<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0 - 6234
-------------
ACMAT CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-0682460
(State of incorporation) (I.R.S. Employer Identification No.)
233 Main Street
New Britain, Connecticut 06050-2350
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(860) 229-9000
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
Class A Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
The aggregate market value as of March 7, 1997 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $41,461,268.
As of March 7, 1997 there were 598,357 shares of the registrant's Common Stock
and 2,817,791 shares of registrant's Class A Stock, each without par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1. Business 3
General 3
Financial Information about Industry Segments 3
Description of Business Segments 3
Insurance and Surety Bonding 3
General 3
Liability Insurance 3
Surety Bonding 4
Insurance Performance Ratios 5
Underwriting 5
Reinsurance 6
Claims 6
Reserves for Losses and Loss Adjustment Expenses 6
IRIS Ratios 8
A.M. Best Ratings 9
Risk-Based Capital 9
Construction Contracting 9
General 9
Backlog 9
Materials 10
Contract Acquisition 10
Warranty 10
Asbestos Abatement Operations 10
Marketing 11
Competition 11
Regulation 12
Investments 12
Environmental Compliance 15
Employees 15
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Reserves for Losses and Loss Adjustment Expenses 20
Liquidity and Capital Resources 22
Regulatory Environment 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial
Owners and Management 54
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 57
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
General
ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial
insurance and bonding coverages for contractors, architects, engineers and other
professionals in the construction and environmental fields and other specialty
insurance. The Company derives its underwriting expertise from its construction
and remediation operations. Through United Coastal Insurance Company ("United
Coastal Insurance"), the Company provides a broad line of general, professional,
environmental and other liability insurance primarily to environmental
contractors and specialty trade contractors and architects, engineers and other
professionals. Through ACSTAR Insurance Company ("ACSTAR Insurance"), the
Company provides surety bonds for general building, specialty trade and
environmental contractors and others. Both United Coastal Insurance and ACSTAR
Insurance are rated A (excellent) by The A.M. Best Co., Inc. ("A.M. Best"). In
1996, insurance operations accounted for over 70% of the Company's consolidated
revenues.
The Company is also engaged in construction contracting which consists of
interior contracting services involving the design and furnishing of building
interiors and asbestos abatement services for commercial, industrial and
institutional buildings.
Effective September 16, 1996, the Company completed the merger of United Coasts
Corporation into ACMAT. United Coasts Corporation shareholders received one
share of ACMAT Class A stock for each approximately 1.536 shares of United
Coasts Corporation stock. As a result of the merger, ACMAT issued approximately
1,100,000 shares of its Class A stock amounting to a purchase price of
approximately $14 million for the 16% minority interest in the insurance holding
company subsidiary. As a result, United Coastal Insurance Company, formerly a
subsidiary of United Coasts, became a wholly-owned subsidiary of ACMAT and its
affiliates.
Financial Information about Industry Segments
Financial information relating to the two segments is set forth in Note 16 to
the consolidated financial statements on page 39 of this document.
INSURANCE AND SURETY BONDING
General
The Company's insurance subsidiaries primarily provide liability insurance and
surety bonding for general, specialty trade, environmental remediation, asbestos
and lead abatement contractors and professional liability for architects,
engineers, environmental consultants and others. The Company also provides
products liability insurance for manufacturers and distributors. This highly
specialized insurance market includes general liability, pollution liability,
environmental consulting liability, hazardous waste storage and treatment
pollution liability and other related liabilities. Fewer 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.
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 are offered to general contractors and
specialty trade contractors involved in plumbing, heating, electrical,
framing, roofing, drilling, excavation, demolition, road work, and other
contracting activities. Coverage is also offered for other specialized
non-contractor general liability risks. Coverage is limited to third-party
bodily injury and property damage arising out of covered operations.
General liability insurance is offered on either a claims-made or
occurrence basis.
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- - Contractor Pollution Liability - Policies are offered to contractors
involved in hazardous waste remediation or cleanup, installation or
removal of storage tanks, or the transportation of hazardous waste.
Coverage is provided for third party-bodily injury or property damage
liability caused by release of, or exposure to, pollutants as a result
of contractors' operations. Contractors pollution liability insurance
is offered on a claims-made basis.
- - Asbestos and Lead Abatement Liability - Policies are offered to
contractors involved in the removal or encapsulation of asbestos and/or
lead containing materials from structures or their containment through
appropriate encapsulation or repair. Coverage is provided for
third-party bodily injury and property damage liability as a result of
a release of asbestos or lead which arises out of the contractors'
operations. Asbestos and lead abatement liability insurance is provided
on either a claims-made or occurrence basis.
Professionals
- - Architects and Engineers Professional Liability - Policies are offered
to architects and engineers and consultants in the fields of
architecture; civil, electrical, mechanical, structural and process
engineering; construction/property management; design/build services;
laboratory testing and surveying. Project professional liability
policies are also offered for architect and engineer design teams and
owner controlled wrap-ups. All policies are written on a claims-made
basis.
- - Environmental Asbestos and/or Lead Consultants Professional Liability -
Policies are offered to consultants involved in providing services such
as environmental assessments, design/build services, asbestos or lead
consulting, remedial investigations and feasibility studies, and
storage tank consulting. Coverage is provided for liability arising out
of the acts, errors or omissions of a consultant in the performance of
professional services. All professional liability coverages are written
on a claims-made basis.
Owners and Lenders
- - Hazardous Waste Storage and Treatment Pollution Liability - Policies
are offered on a claims-made basis in response to the insurance
requirements of the Environmental Protection Agency in connection with
facilities subject to the Resource Conservation and Recovery Act of
1976 ("RCRA").
- - Site Specific Pollution Liability - These policies cover pollution
claims arising or emanating from a specific site and are provided on a
claims-made basis. Comprehensive site evaluations are required prior to
providing coverage for any site.
- - Lenders Pollution Liability - Policies are offered to financial
institutions for pollution occurring at property owned or controlled by
the institution as a result of foreclosure or otherwise. Lender
pollution liability coverage is offered on a claims-made basis.
Products Liability
- - Products Liability - Policies are offered on a claims-made or
occurrence basis to manufacturers for a variety of products including
chemicals, fertilizers, pesticides, pollution control devices and
storage tanks and other.
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.
Surety Bonding
Surety bonds are written for general, specialty trade, environmental, asbestos
and lead abatement contractors. The Company also offers a wide variety of
miscellaneous bonds. Most bonds are supported by various levels of collateral
based upon the financial condition of the contractor.
The Company generally requires cash, liquid investments 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.
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However, no assurance can be made that such financial institutions will maintain
their financial strength and, thus, that funds guaranteed under letters of
credit will be available, if needed, to offset any potential future claims.
The Company provides the following types of bonds:
- - Payment and performance bonds - Bonds are provided for general building
and specialty trade contractors, environmental remediation and asbestos
abatement contractors and consultants, lead abatement contractors and
solid waste disposal contractors. A payment and performance bond
guarantees satisfactory performance and completion of the contractor's
work and payment of the contractor's debts and obligations relating to
the performance of the contract covered by the bond.
- - Closure and post-closure bonds - Bonds are provided for owners of solid
and hazardous waste landfills as required to meet certain requirements
under RCRA and remediation bonds in connection with the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). Closure bonds usually guarantee that a property owner will
restore property to a specified level or condition. Post-closure bonds
guarantee cultivation and maintenance of a closed site.
- - Supply bonds and other specialty bonds - Bonds are provided for
contractors, manufacturers and other owners in their normal course of
operations, usually to guaranty the supply of equipment and material.
- - Miscellaneous surety, license, permit, self insurer, supersedeas and
other bonds - Miscellaneous bonds are provided for applicants based on
those requirements specified in the bond form and the applicant's
financial strength.
The underwriting department and management are responsible for the development
of new insurance products and enhancements. Underwriting profitability is
enhanced by the creation of niche products focused on classes of business which
traditionally have provided underwriting profits.
Insurance Performance Ratios
The following table sets forth the combined ratios of the Company, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense.
<TABLE>
<CAPTION>
Year
Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
GAAP Ratios:
Loss ratio 30.0% 30.0% 30.0%
Expense ratio 43.5 41.4 39.6
----- ------ ------
GAAP combined ratio 73.5 71.4 69.6
----- ------ ------
Statutory Ratios:
Loss ratio 30.5 30.5 30.3
Expense ratio 42.7 41.9 38.3
----- ------ ------
Statutory combined ratio 73.2 72.4 68.6
----- ------ ------
</TABLE>
The increase in the combined ratio over the past three years results primarily
from the decline in premiums. See Item 7 -- "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Underwriting
The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over forty-five years of construction contracting.
Accordingly, ACMAT, in addition to its construction contracting operations,
provides risk evaluation, loss adjustment, underwriting, claims handling and
monitoring services for its insurance subsidiaries, United Coastal Insurance and
ACSTAR Insurance. Contractors seeking liability insurance and bonding through
the Company are carefully reviewed with respect to their past practices, claims
history and records. Other factors considered are the contractors' and
professionals' financial conditions, training techniques,
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safety procedures, histories of violations, record keeping, supervisory
qualifications and experience. Historically, the Company has issued policies and
bonds to fewer than twenty-five percent of its applicants. Underwriting
procedures for products liability insurance involve conducting an in-depth
review of the product that is being manufactured or distributed. Such review
involves examining an applicant's past record of recalls, claims history and
litigation.
The Company's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio well below 100%.
The Company has a conservative underwriting philosophy which, in the opinion of
management, is one of the primary reasons for the favorable loss ratios relative
to the property and casualty insurance industry over the last three years.
The Company continually monitors financial stability of contractors with surety
bonds outstanding. Work in progress reports and updated financial information
are reviewed by the Company to ensure that the contractor continues to meet the
underwriting guidelines.
Reinsurance
The Company reinsures the excess limit on each insurance policy above $2 million
up to $5 million for liability and reinsures $10 million of $15.8 million of
individual bond limits offered by the Company through a treaty with two
companies, Transatlantic Reinsurance Company, an affiliate of AIG Insurance, and
United States Fidelity & Guaranty Company, each rated "A+" and "A",
respectively, by A. M. Best. The Company has 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. To date, the Company's reinsurers
have fulfilled their obligations under their reinsurance contracts with the
Company. Facultative reinsurance is also used for current insureds seeking
project specific excess insurance. In general, a reinsurance transaction takes
place when an insurance company cedes all or a portion of its exposure to
liability on insurance written or surety bonds issued to another insurer which
assumes such exposure, as if the ceding insurer were itself purchasing insurance
from the assuming insurer. Reinsurance does not legally discharge an insurance
carrier from its primary liability to a policyholder for the face amount of
coverage and, accordingly, the financial stability of the Company's reinsurers
is an important factor in determining the Company's ultimate exposure to claims.
The availability and price of reinsurance fluctuates according to market
conditions. In recent years, many reinsurers have withdrawn from the market or
become insolvent. Depending on the availability and cost of reinsurance, the
Company may, from time to time, elect to cede greater or lesser portions of its
underwriting risk.
Claims
The Company directly handles substantially all claims of its insureds, except
that independent claims adjusters and/or counsel selected for their experience
and reputation in the locality of the claim are retained to conduct initial
fact-finding investigations. All decisions respecting payment of claims are made
by experienced employees of the Company.
Reserves for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses are estimates at any given
point in time of what the Company may have to ultimately pay on incurred losses,
including related settlement costs, based on facts and circumstances then known.
The Company also reviews its claims reporting patterns, past loss experience,
risk factors and current trends and considers their effect in the determination
of estimates of incurred but not reported losses. Ultimate losses and loss
adjustment expenses are affected by many factors which are difficult to predict,
such as claim severity and frequency, inflation levels and unexpected and
unfavorable judicial rulings. Reserves for surety claims also consider the
amount of collateral held as well as the financial strength of the contractor
and its indemnitors. Management believes that the reserves for losses and loss
adjustment expenses at December 31, 1996 are adequate to cover the unpaid
portion of the ultimate net cost of losses incurred through that date and
related adjustment expenses incurred, including losses incurred but not
reported.
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
In determining appropriate adjustments to reserves historical
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data is reviewed and consideration is given to the anticipated impact of various
factors such as legal developments and economic conditions, including the
effects of inflation. Reserves are monitored and recomputed periodically using
new information on reported claims.
The following table sets forth a reconciliation of beginning and ending reserves
for losses and loss adjustment expenses for the periods indicated on a GAAP
basis for the business of the Company.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 45,235,311 $ 40,954,783 $34,729,643
Less reinsurance recoverable 3,872,099 4,228,879 4,293,049
------------ ------------ -----------
Net balance at January 1 41,363,212 36,725,904 30,436,594
Incurred related to:
Current year 7,137,183 8,015,877 8,209,992
Prior years (1,167,203) (900,506) --
------------ ------------ -----------
Total incurred 5,969,980 7,115,371 8,209,992
Payments related to:
Current year 153,514 111,989 284,736
Prior years 3,060,595 2,366,074 1,635,946
------------ ------------ -----------
Total Payments 3,214,109 2,478,063 1,920,682
Net balance at December 31 44,119,083 41,363,212 36,725,904
Plus reinsurance recoverable 3,841,001 3,872,099 4,228,879
------------ ------------ -----------
Balance at December 31 $ 47,960,084 $ 45,235,311 $40,954,783
============ ============ ===========
</TABLE>
The decrease in 1996 and 1995 of incurred losses and loss adjustment expenses of
prior years represents a reallocation of reserves among accident years. The
continued increase in claim payments are primarily the result of payments
relating to settlement of losses reserved in prior periods and are expected
based on the continued development of the Company's insurance operations. There
can be no assurance, however, that the Company's reserves will be sufficient to
cover ultimate losses and loss adjustment expenses or that future adjustments to
losses and loss adjustment expense reserves will not be required.
