
share -- assuming full dilution was not presented for 1995 because the effect
was not material.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid during the three months ended March 31, 1996 and 1995 was
$33,530 and $241,928, respectively, and interest paid for the three months ended
March 31, 1996 and 1995 was $680,501 and $736,236, respectively.
On March 29, 1996, the Company issued 49,999 shares of Class A Stock at $10
per share pursuant to the conversion options of the Convertible Senior Notes to
AIG Life Insurance Company and American International Life Assurance Company of
New York. The issuance of stock pursuant to the conversion option of the
Convertible Senior notes is a non-cash transaction that is not reflected in the
Consolidated Statement of Cash Flows.
(4) APPLICATION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of " (FAS 121). This statement
establishes accounting standards for the impairment of long-lived assets and
certain identifiable intangibles to be disposed of. This statement requires a
write down to fair value when long-lived assets to be held and used are
impaired. The adoption of this statement did not have any effect on results of
operations, financial condition or liquidity as no adjustments were required.
Also, effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123). This statement addresses alternative accounting treatments for stock-based
compensation, such as stock options and restricted stock. FAS 123
F-27
<PAGE> 89
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
permits disclosing in the financial statement footnotes the pro forma impact to
net income as if the value of stock-based compensation awards had been expensed.
The value of awards are measured at the grant date based upon estimated fair
value, using option pricing models. The Company has selected the alternative
method which provides for pro forma disclosure in the footnotes to the year-end
financial statements only.
F-28
<PAGE> 90
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNITED COASTS CORPORATION AND SUBSIDIARY
The following Consolidated Financial Statements of United Coasts
Corporation and Subsidiary, related notes and Independent Auditors' Report are
included herein:
<TABLE>
<S> <C>
Independent Auditors' Report...................................................... F-30
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and
1993............................................................................ F-31
Consolidated Balance Sheets as of December 31, 1995 and 1994...................... F-32
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993................................................ F-33
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994
and 1993........................................................................ F-34
Notes to Consolidated Financial Statements -- December 31, 1995, 1994 and 1993.... F-35
Unaudited Consolidated Statements of Income for the three-month periods ended
March 31, 1996 and 1995......................................................... F-46
Unaudited Consolidated Balance Sheet as of March 31, 1996......................... F-47
Unaudited Consolidated Statements of Changes in Stockholders' Equity for the
three-month period ended March 31, 1996 and 1995................................ F-48
Unaudited Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 1996, and 1995........................................................ F-49
Notes to Unaudited Consolidated Financial Statements.............................. F-50
</TABLE>
F-29
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
The Board of Directors
United Coasts Corporation:
We have audited the accompanying consolidated balance sheets of United
Coasts Corporation and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 United
Coasts Corporation and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994
the Company changed its method of accounting for investments.
KPMG Peat Marwick LLP
Hartford, Connecticut
February 23, 1996
F-30
<PAGE> 92
UNITED COASTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums earned..................................... $17,992,149 21,008,544 19,343,348
Net investment income............................... 4,487,628 3,264,875 3,293,924
Net realized capital gains (losses)................. 3,238 (25,749) 720,498
Income on intercompany notes receivable............. 1,278,032 558,072 43,238
Other income........................................ 97,102 252,234 124,983
----------- ----------- -----------
23,858,149 25,057,976 23,525,991
----------- ----------- -----------
EXPENSES:
Losses and loss adjustment expenses................. 5,397,645 6,302,563 5,783,662
Amortization of policy acquisition costs............ 4,891,952 5,300,806 4,381,880
Other expenses...................................... 2,110,930 2,513,156 2,532,281
Interest expense.................................... -- 74,912 299,650
----------- ----------- -----------
12,400,527 14,191,437 12,997,473
----------- ----------- -----------
Income before income tax............................ 11,457,622 10,866,539 10,528,518
Provision for income tax............................ 3,173,900 2,913,430 2,876,817
----------- ----------- -----------
NET INCOME............................................ $ 8,283,722 7,953,109 7,651,701
=========== =========== ===========
NET INCOME PER SHARE.................................. $ .81 .78 .74
=========== =========== ===========
Weighted average shares outstanding................... 10,239,543 10,241,247 10,279,553
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 93
UNITED COASTS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
ASSETS:
Investments:
Fixed maturities-available for sale, at fair value in 1995
and 1994 (amortized cost $89,481,543 in 1995 and
$83,519,818 in 1994)...................................... $ 90,065,029 82,111,607
Equity securities, at fair value (cost $20,000 in 1995 and
$627,252 in 1994)......................................... 20,000 444,109
Limited partnership investment, at fair value (cost $654,516
in 1995 and $603,120 in 1994)............................. 987,783 724,950
Short term investments, at cost which approximates fair
value..................................................... 1,478,377 2,953,847
------------ ------------
Total investments...................................... 92,551,189 86,234,513
Cash........................................................... 3,096,506 4,607,085
Agent's balance due from affiliate............................. 5,081,092 5,659,766
Reinsurance recoverable........................................ 1,762,286 1,557,704
Investment income due and accrued.............................. 1,632,461 1,354,169
Income tax receivable.......................................... 150,920 --
Deferred income tax............................................ 2,322,945 2,534,474
Furniture, fixtures and equipment, net......................... 234,837 302,925
Deferred policy acquisition costs.............................. 2,679,935 2,814,500
Prepaid reinsurance premiums................................... 899,277 564,424
Notes receivable from affiliate................................ 20,300,112 12,901,854
Other assets................................................... 375,949 75,031
------------ ------------
$131,087,509 118,606,445
============ ============
LIABILITIES:
Reserves for losses and loss adjustment expenses............... $ 34,618,951 31,629,263
Unearned premiums.............................................. 11,227,683 11,803,745
Income tax..................................................... -- 429,214
Collateral held................................................ 135,000 --
Accrued liabilities and accounts payable....................... 373,840 335,491
------------ ------------
Total liabilities...................................... 46,355,474 44,197,713
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, par value $0.01;
none outstanding............................................ -- --
Common stock, 20,000,000 shares authorized, par value $0.01;
10,187,189 shares issued and outstanding at December 31,
1995 and 1994............................................... 101,872 101,872
Paid-in capital................................................ 20,268,520 20,303,520
Retained earnings.............................................. 63,756,586 55,472,864
Net unrealized gain (loss) on securities, net of deferred
taxes....................................................... 605,057 (1,469,524)
------------ ------------
Total stockholders' equity............................. 84,732,035 74,408,732
Commitments and contingencies
------------ ------------
$131,087,509 118,606,445
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 94
UNITED COASTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON PAID-IN RETAINED GAIN (LOSS)
STOCK CAPITAL EARNINGS ON SECURITIES TOTAL
-------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992............... $102,808 20,911,490 39,868,054 (77,035) 60,805,317
Issuance of 40,000 shares of restricted
common stock............................. 400 79,600 -- -- 80,000
Acquisition and retirement of 40,000 shares
of restricted common stock............... (400) (179,600) -- -- (180,000)
Acquisition and retirement of 93,580 shares
of common stock.......................... (936) (466,720) -- -- (467,656)
Decrease in net unrealized loss on
securities, net of deferred taxes of
$66,895.................................. -- -- -- 206,891 206,891
Net income................................. -- -- 7,651,701 -- 7,651,701
-------- ---------- ---------- ---------- ----------
Balance at December 31, 1993............... $101,872 20,344,770 47,519,755 129,856 68,096,253
Issuance of 15,000 shares of restricted
common stock............................. 150 29,850 -- -- 30,000
Acquisition and retirement of 15,000 shares
of restricted common stock............... (150) (71,100) -- -- (71,250)
Effect of Adoption of FAS No. 115,
net of taxes............................. -- -- -- 271,240 271,240
Increase in net unrealized loss on
securities............................... -- -- -- (1,870,620) (1,870,620)
Deferred tax benefit on net unrealized loss
on securities............................ -- -- -- 499,638 499,638
Deferred tax valuation allowance........... -- -- -- (499,638) (499,638)
Net income................................. -- -- 7,953,109 -- 7,953,109
-------- ---------- ---------- ---------- ----------
Balance at December 31, 1994............... $101,872 20,303,520 55,472,864 (1,469,524) 74,408,732
Issuance of 10,000 shares of restricted
common stock............................. 100 19,900 -- -- 20,000
Acquisition and retirement of 10,000 shares
of restricted common stock............... (100) (54,900) -- -- (55,000)
Increase in net unrealized gain on
securities............................... -- -- -- 2,386,277 2,386,277
Deferred tax liability on net unrealized
gain on securities....................... -- -- -- (311,696) (311,696)
Net Income................................. -- -- 8,283,722 -- 8,283,722
-------- ---------- ---------- ---------- ----------
Balance at December 31, 1995............... $101,872 20,268,520 63,756,586 605,057 84,732,035
======== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 95
UNITED COASTS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 8,283,722 7,953,109 7,651,701
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation................... 936,053 1,444,113 1,819,603
Net realized capital (gains) losses............. (7,720) 24,108 (718,684)
Change in:
Agent's balance due from affiliate........... 578,674 (962,990) 766,540
Reinsurance recoverable...................... (204,582) (286,680) (1,271,024)
Investment income due and accrued............ (278,292) (168,288) 128,410
Deferred policy acquisition costs............ 134,565 (14,394) (729,008)
Prepaid reinsurance premiums................. (334,853) (83,828) (480,596)
Notes receivable from affiliate.............. (7,398,258) (9,733,454) (3,168,400)
Reserves for losses and loss adjustment
expenses................................... 2,989,688 4,508,060 827,240
Unearned premiums............................ (576,062) 1,156 1,946,886
Income taxes, net............................ (680,299) (126,211) (10,808)
Collateral held.............................. 135,000 (1,600,000) 1,600,000
Accrued liabilities and accounts payable..... 38,349 13,998 28,583
Other assets................................. (300,918) (3,214) (323)
------------- ------------ ------------
Net cash provided by operating
activities............................ $ 3,315,067 965,485 8,390,120
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Fixed maturities -- sold..................... 10,642,305 10,603,067 90,703,288
Fixed maturities -- matured.................. 28,325,000 19,950,000 3,061,000
Equity securities............................ 614,340 925,272 484,405
Purchases of:
Fixed maturities............................. (45,744,524) (27,128,421) (104,401,680)
Equity securities............................ -- (384,013) --
Limited partnership investment............... (51,397) (49,836) (53,284)
Short-term investments, net..................... 1,475,470 (1,965,367) (690,164)
Payments for non-competition agreements......... -- -- (250,000)
Purchase of furniture, fixtures and equipment,
net.......................................... (51,840) (68,352) (81,557)
------------- ------------ ------------
Net cash provided by (used in) investing
activities............................ $ (4,790,646) 1,882,350 (11,227,992)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of restricted common stock............. 20,000 30,000 80,000
Payments for acquisition of common stock........ (55,000) (71,250) (647,656)
Repayment of long-term debt..................... -- (3,065,000) --
------------- ------------ ------------
Net cash used in financing activities... $ (35,000) (3,106,250) (567,656)
------------- ------------ ------------
Decrease in cash................................ (1,510,579) (258,415) (3,405,528)
Cash at beginning of year....................... 4,607,085 4,865,500 8,271,028
------------- ------------ ------------
Cash at end of year............................. $ 3,096,506 4,607,085 4,865,500
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 96
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) REPORTING ENTITY
United Coasts Corporation (United Coasts) was incorporated on August 15,
1985 as a Delaware Corporation. Its primary function is to act as an insurance
holding company for its wholly-owned subsidiary, United Coastal Insurance
Company (Coastal Insurance). Coastal Insurance is licensed as a property and
casualty insurance company by the State of Arizona. ACMAT Corporation (ACMAT)
and ACSTAR Insurance Company (ACSTAR Insurance) collectively own approximately
84% of the United Coasts' common stock.
(2) DESCRIPTION OF INSURANCE OPERATIONS
Coastal Insurance 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. As an approved
non-admitted insurance company, Coastal Insurance 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. Coastal
Insurance offers general, asbestos, lead, pollution and professional liability
insurance nationwide to specialty trade contractors, environmental contractors,
property owners, storage and treatment facilities and allied professionals.
Coastal Insurance also offers products liability insurance to manufacturers and
distributors.
(3) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of United Coasts
and its wholly owned subsidiary, Coastal Insurance. All significant intercompany
balances and transactions have been eliminated in consolidation.
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles (GAAP).
Investments
Effective January 1, 1994, United Coasts and Coastal Insurance adopted
Statement of Financial Accounting Standards (FAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Under FAS 115, debt
securities are classified as held to maturity, available for sale or trading.
United Coasts and Coastal Insurance classify all debt and equity securities as
available for sale. As of January 1, 1994, debt securities classified as
available for sale, are carried at fair value and unrealized gains and losses
are excluded from earnings and recorded as a separate component of stockholders'
equity, net of estimated income taxes. The effect on stockholders' equity from
adoption of the statement resulted in an increase in stockholders' equity of
$271,240, net of deferred taxes, due to the revaluation of United Coasts' and
Coastal Insurance's debt securities on January 1, 1994.
Investments in equity securities, which are comprised of common stocks, are
classified as available for sale and carried at quoted fair values.
Investment in limited partnership, which represents participation in a
joint venture which invests primarily in small capitalization stocks traded on
national market exchanges, is carried at fair value, which is determined based
upon the market value of the investments held by the partnership. Short-term
investments are considered available for sale and are carried at cost which,
along with accrued interest, approximates fair value. Realized gains and losses
are determined on a specific identification basis. Unrealized gains and losses
on debt, equity securities and limited partnership, net of deferred taxes, are
included in stockholders' equity.
F-35
<PAGE> 97
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
United Coasts and Coastal Insurance continually evaluates its investment
portfolio and establishes reserves for impairments in value deemed to be other
than temporary.
Supplemental Cash Flow Information
Income taxes paid during the years ended December 31, 1995, 1994 and 1993
were $3,854,200, $3,208,000 and $2,887,732, respectively. Interest paid during
the years ended December 31, 1994 and 1993 was $74,912 and $299,650,
respectively. There was no interest paid in 1995.
Furniture, Fixtures and Equipment
Furniture, Fixtures and Equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over
estimated useful lives of seven years for furniture and equipment, five years
for electronic data processing equipment and three years for automobiles.
