<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0 - 6234
ACMAT CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-0682460
(State of incorporation) (I.R.S. Employer Identification No.)
233 Main Street
New Britain, Connecticut 06050-2350
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(860) 229-9000
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
Class A Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
The aggregate market value as of March 1, 1999 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $35,709,538.
As of March 1, 1999 there were 592,088 shares of the registrant's Common Stock
and 2,389,808 shares of registrant's Class A Stock, each without par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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<TABLE>
<CAPTION>
PART I
<S> <C>
Item 1. Business 3
General 3
Financial Information about Operating Segments 3
United Control Liability Insurance 3
ACSTAR Bonding 5
Insurance and Bonding Performance Ratios 5
Underwriting 6
Reinsurance 6
Claims 6
Reserves for Losses and Loss Adjustment Expenses 6
IRIS Ratios 9
A.M. Best Ratings 9
Risk-Based Capital 9
ACMAT Contracting 9
General 9
Backlog 9
Materials 10
Contract Acquisition 10
Warranty 10
Asbestos Abatement Operations 10
Marketing 10
Competition 11
Year 2000 Issue 20
Investments 12
Environmental Compliance 14
Employees 14
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
Reserves for Losses and Loss Adjustment Expenses 18
Liquidity and Capital Resources 19
Year 2000 Issue 20
Regulatory Environment 21
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management 54
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
</TABLE>
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PART I
ITEM 1. BUSINESS
General
ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial
insurance and bonding coverages for contractors, architects, engineers and other
professionals in the construction and environmental fields and other specialty
insurance such as products liability. The Company derives its underwriting
expertise from its construction and remediation operations. Through United
Coastal Insurance Company ("United Coastal Insurance"), the Company provides a
broad line of general, professional, environmental and other liability insurance
primarily to environmental contractors and specialty trade contractors and
architects, engineers and other professionals. Through ACSTAR Insurance Company
("ACSTAR Insurance"), the Company provides surety bonds for general building,
specialty trade and environmental contractors and all forms of commercial
surety. Both United Coastal Insurance and ACSTAR Insurance are rated A-
(excellent) by The A.M. Best Co., Inc. ("A.M. Best"). In 1998, insurance
operations accounted for over 64% of the Company's consolidated revenues.
The Company is also engaged in construction contracting which consists of
interior contracting services involving the design and furnishing of building
interiors and asbestos abatement services for commercial, industrial and
institutional buildings.
Financial Information about Operating Segments
Financial information relating to the three business segments is set forth in
Note 16 to the consolidated financial statements on page 41 of this document.
The Company has three reportable operating segments: United Coastal Liability
Insurance, ACSTAR Bonding and ACMAT Contracting. The Company's reportable
segments are primarily the three main legal entities of the Company which offer
different products and services. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.
The United Coastal Liability Insurance operating segment offers specific lines
of liability insurance as an approved non-admitted excess and surplus lines
insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of
Columbia. United Coastal offers claims made and occurrence policies for specific
specialty lines of liability insurance through certain excess and surplus lines
brokers who are licensed and regulated by the state insurance department(s) in
the state(s) in which they operate. United Coastal offers general, asbestos,
lead, pollution and professional liability insurance nationwide to specialty
trade contractors, environmental contractors, property owners, storage and
treatment facilities and professionals. United Coastal also offers products
liability insurance to manufacturers and distributors.
The Bonding operating segment provides, primarily through ACSTAR, surety bonds
written for prime, specialty trade, environmental, asbestos and lead abatement
contractors and miscellaneous obligations. ACSTAR also offers other
miscellaneous surety such as workers' compensation bonds, supply bonds,
subdivision bonds and license and permit bonds.
ACMAT Contracting provides construction contracting services to commercial and
governmental customers. ACMAT Contracting also provides underwriting services to
its insurance subsidiaries. In addition, ACMAT Contracting owns a commercial
office building in New Britain, Connecticut and leases office space to its
insurance subsidiaries as well as third parties.
UNITED COASTAL LIABILITY INSURANCE
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The liability insurance lines of the Company, which consist primarily of
contractor policies and professional liability policies, are discussed more
fully below:
Contractors
- General Liability - Policies are offered to general contractors and
specialty trade contractors involved in plumbing, heating, electrical,
framing, roofing, drilling, excavation, demolition, road work, and
other contracting activities. Coverage is also offered for other
specialized non-contractor general liability risks. Coverage is limited
to third-party bodily injury and property damage arising out of covered
operations. General liability insurance is offered on either a
claims-made or occurrence basis.
- Contractor Pollution Liability - Policies are offered to contractors
involved in hazardous waste remediation or cleanup, installation or
removal of storage tanks, or the transportation of hazardous waste.
Coverage is provided for third party-bodily injury or property damage
liability caused by release of, or exposure to, pollutants as a result
of contractors' operations. Contractor pollution liability insurance is
offered on a claims-made basis.
- Asbestos and Lead Abatement Liability - Policies are offered to
contractors involved in the removal or encapsulation of asbestos and/or
lead containing materials from structures or their containment through
appropriate encapsulation or repair. Coverage is provided for
third-party bodily injury and property damage liability as a result of
a release of asbestos or lead which arises out of the contractors'
operations. Asbestos and lead abatement liability insurance is provided
on either a claims-made or occurrence basis.
Professionals
- Architects and Engineers Professional Liability - Policies are offered
to architects and engineers and consultants in the fields of
architecture; civil, electrical, mechanical, structural and process
engineering; construction/property management; design/build services;
laboratory testing and surveying. Project professional liability
policies are also offered for architect and engineer design teams and
owner controlled wrap-ups. All policies are written on a claims-made
basis.
- Environmental Asbestos and/or Lead Consultants Professional Liability -
Policies are offered to consultants involved in providing services such
as environmental assessments, design/build services, asbestos or lead
consulting, remedial investigations and feasibility studies, and
storage tank consulting. Coverage is provided for liability arising out
of the acts, errors or omissions of a consultant in the performance of
professional services. All professional liability coverages are written
on a claims-made basis.
Owners and Lenders
- Hazardous Waste Storage and Treatment Pollution Liability - Policies
are offered on a claims-made basis in response to the insurance
requirements of the Environmental Protection Agency in connection with
facilities subject to the Resource Conservation and Recovery Act of
1976 ("RCRA").
- Site Specific Pollution Liability - These policies cover pollution
claims arising or emanating from a specific site and are provided on a
claims-made basis. Comprehensive site evaluations are required prior to
providing coverage for any site.
- Lenders Pollution Liability - Policies are offered to financial
institutions for pollution occurring at property owned or controlled by
the institution as a result of foreclosure or otherwise. Lender
pollution liability coverage is offered on a claims-made basis.
Products Liability
- Products Liability - Policies are offered on a claims-made or
occurrence basis to manufacturers for a variety of products including
chemicals, fertilizers, pesticides, pollution control devices, storage
tanks and other.
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The Company customizes many of its insurance policies to suit the individual
needs of its insureds. Combined policies insuring multiple exposures under one
policy form and one combined policy limit are available.
ACSTAR Bonding
Surety bonds are written for general, specialty trade, environmental, asbestos
and lead abatement contractors. The Company also offers a wide variety of
miscellaneous bonds. Many bonds are supported by various levels of collateral
based upon the financial condition of the customer.
The Company often requires cash or irrevocable letters of credit to
collateralize a portion of most bonds issued. In addition, the Company will only
accept irrevocable letters of credit from financial institutions which have a
rating of C "sound credit risk" or higher as determined by Thomson BankWatch,
Inc. However, no assurance can be made that such financial institutions will
maintain their financial strength and, thus, that funds guaranteed under letters
of credit will be available, if needed, to offset any potential future claims.
The Company provides the following types of bonds:
- Payment and performance bonds - Bonds are provided for general building
and specialty trade contractors, environmental remediation and asbestos
abatement contractors and consultants, lead abatement contractors and
solid waste disposal contractors. A payment and performance bond
guarantees satisfactory performance and completion of the contractor's
work and payment of the contractor's debts and obligations relating to
the performance of the contract covered by the bond.
- Closure and post-closure bonds - Bonds are provided for owners of solid
and hazardous waste landfills as required to meet certain requirements
under RCRA and remediation bonds in connection with the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA"). Closure bonds usually guarantee that a property owner will
restore property to a specified level or condition. Post-closure bonds
guarantee cultivation and maintenance of a closed site.
- Supply and other specialty bonds - Bonds are provided for contractors,
manufacturers and other owners in their normal course of operations,
usually to guaranty the supply of equipment and material.
- Miscellaneous surety, license, permit, self insurer, supersedeas and
other bonds - Miscellaneous bonds are provided for applicants based on
those requirements specified in the bond form and the applicant's
financial strength.
The underwriting department and management are responsible for the development
of new insurance products and enhancements. Underwriting profitability is
enhanced by the creation of niche products focused on classes of business which
traditionally have provided underwriting profits.
Insurance and Bonding Performance Ratios
The following table sets forth the combined ratios of the Company, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense.
<TABLE>
<CAPTION>
Year
Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
GAAP Ratios:
Loss ratio 19.6% 28.8% 30.0%
Expense ratio 51.8 48.0 43.5
---- ---- ----
GAAP combined ratio 71.4 76.8 73.5
==== ==== ====
Statutory Ratios:
Loss ratio 19.9 29.5 30.5
Expense ratio 59.2 45.0 42.7
---- ---- ----
Statutory combined ratio 79.1% 74.5% 73.2%
==== ==== ====
</TABLE>
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The increase in the combined statutory ratio over the past three years results
primarily from the decline in premiums offset by the release of reserves on
older underwriting years. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Underwriting
The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over forty-nine years of construction contracting.
Accordingly, ACMAT, in addition to its construction contracting operations,
provides risk evaluation, loss adjustment, underwriting, claims handling and
monitoring services for its insurance subsidiaries, United Coastal Insurance and
ACSTAR Insurance. Contractors seeking liability insurance and bonding through
the Company are carefully reviewed with respect to their past practices, claims
history and records. Other factors considered are the contractors' and
professionals' financial conditions, training techniques, safety procedures,
histories of violations, record keeping, supervisory qualifications and
experience. Historically, the Company has issued policies and bonds to fewer
than twenty-five percent of its applicants.
Underwriting procedures for products liability insurance involve conducting an
in-depth review of the product that is being manufactured or distributed. Such
review involves examining an applicant's past record of recalls, claims history
and litigation.
The Company's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio well below 100%.
The Company has a conservative underwriting philosophy which, in the opinion of
management, is one of the primary reasons for the favorable loss ratios relative
to the property and casualty insurance industry over the last three years.
The Company continually monitors financial stability of contractors with surety
bonds outstanding. Work in progress reports and updated financial information
are reviewed by the Company to ensure that the contractor continues to meet the
underwriting guidelines.
Reinsurance
In the normal course of business, the Company assumes and cedes reinsurance with
other companies. Reinsurance ceded primarily represents excess of loss
reinsurance with companies with "A" ratings from the insurance rating
organization, A.M. Best Company, Inc. Such reinsurance is applicable on a per
policy basis generally to those policies with per occurrence limits in excess of
$2 million up to $10 million for liability and for individual surety bonds, the
Company reinsures through various layered excess of loss agreements up to $10
million on a $15.6 million bond. Reinsurance ceded also includes a facultative
reinsurance treaty which is applicable to excess policies written over a primary
policy issued by the Company for specific projects. Reinsurance is ceded to
limit losses from large exposures and to permit recovery of a portion of direct
losses; however, such a transfer does not relieve the originating insurer of its
liability. The Company participates in assumed quota share reinsurance
arrangements covering marine and property catastrophe risks with one of its
excess of loss reinsurers.
The availability and price of reinsurance fluctuates according to market
conditions. Depending on the availability and cost of reinsurance, the Company
may, from time to time, elect to cede greater or lesser portions of its
underwriting risk.
Claims
The Company directly handles substantially all claims of its insureds, except
that independent claims adjusters and/or counsel selected for their experience
and reputation in the locality of the claim are retained to conduct initial
fact-finding investigations. All decisions respecting payment of claims are made
by experienced employees of the Company.
Reserves for Losses and Loss Adjustment Expenses
Reserves for losses and loss adjustment expenses are estimates at any given
point in time of what the Company may have to ultimately pay on incurred losses,
including related settlement costs, based on facts and circumstances then known.
The Company also reviews its claims reporting patterns, past loss experience,
risk factors and current trends and considers their effect in the determination
of estimates of incurred but not reported losses. Ultimate losses and loss
adjustment expenses are affected by many factors which are difficult to predict,
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such as claim severity and frequency, inflation levels and unexpected and
unfavorable judicial rulings. Reserves for surety claims also consider the
amount of collateral held as well as the financial strength of the contractor
and its indemnitors. Management believes that the reserves for losses and loss
adjustment expenses at December 31, 1998 are adequate to cover the unpaid
portion of the ultimate net cost of losses incurred through that date and
related adjustment expenses incurred, including losses incurred but not
reported.
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
In determining appropriate adjustments to reserves historical data is reviewed
and consideration is given to the anticipated impact of various factors such as
legal developments and economic conditions, including the effects of inflation.
Reserves are monitored and recomputed periodically using new information on
reported claims.
The following table sets forth a reconciliation of beginning and ending reserves
for losses and loss adjustment expenses for the periods indicated on a GAAP
basis for the business of the Company.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 48,900,713 $ 47,960,084 $ 45,235,311
Less reinsurance recoverable 3,478,121 3,841,001 3,872,099
------------ ------------ ------------
Net balance at January 1 45,422,592 44,119,083 41,363,212
Incurred related to:
Current year 4,508,667 5,176,030 7,137,183
Prior years (2,321,939) (838,778) (1,167,203)
------------ ------------ ------------
Total incurred 2,186,728 4,337,252 5,969,980
Payments related to:
Current year 18,260 94,398 153,514
Prior years 6,700,114 2,939,345 3,060,595
------------ ------------ ------------
Total Payments 6,718,374 3,033,743 3,214,109
Net balance at December 31 40,890,946 45,422,592 44,119,083
Plus reinsurance recoverable 2,224,116 3,478,121 3,841,001
------------ ------------ ------------
Balance at December 31 $ 43,115,062 $ 48,900,713 $ 47,960,084
============ ============ ============
</TABLE>
The decrease of incurred losses and loss adjustment expenses of prior years
represents a reallocation of reserves among accident years. There can be no
assurance, however, that the Company's reserves will be sufficient to cover
ultimate losses and loss adjustment expenses or that future adjustments to
losses and loss adjustment expense reserves will not be required.
The Company has no exposure to any asbestos or environmental claims associated
with general liability policies issued with the pre-1986 pollution exclusion.
Policies written with the exclusion are typically associated with mass tort
environmental and asbestos claims. The Company has never issued a policy with
the pre-1986 pollution exclusion. The Company's exposure to asbestos and
environmental liability claims is primarily limited to asbestos and
environmental liability insurance for contractors and consultants involved in
the remediation, removal, storage, treatment and/or disposal of environmental
and asbestos hazards.
As of December 31, 1998, 1997 and 1996 reserves for the combined losses and loss
adjustment expenses of the Company's insurance operations as determined in
accordance with accounting principles and practices prescribed or permitted by
insurance regulatory authorities ("Statutory basis reserves") were $49,758,263,
$57,723,399 and $59,968,945, respectively. As of December 31, 1998, 1997 and
1996 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $43,115,062, $48,900,713 and
$47,960,084, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves
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result from the minimum statutory, or "Schedule P", loss reserves required to be
maintained by the Company's insurance subsidiaries, partially offset by the
netting of reinsurance recoverable against losses and loss adjustment expense
reserves for statutory purposes.
The following losses and loss adjustment expense reserve runoff table is for the
combined insurance operations of the Company's insurance subsidiaries. The data
for 1992 and prior periods are presented on a net basis in the reserve run-off
table. Restatement of prior periods is not practicable.
Each column shows the reserve held at the indicated calendar year-end and
cumulative data on payments and reestimated liabilities for that accident year
and all prior accident years making up that calendar year-end reserve.
Therefore, the redundancy (deficiency) is also a cumulative number for that year
and all prior years. It would not be appropriate to use this cumulative history
to project future performance.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss adjustment expenses 15,626 21,378 26,234 29,240 30,437 36,726 41,363 44,119 45,423 40,891
Liability reestimated as of:
One year later 15,476 21,378 26,234 29,240 30,437 35,825 40,193 43,282 43,106
Two years later 15,476 21,378 26,234 29,240 28,337 34,659 37,872 40,865
Three years later 15,476 21,378 26,234 26,000 27,170 29,913 35,354
Four years later 14,876 21,378 22,094 24,833 23,550 27,193
Five years later 14,876 16,642 20,927 22,284 20,880
Six years later 6,622 15,475 18,841 19,914
Seven years later 5,455 13,394 16,932
Eight years later 4,411 12,845
Nine years later 4,261
Cumulative Redundancy
(deficiency): 11,365 8,533 9,302 9,326 9,557 9,533 6,009 3,256 2,317
Paid (cumulative) as of:
One year later 565 1,357 3,216 6,142 1,560 2,361 3,067 2,942 6,703
Two years later 743 4,067 8,699 7,574 3,655 4,582 5,256 8,951
Three years later 2,140 8,954 9,576 8,603 5,022 6,412 8,922
Four years later 3,460 10,233 10,488 9,554 6,189 7,969
Five years later 3,924 10,554 10,816 9,818 6,869
Six years later 4,010 10,858 10,856 10,034
Seven years later 4,012 10,874 10,949
Eight years later 4,011 10,874
Nine years later 4,011
Gross liability - end of year 34,730 40,955 45,235 47,960 48,901 43,115
Reinsurance recoverable 4,293 4,229 3,872 3,841 3,478 2,224
------ ------ ------ ------ ------ ------
Net liability - end of year 30,437 36,726 41,363 44,119 45,423 40,891
</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.
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IRIS Ratios
The National Association of Insurance Commissioners ("NAIC") has developed the
Insurance Regulatory Information System ("IRIS"), intended to assist state
insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies eleven industry ratios and specifies "usual values" for each
ratio. When an insurance company's ratio falls outside the "usual value," it is
designated an "unusual value," which event alerts state insurance departments to
potential problems. For the year ended December 31, 1998, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value", except
for the change in net writings for United Coastal and the change in surplus and
the investment yield for both insurance companies. The change in net writings
for United Coastal was below the NAIC standard of 33% primarily due to a
continuing soft insurance marketplace and the Company's strategy to avoid
current unfavorable pricing. The investment yield for United Coastal is below
the NAIC standard of 4.5% primarily due to loss related to United Coastal's
share of losses from a limited partnership investment. The investment yield for
ACSTAR is above the NAIC standard of 10% primarily due to dividends received
from ACSTAR's investment in United Coastal. The decrease in surplus is greater
than 10% primarily due to dividends of $18,500,000 paid by United Coastal and
dividends of $6,390,000 paid by ACSTAR during 1998.
A.M. Best Ratings
A.M. Best ratings are indications of the solvency of an insurer based on an
analysis of the financial condition and operations of a company relative to the
industry in general. Occasionally, the requirement for an A.M. Best's-rated
insurer is a condition imposed upon the contractor by the party engaging the
contractor. Certain insurance brokers also restrict the business they will place
with insurers which are not A.M. Best's-rated. The 1998 Best letter ratings
range from A++ (superior) to F (in liquidation). United Coastal Insurance and
ACSTAR Insurance each have an A.M. Best's rating of A- (excellent).
Risk-Based Capital
Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
require further regulatory action. The ratio for each of the Company's insurance
subsidiaries as of December 31, 1998 was significantly above the level which
might require regulatory action.
ACMAT CONTRACTING
General
The Company provides a broad range of general building construction and
coordinated interior contracting services. The Company began to offer asbestos
abatement services in the 1970's and the Company continues to be active in the
asbestos abatement field. The Company provides new and renovation general
construction and installs interiors for office buildings, retail establishments,
schools, colleges, churches, hospitals and other buildings. The Company's
general building construction and interior contracting is provided both in
connection with new buildings and in connection with the remodeling and
renovation of interiors of existing buildings usually under contracts with
building owners and building occupants. The Company provides a broad range of
coordinated interior contracting services, many of which are performed by
subcontractors.
Backlog
The following table sets forth the Company's backlog of unbilled contract
amounts, the total number of contracts and the number of contracts with unbilled
amounts in excess of $400,000 as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Total Number of Contracts. 4 12
Total unbilled contract amounts. $6,000,000 $4,800,000
Number of contracts with unbilled amounts in
excess of $400,000. 2 2
Aggregate unbilled amount of contracts in
excess of $400,000. $5,900,000 $4,000,000
</TABLE>
The Company estimates that all of the December 31, 1998 backlog will be
completed prior to December 31, 1999.
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Materials
The Company purchases the materials it installs in the course of its
construction contracting operations from a number of suppliers. Most of the
Company's materials are standard building components which historically have
been readily available from several suppliers. Some components are manufactured
to the Company's specifications. Most of the materials used by the Company are
shipped directly to the job site by the manufacturer.
Contract Acquisition
The Company's work projects are obtained by lump sum fixed price bids, unit
prices or are negotiated. Contract prices are usually determined by competition
with other contractors.
Warranty
Each project usually contains a one-year warranty or guaranty period, wherein
the Company and its subcontractors warrant that the work is free from defects
and was performed in accordance with the plans and specifications. Occasionally,
the Company is required to make minor corrections or adjustments, but has never
incurred any significant costs in connection with any such work.