The Company has no exposure to any asbestos or environmental claims associated
with general liability policies issued with the pre-1986 pollution exclusion.
Policies written with the exclusion are typically associated with mass tort
environmental and asbestos claims. The Company has never issued a policy with
the pre-1986 pollution exclusion. The Company's exposure to asbestos and
environmental liability claims is primarily limited to asbestos and
environmental liability insurance for contractors and consultants involved in
the remediation, removal, storage, treatment and/or disposal of environmental
and asbestos hazards.
As of December 31, 1996, 1995 and 1994 reserves for the combined losses and loss
adjustment expenses of the Company's insurance operations as determined in
accordance with accounting principles and practices prescribed or permitted by
insurance regulatory authorities ("Statutory basis reserves") were $59,968,945,
$58,835,913 and $53,642,609, respectively. As of December 31, 1996, 1995 and
1994 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $47,960,084, $45,235,311 and
$40,954,783, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves result from the minimum statutory, or "Schedule P",
loss reserves required to be maintained by the Company's insurance subsidiaries,
partially offset by the netting of reinsurance recoverable against losses and
loss adjustment expense reserves for statutory purposes.
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The following losses and loss adjustment expense reserve runoff table is for the
combined insurance operations of the Company's insurance subsidiaries. ACSTAR
Insurance operations began in 1988. The run-off table presents the reserve
activity since the inception of United Coastal Insurance in 1985. The data for
1992 and prior periods are presented on a net basis in the reserve run-off
table. Restatement of prior periods is not practicable.
Each column shows the reserve held at the indicated calendar year-end and
cumulative data on payments and reestimated liabilities for that accident year
and all prior accident years making up that calendar year-end reserve.
Therefore, the redundancy (deficiency) is also a cumulative number for that
year and all prior years. It would not be appropriate to use this cumulative
history to project future performance.
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------ ------- ------ ------ ------- -----
(thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and loss adjustment
expenses 6,178 11,528 15,626 21,378 26,234 29,240 30,437 36,726 41,363 44,119
Liability reestimated
as of:
One year later 6,178 11,528 15,476 21,378 26,234 29,240 30,437 35,825 40,193
Two years later 6,178 11,378 15,476 21,378 26,234 29,240 28,337 34,659
Three years later 6,028 11,378 15,476 21,378 26,234 26,000 27,170
Four years later 6,028 11,378 14,876 21,378 22,094 24,833
Five years later 5,413 10,778 14,876 16,642 20,927
Six years later 4,813 10,778 6,622 15,475
Seven years later 4,813 2,924 5,455
Eight years later 671 2,382
Nine years later 671
Cumulative 5,507 9,146 10,171 5,903 5,307 4,407 3,267 2,067 1,170
Redundancy
(deficiency):
Paid (cumulative) as of:
One year later 81 759 565 1,357 3,216 6,142 1,560 2,361 3,067
Two years later 581 1,026 743 4,067 8,699 7,574 3,655 4,582
Three years later 588 1,070 2,140 8,954 9,576 8,603 5,022
Four years later 588 1,178 3,460 10,233 10,488 9,554
Five years later 671 2,349 3,924 10,554 10,816
Six years later 671 2,355 4,010 10,858
Seven years later 671 2,238 4,012
Eight years later 671 2,354
Nine years later 671
Gross liability - end of 34,730 40,955 45,235 47,960
year
Reinsurance recoverable 4,293 4,229 3,872 3,841
------ ------ ------ ------
Net liability - end of year 30,437 36,726 41,363 44,119
</TABLE>
In 1995, the Company changed its method of reporting estimated liabilities for
claims-made policies which is reflected in the reserve run-off table. For
calendar years 1994 and prior, reserves associated with claims-made policies
were reported based on accident year basis consistent with the Company's
treatment in Schedule P to the Company's Statutory Annual Statement. At the
request of the Arizona Insurance Department, ("Department") the Company was
required to change its method of reporting in Schedule P to the Annual
Statement, reserve and payment data associated with claims-made policies to a
report year basis versus an accident year basis in order to comply with the
National Association of Insurance Commissioners ("NAIC") guidelines. The
Company's prior treatment of claims- made loss data on an accident basis was
approved by the Department during years prior to 1995. For its 1995 statutory
filing, the Company restated loss data reported in Schedule P to comply with the
Department's request. As a result of the change to Schedule P for claims-made
policies, the Company has also changed the method for reporting claims-made loss
payment data in the reserve run-off table to conform to a report year basis for
claims- made policies. Occurrence policies were and continue to be reported on
an accident year basis. The 1995 reestimated liabilities for each calendar year
have been restated to reflect the new method of reporting.
Because of the change in reporting loss data for claims-made policies from an
accident year basis to a report year basis, prior accident year reserves have
been moved forward to fall within the report year resulting in no change to
total reserve amounts or estimates. Management believes that the aggregate
reserves for losses and loss adjustment expenses for all accident years are
adequate.
IRIS Ratios
The National Association of Insurance Commissioners ("NAIC") has developed the
Insurance Regulatory Information System ("IRIS"), intended to assist state
insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies "usual values" for each
ratio. When an insurance company's ratio falls outside the "usual value," it is
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designated an "unusual value," which event alerts state insurance departments to
potential problems. For the year ended December 31, 1996, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value," except
for the investment yield ratio for ACSTAR Insurance Company. The calculated
investment yield was below the NAIC standard of 4.5% because of the Company's
policy of investing in relatively short-term tax-exempt securities and ACSTAR
Insurance Company's ownership of United Coastal Insurance Company which is not
an income producing security.
A.M. Best Ratings
A.M. Best ratings are indications of the solvency of an insurer based on an
analysis of the financial condition and operations of a company relative to the
industry in general. Occasionally, the requirement for A.M. Best's-rated insurer
is a condition imposed upon the contractor by the party engaging the contractor.
Certain insurance brokers also restrict the business they will place with
insurers which are not A.M. Best's-rated. The 1996 Best letter ratings range
from A++ (superior) to F (in liquidation).
Since 1994, United Coastal Insurance and ACSTAR Insurance each have an A.M.
Best's rating of A (excellent).
Risk-Based Capital
Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
require further regulatory action. The ratio for each of the Company's insurance
subsidiaries as of December 31, 1996 was significantly above the level which
might require regulatory action.
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 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.
Backlog
The following table sets forth the Company's backlog of unbilled contract
amounts, the total number of contracts and the number of contracts with unbilled
amounts in excess of $400,000 as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Total Number of Contracts 14 16
Total unbilled contract amounts $8,700,000 $3,600,000
</TABLE>
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<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Number of contracts with unbilled
amounts in excess of $400,000 3 3
Aggregate unbilled amount of
contracts in excess of $400,000 $8,200,000 $3,000,000
</TABLE>
The Company estimates that approximately $6,000,000 of the December 31, 1996
backlog will be completed prior to December 31, 1997.
Materials
The Company purchases the materials it installs in the course of its
construction contracting operations from a number of suppliers. Most of the
Company's materials are standard building components which historically have
been readily available from several suppliers. Some components are manufactured
to the Company's specifications. Most of the materials used by the Company are
shipped directly to the job site by the manufacturer.
Contract Acquisition
The Company's work projects are obtained by lump sum fixed price bids, unit
prices or are negotiated. Contract prices are usually determined by competition
with other contractors.
Warranty
Each project usually contains a one-year warranty or guaranty period, wherein
the Company and its subcontractors warrant that the work is free from defects
and was performed in accordance with the plans and specifications. Occasionally,
the Company is required to make minor corrections or adjustments, but has never
incurred any significant costs in connection with any such work.
Asbestos Abatement Operations
Both the Company's insurance and construction contracting operations have
involved risks associated with asbestos. The Company has in the past insured and
continues to insure risks associated with asbestos abatement or containment
operations on both a claims-made and occurrence basis. Since harm from exposure
to asbestos fibers may not be detectable in humans for as much as thirty years,
losses under insurance contracts written on an occurrence basis may not be known
for some time.
The Company's construction contracting operations involve the removal of
asbestos. As asbestos containing materials deteriorate or become disturbed by
incidental or intentional contact, asbestos fibers may enter the air and can
circulate into the breathing zone of building occupants. Exposure to asbestos is
thought by some to be a cause of cancer. In the mid 1970's, the Company became
engaged in the removal of asbestos in addition to its other contracting
operations. Since that time, it has been engaged in hundreds of contracts
involving the removal of asbestos. Claims by non-employees related to asbestos
have been made against the Company from time to time and are pending and there
can be no assurance that claims will not be made in the future.
While the Company currently has claims pending against it by employees, the
Company believes that it is fully covered by workers' compensation insurance
with respect to any claims by current and former employees relating to asbestos
operations. The Company currently obtains its workers' compensation insurance in
those states in which it performs work either from state insurance funds or one
of several insurance companies designated in accordance with the Assigned Risk
Pool. The amount of workers' compensation insurance maintained varies from state
to state but is generally greater than the maximum recovery limits established
by law and is not subject to any aggregate policy limits. In the past, the
Company has received a number of asbestos-related claims from employees, all of
which have been fully covered by its workers' compensation insurance. The
Company believes, although no assurances can be given, that workers'
compensation insurance sufficient to cover all future claims will remain
available in accordance with applicable state laws.
10
<PAGE> 11
MARKETING
Insurance and Surety Bonding
As an excess and surplus lines carrier, United Coastal Insurance markets its
policies through excess and surplus lines brokers only in those states in which
it is permitted to write coverage. Currently, United Coastal Insurance is
permitted to write excess and surplus lines insurance as a nonadmitted insurer
in forty-six states, the District of Columbia, Puerto Rico and the Virgin
Islands.
ACSTAR Insurance offers payment and performance bonds through carefully selected
insurance agents which specialize in the needs of contractors. All underwriting
approvals and issuance of policies and bonds are performed directly by the
Company's insurance subsidiaries.
The Company's insurance products are marketed in all 50 states primarily through
several of the largest insurance brokers, including Johnson & Higgins, Marsh &
McLennan, Willis Corroon, AON, Inc. and Sedgwick.
Construction Contracting
The Company markets its construction contracting services directly to building
owners and building occupants. Project opportunities are brought to the
attention of the Company through various sources such as F. W. Dodge Company,
which publishes lists of projects available for bid, architects, owners, general
contractors, or engineers who are familiar with the Company. The Company also
depends upon repeat business and responses to the Company's advertising program
which is intended to emphasize ACMAT's packaged interior renovation capability.
ACMAT's sales force consists of its senior management and project managers, all
of whom function as construction consultants and work closely with owners,
tenants and architects.
COMPETITION
Insurance and Surety Bonding
The property and casualty insurance industry is highly competitive. The Company
competes with large national and smaller regional insurers in each state in
which it operates, as well as monoline specialty insurers. The Company's
principal competitors include certain insurance subsidiaries of American
International Group, Inc. ("AIG"), Reliance Insurance Group, Zurich Insurance
Group, Design Professionals Insurance Company, CNA Insurance Companies and
Lloyd's of London. Many of its competitors are larger and have greater financial
resources than the Company. Among other things, competition may take the form of
lower prices, broader coverage, greater product flexibility, higher quality
services or the insurer's rating by independent rating agencies. The Company
competes with admitted insurers, surplus line insurers, new forms of insurance
organizations such as risk retention groups, and alternative self-insurance
mechanisms.
Competition in the field of surety bonding is intense and many of the Company's
competitors are larger and have greater surplus than the Company, thereby
allowing them to provide bonds with higher limits than those which the Company
is able to provide. The Company's principal competitors include the St. Paul
Companies, Inc., Reliance Insurance Group, AIG and CNA. The Company's insurance
subsidiaries hold primary and reinsurance certificates of authority as
acceptable sureties on Federal bonds as do approximately 250 to 300 other surety
companies. The certificates give the Company an advantage over companies which
are not certified by the United States Treasury Department with respect to
surety bonding on Federal projects in that such certification has become a
standard with respect to both Federal and other bonds. Approximately one-half of
the surety bonds written by the Company's subsidiaries are required to be
provided by a Treasury listed company. With respect to other bonds, the Company
faces competition from as many as 1,000 additional non-certified surety
companies.
Construction Contracting
Competition in the interior construction business serviced by ACMAT generally is
intense. Historically, a majority of the Company's construction business was
performed on projects on which the Company had been in competition with other
contractors. The Company 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.
11
<PAGE> 12
The economic climate of the Northeast has increased the competitive pressure on
all aspects of the Company's contracting operations. The Company has responded
with marketing efforts seeking to obtain business when the Company's reputation
and experience allow it to privately negotiate contracts at prices which are
sufficiently profitable.
REGULATION
The business of ACMAT's insurance subsidiaries is subject to comprehensive and
detailed regulation and supervision throughout the United States. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative authority which includes, but is not limited to, the power to
regulate licenses, to transact business, trade practices, agent licensing,
policy forms, claim practices, underwriting practices, reserve requirements, the
form and content of required financial statements and the type and amounts of
investments permitted. The insurance companies are required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
they do business, and their operations and accounts are subject to examination
by such agencies at regular intervals.