Maintenance and repairs are expensed as incurred.
Deferred Policy Acquisition Costs
Policy acquisition costs, consisting primarily of commissions, are deferred
and amortized over the policy term using the straight line method. During the
years ended December 31, 1995 and 1994, deferrable costs capitalized were
$4,757,387 and $5,315,200, respectively.
The amortization of deferred policy acquisition costs charged to operations
for the years ended December 31, 1995, 1994 and 1993 were $4,891,952, $5,300,806
and $4,381,880, respectively.
Notes Receivable
Notes receivable from affiliate represent demand notes with interest rates
which adjust based upon current market rates. Accordingly, the carrying amounts
of these notes approximate fair value.
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 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 Coastal Insurance may have to pay ultimately on incurred
losses, including related settlement costs, based on facts and circumstances
then known. Coastal Insurance 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. 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.
F-36
<PAGE> 98
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reinsurance
In the normal course of business, Coastal Insurance assumes and cedes
reinsurance with other companies. Reinsurance ceded primarily represents excess
of loss reinsurance with companies with "A" ratings from the insurance rating
organization, A.M. Best Company, Inc. Such reinsurance is applicable on a per
policy basis generally to those policies with per occurrence limits in excess of
$2 million up to $5 million. Effective April 1, 1995, Coastal Insurance secured
additional treaty excess of loss reinsurance which provides limits on a per
policy basis of $5,000,000 per occurrence or claim made and in the aggregate
excess of $5,000,000 per occurrence or claim made and in the aggregate.
Reinsurance ceded also includes a facultative reinsurance treaty which is
applicable to excess policies written over a Coastal Insurance primary policy
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. Reinsurance is
assumed primarily from its affiliate, ACSTAR Insurance to allow Coastal
Insurance to write business in states in which it is not licensed or approved as
well as to increase the capacity of Coastal Insurance to write higher limits.
Coastal Insurance also participates in assumed quota-share reinsurance
arrangements covering marine and property catastrophe risks with one of its
excess of loss reinsurers. Reinsurance recoverables include ceded reserves for
losses and loss adjustment expenses and ceded unearned premiums are included in
prepaid reinsurance premiums.
All reinsurance contracts maintained by Coastal Insurance qualify as
short-duration prospective contracts under the provisions of FAS No. 113. A
summary of reinsurance premiums written and earned is provided below:
<TABLE>
<CAPTION>
PREMIUMS WRITTEN PREMIUMS EARNED
------------------------------------- -------------------------------------
1995 1994 1993 1995 1994 1993
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Direct................ $13,183,905 15,768,565 17,326,632 $13,202,948 15,648,146 16,534,979
Assumed............... 5,014,654 6,196,735 4,455,948 5,571,673 6,315,998 3,729,269
Ceded................. (1,117,325) (1,039,428) (972,942) (782,472) (955,600) (920,900)
----------- ----------- ----------- ----------- ----------- -----------
Totals........... $17,081,234 20,925,872 20,809,638 $17,992,149 21,008,544 19,343,348
=========== =========== =========== =========== =========== ===========
</TABLE>
Reinsurance recoveries on ceded paid losses and loss adjustment expenses
totalled approximately $30,159 for the year ended December 31, 1995 and $388,000
for the year ended December 31, 1993. There were no reinsurance recoveries on
ceded paid losses and loss adjustment expenses for the year ended December 31,
1994. Ceded incurred losses and loss adjustment expenses totalled $234,741,
$286,680 and $278,428 for years ended December 31, 1995, 1994 and 1993,
respectively.
Revenue Recognition
Premiums are recognized over the terms of the respective policy contracts.
Unearned premiums represent the portion of premiums written which are applicable
to the unexpired terms of policies in force, calculated on a prorata basis.
Income Taxes
United Coasts and Coastal Insurance use the asset and liability method of
accounting for 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
F-37
<PAGE> 99
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the enactment date. United Coasts and Coastal Insurance are included in the
consolidated Federal income tax return of ACMAT. Allocation of income tax
expense is based upon separate return calculations.
Earnings Per Share
Earnings per share is computed using the weighted average number of shares
of common stock outstanding for the period and reflects the common stock
equivalency of outstanding stock options and warrants, if dilutive.
Future Application of Accounting Standards
In March, 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(FAS 121). This statement establishes accounting standards for the impairment of
long-lived assets and certain identifiable intangibles to be disposed of. This
statement requires a write down to fair value when long-lived assets to be held
and used are impaired. The adoption of this statement effective January 1, 1996
will not have a material effect on results of operations, financial condition or
liquidity.
In October, 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). This
statement addresses alternative accounting treatments for stock-based
compensation, such as stock options and restricted stock. FAS 123 permits either
expensing the value of stock-based compensation over the period earned or
disclosing in the financial statement footnotes the pro forma impact to net
income as if the value of stock-based compensation awards had been expensed. The
value of awards would be measured at the grant date based upon estimated fair
value, using option pricing models. The requirements of this statement will be
effective for 1996 financial statements, although earlier adoption is
permissible if an entity elects to expense the cost of stock-based compensation.
United Coasts is currently evaluating the disclosure requirements and expense
recognition alternatives addressed by this statement.
Use of Estimates
The preparation of financial statements in conformity with general 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.
(4) RELATED PARTY TRANSACTIONS
The Corporation's significant shareholders are ACMAT and its subsidiary,
ACSTAR Insurance who collectively own approximately 84% of the Corporation's
common stock at December 31, 1995. The remaining common shares, some of which
are held by officers and directors of United Coasts, are owned by the public.
Under note agreements between ACMAT and certain noteholders, ACMAT may
require United Coasts to pay dividends to the extent of funds legally available
in order to enable ACMAT to have funds to pay on a timely basis all amounts due
with respect to the notes or to act as a guarantor in the event of default. In
addition, the note agreements place certain restrictions on the reacquisition of
shares, borrowings and types of investments that United Coasts and Coastal
Insurance and ACMAT may hold. At December 31, 1995, ACMAT is in compliance with
all but one of the restrictions set forth in the note agreements and ACMAT has
received a waiver relative to the noncompliance with such restriction.
Underwriting, loss adjustment, audit and inspection services are provided
to Coastal Insurance by ACMAT under an agreement which can be canceled by either
party after providing 90 days written notice. ACMAT receives a commission based
on direct premiums written. Coastal Insurance incurred approximately $1,260,000,
$1,282,000 and $1,312,000 for these services provided by ACMAT for the years
ended
F-38
<PAGE> 100
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1995, 1994 and 1993, respectively. The underwriting portion of the
ACMAT commission incurred by the Company is deferred and amortized as deferred
policy acquisition costs. The portion of the underwriting commission deferred
relates to policies ultimately written.
AMINS, Inc. (a wholly-owned subsidiary of ACMAT) acts as a general agent
for Coastal Insurance, and receives a fee based on premiums written subject to a
refund of all or a portion thereof in the event of cancellation of a policy on
which a commission has been paid. AMINS, Inc. earned commissions of
approximately $1,250,000, $1,409,000 and $1,318,000 during the years ended
December 31, 1995, 1994 and 1993, respectively. The commissions earned by AMINS,
Inc. are deferred and amortized as deferred policy acquisition costs. Agent's
balance due from affiliate represents net premiums in the course of collection
from insureds due from AMINS, Inc., net of reinsurance transactions.
Premiums earned include $244,149, $260,752 and $200,098 during the years
ended December 31, 1995, 1994 and 1993, respectively, on policies issued to
ACMAT. There have been no claims under the policies issued to ACMAT during the
years ended December 31, 1995, 1994 and 1993.
Premiums earned for the years ended December 31, 1995, 1994 and 1993
include $4,037,671, $3,997,593 and $2,840,661, respectively, for policies and
surety bonds assumed from ACSTAR and exclude $130,592, $309,506 and $157,992,
respectively, for policies and surety bonds ceded to ACSTAR. Reinsurance between
Coastal Insurance and ACSTAR is utilized to provide the respective companies
with the ability to write business in states where they are not licensed or
approved as well as increase the capacity of the companies to write bonds or
policies with higher limits. These agreements do not relieve the original
insurer from its liability.
Coastal Insurance leases certain office and storage space from ACMAT in its
corporate headquarters building in New Britain, CT. (see Note (6) for further
discussion of this lease). Total rent expense for 1995, 1994 and 1993 under this
arrangement was $535,697, $506,560 and $488,480, respectively.
ACMAT provides investment advisory services to United Coasts which include
the purchase and sale of investments, collection of interest and dividend
income, safekeeping of investments and development and implementation of
portfolio strategies. ACMAT is paid a quarterly fee based upon the market value
of United Coasts' investment portfolio at the end of each calendar quarter.
Total fees incurred in 1995, 1994 and 1993 for these services were $8,579,
$33,028 and $22,409 respectively.
At December 31, 1995 and 1994, United Coasts had $19,800,000 and
$12,700,000, respectively of notes receivable due from ACMAT. Such notes are
callable on demand and bear interest at the London Inter-Bank offering Rate
(LIBOR) plus 180 basis points. Accrued interest receivable on such notes was
$500,112 and $201,854, at December 31, 1995 and 1994, respectively. Interest is
payable semi-annually. Total interest received during 1995 and 1994 from ACMAT
in connection with these notes was $979,774 and $378,831, respectively. The
applicable LIBOR rate, inclusive of the additional 180 basis points, was
approximately 7.675% and 8.0% at December 31, 1995 and 1994, respectively. The
Corporation loaned ACSTAR $300,000 during 1995 under a demand note bearing
interest at LIBOR plus 180 basis points. The note was repaid in full in 1995.
Total interest received during 1995 from ACSTAR Insurance in connection with the
note was $1,379.
F-39
<PAGE> 101
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INVESTMENTS
Investments at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AMOUNT AT
WHICH
AMORTIZED ESTIMATED SHOWN IN
COST OR FAIR THE BALANCE
COST VALUE SHEET
----------- ---------- -----------
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds:
States, municipalities and political subdivisions... $57,913,797 58,069,615 58,069,615
United States Government and government agencies.... 31,284,293 31,713,733 31,713,733
Industrial and miscellaneous........................ 283,453 281,681 281,681
----------- ----------- -----------
Total fixed maturities...................... 89,481,543 90,065,029 90,065,029
----------- ----------- -----------
Equity securities:
Common stocks:
Industrial and miscellaneous........................ 20,000 20,000 20,000
----------- ----------- -----------
Total common stocks................................. 20,000 20,000 20,000
----------- ----------- -----------
Total equity securities..................... 20,000 20,000 20,000
----------- ----------- -----------
Limited Partnership Investment........................ 654,516 987,783 987,783
Short-term investments................................ 1,478,377 1,478,377 1,478,377
----------- ----------- -----------
$91,634,436 92,551,189 92,551,189
=========== =========== ===========
</TABLE>
Investments at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
AMOUNT AT
WHICH
AMORTIZED ESTIMATED SHOWN IN
COST OR FAIR THE BALANCE
COST VALUE SHEET
----------- ---------- -----------
<S> <C> <C> <C>
Fixed maturities available for sale:
Bonds:
States, municipalities and political subdivisions... $70,301,228 69,050,609 69,050,609
United States Government and government agencies.... 12,359,574 12,209,376 12,209,376
Industrial and miscellaneous........................ 859,016 851,622 851,622
----------- ----------- -----------
Total fixed maturities...................... 83,519,818 82,111,607 82,111,607
----------- ----------- -----------
Equity securities:
Common stocks:
Banks, trust and insurance.......................... 223,240 163,749 163,749
Industrial and miscellaneous........................ 404,012 280,360 280,360
----------- ----------- -----------
Total common stocks.............................. 627,252 444,109 444,109
----------- ----------- -----------
Total equity securities.......................... 627,252 444,109 444,109
----------- ----------- -----------
Limited Partnership Investment........................ 603,120 724,950 724,950
Short-term investments................................ 2,953,847 2,953,847 2,953,847
----------- ----------- -----------
$87,704,037 86,234,513 86,234,513
=========== =========== ===========
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information 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 United Coasts' and Coastal Insurance's entire
holdings of a particular financial instrument. In addition, the tax
ramifications related to the realization of the unrealized gains and
F-40
<PAGE> 102
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses have not been considered in any of the estimates. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
The amortized cost and market value of fixed maturities at December 31,
1995 and 1994, by effective maturity, are shown below.
<TABLE>
<CAPTION>
1995 1994
-------------------------- -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less.................. $52,799,944 53,058,250 33,618,556 33,441,181
Due after one year through five years.... 36,681,599 37,006,779 49,901,262 48,670,426
----------- ----------- ----------- -----------
Total fixed maturities......... $89,481,543 90,065,029 83,519,818 82,111,607
=========== =========== =========== ===========
</TABLE>
United Coasts' and Coastal Insurance's portfolio is comprised primarily of
fixed maturity securities rated AA or better by Standard and Poor's and includes
mostly U.S. Treasury and tax-free municipal securities.
A summary of gross unrealized gains and losses at December 31, 1995 and
1994 follows:
<TABLE>
<CAPTION>
1995 1994
-------------------- ----------------------
GAINS LOSSES GAINS LOSSES
-------- ------- ------- ----------
<S> <C> <C> <C> <C>
Fixed maturities:
States, municipalities and political
subdivisions............................... $192,750 (36,932) -- (1,250,619)
United States Government and government
agencies................................... 430,554 (1,114) -- (150,198)
Industrial and miscellaneous.................. -- (1,772) -- (7,394)
-------- ------- -------- ----------
Total-fixed maturities................ 623,304 (39,818) -- (1,408,211)
Equity securities............................. -- -- -- (183,143)
Limited partnership investment................ 333,267 -- 121,830 --
-------- ------- -------- ----------
Total................................. $956,571 (39,818) 121,830 (1,591,354)
======== ======= ======== ==========
</TABLE>
A summary of net investment income for the years ended December 31, 1995,
1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Tax-exempt interest.............................. $2,514,868 2,618,695 2,308,175
Taxable interest................................. 1,960,645 680,941 952,706
Dividends on equity securities................... 7,617 24,749 77,943
Limited partnership income....................... 51,397 49,836 53,284
Investment expense............................... (46,899) (109,346) (98,184)
---------- --------- ---------
Net investment income.................. $4,487,628 3,264,875 3,293,924
========== ========= =========
</TABLE>
A summary of realized capital gains (losses) for the years ended December
31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Fixed maturities...................................... $(3,849) (64,301) 761,598
Equity securities..................................... 7,087 41,247 (41,100)
Fixed asset disposals................................. -- (2,695) --
------- ------- -------
Net realized capital gains (losses)......... $ 3,238 (25,749) 720,498
======= ======= =======
</TABLE>
F-41
<PAGE> 103
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gross gains of $20,576, $17,076 and $809,639 and gross losses of $24,425,
$81,377 and $48,041 were realized on fixed maturity sales for the years ended
December 31, 1995, 1994 and 1993, respectively.