Asbestos Abatement Operations
Both the Company's insurance and construction contracting operations have
involved risks associated with asbestos. The Company has in the past insured and
continues to insure risks associated with asbestos abatement or containment
operations on both a claims-made and occurrence basis. Since harm from exposure
to asbestos fibers may not be detectable in humans for as much as thirty years,
losses under insurance contracts written on an occurrence basis may not be known
for some time.
The Company's construction contracting operations involve the removal of
asbestos. As asbestos containing materials deteriorate or become disturbed by
incidental or intentional contact, asbestos fibers may enter the air and can
circulate into the breathing zone of building occupants. Exposure to asbestos is
thought by some to be a cause of cancer. In the mid 1970's, the Company became
engaged in the removal of asbestos in addition to its other contracting
operations. Since that time, it has been engaged in hundreds of contracts
involving the removal of asbestos. Claims by non-employees related to asbestos
have been made against the Company from time to time and are pending and there
can be no assurance that claims will not be made in the future.
While the Company currently has claims pending against it by employees, the
Company believes that it is fully covered by workers' compensation insurance
with respect to any claims by current and former employees relating to asbestos
operations. The Company currently obtains its workers' compensation insurance in
those states in which it performs work either from state insurance funds or one
of several insurance companies designated in accordance with the Assigned Risk
Pool. The amount of workers' compensation insurance maintained varies from state
to state but is generally greater than the maximum recovery limits established
by law and is not subject to any aggregate policy limits. In the past, the
Company has received a number of asbestos-related claims from employees, all of
which have been fully covered by its workers' compensation insurance. The
Company believes, although no assurances can be given, that workers'
compensation insurance sufficient to cover all future claims will remain
available in accordance with applicable state laws.
MARKETING
Insurance and Bonding
As an excess and surplus lines carrier, United Coastal Insurance markets its
policies through excess and surplus lines brokers only in those states in which
it is permitted to write coverage. Currently, United Coastal Insurance is
permitted to write excess and surplus lines insurance as a nonadmitted insurer
in forty-six states, the District of Columbia, Puerto Rico and the Virgin
Islands.
ACSTAR Insurance offers payment and performance bonds through carefully selected
insurance agents which specialize in the needs of contractors. All underwriting
approvals and issuance of policies and bonds are performed directly by the
Company's insurance subsidiaries.
10
<PAGE> 11
The Company's insurance products are marketed in all 50 states primarily through
several of the largest insurance brokers, including J&H Marsh & McLennan, Willis
Corroon, AON, Inc. and Sedgwick.
ACMAT Contracting
The Company markets its construction contracting services directly to building
owners and building occupants. Project opportunities are brought to the
attention of the Company through various sources such as F. W. Dodge Company,
which publishes lists of projects available for bid, architects, owners, general
contractors, or engineers who are familiar with the Company. The Company also
depends upon repeat business and responses to the Company's advertising program
which is intended to emphasize ACMAT's packaged interior renovation capability.
ACMAT's sales force consists of its senior management and project managers, all
of whom function as construction consultants and work closely with owners,
tenants and architects.
COMPETITION
Insurance and Bonding
The property and casualty insurance industry is highly competitive. The Company
competes with large national and smaller regional insurers in each state in
which it operates, as well as monoline specialty insurers. The Company's
principal competitors include certain insurance subsidiaries of American
International Group, Inc. ("AIG"), Reliance Insurance Group, Zurich Insurance
Group, Design Professionals Insurance Company, CNA Insurance Companies and
Lloyd's of London. Many of its competitors are larger and have greater financial
resources than the Company. Among other things, competition may take the form of
lower prices, broader coverage, greater product flexibility, higher quality
services or the insurer's rating by independent rating agencies. The Company
competes with admitted insurers, surplus line insurers, new forms of insurance
organizations such as risk retention groups, and alternative self-insurance
mechanisms.
Competition in the field of surety bonding is intense and many of the Company's
competitors are larger and have greater surplus than the Company, thereby
allowing them to provide bonds with higher limits than those which the Company
is able to provide. The Company's principal competitors include the St. Paul
Companies, Inc., Reliance Insurance Group, AIG, CNA and Frontier Insurance
Company. The Company's insurance subsidiaries hold primary and reinsurance
certificates of authority as acceptable sureties on Federal bonds as do
approximately 250 to 300 other surety companies. The certificates give the
Company an advantage over companies which are not certified by the United States
Treasury Department with respect to surety bonding on Federal projects in that
such certification has become a standard with respect to both Federal and other
bonds. Approximately one-half of the surety bonds written by the Company's
subsidiaries are required to be provided by a Treasury listed company. With
respect to other bonds, the Company faces competition from as many as 1,000
additional non-certified surety companies.
ACMAT Contracting
Competition in the interior construction business serviced by ACMAT generally is
intense. Historically, a majority of the Company's construction business was
performed on projects on which the Company had been in competition with other
contractors. The Company focuses its efforts on privately negotiated contracts
obtained through advertising and its reputation. Quality of service and pricing
are the Company's principal methods of competition.
The economic climate of the Northeast has increased the competitive pressure on
all aspects of the Company's contracting operations. The Company has responded
with marketing efforts seeking to obtain business when the Company's reputation
and experience allow it to privately negotiate contracts at prices which are
sufficiently profitable.
REGULATION
The business of ACMAT's insurance subsidiaries is subject to comprehensive and
detailed regulation and supervision throughout the United States. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative authority which includes, but is not limited to, the power to
regulate licenses, to transact business, trade practices, agent licensing,
policy forms, claim practices, underwriting practices, reserve requirements, the
form and content of required financial statements and the type and amounts of
investments permitted. The insurance companies are required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
they do business, and their operations and accounts are subject to examination
by such agencies at regular intervals.
11
<PAGE> 12
As a nonadmitted excess and surplus lines insurer, United Coastal Insurance is
not subject to the comparatively more extensive state regulations to which
ACSTAR Insurance is subject. The regulations and restrictions to which ACSTAR
Insurance and United Coastal Insurance are subject include provisions intended
to assure the solvency of ACSTAR Insurance and United Coastal Insurance and are
primarily for the protection of policyholders and loss claimants rather than for
the benefit of investors.
State insurance regulations impose certain restrictions upon the types of
investments that the Company's insurance subsidiaries can acquire and the
percentage of their capital or assets that may be placed in any particular
investment or type of investment. Certain states also require insurance
companies to furnish evidence of financial security by means of a deposit of
marketable securities with the state insurance regulatory authority. On December
31, 1998, the Company's insurance subsidiaries had securities with an aggregate
book value of approximately $10 million on deposit with various state regulatory
authorities.
The insurance subsidiaries of ACMAT are restricted as to the amount of cash
dividends they may pay. United Coastal Insurance is restricted by the Arizona
Insurance Holding Company Systems Act as to the amount of dividends it may pay
without the prior approval of the Arizona Department. During 1998, United
Coastal Insurance paid $18,500,000 in dividends. At January 1, 1999,
approximately $3,030,000 is available for the payment of dividends by United
Coastal Insurance in 1999 without the prior approval of the Arizona Insurance
Department.
Under applicable insurance regulations in its domicile state of Illinois, ACSTAR
Insurance is also restricted as to the amount of dividends it may pay. ACSTAR
may pay or declare a dividend only up to the amount of any available surplus
funds derived from realized net profits on its business, as determined in
accordance with statutory accounting principles. During 1998, ACSTAR paid
$6,980,000 in dividends to ACSTAR Holdings. At January 1, 1999, approximately
$7,700,000 is available for the payment of dividends by ACSTAR Insurance in 1999
without the prior approval of the Illinois Insurance Department.
New regulations and legislation are being proposed to limit damage awards, to
control plaintiffs' counsel fees, to bring the industry under regulation by the
federal government and to control premiums, policy terminations and other policy
terms. It is not possible to predict whether these proposals will be adopted or
their likely effect, if any, on the Company.
INVESTMENTS
The Company's investment strategy is to maintain a conservative investment
policy by generally acquiring high quality securities, primarily bonds, with
fixed effective maturities of approximately three years or less. The investment
portfolio is well diversified and is in compliance with regulatory requirements.
The Company's bond portfolio is composed primarily of investments rated AA or
better by Standard and Poor's. Management has also decided to avoid long-term
investing at what management believes to be low long-term interest rates.
The Company's investment portfolio is subject to several risks including
interest rate and reinvestment risk. Fixed maturity security values generally
fluctuate inversely with movements in interest rates. The Company's corporate
and municipal bond investments may contain call and sinking fund features which
may result in early redemptions and the Company's mortgage-backed securities
investments held by the Company are subject to prepayment risk. Declines in
interest rates could cause early redemptions or prepayments which would require
the Company to reinvest at lower rates.
Investment securities are classified as held to maturity, available for sale or
trading. The Company currently classifies all investment securities as available
for sale. Investment securities available for sale are carried at fair value
and unrealized gains and losses are included in other comprehensive income, net
of estimated income taxes.
12
<PAGE> 13
The Company invests primarily in tax-exempt securities as part of its strategy
to maximize after-tax income. Such strategy considers, among other factors, the
impact of the alternative minimum tax. The following table summaries the fair
value fixed maturity investments portfolio at December 31, 1998 and 1997
(dollars in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997
------------------------- ------------------------
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 $ 19,006 16.7% $ 28,866 21.3%
State and political subdivisions 55,082 48.3 43,976 32.5
Industrial and Miscellaneous -- -- 15,137 11.2
Mortgage-backed securities 24,795 21.8 13,874 10.3
-------- ------- -------- -------
Total fixed maturities available for sale 98,883 86.8 101,853 75.3
Equity securities(2) 2,061 1.8 1,011 .7
Short-term investments (3) 12,948 11.4 32,422 24.0
-------- ------- -------- -------
Total investments $113,892 100.0% $135,286 100.0%
======== ======= ======== =======
</TABLE>
(1) Fixed maturities available for sale are carried at fair value. Total
cost of fixed maturities was approximately $98,128,000 at December 31,
1998 and $101,524,000 at December 31, 1997.
(2) Equity securities are carried at fair value. Total cost of equity
securities was approximately $2,065,000 at December 31,1998 and
$983,000 at December 31, 1997.
(3) Short-term investments, consisting primarily of money market
instruments maturing within one year are carried at cost which, along
with accrued interest, approximates fair value.
The following table sets forth the fair value of fixed maturities in the fixed
maturity investment portfolio at December 31, 1998 and 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1998 1997
---------------------------- ------------------------
Percent Percent
of Of
Amount Total Amount Total
------ ----- ------ -----
<S> <C> <C> <C> <C>
Due in (1):
One year or less $ 19,805 20.0% $ 46,296 45.5%
After one year through five years 72,805 73.6% 55,149 54.1
After five years through ten years 5,225 5.3% 408 .4
After ten years 1,048 1.1% -- --
-------- -------- -------- -------
$ 98,883 100.0% $101,853 100.0%
======== ======== ======== =======
</TABLE>
(1) Based on effective maturity dates. Actual maturities may differ
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
The Company's insurance subsidiaries are subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1998, the Company's
investments complied with such laws and regulations.
13
<PAGE> 14
Investment results for the years ended December 31, 1998, 1997 and 1996 are
shown in the following table (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Invested assets (1) $126,371 $140,029 $139,282
Investment income (2) $ 6,138 $ 6,505 $ 6,536
Average yield 4.86% 4.65% 4.69%
</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. Invested assets are attributable to the net cash flow generated
by written premiums, cash collateral and the reinvestment of investment income
offset in part by cash used to repay debt and repurchase stock.
ENVIRONMENTAL COMPLIANCE
The Company does not expect that its compliance with federal, state or local
environmental laws or regulations will have any material effect upon its capital
expenditures, earnings or competitive position.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 40 persons, all in
the United States. None of its current employees are employed subject to
collective bargaining agreements. The Company believes that its relations with
all of its employees are excellent.
ITEM 2. PROPERTIES
The Company and its subsidiaries occupy a 7 story office building located at 233
Main Street, in New Britain, Connecticut. ACMAT leases approximately 40% of the
building to unaffiliated tenants. The office building is suitable and adequate
for ACMAT's current and future requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal actions arising in the ordinary course of its
business. In management's opinion, the Company has adequate legal defenses
respecting those actions where the Company is a defendant, has appropriate
insurance reserves recorded, and does not believe that their settlement will
materially affect the Company's operations or financial position.
The Company has, together with many other defendants, been named as a defendant
in approximately 190 actions brought in Connecticut state courts by injured or
deceased individuals or their representatives based on product liability claims
relating to materials containing asbestos. No specific claims for monetary
damages are asserted in these actions. Although it is early in the litigation
process, the Company does not believe that its exposure in connection with these
cases is significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ACMAT's Class A Stock trades on the Nasdaq Stock Market under the symbol ACMTA.
The Common Stock trades on the over-the-counter market. The following table sets
forth the quarterly high and low closing prices of the Company's Common Stock
and Class A Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
1998 1997
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
COMMON STOCK
1st Quarter 21-1/4 21-1/4 20 20
2nd Quarter 21 21 20 20
3rd Quarter 21 21 21-1/2 20-1/2
4th Quarter 23 20-1/2 21 21
CLASS A STOCK
1st Quarter 17-7/8 15-3/8 16-1/4 14-1/4
2nd Quarter 15-3/4 15-1/8 16-1/2 15
3rd Quarter 16-1/2 14-9/16 19-3/4 15-1/2
4th Quarter 15-3/4 14-1/4 19-1/2 17
</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 18, 1999, there were Common
Stock shareholders of record and Class A Stock shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues $ 28,752,273 $33,552,135 $37,035,305 $41,857,398 $40,755,676
Total Assets 146,126,465 176,208,762 184,359,566 180,402,238 168,494,814
Long-Term Debt 37,200,000 48,212,727 35,807,419 40,127,590 43,405,266
Stockholders' Equity 37,622,926 39,577,739 49,702,404 37,587,259 38,004,935
Net Earnings 2,120,529 4,456,949 5,293,111 5,350,280 4,839,861
Basic Earnings Per Share .66 1.29 1.56 1.49 1.20
Diluted Earnings Per Share .65 1.12 1.22 1.17 1.18
</TABLE>
Note: No cash dividends were paid during any of the periods above.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1998 AND 1997:
Earned Premiums
Earned premiums in 1998 were $10,962,663 compared to $15,045,844 in 1997. Net
written premiums were $8,203,617 in 1998 compared to $12,680,197 in 1997. The
decrease in earned premiums in 1998 reflects the 35% decrease in 1998 net
written premiums over 1997 net written premiums primarily due to a continuing
soft insurance market place and the Company's strategy to avoid current
unfavorable pricing in the Company's casualty operations. Variances in net
written premiums have historically occurred due to the fluctuations in size,
number and timing of bonds and policies bound by the Company. The Company plans
to maintain its existing pricing strategy and high level of service.
Contract Revenues
Contract revenues were $12,139,924 in 1998 compared to $10,056,322 in 1997. The
increase in contract revenues reflects the Company's securement of an $11
million project in July 1998 which will be completed in August of 1999.
Construction revenue is difficult to predict in 1999 and depends greatly on the
successful securement of contracts bid. The Company's construction backlog at
December 31, 1998 was approximately $6,000,000 compared to $4,800,000 at
December 31, 1997.
Investment Income, Net
Net investment income was $6,138,105 in 1998 compared to $6,504,716 in 1997,
representing effective yields of 4.86% and 4.65%, respectively. The decrease in
investment income in 1998 over 1997 was due primarily to a decrease in total
invested assets. Invested assets, including cash and cash equivalents, were
$116,198,344 and $137,381,669 at December 31, 1998 and 1997, respectively. The
decrease in invested assets is attributable to the net cash flow used to
purchase stock, repay debt, return cash collateral and pay claims offset by net
cash flow generated from written premiums and the reinvestment of investment
income.
Net Realized Capital Gains
Realized capital gains from the sale of investments during 1998 were $266,169
compared to realized capital gains of $282,667 in 1997.
Other Income
Other income (expense) was ($754,588) in 1998 compared to $1,662,586 in 1997.
The fluctuation in other income (expense) is due to a loss of approximately
$1,400,000 for the Company's share of losses from a limited partnership in 1998
which compares to a gain of approximately $965,000 in 1997. The limited
partnership invests in small cap equities and incurred losses in 1998 due to
volatility in the small cap market. The Company sold its investment in the
limited partnership on December 31, 1998.
Cost of Contract Revenues
Cost of contract revenues were $11,635,879 in 1998 compared to $9,331,103 in
1997. The increase in cost of contract revenues during 1998 compared to 1997 is
consistent with the increase in contract revenues. The gross profit margin on
construction contracts was 4.2% and 7.2% in 1998 and 1997, respectively. Gross
margins fluctuate each year based upon the profitability of specific projects.
The decrease in the 1998 profit margin was due primarily to losses on two
projects which were completed in 1998. Cost of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues).
16
<PAGE> 17
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $2,186,728 in 1998 compared to
$4,337,252 in 1997. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1997 to 1998 and the release
of approximately 1,150,000 of surety loss reserves which compares to a release
of approximately $176,500 in 1997. The reserves released represent the release
of reserves on older underwriting years which are no longer needed. Losses and
loss adjustment expense reserves represent management's estimate of the ultimate
cost of unpaid losses incurred for these periods relative to premiums earned.
Amortization of Policy Acquisition Costs
Amortization of policy acquisition costs was $2,112,857 in 1998 as compared to
$2,802,993 in 1997. The decrease in amortization of policy acquisition costs is
primarily attributable to the decrease in premiums earned. Policy acquisition
costs, primarily commissions, are deferred and amortized over the policy or bond
term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5,355,183 in 1998 compared to
$5,767,808 in 1997. The decrease in selling, general and administrative expenses
from 1998 to 1997 is due primarily to a decrease in bad debt expense.
Interest Expense
Interest expense decreased to $4,621,401 in 1998 from $5,116,414 in 1997. The
decrease in interest expense in 1998 is due to a decrease in long-term and
short-term debt.
Income Taxes
Income tax expense was $719,696 in 1998 compared to $1,739,616 in 1997,
representing effective Federal tax rates of 23.2% and 27.3%, respectively. The
decrease in the Federal effective tax rate is due to tax exempt interest income
and dividends subject to the dividend received deduction making up a larger
portion of taxable income.
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1997 AND 1996:
Earned Premiums
Earned premiums in 1997 were $15,045,844 compared to $19,899,936 in 1996. Net
written premiums were $12,680,197 in 1997 compared to $18,041,488 in 1996. The
decrease in earned premiums in 1997 reflects the 30% decrease in 1997 net
written premiums over 1996 net written premiums primarily due to a continuing
soft insurance market place and the Company's strategy to avoid unfavorable
pricing in the Company's casualty operations. Variances in net written premiums
have historically occurred due to the fluctuations in size, number and timing of
bonds and policies bound by the Company.
Contract Revenues
Contract revenues were $10,056,322 in 1997 compared to $9,415,734 in 1996. The
Company's construction backlog at December 31, 1997 was approximately $4,800,000
compared to $8,700,000 at December 31, 1996.
Investment Income, Net
Net investment income was $6,504,716 in 1997 compared to $6,535,572 in 1996,
representing effective yields of 4.65% and 4.69%, respectively. Invested assets,
including cash and cash equivalents, were $137,381,669 and $142,677,985 at
December 31, 1997 and 1996, respectively. The decrease in invested assets was
attributable to the net cash flow used to purchase stock and repay debt offset
in part by written premiums, cash collateral and the reinvestment of investment
income offset by the purchase of stock and the repayment of debt.
17
<PAGE> 18
Net Realized Capital Gains
Realized capital gains from the sale of investments during 1997 were $282,667
compared to realized capital gains of $257,774 in 1996.
Other Income
Other income was $1,662,586 in 1997 compared to $926,289 in 1996. The increase
in other income reflects earnings of $965,845 from the limited partnership
investment in 1997.
Cost of Contract Revenues
Cost of contract revenues were $9,331,103 in 1997 compared to $8,396,344 in
1996. The increase in cost of contract revenues during 1997 compared to 1996
reflects the increase in contract revenues. Costs of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues).
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $4,337,252 in 1997 compared to
$5,969,980 in 1996. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1996 to 1997. Losses and
loss adjustment expense reserves represent management's estimate of the ultimate
cost of unpaid losses incurred for these periods relative to premiums earned.
Amortization of Policy Acquisition Costs
Amortization of policy acquisition costs was $2,802,993 in 1997 as compared to
$3,617,308 in 1996. Policy acquisition costs, primarily commissions, are
deferred and amortized over the policy or bond term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5,767,808 in 1997 compared to
$5,610,176 in 1996. The increase in selling, general and administrative expenses
from 1997 to 1996 reflects an increase in the bad debts expense.
Interest Expense
Interest expense has increased to $5,116,414 in 1997 from $4,946,418 in 1996.
The increase in interest expense in 1997 was due primarily to an increase in
long-term debt issued to purchase stock offset in part by a decrease in
short-term debt.
Income Taxes
Income tax expense was $1,739,616 in 1997 compared to $2,313,828 in 1996,
representing effective Federal tax rates of 27.3% and 26.5%, respectively. The
Federal effective tax rate fluctuates according to the mix of tax exempt and
taxable securities held by the Company.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal developments
and economic conditions, including the effects of inflation. Reserves are
monitored and evaluated periodically using current information on reported
claims.