As a nonadmitted excess and surplus lines insurer, United Coastal Insurance is
not subject to the comparatively more extensive state regulations to which
ACSTAR Insurance is subject. The regulations and restrictions to which ACSTAR
Insurance and United Coastal Insurance are subject include provisions intended
to assure the solvency of ACSTAR Insurance and United Coastal Insurance and are
primarily for the protection of policyholders and loss claimants rather than for
the benefit of investors.
State insurance regulations impose certain restrictions upon the types of
investments that the Company's insurance subsidiaries can acquire and the
percentage of their capital or assets that may be placed in any particular
investment or type of investment. Certain states also require insurance
companies to furnish evidence of financial security by means of a deposit of
marketable securities with the state insurance regulatory authority. On December
31, 1996, the Company's insurance subsidiaries had securities with an aggregate
book value of approximately $9.8 million on deposit with various state
regulatory authorities.
The insurance subsidiaries of ACMAT are restricted as to the amount of cash
dividends they may pay. United Coastal Insurance is restricted by the Arizona
Insurance Holding Company Systems Act as to the amount of dividends it may pay
without the prior approval of the Arizona Department. During 1996, United
Coastal Insurance paid $6,047,900 in dividends. At January 1, 1997, $4,301,000
is available for the payment of dividends by United Coastal Insurance in 1997
without the prior approval of the Arizona Insurance Department.
Under applicable insurance regulations in its domicile state of Illinois, ACSTAR
Insurance is also restricted as to the amount of dividends it may pay. ACSTAR
may pay or declare a dividend only up to the amount of any available surplus
funds derived from realized net profits on its business, as determined in
accordance with statutory accounting principles. During 1996, ACSTAR paid
$2,000,000 in dividends to ACSTAR Holdings. At January 1, 1997, approximately
$2,710,000 is available for the payment of dividends by ACSTAR Insurance in 1997
without the prior approval of the Illinois Insurance Department.
New regulations and legislation are being proposed to limit damage awards, to
control plaintiffs' counsel fees, to bring the industry under regulation by the
federal government and to control premiums, policy terminations and other policy
terms. It is not possible to predict whether these proposals will be adopted or
their likely effect, if any, on the Company.
INVESTMENTS
The Company's investment strategy is to maintain a conservative investment
policy by generally acquiring high quality tax-exempt securities, primarily
bonds, with fixed effective maturities of approximately three years or less.
The investment portfolio is well diversified and is in compliance with
regulatory requirements. The Company's bond portfolio is composed primarily of
investments rated AA or better by Standard and Poor's. Management has also
decided to avoid long-term investing at what management believes to be low
long-term interest rates.
The Company's investment portfolio is subject to several risks including
interest rate and reinvestment risk. Fixed maturity security values generally
fluctuate inversely with movements in interest rates. The Company's corporate
and municipal bond investments may contain call and sinking fund features which
may result in early redemptions and the Company's mortgage-backed securities
investments held by the Company are subject to prepayment risk. Declines in
interest rates could cause early redemptions or prepayments which would require
the Company to reinvest at lower rates.
12
<PAGE> 13
Investment securities are classified as held to maturity, availablefor sale
or trading. The Company currently classifies all investment securities as
available for sale. Investment securities available for sale, are carried at
fair value and unrealized gains and losses are excluded from earnings and
recorded as a separate component of stockholders' equity, net of estimated
income taxes.
13
<PAGE> 14
The Company invests primarily in tax-exempt securities as part of its strategy
to maximize after-tax income. Such strategy considers, among other factors, the
impact of the alternative minimum tax. The following table summaries the fixed
maturity investments portfolio at December 31, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
--------------- -----------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
Fixed maturities available for sale (1):
U.S. government and government
agencies and authorities $ 38,376 27.0% $ 43,749 33.0%
State and political subdivisions 55,135 38.9 78,238 59.1
Industrial and Miscellaneous -- -- 400 .3
-------- ----- -------- -----
Total fixed maturities available for sale 93,511 65.9 122,387 92.4
Equity securities (2) 11 -- 20 .1
Limited partnership investment (3) 1,439 1.0 1,642 1.2
Short-term investments 46,969 33.1 8,359 6.3
-------- ----- -------- -----
Total investments $141,930 100.0% $132,408 100.0%
======== ===== ======== =====
</TABLE>
- ------------------
(1) Fixed maturities available for sale are carried at fair value. Total
cost of fixed maturities was approximately $93,398,000 at December
31, 1996 and $121,613,000 at December 31, 1995.
(2) Equity securities are carried at fair value. Total cost of equity
securities was approximately $5,000 at December 31,1996 and $20,000
at December 31, 1995.
(3) Limited partnership investments are carried at fair value. Total cost
of the limited partnership investments was approximately $1,087,000
at December 31, 1996 and $1,120,000 at December 31, 1995.
The following table sets forth the maturities in the fixed maturity investment
portfolio at December 31, 1996 and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1996 1995
------------------ -------------------
Percent Percent
of of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
Due in (1):
One year or less $41,559 44.4% $ 66,127 54.0%
After one year through five years 51,231 54.8 54,480 44.5
After five years through ten years 372 .4 1,097 .9
After ten years 349 .4 683 .6
------- ----- -------- -----
$93,511 100.0% $122,387 100.0%
======= ===== ======== =====
</TABLE>
- ---------------------
(1) Based on stated maturity dates with no prepayment assumptions. Actual
maturities may differ because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Company's insurance subsidiaries are subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1996, the Company's
investments complied with such laws and regulations.
14
<PAGE> 15
Investment results for the years ended December 31, 1996, 1995 and 1994 are
shown in the following table (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Invested assets (1) $140,823 $132,513 $124,643
Investment income (2) $ 6,536 $ 6,036 $ 4,637
Average yield 4.6% 4.6% 3.7%
</TABLE>
(1) Average of the aggregate invested amounts at the beginning and end of the
period including cash and cash equivalents.
(2) Investment income is net of investment expenses and does not include
realized investment gains or losses or provision for income taxes.
The yields reflect the Company's investment strategy of acquiring high quality
tax-exempt securities with fixed effective maturities of approximately three
years or less. The increase in investment income in 1996 over 1995 was due
substantially to an increase in total invested assets. 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 as well as an increase in
total invested assets. 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 in part by cash used to repay debt and
repurchase stock.
ENVIRONMENTAL COMPLIANCE
The Company does not expect that its compliance with federal, state or local
environmental laws or regulations will have any material effect upon its capital
expenditures, earnings or competitive position.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 30 persons, all in
the United States. None of its current employees are employed subject to
collective bargaining agreements. The Company believes that its relations with
all of its employees are excellent.
ITEM 2. PROPERTIES
The Company and its subsidiaries occupy a 7 story office building located at 233
Main Street, in New Britain, Connecticut. ACMAT leases approximately 40% of the
building to unaffiliated tenants. The office building is suitable and adequate
for ACMAT's current and future requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a few legal actions arising in the ordinary course of
its business. In management's opinion, the Company has adequate legal defenses
or insurance coverages respecting those actions where the Company is a defendant
and does not believe their settlement will materially affect the Company's
operations or financial position.
The Company has, together with many other defendants, been named as a defendant
in approximately 152 actions brought in Connecticut state courts by injured or
deceased individuals or their representatives based on product liability claims
relating to materials containing asbestos. No specific claims for monetary
damages are asserted in these actions. Although it is early in the litigation
process, the Company does not believe that its exposure in connection with these
cases is significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
15
<PAGE> 16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ACMAT's Class A Stock trades on the Nasdaq National Market under the symbol
ACMTA. As of September 5, 1995, the Common Stock no longer qualified for
continued listing on the Nasdaq National Market and is now traded in the
over-the-counter market. The following table sets forth the quarterly high and
low closing prices of the Company's Common Stock and Class A Stock as reported
by Nasdaq.
<TABLE>
<CAPTION>
1996 1995
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
COMMON STOCK
1st Quarter 16 15 16 1/4 13 1/2
2nd Quarter 20 15 17 14 1/2
3rd Quarter 18 7/8 17 16 15
4th Quarter 20 1/2 18 17 15
CLASS A STOCK
1st Quarter 13 3/4 12 1/2 11 5/8 9 3/16
2nd Quarter 13 11 5/8 12 7/8 11 5/8
3rd Quarter 13 11 1/2 12 3/4 11 3/4
4th Quarter 14 3/4 12 1/2 13 1/4 11 5/8
</TABLE>
No dividends have been paid in the past five years and there is no intention of
paying dividends in the near future. As of March 24, 1997, there were 310 Common
Stock shareholders of record and 926 Class A Stock shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 37,035,305 $ 41,857,398 $ 40,755,676 $ 40,193,622 $ 39,697,632
Total Assets 184,359,566 180,402,238 168,494,814 174,609,667 159,674,290
Long-Term Debt 35,807,419 40,127,590 43,405,266 49,832,463 51,396,504
Stockholders' Equity 49,702,404 37,587,259 38,004,935 36,686,002 34,029,931
Net Earnings 5,293,111 5,350,280 4,839,861 3,909,117 2,826,870
Earnings Per Share (EPS) 1.49 1.46 1.17 .91 .65
Fully Diluted EPS 1.21 1.18 -- -- --
</TABLE>
Note: No cash dividends were paid during any of the periods above.
*Including cumulative effect of a change in accounting principle of $1,127,943
(26(cent) per share) in 1992.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1996 AND 1995:
Earned Premiums
Earned premiums in 1996 were $19,899,936 compared to $23,492,905 in 1995. Net
written premiums were $18,041,488 in 1996 compared to $22,856,791 in 1995. The
decrease in earned premiums in 1996 reflects the 21% decrease in 1996 net
written premiums over 1995 net written premiums. The Company has written fewer
new accounts as a result of what is believed to be an inadequate pricing
environment in the market. Variances in net written premiums have historically
occurred due to the fluctuations in size, number and timing of bonds and
policies bound by the Company.
Contract Revenues
Contract revenues were $9,415,734 in 1996 compared to $11,614,632 in 1995.
During the past several years, the Company has focused on fewer, more profitable
projects. Construction revenue is difficult to predict in 1997 and depends
greatly on the successful securement of contracts bid.
Investment Income, Net
Net investment income was $6,535,572 in 1996 compared to $6,062,883 in 1995,
representing effective yields of 4.64% and 4.58%, respectively. The increase in
investment income in 1996 over 1995 was due substantially to an increase in
total invested assets. Invested assets, including cash and cash equivalents,
were $144,117,159 and $137,528,676 at December 31, 1996 and 1995, respectively.
The increase in invested assets is attributable to the net cash flow generated
by written premiums, cash collateral and the reinvestment of investment income
offset by the purchase of stock and the repayment of debt.
Net Realized Capital Gains
Realized capital gains from the sale of investments during 1996 were $257,774
compared to realized capital gains of $7,897 in 1995. In December, 1996, the
Company sold fixed maturity securities with a book value of approximately
$34,000,000 resulting in a realized gain of approximately $204,000.
Cost of Contract Revenues
Cost of contract revenues were $8,396,344 in 1996 compared to $10,774,758 in
1995. The decrease in cost of contract revenues during 1996 compared to 1995
reflects the decrease in contract revenues. Cost of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues). The
Company's construction backlog at December 31, 1996 was approximately $8,700,000
compared to $3,600,000 at December 31, 1995.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $5,969,980 in 1996 compared to
$7,115,371 in 1995. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1995 to 1996 without any
fluctuations in the loss ratios. Loss and loss adjustment expense reserves
represent management's estimate of the ultimate cost of unpaid losses incurred
for these periods relative to premiums earned.
Amortization of Policy Acquisition Costs
Amortization of policy acquisition costs was $3,617,308 in 1996 as compared to
$3,939,008 in 1995. The decrease in amortization of policy acquisition costs is
primarily attributable to the decrease in premiums earned. Policy acquisition
costs, primarily commissions, are deferred and amortized over the policy or bond
term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5,610,176 in 1996 compared to
$6,097,322 in 1995. The decrease in selling, general and administrative expenses
from 1996 to 1995 reflects a decrease in salary expense.
17
<PAGE> 18
18
<PAGE> 19
Interest Expense
Interest expense has increased to $4,946,418 in 1996 from $4,810,578 in 1995.
The increase in interest expense in 1996 is due primarily to the increase in
short term borrowings offset, in part, by a decrease in long-term debt.
Income Taxes
Income tax expense was $2,313,828 in 1996 compared to $2,414,400 in 1995,
representing effective Federal tax rates of 26.5% and 25.1%, respectively. The
Federal effective tax rate fluctuates according to the mix of tax exempt and
taxable securities held by the Company.
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 an inadequate pricing
environment in the market. Variances in net written premiums have historically
occurred due to the fluctuations in size, number and timing of bonds and
policies bound by the Company.
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 in 1996 and depends greatly on the successful
securement of contracts bid.
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.
19
<PAGE> 20
Cost of Contract Revenues
Cost of contract revenues were $10,774,758 in 1995 compared to $7,793,535 in
1994. The increase in cost 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. Loss and loss adjustment expense reserves
represent management's estimate of the ultimate cost of unpaid losses incurred
for these periods relative to premiums earned.
Amortization of Policy Acquisition Costs
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.
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.