Coastal Insurance, as required by state law, deposits certain securities
with various state insurance departments. At December 31, 1995, securities on
deposit had an aggregate market value of approximately $5,922,800.
(6) LEASES
In an agreement between Coastal Insurance and ACMAT, Coastal Insurance has
agreed to lease approximately 18,000 square feet of office and storage space in
ACMAT's corporate headquarters. The lease, which expires in February 2000, is
accounted for as an operating lease and calls for the following future minimum
lease payments:
<TABLE>
<CAPTION>
MINIMUM
LEASE
YEARS ENDED DECEMBER 31, PAYMENTS
--------------------------------------------------------------- ----------
<S> <C>
1996........................................................... $ 538,432
1997........................................................... 565,353
1998........................................................... 593,621
1999........................................................... 623,302
2000........................................................... 104,715
----------
$2,425,423
==========
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$535,697, $506,560 and $488,480, respectively.
(7) LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for unpaid claims and claim adjustment expenses
is summarized below:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Balance at January 1.................................. $31,629,263 27,121,203 27,481,898
Less reinsurance recoverables....................... 1,557,704 1,271,024 1,187,935
----------- ---------- ----------
Net Balance at January 1.............................. 30,071,559 25,850,179 26,293,963
----------- ---------- ----------
Incurred related to:
Current year........................................ 6,298,151 6,302,563 5,783,662
Prior years......................................... (900,506) -- --
----------- ---------- ----------
Total incurred........................................ 5,397,645 6,302,563 5,783,662
----------- ---------- ----------
Paid related to:
Current year........................................ 75,280 194,208 108,656
Prior years......................................... 2,537,259 1,886,975 6,118,790
----------- ---------- ----------
Total paid............................................ 2,612,539 2,081,183 6,227,446
----------- ---------- ----------
Net Balance at December 31............................ 32,856,665 30,071,559 25,850,179
Plus reinsurance recoverables....................... 1,762,286 1,557,704 1,271,024
----------- ---------- ----------
Balance at December 31................................ $34,618,951 31,629,263 27,121,203
=========== ========== ==========
</TABLE>
The decrease in 1995 in incurred losses and loss adjustment expenses of
prior years represents a reallocation of reserves among accident years. The
increased claim payments in 1993 are partially a result of
F-42
<PAGE> 104
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments relating to settlement of losses reserved in prior periods. Based on
the lower payments made in 1995 and 1994, as well as an evaluation of case
reserves, Coastal Insurance does not believe that the claim payouts in 1993
represent a trend. 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.
(8) LONG-TERM DEBT
Interest paid in 1994 and 1993 of $74,912 and $299,650, respectively,
represents interest on notes due to former stockholders in connection with the
purchase of all shares of United Coasts held by such former stockholders. No
interest was paid in 1995 as these notes, which totalled $3,065,000, were repaid
in full in March, 1994.
(9) STOCKHOLDERS' EQUITY
At its May 1, 1991, June 16, 1992 and December 29, 1992 meetings, the Board
of Directors approved the granting of nonstatutory common stock options to
certain officers and directors giving such individuals the option to purchase a
total of 40,000, 40,000 and 60,000 shares, respectively, of restricted common
stock of United Coasts at an exercise price of $2 per share. The option to
purchase such shares must be exercised within 10 years of the date of grant. In
July 1993, June 1994 and June 1995, 40,000, 15,000 and 10,000 shares,
respectively, were exercised which resulted in United Coasts' issuance of
40,000, 15,000 and 10,000 shares of restricted common stock in 1993, 1994 and
1995, respectively. United Coasts repurchased and retired the shares. These
transactions resulted in a reduction of stockholders' equity of $100,000,
$41,250 and $35,000 in 1993, 1994 and 1995, respectively.
Coastal Insurance is restricted by the Arizona Insurance Holding Company
Systems Act as to the amount of dividends it may pay to United Coasts without
the approval of the Arizona Insurance Department. For the years ended December
31, 1995, 1994 and 1993, Coastal Insurance paid dividends totalling $5,181,000,
$5,500,000 and $5,622,750, respectively, to the Corporation. All of the
dividends paid in 1994 and a portion of the dividends paid in 1995 and 1993 were
considered extraordinary. Coastal Insurance applied for and received approval
from the Arizona Insurance Department for the extraordinary portion of the
dividends paid. Approximately $4,047,500 is available for the payment of
dividends to United Coasts in 1996 without the prior approval of the Arizona
Insurance Department.
Coastal Insurance prepares its statutory financial statements in accordance
with accounting practices prescribed by the Arizona Insurance Department.
Prescribed accounting practices include a variety of publications of the
National Association of Insurance Commissioners (NAIC), as well as state laws,
regulations and general administrative rules. As of December 31, 1995, Coastal
Insurance does not utilize any statutory accounting practices which are not
prescribed by insurance regulators that individually or in the aggregate
materially affect statutory shareholder's equity.
In accordance with statutory accounting principles, Coastal Insurance's
statutory capital and surplus was $40,475,130 and $38,344,510 at December 31,
1995 and 1994, respectively. Statutory net income was $7,481,455, $7,136,705 and
$7,308,330 for the years ended December 31, 1995, 1994 and 1993, respectively.
Coastal Insurance's stockholder's equity in accordance with Generally Accepted
Accounting Principles ("GAAP") was $63,754,804 and $59,424,010 at December 31,
1995 and 1994, respectively. Coastal Insurance's GAAP net income was $7,437,741,
$7,579,679 and $7,708,377 for the years ended December 31, 1995, 1994 and 1993,
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, prepaid non-
F-43
<PAGE> 105
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
compete payments and certain notes receivable; and deferred acquisition costs
and deferred taxes which are recognized for GAAP only.
(10) TAXES
A summary of the components of the provision for income tax for the years
ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
Income tax expense (benefit):
Current................................................ $3,274,066 3,328,628 2,757,147
Deferred............................................... (100,166) (415,198) 119,670
---------- --------- ---------
$3,173,900 2,913,430 2,876,817
========== ========= =========
</TABLE>
The effective Federal income tax rate as a percentage of income before
income tax expense and cumulative effect of change in accounting principle
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.................................... 34.0% 34.0% 34.0%
Effect of tax-exempt interest................................. (6.3) (6.9) (7.4)
Other, net.................................................... -- (.3) .7
---- ---- ----
27.7% 26.8% 27.3%
==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves for losses and loss adjustment expense,
principally due to reserve discounting.................. $2,814,134 2,700,945
Unearned premiums.......................................... 702,332 764,274
Net unrealized losses...................................... -- 499,638
Other...................................................... 51,319 48,152
---------- ----------
Total gross deferred tax assets............................ 3,567,785 4,013,009
Less valuation allowance................................... -- (499,638)
---------- ----------
Net deferred tax assets.................................... 3,567,785 3,513,371
---------- ----------
Deferred tax liabilities:
Deferred policy acquisition costs.......................... 911,178 956,930
Net unrealized gains....................................... 311,696 --
Other...................................................... 21,966 21,967
---------- ----------
Total gross deferred tax liabilities....................... 1,244,840 978,897
---------- ----------
Net deferred tax asset..................................... $2,322,945 2,534,474
========== ==========
</TABLE>
The change in the total valuation allowance for the year ended December 31,
1995 as compared to December 31, 1994 is due to the reversal of the deferred tax
asset related to net unrealized losses on securities. At December 31, 1994,
management was uncertain as to the realization of the deferred tax asset
attributable to these net unrealized losses. At December 31, 1995, United Coasts
and Coastal Insurance had net unrealized gains on securities of $916,753 which
resulted in a deferred tax liability of $311,696. In assessing
F-44
<PAGE> 106
UNITED COASTS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 primarily 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 that United
Coasts and Coastal Insurance will realize the benefits of these deductible
differences at December 31, 1995.
As discussed in Note 1, United Coasts' and Coastal Insurance's tax return
is consolidated with ACMAT's tax return. A tax sharing arrangement exists which
calls for a separate return method of tax allocation. Approximately $3,854,200,
$3,039,600, $2,887,700 of tax related amounts (net of tax refund in 1994) were
paid to ACMAT during the year ended December 31, 1995, 1994, and 1993,
respectively.
Approximately $221,000 of tax related amounts were due to ACMAT at December
31, 1994 and approximately $359,000 tax related amounts were due from ACMAT at
December 31, 1995.
F-45
<PAGE> 107
UNITED COASTS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
INCOME:
Premiums earned................................................... $3,456,664 4,425,620
Net investment income............................................. 1,247,376 1,053,388
Net realized losses............................................... (7,788) (120)
Income on intercompany notes receivable........................... 384,104 250,803
Other income...................................................... 19,384 24,051
----------- -----------
5,099,740 5,753,742
----------- -----------
EXPENSES:
Losses and loss adjustment expenses............................... 1,036,999 1,327,686
Amortization of policy acquisition costs.......................... 942,212 1,196,650
Other expenses.................................................... 512,351 440,351
----------- -----------
2,491,562 2,964,687
----------- -----------
Income before income tax.......................................... 2,608,178 2,789,055
Provision for income tax.......................................... 715,460 747,485
----------- -----------
NET INCOME.......................................................... $1,892,718 2,041,570
=========== ===========
NET INCOME PER SHARE................................................ $ .19 .20
=========== ===========
Weighted average shares outstanding................................. 10,187,189 10,187,189
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-46
<PAGE> 108
UNITED COASTS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1996
-------------
<S> <C>
ASSETS:
Investments:
Fixed maturities-available for sale, at fair value in 1996 and 1995
(amortized cost $90,827,686)............................................. $ 91,114,562
Limited partnership investment, at fair value (cost $643,157)............. 1,087,056
Short term investments, at cost which approximates fair value............. 2,842,736
------------
Total investments.................................................... 95,044,354
Cash......................................................................... 1,825,482
Agent's balance due from affiliate........................................... 5,893,940
Reinsurance recoverable...................................................... 1,810,831
Investment income due and accrued............................................ 1,621,119
Income tax receivable........................................................ --
Deferred income tax.......................................................... 2,357,710
Furniture, fixtures and equipment, net....................................... 217,039
Deferred policy acquisition costs............................................ 2,725,267
Prepaid reinsurance premiums................................................. 958,461
Notes receivable from affiliate.............................................. 21,201,128
Other assets................................................................. 72,999
------------
$ 133,728,330
============
LIABILITIES:
Reserves for losses and loss adjustment expenses............................. $ 35,044,814
Unearned premiums............................................................ 11,796,833
Income tax................................................................... 53,573
Collateral held.............................................................. 135,000
Accrued liabilities and accounts payable..................................... 196,102
------------
Total liabilities.................................................... 47,226,322
------------
STOCKHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized, par value $0.01; none
outstanding............................................................... --
Common stock, 20,000,000 shares authorized, value $0.01; 10,187,189 shares
issued and outstanding.................................................... 101,872
Paid-in capital.............................................................. 20,268,520
Retained earnings............................................................ 65,649,304
Net unrealized gain on securities, net of deferred taxes..................... 482,312
------------
Total stockholders' equity........................................... 86,502,008
Commitments and contingencies
------------
$ 133,728,330
============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-47
<PAGE> 109
UNITED COASTS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON PAID-IN RETAINED GAIN (LOSS)
STOCK CAPITAL EARNINGS ON SECURITIES TOTAL
-------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994................... $101,872 20,303,520 55,472,864 (1,469,524) 74,408,732
Change in net unrealized loss on securities.... -- -- -- 1,151,508 1,151,508
Net income..................................... -- -- 2,041,570 -- 2,041,570
-------- ---------- ---------- ---------- ----------
Balance at March 31, 1995...................... $101,872 20,303,520 57,514,434 (318,016) 77,601,810
======== ========== ========== ========== ==========
Balance at December 31, 1995................... 101,872 20,268,520 63,756,586 605,057 84,732,035
Change in net unrealized gain on securities.... -- -- -- (185,977) (185,977)
Change in deferred tax on net unrealized
gain......................................... -- -- -- 63,232 63,232
Net Income..................................... -- -- 1,892,718 -- 1,892,718
-------- ---------- ---------- ---------- ----------
Balance at March 31, 1996...................... $101,872 20,268,520 65,649,304 482,312 86,502,008
======== ========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-48
<PAGE> 110
UNITED COASTS CORPORATION AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................... $ 1,892,718 2,041,570
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation................................ 199,589 267,112
Net realized capital (gains) losses.......................... 7,788 120
Change in:
Agent's balance due from affiliate......................... (812,848) 755,431
Reinsurance recoverable.................................... (48,545) (45,273)
Investment income due and accrued.......................... 11,342 (257,546)
Deferred policy acquisition costs.......................... (45,332) 95,454
Prepaid reinsurance premiums............................... (59,184) 110,506
Notes receivable from affiliate............................ (901,016) (250,803)
Reserves for losses and loss adjustment expenses........... 425,863 1,138,143
Unearned premiums.......................................... 569,150 (635,345)
Income taxes, net.......................................... 232,960 (189,515)
Accrued liabilities and accounts payable................... (177,738) (76,128)
Other assets............................................... 302,950 1,923
------------ -----------
Net cash provided by operating activities............... $ 1,597,697 2,955,649
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold or matured:
Fixed maturities -- sold..................................... 1,298,740 126,348
Fixed maturities -- matured.................................. 8,457,500 13,910,000
Purchases of:
Fixed maturities............................................. (11,260,297) (17,607,643)
Limited partnership investment adjustment....................... 11,360 --
Short-term investments, net..................................... (1,364,359) (1,521,165)
Purchase of furniture, fixtures and equipment, net.............. (11,665) (11,331)
------------ -----------
Net cash provided by (used in) investing activities..... $(2,868,721) (5,103,791)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by (used in) financing activities..... $ -- --
------------ -----------
Decrease in cash................................................ (1,271,024) (2,148,142)
Cash at beginning of year....................................... 3,096,506 4,607,085
------------ -----------
Cash at end of year............................................. $ 1,825,482 2,458,943
============ ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-49
<PAGE> 111
UNITED COASTS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of United Coasts
Corporation ("United Coasts") and its subsidiary, United Coastal Insurance
Company ("Coastal Insurance"). The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and are
unaudited.