18
<PAGE> 19
Management believes that the reserves for losses and loss adjustment expenses at
December 31, 1998 are adequate to cover the unpaid portion of the ultimate net
cost of losses and loss adjustment expenses, including losses incurred but not
reported. Reserves for losses and loss adjustment expenses are estimates at any
given point in time of what the Company may have to pay ultimately on incurred
losses, including related settlement costs based on facts and circumstances then
known. The Company also reviews its claims reporting patterns, past loss
experience, risk factors and current trends and considers their effect in the
determination of estimates of incurred but not reported reserves. Ultimate
losses and loss adjustment expenses are affected by many factors which are
difficult to predict, such as claim severity and frequency, inflation levels and
unexpected and unfavorable judicial rulings. Reserves for surety claims also
consider the amount of collateral held as well as the financial strength of the
principal and its indemnitors.
The combined ratio is one means of measuring the underwriting experience of a
property and casualty insurer. The combined ratio, consisting of the ratio of
losses and loss adjustment expenses to premiums earned (the "loss ratio") plus
the ratio of underwriting expenses to premiums written (the "expense ratio")
reflects relative underwriting profit or loss. The Company's insurance
subsidiaries' loss ratios under generally accepted accounting principles
("GAAP") were 19.6%, 28.8% and 30.0% for the years ended December 31, 1998, 1997
and 1996, respectively. These loss ratios are below industry averages and are
believed to be the result of conservative underwriting. The decrease in the loss
ratios is due to the release of Surety reserves in 1998 and 1997. There can be
no assurance that such loss ratios can continue. The Company's insurance
subsidiaries' expense ratios under GAAP were 51.8%, 48.0% and 43.5% for the
years ended December 31, 1998, 1997 and 1996, respectively. The increase in the
expense ratios is due to the decline in premiums. The Company's insurance
subsidiaries' combined ratios under GAAP were 71.4%, 76.8% and 73.5% for the
years ended December 31, 1998, 1997 and 1996, respectively. The decrease in the
1998 combined ratio results primarily from the reduction in loss reserves offset
in part by the decline in premiums.
LIQUIDITY AND CAPITAL RESOURCES:
The Company internally generates sufficient funds for its current operations and
maintains a relatively high degree of liquidity in its investment portfolio. The
primary sources of funds to meet the demands of claim settlements and operating
expenses are premium collections, investment earnings and maturing investments.
The Company has no material commitments for capital expenditures and, in the
opinion of management, has adequate sources of liquidity to fund its operations
over the next 12 months.
ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from
operating activities primarily because of interest expense related to notes
payable and long-term debt incurred by ACMAT to acquire and capitalize its
insurance subsidiaries and to repurchase Company stock. ACMAT has also incurred
negative working capital as a result of holding short-term debt related to its
operations.
ACMAT's principal sources of funds are dividends from its wholly owned
subsidiaries, intercompany and short-term borrowings, insurance underwriting
fees from its subsidiaries, construction contracting operations and rental
income. Management believes that these sources of funds are adequate to serve
its indebtedness. ACMAT has recently utilized short-term borrowings to
repurchase its stock. ACMAT has also relied on dividends from its insurance
subsidiaries to repay debt.
The Company used cash flow from other sources to support operations in the
amount of $530,977 in 1998, compared to cash flow realized from operations of
$5,585,329 in 1997 and $14,260,264 in 1996. The reduction in cash flows from
operations is due primarily to the return of cash collateral and the payment of
claims. Substantially all of the Company's cash flow is used to repay short-term
and long-term debt, repurchase stock and purchase investments. Purchases of
investments are made based upon excess cash available after the payment of
losses and loss adjustment expenses and other operating and non-operating
expenses. The Company's short term investment strategy coincides with the
relatively short maturity of its liabilities which are comprised primarily of
reserves for losses covered by claims-made insurance policies, reserves related
to surety bonds and collateral held for surety obligations.
Net cash provided by investing activities was $21,326,746 in 1998, and
$4,993,298 in 1997. Net cash used for investing activities amounted to
$11,392,397 in 1996.
19
<PAGE> 20
The terms of the Company's note agreements contain limitations on payment of
cash dividends, re-acquisition of shares, borrowings and investments and require
maintenance of specified ratios and minimum net worth levels, including cross
default provisions. The payment of future cash dividends and the re-acquisition
of shares are restricted each to amounts of an available fund ("Available
Fund"). The Available Fund is a cumulative fund which is increased each year by
20% of the Consolidated Net Earnings (as defined). The Company is in compliance
with all covenants at December 31, 1998, except for the ratio of Earnings Before
Income Taxes, Depreciation and Amortization to Fixed Charges. The Company has
received a waiver for this covenant.
The Company maintains a short-term unsecured bank credit line of $10 million to
fund interim cash requirements. There were no borrowings outstanding under this
line of credit as of December 31, 1998. Effective December 23, 1998, the Company
obtained a $5,000,000, five-year, term loan which is repayable in quarterly
installments commencing March 1, 1999. Portions of the proceeds of such term
loan were applied to the repayment of term debt and to the reduction of the
Company's short-term credit line.
During 1998, the Company purchased, in the open market and privately negotiated
transactions, 4,769 shares of its Common Stock at an average price of $20.65.
The Company also purchased, in open market and privately negotiated
transactions, 342,366 shares of its Class A Stock at an average price of $15.10
per share.
The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. During 1998, ACMAT received
$18,850,000 as dividends from its subsidiaries. Under applicable insurance
regulations, ACMAT's insurance subsidiaries are restricted as to the amount of
dividends they may pay to their respective holding companies, without the prior
approval of their domestic state insurance department. For 1999, the amount of
dividends ACMAT's insurance subsidiaries may pay, without prior approval of
their domestic state insurance departments, is limited to approximately
$10,730,000.
In 1999, the Company anticipates that internally generated funds and short-term
borrowings will be utilized for repayment of long-term debt. Principal
repayments on long-term debt is scheduled to be approximately $1,560,000 in
1999.
YEAR 2000 ISSUE
There has been significant public discussion in recent years of the "Year 2000"
issue, which relates to the potential inability of computer programs and systems
to adequately store and process data after December 31, 1999, due to the
inability of such programs and systems to identify correct dates subsequent to
December 31, 1999.
In 1997, the Company began to address the Year 2000 issue. The Company's
financial and operational computer and software systems are approximately 60%
compliant, with all systems expected to be compliant and tested by June 30,
1999. The total cost of the project is estimated to be less than $100,000 and is
being funded through operating cash flows. Management believes that these
systems will be suitable for continued use into and beyond the year 2000. If for
any reason these systems are not suitable for such use, the Year 2000 issue
could have a material adverse impact on the Company's ability to meet financial
and reporting requirements and to support its insurance operations.
The Company's Year 2000 review includes an assessment of "embedded chip" systems
associated with its end-user computing hardware and software (including personal
computers, spreadsheets, word processing and other personal and work group
applications), its corporate facilities (such as security systems, elevators and
climate control systems) and its office equipment (including telephones, fax
machines and similar equipment). The Company is continuing to identify potential
problems associated with its embedded chip systems and to develop corrective
plans to avoid or mitigate such potential problems. Where appropriate, the
Company intends to upgrade or replace non-compliant embedded chip systems to
avoid potential Year 2000 problems. The Company anticipates that the deployment
of corrected systems for its "embedded chip" technology will be completed during
the second quarter of 1999.
The Company is reviewing certain suppliers, business partners, customers and
other parties to determine the extent to which the Company may be vulnerable to
the failure of these parties to address and correct their own Year 2000
problems. However, there can be no guarantee that the systems of other companies
that support the Company's operations will be timely converted or that a failure
by these companies to correct their Year 2000 problems will not have a material
adverse effect on the Company.
20
<PAGE> 21
The Company's Year 2000 Review is intended to reduce the level of uncertainty
associated with the Year 2000 issue. As part of this review, the Company plans
to develop contingency plans to address and mitigate the potential impact of
problems that might surface with the approach of the millennium. In light of the
current stage of the Company's review of its core financial and operational
systems and its "embedded chip" technology, the Company is developing
contingency plans that focus on the potential interruption of support services
provided to the Company by business affiliates or public authorities due to
problems these parties may experience in connection with the Year 2000 issue.
The Company intends to explore these and other "worst case" scenarios in the
coming months to anticipate and limit, wherever possible, the potential impact
of any such scenario on the Company's insurance operations or financial
condition. These plans will include identifying alternate suppliers and vendors,
conducting staff training and developing alternative communication plans.
The Company has made changes in insurance coverage it currently markets in light
of the Year 2000 issue. In the past, judicial interpretations have expanded the
coverage of insurance policies, including those regarding pollution and other
environmental exposures, beyond the scope anticipated by insurers. The Company
will continue to review its reserves in light of evolving developments relating
to the Year 2000 issue.
The dates on which the Company believes that the various components of its Year
2000 review will be completed are based on management's best estimates, which,
in turn, are based upon numerous assumptions regarding future events, including
the continued availability of certain resources, third-party compliance plans
and other factors. As a result, there can be no guarantee that the Company's
schedule of completion dates will be realized or that there will not be
increased costs associated with the implementation of the Year 2000 review. Due
to the general uncertainty inherent in the Year 2000 issue, resulting in part
from the uncertainty of the Year 2000 readiness of third-parties, the Company
cannot assure its ability to timely and cost-effectively resolve problems
associated with the Year 2000 issue that may effect its operations and business
or expose it to third-party liability.
REGULATORY ENVIRONMENT
Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
require further regulatory action. The ratio for each of the Company's insurance
subsidiaries as of December 31, 1998 was significantly above the level which
might require regulatory action.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The carrying value of the Company's investment portfolio as of December 31, 1998
was $113,892,112, 87% of which is invested in fixed maturity securities. The
primary market risk to the investment portfolio is interest rate risk associated
with investments in fixed maturity securities. The Company's exposure to equity
price risk and foreign exchange risk is not significant. The Company has no
direct commodity risk.
For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how those exposures are managed
compared to the year December 31, 1997. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.
The primary market risk for all of the Company's long-term debt is interest rate
risk at the time of refinancing. As the majority of the Company's debt is fixed
rate debt, the Company's exposure to interest rate risk in its long-term debt is
not significant. The Company will continue to monitor the interest rate
environment and to evaluate refinancing opportunities as the maturity dates
approach.
SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the consolidated financial statements.
In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stocks,
short-term securities, cash, investment income accrued, and long-term debt. The
primary market risk to the Company's market sensitive instruments is interest
rate risk. The sensitivity analysis model uses a 100 basis point change in
interest rates to measure the hypothetical change in fair value of financial
instruments included in the model.
For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1998.
The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $1.7 million based on a 100 basis point
increase in interest rates as of December 31, 1998, which is not considered
material . This loss of value only reflects the impact of an interest rate
increase on the fair value of the Company's financial instruments, which
constitute approximately 78% of total assets. As a result, the loss value
excludes a significant portion of the Company's consolidated balance sheet which
would materially mitigate the impact of the loss in fair value associated with a
100 basis point increase in interest rates.
For example, certain non-financial instruments, primarily insurance accounts for
which the fixed maturity portfolio's primary purpose is to fund future claims
payments related thereto, are not reflected in the development of the above loss
value. These non-financial instruments include premium balances receivable,
reinsurance recoverables, claims and claim adjustment expense reserves and
unearned premium reserves.
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Schedules
ACMAT Corporation and Subsidiaries:
The following Consolidated Financial Statements of the Company, related notes
and Independent Auditors' Report are included herein:
Independent Auditors' Report
Consolidated Statements of Earnings for the years ended December 31, 1998,
1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements - December 31, 1998, 1997 and
1996
Consolidated Schedules included in Part II of this Report - Years ended
December 31, 1998, 1997 and 1996:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty
Insurance Operations
22
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
The Board of Directors
ACMAT Corporation:
We have audited the consolidated financial statements of ACMAT Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACMAT Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
KPMG LLP
Hartford, Connecticut
February 26, 1999
23
<PAGE> 24
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Earned Premiums $ 10,962,663 15,045,844 19,899,936
Contract Revenues 12,139,924 10,056,322 9,415,734
Investment Income, Net 6,138,105 6,504,716 6,535,572
Net Realized Capital Gains 266,169 282,667 257,774
Other Income (Expense) (754,588) 1,662,586 926,289
------------ ------------ ------------
28,752,273 33,552,135 37,035,305
Losses and Loss Adjustment Expenses 2,186,728 4,337,252 5,969,980
Cost of Contract Revenues 11,635,879 9,331,103 8,396,344
Amortization of Policy Acquisition Costs 2,112,857 2,802,993 3,617,308
Selling, General and Administrative Expenses 5,355,183 5,767,808 5,610,176
Interest Expense 4,621,401 5,116,414 4,946,418
------------ ------------ ------------
25,912,048 27,355,570 28,540,226
------------ ------------ ------------
Earnings Before Income Taxes and Minority Interest 2,840,225 6,196,565 8,495,079
Income Taxes 719,696 1,739,616 2,313,828
------------ ------------ ------------
Earnings Before Minority Interest 2,120,529 4,456,949 6,181,251
Minority Interest -- -- (888,140)
------------ ------------ ------------
Net Earnings $ 2,120,529 4,456,949 5,293,111
============ ============ ============
Basic Earnings Per Share $ .66 1.29 1.56
------------ ------------ ------------
Diluted Earnings Per Share $ .65 1.12 1.22
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
24
<PAGE> 25
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets 1998 1997
---- ----
<S> <C> <C>
Investments:
Fixed Maturities - Available for Sale at Fair Value
(Cost of $98,128,192 in 1998 and $101,523,931 in 1997) $ 98,882,751 101,852,980
Equity Securities - Available for Sale at Fair Value
(Cost of $2,065,262 in 1998 and $983,074 in 1997) 2,061,448 1,010,927
Short-term Investments, at Cost which Approximates Fair Value 12,947,913 32,422,313
------------ ------------
Total Investments 113,892,112 135,286,220
Cash and Cash Equivalents 2,306,232 2,095,449
Accrued Interest Receivable 1,352,334 1,458,164
Receivables, Net of Allowance for Doubtful Accounts of
$257,617 in 1998 and $309,746 in 1997 3,737,627 7,118,527
Reinsurance Recoverable 2,224,116 3,478,121
Income Tax Refund Receivable 207,380 564,829
Prepaid Expenses 162,784 204,642
Deferred Income Taxes 1,733,987 1,940,936
Limited Partnership Investment -- 2,052,475
Property and Equipment, Net 12,894,191 13,179,337
Deferred Policy Acquisition Costs 1,550,089 2,078,405
Other Assets 3,170,242 3,529,634
Intangibles, Net 2,895,371 3,222,023
------------ ------------
$146,126,465 176,208,762
============ ============
Liabilities & Stockholders' Equity
Notes Payable to Banks $ -- 5,000,000
Accounts Payable 3,200,965 3,188,554
Reserves for Losses and Loss Adjustment Expenses 43,115,062 48,900,713
Unearned Premiums 6,795,435 9,804,159
Collateral Held 17,344,376 20,275,702
Other Accrued Liabilities 847,701 1,249,168
Long-term Debt 37,200,000 48,212,727
------------ ------------
Total Liabilities 108,503,539 136,631,023
Commitments and Contingencies
Stockholders' Equity:
Common Stock (No Par Value; 3,500,000 Shares Authorized;
592,088 and 596,857 Shares Issued and Outstanding) 592,088 596,857
Class A Stock (No Par Value; 10,000,000 Shares Authorized;
2,460,808 and 2,712,174 Shares Issued and Outstanding) 2,460,808 2,712,174
Retained Earnings 34,074,538 36,033,153
Accumulated Other Comprehensive Income 495,492 235,555
------------ ------------
Total Stockholders' Equity 37,622,926 39,577,739
------------ ------------
$146,126,465 176,208,762
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
25
<PAGE> 26
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Common
stock par Class A Additional Retained
value stock par paid-in earnings
value capital
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance as of December 31, 1995 $642,464 2,665,836 1,921,100 31,601,383
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment - - - -
Net earnings - - - 5,293,111
Total comprehensive income
Acquisition and retirement of 42,207
shares of Common Stock $(42,207) - (751,865) -
Acquisition and retirement of 872,975
shares of Class A Stock - (872,975) (10,633,162) -
Issuance of 499,999 Shares of Class A
Stock - 499,999 4,499,991 -
Issuance of 85,000 Shares of Class A
Stock pursuant to stock options - 85,000 644,150 -
Issuance of 1,111,000 Shares of
Class A Stock - 1,111,000 12,727,663 -
-------- --------- ----------- ----------
Balance as of December 31, 1996 $600,257 3,488,860 8,407,877 36,894,494
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment - - - -
Net earnings - - - 4,456,949
Total comprehensive income
Acquisition and retirement of
3,400 shares of Common Stock $ (3,400) - (66,096) -
Acquisition and retirement of
1,347,686 shares of Class A Stock - (1,347,686) (13,522,491) (5,318,290)
Issuance of 450,000 shares
of Class A Stock - 450,000 4,050,000 -
Issuance of 121,000 shares of Class A Stock
pursuant to stock options - 121,000 1,130,710
-------- --------- ----------- ----------
Balance as of December 31, 1997 $596,857 2,712,174 - 36,033,153
Comprehensive income:
Net unrealized appreciation of debt and
equity securities, net of reclassification
adjustment - - -
Net earnings - - - 2,120,529
Total comprehensive income
Acquisition and retirement of
4,769 shares of Common Stock $ (4,769) - - (93,697)
Acquisition and retirement of
342,366 shares of Class A Stock - (342,366) (841,980) (3,985,447)
Issuance of 91,000 shares of Class A Stock
pursuant to stock options - 91,000 841,980 -
-------- --------- ----------- ----------
-
Balance as of December 31, 1998 $592,088 2,460,808 - 34,074,538
======== ========= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
other Total
comprehensive stockholders'
income equity
------------- -------------
<S> <C> <C>
Balance as of December 31, 1995 756,476 37,587,259
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment (445,560) (445,560)
Net earnings - 5,293,111
-----------
Total comprehensive income 4,847,551
Acquisition and retirement of 42,207
shares of Common Stock - (794,072)
Acquisition and retirement of 872,975
shares of Class A Stock - (11,506,137)
Issuance of 499,999 Shares of Class A
Stock - 4,999,990
Issuance of 85,000 Shares of Class A
Stock pursuant to stock options - 729,150
Issuance of 1,111,000 Shares of
Class A Stock - 13,838,663
-------- -----------
Balance as of December 31, 1996 310,916 49,702,404
Comprehensive income:
Net unrealized losses on debt and equity
securities, net of reclassification
adjustment (75,361) (75,361)
Net earnings 4,456,949
-----------
Total comprehensive income 4,381,588
Acquisition and retirement of
3,400 shares of Common Stock - (69,496)
Acquisition and retirement of
1,347,686 shares of Class A Stock - (20,188,467)
Issuance of 450,000 shares
of Class A Stock - 4,500,000
Issuance of 121,000 shares of Class A Stock
pursuant to stock options - 1,251,710
-------- -----------
Balance as of December 31, 1997 235,555 39,577,739
Comprehensive income:
Net unrealized appreciation of debt and
equity securities, net of reclassification
adjustment 259,937 259,937
Net earnings - 2,120,529
-----------
Total comprehensive income 2,380,466
Acquisition and retirement of
4,769 shares of Common Stock - (98,466)
Acquisition and retirement of
342,366 shares of Class A Stock - (5,169,793)
Issuance of 91,000 shares of Class A Stock
pursuant to stock options - 932,980
-------- -----------
Balance as of December 31, 1998 495,492 37,622,926
======== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE> 27
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Earnings $ 2,120,529 4,456,949 5,293,111
Adjustments to Reconcile Net Earnings to Net
Cash Provided by (Used for) Operating Activities:
Depreciation and Amortization 1,412,004 1,506,013 1,787,061
Minority Interests -- -- 888,140
Net Realized Capital Gain (266,169) (282,667) (257,774)
Limited Partnership Investment 1,429,288 (966,315) 33,725
Deferred Income Taxes 73,041 383,771 (34,197)
Changes In:
Accrued Interest Receivable 105,830 109,597 663,227
Receivables, Net 3,380,900 1,263,063 640,844
Reinsurance Recoverable 1,254,005 362,880 31,098
Deferred Policy Acquisition Costs 528,316 827,470 553,433
Prepaid Expenses and Other Assets 951,605 351,384 (183,343)
Accounts Payable and Other Liabilities (389,056) 1,159,290 (773,028)
Collateral Held (2,931,326) (1,554,864) 4,062,611
Reserves for Losses and Loss Adjustment Expenses (5,785,651) 940,629 2,724,773
Income Taxes 594,431 (434,388) 791,554
Unearned Premiums (3,008,724) (2,537,483) (1,960,971)
------------ ------------ ------------
Net Cash Provided by (Used for) Operating Activities (530,977) 5,585,329 14,260,264
------------ ------------ ------------
Cash Flows From Investing Activities:
Proceeds From Investments Sold or Matured:
Fixed Maturities - Sold 40,118,160 41,501,401 39,094,153
Fixed Maturities - Matured 38,383,281 35,221,999 61,896,825
Equity Securities 1,022,466 774,349 298,568
Short-Term Investments 79,604,384 155,255,106 95,826,099
Purchases Of:
Fixed Maturities (75,373,107) (85,168,980) (73,340,147)
Equity Securities (2,060,000) (1,727,812) (255,262)
Short-term Investments (60,129,984) (140,708,282) (134,436,189)
Capital Expenditures (238,454) (154,483) (140,838)
Other -- -- (335,606)
------------ ------------ ------------
Net Cash Provided by (Used for) Investing Activities 21,326,746 4,993,298 (11,392,397)
------------ ------------ ------------
Cash Flows From Financing Activities:
Borrowings Under Line of Credit 7,000,000 5,000,000 9,200,000
Repayments Under Line of Credit (12,000,000) (13,200,000) (3,500,000)
Repayments on Long-term Debt (23,812,727) (3,594,692) (1,820,181)
Issuance of Long-term Debt 12,800,000 8,500,000 2,500,000
Issuance of Class A Stock 696,000 882,250 560,000
Payments for Subsidiaries' Stock -- -- (440,625)
Payments for Acquisition and Retirement of Stock (5,268,259) (8,257,963) (12,300,209)
------------ ------------ ------------
Net Cash Used For Financing Activities (20,584,986) (10,670,405) (5,801,015)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 210,783 (91,778) (2,933,148)
Cash and Cash Equivalents, Beginning of Year 2,095,449 2,187,227 5,120,375
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 2,306,232 2,095,449 2,187,227
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE> 28
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include ACMAT Corporation
("ACMAT" or the "Company"), its subsidiaries, AMINS, Inc., Geremia
Electric Co., ACMAT of Texas, Inc., ACSTAR Holdings, Inc. ("ACSTAR
Holdings") and ACSTAR Holdings' wholly-owned subsidiary, ACSTAR
Insurance Company ("ACSTAR"); and United Coastal Insurance Company
("United Coastal Insurance").
These consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP").
All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain re- classifications have been
made to the 1997 and 1996 financial statements to conform to the
classifications in 1998.
(b) Business
ACMAT operates as an insurance holding company and as an interior
contractor; designing, supplying, renovating and installing
interiors for commercial, industrial and institutional buildings,
including asbestos abatement contracting.
ACMAT's Insurance Group includes United Coastal Insurance, ACSTAR
and AMINS, Inc. United Coastal Insurance is an excess and surplus
lines property and casualty insurer providing specialty general and
environmental liability insurance to specialty trade and
environmental contractors, property owners, storage and treatment
facilities and allied professionals, as well as professional
liability insurance to architects, engineers and consultants.
ACSTAR is licensed as an admitted insurer in 49 states and the
District of Columbia and provides surety bonding for specialty
trade, environmental remediation and asbestos abatement
contractors. AMINS, Inc. is an insurance agency which acts
primarily as a general agent for ACSTAR and United Coastal
Insurance. United Coastal Insurance participates in a number of
reinsurance arrangements with other companies on a quota share
basis. These arrangements primarily cover marine and other property
catastrophic risks.
During 1998, 1997 and 1996, customers who individually accounted
for more than 10% of consolidated construction contracting revenue
are as follows; in 1998 - three customers provided 52%, 19% and
17%, respectively. in 1997 - four customers provided 28%, 21%, 19%
and 11%, respectively; in 1996 - four customers provided 18%, 15%,
14% and 10%, respectively. No customers accounted for more than 10%
of the consolidated insurance revenues in any year.
(c) Investments
Securities are classified in one of three categories, held to
maturity, trading or available for sale. Debt securities for which
the Company has the ability and intent to hold to maturity are
classified as held to maturity and are stated at amortized cost.
Securities bought in anticipation of short-term market movements,
if any, are classified as trading securities and are carried at
market value with unrealized gains or losses reflected in the
statement of income. Securities that are not classified as either
held-to maturity securities or trading securities are classified as
available for sale and are carried at market value with unrealized
gains or losses included in other comprehensive income, net of
income taxes.
The fair value of investment securities are based on quoted market
prices. Premiums and discounts on debt securities are amortized
into interest income over the term of the securities in a manner
that approximates the interest method. Realized gains and losses on
sales of securities are computed using the specific identification
method. Any security which management believes has experienced a
decline in value which is other than temporary is written down to
its market value through a charge to income.
Short-term investments, consisting primarily of money market
instruments maturing within one year are carried at cost which,
along with accrued interest, approximates fair value. Cash and cash
equivalents include cash on hand and short-term highly liquid
investments of maturities of three months or less when purchased.
These investments are carried at cost plus accrued interest which
approximates fair value.
(d) Limited Partnership Investment
The limited partnership investment represented an 11.2%
participation in a joint venture, Grandview Partners, L.P., which
invested primarily in small capitalization stocks traded on
national market exchanges. The Company sold the Limited Partnership
on December 31, 1998. The limited partnership investment was
carried on the equity method of accounting in which the Company's
share of the net income of the limited partnership was recognized
as income in the Company's income statement and added to the
carrying value of the investment and distributions received from
the limited partnership are treated as a reduction of the carrying
value of the investment.
28
<PAGE> 29
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Policy Acquisition Costs
Policy acquisition costs, representing commissions and certain
underwriting costs, are deferred and amortized on a straight-line
basis over the policy term. During the years ended December 31,
1998, 1997 and 1996, deferrable costs capitalized were $1,584,541,
$1,975,523 and $3,063,875, respectively. The amortization of
deferred policy acquisition costs charged to operations for the
years ended December 31, 1998, 1997 and 1996 was $2,112,857,
$2,802,993 and $3,617,308, respectively.
(f) Property and Equipment
Property and equipment are reported at depreciated cost.
Depreciation is computed using the straight-line method at rates
based upon the respective estimated useful lives of the assets.
Maintenance and repairs are expensed as incurred.
(g) Intangibles
All intangibles are stated at amortized cost and are being
amortized using the straight-line method. Intangibles include
insurance operating licenses and goodwill, which represents the
excess of cost over the fair market value of net assets acquired.
These intangible assets are amortized over periods ranging from 15
to 25 years.
(h) Insurance Reserve Liabilities
Reserves for losses and loss adjustment expenses are established
with respect to both reported and incurred but not reported claims
for insured risks. The amount of loss reserves for reported claims
is primarily based upon a case-by-case evaluation of the type of
risk involved, knowledge of the circumstances surrounding the claim
and the policy provisions relating to the type of claim. As part of
the reserving process, historical data are reviewed and
consideration is given to the anticipated impact of various factors
such as legal developments and economic conditions, including the
effects of inflation. Reserves are monitored and recomputed
periodically using new information on reported claims.
Reserves for losses and loss adjustment expenses are estimates at
any given point in time of what the Company may have to pay
ultimately on incurred losses, including related settlement costs,
based on facts and circumstances then known. The Company also
reviews its claims reporting patterns, past loss experience, risk
factors and current trends and considers their effect in the
determination of estimates of incurred but not reported losses.
Ultimate losses and loss adjustment expenses are affected by many
factors which are difficult to predict, such as claim severity and
frequency, inflation levels and unexpected and unfavorable judicial
rulings. Reserves for surety claims also consider the amount of
collateral held as well as the financial strength of the contractor
and its indemnitors. Management believes that the reserves for
losses and loss adjustment expenses are adequate to cover the
unpaid portion of the ultimate net cost of losses and loss
adjustment expenses incurred, including losses incurred but not
reported.
(i) Collateral Held
The carrying amount of collateral held approximates its fair value
because of the short maturity of these instruments. Collateral held
represents cash and investments retained by the Company for surety
bonds issued by the Company.
(j) Reinsurance
In the normal course of business, the Company assumes and cedes
reinsurance with other companies. Reinsurance ceded primarily
represents excess of loss reinsurance with companies with "A"
ratings from the insurance rating organization, A.M. Best Company,
Inc. Such reinsurance is applicable on a per policy basis generally
to those policies with per occurrence limits in excess of $2
million up to $10 million for liability and for individual surety
bonds, the Company reinsures through various layered excess of loss
agreements up to $10 million on a $15.6 million bond. Reinsurance
ceded also includes a facultative reinsurance treaty which is
applicable to excess policies written over a primary policy issued
by the Company for specific projects. Reinsurance is ceded to limit
losses from large exposures and to permit recovery of a portion of
direct losses; however, such a transfer does not relieve the
originating insurer of its liability. The Company participates in
assumed quota share reinsurance arrangements covering marine and
property catastrophe risks with one of its excess of loss
reinsurers.
29
<PAGE> 30
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance recoverables include ceded reserves for losses and loss
adjustment expenses. Ceded unearned premiums of $662,363 and $912,039
at December 31, 1998 and 1997, respectively, are included in other
assets. All reinsurance contracts maintained by the Company qualify as
short-duration prospective contracts. A summary of reinsurance premiums
written and earned is provided below:
<TABLE>
<CAPTION>
Premiums Written Premiums Earned
------------------------------------------- -------------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Direct $ 8,324,506 12,851,647 17,954,271 11,211,803 15,164,588 19,834,586
Assumed 528,220 686,935 1,516,988 656,023 1,144,017 1,470,043
Ceded (649,109) (858,385) (1,429,771) (905,163) (1,262,761) (1,404,693)
----------- ----------- ----------- ----------- ----------- -----------
Totals $ 8,203,617 12,680,197 18,041,488 10,962,663 15,045,844 19,899,936
=========== =========== =========== =========== =========== ===========
</TABLE>
There were no reinsurance recoveries on ceded paid losses and loss
adjustment expenses for the years ended December 31, 1998 and 1997.
Reinsurance recoveries on ceded paid losses and loss adjustment
expenses totaled approximately $98,000 for the year ended December 31,
1996. Ceded incurred losses and loss adjustment expenses totaled
$180,553, $364,015 and $421,408 for the years ended December 31, 1998,
1997 and 1996, respectively.
(k) Revenue Recognition
Revenue on construction contracts is recorded using the percentage of
completion method. Under this method revenues with respect to
individual contracts are recognized in the proportion that costs
incurred to date relate to total estimated costs. Revenues and cost
estimates are subject to revision during the terms of the contracts,
and any required adjustments are made in the periods in which the
revisions become known. Provisions are made, where applicable, for the
entire amount of anticipated future losses on contracts in progress.
Claims are recorded as revenue at the time of settlement and profit
incentives and change orders are included in revenues when their
realization is reasonably assured. Selling, general and administrative
expenses are not allocated to contracts.
Insurance premiums are recognized over the coverage period. Unearned
premiums represent the portion of premiums written that is applicable
to the unexpired terms of policies in force, calculated on a prorata
basis.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
(m) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
reported results using those estimates.
(n) Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. This statement stipulates that
comprehensive income reflect the change in equity of an enterprise
during a period from transactions and other events and circumstances
from non-owner sources. Comprehensive income thus represents the sum of
net income and other changes in equity from non-owner sources. The
adoption of SFAS No. 130 resulted in the Company reporting unrealized
gains and losses on investments as other comprehensive income.
30
<PAGE> 31
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes reclassification adjustments for other
comprehensive income (loss) and the related tax effects for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized gains (losses) on investments:
Unrealized holding gain (loss) arising during period net of income tax
expense of $224,405 and $57,163 for 1998 and 1997, respectively and
income tax benefit of $141,888 in 1996 $435,609 111,199 (275,429)
Less reclassification adjustment for gains included in net earnings, net of
income tax expense of $90,497, $96,107 and $87,643 for 1998, 1997
and 1996, respectively 175,672 186,560 170,131
-------- -------- --------
Other comprehensive income (loss) $259,937 (75,361) (445,560)
======== ======== ========
</TABLE>
(o) Future Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued in June 1998 and establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999, earlier
application is encouraged, but it is permitted only as of the beginning
of any fiscal quarter that begins after issuance of this statement.
This Statement should not be applied retroactively to financial
statements of prior periods. The Company has not completed its
evaluation of the effect SFAS No. 133 will have on the Company's
results of operations or financial condition.
Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments", was issued in December
1997 and provides guidance for determining when an entity should
recognize a liability for guaranty-fund and other insurance-related
assessments, how to measure that liability, and when an asset may be
recognized for the recovery of such assessments through premium tax
offsets or policy surcharges. SOP 97-3 is effective for financial
statements for fiscal years beginning after December 15, 1998, and the
effect of initial adoption is to be reported as a cumulative catch-up
adjustment. Restatement of previously issued financial statements is
not allowed. The adoption of this SOP is not expected to have a
material effect on the Company's results of operations or financial
condition.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued
in March 1998 and provides guidance on accounting for the costs of
computer software developed or obtained for internal use and for
determining when specific costs should be capitalized and when they
should be expensed. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. Costs incurred prior to
initial application of this SOP, whether capitalized or not, should not
be adjusted to the amounts that would have been capitalized had this
SOP been in effect when those costs were incurred. The adoption of this
SOP is not expected to have a material effect on the Company's result
of operations or financial condition.
(2) ACQUISITIONS
Effective September 16, 1996, the Company completed the merger of
United Coasts Corporation into ACMAT. United Coasts Corporation
shareholders received one share of ACMAT Class A stock for each
approximately 1.536 shares of United Coasts Corporation stock. As a
result of the merger, ACMAT issued approximately 1,100,000 shares of
its Class A Stock amounting to a purchase price of approximately $14
million for the 16% minority interest in the insurance holding company
subsidiary. As a result, United Coastal Insurance, formerly a
subsidiary of United Coasts Corporation, became a wholly owned
subsidiary of ACMAT and its affiliates. The merger was a non-cash
transaction that is not reflected in the Consolidated Statements of
Cash Flow.
31
<PAGE> 32
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTMENTS
<TABLE>
<CAPTION>
INVESTMENTS AT DECEMBER 31, 1998 AND 1997 FOLLOWS: AMORTIZED ESTIMATED CARRYING
COST FAIR VALUE VALUE
---- ---------- -----
<S> <C> <C> <C>
1998
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political Subdivisions $ 54,679,758 55,081,641 55,081,641
United States Government and Government Agencies 18,809,228 19,005,763 19,005,763
Mortgage-Backed Securities 24,639,206 24,795,347 24,795,347
------------ ------------ ------------
Total Fixed Maturities 98,128,192 98,882,751 98,882,751
Equity Securities - Common Stocks:
Banks, Trusts and Insurance 5,262 18,948 18,948
Equity Securities - Redeemable Preferred Stocks:
Banks, Trusts and Insurance 1,060,000 1,060,000 1,060,000
Industrial and Miscellaneous 1,000,000 982,500 982,500
------------ ------------ ------------
Total Equity Securities 2,065,262 2,061,448 2,061,448
Short-Term Investments 12,947,913 12,947,913 12,947,913
------------ ------------ ------------
Total Investments $113,141,367 113,892,112 113,892,112
============ ============ ============
1997
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political Subdivision $ 43,928,817 43,975,620 43,975,620
United States Government and Government Agencies 28,747,121 28,866,243 28,866,243
Industrial and Miscellaneous 15,057,614 15,136,895 15,136,895
Mortgage-Backed Securities 13,790,379 13,874,222 13,874,222
------------ ------------ ------------
Total Fixed Maturities 101,523,931 101,852,980 101,852,980
Equity Securities - Common Stocks:
Banks, Trusts and Insurance 5,262 15,927 15,927
Equity Securities - Redeemable Preferred Stocks:
Industrial and Miscellaneous 977,812 995,000 995,000
------------ ------------ ------------
Total Equity Securities 983,074 1,010,927 1,010,927
Short-Term Investments 32,422,313 32,422,313 32,422,313
------------ ------------ ------------
Total Investments $134,929,318 135,286,220 135,286,220
============ ============ ============
</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. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
On December 31, 1998, the Company's insurance subsidiaries had
securities with an aggregate book value of approximately $10 million on
deposit with various state regulatory authorities.
32
<PAGE> 33
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of fixed maturities at December 31,
1998 and 1997, by effective maturity, follows:
<TABLE>
<CAPTION>
1998 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due In One Year or Less $19,661,604 19,804,671 46,284,844 46,296,200
Due After One Year Through Five Years 72,227,199 72,805,247 54,904,724 55,148,780
Due After Five Years Through Ten Years 5,198,529 5,225,378 334,363 408,000
Due After Ten Years 1,040,860 1,047,455 -- --
----------- ----------- ----------- -----------
Total $98,128,192 98,882,751 101,523,931 101,852,980
=========== =========== =========== ===========
</TABLE>
The Company's portfolio is comprised primarily of fixed maturity
securities rated AA or better by Standard and Poor's and includes
mostly U.S. Treasuries and tax-free municipal securities
A summary of gross unrealized gains and losses at December 31, 1998 and
1997 follows:
<TABLE>
<CAPTION>
1998 1997
Gains Losses Gains Losses
----- ------ ----- ------
<S> <C> <C> <C> <C>
States, Municipalities and
Political Subdivisions $413,730 (11,847) 71,667 (24,864)
United States Government and
Government Agencies 232,849 (36,314) 137,462 (18,340)
Industrial and Miscellaneous -- -- 79,280 --
Mortgage-Backed Securities 156,767 (626) 83,884 (40)
-------- -------- -------- --------
Total 803,346 (48,787) 372,293 (43,244)
Equity Securities 13,686 (17,500) 27,853 --
-------- -------- -------- --------
Total $817,032 (66,287) 400,146 (43,244)
======== ======== ======== ========
</TABLE>
(4) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES
A summary of net investment income for the years ended December 31,
1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax-Exempt Interest $ 2,045,722 1,996,969 2,912,844
Taxable Interest 4,080,814 4,639,758 3,768,102
Dividends on Equity Securities 56,603 10,283 750
Other -- -- (33,725)
Investment Expenses (45,034) (142,294) (112,399)
----------- ----------- -----------
Net Investment Income $ 6,138,105 6,504,716 6,535,572
=========== =========== ===========
</TABLE>
Realized capital gains (losses) for the years ended December 31, 1998,
1997 and 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fixed Maturities $ 225,701 258,318 209,918
Equity Securities 44,653 24,349 48,568
Other (4,185) -- (712)
--------- --------- ---------
Net Realized Capital Gains $ 266,169 282,667 257,774
========= ========= =========
</TABLE>
33
<PAGE> 34
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross gains of $229,063, $261,005 and $237,726 and gross losses of
$3,362, $2,687 and $27,808 were realized on fixed maturity sales for
the years ended December 31, 1998, 1997 and 1996, respectively. Gross
gains of $44,653, $24,349 and $48,568 were realized on sale of equity
securities for the years ended December 31, 1998, 1997 and 1996,
respectively. There were no losses realized on equity security sales
for the years ended December 31, 1998, 1997 and 1996.
(5) RECEIVABLES
A summary of receivables at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Insurance Premiums Due From Agents $ 2,440,836 4,469,243
Receivables Under Construction Contracts:
Amounts Billed 2,662,501 1,834,994
Recoverable Costs in Excess of Billings on Uncompleted Contracts 173,324 588,009
Billings in Excess of Costs on Uncompleted Contracts (1,957,000) (5,400)
Retainage, Due on Completion of Contracts 504,857 264,067
----------- -----------
Total Receivables Under Construction Contracts 1,383,682 2,681,670
Other 170,726 277,360
----------- -----------
Total Receivables 3,995,244 7,428,273
Less Allowances for Doubtful Accounts (257,617) (309,746)
----------- -----------
Total Receivables, Net $ 3,737,627 7,118,527
=========== ===========
</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 1999.
Recoverable costs in excess of billings on uncompleted contracts are
comprised principally of amounts of revenue recognized on contracts for
which billings had not been presented to the contract owners as of the
balance sheet date. These amounts will be billed in accordance with the
contract terms.
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1998 and 1997
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Building $14,843,201 14,657,155
Land 800,000 800,000
Equipment and Vehicles 1,008,966 1,073,059
Furniture and Fixtures 892,663 914,187
----------- -----------
17,544,830 17,444,401
Less Accumulated Depreciation 4,650,639 4,265,064
----------- -----------
$12,894,191 13,179,337
=========== ===========
</TABLE>
Future minimum rental income to be generated by leasing a portion of
the building under non-cancelable operating leases as of December 31,
1998 are estimated to be $654,548 for 1999, $591,845 for 2000, $570,944
for 2001, $570,944 for 2002 and $486,944 for 2003. Rental income earned
in 1998, 1997 and 1996 was $626,730, $561,852 and $504,063,
respectively.
(7) INTANGIBLES
A summary of intangibles, acquired primarily in connection with
purchases of the Company's insurance subsidiaries, at December 31, 1998
and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Insurance Licenses $4,188,926 4,188,926
Goodwill 2,524,872 2,524,872
---------- ----------
6,713,798 6,713,798
Less Accumulated Amortization 3,818,427 3,491,775
---------- ----------
$2,895,371 3,222,023
========== ==========
</TABLE>
Intangible assets are written off when they become fully amortized.
34
<PAGE> 35
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid losses and loss adjustment expenses for the periods
indicated on a GAAP basis for the business of the Company.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 48,900,713 47,960,084 45,235,311
Less reinsurance recoverable 3,478,121 3,841,001 3,872,099
------------ ------------ ------------
Net balance at January 1 45,422,592 44,119,083 41,363,212
Incurred related to:
Current year 4,508,667 5,176,030 7,137,183
Prior years (2,321,939) (838,778) (1,167,203)
------------ ------------ ------------
Total incurred 2,186,728 4,337,252 5,969,980
Payments related to:
Current year 18,260 94,398 153,514
Prior years 6,700,114 2,939,345 3,060,595
------------ ------------ ------------
Total payments 6,718,374 3,033,743 3,214,109
Net balance at December 31 40,890,946 45,422,592 44,119,083
Plus reinsurance recoverable 2,224,116 3,478,121 3,841,001
------------ ------------ ------------
Balance at December 31 $ 43,115,062 48,900,713 47,960,084
============ ============ ============
</TABLE>
The decrease of incurred losses and loss adjustment expenses of prior
years represents a reallocation of reserves among accident years.