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, 1996 are adequate to cover the unpaid portion of the ultimate net
cost of losses and lost adjustment expenses, including losses incurred but not
reported. Reserves for losses and loss adjustment expenses are estimates at any
given point in time of what the Company may have to pay ultimately on incurred
losses, including related settlement costs based on facts and circumstances then
known. The Company also reviews its claims reporting patterns, past loss
experience, risk factors and current trends and considers their effect in the
determination of estimates of incurred but not reported reserves. Ultimate
losses and loss adjustment expenses are affected by many factors which are
difficult to predict, such as claim severity and frequency, inflation levels and
unexpected and unfavorable judicial rulings. Reserves for surety claims also
consider the amount of collateral held as well as the financial strength of the
contractor and its indemnitors.
20
<PAGE> 21
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, 1996, 1995 and
1994. 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 43.5%, 41.4% and 39.6% for the years ended December 31, 1996, 1995 and
1994, respectively. The Company's insurance subsidiaries' combined ratios under
GAAP were 73.5%, 71.4% and 69.6% for the years ended December 31, 1996, 1995 and
1994, respectively. The increase in the 1996 combined ratio results primarily
from the decline in premiums.
LIQUIDITY AND CAPITAL RESOURCES:
The Company internally generates sufficient funds for its current operations and
maintains a relatively high degree of liquidity in its investment portfolio. The
primary sources of funds to meet the demands of claim settlements and operating
expenses are premium collections, investment earnings and maturing investments.
The Company has no material commitments for capital expenditures and, in the
opinion of management, has adequate sources of liquidity to fund its operations
over the next 12 months.
ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from
operating activities primarily because of interest expense related to notes
payable and long-term debt incurred by ACMAT to acquire and capitalize its
insurance subsidiaries and to repurchase Company stock. ACMAT has also incurred
negative working capital as a result of holding short-term debt related to its
operations.
ACMAT's principal sources of funds are dividends from its wholly-owned
subsidiaries, intercompany and short-term borrowings, insurance underwriting
fees from its subsidiaries, construction contracting operations and rental
income. Management believes that these sources of funds are adequate to service
its indebtedness. 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 subsidiaries to improve its working capital.
The Company realized cash flow from operations of $14,226,539 in 1996 compared
to $19,312,412 in 1995 and $9,629,444 in 1994. Net cash flows provided by
operations in 1996 were derived principally from premium collections and
collateral held. Substantially all of 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.
Net cash used for investing activities amounted to $11,358,672 in 1996,
$11,454,974 in 1995 and $4,535,375 in 1994. In December 1996, the Company sold
fixed maturity securities with a book value of approximately $34,000,000
resulting in a realized gain of approximately $204,000.
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 December 31, 1996, except for the limitation on the
reacquisition of shares which exceeded the Available Fund at December 31, 1996.
The Company has received a waiver to exceed this limitation at December 31,
1996.
22
<PAGE> 22
The Company maintains a short-term unsecured bank credit line of $10 million to
fund interim cash requirements. There was $8,000,000 outstanding under this line
of credit as of December 31, 1996. Effective June 30, 1994, this credit line was
renewed and modified to include an additional $8,000,000, six-year, term loan
which is repayable in quarterly installments commencing September 30, 1994.
Portions of the proceeds of such term loan were applied to the repayment of
intercompany debt and to the reduction of the Company's short-term credit line.
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, 1997.
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 $5,200,000 outstanding under this line of credit at
December 31, 1996.
During 1996, the Company purchased, in the open market and privately negotiated
transactions, 42,207 shares of its Common Stock at an average price of $18.81.
The Company also repurchased, in open market and privately negotiated
transactions, 872,975 shares of its Class A Stock at an average price of $13.24
per share.
The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance 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 1997, the amount of
dividends ACMAT's insurance subsidiaries may pay, without prior approval of
their domestic state insurance departments, is limited to approximately
$7,011,000.
In 1997, the Company anticipates that internally generated funds and short-term
borrowings will be utilized for repayment of long-term debt. Principal
repayments on long-term debt is scheduled to be approximately $6,300,000 in
1997.
REGULATORY ENVIRONMENT
Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
require further regulatory action. The ratio for each of the Company's insurance
subsidiaries as of December 31, 1996 was significantly above the level which
might require regulatory action.
23
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Schedules
ACMAT Corporation and Subsidiaries:
The following Consolidated Financial Statements of the Company, related notes
and Independent Auditors' Report are included herein:
Independent Auditors' Report
Consolidated Statements of Earnings for the years ended December 31,
1996, 1995 and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements - December 31, 1996, 1995
and 1994
Consolidated Schedules included in Part II of this Report - Years ended
December 31, 1996, 1995 and 1994:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty Insurance
Operations
24
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ACMAT Corporation:
We have audited the consolidated financial statements of ACMAT Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACMAT Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
Hartford, Connecticut KPMG Peat Marwick LLP
February 24, 1997
25
<PAGE> 25
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Earned Premiums $ 19,899,936 23,492,905 27,141,639
Contract Revenues 9,415,734 11,614,632 8,160,758
Investment Income, Net 6,535,572 6,062,883 4,637,158
Net Realized Capital Gains (Losses) 257,774 7,897 (34,238)
Other Income 926,289 679,081 850,359
------------ ----------- -----------
37,035,305 41,857,398 40,755,676
Losses and Loss Adjustment Expenses 5,969,980 7,115,371 8,209,992
Cost of Contract Revenues 8,396,344 10,774,758 7,793,535
Amortization of Policy Acquisition Costs 3,617,308 3,939,008 4,260,759
Selling, General and Administrative Expense 5,610,176 6,097,322 6,964,686
Interest Expense 4,946,418 4,810,578 4,940,014
------------ ----------- -----------
28,540,226 32,737,037 32,168,986
------------ ----------- -----------
Earnings Before Income Taxes and Minority 8,495,079 9,120,361 8,586,690
Income Taxes 2,313,828 2,414,400 2,245,300
------------ ----------- -----------
Earnings Before Minority Interest 6,181,251 6,705,961 6,341,390
Minority Interest (888,140) (1,355,681) (1,501,529)
------------ ----------- -----------
Net Earnings $ 5,293,111 5,350,280 4,839,861
============ =========== ===========
Net Earnings Per Share and Share Equivalent $ 1.49 1.46 1.17
------------ ----------- -----------
Net Earnings Per Share - Assuming Full Dilution $ 1.21 1.18 --
------------ ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE> 26
ACMAT CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
- ------ ---- ----
<S> <C> <C>
Investments:
Fixed Maturities - Available for Sale at Fair Value
(Cost of $93,397,819 in 1996 and $121,612,706 in 1995) $ 93,511,048 122,387,491
Equity Securities - Available for Sale at Fair Value
(Cost of $5,262 in 1996 and $20,000 in 1995) 10,573 20,000
Limited Partnership Investment, at Fair Value
(Cost of $1,086,630 in 1996 and $1,120,354 in 1995) 1,439,174 1,641,763
Short-term Investments, at Cost Which Approximates Fair Value 46,969,137 8,359,047
------------ -----------
Total Investments 141,929,932 132,408,301
Cash and Cash Equivalents 2,187,227 5,120,375
Accrued Interest Receivable 1,567,761 2,230,988
Receivables, Net of Allowance for Doubtful Accounts of
$322,406 in 1996 and $340,844 in 1995 8,381,590 9,022,434
Reinsurance Recoverable 3,841,001 3,872,099
Income Tax Refund Receivable -- 233,572
Prepaid Expenses 206,562 178,965
Deferred Income Taxes 2,285,883 1,971,148
Property and Equipment, Net 13,553,114 13,987,256
Deferred Policy Acquisition Costs 2,905,875 3,459,308
Other Assets 3,951,946 3,869,028
Intangibles, Net 3,548,675 4,048,764
------------ -----------
$184,359,566 180,402,238
============ ===========
Liabilities & Stockholders' Equity
- ----------------------------------
Notes Payable to Banks $ 13,200,000 7,500,000
Accounts Payable 1,873,611 2,189,645
Reserves for Losses and Loss Adjustment Expenses 47,960,084 45,235,311
Unearned Premiums 12,341,642 14,302,613
Collateral Held 21,830,566 17,767,955
Other Accrued Liabilities 1,404,821 1,861,815
Income Taxes 239,019 --
Long-term Debt 35,807,419 40,127,590
------------ -----------
Total Liabilities 134,657,162 128,984,929
Minority Interest -- 13,830,050
Stockholders' Equity:
Common Stock (No Par Value; 3,500,000 Shares Authorized;
600,257 and 642,464 Shares Issued and Outstanding) 600,257 642,464
Class A Stock (No Par Value; 10,000,000 Shares Authorized;
3,488,860 and 2,665,836 Shares Issued and Outstanding) 3,488,860 2,665,836
Additional Paid-in Capital 8,407,877 1,921,100
Retained Earnings 36,894,494 31,601,383
Unrealized Gain on Securities, Net of Deferred Taxes
of $160,168 in 1996 and $389,685 in 1995 310,916 756,476
------------ -----------
Total Stockholders' Equity 49,702,404 37,587,259
------------ -----------
Commitments and Contingencies $184,359,566 180,402,238
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE> 27
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
unrealized
Common Class A gains
stock stock Additional (losses) Total
par par paid-in Retained on stockholders'
value value capital earnings securities equity
----- ----- ------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
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
Acquisition and retirement of
42,207 shares of Common Stock $ (42,207) -- (751,865) -- -- (794,072)
Acquisition and retirement of
872,975 shares of Class A Stock -- (872,975) (10,633,162) -- -- (11,506,137)
Issuance of 499,999 Shares of
Class A Stock -- 499,999 4,499,991 -- -- 4,999,990
Issuance of 85,000 Shares of Class A
Stock pursuant to stock options -- 85,000 644,150 -- -- 729,150
Issuance of 1,111,000 Shares of
Class A Stock -- 1,111,000 12,727,663 -- -- 13,838,663
Net unrealized losses on debt and
equity securities -- -- -- -- (675,077) (675,077)
Deferred taxes on net unrealized
gains on debt and equity securities -- -- -- -- 229,517 229,517
Net earnings -- -- -- 5,293,111 -- 5,293,111
--------- ---------- ----------- ---------- ---------- -----------
Balance as of December 31, 1996 $ 600,257 3,488,860 8,407,877 36,894,494 310,916 49,702,404
========= ========== =========== ========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE> 28
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Earnings $ 5,293,111 5,350,280 4,839,861
Adjustments to Reconcile Net Earnings to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 1,787,061 2,224,897 2,953,146
Minority Interests 888,140 1,355,681 1,501,529
Net Realized Capital (Gains) Losses (257,774) (7,897) 34,238
Changes In:
Accrued Interest Receivable 663,227 (340,162) (204,588)
Receivables, Net 640,844 458,133 (1,230,342)
Reinsurance Recoverable 31,098 356,780 64,170
Deferred Policy Acquisition Costs 553,433 202,113 44,338
Prepaid Expenses and Other Assets (183,343) (693,741) (184,745)
Accounts Payable and Other Liabilities (773,028) 67,992 (114,872)
Collateral Held 4,062,611 7,364,249 (4,811,215)
Reserves for Losses and Loss Adjustment Expenses 2,724,773 4,280,528 6,225,140
Income Taxes 757,357 (631,229) 559,938
Unearned Premiums (1,960,971) (675,212) (47,154)
------------- ----------- -----------
Net Cash Provided by Operating Activities 14,226,539 19,312,412 9,629,444
------------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds From Investments Sold or Matured:
Fixed Maturities - Sold 39,094,153 12,902,187 12,832,799
Fixed Maturities - Matured 61,896,825 42,485,000 27,569,700
Equity Securities 298,568 614,340 925,272
Short-Term Investments 95,826,099 80,444,029 58,194,966
Purchases Of:
Fixed Maturities (73,340,147) (67,587,026) (38,382,662)
Equity Securities (255,262) -- (384,013)
Limited Partnership Investment 33,725 (23,092) (49,836)
Short-term Investments (134,436,189) (80,077,020) (61,455,475)
Purchase of 9% interest in ACSTAR Holdings, Inc. -- -- (3,000,000)
Capital Expenditures (140,838) (213,392) (786,126)
Other (335,606) -- --
------------- ----------- -----------
Net Cash Used for Investing Activities (11,358,672) (11,454,974) (4,535,375)
------------- ----------- -----------
Cash Flows From Financing Activities:
Borrowings Under Line of Credit 9,200,000 4,200,000 1,700,000
Repayments Under Line of Credit (3,500,000) (1,000,000) (1,700,000)
Repayments on Long-term Debt (1,820,181) (1,777,706) (14,427,197)
Issuance of Long-term Debt 2,500,000 -- 8,000,000
Issuance of Class A Stock 560,000 -- 2,881,532
Payments for Subsidiaries' Stock (440,625) (35,000) (41,250)
Payments for Acquisition and Retirement of Stock (12,300,209) (9,595,505) (4,702,754)
------------- ----------- -----------
Net Cash Used For Financing Activities (5,801,015) (8,208,211) (8,289,669)
------------- ----------- -----------
Net Decrease in Cash and Cash Equivalents (2,933,148) (350,773) (3,195,600)
Cash and Cash Equivalents, Beginning of Year 5,120,375 5,471,148 8,666,748
------------- ----------- -----------
Cash and Cash Equivalents, End of Year $ 2,187,227 5,120,375 5,471,148
============= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE> 29
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include ACMAT Corporation
("ACMAT" or the "Company"), its subsidiaries, AMINS, Inc., Geremia
Electric Co., ACMAT of Texas, Inc., ACSTAR Holdings, Inc. ("ACSTAR
Holdings") and ACSTAR Holdings' wholly-owned subsidiary, ACSTAR
Insurance Company ("ACSTAR"); and United Coastal Insurance Company
("United Coastal Insurance").
These consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP").
All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been
made to the 1995 and 1994 financial statements to conform with the
classifications in 1996.
(b) Business
ACMAT operates as an insurance holding company and as an interior
contractor; designing, supplying, renovating and installing
interiors for commercial, industrial and institutional buildings,
including asbestos abatement contracting.
ACMAT's Insurance Group includes United Coastal Insurance, ACSTAR
and AMINS, Inc. United Coastal Insurance is an excess and surplus
lines property and casualty insurer providing specialty general and
environmental liability insurance to specialty trade and
environmental contractors, property owners, storage and treatment
facilities and allied professionals, as well as professional
liability insurance to architects, engineers and consultants. ACSTAR
is licensed as an admitted insurer in 49 states and the District of
Columbia and provides surety bonding for specialty trade,
environmental remediation and asbestos abatement contractors. AMINS,
Inc. is an insurance agency which acts primarily as a general agent
for ACSTAR and United Coastal Insurance. United Coastal Insurance
participates in a number of reinsurance arrangements with other
companies on a quota share basis. These arrangements primarily cover
marine and other property catastrophic risks.
During 1996, 1995 and 1994, customers who individually accounted for
more than 10% of consolidated construction contracting revenue for
the respective years are as follows: 1996 - four customers provided
18%, 15%, 14% and 10%, respectively; in 1995 - three customers
provided 28%, 24% and 18%, respectively; in 1994 - three customers
provided 17%, 13% and 11%, respectively. No customers accounted for
more than 10% of the consolidated insurance revenues in any year.
(c) Investments
Investment securities are classified as held to maturity, available
for sale or trading. The Company classifies all investment
securities as available for sale. Investment securities 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.
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.
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. The fair values of investment securities were
based on quoted market prices.
The Company continually evaluates its investment portfolio and
establishes reserves for impairment in value deemed to be other than
temporary.
30
<PAGE> 30
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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,
1996, 1995 and 1994, deferrable costs capitalized were $3,063,875,
$3,736,895 and 4,216,421, respectively. The amortization of deferred
policy acquisition costs charged to operations for the years ended
December 31, 1996, 1995 and 1994 was $3,617,308, $3,939,008 and
$4,260,759, respectively.
(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.
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
$15.8 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 ot its excess of loss reinsurers.
31
<PAGE> 31
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance recoverables include ceded reserves for losses and loss
adjustment expenses. Ceded unearned premiums of $1,083,877 and $1,186,401
at December 31, 1996 and 1995, respectively, are included in other assets.
All reinsurance contracts maintained by the Company qualify as
short-duration prospective contracts under the provisions of FAS No. 113.
A summary of reinsurance premiums written and earned is provided below:
<TABLE>
<CAPTION>
Premiums Written Premiums Earned
-------------------------------------------- ----------------------------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Direct $ 17,954,271 22,810,600 26,307,031 $ 19,834,586 23,171,614 26,177,153
Assumed 1,516,988 1,427,542 2,509,377 1,470,043 1,582,138 2,480,330
Ceded (1,429,771) (1,381,351) (1,599,953) (1,404,693) (1,260,847) (1,515,844)
------------ ----------- ----------- ------------ ----------- -----------
Totals $ 18,041,488 22,856,791 27,216,455 $ 19,899,936 23,492,905 27,141,639
============ =========== =========== ============ =========== ===========
</TABLE>
Reinsurance recoveries on ceded paid losses and loss adjustment expenses
totaled approximately $98,000 and $30,000 for the years ended December
31, 1996 and 1995, respectively. 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
totaled $421,408 and $378,254 for the years ended December 31, 1996 and
1995, respectively.
(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
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) 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 permits disclosing in the financial statement
footnotes the pro forma impact to net income as if the value of
stock-based compensation awards had been expensed. The value of awards
are measured at the grant date based upon estimated fair value, using
option pricing models. The Company has selected the alternative which
provides for pro forma disclosure in the footnotes to the consolidated
financial statements (See Note 13).
32
<PAGE> 32
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS
Effective September 16, 1996, the Company completed the merger of United
Coasts Corporation into ACMAT. United Coasts Corporation shareholders
received one share of ACMAT Class A stock for each approximately 1.536
shares of United Coasts Corporation stock. As a result of the merger,
ACMAT issued approximately 1,100,000 shares of its Class A stock amounting
to a purchase price of approximately $14 million for the 16% minority
interest in the insurance holding company subsidiary. As a result, United
Coastal Insurance, formerly a subsidiary of United Coasts Corporation, has
become a wholly-owned subsidiary of ACMAT and its affiliates. The merger
is a non-cash transaction that is not reflected in the Statements of Cash
Flow.
The merger of United Coasts Corporation into ACMAT has been accounted for
by the purchase method and, accordingly, the purchase price was allocated
to the net assets of United Coasts Corporation based on the fair value of
the assets purchased and liabilities assumed on September 16, 1996.
The following table presents the unaudited pro forma results of operations
as if the merger of United Coasts Corporation had been consummated at the
beginning of the periods presented. These unaudited pro forma results have
been prepared for comparative purposes only and are not necessarily
indicative of the actual results of operations that would have occurred
had the merger actually been made at the beginning of the periods
presented, or of results which may occur in the future.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues $ 37,035,305 41,857,398
Net Earnings $ 6,181,251 6,705,961
Net earnings per share and share equivalent $ 1.42 1.41
Net earnings per share-assuming full dilution $ 1.20 1.18
</TABLE>
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.
33
<PAGE> 33
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTMENTS
Investments at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED CARRYING
COST FAIR VALUE VALUE
------------ ----------- -----------
<S> <C> <C> <C>
1996
- ----
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political Subdivisions $ 54,988,633 55,135,319 55,135,319
United States Government and Government Agencies 38,409,186 38,375,729 38,375,729
------------ ----------- -----------
Total Fixed Maturities 93,397,819 93,511,048 93,511,048
Equity Securities - Common Stocks:
Banks, Trusts and Insurance 5,262 10,573 10,573
------------ ----------- -----------
Total Equity Securities 5,262 10,573 10,573
------------ ----------- -----------
Limited Partnership Investment 1,086,630 1,439,174 1,439,174
Short-Term Investments 46,969,137 46,969,137 46,969,137
------------ ----------- -----------
Total Investments $141,458,848 141,929,932 141,929,932
============ =========== ===========
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
============ =========== ===========
</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.
On December 31, 1996, the Company's insurance subsidiaries had securities with
an aggregate book value of approximately $9.8 million on deposit with various
state regulatory authorities.
The amortized cost and fair value of fixed maturities at December 31, 1996 and
1995, by effective maturity, follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- --------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due In One Year or Less $41,537,975 41,558,524 65,835,788 66,127,246
Due After One Year Through Five Years 51,207,347 51,231,119 54,091,310 54,480,413
Due After Five Years Through Ten Years 306,286 372,000 1,007,381 1,096,708
Due After Ten Years 346,211 349,405 678,227 683,124
----------- ---------- ----------- -----------
Total $93,397,819 93,511,048 121,612,706 122,387,491
=========== ========== =========== ===========
</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.
34
<PAGE> 34
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of gross unrealized gains and losses at December 31, 1996 and
1995 follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ---------------------------
Gains Losses Gains Losses
------- -------- ------- --------
<S> <C> <C> <C> <C>
Fixed Maturities:
States, Municipalities and
Political Subdivisions $191,053 (44,367) 240,670 (55,943)
United States Government and
Government Agencies 83,642 (117,099) 595,921 (2,901)
Industrial and Miscellaneous -- -- -- (2,962)
-------- -------- --------- -------
Total Fixed Maturities 274,695 (161,466) 836,591 (61,806)
Equity Securities 5311 -- -- --
Limited Partnership Investment 352,544 -- 521,409 --
-------- -------- --------- -------
Total $632,550 (161,466) 1,358,000 (61,806)
======== ======== ========= =======
</TABLE>
(4) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES
A summary of net investment income for the years ended December 31,
1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax-exempt Interest $ 2,912,844 3,317,887 3,439,654
Taxable Interest 3,768,102 2,769,577 1,202,619
Dividends on Equity Securities 750 7,617 24,749
Limited Partnership Income (33,725) 23,094 49,836
Investment Expenses (112,399) (55,292) (79,700)
----------- ---------- ----------
Net Investment Income $ 6,535,572 6,062,883 4,637,158
=========== ========== ==========
</TABLE>
Realized capital gains (losses) for the years ended December 31, 1996,
1995 and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed Maturities $ 209,918 810 (72,790)
Equity Securities 48,568 7,087 41,247
Sales of Property and Equipment (712) -- (2,695)
--------- ----- -------
Net Realized Capital Gains (Losses) $ 257,774 7,897 (34,238)
========= ===== =======
</TABLE>
Gross gains of $237,726, $25,235 and $17,076 and gross losses of
$27,808, $24,425 and $89,866 were realized on fixed maturity sales for
the years ended December 31, 1996, 1995, and 1994, respectively. Gross
gains of $48,568, $56,926 and $41,247 and gross losses of $0, $49,839
and $0 were realized on sale of equity securities for the years ended
December 31, 1996, 1995 and 1994, respectively.
35
<PAGE> 35
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) RECEIVABLES
A summary of receivables at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Insurance Premiums Due From Agents $ 6,299,560 7,167,667
Receivables Under Long-term Contracts:
Amounts Billed 1,139,034 973,882
Recoverable Costs in Excess of Billings on
Uncompleted Contracts 594,062 221,827
Billings in Excess of Costs on Uncompleted Contracts (203,200) (290,785)
Retainage, Due on Completion of Contracts 235,382 637,102
----------- ----------
Total Receivables Under Long-term Contracts 1,765,278 1,542,026
Other 639,158 653,585
----------- ----------
Total Receivables 8,703,996 9,363,278
Less Allowances for Doubtful Accounts (322,406) (340,844)
----------- ----------
Total Receivables, Net $ 8,381,590 9,022,434
=========== ==========
</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 1997.
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, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Building $14,617,842 14,538,942
Land 800,000 800,000
Equipment and Vehicles 1,250,233 1,307,942
Furniture and Fixtures 892,858 886,639
----------- ----------
17,560,933 17,533,523
Less Accumulated Depreciation 4,007,819 3,546,267
----------- ----------
$13,553,114 13,987,256
=========== ==========
</TABLE>
Future minimum rental income to be generated by leasing a portion of the
building under noncancelable operating leases as of December 31, 1996
are estimated to be $528,548 for 1997, $528,548 for 1998, $465,845 for
1999, $444,944 for 2000, and $444,944 for 2001. Rental income earned in
1996, 1995 and 1994 was $504,063, $543,507 and $561,825, respectively.
(7) INTANGIBLES
A summary of intangibles, acquired primarily in connection with
purchases of the Company's insurance subsidiaries, at December 31, 1996
and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---------- ---------
<S> <C> <C>
Insurance Licenses $4,188,926 4,188,926
Goodwill 2,524,872 2,698,309
---------- ---------
6,713,798 6,887,235
Less Accumulated Amortization 3,165,123 2,838,471
---------- ---------
$3,548,675 4,048,764
========== =========
</TABLE>
Intangible assets are written off when they become fully amortized.
36
<PAGE> 36
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid losses and loss adjustment expenses for the periods
indicated on a GAAP basis for the business of the Company.
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Balance at January 1 $ 45,235,311 40,954,783 34,729,643
Less reinsurance recoverable 3,872,099 4,228,879 4,293,049
------------ ----------- ----------
Net balance at January 1 41,363,212 36,725,904 30,436,594
Incurred related to:
Current year 7,137,183 8,015,877 8,209,992
Prior years (1,167,203) (900,506) --
------------ ----------- ----------
Total incurred 5,969,980 7,115,371 8,209,992
Payments related to:
Current year 153,514 111,989 284,736
Prior years 3,060,595 2,366,074 1,635,946
------------ ----------- ----------
Total payments 3,214,109 2,478,063 1,920,682
Net balance at December 31 44,119,083 41,363,212 36,725,904
Plus reinsurance recoverable 3,841,001 3,872,099 4,228,879
------------ ----------- ----------
Balance at December 31 $ 47,960,084 45,235,311 40,954,783
============ =========== ==========
</TABLE>
The decrease in 1996 and 1995 of incurred losses and loss adjustment
expenses of prior years represents a reallocation of reserves among
accident years. The increases in claim payments are also attributable to
an increase in earned premiums during the development of the Company's
insurance operations and the conversion of related loss reserves to loss
payments in the normal course of business. Management believes that the
reserves for losses and loss adjustment expenses are adequate to cover the
unpaid portion of the ultimate net cost of losses and loss adjustment
expenses, including losses incurred but not reported.
The Company has no exposure to any asbestos or environmental claims
associated with general liability policies issued with the pre-1986
pollution exclusion. Policies written with the exclusion are typically
associated with mass tort environmental and asbestos claims. The Company
has never issued a policy with the pre-1986 pollution exclusion. The
Company's exposure to asbestos and environmental liability claims is
primarily limited to asbestos and environmental liability insurance for
contractors and consultants involved in the remediation, removal, storage,
treatment and/or disposal of environmental and asbestos hazards.