The interim financial information contained in this report has been
prepared from the books and records of United Coasts and Coastal Insurance and
reflects, in the opinion of the management, all adjustments (consisting of
normal and recurring accruals) necessary to fairly present results of operations
for the periods indicated. All significant intercompany accounts and
transactions have been eliminated in consolidation.
These statements should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
(2) EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of shares
of common stock outstanding for the period and reflect the common stock
equivalency of outstanding stock options and warrants, if dilutive.
(3) SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid during the three months ended March 31, 1996 and 1995 was
$482,500 and $937,000, respectively. There was no interest paid in 1995 or 1996.
(4) APPLICATION OF NEW ACCOUNTING STANDARDS
Effective January 1, 1996, United Coasts adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" (FAS 121). This statement
establishes standards for the impairment of long-lived assets and certain
identifiable intangibles to be disposed of. This statement requires a write down
to fair value when long-lived assets to be held and used are impaired. The
adoption of this statement did not have any effect on results of operations,
financial condition or liquidity as no adjustments were required.
Also, effective January 1, 1996, United Coasts adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). This statement addresses alternative accounting
treatments for stock-based compensation, such as stock options and restricted
stock. FAS 123 permits either expensing the value of stock-based compensation
over the period earned or disclosing in the financial statement footnotes the
pro forma impact to net income as if the value of stock-based compensation
awards had been expensed. The value of awards are measured at the grant date
based upon estimated fair value, using option pricing models. United Coasts has
selected the alternative method which would provides for pro forma disclosure in
the footnote to the year-end financial statement only.
F-50
<PAGE> 112
APPENDIX A
AGREEMENT AND PLAN OF LIQUIDATION AND MERGER
THIS AGREEMENT AND PLAN OF LIQUIDATION AND MERGER (the "Agreement") is made
and entered into on this 28th day of May, 1996, by and among ACMAT CORPORATION,
a Connecticut corporation ("ACMAT") and UNITED COASTS CORPORATION, a Delaware
corporation and a subsidiary of ACMAT ("United Coasts").
WITNESSETH:
WHEREAS, the parties hereto desire to effect the merger of United Coasts
with and into ACMAT (the "Merger"), as a result of which (a) ACMAT shall be the
surviving corporation, (b) the separate corporate existence of United Coasts
shall cease, and (c) the shareholders of United Coasts, other than ACMAT, shall
receive the consideration hereinafter set forth in exchange for their shares of
United Coasts Common Stock (the "UC Common Stock");
WHEREAS, the respective Boards of Directors of ACMAT and United Coasts, and
the shareholders of United Coasts, have approved the merger of United Coasts
with and into ACMAT pursuant to the terms and conditions of this Agreement and
the applicable laws of the States of Connecticut and Delaware;
WHEREAS, ACMAT is authorized to issue 10,000,000 shares of Class A Stock of
which 2,232,585 shares have been duly issued and are now outstanding; and
WHEREAS, the parties hereto desire to effectuate the Merger as a nontaxable
transaction under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto hereby agree as follows:
1. Merger. In accordance with the provisions of this Agreement, and the
Stock Corporation Act of the State of Connecticut ("SCA") and the General
Corporation Law of the State of Delaware ("GCL"), at the Effective Time (as
defined in Section 4, below) United Coasts shall merge with and into ACMAT and
ACMAT shall be the surviving corporation (hereinafter sometimes called the
"Surviving Corporation"). As of the Effective Time, ACMAT shall continue its
corporate existence under the laws of the State of Connecticut and the separate
corporate existence of United Coasts shall cease.
2. Effect of the Merger. The Surviving Corporation shall, at and after the
Effective Time, possess all the rights, privileges, powers and franchises as
well of a public as of a private nature of each of ACMAT and United Coasts
(collectively, the "Constituent Corporations"), subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; and all and
singular, the rights, privileges, powers and franchises of the Constituent
Corporations, and all property, real, personal and mixed, and all debts due on
whatever account, and all other things in action, and all and every other
interest, of or belonging to or due to each of the Constituent Corporations,
shall be taken and deemed to be transferred to and vested in the Surviving
Corporation without further act or deed; and the title to any real estate, or
any interest thereto, vested in any of the Constituent Corporations shall not
revert or be in any way impaired by reason of the Merger; and all property,
rights, privileges, powers and franchises, and all and every other interest
shall be thereafter the property of the Surviving Corporation as effectively as
they were of the Constituent Corporations; but all rights of creditors and all
liens upon any property of any of the Constituent Corporations shall be
preserved unimpaired, and all debts, liabilities and duties of the Constituent
Corporations shall thenceforth attach to the Surviving Corporation, and may be
enforced against the Surviving Corporation to the same extent as if said debts,
liabilities and duties had been incurred or contracted by it.
3. Manner and Basis of Converting Shares of United Coasts. (a) Immediately
prior to the Effective Time, all shares of UC Common Stock issued and
outstanding and held by ACMAT's subsidiary, ACSTAR Insurance Company ("ACSTAR"),
will be exchanged for shares of common stock of United Coastal Insurance
Company, an Arizona corporation and a wholly-owned subsidiary of United Coasts
("Coastal
A-1
<PAGE> 113
Insurance"), with an aggregate fair market value substantially equal to the
value of said shares of UC Common Stock.
(b) At the Effective Time, by virtue of the Merger and without any further
action required on the part of ACMAT or United Coasts:
(i) All shares of the UC Common Stock, par value $0.01 per share, issued
and outstanding immediately prior to the Effective Time (other than shares held
by ACMAT and ACSTAR) shall be converted into and become validly issued, fully
paid and nonassessable shares of Class A Stock, no par value, of ACMAT (the
"Class A Stock") in the following manner:
(A) Such shares of UC Common Stock will be converted into and become
shares of Class A Stock at the ratio of one (1) share of Class A Stock for
each X shares of UC Common Stock (the "Exchange Ratio") where X is
determined by (aa) dividing the total number of shares of UC Common Stock
held by United Coasts shareholders as of the Effective Time other than
ACMAT and ACSTAR (the "Unaffiliated Holders") by 1.5, (bb) subtracting from
the quotient obtained the number of shares of UC Common Stock allowed by
the Court, referred to in paragraph 4(b) of this Agreement, as a fee of
plaintiff's counsel in connection with the litigation described in
paragraph 4(b) of this Agreement, and (cc) dividing the number of shares of
UC Common Stock held by the Unaffiliated Holders at the Effective Time by
the remainder obtained in step (bb). The quotient thereby obtained equals
X.
(B) The number of shares of Class A Stock issuable to the Unaffiliated
Holders as of the Effective Time determined in accordance with the Exchange
Ratio plus the number of shares allowed by such Court as a fee of
plaintiff's counsel in connection with such litigation shall constitute the
total number of shares of Class A Stock issuable with respect to all shares
of the Unaffiliated Holders held by them at the Effective Time, provided,
however, that the number of such shares determined in accordance with the
Exchange Ratio shall be issuable to such Unaffiliated Holders, pro rata in
accordance with their respective holdings of UC Common Stock, and the
number of shares allowed by such Court as the fee of plaintiff's counsel in
connection with such litigation shall be issued to such plaintiff's
counsel.
(ii) Shares of UC Common Stock held directly by ACMAT will be cancelled;
and
(iii) In the event a shareholder of UC Common Stock is entitled to a
fractional share of Class A Stock, then in lieu thereof such holder shall
receive the value of such fractional interest in cash based on the average
closing price of a full share of the Class A Stock as reported on the Nasdaq
National Market for the last five days on which the Class A Stock was traded
thereon prior to the Effective Time.
4. Terms, Conditions and Mode of Carrying into Effect the Merger. (a) This
Merger shall be effective upon the completion of the execution and filing, in
accordance with Sections 285 of the SCA and 103 of the GCL, respectively, of
Certificates of Merger in the respective Offices of the Secretaries of State of
the States of Connecticut and Delaware (the "Effective Time"). Upon this Merger
becoming effective, the separate existence of United Coasts shall cease, except
to the extent continued by statute, and all of its property, rights, privileges,
franchises, obligations and liabilities of whatever nature and description,
shall be transferred to, vest and devolve upon the Surviving Corporation without
further act or deed.
(b) The Merger is being proposed pursuant to a settlement agreement for the
benefit of a class of shareholders of United Coasts (the "Class") resolving
litigation brought by a shareholder against ACMAT and certain other defendants
(the "Defendants") in the Court of Chancery of the State of Delaware (the
"Settlement Agreement"), and is subject to the satisfaction of certain
conditions, including, but not limited to, the approval by said court of the
Settlement Agreement. The Merger is further subject to the following conditions:
(i) no more than twenty-five percent (25%) of the shareholders comprising the
Class making a demand for appraisal rights under Delaware law; (ii) approval of
the Merger by holders of the majority of all shares of UC Common Stock entitled
to vote on the Merger; and (iii) the receipt of the favorable vote of the
members of the Class holding a majority of shares of UC Common Stock held by the
Class which are voted in connection with the Merger. In the event that either
condition (ii) or (iii), above, is not satisfied, the Merger will be abandoned.
In the event that condition (i), above, is not satisfied, the Merger may be
abandoned at the discretion of the Defendants.
A-2
<PAGE> 114
5. Certificate of Incorporation. The Certificate of Incorporation of the
Surviving Corporation as it exists at the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation and shall not be
amended or otherwise affected by the Merger.
6. Post Merger Amendment of Certificate of Incorporation. The Surviving
Corporation reserves the right and powers after the Effective Time, to alter,
amend, change, repeal or restate any of the provisions contained in its
Certificate of Incorporation, in the manner now or hereinafter provided by
statute, and all rights conferred on officers, directors or shareholders herein
are subject to this reservation.
7. Bylaws. The Bylaws of the Surviving Corporation, as such bylaws exist
at the Effective Time, shall remain and be the Bylaws of the Surviving
Corporation until altered, amended or repealed or until new bylaws shall be
adopted in accordance with the provisions thereof, the Certificate of
Incorporation, or in the manner permitted by the applicable provisions of law.
8. Directors. The Board of Directors of the Surviving Corporation shall
consist of the members of the Board of Directors of ACMAT in office immediately
prior to the Merger. The Directors of the Surviving Corporation shall continue
in office as Directors of the Surviving Corporation until the next annual
meeting of the shareholders thereof, or until their successors shall be elected
and shall qualify.
9. Officers. The officers of ACMAT as of the Effective Time shall continue
in office as officers of the Surviving Corporation until the next annual meeting
of the Board of Directors of the Surviving Corporation, or until their
successors shall be elected and shall qualify.
10. Termination. This Merger may be terminated at any time prior to the
Effective Time by the Board of Directors of United Coasts or ACMAT.
11. Compliance with Connecticut and Delaware law. United Coasts and the
Surviving Corporation shall each take all appropriate corporate action to comply
with the applicable laws of the States of Connecticut and Delaware in connection
with the contemplated merger.
12. Closing of Stock Books. At the Effective Time of this Merger, the
transfer books of United Coasts shall be closed and no transfer of shares of
stock shall be made or consummated thereafter.
IN WITNESS WHEREOF, ACMAT and United Coasts, acting through their duly
authorized officers, have caused their names and seals to be signed and
attested, and affixed to this Agreement and Plan of Liquidation and Merger, on
this 28th day of May 1996.
<TABLE>
<S> <C>
Attest: ACMAT CORPORATION
a Connecticut corporation
By: /s/ MICHAEL P. CIFONE
------------------------------------------ By: /s/ HENRY W. NOZKO, SR.
--------------------------------------------
Its President
Attest: UNITED COASTS CORPORATION
a Delaware corporation
By: /s/ ROBERT H. FRAZER
------------------------------------------ By: /s/ HENRY W. NOZKO, JR.
--------------------------------------------
Its President
</TABLE>
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APPENDIX B
SEC. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds share of stock
on the date of the making of a demand pursuant to the provisions of subsection
(d) of this section with respect to such shares, who continuously holds such
shares through the effective date of the merger or consolidation, who has
otherwise complied with the provisions of subsection (d) of this Section and who
has neither voted in favor of the merger or consolidation nor consented thereto
in writing pursuant to sec. 228 of this Chapter shall be entitled to an
appraisal by the Court of Chancery of the fair value of his shares of stock
under the circumstances described in subsections (b) and (c) of this Section. As
used in this Section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of non-stock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a non-stock
corporation; and the words "depository receipt" mean a receipt of other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Sections 251, 252, 254, 257, 258, 263 or 264 of this
Chapter;
(1) provided, however, that no appraisal rights under this Section
shall be available for the shares of any class or series of stock which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the national Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of Section 251 of this Chapter.
(2) Notwithstanding the provisions of subsection (b)(1) of this
Section, appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to Sections 251, 252, 254, 257, 258, 263 and 264 of
this Chapter to accept for such stock anything except (i) shares of stock
of the corporation surviving or resulting from such merger or
consolidation, or depository receipts in respect thereof; (ii) shares of
stock of any other corporation or depository receipts in respect thereof,
which shares of stock or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 holders; (iii) cash in lieu of fractional
shares or fractional depository receipts described in the foregoing clauses
(i) and (ii); or (iv) any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares, or fractional depository
receipts described in the foregoing clauses (i), (ii) and (iii) of this
subsection.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this Chapter is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this Section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this Section, including those set forth in subsections (d) and
(e), shall apply as nearly as is practicable.