Management believes that the reserves for losses and loss adjustment
expenses are adequate to cover the unpaid portion of the ultimate net
cost of losses and loss adjustment expenses, including losses incurred
but not reported.
The Company has no exposure to any asbestos or environmental claims
associated with general liability policies issued with the pre-1986
pollution exclusion. Policies written with the exclusion are typically
associated with mass tort environmental and asbestos claims. The
Company has never issued a policy with the pre-1986 pollution
exclusion. The Company's exposure to asbestos and environmental
liability claims is primarily limited to asbestos and environmental
liability insurance for contractors and consultants involved in the
remediation, removal, storage, treatment and/or disposal of
environmental and asbestos hazards.
(9) NOTES PAYABLE TO BANKS
At December 31, 1998, the Company has a $10,000,000 bank line of credit
with a financial institution. The line of credit does not require the
Company to maintain a compensating balance. There were no outstanding
borrowings under this line of credit at December 31, 1998. Borrowings
outstanding at December 31, 1997 under a previous line of credit were
$5,000,000.
Under the terms of the line of credit, interest on the outstanding
balance is calculated based upon the London Inter-Bank Offering Rate
(LIBOR) plus 160 basis points in effect during the borrowing period.
The fair value of notes payable to banks approximates cost.
(10) LONG-TERM DEBT
A summary of long-term debt at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Mortgage Note Due 2009 $ 7,800,000 --
Term Loan Due 2003 5,000,000 --
Senior Notes Due 2005 9,000,000 12,000,000
Term Loan Due 2004 -- 6,690,000
Term Loan Due 2003 -- 1,874,998
Term Loan Due 2000 -- 3,333,333
Mortgage Note Due 2000 -- 7,814,396
Convertible Note Due 2022 15,400,000 16,500,000
----------- -----------
$37,200,000 48,212,727
=========== ===========
</TABLE>
35
<PAGE> 36
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 23, 1998, the Company obtained a permanent mortgage loan
from a financial institution. The $7,800,000 mortgage note, with
interest fixed at 6.95% is payable in monthly installments of principal
and interest over 10 years. The loan agreements contain certain
limitations on borrowings, minimum statutory capital levels and require
maintenance of specified ratios. The proceeds were used to repay the
existing mortgage note.
On December 9, 1998, the Company obtained a $5,000,000, five-year term
loan from a financial institution, which is currently payable in
quarterly installments of $250,000 commencing March 1, 1999. The
interest rate is fixed at 7.25%. The loan agreements contain certain
limitations on borrowings, minimum statutory capital levels and require
maintenance of specified ratios. The proceeds, along with internal
funds, were used to refinance existing debt which existed at December
31, 1998.
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of
Class A Stock which AIG Life Insurance Company (366,663 shares) and
American International Life Assurance Company of New York, (733,333)
had acquired over the last three years through conversion options (See
Note 13). The shares were purchased at an average price of $14.70 per
share, for a total purchase price of $16,174,942. The purchase price of
$16,174,942 consisted of $4,174,942 in cash and promissory notes
totaling $12,000,000. The promissory notes are with AIG Life Insurance
Company and American International Life Assurance Company of New York
and are payable over eight years with annual payments of $1,500,000
which commenced on January 31, 1998, with interest at prime rate
(7-3/4%). The Company voluntarily prepaid the principal payment of
$1,500,000 due January 31, 1999 on December 31, 1998. The interest rate
is equal to the prime rate, however, the interest rate shall not exceed
9-1/4% and it shall not be less than 7-1/4%. The purchase of stock in
1997 with the $12,000,000 promissory notes is a non-cash transaction
that is not reflected in the Consolidated Statement of Cash Flows.
The terms of the note agreements with AIG Life Insurance Company and
American International Life Assurance Company of New York contain
limitations on payment of cash dividends, re-acquisition of shares,
borrowings and investments and require maintenance of specified ratios
and a minimum tangible net worth of $12,000,000. ACMAT may also require
its insurance subsidiaries to pay dividends to the extent of funds
legally available therefore, in order to enable ACMAT to have funds to
pay on a timely basis all amounts due with respect to the notes. The
Company is in compliance with all of these covenants at December 31,
1998, except for the ratio of Earnings Before Interest expense, Taxes,
Depreciation and Amortization to Fixed Charges. The Company has
received a waiver for this covenant
On July 1, 1992, the Company issued a 30-year unsecured $16,500,000,
11.5% subordinated debenture to the Sheet Metal Workers' National
Pension Fund ("Fund") to purchase 3,000,000 shares of United Coasts
Corporation's outstanding common stock held by the Fund. Annual
principal payments of $1,650,000 per year for ten years are due
beginning on July 1, 2012. The note is convertible into ACMAT Class A
stock at $11 per share. The conversion price of $11 per share would be
adjusted at the time of conversion to reflect any stock dividends,
recapitalizations or additional stock issuance. The Company can prepay
the note and the Fund has the option to accept the prepayment or
convert the note to stock. The Company made a voluntary principal
payment of $1,100,000 on July 31, 1998. At December 31, 1998, the
Company had reserved 1,400,000 shares of Class A Stock for issuance
pursuant to such conversion option.
Principal payments on long-term debt are $1,559,871, $3,100,052,
$3,143,108, $3,189,256 and $3,238,716 the years 1999 through 2003,
respectively. Interest expense paid in 1998, 1997 and 1996 amounted to
$5,121,093, $4,630,502 and $4,980,833, respectively.
The fair value at December 31, 1998 of the mortgage, the term loan and
the senior notes approximate carrying value. It is not practicable to
estimate the fair value of convertible note at December 31, 1998
because of the complex and unique terms associated with this debt
instrument.
36
<PAGE> 37
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) INCOME TAXES
The components of income tax expense for each year follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current Taxes:
Federal $ 584,655 1,310,845 2,288,025
State 62,000 45,000 60,000
---------- ---------- ----------
646,655 1,355,845 2,348,025
---------- ---------- ----------
Deferred Taxes (Credits):
Federal 73,041 383,771 (34,197)
State -- -- --
---------- ---------- ----------
73,041 383,771 (34,197)
---------- ---------- ----------
Total $ 719,696 1,739,616 2,313,828
========== ========== ==========
</TABLE>
The effective Federal income tax rate, as a percentage of earnings before
income taxes and minority interest follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal Statutory Tax Rate 34.0% 34.0% 34.0%
State Income Tax Benefit (.7) (.3) (.2)
Effect of Tax-Exempt Interest (20.8) (9.4) (9.9)
Dividend Received Deduction (4.8) -- --
Amortization of Goodwill 3.9 1.8 1.3
Officers Life Insurance Premiums 2.8 1.2 .8
Other, Net 8.8 .- .5
----- ---- ----
Effective Federal Income Tax Rate 23.2% 27.3% 26.5%
===== ==== ====
</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, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Assets:
Reserves for Losses and Loss Adjustment Expenses,
Principally Due to Reserve Discounting $2,455,519 2,848,237
Unearned Premiums 417,049 604,664
Accounts Receivable, Principally Due to Allowance for Doubtful Accounts 87,590 105,314
State Net Operating Loss Carryforward 1,365,900 1,442,000
Other 22,073 26,505
---------- ----------
Total Gross Deferred Tax Assets 4,348,131 5,026,720
Less Valuation Allowance 1,365,900 1,442,000
---------- ----------
Net Deferred Tax Assets $2,982,231 3,584,720
Deferred Tax Liabilities:
Plant and Equipment 461,970 461,118
Deferred Policy Acquisition Costs 527,030 706,658
Unrealized Gains on Investments 255,254 121,346
Limited Partnership Investment -- 352,659
Other 3,990 2,003
---------- ----------
Total Gross Deferred Tax Liabilities 1,248,244 1,643,784
---------- ----------
Net Deferred Tax Assets $1,733,987 1,940,936
========== ==========
</TABLE>
A valuation allowance is provided for the state net operating loss
carryforward which is not considered realizable. In assessing the
realization of deferred tax assets, management considers whether it is
more likely than not that the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, tax planning strategies
and anticipated future taxable income in making this assessment and
believes it is more likely than not the Company will realize the
benefits of its deductible temporary differences, net of the valuation
allowance, at December 31, 1998.
Taxes paid in 1998, 1997 and 1996 were $52,227, $1,790,253 and
$1,556,471, respectively.
37
<PAGE> 38
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) PENSION AND PROFIT SHARING PLANS
The Company and its subsidiaries maintain, for the benefit of non-union
employees, a qualified thrift, profit sharing and retirement plan.
Participants are required to contribute three percent of their
compensation to the plan annually. The Company's contributions,
established by the Board of Directors, were $85,000, $85,000 and
$100,000 for 1998, 1997 and 1996, respectively.
The Company participated in various multi-employer defined contribution
plans for its union employees. Upon withdrawal from these plans, the
Company may be liable for its share of the unfunded vested liabilities
of the plans. Such obligations, if any, of the Company are not
determinable at December 31, 1998.
(13) STOCKHOLDERS' EQUITY
The Company has two classes of common stock; the Common Stock and the
Class A Stock, each without par value. The rights of the Common Stock
and the Class A Stock are identical, except with respect to voting
rights. Holders of the Class A Stock are entitled to one-tenth vote per
share in relation to the Common Stock, holders of which are entitled to
one vote per share.
During 1998, 1997 and 1996, ACMAT repurchased, in open market and
privately negotiated transactions 4,769, 3,400 and 42,207 respectively,
shares of its Common Stock at an average price of $20.65, $20.44 and
$18.81 per share, respectively. The Company also repurchased during
1998, 1997 and 1996, in open market and privately negotiated
transactions 342,366, 1,347,686 and 872,975, respectively, shares of
its Class A Stock at an average price of $15.10, $14.98 and $13.18 per
share, respectively.
During 1997 and 1996, the Company issued 450,000 and 499,999,
respectively, shares of Class A Stock at $10 per share pursuant to the
conversion options of the Convertible Senior Notes to AIG Life
Insurance Company and American International Life Assurance Company of
New York, all of which was repurchased by the Company in 1997 (see Note
10). The issuance of stock pursuant to the conversion option of the
Convertible Senior Notes is a non-cash transaction that is not
reflected in the Consolidated Statement of Cash Flows.
The stockholders have periodically approved the distribution of
non-qualified stock options to certain officers and directors giving
such individuals the right to purchase restricted shares of the
Company's Common and Class A Stock. Transactions regarding these stock
options are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Options outstanding at December 31 292,000 383,000 504,000
Weighted average price per share of
options outstanding $10.20 $9.59 $9.04
Expiration dates 1/2001-7/2006 1/2001-7/2006 1/2001-7/2006
Options exercisable at December 31 292,000 383,000 405,000
Options granted - - 99,000
Options exercised or surrendered 91,000 121,000 85,000
Price ranges of options exercised or surrendered $6.00-$8.50 $6.00-$8.50 $6.00-$8.50
</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 accounts for stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, compensation
expense is recognized only if the fair value of the underlying stock at
the grant date exceeds the exercise price of the option. Accordingly,
no compensation cost has been recognized for stock options. Had
compensation cost for the Company's stock options issued in 1996 been
determined consistent with SFAS No. 123, "Accounting for Stock Based
Compensation" the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below: There were
no stock options granted in 1998 or 1997.
<TABLE>
<CAPTION>
1996
----
<S> <C> <C>
Net Earnings As Reported $5,293,111
Pro Forma $4,946,617
Basic Earnings per share As Reported $ 1.56
Pro Forma $ 1.46
Diluted Earnings per share As Reported $ 1.22
Pro Forma $ 1.16
</TABLE>
38
<PAGE> 39
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for the options granted in 1996: no dividend yield;
expected volatility of 20%; risk free interest rate of 6.7%; and
expected life of ten years for the options. The weighted average fair
value of options granted in 1996 was $5.99 per share.
Under applicable insurance regulations, ACMAT's insurance subsidiaries
are restricted as to the amount of dividends they may pay, without the
prior approval of any insurance department and are limited to
approximately $10,730,000 in 1999.
The Company's insurance subsidiaries, United Coastal Insurance and
ACSTAR, are domiciled in Arizona and Illinois, respectively. The
statutory financial statements of United Coastal Insurance and ACSTAR
are prepared in accordance with accounting practices prescribed by the
Arizona Department of Insurance and the Illinois Department of
Insurance, respectively. Prescribed statutory accounting practices
include a variety of publications of the National Association of
Insurance Commissioners (NAIC), as well as the state laws, regulations,
and general administrative rules. As of December 31, 1998, the Company
does not utilize any statutory accounting practices which are not
prescribed by insurance regulators that individually or in the
aggregate materially affect statutory shareholders' equity.
In accordance with statutory accounting principles, ACMAT's insurance
subsidiaries' statutory capital and surplus was $55,124,801, and
$70,989,140 at December 31, 1998 and 1997, respectively, and their
statutory net income for the years ended December 31, 1998, 1997 and
1996 was $12,078,378, $12,383,045 and $8,778,843, respectively. The
primary differences between amounts reported in accordance with GAAP
and amounts reported in accordance with statutory accounting principles
are excess statutory reserves over statement reserves (Schedule P
Liability), carrying value of fixed maturity investments; assets not
admitted for statutory purposes such as agents balances over 90 days,
furniture and fixtures and certain notes receivable; and deferred
acquisition costs and deferred taxes which are recognized for GAAP
only.
Pursuant to various debt covenants, previously described, ACMAT is
restricted from purchasing treasury stock and paying dividends greater
than 20% of consolidated net earnings.
(14) EARNINGS PER SHARE
The Company adopted SFAS No. 128, Earnings per Share, on December 31,
1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share,
and replaces primary earnings per share and fully diluted earnings per
share with basic earnings per share and diluted earnings per share,
respectively. The Company has restated earnings per share for all prior
periods presented to comply with the provisions of SFAS No. 128.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share ("EPS") computations for the
years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Average
Shares Per-Share
1998: Earnings Outstanding Amount
-------- ----------- ------
<S> <C> <C> <C>
Basic EPS:
Earnings available to stockholders $2,120,529 3,199,906 $ .66
Effect of Dilutive Securities:
Stock options -- 79,029
---------- ----------
Diluted EPS:
Earnings available to stockholders $2,120,529 3,278,935 $ .65
========== ========== ========
1997:
Basic EPS:
Earnings available to stockholders $4,456,949 3,443,976 $ 1.29
Effect of Dilutive Securities:
Stock options -- 128,917
Convertible Senior Notes $ 29,903 43,150
Convertible Note $1,252,350 1,500,000
---------- ---------
Diluted EPS:
Earnings available to stockholders $5,739,202 5,116,043 $ 1.12
========== ========== ========
</TABLE>
39
<PAGE> 40
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Average
Shares Per-Share
1996: Earnings Outstanding Amount
-------- ----------- ------
<S> <C> <C> <C>
Basic EPS:
Earnings available to stockholders $5,293,111 3,397,197 $ 1.56
Effect of Dilutive Securities:
Stock options -- 132,333
Convertible Senior Notes $ 502,425 725,000
Convertible Note $1,252,350 1,500,000
---------- ----------
Diluted EPS:
Earnings available to stockholders $7,047,886 5,754,530 $ 1.22
========== ========== ========
</TABLE>
The Convertible notes were anti-dilutive in 1998.
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to legal actions arising in the ordinary course
of its business. In management's opinion, the Company has adequate
legal defenses respecting those actions where the Company is a
defendant, has appropriate insurance reserves recorded, and does not
believe that their settlement will materially affect the Company's
operations or financial position.
Many construction projects in which the Company has been engaged have
included asbestos exposures which the Company believes to involve a
particularly high degree of risk because of the hazardous nature of
asbestos. The Company believes it has reduced the risks associated with
asbestos through proper training of its employees and by maintaining
general liability and workers' compensation insurance. From 1986 to
1996, the Company obtained its general liability insurance from its
insurance subsidiaries. Since 1989, the Company has obtained its surety
bonds from its insurance subsidiary.
The Company has, together with many other defendants, been named as a
defendant in approximately 190 actions brought in Connecticut state
courts by injured or deceased individuals or their representatives
based on product liability claims relating to materials containing
asbestos. No specific claims for monetary damages are asserted in these
actions. Although it is early in the litigation process, the Company
does not believe that its exposure in connection with these cases is
significant.
(16) SEGMENT REPORTING
Effective January 1, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for the way that public enterprises
report information about operating segments in annual financial
statements and requires that selected information about those operating
segments be reported in interim financial statements. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate
resources and assessing performance. The Company redefined its
reportable operating segments as a result of the adoption of SFAS No.
131 and segment information for 1997 and 1996 has been restated.
The Company has three reportable operating segments: ACMAT Contracting,
ACSTAR Bonding and United Coastal Liability Insurance. The Company's
reportable segments are primarily the three main legal entities of the
Company which offer different products and services. The accounting
policies of the segments are the same as those described in the summary
of significant accounting policies.
ACMAT Contracting provides construction contracting services to
commercial and governmental customers. ACMAT Contracting also provides
underwriting services to its insurance subsidiaries. In addition, ACMAT
Contracting owns a commercial office building in New Britain
Connecticut and leases office space to its insurance subsidiaries as
well as third parties.
The United Coastal Liability Insurance operating segment offers
specific lines of liability insurance as an approved non-admitted
excess and surplus lines insurer in forty-six states, Puerto Rico, the
Virgin Islands and the District of Columbia. United Coastal offers
claims made and occurrence policies for specific specialty lines of
liability insurance through certain excess and surplus lines brokers
who are licensed and regulated by the state insurance department(s) in
the state(s) in which they operate. United Coastal offers general,
asbestos, lead, pollution and professional liability insurance
nationwide to specialty trade contractors, environmental contractors,
property owner, storage and treatment facilities and professionals.
United Coastal also offers products liability insurance to
manufacturers and distributors.
The Bonding operating segment provides, primarily through ACSTAR,
surety bonds written for prime, specialty trade, environmental,
asbestos and lead abatement contractors and miscellaneous obligations.
ACSTAR also offers other miscellaneous surety such as workers'
compensation bonds, supply bonds, subdivision bonds and license and
permit bonds.
40
<PAGE> 41
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates performance based on earnings before income taxes
and excluding interest expense. The Company accounts for intersegment
revenue and expenses as if the products/services were to third parties.
Information relating to the three segments is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
ACSTAR Bonding $ 5,286,955 7,209,863 6,948,365
United Coastal Liability Insurance 10,315,294 15,043,823 20,288,641
ACMAT Contracting 15,801,541 14,218,660 14,609,901
----------- ---------- ----------
$ 31,403,790 36,472,346 41,846,907
=========== ========== ==========
Operating Earnings:
ACSTAR Bonding $ 2,314,485 2,305,342 2,282,168
United Coastal Liability Insurance 5,176,870 8,239,017 10,105,725
ACMAT Contracting 501,712 1,224,579 2,631,958
----------- ---------- ----------
$ 7,993,067 11,768,938 15,019,851
=========== ========== ==========
Depreciation and Amortization:
ACSTAR Bonding $ 442,457 307,453 511,585
United Coastal Liability Insurance 279,422 512,769 573,444
ACMAT Contracting 690,125 685,791 702,032
----------- ---------- ----------
$ 1,412,004 1,506,013 1,787,061
=========== ========== ==========
Identifiable Assets:
ACSTAR Bonding $ 50,312,769 53,220,508
United Coastal Liability Insurance 78,888,156 100,524,851
ACMAT Contracting 16,925,540 20,463,403
------------ -----------
$146,126,465 176,208,762
============ ===========
Capital Expenditures:
ACSTAR Bonding $ 3,364 652
United Coastal Liability Insurance 49,044 93,709
ACMAT Contracting 186,046 60,122
------------ -----------
$ 238,454 154,483
============ ===========
The components of revenue for each segment are as follows:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
ACMAT Contracting:
Contract revenues $ 12,139,924 10,056,322 9,415,734
Investment income, net 65,342 55,071 76,800
Intersegment revenue:
Rental income 1,251,299 1,251,955 1,201,725
Underwriting services and agency commissions 1,697,978 2,295,371 3,089,567
Capital losses - - (712)
Other 646,998 559,941 826,787
------------ ---------- ----------
$15,801,541 14,218,660 14,609,901
------------ ---------- ----------
ACSTAR Bonding:
Premiums $ 4,618,281 5,847,558 5,837,254
Investment income, net 1,169,977 962,815 1,128,896
Equity income (loss) from limited partnership investment (569,343) 244,302 (22,365)
Capital gains/(losses) 68,040 25,380 (6,788)
Other - 129,808 11,368
------------ ---------- ----------
$ 5,286,955 7,209,863 6,948,365
------------ ---------- ----------
United Coastal Liability Insurance:
Premiums $ 6,519,382 9,198,286 14,062,682
Investment income, net 4,430,026 4,859,805 5,885,793
Equity income (loss) from limited partnership investment (832,243) 591,735 (11,360)
Capital gains 198,129 257,287 265,274
Other - 136,710 86,252
------------ ---------- ----------
$ 10,315,294 15,043,823 20,288,641
------------ ---------- ----------
</TABLE>
41
<PAGE> 42
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of segment totals for revenue and
operating income to corresponding amounts in the Company's statement of
earnings:
<TABLE>
<CAPTION>
Revenue: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Total revenue for reportable segments $ 31,403,790 36,472,346 41,846,907
Intersegment eliminations (2,651,517) (2,920,211) (4,811,602)
------------ ------------ ------------
$ 28,752,273 33,552,135 37,035,305
============ ============ ============
Operating Earnings:
Total operating earnings for reportable segments $ 7,993,067 11,768,938 15,019,851
Interest expense (4,621,401) (5,116,414) (4,946,418)
Intersegment interest expense (52,774) -- (1,118,546)
Other operating expenses (478,667) (455,959) (459,808)
------------ ------------ ------------
$ 2,840,225 6,196,565 8,495,079
============ ============ ============
</TABLE>
Operating earnings for ACMAT contracting are operating revenues less
cost of contract revenues and identifiable selling, general and
administrative expenses. Operating earnings for the bonding and
liability insurance segments are revenues less losses and loss
adjustment expenses, amortization of policy acquisition costs and
identifiable selling, general and administrative expenses. The
adjustments and eliminations required to arrive at consolidated amounts
shown above consist principally of the elimination of the intersegment
revenues related to the performance of certain services and rental
charges. Identifiable assets are those assets that are used by each
segment's operations. Foreign revenues are not significant
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results of operations for 1998 and
1997 follows:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1998
Operating Revenues $7,402,497 6,963,358 7,504,575 6,881,843
---------- ---------- ---------- ----------
Operating Earnings $2,608,244 1,990,413 1,199,983 1,662,986
---------- ---------- ---------- ----------
Net Earnings $1,003,526 620,254 66,538 430,211
---------- ---------- ---------- ----------
Basic Earnings Per Share $ .30 .19 .02 .14
---------- ---------- ---------- ----------
Diluted Earnings Per Share $ .27 .19 .02 .14
---------- ---------- ---------- ----------
1997
Operating Revenues $8,263,809 8,642,065 8,056,863 8,589,398
---------- ---------- ---------- ----------
Operating Earnings $2,935,909 3,315,024 2,614,952 2,447,094
---------- ---------- ---------- ----------
Net Earnings $1,149,226 1,409,415 1,013,071 885,237
---------- ---------- ---------- ----------
Basic Earnings Per Share $ .31 .41 .30 .27
---------- ---------- ---------- ----------
.31
Diluted Earnings Per Share $ .27 .34 .27 .24
---------- ---------- ---------- ----------
</TABLE>
Note: Operating earnings represent operating revenues less the cost of contract
revenues, losses and loss adjustment expenses and amortization of policy
acquisition costs and selling, general and administrative expenses.