(9) NOTES PAYABLE TO BANKS
The Company has available a $10,000,000 bank line of credit with Fleet
Bank, N.A. which expires in June 1997. The line of credit requires the
Company to maintain, on deposit with the bank, a compensating balance
equal to 5% of the line of credit. Borrowings outstanding under this line
were $8,000,000 at December 31, 1996 and $7,500,000 at December 31, 1995.
Under the terms of the line of credit, interest on the outstanding balance
is calculated based upon the London Inter-Bank Offering Rate (LIBOR) plus
180 basis points in effect during the borrowing period (7.4% and 7.7% at
December 31, 1996 and 1995, respectively).
The Company has available a $7,500,000 Demand Discretionary Line of Credit
with The Bank of Boston Connecticut which expires on November 6, 1997.
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 (7.4% at December 31, 1996). Borrowings outstanding
under this line was $5,200,000 at December 31, 1996. There were no
borrowings outstanding under this line of credit at December 31, 1995.
The fair value of notes payable to banks approximates cost.
(10) LONG-TERM DEBT
A summary of long-term debt at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Term Loan Due 2003 $ 2,232,142 --
Term Loan Due 2000 4,666,667 6,133,333
10.5% Convertible Senior Notes Due 1999 4,500,000 9,500,000
9.69% Mortgage Note Due 2000 7,908,610 7,994,257
11.5% Convertible Note Due 2022 16,500,000 16,500,000
----------- ----------
$35,807,419 40,127,590
=========== ==========
</TABLE>
37
<PAGE> 37
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On April 1, 1996, the Company obtained a $2,500,000, seven-year, term
loan, which is repayable in quarterly installments of $89,286 commencing
June 30, 1996. The proceeds were used to repay the line of credit.
On 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 $10 per share would be
adjusted at the time of conversion to reflect any stock dividends,
recapitalizations or additional stock issuances. At December 31, 1996, the
Company had reserved 450,000 shares of Class A Stock for issuance pursuant
to such conversion option.
During 1996 and 1995, the Company issued 499,999 and 149,997 shares,
respectively of Class A Stock at $10 per share pursuant to the conversion
options of the Convertible Senior Notes to AIG Life Insurance Company and
American International Life Assurance Company of New York. The issuance of
stock pursuant to the conversion option of the Convertible Senior Notes is
a non-cash transaction that is not reflected in the Consolidated Statement
of Cash Flows.
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, 1996 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 $6,284,692, $1,794,238,
$1,804,751, $8,620,250 and $357,144 for the years 1997 through 2001,
respectively. Interest expense paid in 1996, 1995 and 1994 amounted to
$4,980,833, $4,791,005 and $4,911,392, respectively.
It is not practicable to estimate the fair value of long-term debt at
December 31, 1996 because of the complex and unique terms associated with
these debt instruments.
(11) INCOME TAXES
The components of income tax expense for each year follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Current Taxes:
Federal $ 2,288,025 2,415,594 1,900,110
State 60,000 125,000 135,800
----------- ---------- ---------
2,348,025 2,540,594 2,035,910
----------- ---------- ---------
Deferred Taxes (Credits):
Federal (34,197) (126,194) 209,390
State -- -- --
----------- ---------- ---------
(34,197) (126,194) 209,390
----------- ---------- ---------
Total $ 2,313,828 2,414,400 2,245,300
=========== ========== =========
</TABLE>
38
<PAGE> 38
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effective Federal income tax rate, as a percentage of earnings
before income taxes and minority interest follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Federal Statutory Tax Rate 34.0% 34.0% 34.0%
State Income Tax Benefit (.2) (.5) (.5)
Effect of Tax-Exempt Interest (9.9) (10.5) (11.6)
Dividends Received Deduction -- -- (.1)
Amortization of Goodwill 1.3 1.2 1.5
Officers Life Insurance Premiums .8 .7 .7
Other, Net .5 .2 .6
------ ------ ------
Effective Federal Income Tax Rate 26.5% 25.1% 24.6%
====== ====== ======
</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, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets:
Reserves for Losses and Loss Adjustment Expenses,
Principally Due to Reserve Discounting $2,984,252 2,972,570
Unearned Premiums 765,529 891,902
Accounts Receivable, Principally Due to
Allowance for Double Accounts 109,619 115,887
Other 22,073 22,073
---------- ---------
Total Gross Deferred Tax Assets 3,881,473 4,002,432
Less Valuation Allowance -- --
---------- ---------
Net Deferred Tax Assets $3,881,473 4,002,432
Deferred Tax Liabilities:
Plant and Equipment 441,031 411,498
Deferred Policy Acquisition Costs 987,998 1,176,165
Unrealized Gains on Investments 160,169 440,696
Other 6,392 2,925
---------- ---------
Total Gross Deferred Tax Liabilities 1,595,590 2,031,284
---------- ---------
Net Deferred Tax Assets $2,285,883 1,971,148
========== =========
</TABLE>
There was no valuation allowance for deferred income tax assets as of
December 31, 1996 and 1995. 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, 1996.
Taxes paid in 1996, 1995 and 1994 were $1,556,471, $3,045,627 and
$1,685,362, respectively.
(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, $100,000 and
$90,600, for 1996, 1995 and 1994, respectively.
The Company participates in various multi-employer defined contribution
plans for its union employees. Charges to expense with respect to the
Company's contributions to the various plans were approximately $13,593 in
1996, $42,000 in 1995 and $19,000 in 1994. Upon withdrawal from these
plans, the Company may be liable for its share of the unfunded vested
liabilities of the plans. Such obligations, if any, of the Company are not
determinable at December 31, 1996.
39
<PAGE> 39
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 1996, 1995 and 1994, ACMAT repurchased, in open market and
privately negotiated transactions 42,207, 10,456, and 40,413,
respectively, shares of its Common Stock at an average price of $18.81,
$15.52 and $12.07 per share, respectively. The Company also repurchased
during 1996, 1995 and 1994, in open market and privately negotiated
transactions 872,975, 797,228 and 478,484, respectively, of its Class A
Stock at an average price of $13.18, $11.83 and $8.81 per share,
respectively.
During 1996 and 1995, the Company issued 449,999 and 149,997,
respectively, shares of Class A Stock at $10 per share pursuant to the
conversion options of the Convertible Senior Notes to AIG Life Insurance
Company and American International Life Assurance Company of New York. 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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Options outstanding at December 31 504,000 490,000 505,000
Weighted average price per share of
options outstanding $ 9.04 $ 8.12 $ 8.13
Expiration dates 1/2001-7/2006 1/2001 - 9/2004 1/2001-9/2004
Options exercisable at December 31 405,000 490,000 165,000
Options granted 99,000 -- 340,000
Options exercised or surrendered 85,000 15,000 55,000
Price ranges of options exercised or surrendered $ 6.00-$8.50 $ 8.50 $ 6.00
</TABLE>
The exercise price of each option equals the market price of the
Company's stock on the date of grant and the option's term is ten years.
The options vest six months after the date of grant.
The Company applies APB
Opinion No. 25 and related interpretations in accounting for its stock
options. Accordingly, no compensation cost has been recognized for its
stock options. Had compensation cost for the Company's stock options
issued in 1996 been determined consistent with FASB Statement No. 123,
the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below. There were no stock options
granted in 1995.
<TABLE>
<CAPTION>
1996
----
<S> <C> <C>
Net Earnings As Reported $5,293,111
Pro Forma $4,946,617
Net Earnings per share and share equivalent As Reported $ 1.49
Pro Forma $ 1.39
Net Earnings per share assuming full dilution As Reported $ 1.21
Pro Forma $ 1.15
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for the options granted in 1996: no dividend yield;
expected volatility of 20%; risk free interest rate of 6.7%; and expected
life of ten years for the options. The weighted average of fair value of
options granted in 1996 was $5.99 per share.
Under applicable insurance regulations, ACMAT's insurance subsidiaries
are restricted as to the amount of dividends they may pay, without the
prior approval of any insurance department, and are limited to
approximately $7,011,000 in 1997.
40
<PAGE> 40
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's insurance subsidiaries, United Coastal Insurance and ACSTAR,
are domiciled in the States of Arizona and Illinois, respectively. The
statutory financial statements of United Coastal Insurance and ACSTAR are
prepared in accordance with accounting practices prescribed by the Arizona
Department of Insurance and the Illinois Department of Insurance,
respectively. Prescribed statutory accounting practices include a variety
of publications of the National Association of Insurance Commissioners
(NAIC), as well as the state laws, regulations, and general administrative
rules. As of December 31, 1996, the Company does not utilize any statutory
accounting practices which are not prescribed by insurance regulators that
individually or in the aggregate materially affect statutory shareholders'
equity.
In accordance with statutory accounting principles, ACMAT's insurance
subsidiaries' statutory capital and surplus was $70,109,199 and
$66,382,683 at December 31, 1996 and 1995, respectively, and their
statutory net income for the years ended December 31, 1996, 1995 and 1994
was $8,778,843, $9,072,104 and $ 8,860,484, respectively.
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 3,559,367, 3,661,577 and 4,134,110 for 1996, 1995 and 1994,
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 1996 and 1995 were
determined on the assumptions that the convertible notes were converted
and the options were exercised at the beginning of the year. As to the
debentures, net earnings were adjusted for the interest expense, net of
its tax effect. As to the options, outstanding shares were increased as
described above, except that purchases were assumed to have been made at
the year-end price of the shares. Earnings per share - assuming full
dilution was not presented for 1994 because the effects are not material.
(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
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.
41
<PAGE> 41
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating Revenues:
Insurance $ 27,099,143 30,715,995 33,318,620
Construction Contracting 13,629,218 15,787,715 12,359,565
Eliminations and Adjustments (3,693,056) (4,646,312) (4,922,509)
------------ ----------- -----------
$ 37,035,305 41,857,398 40,755,676
============ =========== ===========
Operating Earnings (Loss):
Insurance $ 12,104,805 13,398,956 13,908,822
Construction Contracting 1,336,692 531,983 (382,118)
------------ ----------- -----------
13,441,497 13,930,939 13,526,704
Interest Expense (4,946,418) (4,810,578) (4,940,014)
------------ ----------- -----------
Earnings Before Income Taxes and Minority
Interest
$ 8,495,079 9,120,361 8,586,690
============ =========== ===========
Depreciation and Amortization:
Insurance $ 1,086,430 1,547,490 2,213,260
Construction Contracting 682,166 677,407 739,886
------------ ----------- -----------
$ 1,768,596 2,224,897 2,953,146
============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Identifiable Assets:
Insurance $164,764,249 161,954,513
Construction Contracting 19,595,317 18,447,725
------------ -----------
$184,359,566 180,402,238
============ ===========
Capital Expenditures:
Insurance $ 55,732 57,690
Construction Contracting 85,106 155,702
------------ -----------
$ 140,838 213,392
============ ===========
</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.
(17) SUBSEQUENT EVENT
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its
own Class A Stock from AIG Life Insurance Company (366,663 shares) and
American International Life Assurance Company of New York, (733,333). The
shares were purchased at an average price of $14.70 per share for a total
purchase price of $16,174,942.
The purchase price of $16,174,942 consisted of $4,174,942 in cash and
promissory notes totaling $12,000,000. The promissory notes are with AIG
Life Insurance Company and American International Life Assurance Company
of New York and are payable over eight years with interest at prime rate
(8-1/4%). The interest rate is equal to the prime rate, however, it shall
not exceed 9-1/4% and it shall not be less than 7-1/4%.
The 1,099,996 shares of Class A Stock were acquired throughout the past
two years by AIG Life Insurance Company and American International Life
Assurance Company of New York pursuant to the conversion options of the
Convertible Senior Notes.
42
<PAGE> 42
(18) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results of operations for 1996 and
1995 follows:
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1996
Operating Revenues $8,458,973 10,083,327 9,658,242 8,834,763
---------- ---------- ---------- ---------
Operating Earnings $3,164,711 3,520,217 3,419,530 3,337,039
---------- ---------- ---------- ---------
Net Earnings $1,140,114 1,330,331 1,402,372 1,420,294
---------- ---------- ---------- ---------
Net Earnings Per Share and Share Equivalent $ .34 .44 .39 .33
---------- ---------- ---------- ---------
Net Earnings Per Share - Assuming Full Dilution $ .28 .33 .32 .29
---------- ---------- ---------- ---------
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
---------- ---------- ---------- ---------
</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 1996 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.
43
<PAGE> 43
Schedule I
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant
As of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994
The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 1996 and 1995 and its condensed
statements of earnings and cash flows for the years ended December 31, 1996,
1995 and 1994.
<TABLE>
<CAPTION>
BALANCE SHEETS
Assets 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash $ 1,021,946 485,339
Receivables 2,114,041 1,939,730
Other current assets 194,762 167,926
------------ ----------
Total current assets 3,330,749 2,592,995
Property and equipment, net 13,304,686 13,654,556
Investments in and advance from subsidiaries 82,608,954 69,823,996
Intangibles 866,855 1,214,652
Other assets 2,400,640 2,317,880
------------ ----------
$102,511,884 89,604,079
============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 13,200,000 7,500,000
Current portion of long-term debt 6,284,692 9,062,751
Other current liabilities 3,802,061 4,389,230
------------ ----------
Total current liabilities 23,286,753 20,951,981
Long-term debt 29,522,727 31,064,839
------------ ----------
Total liabilities 52,809,480 52,016,820
Stockholders' equity 49,702,404 37,587,259
------------ ----------
$102,511,884 89,604,079
============ ==========
</TABLE>
See Notes to Condensed Financial Statements.