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(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this Section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsections (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
Section. Each stockholder electing to demand the appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger of
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with the
provisions of this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation
has become effective; or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this Chapter, the surviving or resulting corporation,
either before the effective date of the merger or consolidation or within
10 days thereafter, shall notify each of the stockholders entitled to
appraisal rights of the effective date of the merger or consolidation and
that appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
Section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identify of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with requirements
of subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by one or more publications at
least one week before the day of the hearing, in a newspaper of general
circulation published in the City of
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<PAGE> 117
Wilmington, Delaware or such publications as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this Section and who have
become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings, and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest which the surviving or resulting corporation would have had to pay
to borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this Section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this Section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder; in the case of
holders of uncertified stock forthwith, and in the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this Section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this Section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this Section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is a Connecticut corporation. Section 33-320a of the
Connecticut Stock Corporation Act ("Section 33-320a") provides that a
corporation shall indemnify any director or officer of the corporation against
expenses incurred by him in connection with any action, suit or proceeding in
which he is made or is threatened to be made a party by reason of having been a
director or officer of the corporation, subject to certain limitations.
For example, the corporation shall not so indemnify any person made a party
to any proceeding, other than an action by or in the right of the corporation by
reason of the fact that he, or the person whose legal representative he is, is
or was a shareholder, director, officer, employee or agent of the corporation,
or an eligible outside party, unless (1) such person, and the person whose legal
representative he is, was successful on the merits in the defense of any
proceeding referred to in Section 33-320a, or (2) it shall be concluded as
provided in section (d) of Section 33-320a that such person, and the person
whose legal representative he is, acted in good faith and in a manner he
reasonably believed to be in the best interests of the corporation or, in the
case of a person serving as a fiduciary of an employee benefit plan or trust,
either in the best interests of the corporation or in the best interest of the
participants and beneficiaries of such employee benefit plan or trust and
consistent with the provisions of such employee benefit plan or trust and, with
respect to any criminal action or proceeding, that he had no reasonable cause to
believe his conduct was unlawful, or (3) the court, on application as provided
in subsection (e) of Section 33-320a shall have determined that in view of all
the circumstances such person is fairly and reasonably entitled to be
indemnified and then for such amount as the court shall determine; except that
in connection with an alleged claim based upon his purchase or sale of
securities of the corporation or of another enterprise, which he serves or
served at the request of the corporation, the corporation shall only indemnify
such person after the court shall have determined on application as provided in
subsection (e) of Section 33-320a, that in view of all the circumstances such
person is fairly and reasonably entitled to be indemnified, and then for such
amount as the court shall determine. The termination of any proceeding by
judgment, order settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself create a presumption that the person did not act
in good faith or in a manner which he did not reasonably believe to be in the
best interests of the corporation of the participants and beneficiaries of such
employee benefit plan or trust and consistent with the provisions of such
employee benefit plan or trust, or, with respect to any criminal action or
proceeding that he had reasonable cause to believe that this conduct was
unlawful.
Except as otherwise provided in Section 33-320a, a corporation shall
indemnify any person made a party to any proceeding, by or in the right of the
corporation, to procure a judgment in its favor by reason of the fact that he,
or the person whose legal representative he is, is or was a shareholder,
director, officer, employee or agent of the corporation, or an eligible outside
party, against reasonable expenses actually incurred by him in connection with
such proceeding in relation to matters as to which such person, or the person
whose legal representative he is, is finally adjudged not to have breached his
duty to the corporation, or where the court, on application as provided in
subsection (e) of Section 33-320a shall have determined that in view of all the
circumstances such person is fairly and reasonably entitled to be indemnified,
and that for such amount s the court shall determine. The corporation shall not
so indemnify any such person for amounts paid to the corporation, to a plaintiff
or to counsel for a plaintiff in settling or otherwise disposing of a
proceeding, with or without court approval; or for expenses incurred in
defending a proceeding which is settled or otherwise disposed of without court
approval.
The Certificate of Incorporation of the Company includes a provision
limiting the personal liability of a director to the Company or its shareholders
for monetary damages for breach of duty as a director to an amount equal to the
amount of compensation received by the director for serving the Company during
the calendar year in which the violation occurred, subject to a number of
exceptions, including a knowing and culpable violation of law, a breach of duty
which enables a director or an associate to receive an improper
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<PAGE> 119
personal gain, conduct showing a lack of good faith and conscious disregard of
duty to the Company, a sustained and unexcused pattern of inattention, or the
approval of an illegal distribution of assets of the Company to its
shareholders. An associate of the Company, in terms of improper personal gains,
is defined as (A) any corporation or organization of which a Company director is
an officer or partner or is, directly or indirectly, the beneficial owner of ten
percent or more of any class of voting stock, (B) any trust or other estate in
which a Company director has at least ten percent beneficial interest or as to
which a company director serves as trustee or in a similar fiduciary capacity
and (C) any relative or spouse of a company director, or any relative of such
spouse who has the same name as the company director.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
<TABLE>
<S> <C>
(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.
(4) Note Purchase Agreements between ACMAT Corporation and AIG Life Insurance Company
and American International Life Assurance Company of New York dated July 18, 1989
regarding 10 1/2% Convertible Senior notes due June 30, 1999 filed as Exhibits to
the Company's Form 10-Q for the Quarter ended June 30, 1989 are incorporated herein
by reference.
(4a) Promissory Note between ACMAT Corporation and The Bank of Boston Connecticut dated
November 7, 1995 filed as Exhibit 4(a) to the Company's Form 10-K for 1995 is
incorporated herein by reference.
(4b) Promissory Note between ACMAT Corporation and The Manufacturers Life Insurance
Company filed as an Exhibit to the Company's Form 10-Q for the Quarter ended March
31, 1990 are incorporated herein by reference.
(4c) Open-end Mortgage Deed and Security Agreement between ACMAT Corporation and The
Manufacturers Life Insurance Company filed as an Exhibit to the Company's Form 10-Q
for the Quarter ended March 31, 1990 are incorporated herein by reference.
(4d) Loan Agreement dated as of June 30, 1994 between ACMAT Corporation and Shawmut Bank
Connecticut, N.A. filed as an Exhibit to the Company's Amendment No. 1 to Form S-1
dated July 13, 1994 is incorporated herein by reference.
(5)* Opinion of Murtha, Cullina, Richter and Pinney concerning legality of shares being
registered pursuant to this Registration Statement.
(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:
$16,500,000 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.
(10c) Stipulation of Settlement among the Company, Henry W. Nozko, Sr., Henry W. Nozko,
Jr., John C. Creasy and Donald E. Hamilton, dated May 2, 1996.
(21) Subsidiaries of ACMAT filed as Exhibit 21 to the Company's Form 10-K for 1995 is
incorporated by reference.
(23a) Consent of KPMG Peat Marwick LLP, as independent certified public accountants.
(23b)* The consent of Messrs. Murtha, Cullina, Richter and Pinney, counsel for the
Company, to the reference to their firm in the Prospectus forming a part of this
Registration Statement and to the use of their opinion as Exhibit 5 to this
Registration Statement is included in said opinion.
(24)* Power of Attorney pursuant to which this Registration Statement has been signed on
behalf of certain directors.
(27)* Financial Data Schedule.
(28) Information from Reports Furnished to State Insurance Regulatory Authorities.
Schedule P of the Annual Statements of Acstar Insurance Company and United Coastal
Insurance Company for 1995 filed as Exhibit 28 to the Company's Form 10-K for 1995
is incorporated by reference.
</TABLE>
- ---------------
* Previously filed.
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<PAGE> 120
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, subject to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to that request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 (sec. 230.415 of this chapter), will
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 1 to
its Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New Britain, State of
Connecticut on the 30th day of May, 1996.
ACMAT CORPORATION
(Registrant)
By: /s/ HENRY W. NOZKO, SR.
------------------------------------
Henry W. Nozko, Sr.,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<S> <C> <C>
/s/ HENRY W. NOZKO, SR. Chairman of the Board, President and May 30, 1996
- ----------------------------------- Chief Executive Officer (Principal
Henry W. Nozko, Sr. Executive Officer)
/s/ MICHAEL P. CIFONE Vice President -- Finance (Principal May 30, 1996
- ----------------------------------- Financial and Accounting Officer)
Michael P. Cifone
/s/ HENRY W. NOZKO, JR. Director May 30, 1996
- -----------------------------------
Henry W. Nozko, Jr.
/s/ HENRY W. NOZKO, JR. Attorney-in-fact for: May 30, 1996
- -----------------------------------
Henry W. Nozko, Jr.
John C. Creasy Director
Victoria C. Nozko Director
Michael J. Sullivan Director
</TABLE>
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<PAGE> 122
EXHIBIT INDEX
Exhibit
Number Description
- -------- -------------
<TABLE>
<S> <C>
(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.
(4) Note Purchase Agreements between ACMAT Corporation and AIG Life Insurance Company
and American International Life Assurance Company of New York dated July 18, 1989
regarding 10 1/2% Convertible Senior notes due June 30, 1999 filed as Exhibits to
the Company's Form 10-Q for the Quarter ended June 30, 1989 are incorporated herein
by reference.
(4a) Promissory Note between ACMAT Corporation and The Bank of Boston Connecticut dated
November 7, 1995 filed as Exhibit 4(a) to the Company's Form 10-K for 1995 is
incorporated herein by reference.
(4b) Promissory Note between ACMAT Corporation and The Manufacturers Life Insurance
Company filed as an Exhibit to the Company's Form 10-Q for the Quarter ended March
31, 1990 are incorporated herein by reference.
(4c) Open-end Mortgage Deed and Security Agreement between ACMAT Corporation and The
Manufacturers Life Insurance Company filed as an Exhibit to the Company's Form 10-Q
for the Quarter ended March 31, 1990 are incorporated herein by reference.
(4d) Loan Agreement dated as of June 30, 1994 between ACMAT Corporation and Shawmut Bank
Connecticut, N.A. filed as an Exhibit to the Company's Amendment No. 1 to Form S-1
dated July 13, 1994 is incorporated herein by reference.
(5)* Opinion of Murtha, Cullina, Richter and Pinney concerning legality of shares being
registered pursuant to this Registration Statement.
(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:
$16,500,000 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.
(10c) Stipulation of Settlement among the Company, Henry W. Nozko, Sr., Henry W. Nozko, Jr.,
John C. Creasy and Donald E. Hamilton, dated May 2, 1996.
(21) Subsidiaries of ACMAT filed as Exhibit 21 to the Company's Form 10-K for 1995 is
incorporated by reference.
(23a) Consent of KPMG Peat Marwick LLP, as independent certified public accountants.
(23b)* The consent of Messrs. Murtha, Cullina, Richter and Pinney, counsel for the Company,
to the reference to their firm in the Prospectus forming a part of this Registration
Statement and to the use of their opinion as Exhibit 5 to this Registration
Statement is included in said opinion.
(24)* Power of Attorney pursuant to which this Registration Statement has been signed on
behalf of certain directors.
(27)* Financial Data Schedule.
(28) Information from Reports Furnished to State Insurance Regulatory Authorities.
Schedule P of the Annual Statements of Acstar Insurance Company and United Coastal
Insurance Company for 1995 filed as Exhibit 28 to the Company's Form 10-K for 1995
is incorporated by reference.
</TABLE>
* Previously filed.
<PAGE> 1
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- -----------------------------------------------------
DONALD E. HAMILTON,
Plaintiff,
v.
C.A. No. 13014
HENRY W. NOZKO, SR., HENRY W.
NOZKO, JR., JOHN C. CREASY,
and ACMAT CORPORATION,
Defendants.
- -----------------------------------------------------
STIPULATION OF SETTLEMENT
The parties to the above-captioned action ("the Action"), by their
respective undersigned counsel of record, enter into this Stipulation of
Settlement (the "Stipulation" or this "Settlement"), dated as of May 2, 1996.
WHEREAS:
A. United Coasts Corporation ("UC") is an insurance holding company
whose wholly-owned subsidiary, United Coastal Insurance Company ("Coastal
Insurance"), operates as an excess and surplus lines property and casualty
insurer in 46 states, Puerto Rico, the District of Columbia and the Virgin
Islands. Coastal Insurance offers general, asbestos, pollution and professional
insurance to specialty trade contractors, environmental contractors, property
owners, storage and treatment facilities and allied professionals. It also
offers product liability policies to
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<PAGE> 2
manufacturers and distributors.
B. ACMAT Corporation ("ACMAT") conducts operations directly and through
subsidiaries in two business segments: construction contracting and insurance.
Construction contracting operations include the furnishing of building
interiors, renovations, alterations and additions, and asbestos abatement
services. ACMAT does its insurance business through its subsidiaries, Coastal
Insurance and ACSTAR Insurance Company ("ACSTAR"). ACSTAR sells surety bonds and
contract payment and performance bonds to the construction industry.
C. As of May 4, 1993, ACMAT and its subsidiaries owned 83.6% of UC's
common stock. Henry W. Nozko, Sr. and Henry W. Nozko, Jr. together own
approximately 63% of the voting power of ACMAT, and thereby control UC.
D. Until mid-1993, UC common stock traded on the NASDAQ National
Market. In early 1993, UC ceased to provide public information and reports filed
under the Securities and Exchange Act of 1934 ("Exchange Act") and terminated
the registration of UC common stock under section 12 of the Exchange Act. UC's
last publicly filed report with the SEC was its Form 10Q for the quarter ended
September 30, 1992. As a result of the termination of UC's filing status, the UC
common stock ceased to trade on the NASDAQ National Market.
E. On or about May 13, 1993, ACMAT proposed an exchange offer (the
"Exchange Offer") for the UC common stock in which it offered to exchange one
share of ACMAT Class A stock for each 1.75 shares of outstanding UC common
stock. The Exchange Offer was scheduled to expire on June 30, 1993.
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<PAGE> 3
F. On June 10, 1993, plaintiff Donald E. Hamilton ("Hamilton"),
individually and on behalf of persons similarly situated, filed the Action
seeking injunctive relief with respect to the Exchange Offer and damages on
behalf of a class of all holders of UC common stock and their successors in
interest, other than defendants and their affiliates. On June 15, 1993, ACMAT
announced that it was withdrawing the Exchange Offer.