42
<PAGE> 43
Schedule I
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant
As of December 31, 1998 and 1997 and for the
years ended December 31, 1998, 1997 and 1996
The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 1998 and 1997 and its condensed
statements of earnings and cash flows for the years ended December 31, 1998,
1997 and 1996.
BALANCE SHEETS
<TABLE>
<CAPTION>
Assets 1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash $ 396,430 822,100
Receivables 1,549,013 2,953,635
Other current assets 150,984 192,842
----------- -----------
Total current assets 2,096,427 3,968,577
Property and equipment, net 12,671,837 12,927,465
Investments in and advance from subsidiaries 61,652,491 76,576,942
Intangibles 518,135 692,495
Other assets 1,731,203 2,549,472
----------- -----------
$78,670,093 96,714,951
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ -- 5,000,000
Current portion of long-term debt 1,559,871 4,365,381
Other current liabilities 3,847,167 3,924,485
----------- -----------
Total current liabilities 5,407,038 13,289,866
Long-term debt 35,640,129 43,847,346
----------- -----------
Total liabilities 41,047,167 57,137,212
Commitments and contingencies
Stockholders' equity 37,622,926 39,577,739
----------- -----------
$78,670,093 96,714,951
=========== ===========
</TABLE>
See Notes to Condensed Financial Statements.
43
<PAGE> 44
Schedule I, continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Contract revenues $ 12,139,924 10,056,322 9,415,734
Cost of contract revenues 11,810,879 9,331,103 8,396,344
------------ ------------ ------------
Gross profit 329,045 725,219 1,019,390
Selling, general and administrative expenses 3,841,623 3,982,916 3,896,182
------------ ------------ ------------
Operating loss (3,512,578) (3,257,697) (2,876,792)
Interest expense (4,674,175) (5,116,414) (6,064,964)
Interest income 46,854 43,101 52,999
Underwriting fees 1,260,399 1,718,281 2,132,685
Other income 1,898,297 1,811,896 2,027,800
------------ ------------ ------------
Loss before income taxes and equity in net
earnings of subsidiaries (4,981,203) (4,800,833) (4,728,272)
Income tax benefit (1,435,000) (1,500,000) (1,473,000)
------------ ------------ ------------
Loss before equity in net earnings of subsidiaries (3,546,203) (3,300,833) (3,255,272)
Equity in net earnings of subsidiaries 5,666,732 7,757,782 8,548,383
------------ ------------ ------------
Net earnings $ 2,120,529 4,456,949 5,293,111
============ ============ ============
</TABLE>
See Notes to Condensed Financial Statements.
44
<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: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings $ 2,120,529 4,456,949 5,293,111
Depreciation and amortization 688,862 684,521 682,166
Equity in undistributed earnings of subsidiaries (5,666,732) (7,757,782) (8,548,383)
(Increase) decrease in accounts receivable 1,404,622 (839,594) (174,311)
(Increase) decrease in other assets 787,299 149,711 (182,424)
Increase (decrease) in other liabilities 159,662 122,424 (587,169)
------------ ------------ ------------
Net cash used for operating activities (505,758) (3,183,771) (3,517,010)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (186,046) (60,122) (85,108)
Decrease in investment in subsidiaries 20,851,120 13,714,452 9,834,721
Other -- -- (335,606)
------------ ------------ ------------
Net cash provided by investing activities 20,665,074 13,654,330 9,414,007
------------ ------------ ------------
Cash flows from financing activities:
Borrowings under lines of credit 7,000,000 5,000,000 9,200,000
Repayments of lines of credit (12,000,000) (13,200,000) (3,500,000)
Repayment of long-term debt (23,812,727) (3,594,692) (1,820,181)
Issuance of long-term debt 12,800,000 8,500,000 2,500,000
Issuance of Class A stock, net of taxes 696,000 882,250 560,000
Payments for acquisition and retirement of stock (5,268,259) (8,257,963) (12,300,209)
------------ ------------ ------------
Net cash used for financing activities (20,584,986) (10,670,405) (5,360,390)
------------ ------------ ------------
Net increase (decrease) in cash (425,670) (199,846) 536,607
Cash, beginning of year 822,100 1,021,946 485,339
------------ ------------ ------------
Cash, end of year $ 396,430 822,100 1,021,946
============ ============ ============
</TABLE>
See Notes to Condensed Financial Statements.
45
<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
1998 Annual Report.
(1) SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes received from subsidiaries during the years ended December
31, 1998, 1997 and 1996 were $2,355,403, $112,995, and $1,990,201,
respectively. Interest paid during the years ended December 31, 1998,
1997 and 1996 was $5,173,867 $4,630,502, and $6,099,379, respectively.
Interest paid in 1998 and 1996 included $52,774 and $1,118,546,
respectively, paid to subsidiaries for intercompany loans.
On February 5, 1997, ACMAT Corporation purchased the 1,099,996 shares
of Class A Stock which AIG Life Insurance Company (366,663 shares) and
American International Life Assurance Company of New York, (733,333)
had acquired over the last three years through conversion options. The
shares were purchased at an average price of $14.70 per share for a
total purchase price of $16,174,942. The purchase price of $16,174,942
consisted of $4,174,942 in cash and promissory notes totaling
$12,000,000. The purchase of stock with the $12,000,000 promissory
notes is a non-cash transaction that is not reflected in the
Consolidated Statement of Cash Flows.
(2) LONG-TERM DEBT
A summary of long-term debt at December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Term Loan Due 2003 $ 5,000,000 --
Mortgage Note Due 2008 7,800,000 --
Senior Notes Due 2005 9,000,000 12,000,000
Term Loan Due 2004 -- 6,690,000
Term Loan Due 2003 -- 1,874,998
Term Loan Due 2000 -- 3,333,333
Mortgage Note Due 2000 -- 7,814,396
Convertible Note Due 2022 15,400,000 16,500,000
----------- -----------
$37,200,000 48,212,727
=========== ===========
</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 1999 to 2003 and thereafter.
(3) INCOME TAXES
See Note 11 to the Consolidated Financial Statements in the Annual
Report for a description of income taxes.
(4) COMMITMENTS AND CONTINGENCIES
See Note 15 to the Consolidated Financial Statements in the Annual
Report for a description of the commitments and contingencies.
46
<PAGE> 47
SCHEDULE II
ACMAT CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Balance Additions
at charged Balance
beginning to costs at
of and end of
Description period expenses Deductions(a) period
----------- ------ -------- ------------- ------
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts:
1998 $309,746 293,149 345,278 257,617
======== ======== ======== ========
1997 $322,406 620,000 632,660 309,746
======== ======== ======== ========
1996 $340,844 400,904 419,342 322,406
======== ======== ======== ========
</TABLE>
(a) Deductions represent accounts written off.
47
<PAGE> 48
ACMAT CORPORATION AND SUBSIDIARIES Schedule V
Supplemental Information concerning property-casualty insurance operations
As of and for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Discount Ded.
Reserves for from Unpaid
Deferred Unpaid Losses Losses
Affiliation Policy and Loss and Loss Net
with Acquisition Adjustment Adjustment Unearned Earned Investment
Registrant Costs Expenses Expenses Premiums Premiums Income
---------- ----- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
United
Coastal
Liability
Insurance:
1998 $1,004,850 31,471,445 -- 4,650,438 6,519,382 4,430,026
=========== =========== ========== ========== ========== =========
1997 $1,432,358 35,994,240 -- 6,846,846 9,198,286 4,859,805
========== ========== ========== ========== ========== =========
1996 $2,056,166 36,097,543 -- 9,230,566 14,062,682 4,711,440
========== ========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Losses & Loss Adjustment Amortization Paid
Expenses Incurred of Deferred Losses
Affiliation Related to Policy and Loss
with --------------------------- Acquisition Adjustment Premiums
Registrant Current Year Prior Years Costs Expenses Written
---------- ------------ ----------- ----- -------- -------
<S> <C> <C> <C> <C> <C>
United
Coastal
Liability
Insurance:
1998 3,123,183 (1,167,367) 1,852,218 6,572,054 4,351,983
========= =========== ========= ========= ==========
1997 3,421,762 (662,276) 2,569,959 3,011,873 7,026,051
========== ========== ========= ========= ==========
1996 5,386,007 (1,167,203) 3,860,129 2,959,515 12,227,735
========= =========== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Discount Ded.
Reserves for from Unpaid
Deferred Unpaid Losses Losses
Affiliation Policy and Loss and Loss Net
with Acquisition Adjustment Adjustment Unearned Earned Investment
Registrant Costs Expenses Expenses Premiums Premiums Income
---------- ----- -------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ACSTAR
BONDING:
1998 $ 545,239 14,512,333 -- 2,889,186 4,618,281 1,169,977
=========== =========== ========== ========== ========== =========
1997 $ 646,047 16,093,222 -- 3,587,126 5,847,558 962,815
=========== =========== ========== ========== ========== =========
1996 $ 849,709 14,781,134 -- 4,100,310 5,837,254 1,106,531
=========== =========== ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Losses & Loss Adjustment Amortization Paid
Expenses Incurred of Deferred Losses
Affiliation Related to Policy and Loss
with ---------------------------- Acquisition Adjustment Premiums
Registrant Current Year Prior Years Costs Expenses Written
---------- ------------ ----------- ----- -------- -------
<S> <C> <C> <C> <C> <C>
ACSTAR
BONDING:
1998 1,385,484 $(1,154,572) 1,225,718 146,320 4,026,634
========= =========== =========== ========== ==========
1997 1,754,268 $ (176,502) 1,605,140 21,870 5,654,146
========= =========== =========== ========== ==========
1996 1,751,176 $ -- 1,724,096 254,594 5,813,753
========= =========== =========== ========== ==========
</TABLE>
48
<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 BUSINESS EXPERIENCE
SINCE DURING LAST FIVE YEARS, INCLUDING OCCUPATION
<S> <C> <C> <C>
HENRY W. NOZKO, SR. (1) 79 1951 Chairman of the Board, President and Chief Executive
Officer of the Company. Chairman of the Board and
Director of United Coastal Insurance Company, ACSTAR
Holdings, Inc. and ACSTAR Insurance Company.
Co-Chief Executive Officer of United Coastal
Insurance Company.
HENRY W. NOZKO, JR. (1) 52 1971 Executive Vice President, Chief Operating Officer,
and Treasurer of the Company. Member of the Audit
Committee. President, Co-Chief Executive Officer and
Treasurer of United Coastal Insurance Company.
President and Treasurer of ACSTAR Holdings, Inc. and
ACSTAR Insurance Company. Member, Boards of
Directors of United Coastal Insurance Company, ACSTAR
Holdings, Inc., ACSTAR Insurance Company.
VICTORIA C. NOZKO (1) 80 1982 Housewife during past five years. Member of the
Audit Committee.
JOHN C. CREASY 79 1987 Retired Chief Executive Officer of Danbury Hospital,
Member, Board of United Coastal Insurance Company.
Member of the Compensation Committee and Audit
Committee.
MICHAEL J. SULLIVAN (2) 54 1993 Business Manager, Financial Secretary/Treasurer of
Sheet Metal Workers' Local Union No. 20; General
Secretary-Treasurer of Sheet Metal Workers'
International Association.
</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.
(2) Mr. Michael J. Sullivan resigned from the Board of Directors effective
February 28, 1999. The Pension Fund will nominate a new Director to be
voted upon at the upcoming Annual Meeting of Shareholders.
49
<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. 79 President, Chief Executive
Officer, Director and
Chairman of the Board
since 1951.
Henry W. Nozko, Jr. 52 Executive Vice President since
1982. Treasurer since 1973.
Director since 1971, and Chief
Operating Officer since 1985.
Robert H. Frazer 52 Vice President since 1982.
Secretary since 1992. General
Counsel since 1977.
Michael P. Cifone 40 Vice President-Finance since
1990. Corporate Controller
since 1989.
</TABLE>
50
<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 COMPENSATION (A) LONG-TERM ALL OTHER
POSITION COMPENSATION (B) COMPENSATION (C)
YEAR SALARY BONUS CLASS A OPTIONS
<S> <C> <C> <C> <C> <C>
Henry W. Nozko, Sr. 1998 $447,200 - - $12,238
Chairman, President 1997 $430,000 $ 86,000 - $10,591
And Chief Executive Officer 1996 $428,292 $172,000 $46,000 $10,345
Henry W. Nozko, Jr. 1998 $322,500 - - $12,120
Executive Vice President and Chief 1997 $310,000 $ 62,000 - $10,488
Operating Officer 1996 $334,500 $124,000 $26,000 $10,238
Robert H. Frazer, Esq. 1998 $171,600 - - $12,075
Vice President, Secretary and 1997 $165,000 $33,000 - $10,450
General Counsel 1996 $164,375 $49,500 - $10,198
Michael P. Cifone 1998 $114,400 - - $10,202
Vice President-Finance 1997 $110,000 $22,000 - $ 9,253
1996 $109,583 $33,000 - $10,090
</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, provided the total
amount of bonuses paid do not exceed the total incentive fund available. In
addition, the Company may offer separate incentives and commissions on an
individual basis.
(B) Options were granted for ACMAT Class A Stock.
(C) The amounts shown in this column represent contributions made by the Company
to the Company's Thrift, Profit Sharing and Retirement Plan ("Plan"). The Plan
provides that all nonunion employees employed on a full time or part time
salaried basis are eligible to participate on the first day of January or July
after twelve consecutive months of employment. The Company contributes amounts,
as determined by the Board of Directors, to be allocated among the participants
according to a formula based upon the employee's years of service and
compensation. A participant becomes vested at the rate of 20% per year
commencing after two years of service.
51
<PAGE> 52
The following table provides information on options exercised during 1998 by the
named Executive Officers and the value of their unexercised options at December
31, 1998. No options were granted in 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR END 1998 OPTION VALUES
<TABLE>
<CAPTION>
Number of
Shares Unexercised Value of Unexercised
Acquired Value Options at In-the-Money Options
Name on Exercise Realized 12/31/98 (1) at 12/31/98 (2)
----------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Henry W. Nozko, Sr.
- ACMAT Class A Stock Options 15,000 $105,000 46,000 $172,500
- ACMAT Common Stock Options - - 50,000 $550,000
Henry W. Nozko, Jr.
- ACMAT Class A Stock Options 16,000 $152,000 45,000 $235,750
- ACMAT Common Stock Options - - 50,000 $550,000
Robert H. Frazer
- ACMAT Class A Stock Options 15,000 $142,500 35,000 $236,250
Michael P. Cifone
- ACMAT Class A Stock Options - - 10,000 $ 67,500
</TABLE>
(1) Represents the number of options held at year end. All options
were exercisable at December 31, 1998.
(2) Represents the total gain which would have been realized if
all options for which the year-end stock price was greater
than the exercise price were exercised on the last day of the
year.
52
<PAGE> 53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
As of March 1, 1999, no person was known to the Company to be the beneficial
owner of more than five percent of its outstanding shares of Common Stock or
Class A Stock except as set forth in the following table which also shows, as of
that date, the total number of shares of each class of stock of the Company
beneficially owned, and the percent of the outstanding class of stock so owned,
by each director, and by all directors and officers of the Company, as a group:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
CLASS NUMBER OF SHARES OF CLASS OF TOTAL
BENEFICIAL OWNER OF STOCK BENEFICIALLY OWNED (1) OUTSTANDING VOTING POWER (17)
---------------- -------- ---------------------- ----------- -----------------
<S> <C> <C> <C> <C>
Henry W. Nozko, Sr. Common 438,000 (2)(5) 68.21% 50.13%
Class A 60,000 (2)(4) 2.46
Henry W. Nozko, Jr. Common 190,274 (2)(3)(5) 29.63 23.37
Class A 167,574 (2)(3)(6) 6.86
Victoria C. Nozko Class A 42,000 (7) 1.75 .50
John C. Creasy Common 3,300 .56 .62
Class A 18,453 (8) .77
Michael J. Sullivan Class A 18,390 (9) .76 .22
Sheet Metal Workers'
National Pension Fund Class A 1,400,000 (10) 36.94 14.42
Franklin Resources, Inc. Class A 495,000 (11) 20.71 5.96
First Manhattan Co. Class A 307,816 (12) 12.88 3.70
Queensway Financial
Holdings Limited Class A 349,100 (13) 14.61 4.20
Investment Counselor of
Maryland, Inc. Class A 190,000 (14) 7.95 2.29
EQSF Advisors, Inc. Class A 189,978 (15) 7.95 2.29
U.S. Bancorp Class A 179,800 (16) 7.52 2.16
All Directors and
Officers (7 persons)
as a Group Common 631,574 91.26 70.21
Class A 351,632 13.65
</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 24,250 shares of Class A Stock and 6,500 shares of
Common Stock held by Mr. Nozko, Jr. as custodian for his minor child
nor 900 shares of Class A Stock and 3,750 shares of Common Stock held
by his wife, Gloria C. Nozko.
(4) Includes options to purchase 46,000 shares of Class A Stock.
(5) Includes options to purchase 50,000 shares of Common Stock.
(6) Includes options to purchase 45,000 shares of Class A Stock.
(7) Includes options to purchase 15,000 shares of Class A Stock.
(8) Includes options to purchase 16,500 shares of Class A Stock.
(9) Includes options to purchase 18,000 shares of Class A Stock.
(10) Assumes the full conversion of $15,400,000 principal amount of 11.5%
Convertible Note into 1,400,000 shares of Class A Stock. The Address of
the Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314.
(11) Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
Mateo, CA 94404
(12) Address of First Manhattan Co. is 437 Madison Avenue, New York, NY
10022.
(13) Address of Queensway Financial Holdings Limited is 90 Adelaide Street
West, Toronto, Ontario M5H3V9.
(14) Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
Street, Baltimore, MD 21201.
(15) Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
10017-2023.
(16) Address of U.S. Bancorp is 601 2nd Avenue South, Minneapolis, MN
55402-4302.
(17) Based upon one vote for each share of Common Stock and one-tenth vote
for each share of Class A Stock.
53
<PAGE> 54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Sheet Metal Workers' National Pension Fund
The Pension Fund has the right to convert indebtedness of ACMAT to the Pension
Fund in the principal amount of $15,400,000 into shares of Class A Stock at the
current conversion price of $11.00 per share pursuant to the terms of a 30-year
unsecured, subordinated debenture dated July 1, 1992 and bearing interest at the
annual rate of 11.5%.
Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a
voting agreement pursuant to which the parties have agreed to vote their
respective shares of Class A Stock in favor of the Pension Fund's nominees to
the ACMAT Board of Directors. Michael J. Sullivan has resigned from the Board of
Directors effective February 28, 1999. The Pension Fund will nominate a new
Director to be voted upon at the upcoming Annual Meeting of Shareholders.
AIG Life Insurance Company
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its own
Class A Stock from AIG Life Insurance Company (366,663 shares) and American
International Life Assurance Company of New York (733,333 shares). The 1,099,996
shares of Class A Stock were acquired throughout the past two years by AIG Life
Insurance Company and American International Life Assurance Company of New York
pursuant to the conversion options of the Convertible Senior Notes. The shares
were purchased by the Company at an average price of $14.70 per share for a
total purchase price of $16,174,942.