44
<PAGE> 44
Schedule I, continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Contract revenues $ 9,415,734 11,614,632 8,160,758
Cost of contract revenues 8,396,344 10,999,758 8,018,230
----------- ----------- ----------
Gross profit (loss) 1,019,390 614,874 142,528
Selling, general and administrative expenses 3,896,182 4,255,974 4,723,088
----------- ----------- ----------
Operating loss (2,876,792) (3,641,100) (4,580,560)
Interest expense (6,064,964) (6,087,231) (5,594,659)
Interest income 52,999 27,576 58,571
Underwriting fees 2,132,685 2,433,587 2,478,468
Other income 2,027,800 1,711,920 1,661,609
----------- ----------- ----------
Loss before income taxes and equity in net
earnings of subsidiaries (4,728,272) (5,555,248) (5,976,571)
Income tax benefit (1,473,000) (1,750,000) (1,919,485)
----------- ----------- ----------
Loss before equity in net earnings of
subsidiaries (3,255,272) (3,805,248) (4,057,086)
Equity in net earnings of subsidiaries 8,548,383 9,155,528 8,896,947
----------- ----------- ----------
Net earnings $ 5,293,111 5,350,280 4,839,861
=========== =========== ==========
</TABLE>
(Continued)
See Notes to Condensed Financial Statements.
45
<PAGE> 45
Schedule I, Continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cash flows from operating activities: 1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net earnings $ 5,293,111 5,350,280 4,839,861
Depreciation and amortization 682,166 677,407 739,887
Equity in undistributed earnings of subsidiaries (8,548,383) (9,155,528) (8,896,947)
(Increase) decrease in accounts receivable (174,311) 42,888 (30,164)
(Increase) decrease in other assets (182,424) (139,069) (230,935)
Increase (decrease) in other liabilities (587,169) 643,844 (33,158)
------------ ----------- -----------
Net cash used for operating activities (3,517,010) (2,580,178) (3,611,456)
------------ ----------- -----------
Cash flows from investing activities:
Purchase of 9% interest in ACSTAR Holdings, Inc. -- -- (3,000,000)
Capital expenditures (85,108) (155,700) (693,171)
Other (335,606) -- --
------------ ----------- -----------
Net cash used for investing activities (420,714) (155,700) (3,693,171)
------------ ----------- -----------
Cash flows from financing activities:
Borrowings under lines of credit 9,200,000 4,200,000 1,700,000
Repayments of lines of credit (3,500,000) (1,000,000) (1,700,000)
Repayment of long-term debt (1,820,181) (1,777,708) (11,362,197)
Increase in amounts due to subsidiaries 9,834,721 10,768,258 13,114,216
Issuance of long-term debt 2,500,000 -- 8,000,000
Issuance of Class A stock 560,000 -- 2,881,532
Payments for acquisition and retirement of stock (12,300,209) (9,595,505) (4,702,754)
------------ ----------- -----------
Net cash provided by financing
activities 4,474,331 2,595,047 7,930,797
------------ ----------- -----------
Net increase (decrease) in cash 536,607 (140,831) 626,170
Cash, beginning of year 485,339 626,170 0
------------ ----------- -----------
Cash, end of year $ 1,021,946 485,339 626,170
============ =========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
46
<PAGE> 46
Schedule I, Continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information
Notes to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Company's
1996 Annual Report.
(1) SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes received from subsidiaries during the years ended December
31, 1996, 1995 and 1994 were $1,990,201, $2,214,656 and $1,962,126,
respectively. Interest paid during the years ended December 31, 1996, 1995
and 1994 was $6,099,379 $5,769,404 and $5,566,037, respectively. Interest
paid in 1996 and 1995 included $1,118,546 and $978,399, respectively, paid
to subsidiaries for intercompany loans.
During 1996 and 1995, the Company issued 499,999 and 149,997 shares of
Class A Stock respectively at $10 per share pursuant to the conversion
options of the Convertible Senior Notes to AIG Life Insurance Company and
American International Life Assurance Company of New York. The issuance of
stock pursuant to the conversion option of the Convertible Senior Notes is
a non-cash transaction that is not reflected in the Consolidated Statement
of Cash Flows.
(2) LONG-TERM DEBT
A summary of long-term debt at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Term Loan Due 2003 $ 2,232,142 $ --
Term Loan Due 2000 4,666,667 6,133,333
10.5% Convertible Senior Notes Due 1999 4,500,000 9,500,000
9.69% Mortgage Note Due 2000 7,908,610 7,994,257
11.5% Convertible Note Due 2022 16,500,000 16,500,000
----------- -----------
$35,807,419 $40,127,590
=========== ===========
</TABLE>
See Note 10 to the Consolidated Financial Statements in the Annual Report
for a description of the long-term debt and aggregate maturities for 1997
to 2001 and thereafter.
(3) INCOME TAXES
See Note 11 to the Consolidated Financial Statements in the Annual Report
for a description of income taxes.
(4) COMMITMENTS AND CONTINGENCIES
See Note 15 to the Consolidated Financial Statements in the Annual Report
for a description of the commitments and contingencies.
47
<PAGE> 47
SCHEDULE II
ACMAT CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Balance Additions
at charged Balance
beginning to costs at
of and end of
Description period expenses Deductions (a) period
--------- --------- ------------- -------
Allowance for
doubtful accounts:
<S> <C> <C> <C> <C>
1996 $340,844 400,904 419,342 322,406
======== ========= ======= =======
1995 $271,519 340,000 270,675 340,844
======== ========= ======= =======
1994 $123,290 1,121,630 973,401 271,519
======== ========= ======= =======
</TABLE>
(a) Deductions represent accounts written off.
48
<PAGE> 48
Schedule V
ACMAT CORPORATION AND SUBSIDIARIES
Supplemental Information concerning property-casualty insurance operations
As of and for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Discount Ded. Amortization
Reserves for from Unpaid Losses & Loss Adjustment
Deferred Unpaid Losses Losses Expenses Incurred
Affiliation Policy and Loss and Loss Net Related to
with Acquisition Adjustment Adjustment Unearned Earned Investment -----------------------------
Registrant Costs Expenses Expenses Premiums Premiums Income Current Year Prior Years
- ---------- ----- -------- -------- -------- -------- ------ ------------ -----------
Insurance
Segment
<C> <C> <C> <C> <C> <C> <C> <C>
1996 $2,905,875 47,960,084 - 12,341,642 19,899,936 6,482,573 7,137,183 (1,167,203)
========== ========== = ========== ========== ========= ========= ==========
1995 $3,459,308 45,253,311 - 14,302,613 23,492,905 6,035,307 8,015,877 (900,506)
========== ========== = ========== ========== ========= ========= ==========
1994 $3,661,421 40,954,783 - 14,977,825 27,141,639 4,578,428 8,209,992 --
========== ========== = ========== ========== ========= ========= ==========
<CAPTION>
Amortization Paid
of Deferred Losses
Policy and Loss
Acquisition Adjustment Premiums
Costs Expenses Written
----- -------- -------
<S> <C> <C> <C>
1996 3,617,308 3,214,109 18,041,488
========= ========= ==========
1995 3,939,008 2,478,063 22,856,791
========= ========= ==========
1994 4,260,759 1,920,682 27,216,455
========= ========= ==========
</TABLE>
49
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows for each director (a) his or her age, (b) the year in
which the director first served as a director of the Company, (c) position with
the Company and business experience during the past five years, including
principal occupation, (d) his or her committee assignments, and (e) his or her
other directorships. Each director is elected for a term of one year and until
his or her successor shall be elected.
<TABLE>
<CAPTION>
NAME AGE DIRECTOR POSITION WITH THE COMPANY AND
SINCE BUSINESS EXPERIENCE DURING LAST FIVE
YEARS, INCLUDING OCCUPATION
<S> <C> <C> <C>
HENRY W. NOZKO, SR.(1) 77 1951 Chairman of the Board, President and Chief
Executive Officer of the Company. Chairman of
the Board and Director of United Coastal
Insurance Company, ACSTAR Holdings, Inc.
and ACSTAR Insurance Company. Co-Chief
Executive Officer of United Coastal Insurance
Company.
HENRY W. NOZKO, JR.(1) 50 1971 Executive Vice President, Chief Operating
Officer, and Treasurer of the Company. Member
of the Audit Committee. President, Co-Chief
Executive Officer and Treasurer of United
Coastal Insurance Company. President and
Treasurer of ACSTAR Holdings, Inc. and
ACSTAR Insurance Company. Member, Boards
of Directors of United Coastal Insurance
Company, ACSTAR Holdings, Inc., ACSTAR
Insurance Company and Three D Departments,
Inc.
VICTORIA C. NOZKO (1) 78 1982 Housewife during past five years. Member of the
Audit Committee.
JOHN C. CREASY 77 1987 Retired Chief Executive Officer of Danbury
Hospital, Member, Board of United Coastal
Insurance Company. Member of the
Compensation Committee and Audit Committee.
MICHAEL J. SULLIVAN 52 1993 Business Manager, Financial
Secretary/Treasurer of Sheet Metal Workers'
Local Union No. 20; General Secretary-
Treasurer of Sheet Metal Workers' International
Association.
</TABLE>
(1) Mr. Henry W. Nozko, Sr. and Mrs. Victoria C. Nozko are husband and wife and
Mr. Henry W. Nozko, Jr. is their son.
50
<PAGE> 50
Executive Officers of the Registrant:
The following are the Company's Executive Officers, their age, and offices held.
Officers are appointed to serve until the meeting of the Board of Directors
following the next Annual Meeting of Stockholders and until their successors
have been elected.
<TABLE>
<CAPTION>
NAME AGE OFFICES HELD
---- --- ------------
<S> <C> <C>
Henry W. Nozko, Sr. 77 President, Chief Executive
Officer, Director and
Chairman of the Board
since 1951.
Henry W. Nozko, Jr. 50 Executive Vice President
since 1982. Treasurer
since 1973. Director since
1971, and Chief Operating
Officer since 1985.
Robert H. Frazer 50 Vice President since 1982.
Secretary since 1992.
General Counsel since
1977.
Michael P. Cifone 38 Vice President-Finance
since 1990. Corporate
Controller since 1989.
</TABLE>
51
<PAGE> 51
ITEM 11. EXECUTIVE COMPENSATION
Directors who are not employees of the Company are paid an annual fee of $4,000.
The following table provides certain summary information regarding compensation
of the Company's Chief Executive Officer and each of the four most highly
compensated executive officers of the Company for the periods indicated.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL ANNUAL LONG-TERM ALL OTHER
POSITION COMPENSATION (A) COMPENSATION (B) COMPENSATION (C)
YEAR SALARY BONUS CLASS A COMMON
OPTIONS OPTION
<S> <C> <C> <C> <C> <C> <C>
Henry W. Nozko, Sr. 1996 $428,292 $172,000 46,000 -- $10,345
Chairman, President 1995 $407,875 $184,275 -- -- $ 9,876
and Chief Executive Officer 1994 $390,000 $175,500 15,000 50,000 $ 9,506
Henry W. Nozko, Jr. 1996 $334,500 $124,000 26,000 -- $10,238
Executive Vice President and 1995 $292,833 $132,300 -- -- $ 9,774
Chief Operating Officer 1994 $280,000 $126,000 15,000 50,000 $ 9,408
Robert H. Frazer, Esq. 1996 $164,375 $ 49,500 -- -- $10,198
Vice President, Secretary and 1995 $156,875 $ 70,875 -- -- $ 9,736
General Counsel 1994 $150,000 $ 67,500 50,000 -- $ 9,371
Michael P. Cifone 1996 $109,583 $ 33,000 -- -- $10,090
Vice President-Finance 1995 $104,583 $ 47,250 -- -- $ 9,608
1994 $100,000 $ 45,000 50,000 -- $ 9,272
</TABLE>
(A) Amounts shown include cash compensation earned and received by the executive
officers. There are no other forms of non-cash compensation or other perquisites
for any executive officer.
The Company has a Management Compensation Plan based upon earnings of the
Company. As a guideline, the plan provides that participants may share in an
incentive fund equal to 12% of pretax earnings, provided such pretax earnings
amount to at least a 10% return on the Company's equity. However, both the
participants and the amount of bonus are discretionary. In addition, the Company
may offer separate incentives and commissions on an individual basis.
(B) Options were granted for ACMAT Class A Stock and Common Stock.
(C) The amounts shown in this column represent contributions made by the Company
to the Company's Thrift, Profit Sharing and Retirement Plan ("Plan"). The Plan
provides that all nonunion employees employed on a full time or part time
salaried basis are eligible to participate on the first day of January or July
after twelve consecutive months of employment. The Company contributes amounts,
as determined by the Board of Directors, to be allocated among the participants
according to a formula based upon the employee's years of service and
compensation. A participant becomes vested at the rate of 20% per year
commencing after two years of service.