G. On June 30, 1993, Hamilton filed an Amended Complaint (the
"Complaint"). The Complaint alleges violations of duties arising under the laws
of the State of Delaware, including, inter alia, alleged breaches of fiduciary
duties in connection with the Exchange Offer and with the deregistration and
delisting of the UC stock. The Complaint alleges that the Exchange Offer was
unlawfully coercive in that UC stockholders were faced with a choice of
exchanging their UC shares for unfair consideration or being left with stock for
which there would be no market because of defendants' expressed intent not to
provide financial information necessary to sustain a public market for UC
shares. In addition, the Complaint charged the defendants with proposing the
Exchange Offer to further their own interests by improving the liquidity of the
ACMAT Class A stock and providing to ACMAT access to UC's substantial cash
assets. The Complaint sought a mandatory injunction to require defendants to
reinstate and maintain the registration of UC stock under Section 12 of the
Exchange Act, damages, and attorneys' fees and expenses, including fees and
expenses for inducing the withdrawal of the Exchange Offer.
H. On July 7, 1993, defendants moved to dismiss the Action on the basis
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<PAGE> 4
that the allegations regarding the Exchange Offer were moot by virtue of the
withdrawal of the Exchange Offer, and that in any event, the Exchange Offer was
not actionably coercive. The Court denied defendants' motion, finding that the
Complaint stated potentially actionable claims for relief both as to the
deregistration and delisting of the stock and as to the potentially coercive
nature of the Exchange Offer. Hamilton v. Nozko, Del. Ch., C.A. No. 13014,
Jacobs, V.C. (July 26, 1994). After the Court denied defendants' motion,
defendants answered the Complaint and responded to plaintiffs' discovery
requests. Plaintiff's counsel proceeded with discovery while simultaneously
engaging in extensive settlement negotiations with defendants. After nearly a
year of discovery and negotiations, the parties agreed to terms for the proposed
resolution of the claims alleged, which were embodied in a Memorandum of
Understanding signed in late December 1995.
I. Counsel for plaintiff have conducted a thorough investigation of the
facts, circumstances and transactions relating to and surrounding the
allegations set forth in the Complaint, including extensive consultations with a
financial expert, inspection of publicly-available documents, review of
thousands of pages of documents produced by defendants and the deposition of
defendant Henry W. Nozko, Jr.
J. Plaintiff and his counsel enter into this Stipulation (i) after
taking into account the likelihood that this litigation, if not settled by
voluntary agreement among the parties to this Stipulation, will be expensive to
all of the said parties and protracted (including a lengthy trial and potential
time-consuming appeals), and would
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<PAGE> 5
involve highly complex issues of fact (as to which the experts for the parties
may hold varying opinions), and other difficult issues relating both to
liability and to damages, as well as the other uncertainties and risks inherent
in complex litigation such as this case; (ii) after taking into account the
substantial benefits UC shareholders will receive as a result of the proposed
Settlement; and (iii) after having concluded, in light of, among other things,
governing law and the facts of this case, that the proposed Settlement provided
for herein is fair, reasonable and adequate and in the best interests of
plaintiff and the members of the Class defined below.
K. The defendants have denied and continue to deny each and all of the
claims in the Action. The defendants have asserted and continue to assert many
defenses thereto, and have expressly denied and continue to deny any wrongdoing
or legal liability arising out of the conduct alleged in the Action.
L. The defendants have, nonetheless, concluded that it is desirable
that the Action be settled in the manner and upon the terms and conditions set
forth herein in order to avoid the expense, inconvenience and distraction of
further legal proceedings and to put to rest completely the claims by the
plaintiff and the members of the Class against the defendants.
NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED, by and among the
undersigned parties, through their respective attorneys, subject to the approval
of the Court, the performance of all other matters on the part of the plaintiff
and defendants to be performed pursuant to the Stipulation, and the entry by the
Court of a Final Judgment approving the Settlement as fair, adequate and
reasonable and
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<PAGE> 6
dismissing this Action with prejudice, that all claims, rights, causes of
action, suits, matters and issues, known and unknown, arising under common law,
or federal or state statutory law, including all securities laws (except for
claims for appraisal pursuant to Section 262 of the Delaware General Corporation
Law and the rights conferred by the Settlement) that have been or could have
been asserted in this or any other Court or forum by plaintiff or by any member
of the Class (as defined in paragraph 1 below), whether directly, indirectly,
representatively, derivatively, individually or in any other capacity, against
any of the defendants named in the Action, and their respective predecessors and
successors, present or former officers, directors, stockholders, agents,
employees, attorneys, representatives, advisors, affiliates (including the
directors and officers of such affiliates, parents, and subsidiaries), heirs,
executors, personal representatives, estates, administrators, successors and
assigns of any of the defendants or of any affiliate, parent or subsidiary of
any defendant (collectively, the "Defendants' Affiliates"), in connection with,
arising out of, or in any way related to any of the acts, facts, transactions,
occurrences, representations or admissions set forth, alleged, embraced or
otherwise referred to in the Action by plaintiff or any member of the Class, or
by any present or former common stockholder of UC, either directly, indirectly,
individually, derivatively, representatively or in any other capacity, except
for claims relating to any party's alleged failure to comply with the terms and
conditions of this Stipulation (the "Settled Claims"), shall be finally and
forever compromised, settled, remised, released, discharged and dismissed with
prejudice upon and subject to the following terms and
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<PAGE> 7
conditions:
1. For purposes of this Settlement only, the Action shall be
maintained as a class action by plaintiff as the representative plaintiff, and
his counsel of record as class counsel, pursuant to Delaware Court of Chancery
Rules 23(a), 23(b)(1) and 23(b)(2) on behalf of a class (the "Class") consisting
of all persons and entities who are or were record holders or beneficial owners
of UC common stock at any time during the period from June 10, 1993 through the
record date of closing of the Merger (as defined below) (other than defendants,
members of their immediate families, ACSTAR, any entity in which any defendant
has, or during the Class period had, a controlling interest, and all of their
subsidiaries, affiliates, legal representatives, heirs, successors, or assigns)
including the legal representatives, heirs, predecessors and
successors-in-interest, transferees or assigns of all such foregoing holders,
immediate or remote (the "Class").
2. Defendants shall approve and take all steps necessary to
propose to UC's present shareholders for their approval a merger of UC with and
into ACMAT pursuant to an Agreement and Plan of Liquidation and Merger (the
"Merger") on the following terms:
(a) Each share of UC common stock not owned by ACMAT or
ACSTAR will be converted into Class A common stock of
ACMAT ("ACMAT stock") at the ratio of one share of
ACMAT stock per each X UC shares ("the Exchange
Ratio"), where X is determined as follows (i) divide
the total
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<PAGE> 8
number of UC shares held by Class members as of the
Merger effective date by 1.5; (ii) from that
quotient, subtract the number of UC shares the Court
allows plaintiff's counsel in response to their fee
and expense request as contemplated in paragraph 9;
(iii) then divide the number of UC shares held by
Class members as of the Merger effective date by the
remainder obtained in step (ii). The quotient equals
X.
(b) All shares of UC common stock owned by ACSTAR will be
exchanged for shares of Coastal Insurance having
substantially equal aggregate fair market value; and
each share of UC common stock held by ACMAT will be
cancelled.
(c) To the extent that the Exchange Ratio results in any
UC shareholder becoming entitled to receive
fractional shares of ACMAT, such fractional share
interest will be converted into the right to receive
a sum of cash determined by the product of the
fraction and the average closing price of the ACMAT
stock during the last five days the stock was traded
on the NASDAQ National Market prior to the effective
date of the Merger (the "Merger Date"). Cash for
fractional shares will be paid within thirty (30)
days
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<PAGE> 9
following the Merger Date.
(d) Defendants and their affiliates will refrain from
trading in ACMAT stock for twenty-one (21) days prior
to the Merger Date.
(e) The Merger will close as promptly as practicable
after final judicial approval of the Settlement and
all shareholder approvals are obtained.
(f) An express condition of the Merger will be approval
of the Merger (including the Exchange Ratio) by a
majority of UC shares held by persons other than
defendants and their affiliates that are voted in
connection with the Merger.
(g) Defendants will make usual and customary efforts to
solicit votes in favor of the Merger.
3. Contemporaneously with submission to the SEC of a
Registration Statement of ACMAT concerning the public offering to members of the
Class of shares of ACMAT stock, defendants shall provide such Registration
Statement and any related materials concerning a special meeting of UC
shareholders called to approve the Merger to plaintiff's counsel. In preparing
the final Registration Statement and related materials, defendants shall
consider any and all comments they may receive from plaintiff's counsel,
although they shall be under no obligation to implement any such comments.
4. In the event that valid and effective demands for appraisal
are
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<PAGE> 10
received with respect to more than 416,797 United Coasts shares, defendants
may, in their discretion withdraw from the Settlement, and the provisions of
paragraph 12 shall apply.
5. Promptly following the execution of this Stipulation, ACMAT
shall apply to the administrator of the insurance laws of the State of Illinois
for consent or approval to the exchange under the terms of the Merger of shares
of UC common stock held by ACSTAR for shares of Coastal Insurance with
substantially equal aggregate fair market value, and shall take all reasonable
steps necessary to secure such consent or approval. In the event that such
consent or approval is denied or not received within a reasonable time,
defendants may, in their discretion, withdraw from the Settlement, and the
provisions of paragraph 12 shall apply.
6. Immediately following execution of this Stipulation, the
undersigned attorneys shall submit to the Court this Stipulation and a proposed
order ("the Settlement Hearing Order"), substantially in the form attached
hereto as Exhibit A.
7. If the Court approves the Settlement, the parties will
jointly move for the entry of an Order and Final Judgment substantially in the
form attached hereto as Exhibit C.
8. ACMAT shall assume the administrative responsibility and
shall bear the expense of preparing and distributing the Notice of Pendency of
Class Action, Class Action Determination, Proposed Settlement, Settlement
Hearing and Right to Appear (the "Notice"), substantially in the form attached
hereto as Exhibit B, in
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<PAGE> 11
accordance with the Settlement Hearing Order. Prior to the Settlement hearing,
counsel for ACMAT shall file with the Court an affidavit attesting to the
mailing of the Notice.
9. If the Settlement set forth in this Stipulation, including
any modification thereof made with consent of the parties as provided for
herein, is approved by the Court, and the UC shareholders approve the Merger,
plaintiff's counsel will apply to the Court for an award of attorneys' fees and
disbursements, in the amount of 26,000 shares of ACMAT stock to be deducted from
shares otherwise distributable to the Class in connection with the Merger.
Defendants may object to plaintiff's counsel's application. If the Court allows
fees and expenses in ACMAT stock and such award becomes final as a result of the
latter of lack of objection, final affirmance on appeal or reargument, lapse of
time to appeal, or otherwise being no longer subject to appeal, or final
dismissal of any appeal, then plaintiff's counsel shall be entitled to receive
such award at the later of the time the Merger is implemented or the award
becomes final. Prior to the distribution of shares in connection with the
Merger, plaintiff's counsel, Rosenthal, Monhait, Gross & Goddess, P.A. and
Kaufman Malchman Kirby & Squire, LLP shall advise defendants in writing of the
number of shares to be allocated to each firm, and the shares shall be issued
pursuant to such advice.
10. If the Merger does not receive majority of the minority approval as
provided in paragraph 2(f), plaintiff will dismiss the Action without prejudice,
except for a claim for an allowance of attorneys' fees and expenses for inducing
withdrawal
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<PAGE> 12
of the Exchange Offer. Any such application shall not exceed $75,000. Defendants
may oppose any such application.
11. Neither the Stipulation nor any document referred to herein, nor
any action taken to carry out this Stipulation is, may be construed as, or may
be used as, an admission by or against the defendants of any fault, wrongdoing
or liability whatsoever, or by plaintiff of any lack of merit in the claims
asserted. Entering into or carrying out this Stipulation, and any negotiations
or proceeding related thereto, shall not in any event be construed as, or deemed
to be evidence of, an admission or a concession with regard to the denials or
defenses by the defendants and shall not be offered or received in evidence in
any action or proceeding against any party hereto in any court, administrative
agency or other tribunal for any purpose whatsoever other than to enforce or
implement the provisions of this Stipulation, or the provisions of any related
agreement or release, except that this Stipulation and related documents may be
filed in this Action as evidence of a matter set forth in this Stipulation and
such related documents.
12. If (a) defendants exercise their right to withdraw from the
Settlement pursuant to paragraphs 4 or 5; (b) an Order containing provisions
substantially as provided in Exhibit A is not approved by the Court; or (c) the
Settlement is not approved, or an Order and Final Judgment containing provisions
substantially as provided in Exhibit C is otherwise not entered or such Order is
entered but is not finally affirmed on appeal or does not become final by lapse
of time, dismissal or otherwise, this Stipulation shall be null and void, shall
have no further force and effect
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<PAGE> 13
with respect to any party in the Action, and shall not be used in the Action or
in any other proceedings for any purpose, and the Stipulation and all papers,
negotiations, proceedings and statements made or had in connection herewith
shall be without prejudice to any person, and shall not be deemed or construed
to be an admission or concession by any party of any fact, matter, or
proposition, and shall not be used in any manner or for any purpose in any
subsequent proceeding in this Action or in any Court; and all parties to the
Action shall stand in the same position, without prejudice, as if this
Stipulation had not been made or filed with the Court, except that ACMAT shall
not be entitled to reimbursement of expenses incurred in connection with mailing
the Notice pursuant to paragraph 8.
13. The fairness, reasonableness, and adequacy of the Settlement may be
considered and ruled upon by this Court independently of any award of fees and
disbursements requested by counsel for the plaintiff and the Class.
14. The parties and their attorneys agree to cooperate fully with one
another in seeking Court approval of this Stipulation and to use their best
efforts to effect the consummation of this Stipulation, including the entry and
the carrying out of the Order and Final Judgment in the form attached hereto as
Exhibit C.
15. The undersigned counsel for plaintiff represent that plaintiff has
authorized them to execute this Stipulation, and the undersigned counsel for
defendants represent that they have been duly authorized and empowered by their
clients to execute this Stipulation.
16. This Stipulation shall be binding upon and inure to the benefit of
the
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<PAGE> 14
parties hereto and their respective subsidiaries, affiliates, directors,
officers, employees, heirs, partners, successors and assigns and any corporation
or other entity into or with which any corporate party hereto may merge or
consolidate.