The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory
notes totaling $12,000,000. The promissory notes are with AIG Life Insurance
Company and American International Life Assurance Company of New York and are
payable over eight years with interest at prime rate (7-3/4%). The interest rate
is equal to the prime rate, however, it shall not exceed 9-1/4% and it shall not
be less than 7-1/4%.
American International Group, Inc., a holding company for AIG Life Insurance
Company and American International Life Assurance Company of New York, is a
substantial owner of Transatlantic Reinsurance Company, a reinsurer to which the
Company, through Coastal Insurance and ACSTAR Insurance, ceded approximately
$265,000 in reinsurance premiums in the year ended December 31, 1998.
Other Relationships
During the year ended December 31, 1998, the Company paid to Dr. Arthur Cosmas
$128,780 in fees in connection with consulting services rendered by Dr. Cosmas
with respect to inspection and engineering services relating to ACMAT's asbestos
abatement activities. Dr. Cosmas is the son-in-law of Henry W. Nozko, Sr. and
Victoria C. Nozko and the brother-in-law of Henry W. Nozko, Jr.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements
Included in Part II of this Report:
Independent Auditors' Report
Consolidated Statements of Earnings for the years ended
December 31, 1998, 1997 and 1996
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements - December 31,
1998, 1997 and 1996
54
<PAGE> 55
2. Financial Statement Schedules
Consolidated Schedules included in Part II of this
Report-Years ended December 31, 1998, 1997 and 1996:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty
Insurance Operations
All other schedules are omitted as the required information is not
applicable or the information is presented in the Consolidated
Financial Statements or related notes.
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during
the fourth quarter of 1998.
(c) Exhibits
(3) Certificate Amending and Restating the Company's
Bylaws as filed as an Exhibit to the Company's Form
10-Q for the Quarter ended March 31, 1989 is
incorporated herein by reference.
(3a) Certificate Amending and Restating the Company's
Certificate of Incorporation as amended May 1, 1991
as filed as an Exhibit to the Company's Form 10-Q for
the Quarter ended March 31, 1991 is incorporated by
reference.
(4b) Promissory Note between ACMAT Corporation and Webster
Bank is attached hereto as Exhibit 4(b).
(4c) Open-end Mortgage Deed and Security Agreement between
ACMAT Corporation and Webster Bank is attached hereto
as Exhibit 4(c).
(4d) Commercial Credit Agreement between ACMAT Corporation
and BankBoston, N.A. is attached hereto as Exhibit
4(d).
(4e) Revolving Credit Note between ACMAT Corporation and
BankBoston, N.A. is attached hereto as Exhibit 4(e).
(4f) Term Note between ACMAT Corporation and BankBoston,
N.A. is attached hereto as Exhibit 4(f).
(10a) Annual Management Compensation Plan filed as an
Exhibit to the Company's 1984 Form 10-K is
incorporated herein by reference.
(10b) Stock Purchase Agreement dated as of July 1, 1992
between ACMAT Corporation and the Sheet Metal
Workers' National Pension Fund together with Note
Agreement Re: 11 1/2% Convertible Subordinated Notes
due 2012 filed as Exhibit 10g to the Company's Form
10-K for the year ended December 31, 1992 is
incorporated herein by reference.
(21) Subsidiaries of ACMAT.
(27) Financial Data Schedule.
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ACMAT CORPORATION
Dated: March 30, 1999 By: /s/ Henry W. Nozko, Sr.
--------------------------------
Henry W. Nozko, Sr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Chairman of the Board,
President, Chief Executive
/s/ Henry W. Nozko, Sr Officer and Director March 30, 1999
-----------------------
Henry W. Nozko, Sr.
Chief Operating Officer,
Executive Vice President
/s/ Henry W. Nozko, Jr. Treasurer and Director March 30, 1999
-----------------------
Henry W. Nozko, Jr.
Vice President - Finance
(Principal Financial and
/s/ Michael P. Cifone Accounting Officer) March 30, 1999
-----------------------
Michael P. Cifone
/s/ Victoria C. Nozko Director March 30, 1999
-----------------------
Victoria C. Nozko
/s/ John C. Creasy Director March 30, 1999
-----------------------
John C. Creasy
</TABLE>
56
<PAGE> 57
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 4b - Promissory Note between ACMAT
and Webster Bank Incorporated Herein
Exhibit 4c - Open-end Mortgage Deed/Security
Agreement between ACMAT and
Webster Bank. Incorporated Herein
Exhibit 4d - Commercial Credit Agreement between
ACMAT and BankBoston, N.A. Incorporated Herein
Exhibit 4e - Revolving Credit Note between ACMAT
and BankBoston, N.A. Incorporated Herein
Exhibit 4f - Term Note between ACMAT and BankBoston, N.A. Incorporated Herein
Exhibit 10a - Annual Management Incorporated by Reference
Compensation Plan
Exhibit 10b - Stock Purchase and Note Agreement Incorporated by Reference
between ACMAT Corporation
and The Sheet Metal Workers'
National Pension Fund
Exhibit 21 - Subsidiaries of ACMAT Incorporated Herein
Exhibit 27 - Financial Data Schedule Incorporated Herein
</TABLE>
57
<PAGE> 1
Exhibit 4(b)
PROMISSORY NOTE
$7,800,000.00 Hartford, Connecticut
December 23, 1998
FOR VALUE RECEIVED, the undersigned, ACMAT CORPORATION, a Connecticut
corporation having a principal place of business at 233 Main Street, New
Britain, Connecticut 06050-2350 ("BORROWER"), promises to pay to the order of
WEBSTER BANK, a Connecticut banking corporation with a principal place of
business at 150 Main Street, Bristol, Connecticut 06010 ("LENDER"), the
principal sum of SEVEN MILLION EIGHT HUNDRED THOUSAND DOLLARS ($7,800,000.00) or
so much thereof as may be outstanding from time to time hereunder (the
"PRINCIPAL AMOUNT"), together with (i) interest at the rate and in the manner
hereinafter provided; (ii) all amounts which may become due under the Mortgage
Deed dated the date hereof securing this Note (the "MORTGAGE"), which Mortgage
encumbers that certain real property located at 233-235 Main Street, New
Britain, Connecticut (the "PROPERTY") or under any other documents securing,
relating to or further evidencing the indebtedness evidenced by this Note
(collectively with the Note and the Mortgage, the "LOAN DOCUMENTS"); (iii) any
costs and expenses, including reasonable attorneys' and appraisers' fees,
incurred in the collection of this Note, or in the foreclosure of the Mortgage,
or in protecting or sustaining the lien of the Mortgage, or in any litigation or
controversy arising from or connected with this Note or the Loan Documents; and
(iv) all taxes (other than income taxes) or duties assessed upon the debt
evidenced hereby or by the Mortgage and upon the property encumbered by the
Mortgage. All amounts owing under this Note and interest thereon shall be
payable in legal tender of the United States of America.
1. INTEREST RATE
1.1 Interest Rate. The Principal Amount shall bear interest at a fixed rate
equal to six and ninety-five hundredths percent (6.95%) per annum (the "INTEREST
RATE"). Interest on the Principal Amount shall be calculated on the basis of a
three hundred sixty (360) day year and be charged and due for the actual number
of calendar days elapsed.
1.2 Maximum Interest Rate. Notwithstanding any provisions of this Note, it
is the understanding and agreement of Borrower and Lender that the interest
required to be paid by Borrower to Lender under this Note shall not exceed the
maximum rate of interest permissible to be charged by Lender under applicable
laws. Any amount paid in excess of such rate shall be considered to have been a
payment in reduction of principal.
1
<PAGE> 2
2. PAYMENTS OF PRINCIPAL AND INTEREST
2.1 Principal and Interest Payments Until Maturity. If this Note is dated
other than the first day of the month, Borrower shall pay to Lender on the date
hereof interest on the Principal Amount from and including the date hereof (or
the date of disbursement, if later) to and including the last day of the month
in which this Note is dated. A payment consisting of principal and interest in
the amount of $90,749.64 (calculated based upon a 120-month self-liquidating
amortization schedule utilizing a three hundred sixty (360) day year of twelve
(12) equal thirty (30) day months) shall be due and payable in arrears,
commencing on the first (1st) day of February, 1999 and a like sum of $90,749.64
on the first (1st) day of each and every calendar month thereafter up to and
including the first (1st) day of January, 2009.
2.2 Method of Payment. All payments due hereunder shall be payable in
lawful money of the United States of America which shall be legal tender for
public and private debts at the time of payment. Payment shall be made to Lender
at the address set forth in the heading of this Note, or at such other place as
Lender may designate from time to time in writing.
2.3 Maturity. The unpaid principal balance hereof, all accrued and unpaid
interest and all other obligations due hereunder shall be due and payable in
full on January 1, 2009 (the "MATURITY DATE").
2.4 Application of Payments. Payments made under this Note shall be applied
in the following order: first to any late charges and any other fees or charges
to which Borrower shall become subject under this Note; second, to interest due
on this Note; and third, to the Principal Amount.
2.5 Business Day. Whenever any payment hereunder shall be stated to be due
on a day other than a "business day" (a day on which banks are open for business
in Connecticut), such payment shall be made on the next succeeding business day,
unless such extension would cause such payment to be payable in the next
following calendar month, in which case such payment shall be made on the
business day most immediately preceding such day.
2.6 Prepayment. Provided no Event of Default (as hereinafter defined)
exists under this Note or under the other Loan Documents, the Principal Amount
may be prepaid in whole, but not in part. The Principal Amount may be prepaid
only if accompanied by a fee (the "PREPAYMENT FEE") in an amount equal to the
greater of (i) one percent (1%) of the then outstanding Principal Amount or (ii)
the Yield Maintenance Amount (hereinafter defined). Borrower shall also pay to
Lender, as a condition to any permitted prepayment, all unpaid late charges and
accrued but unpaid interest due up to and including the date of prepayment.
2.7 The Yield Maintenance Amount shall be computed as follows: From the
Interest Rate in effect on the date of prepayment, there shall be subtracted the
interest yield rate, as published in the Wall Street Journal on the regularly
scheduled monthly payment date prior to the
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date of prepayment, on United States Treasury Notes or Bonds which will mature
in the same year and month in which the Maturity Date occurs. If no such Note or
Bond matures in such month, then the next month in which such a Note or Bond
will mature shall be the month used to determine the applicable interest yield
rate. If there is more than one such Note or Bond maturing in the applicable
month, then the average of the interest yield rates on all such Notes or Bonds
shall be used. The resulting percentage shall be multiplied by a fraction whose
numerator is the number of days between the date of prepayment and the Maturity
Date, and whose denominator is 365. If the Wall Street Journal is not published
on the regularly scheduled monthly payment date prior to the date of prepayment,
then the next published issue of the Wall Street Journal shall be used. If the
Wall Street Journal ceases to publish interest yield rates described herein or
if there is a suspension of publication of the Wall Street Journal from such
interest payment date through the date of prepayment, then any alternate source
for such rate which Lender may reasonably designate shall be used.
If payment of the Principal Amount shall be accelerated for any reason
whatsoever, the Prepayment Fee in effect as of the date of such acceleration
shall be due and payable, and such Prepayment Fee shall be added to the
Principal Amount in determining the debt for purposes of any judgment of
foreclosure of the Mortgage
3. DEFAULT; REMEDIES
3.1 Event of Default. For purposes of this Note, the term "EVENT OF
DEFAULT" shall mean any of the following events:
(a) The failure of Borrower to pay (i) any periodic installment of
interest or principal when such installment shall become due and
payable hereunder after ten (10) days prior written notice and
opportunity to cure, unless Lender believes such prior notice and
opportunity to cure will have a material adverse effect on its
rights and remedies, or (ii) the outstanding principal balance of
this Note, together with interest accrued thereon and any other
amounts then due hereunder, on the Maturity Date;
(b) The occurrence of an Event of Default (as defined therein) under
any of the Loan Documents (beyond any applicable grace or cure
periods set forth therein).
(c) The filing by or against Borrower or any guarantor of the loan
evidenced by this Note (the "LOAN") of any petition, arrangement,
reorganization, or the like under any insolvency or bankruptcy
law, or the adjudication of Borrower or any guarantor as a
bankrupt (and if such filing is involuntary, the failure to have
same dismissed within sixty (60) days from the date of filing),
or the making of an assignment for the benefit of creditors, or
the appointment of a receiver for any part of Borrower's or any
guarantor's
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properties or the admission in writing by Borrower or any
guarantor of the inability to pay debts as they become due.
(d) The breach of any warranty or the untruth or inaccuracy of any
representation of Borrower or any guarantor in the Loan
Documents.
(e) The occurrence of a default under, or demand for the payment of,
any other note or obligation of Borrower or any guarantor to
Lender.
(f) The attempted revocation or termination of any guaranty of the
Loan.
(g) The failure by Borrower or any guarantor to make payment on any
obligation for borrowed money due to any party other than Lender,
beyond any grace or cure period provided with respect thereto, or
the occurrence of any other default under any agreement under
which any such obligation is created, the effect of which default
is to cause such obligation to become due and payable prior to
its date of maturity, including without limitation, any
obligations owed by Borrower to Fleet National Bank.
(h) The failure of any guarantor to provide any financial statement
or copy of a tax return required under the terms of any guaranty
of the Loan.
(i) The passage or enforcement of any federal, state, or local law,
or the rendition of a final decision of any court (other than a
law or decision with respect to a tax upon the general revenues
of Lender), in any way directly changing or affecting the Loan or
lessening the net income thereon in a fashion which is not
corrected or reimbursed by Borrower.
(j) The passage or enforcement of any federal, state, or local law,
or the rendition of a final decision of any court, in any way
impairing Lender's ability to charge and collect the interest
stated under this Note, including without limitation, the ability
to vary the interest payable under this Note in accordance with
the terms hereof.
(k) The default by Borrower of any of the covenants contained in
Section 4 hereof.
3.2 Acceleration; Remedies. Upon the occurrence of an Event of Default and
at any time thereafter, Lender may, at its option, declare the entire unpaid
Principal Amount (or any part thereof designated by Lender), together with
accrued interest and all other amounts due hereunder, to be immediately due and
payable, without the necessity for prior demand or notice. The rights, powers
and remedies of Lender provided in this Note or any of the other Loan Documents
are and shall be cumulative and concurrent with one another and with any other
rights, powers and
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remedies available to Lender at law or in equity. Such rights, powers and
remedies may be pursued separately, successively or together, in the sole
discretion of Lender, and may be exercised as often as occasion therefor shall
arise.
3.3 Late Charges. Any installment of principal or interest due hereunder
that is not received within ten (10) days after its due date, shall be subject
to a late charge equal to five percent 5% of such overdue payment. In connection
therewith, Borrower agrees as follows: (i) such late payment will cause Lender
to incur administrative costs, collection costs, loss of interest, and other
direct and indirect costs in uncertain amounts, (ii) it would be impractical or
extremely difficult to fix the exact amount of such costs in such event, and
(iii) the late charge is a reasonable estimate of such costs and is fair
compensation to Lender for its anticipated losses resulting from such late
payment.
3.4 Default Interest Rate. From and after either the occurrence of an Event
of Default or the maturity of this Note, any amount due hereunder which is not
paid shall bear interest (without the necessity of further or additional notice)
at the Interest Rate in effect hereunder (as the same may adjust in accordance
with the terms hereof) plus four percent (4%) per annum (the "DEFAULT RATE"),
until the required payment is made.
4. COVENANTS
4.1 Definitions. As used herein, the following terms shall have the
following meanings.
(a) ADJUSTED CASH FLOW: Cash Flow plus allowable dividends permitted
to be paid to Borrower by its Subsidiaries plus management and
underwriting fees paid to Borrower by its Subsidiaries plus rent
paid to Borrower by its Subsidiaries plus tax sharing payments
paid to Borrower by its Subsidiaries (in all cases, not requiring
regulatory approval).
(b) AFFILIATE: with reference to any Person, any director, officer or
employee of such Person, any corporation, association, firm or
other entity in which such Person has a direct or indirect
controlling interest or by which such Person is directly or
indirectly controlled or is under direct or indirect common
control with such Person.
(c) CASH FLOW: Borrower's unconsolidated net income for an accounting
period before provision for payment of Interest Expense and all
income taxes plus depreciation and amortization to the extent
deducted from such net income during such accounting period, all
as determined by GAAP less capital expenditures less income taxes
paid in cash less dividends paid.
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(d) DEBT SERVICE: for any period, the sum of (i) Interest Expense,
(ii) Principal Amortization and (iii) scheduled payments by
Borrower on its capitalized leases.
(e) FUNDED DEBT: aggregate consolidated Indebtedness of Borrower for
borrowed money but excluding Indebtedness owing to the Sheetmetal
Workers National Pension Fund or any refinance of the same.
(f) GAAP: generally accepted accounting principals and practices
consistently applied from accounting period to accounting period.
(g) GOVERNMENTAL AUTHORITIES: any federal, state or local
governmental authority or any political subdivision of any of
them and any court, agency, department, commission, board, bureau
or instrumentality of any of them which now or hereafter has
jurisdiction over the Borrower's business premises.
(h) INDEBTEDNESS: as applied to a Person, (a) all items, except items
of capital stock or of surplus or of general contingency reserves
or of reserves for deferred income taxes, which in accordance
with generally accepted accounting principles and practices would
be included in determining total liabilities as shown on the
liability side of a balance sheet of such person as at the date
of which indebtedness is to be determined, (b) all indebtedness
secured by any mortgage, pledge, lease, lien or conditional sale
or other title retention agreement existing on any property or
asset owned or held by such person subject thereto, whether or
not such indebtedness shall have been assumed, and (c) all
indebtedness of others which such Person has directly or
indirectly guaranteed, endorsed, discounted or agreed
(contingently or otherwise) to purchase or repurchase or
otherwise acquire, or in respect of which such Person has agreed
to supply or advance funds (whether by way of loan, stock
purchase, capital contribution or otherwise) or otherwise to
become liable directly or indirectly with respect thereto.
(i) INTEREST EXPENSE: for any period, all amounts accrued by
Borrower, whether as interest, late charges, service fees or
other charge for money borrowed on account of or in connection
with Borrower's indebtedness for money borrowed or with respect
to which Borrower or any of their respective properties are
liable by assumption, operation of law or otherwise, including,
without limitation, any leases which are required, in accordance
with generally accepted accounting principles, to be carried as a
liability on Borrower's balance sheet.
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(j) INSURANCE SUBSIDIARY: Acstar Insurance Company and/or United
Coastal Insurance Company.
(k) NAIC: National Association of Insurance Commissioners.
(l) PERSON: a corporation, an association, a partnership, an
organization, a limited liability company, a business, an
individual or a government or political subdivision thereof or
any governmental agency.
(m) STATUTORY CAPITAL: means Statutory Capital plus Statutory Surplus
of the Insurance Subsidiaries as shown on the statutory financial
statements filed with the states of Illinois and Arizona.
(n) STATUTORY OPERATING EARNINGS: means the Statutory Operating
Earnings of the Insurance Subsidiaries as shown on the statutory
financial statements filed with the states of Illinois and
Arizona.
(o) SUBSIDIARY: with reference to any Person, a corporation, or
similar association or entity not less than a majority of the
outstanding shares of the class or classes of stock, having by
the terms thereof ordinary voting power to elect a majority of
the directors, managers or trustees of such corporation,
association or entity, of which are at the time owned or
controlled, directly or indirectly, by such Person or by a
Subsidiary of such Person.
4.2 Financial Covenants. Borrower shall maintain the following, calculated
in accordance with GAAP, as shown on the financial statements required to be
provided pursuant to Section 1.13 of the Mortgage;
(a) a ratio of Borrower's consolidated total Indebtedness to
Borrower's (i) cash on hand and cash equivalents on hand plus
(ii) marketable securities (including amounts owing to Borrower
in connection therewith but not yet paid) plus (iii) accrued
interest receivable of not more than 1.05 to 1.0 measured at the
end of each Fiscal Quarter; and
(b) an Interest Coverage Ratio (being the ratio of Adjusted Cash Flow
to consolidated Interest Expense) of at lease 2.25 to 1.0
measured; (i) on a calendar year basis at the end of each Fiscal
Quarter commencing with the Fiscal Quarter ending March 31, 1999
and continuing through the Fiscal Quarter ending September 30,
1999, and (ii) at the end of each Fiscal Quarter over the
immediate preceding four (4) Fiscal Quarters commencing
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with the Fiscal Quarter ending December 31, 1999 and for each
Fiscal Quarter thereafter.
(c) a Debt Service Coverage Ratio (being the ratio of Adjusted Cash
Flow to Debt Service) of not less than 1.25 to 1.0 measured; (i)
on a calender year basis at the end of each Fiscal Quarter
commencing with the Fiscal Quarter ending March 31, 1999 and
continuing through the Fiscal Quarter ending September 30, 1999,
and (ii) at the end of each Fiscal Quarter over the immediate
preceding four (4) Fiscal Quarters commencing with the Fiscal
Quarter ending December 31, 1999 and for each Fiscal Quarter
thereafter.
(d) a ratio of Borrower's total Funded Debt to Statutory Operating
Earnings of not more than 5.0 to 1.0 measured: (i) on a calender
year basis at the end of each Fiscal Quarter commencing with the
fiscal Quarter ending March 31, 1999 and continuing through the
Fiscal Quarter ending September 30, 1999, and (ii) at the end of
each Fiscal Quarter over the immediate preceding four (4) Fiscal
Quarters commencing with the Fiscal Quarter ending December 31,
1999 and for each Fiscal Quarter thereafter.