52
<PAGE> 52
The following table provides information on option grants during 1996 to the
named Executive Officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
PERCENTAGES OF VALUE AT ASSUMED
STOCK TOTAL OPTIONS ANNUAL RATES OF STOCK
OPTIONS GRANTED TO EXERCISE EXPIRA- PRICE APPRECIATION
GRANTED INDIVIDUALS IN PRICE TION FOR OPTION TERM (B)
(A) FISCAL YEAR ($/SH) DATE 5% 10%
---------------- -------------- -------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Henry W. Nozko, Sr. 46,000 46.46% 11.50 7/22/2006 $342,240 $902,980
Henry W. Nozko, Jr. 26,000 26.26% 11.50 7/22/2006 $193,440 $510,380
</TABLE>
(A) Options were granted at an exercise price equal to the fair market value per
share of ACMAT Corporation's Class A Stock as of the date of grant and are
exercisable starting six months after the grant date.
(B) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future stock price. Actual
gains, if any, on stock option exercises are dependent on the future performance
of the stock, overall market conditions and the option holders' continued
employment through the vesting period. This table does not take into account any
appreciation in the price of the Class A Stock from the date of grant to date.
53
<PAGE> 53
The following table provides information on options during 1996 by the
named Executive Officers and the value of their unexercised options at
December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END 1996 OPTION VALUES
<TABLE>
<CAPTION>
Number of
Unexercised Value of Unexercised
Options at In-the-Money Options
12/31/96 (1) at 12/31/96 (2)
------------ ----------------
Shares
Acquired Value
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
Henry W. Nozko, Sr.
- ACMAT Class A Stock Options 40,000 $270,000 15,000/46,000 $ 93,750/149,500
- ACMAT Common Stock Options - - 50,000/ - 462,500/-
- UCC Stock Options 25,000 146,875 -/- -/-
Henry W. Nozko, Jr.
- ACMAT Class A Stock Options - - 55,000/26,000 443,750/84,500
- ACMAT Common Stock Options - - 50,000/ - 462,500/-
- UCC Stock Options 25,000 146,875 -/- -/-
Robert H. Frazer
- ACMAT Class A Stock Options - - 80,000/ - 575,000/-
- UCC Stock Options 25,000 146,875 -/- -/-
Michael P. Cifone
- ACMAT Class A Stock Options 20,000 137,500 45,000/ - 281,250/-
</TABLE>
(1) Represents the number of options held at year end.
(2) Represents the total gain which would have been realized if all options
for which the year-end stock price was greater than the exercise price were
exercised on the last day of the year.
54
<PAGE> 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
As of March 7, 1996, no person was known to the Company to be the beneficial
owner of more than five percent of its outstanding shares of Common Stock or
Class A Stock except as set forth in the following table which also shows, as of
that date, the total number of shares of each class of stock of the Company
beneficially owned, and the percent of the outstanding class of stock so owned,
by each director, and by all directors and officers of the Company, as a group:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
CLASS NUMBER OF SHARES OF CLASS OF TOTAL
BENEFICIAL OWNER OF STOCK BENEFICIALLY OWNED (1) OUTSTANDING VOTING POWER (16)
---------------- -------- ---------------------- ------------ -----------------
<S> <C> <C> <C> <C>
Henry W. Nozko, Sr. Common 444,000 (2)(5) 68.48% 43.56%
Class A 91,200 (2)(4) 3.17
Henry W. Nozko, Jr. Common 206,174 (2)(3)(5) 29.19 20.14
Class A 179,824 (2)(3)(6) 7.11
Victoria C. Nozko Class A 44,000 (7) 1.55 .45
John C. Creasy Common 3,300 .55 .60
Class A 25,953 (8) .91
Michael J. Sullivan Class A 18,000 (9) .63 .18
Sheet Metal Workers'
National Pension Fund Class A 1,500,000 (10) 34.74 13.23
Franklin Resources, Inc. Class A 495,000 (11) 17.57 5.03
First Manhattan Co. Class A 353,650 (12) 12.55 3.59
Investment Counselor of
Maryland, Inc. Class A 190,000 (13) 6.74 1.93
EQSF Advisors, Inc. Class A 189,978 (14) 6.74 1.93
U.S. Bancorp Class A 179,800 (15) 6.38 1.83
All Directors and
Officers (7 persons)
as a Group Common 636,574 91.15 61.60
Class A 512,042 16.30
</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 61,000 shares of Class A Stock.
(5) Includes options to purchase 50,000 shares of Common Stock.
(6) Includes options to purchase 81,000 shares of Class A Stock.
(7) Includes options to purchase 15,000 shares of Class A Stock.
(8) Includes options to purchase 24,000 shares of Class A Stock.
(9) Includes options to purchase 18,000 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.
(11) Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
Mateo, CA 94404
(12) Address of First Manhattan Co. is 437 Madison Avenue, New York, NY
10022.
(13) Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
Street,Baltimore, MD 21201.
(14) Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
10017-2023.
(15) Address of U.S. Bancorp is 111 S.W. Fifth Avenue, Portland, OR 97204.
(16) Based upon one vote for each share of Common Stock and one-tenth vote
for each share of Class A Stock.
55
<PAGE> 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Sheet Metal Workers' National Pension Fund
The Pension Fund has the right to convert indebtedness of ACMAT to the Pension
Fund in the principal amount of $16,500,000 into shares of Class A Stock at the
current conversion price of $11.00 per share pursuant to the terms of a 30-year
unsecured, $16,500,000 subordinated debenture dated July 1, 1992 and bearing
interest at the annual rate of 11.5%.
Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a
voting agreement pursuant to which the parties have agreed to vote their
respective shares of Class A Stock in favor of the Pension Fund's nominees to
the ACMAT Board of Directors. Michael J. Sullivan, a director of ACMAT,
currently serves as the Business Manager and Financial Secretary/Treasurer of
the Sheet Metal Workers' Local Union No. 20 and as First General Vice President
of the Sheetmetal Workers' International Association.
AIG Life Insurance Company
On July 18, 1989, the Company issued $15,000,000 in principal amount of 10.5%
Convertible Senior Notes due June 30, 1999 to AIG Life Insurance Company and its
affiliate, American International Life Assurance Company of New York. These
Notes are convertible at any time into shares of Class A Stock at a current
conversion price of $10.00 per share, subject to adjustment in certain events.
At December 31, 1996, the Company had reserved 450,000 shares of Class A Stock
for issuance pursuant to such conversion rights, which shares may be deemed
beneficially owned by AIG Life Insurance Company and American International Life
Assurance Company of New York. American International Group, Inc., a holding
company for AIG Life Insurance Company and American International Life Assurance
Company of New York, is a substantial owner of Transatlantic Reinsurance
Company, a reinsurer to which the Company, through Coastal Insurance and ACSTAR
Insurance, ceded $421,000 in reinsurance premiums in the year ended December 31,
1996.
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its own
Class A Stock from AIG Life Insurance Company (366,663 shares) and American
International Life Assurance Company of New York (733,333 shares). The shares
were purchased at an average price of $14.70 per share for a total purchase
price of $16,174,942.
The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory
notes totaling $12,000,000. The promissory notes are with AIG Life Insurance
Company and American International Life Assurance Company of New York and are
payable over eight years with interest at prime rate (8-1/4%). The interest rate
is equal to the prime rate, however, it shall not exceed 9-1/4% and it shall
not be less than 7-1/4%.
The 1,099,996 shares of Class A Stock were acquired throughout the past two
years by AIG Life Insurance Company and American International Life Assurance
Company of New York pursuant to the conversion options of the Convertible Senior
Notes.
Other Relationships
During the year ended December 31, 1996, the Company paid to Dr. Arthur Cosmas
$137,300 in fees in connection with consulting services rendered by Dr. Cosmas
with respect to inspection and engineering services relating to ACMAT's asbestos
abatement activities. Dr. Cosmas is the son-in-law of Henry W. Nozko, Sr. and
Victoria C. Nozko and the brother-in-law of Henry W. Nozko, Jr.
56
<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
Included in Part II of this Report:
Independent Auditors' Report
Consolidated Statements of Earnings for the years ended December 31,
1996, 1995 and 1994
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - December 31, 1996, 1995
and 1994
2. Financial Statement Schedules
Consolidated Schedules included in Part II of this Report-Years
ended December 31, 1996, 1995 and 1994:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty
Insurance Operations
All other schedules are omitted as the required information is not
applicable or the information is presented in the Consolidated Financial
Statements or related notes.
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the fourth
quarter of 1996.
(c) Exhibits
(3) Certificate Amending and Restating the Company's Bylaws as
filed as an Exhibit to the Company's Form 10-Q for the Quarter
ended March 31, 1989 is incorporated herein by reference.
(3a) Certificate Amending and Restating the Company's Certificate
of Incorporation as amended May 1, 1991 as filed as an Exhibit
to the Company's Form 10-Q for the Quarter ended March 31,
1991 is incorporated by reference.
(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 as filed
as Exhibits to the Company's Form 10-Q for the Quarter ended
June 30, 1989 are incorporated by reference.
(4a) Promissory Note between ACMAT Corporation and The Bank of
Boston Connecticut as filed as an Exhibit to the Company's
Form 10-K for the year ended December 31, 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 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 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 by reference.
57
<PAGE> 57
(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.
(21) Subsidiaries of ACMAT.
(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 1996.
58
<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ACMAT CORPORATION
Dated: March 28, 1997 By: /s/ Henry W. Nozko, Sr.
-------------------------------
Henry W. Nozko, Sr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the Board,
President, Chief Executive
/s/ Henry W. Nozko, Sr. Officer and Director March 28, 1997
-----------------------
Henry W. Nozko, Sr.
Chief Operating Officer,
Executive Vice President
/s/ Henry W. Nozko, Jr. Treasurer and Director March 28, 1997
-----------------------
Henry W. Nozko, Jr.
Vice President - Finance
(Principal Financial and
/s/ Michael P. Cifone Accounting Officer) March 28, 1997
-----------------------
Michael P. Cifone
/s/ Victoria C. Nozko Director March 28, 1997
-----------------------
Victoria C. Nozko
/s/ John C. Creasy Director March 28, 1997
-----------------------
John C. Creasy
</TABLE>
59
<PAGE> 59
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Regulation S-K Exhibit Page Number
- ---------------------- -----------
<S> <C> <C>
Exhibit 3 - Bylaws Incorporated by Reference
Exhibit 3a - Certificate of Incorporation
as amended May 1, 1991 Incorporated by Reference
Exhibit 4 - Note Purchase Agreements Incorporated by Reference
Exhibit 4a - Promissory Note between ACMAT Incorporated by Reference
and Bank of Boston Connecticut
Exhibit 4b - Promissory Note between ACMAT Incorporated by Reference
and The Manufacturers Life
Insurance Company
Exhibit 4c - Open-end Mortgage Deed/Security Incorporated by Reference
Agreement between ACMAT and The
Manufacturers Life Insurance Co.
Exhibit 4d - Loan Agreement between ACMAT and Incorporated by Reference
Shawmut Bank
Exhibit 10a - Annual Management Incorporated by Reference
Compensation Plan
Exhibit 10b - Stock Purchase and Note Agreement Incorporated by Reference
between ACMAT Corporation
and The Sheet Metal Workers'
National Pension Fund
Exhibit 21 - Subsidiaries of ACMAT Page 61
Exhibit 27 -- Financial Data Schedule Page 62
Exhibit 28 - Information from Reports Page 63
Furnished to State Insurance
Regulatory Authorities
</TABLE>
60
<PAGE> 1
EXHIBIT 21
Subsidiaries of ACMAT Corporation
Listed are the subsidiaries of ACMAT Corporation:
<TABLE>
<CAPTION>
STATE OF
NAME OWNERSHIP INCORPORATION
---- --------- -------------
<S> <C> <C>
ACMAT Companies, Inc. 100% Delaware
AMINS, Inc. 100% Connecticut
Geremia Electric Co. 100% Connecticut
ACSTAR Holdings, Inc. 100% Delaware
ACSTAR Insurance Co. (1) 100% Illinois
ACMAT of Texas, Inc. 100% Delaware
United Coastal Insurance Company (2) 66% Arizona
</TABLE>
(1) Owned 100% by ACSTAR Holdings, Inc.
(2) Owned 66% by ACMAT Corporation and 34% by ACSTAR Insurance Company
61
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,187,227
<SECURITIES> 141,929,932
<RECEIVABLES> 8,703,996
<ALLOWANCES> (322,406)
<INVENTORY> 0
<CURRENT-ASSETS> 158,114,073
<PP&E> 17,560,933
<DEPRECIATION> 4,007,819
<TOTAL-ASSETS> 184,359,566
<CURRENT-LIABILITIES> 98,849,743
<BONDS> 35,807,419
0
0
<COMMON> 4,089,117
<OTHER-SE> 45,613,287
<TOTAL-LIABILITY-AND-EQUITY> 184,359,566
<SALES> 29,315,670
<TOTAL-REVENUES> 37,035,305
<CGS> 17,983,632
<TOTAL-COSTS> 17,983,632
<OTHER-EXPENSES> 5,610,176
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,946,418
<INCOME-PRETAX> 8,495,079
<INCOME-TAX> 2,313,828
<INCOME-CONTINUING> 6,181,251
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,293,111
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.21
</TABLE>
<PAGE> 1
EXHIBIT 28
Information from Reports Furnished to State Insurance Regulatory Authorities
<TABLE>
<CAPTION>
Reserves
(000)
-----
<S> <C>
Schedule P of Annual Statements:
ACSTAR Insurance Company $10,005
United Coastal Insurance Company 34,119
-------
44,124
Reinsurance recoverable 3,841
Other (5)
-------
Reserves per GAAP Financial Statements $47,960
=======
</TABLE>
63