17. This Stipulation shall be construed and entered into in accordance
with the laws of the State of Delaware.
18. Without further order of the Court, the parties may agree to
reasonable extensions of time to carry out any of the provisions of this
Stipulation.
19. The foregoing constitutes the entire agreement between the parties
with regard to the subject matter hereof and may not be waived, modified or
amended in any respect except in writing signed by all parties hereto.
ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A.
By: _______________________________________
Suite 1401, Mellon Bank Center
P.O. Box 1070
Wilmington, DE 19899-1070
(302) 656-4433
KAUFMAN MALCHMAN KIRBY & SQUIRE, LLP
By: _________________________________________
919 Third Avenue
New York, NY 10022
(212) 371-6600
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<PAGE> 15
Attorneys for Plaintiff
MORRIS NICHOLS ARSHT & TUNNELL
By: _________________________________________
1201 N. Market Street
P.O. Box 1347
Wilmington, DE 19899-1347
(302) 658-9200
Attorneys for Defendants
OF COUNSEL:
MURTHA, CULLINA, RICHTER & PINNEY
Cityplace I, 185 Asylum Street
Hartford, CT 06103-3469
(860) 240-6000
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Exhibit A
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- -----------------------------------------------------
DONALD E. HAMILTON,
Plaintiff,
v.
C.A. No. 13014
HENRY W. NOZKO, SR., HENRY W.
NOZKO, JR., JOHN C. CREASY,
and ACMAT CORPORATION,
Defendants.
- -----------------------------------------------------
O R D E R
The parties to the above-captioned action (the "Action"), having
applied for an Order seeking a class action determination and having entered
into the Stipulation of Settlement dated May , 1996 (the "Stipulation" or the
"Settlement"), which among other things seeks dismissal of the Action with
prejudice upon the terms and conditions set forth in the Stipulation;
NOW, upon the consent of the parties, after consideration of the
Stipulation filed with the Court and the exhibits annexed thereto, and after due
deliberation, IT IS HEREBY ORDERED THAT:
1. Pursuant to Court of Chancery Rules 23(a) and 23(b)(1)
and/or (b)(2), the Action, for purposes of the Settlement only and pending the
Settlement
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<PAGE> 17
Hearing, shall be maintained as a class action on behalf of a class consisting
of all persons and entities who are or were record holders or beneficial owners
of United Coasts Corporation ("UC") common stock at any time during the period
from June 10, 1993 through the record date of closing of the Merger (as defined
in the Stipulation) (other than defendants, members of their immediate families,
ACSTAR Insurance Company, any entity in which any defendant has, or during the
Class period had, a controlling interest, and all of their subsidiaries,
affiliates, legal representatives, heirs, successors, or assigns) including the
legal representatives, heirs, predecessors and successors-in-interest,
transferees or assigns of all such foregoing holders, immediate or remote (the
"Class"). The named plaintiff is temporarily certified as the Class
representative and his counsel shall serve as Class counsel.
2. A hearing shall be held at __________ ____.m. on ___________, 1996,
at the Daniel L. Herrmann Courthouse, 1020 North King Street, Wilmington, DE
19801 to (a) determine whether the Settlement, including the release of all
claims, should be approved by the Court, (b) determine whether a judgment should
be entered pursuant to the Stipulation that would, among other things, dismiss
the Action with prejudice, (c) consider the application of plaintiff's counsel
for attorneys' fees and reimbursement of expenses, and (d) rule on such other
matters as the Court may deem appropriate.
3. The Court reserves the right to adjourn the hearing or any
adjournment thereof without further notice of any kind to the Class other than
oral announcement at the hearing or any adjournment thereof.
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<PAGE> 18
4. The Court reserves the right to approve the Settlement with or
without modification and with or without notice of any kind.
5. Not less than thirty (30) days prior to the Special Meeting of UC
shareholders, ACMAT Corporation shall mail the Notice of Pendency of Class
Action, Class Action Determination, Proposed Settlement, Settlement Hearing and
Right to Appear substantially in the form annexed to the Stipulation as Exhibit
B (the "Notice") to those Class members appearing in the transfer journals of UC
as record owners of UC common stock. All record owners in the Class who are not
also the beneficial owners of the UC common stock held by them of record are
requested to forward the Notice to such beneficial owners of those shares. ACMAT
shall use reasonable efforts to give notice to such beneficial owners by making
additional copies of the Notice available to any record holder who, prior to the
hearing, requests them for distribution to beneficial owners or by mailing the
Notice to beneficial owners whose addresses record owners provide.
6. The form and method of notice specified herein is the best notice
practicable and shall constitute due and sufficient notice of the hearing to all
persons entitled to receive such notice. ACMAT shall, at or before the hearing
directed herein, file an appropriate affidavit with respect to the mailing of
the Notice.
7. Any member of the Class who objects to the Settlement and/or the
judgment to be entered herein, or who otherwise wishes to be heard, may appear
in person or by his or her attorney at the hearing and present evidence or
argument that may be proper and relevant; provided, however, that no person
other than counsel for
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<PAGE> 19
the named plaintiff and defendants shall be heard and no papers, briefs,
pleadings or other documents submitted by any person shall be considered by the
Court unless, not later than ten (10) days prior to the hearing, such person
files with the Court and serves upon counsel listed below: (a) a written notice
of intention to appear; (b) a statement of such person's objections to any
matter before the Court; (c) proof of membership in the Class; and, (d) the
reasons and grounds therefor that such person desires to appear and be heard,
and documents or writings that such person desires the Court to consider. Such
filings shall be served upon the following counsel:
Norman M. Monhait
ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A.
Suite 1401, Mellon Bank Center
P.O. Box 1070
Wilmington, DE 19899-1070
Irving Malchman
KAUFMAN MALCHMAN KIRBY & SQUIRE, LLP
919 Third Avenue
New York, NY 10022
Attorneys for Plaintiff
Thomas Reed Hunt, Jr.
MORRIS NICHOLS ARSHT & TUNNELL
1201 N. Market Street
P.O. Box 1347
Wilmington, DE 19899-1347
Attorneys for Defendants
Any person who fails to object in the manner provided herein shall be deemed to
have waived his, her or its objection and shall be forever barred from making
such objection.
8. Pending final determination of whether the Stipulation should be
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<PAGE> 20
approved, plaintiff and all members of the Class, or any of them, either
directly, representatively or in any other capacity, upon receipt of the Notice,
shall not commence or prosecute any action asserting any claims that are or
relate to the Settled Claims (as defined in the Stipulation).
9. If the Settlement is not approved by the Court or shall not become
effective for any reason whatsoever, the Settlement (including any modification
thereof made with the consent of the parties as provided for in the
Stipulation), any class certification herein and any actions taken or to be
taken in connection therewith (including this Order and any judgment entered
herein) shall be terminated and shall become void and have no further force and
effect, except (a) ACMAT's obligation to pay the costs of providing the Notice,
as provided in paragraph 8 of the Stipulation, and (b) plaintiff's right to make
an application for attorneys' fees and expenses for inducing withdrawal of the
Exchange Offer, as provided in paragraph 10 of the Stipulation.
__________________________________
Vice Chancellor
Dated: ______________________, 1996
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<PAGE> 21
Exhibit B
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- -----------------------------------------------------
DONALD E. HAMILTON,
Plaintiff,
v.
C.A. No. 13014
HENRY W. NOZKO, SR., HENRY W.
NOZKO, JR., JOHN C. CREASY,
and ACMAT CORPORATION,
Defendants.
- -----------------------------------------------------
NOTICE OF PENDENCY OF CLASS ACTION,
CLASS ACTION DETERMINATION, PROPOSED
SETTLEMENT, SETTLEMENT HEARING AND RIGHT TO APPEAR
TO: ALL RECORD HOLDERS OR BENEFICIAL OWNERS OF UNITED COASTS
CORPORATION COMMON STOCK AT ANY TIME DURING THE PERIOD FROM
JUNE 10, 1993 THROUGH THE RECORD DATE OF CLOSING OF THE MERGER
(AS DEFINED IN THE STIPULATION OF SETTLEMENT) (OTHER THAN
DEFENDANTS, MEMBERS OF THEIR IMMEDIATE FAMILIES, ACSTAR
INSURANCE COMPANY ("ACSTAR"), ANY ENTITY IN WHICH ANY
DEFENDANT HAS, OR DURING THE CLASS PERIOD HAD, A CONTROLLING
INTEREST, AND ALL OF THEIR SUBSIDIARIES, AFFILIATES, LEGAL
REPRESENTATIVES, HEIRS, SUCCESSORS, OR ASSIGNS) INCLUDING THE
LEGAL REPRESENTATIVES, HEIRS, PREDECESSORS AND SUCCESSORS-IN-
INTEREST, TRANSFEREES OR ASSIGNS OF SUCH FOREGOING HOLDERS,
IMMEDIATE OR REMOTE. PLEASE READ THIS NOTICE WITH CARE AS IT
AFFECTS YOUR RIGHTS WITH RESPECT TO THIS ACTION. THIS NOTICE IS
NOT AN EXPRESSION OF ANY OPINION BY THE COURT AS TO THE MERITS
OF ANY OF THE CLAIMS OR DEFENSES ASSERTED BY ANY PARTY IN THIS
ACTION. THIS NOTICE IS SENT FOR THE PURPOSE OF INFORMING YOU OF
THE PENDENCY OF THIS ACTION, THE PROPOSED SETTLEMENT, THE CLASS
DETERMINATION BY THE COURT FOR THE PURPOSE OF THE PROPOSED
SETTLEMENT, AND THE ALTERNATIVE COURSES OF ACTION THAT YOU
MAY TAKE.
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<PAGE> 22
THIS NOTICE IS TO INFORM YOU OF THE PROPOSED SETTLEMENT OF HAMILTON v.
HENRY W. NOZKO, SR. ET AL., C.A. No. 13014 (THE "CLASS ACTION"), AND THE HEARING
TO BE HELD ON _________________________, 1996 AT ____________ ______.M., BEFORE
THE HONORABLE JACK B. JACOBS, VICE CHANCELLOR OF THE COURT OF CHANCERY OF THE
STATE OF DELAWARE (THE "CHANCERY COURT"), AT THE DANIEL L. HERRMANN COURTHOUSE,
1020 NORTH KING STREET, WILMINGTON, DE 19801, TO DETERMINE WHETHER THE PROPOSED
SETTLEMENT OF THE CLASS ACTION IS FAIR, REASONABLE, ADEQUATE, AND SHOULD BE
APPROVED BY THE COURT;
THE FOLLOWING RECITATION DOES NOT CONSTITUTE THE FINDINGS OF THE
CHANCERY COURT. IT IS BASED ON STATEMENTS OF THE PARTIES.
DESCRIPTION OF THE LITIGATION AND SETTLEMENT
1. In June 1993, Donald E. Hamilton, a United Coasts Corporation
("United Coasts") stockholder, filed a lawsuit in the Chancery Court, assertedly
as a class action on behalf of other United Coasts stockholders against the
members of the United Coasts Board of Directors, and ACMAT Corporation
("ACMAT"), which controls a majority of the United Coasts common stock. The
lawsuit claimed that ACMAT's offer to exchange 1 share of ACMAT Class A Stock
for each 1.75 shares of outstanding United Coasts common stock (the "Exchange
Offer") was coercive and did not offer fair value for the publicly held United
Coasts common stock. After plaintiff filed the Class Action, the defendants
withdrew the Exchange Offer.
2. On July 7, 1993, defendants moved to dismiss the Class Action on the
basis that the allegations regarding the Exchange Offer were moot by virtue of
their withdrawal of the Exchange Offer, and that in any event, the Exchange
Offer was not actionably
2
<PAGE> 23
coercive. The Court denied defendants' motion, finding that the Complaint stated
potentially actionable claims for relief both as to the deregistration and
delisting of the stock and as to the potentially coercive nature of the Exchange
Offer. Hamilton v. Henry W. Nozko, Sr. et al., Del. Ch., C.A. No. 13014, Jacobs,
V.C. (July 26, 1994). After the Court denied defendants' motion, defendants
answered the Complaint and responded to plaintiff's discovery requests.
Plaintiff's counsel proceeded with discovery while simultaneously engaging in
extensive settlement negotiations with defendants. After nearly a year of
discovery and negotiations, the parties agreed to terms for the proposed
resolution of the claims alleged, which were embodied in a Memorandum of
Understanding signed in late December 1995.
3. Counsel for plaintiff have conducted a thorough investigation of the
facts, circumstances and transactions relating to and surrounding the
allegations set forth in the Complaint, including extensive consultations with a
financial expert, inspection of publicly-available documents, review of
thousands of pages of documents produced by defendants and the deposition of
defendant Henry W. Nozko, Jr.
4. Defendants have denied and continue to deny plaintiff's allegations
and have raised a number of defenses to the claims.
5. To avoid the substantial expense of litigation, defendants have
agreed for settlement purposes, to the terms of the proposed Settlement,
described below.
6. The proposed Settlement of the Class Action is now pending before
the Honorable Jack B. Jacobs, Vice Chancellor of the Chancery Court. If approved
by the Chancery Court, the Settlement will be binding upon a class, consisting
of all persons and entities who are or were record holders or beneficial owners
of United Coasts common stock at any time during the period from June 10, 1993
through the record date of closing of the
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<PAGE> 24
Merger (other than defendants, members of their immediate families, ACSTAR, any
entity in which any defendant has, or during the Class period had, a controlling
interest, and all of their subsidiaries, affiliates, legal representatives,
heirs, successors or assigns) including the legal representatives, heirs,
predecessors and successors-in-interest, transferees or assigns of all such
foregoing holders, immediate or remote (the "Class").
SUMMARY OF THE PROPOSED SETTLEMENT
7. Defendants have agreed to approve and to take all steps necessary to
propose to United Coasts' stockholders for their approval a merger of United
Coasts with and into ACMAT pursuant to an Agreement and Plan of Liquidation and
Merger (the "Merger") on the following terms:
(a) Each share of UC common stock not owned by ACMAT or
ACSTAR will be converted into Class A common stock of
ACMAT ("ACMAT stock") at the ratio of one share of
ACMAT stock per each X UC shares ("the Exchange
Ratio"), where X is determined as follows (i) divide
the total number of UC shares held by Class members
as of the Merger effective date by 1.5; (ii) from
that quotient, subtract the number of UC shares the
Court allows plaintiff's counsel in response to their
fee and expense request as contemplated in paragraph
8; (iii) then divide the number of UC shares held by
Class members as of the Merger effective date by the
remainder obtained in step (ii). The quotient equals
X.(1)
(b) All shares of UC common stock owned by ACSTAR will
be exchanged for shares of Coastal Insurance having
substantially
- ------------
(1) There are 1,667,189 shares of outstanding UC common stock held by Class
members. Dividing this number by 1.5 yields a total of 1,111,459 shares of
ACMAT Class A stock issuable to Class members in the merger. If the Court
grants in full the fee and expense request of plaintiffs' counsel as set
forth in paragraph 11 (26,000 shares), a balance of 1,085,459 ACMAT Class A
shares will be distributable to Class members in exchange for their
1,667,189 shares of UC common stock, resulting in the receipt by each Class
member of one share of ACMAT Class A stock for each approximately 1.536
shares of UC common stock. For example, under the terms of the proposed
merger and settlement agreement, a Class member holding 100 shares of UC
common stock as of the merger effective date would receive in exchange 65
shares of Class A stock, together with cash in an amount equal to the value
of .104 shares of Class A stock, the value of such share of Class A stock to
be determined as provided in paragraph 7(c).
4
<PAGE> 25
equal aggregate fair market value; and each share of
UC common stock held by ACMAT will be cancelled.
(c) To the extent that the Exchange Ratio results in any
United Coasts shareholder becoming entitled to
receive fractional shares of ACMAT, such fractional
share interest will be converted into the right to
receive a sum of cash determined by the product of
the fraction and the average closing price of the
ACMAT stock during the last five (5) days the ACMAT
stock was traded on the NASDAQ National Market prior
to the effective date of the Merger (the "Merger
Date"). Cash for fractional shares will be paid
within thirty (30) days following the Merger Date;
(d) Defendants and their affiliates will refrain from
trading in ACMAT stock for twenty-one (21) trading
days prior to the Merger Date; and,
(e) The Merger will close as promptly as practicable
after final judicial approval of the Settlement and
all shareholder approvals are obtained.
(f) The Merger must be approved by a majority of the
United Coasts shares held by the Class that are voted
in connection with the Merger.
(g) Defendants will make usual and customary efforts to
solicit votes in favor of the Merger.
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<PAGE> 26
(h) Defendants may withdraw from the Settlement if
holders of more than 416,797 United Coasts shares
submit valid and effective demands for appraisal.
DISMISSAL OF THE CLASS ACTION AND RELEASE OF CLAIMS
8. The Stipulation provides that, if the proposed Settlement is
approved by the Chancery Court, the Class Action will be dismissed on the merits
with prejudice as to all defendants and their affiliates and against plaintiff
and all other members of the Class without costs, except as provided in the
Stipulation, and the claims asserted in the Class Action shall be compromised,
settled, released and discharged. Thus, if the Chancery Court approves the
proposed Settlement, members of the Class will be forever barred from contesting
the fairness, reasonableness or adequacy of the proposed Settlement, or from
pursuing the claims asserted in the Class Action.
THE SETTLEMENT HEARING
9. All members of the Class may have an interest in the Class Action
and are hereby notified that a hearing will be held before the Chancery Court in
its courtroom in the Daniel L. Herrmann Courthouse, 1020 North King Street,
Wilmington, DE 19801, on ______________________, 1996 ________ ____at .m. (the
"Settlement Hearing"), to determine: (i) whether the proposed Settlement is
fair, reasonable, adequate and in the best interests of the Class, and should be
approved by the Chancery Court, (ii) whether an Order and Final Judgment, as
contemplated by the proposed Settlement, should be entered, dismissing the Class
Action as to all defendants and with prejudice against the named plaintiff and
all members of the Class, and (iii) whether, if the Chancery Court approves the
proposed Settlement and enters
6
<PAGE> 27
the Order and Final Judgment, the Chancery Court should approve the application
for plaintiff's attorneys' fees and expenses.
10. The Chancery Court has reserved the right to adjourn the Settlement
Hearing from time to time by oral announcement at such hearing or any
adjournment thereof, without further notice of any kind. The Chancery Court also
has reserved the right to approve the proposed Settlement with or without
modification, to enter an Order and Final Judgment dismissing the Class Action
on the merits and with prejudice, and to order the payment of attorneys' fees
and disbursements without further notice of any kind.
APPLICATION FOR ATTORNEYS' FEES AND EXPENSES
11. If the proposed Settlement is approved by the Chancery Court in all
respects, and the United Coasts shareholders approve the Merger, plaintiff's
attorneys in the Class Action will apply to the Chancery Court for an award of
attorneys' fees and expenses in the amount of 26,000 shares of ACMAT stock to be
deducted from shares otherwise distributable to the Class in connection with the
Merger. Any such award of attorneys' fees and expenses will reduce the amount of
shares available for distribution to members of the Class in connection with the
Merger. Defendants have reserved the right to object to the application for an
allowance of attorneys' fees and expenses.
12. If a majority of United Coasts shares held by persons other than
defendants and their affiliates which are voted in connection with the Merger
are not voted in favor of the Merger, plaintiff will dismiss the Class Action
without prejudice, except for a claim for an allowance of attorneys' fees and
expenses for inducing withdrawal of the Exchange Offer. Any such application
shall not exceed $75,000, and defendants may oppose any such application.
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<PAGE> 28
RIGHT TO APPEAR
13. At the Settlement Hearing, any person who objects to the proposed
Settlement, the judgment to be entered in the Class Action or the award of
attorneys' fees and expenses, may appear in person or by his or her attorney at
the hearing and present any evidence or arguments that may be proper and
relevant; provided, however, that no person other than the named plaintiff and
defendants in the Class Action shall be heard and no papers, briefs, pleadings
or other documents submitted by any such person shall be received and considered
by the Chancery Court (unless the Chancery Court in its discretion shall
thereafter otherwise direct, upon application of such person and for good cause
shown), unless no later than ten (10) days prior to the Settlement Hearing such
person files with the Court and serves upon counsel listed below: (a) a written
notice of intention to appear, (b) a statement of such person's objections to
any matters before the Chancery Court, (c) proof of membership in the Class, and
(d) the reasons and grounds therefor that such person desires to appear and to
be heard, and all documents or writings that such person desires the Chancery
Court to consider:
Norman M. Monhait, Esquire Irving Malchman, Esquire
ROSENTHAL, MONHAIT, GROSS KAUFMAN, MALCHMAN, KIRBY
& GODDESS, P.A. & SQUIRE LLP
Suite 1401, Mellon Bank Center 919 Third Avenue
P.O. Box 1070 New York, NY 10022
Wilmington, DE 19899-1070
Counsel for Plaintiff
Thomas Reed Hunt, Jr., Esquire
MORRIS, NICHOLS, ARSHT & TUNNELL
1201 N. Market Street
P.O. Box 1347
Wilmington, DE 19899-1347
Counsel for Defendants
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<PAGE> 29
14. Any person who fails to object in the manner described above will
be deemed to have waived such objection and will be forever barred from raising
such objection in this Class Action. Pending final determination of whether the
proposed Settlement should be approved, the Chancery Court has ordered that
plaintiff, all members of the Class, or any of them, either directly,
representatively or in any capacity upon the receipt of this Notice, may not
commence or prosecute any action asserting claims that are or relate to the
claims asserted in the Class Action.
SCOPE OF THIS NOTICE
15. The foregoing description of the transaction at issue, the Class
Action, the Settlement Hearing, the Class determination, the terms of the
proposed Settlement and other matters described herein, does not purport to be
comprehensive. For further information, members of the Class are referred to the
Stipulation of Settlement and other documents filed with the Chancery Court in
the Class Action, which you or your attorney may examine during regular business
hours of each business day at the office of the Register in Chancery, Daniel L.
Herrmann Courthouse, 1020 North King Street, Wilmington, DE 19801.
Dated: May ______, 1996
Wilmington, Delaware
________________________________
Register in Chancery
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<PAGE> 30
Exhibit C
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
- -----------------------------------------------------
DONALD E. HAMILTON,
Plaintiff,
v.
C.A. No. 13014
HENRY W. NOZKO, SR., HENRY W.
NOZKO, JR., JOHN C. CREASY,
and ACMAT CORPORATION,
Defendants.
- -----------------------------------------------------
ORDER AND FINAL JUDGMENT
AND NOW, this _____day of _______________, 1996, this class action (the
"Class Action") having come to be heard on ____________________________, 1996
pursuant to the Ordered entered herein on ______________________, 1996 (the
"Order") and upon the Stipulation of Settlement, dated ___________________, 1996
(the "Stipulation" or the "Settlement"); and the Court having determined that
notice of said hearing was given in accordance with the Order to members of the
Class as certified by the Court in the Order (the "Class"); and that said notice
was adequate and sufficient; and the parties having appeared by their attorneys
of record; and the attorneys for the respective parties having been heard in
support of the settlement of the Class Action; and an opportunity to be heard
having been given to all other persons desiring to be heard; and the entire
matter of the Settlement having been considered by the Court;
IT IS HEREBY ORDERED, ADJUDGED AND DECREED as follows:
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<PAGE> 31
1. The Notice of Pendency of Class Action, Class Action Determination,
Proposed Settlement, Settlement Hearing and Right to Appear (the "Notice") has
been given to the members of the Class pursuant to and in the manner directed by
the Court's Order of ______________________________, 1996; proof of mailing of
said Notice was filed with the Court by counsel for ACMAT at or before the
hearing held before the Court on __________________________, 1996, and full
opportunity to be heard has been offered to all parties, Class members and
interested persons.
2. Pursuant to Court of Chancery Rules 23(a) and 23(b)(1) and (2):
(a) the Court finds that (i) the Class, as defined below, is so
numerous that joinder of all members is impracticable, (ii) there are questions
of law and fact common to the Class, (iii) the claims of the plaintiff are
typical of the claims of the Class, and (iv) the plaintiff has fairly and
adequately protected the interests of the Class;
(b) the action is hereby certified as a class action on behalf of
all persons and entities who were record holders or beneficial owners of United
Coasts common stock at any time during the period from June 10, 1993 through the
record date of closing of the Merger (as defined in the Stipulation) (other than
defendants, members of their immediate families, ACSTAR Insurance Company, any
entity in which any defendant has, or during the Class period had, a controlling
interest, and all of their subsidiaries, affiliates, legal representatives,
heirs, successors, or assigns) including the legal representatives, heirs,
predecessors and successors-in-interest, transferees or assigns of all such
foregoing holders, immediate or remote (the "Class");
(c) plaintiff is hereby certified as Class representative and his
counsel are certified as Class counsel; and
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<PAGE> 32
(d) the Court finds that the requirements of Court of Chancery Rules
23(b)(1) and (2) have been satisfied.
3. The Settlement is found to be fair, reasonable, adequate and in the
best interests of plaintiff and other members of the Class, and is hereby
approved. The parties to the Stipulation are hereby authorized and directed to
comply with and consummate the Settlement in accordance with its terms and
provisions.
4. This Order and Final Judgment shall not constitute any evidence or
admission by any party herein that any acts of wrongdoing have been committed by
any of the parties to this Class Action and shall not be deemed to imply that
there is any liability therefor.
5. The Class Action is hereby dismissed with prejudice as to all
defendants and defendants' affiliates (as defined below) and against plaintiff
and all other members of the Class without costs, except as provided in the
Stipulation.
6. All claims, rights, demands, causes of action, suits, matters and
issues, known and unknown, arising under common law, or federal or state
statutory law, including all securities laws (except for claims for appraisal
pursuant to Section 262 of the Delaware General Corporation Law and the rights
conferred by the Settlement) that have been or could have been asserted in this
or any other court or forum by plaintiff or by any member of the Class (as
defined in paragraph 2(b) above), whether directly, indirectly,
representatively, derivatively, individually, or in any other capacity, against
any of the defendants named in the Action, and their respective predecessors and
successors, present or former officers, directors, stockholders, agents,
employees, attorneys, representatives, advisors, affiliates (including the
directors and officers of such affiliates, parents, and subsidiaries), heirs,
executors, personal representatives, estates, administrators, successors and
assigns of any of the defendants or of any affiliate, parent or subsidiary of
any defendant (collectively, the
3
<PAGE> 33
"Defendants' Affiliates"), in connection with, arising out of, or in any way
related to any of the acts, facts, transactions, occurrences, representations or
admissions set forth, alleged, embraced or otherwise referred to in the Action
by plaintiff or any member of the Class, or by any present or former common
stockholder of United Coasts, either directly, indirectly, individually,
derivatively, representatively or in any other capacity, except for claims
relating to any party's alleged failure to comply with the terms and conditions
of the Stipulation (the "Settled Claims"), shall be and hereby are finally and
forever compromised, settled, remised, released, discharged and dismissed with
prejudice.
7. Plaintiff's counsel, Rosenthal, Monhait, Gross & Goddess, P.A. and
Kaufman Malchman Kirby & Squire, LLP, are hereby awarded attorneys' fees and
expenses in the amount of _______________ shares of ACMAT stock to be deducted
from the shares otherwise distributable to the Class in connection with the
Merger. The shares are to be issued in accordance with the Stipulation.
8. Without effecting the finality of this Order and Final Judgment in
any way, the Chancery Court hereby reserves jurisdiction for the purpose of
taking any action that may be appropriate to give effect to or enforce this
Order and Final Judgment.
____________________________
Vice Chancellor
Dated: _________________, 1996.
4
<PAGE> 1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
ACMAT Corporation and
United Coasts Corporation
We consent to the use of our reports regarding ACMAT Corporation and
Subsidiaries and United Coasts Corporation and Subsidiary, included herein or
incorporated herein by reference, and to the references to our firm under the
heading "Experts", "Company Selected Financial Data", and "United Coasts
Selected Financial Data" in the prospectus. Our reports refer to a change in
accounting for investments in 1994.
/s/ KPMG Peat Marwick LLP
Hartford, Connecticut
May 30, 1996