(e) a ratio of Borrower's total Funded Debt to Statutory Capital of
not more than 0.70 to 1.0 measured at the end of each Fiscal
Quarter.
Borrower acknowledges that it has assisted Lender in the formation of each
of the foregoing financial performance criteria and fully understands each of
said criteria.
4.3 Special Covenants re Insurance Subsidiaries. The Borrower shall:
(a) Notify the Lender annually of the allowable dividend which may be
paid by each Insurance Subsidiary to the Borrower.
(b) Notify the Lender promptly if any Insurance Subsidiary has
applied for permission to grant any special dividends.
(c) Notify the Lender of any allegation of non-compliance by any
Insurance Subsidiary with the laws and regulations of each state
in which it is approved to sell insurance, specifically
including, without limitation, the State of New York, except this
notification does not apply to any non-compliance matter if such
non-compliance matter does not have a material effect.
(d) Furnish to the Lender annually all reports issued by its outside
auditors which analyze the adequacy of the level of each
Insurance Subsidiary's reserves.
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(e) Notify the Lender of any material change in any Insurance
Subsidiary's risk based capital ratio.
(f) Maintain in each Insurance Subsidiary actual capital equal to or
in excess of its required risk based capital.
(g) Notify the Lender, promptly upon becoming aware, of the
following: (i) any material increase in the levels of primary
liability of each Insurance Subsidiary which is ceded to
reinsurers, (ii) the occurrence of any default in any such
contract of reinsurance and (iii) the occurrence of any
insolvency of any reinsurer or any non-compliance by any
reinsurer with the NAIC risk based capital guidelines.
(h) Notify the Lender, promptly upon becoming aware, of the
following: (i) any material increase in the levels of primary
liability of each Insurance Subsidiary which is co-insured with
others, (ii) the occurrence of any default in any such contract
of co-insurance and (iii) the occurrence of any insolvency of any
co-insurer or any non-compliance by any co-insurer with the NAIC
risk based capital guidelines.
(i) Notify the Lender within 90 days of the fiscal year end each
Insurance Subsidiary's (i) net investment income for the year
then ended, (ii) the statutory surplus for the year then ended,
(iii) the "Combined Ratio" for each such Insurance Subsidiary for
the year then ended, (iv) the loss, if any, of any Insurance
Subsidiary in excess of 15% of its statutory surplus for the year
then ended, (v) a listing of each Insurance Subsidiary's
reinsurance recoverables which are more than 90 days past due as
at the end of any year and (vi) a listing of all transactions
with Affiliates entered into by any Insurance Subsidiary during
the year then ended.
(j) Notify the Lender of any reduction in the rating by A.M. Best and
Company of any Insurance Subsidiary.
4.4 Upstream Dividends. Borrower shall, among other things, cause its
Subsidiaries to pay to Borrower such profits, excess capital and other sums as
may be necessary to comply with the financial covenants set forth in this
Section. In extension of the foregoing, Borrower shall diligently apply for and
pursue any approvals from any state or regulatory authority having jurisdiction
over each such Subsidiary if such approvals are necessary to comply with the
financial covenants set forth in this Section.
4.5 Rating. The Insurance Subsidiaries shall at all times maintain a rating
by A.M. Best and Company of at least B+.
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4.6 Restrictions on Indebtedness. Directly or indirectly, create, incur,
assume, guarantee, agree to purchase or repurchase, pay or provide funds in
respect of, or otherwise become or be or remain liable, contingently, directly
or indirectly, with respect to, any Indebtedness other than:
(a) Indebtedness to Lender;
(b) current liabilities for trade and other obligations incurred in
the ordinary course of its business not yet past due and not as a
result of borrowing;
(c) Indebtedness arising under leases permitted hereby;
(d) Indebtedness in respect of endorsements made in connection with
the deposit of items for credit or collection in the normal and
ordinary course of business; and
(e) Indebtedness described in the financial statements described in
Section 2.8 of a certain commercial Credit Agreement by and
between Borrower and Bank Boston, N.A. dated December 9, 1998
(the "Credit Agreement") or refinancing of such Indebtedness in
amounts not to exceed such refinanced Indebtedness.
(f) Indebtedness otherwise in conformity with all of the other terms
hereof incurred in order to fund the loan, advance or capital
contribution described in Section 4.3(F) of the Credit Agreement.
Borrower shall not guarantee or otherwise assure any obligation of any
other party including, without limitation, that of any Guarantor.
5. MISCELLANEOUS PROVISIONS
5.1 Attorneys' Fees. Should suit be brought to enforce, interpret or
collect any part of this Note, Lender shall be entitled to recover, as an
element of the costs of suit and not as damages, reasonable attorneys' fees and
other costs of such enforcement, interpretation or collection.
5.2 Notices. All notices and communications under this Note shall be in
writing and shall be given by either (a) hand-delivery, (b) first class mail
(postage prepaid), or (c) reliable overnight commercial courier (charges
prepaid), to the addresses listed on the first page hereof. Notice shall be
deemed to have been given and received: (i) if by hand delivery, upon delivery;
(ii) if by mail, three (3) calendar days after the date first deposited in the
United States mail; and
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(iii) if by overnight courier, on the date scheduled for delivery. A party may
change its address by giving written notice to the other party as specified
herein.
5.3 Setoff. Borrower hereby gives Lender a lien and right of setoff for all
of Borrower's obligations hereunder upon and against the deposits, credits and
property of Borrower now or hereafter in Lender's possession or control or in
transit to Lender. Lender may, at any time, apply the same or any part thereof
to any of Borrower's obligations hereunder, though unmatured, without notice and
without first resorting to any other collateral.
5.4 Borrower's Waivers.
(a) Borrower and all guarantors, endorsers and other parties now or
hereafter becoming liable for the payment of this Note hereby
waive demand, diligence, presentment, protest, demand of payment,
and notice of protest, dishonor and nonpayment, and waive the
legal effect of Lender's failure to give all notices not
expressly provided for herein. Borrower expressly agrees that,
without in any way affecting the liability of Borrower hereunder,
Lender may, without notice to Borrower, extend the Maturity Date
or the time for payment of any amount due hereunder, accept
additional security, waive or modify any provision of the Loan
Documents, release any party liable hereunder or thereunder, and
release any security now or hereafter securing this Note.
(b) To the extent permitted by applicable law, Borrower hereby waives
and releases all benefit that might accrue to Borrower by virtue
of any present or future laws exempting the Property, or any
other property, real or personal, pledged or mortgaged as
security for the payment of this Note, or any part of the
proceeds arising from any sale of any such property, from
attachment, levy, or sale under execution, or providing for any
stay of execution, exemption from civil process, or extension of
time for payment; and Borrower agrees that any real estate that
may be levied upon pursuant to a judgment obtained by virtue
hereof, or any writ of execution issued thereon, may be sold upon
any such writ in whole or in part in any order desired by Lender.
5.5 Severance. The invalidity or unenforceability of any one or more
phrases, sentences, clauses or sections contained in this Note shall not affect
the validity or enforceability of the remaining portions of this Note, or any
part thereof.
5.6 Remedies Cumulative. No remedy herein conferred upon or reserved to
Lender is intended to be exclusive of any other available remedy or remedies,
but each and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Note or now or hereafter existing at law or
in equity. No delay or omission on the part of Lender to
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exercise any of its rights hereunder or under any of the Loan Documents shall
impair or operate as a waiver of Lender's right to exercise such right or any
other right of Lender hereunder or under the Loan Documents. In order to entitle
Lender to exercise any remedy reserved to it in this Note, it shall not be
necessary to give any notice, other than such notice as may be herein expressly
required. Any waiver, express or implied, of any breach or default hereunder
shall not constitute a waiver of any subsequent or different breach or default
hereunder.
5.7 Modification. No provision of this Note may be waived, modified or
discharged, including, without limitation, by conduct, custom or course of
dealing, other than by an express writing signed by the party against whom
enforcement of such waiver, modification or discharge is sought.
5.8 Construction of Agreement. Whenever in this Note words of any gender
appear, they should be deemed to apply equally to any gender. Whenever used in
this Note, the plural shall include the singular and the singular shall include
the plural, as the context may require. If this Note is now, or hereafter shall
be, signed by more than one person, it shall be the joint and several obligation
of all such persons and shall be binding on all such persons and their
respective successors and assigns. This Note shall be interpreted without regard
to any presumption or other rule requiring presumption against the party which
drafted this Note.
5.9 Capitalized Terms. Any capitalized words used in this Note and not
herein defined shall have the meanings ascribed to such terms in the Loan
Documents.
5.10 Governing Law. The rights and duties of Borrower and Lender under this
Note shall be governed by the internal laws of the State of Connecticut.
5.11 Venue. Borrower hereby consents to the exercise of personal
jurisdiction over it by any federal or state court in the State of Connecticut
and consents to the laying of venue in any jurisdiction or locality in the State
of Connecticut. Borrower irrevocably appoints the Secretary of State of the
State of Connecticut, as Borrower's agent for receipt of service of process on
Borrower's behalf in connection with any suit, writ, attachment, execution or
discovery or supplementary proceedings in connection with the enforcement of
this Note. Service shall be effected by any means permitted by the court in
which any action is filed, or at Lender's option, by mailing process, postage
prepaid, by certified mail, return receipt requested, or to Borrower at
Borrower's address set forth on the first page of this Note. Service shall be
deemed effective upon receipt. Borrower may designate a change of address for
purposes of this Section by written notice to Lender made in accordance with the
provisions of SECTION 4.2 hereof, at least ten (10) days before such change of
address is to become effective.
5.12 WAIVER OF JURY TRIAL. BORROWER HEREBY EXPRESSLY WAIVES ANY AND ALL
RIGHTS IT MAY HAVE TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION, OR CAUSE OF
ACTION (1) ARISING UNDER THIS NOTE OR ANY OTHER LOAN DOCUMENT, OR (2) IN ANY WAY
CONNECTED WITH OR
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RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH
RESPECT TO THIS NOTE OR ANY OTHER LOAN DOCUMENT, OR THE TRANSACTIONS RELATED
HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND BORROWER HEREBY AGREES
AND CONSENTS THAT LENDER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS
SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF BORROWER'S CONSENT TO THE WAIVER
OF ITS RIGHT TO TRIAL BY JURY.
5.13 PREJUDGMENT REMEDY WAIVER. BORROWER HEREBY REPRESENTS, COVENANTS AND
AGREES THAT THE PROCEEDS OF THE LOAN SHALL BE USED FOR GENERAL COMMERCIAL
PURPOSES AND THAT THE LOAN IS A "COMMERCIAL TRANSACTION" AS DEFINED BY THE
STATUTES OF THE STATE OF CONNECTICUT. BORROWER HEREBY WAIVES ALL RIGHTS TO
NOTICE AND PRIOR COURT HEARING OR COURT ORDER UNDER CONNECTICUT GENERAL
STATUTES, SECTION 52-278a et. seq., AS AMENDED, OR UNDER ANY OTHER STATE OR
FEDERAL LAW WITH RESPECT TO ANY AND ALL PREJUDGMENT REMEDIES LENDER MAY EMPLOY
TO ENFORCE ITS RIGHTS AND REMEDIES HEREUNDER. MORE SPECIFICALLY, BORROWER
ACKNOWLEDGES THAT LENDER'S ATTORNEY MAY, PURSUANT TO CONNECTICUT GENERAL
STATUTES, SECTION 52-278f, ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT
SECURING A COURT ORDER. BORROWER ACKNOWLEDGES AND RESERVES ITS RIGHT TO NOTICE
AND A HEARING SUBSEQUENT TO THE ISSUANCE OF A WRIT FOR PREJUDGMENT REMEDY BY
LENDER'S ATTORNEY, AND LENDER ACKNOWLEDGES BORROWER'S RIGHT TO SAID HEARING
SUBSEQUENT TO THE ISSUANCE OF SAID WRIT. BORROWER FURTHER HEREBY WAIVES ANY
REQUIREMENT OR OBLIGATION OF LENDER TO POST A BOND OR OTHER SECURITY IN
CONNECTION WITH ANY PREJUDGMENT REMEDY OBTAINED BY LENDER AND WAIVES ANY
OBJECTIONS TO ANY PREJUDGMENT REMEDY OBTAINED BY LENDER BASED ON ANY OFFSETS,
CLAIMS, DEFENSES OR COUNTERCLAIMS OF BORROWER OR ANY OTHER OBLIGATED PARTY TO
ANY ACTION BROUGHT BY LENDER. BORROWER ACKNOWLEDGES AND AGREES THAT ALL OF THE
WAIVERS CONTAINED IN THIS SECTION HAVE BEEN MADE KNOWINGLY, VOLUNTARILY,
INTENTIONALLY AND INTELLIGENTLY, AND WITH THE ADVICE OF ITS COUNSEL.
5.14 Time of Essence. Time is of the essence in the performance of all
obligations of Borrower under this Note and the Loan Documents.
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5.15 Binding Effect. This Note shall bind the heirs, executors,
administrators, successors and assigns of Borrower and all endorsers hereto, and
shall inure to the benefit of Lender and its successors and assigns.
BORROWER:
ACMAT CORPORATION
By: /s/ Henry W. Nozko, Jr.
-----------------------------------
Henry W. Nozko, Jr.
Executive Vice President
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OPEN-END
MORTGAGE DEED AND SECURITY AGREEMENT
THIS OPEN-END MORTGAGE DEED AND SECURITY AGREEMENT (the "MORTGAGE") is made
this 23rd day of December, 1998, by ACMAT CORPORATION, a Connecticut
corporation, with a principal place of business at 233 Main Street, New Britain,
Connecticut ("BORROWER"), to WEBSTER BANK, a Connecticut banking corporation,
with a principal place of business at 150 Main Street, Bristol, Connecticut
06010 ("LENDER").
IN CONSIDERATION OF THE MORTGAGE DEBT (hereinafter defined) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrower does hereby give, grant, bargain, sell and confirm, with
MORTGAGE COVENANTS, unto Lender, Lender's successors and assigns forever, the
following property:
A. LAND: That certain piece or parcel of real property known as 233-235
Main Street, New Britain, Connecticut, more particularly described in Schedule A
attached hereto and made a part hereof, and all permits, approvals, rights,
privileges and easements appurtenant thereto (the "LAND").
B. IMPROVEMENTS: All the buildings, structures and improvements now or
hereafter placed on the Land (the "IMPROVEMENTS").
C. SERVICE EQUIPMENT: All fixtures, appliances, machinery and equipment now
or hereafter installed upon the Land or the Improvements, including, without
limitation, gas and electric fixtures, radiators, heaters, engines and
machinery, boilers, stoves, ranges, elevators, escalators, incinerators, motors,
dynamos, sinks, disposals, dishwashers, water closets, basins, medicine chests,
pipes, faucets and other plumbing and heating fixtures, ventilating apparatus,
dryers, washing machines, heating, ventilating and air-conditioning equipment
and units, paneling, refrigerating plants, refrigerators, whether mechanical or
otherwise, alarm, fire prevention and extinguishing apparatus, shades, awnings,
screens, blinds, rugs, carpeting, wall cabinets, trees, shrubbery and other
plantings, and such other goods, chattels and personal property as are now or
hereafter attached to, or used or furnished in connection with the letting or
operation of, the Land and/or the Improvements, or in connection with the
activities conducted thereon, and all proceeds, renewals or replacements thereof
or additions thereto or articles of substitution thereof (the "SERVICE
EQUIPMENT").
D. CONDEMNATION PROCEEDS: All awards or payments, including interest
thereon, which may be made with respect to the Land, the Improvements or the
Service Equipment as a result of the exercise of the right of eminent domain.
E. LEASES: All right, title and interest of Borrower in and to any and all
leases, tenancies or rights of use and occupancy, with amendments, if any, and
any extensions, renewals
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or guaranties of the tenants' obligations thereunder, now or hereafter on or
affecting the Land and/or the Improvements, whether or not recorded, with all
security therefor and all monies payable thereunder, and all books and records
which reflect payments made under such leases (collectively, the "LEASES").
F. PROPERTY INCOME: All rents, income, profits, security deposits and other
benefits to which Borrower may now or hereafter be entitled from the Land and/or
Improvements, and/or the business operations conducted thereat or therefrom (the
"PROPERTY INCOME").
G. TAX REFUNDS: All rights of Borrower now or hereafter arising in and to
any refunds of Taxes (as defined herein), or other charges relating to the Land
and/or the Improvements, or the debt secured hereby.
TO HAVE AND TO HOLD the above granted and bargained premises, with the
privileges and appurtenances thereof (collectively referred to herein as the
"PROPERTY"), but subject to those encumbrances, if any, listed upon Schedule B
attached hereto (the "PERMITTED ENCUMBRANCES"), unto Lender, Lender's successors
and assigns forever, to Lender's and their own proper use and behoof.
THE CONDITION OF THIS DEED IS SUCH THAT:
WHEREAS, Borrower is justly indebted to Lender pursuant to a certain
promissory note of even date herewith in the principal amount of $7,800,000 (the
"LOAN"), a copy of which note is attached hereto and made a part hereof as
SCHEDULE C (the "NOTE"). This Mortgage is also subject to the following
additional terms and conditions:
ARTICLE 1
COVENANTS AND REPRESENTATIONS OF BORROWER
Borrower covenants and represents to Lender as follows:
1.1 PAYMENT AND PERFORMANCE. Borrower shall pay the Loan and all other
indebtedness secured hereby, including without limitation Loan Advances under
the Note, in lawful money of the United States and pay and perform all of its
obligations under this Mortgage, the Loan Agreement, the commitment letter
signed and accepted by Borrower in connection with the Loan (the "COMMITMENT
LETTER") and every other instrument now or hereafter securing, evidencing or
relating to the Loan (this Mortgage, the Note, the Commitment Letter and such
other instruments being collectively referred to herein as the "LOAN DOCUMENTS")
at the times and in the manner set forth in such Loan Documents. All amounts due
the Lender under any of the aforesaid instruments shall be secured by the lien
of this Mortgage and shall hereinafter be referred to as the "MORTGAGE DEBT". If
Borrower consists of more than one party, all of the obligations,
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covenants and warranties of Borrower contained in this Mortgage shall be the
joint and several obligations of all the parties constituting Borrower.
1.2 INSURANCE.
A. Borrower shall keep the Property insured against loss by fire,
flood and other hazards, casualties, contingencies and all other "extended
coverage" risks, including rent, business interruption, liability, indemnity, if
available, in such amounts and with such deductibles and companies as Lender may
reasonably require. Borrower shall promptly pay when due the premiums on such
insurance policies. Each insurance policy shall contain, in a form reasonably
acceptable to Lender, a provision to the effect that the policy will not be
canceled without at least ten (10) days prior written notice to Lender, the
standard non-contributing mortgagee endorsement (entitling Lender to collect all
proceeds payable under such insurance), the standard waiver of subrogation
endorsement, and any other endorsement reasonably required by Lender. All
liability insurance carried on the Property must show Lender as an additional
insured. Borrower shall deliver copies of all existing policies (or such other
evidence of insurance reasonably acceptable to Lender) to Lender at Lender's
request and shall deliver copies of all additional and renewal policies (or such
other evidence of renewal reasonably acceptable to Lender), with current premium
bills therefor marked "Paid", to Lender at least thirty (30) days before the
expiration of the old policies.
B. After the happening of any casualty to the Property, Borrower shall
give prompt written notice thereof to Lender, and the following provisions shall
apply:
(1) All proceeds of insurance maintained with respect to the
Property (the "INSURANCE PROCEEDS") shall be payable to Lender, and Lender is
hereby authorized and empowered by Borrower to make proof of loss on, and to
collect, settle, adjust or compromise, any claims for loss, damage or
destruction under any policy or policies of insurance. Provided, however, that
so long as no Event of Default has then occurred, Lender will consult with
Borrower in connection with the settlement, adjustment or compromise of any such
claim, but such right of consultation shall not affect or diminish the rights of
Lender to make all determinations and decisions in respect of the settlement,
adjustment or compromise of any such claim. Borrower does hereby indemnify
Lender and hold Lender harmless against and from any and all claims and
liabilities asserted against Lender in connection with the collection,
adjustment or compromise of any insured loss. Each insurer is authorized and
directed hereby to make payment under such insurance policies, including return
of unearned premiums, directly to Lender instead of to Borrower and Lender
jointly, and Borrower appoints Lender, irrevocably, as Borrower's
attorney-in-fact to endorse any draft therefor. All such Insurance Proceeds
received by Lender shall be held by Lender and applied and disbursed in
accordance with the provisions of this Section.
(2) If the Insurance Proceeds received by Lender for any single
occurrence of damage to or destruction of the Property ("DAMAGE") is $500,000 or
more, Lender
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may in its sole discretion, elect to apply such Insurance Proceeds to the
Mortgage Debt or hold such Insurance Proceeds and apply them to the repair,
restoration, or reconstruction of the Property (the "RESTORATION") in accordance
with the procedures set forth in subparagraph (3) below.
(3) If the Insurance Proceeds received by Lender for any single
occurrence of Damage is more than $100,000, but less than $500,000, no Event of
Default has then occurred, and no Leases have been terminated (or the tenants
have waived their right to terminate) as a result of the Damage, Lender shall
hold such Insurance Proceeds and apply them to the Restoration in accordance
with the following: Prior to the commencement of any work and the disbursement
of any funds so held by Lender, Borrower shall provide Lender with final plans
and specifications for the Restoration (the "PLANS AND SPECIFICATIONS"), which
Plans and Specifications, and the identity of Borrower's architect and
engineer(s) ("BORROWER'S CONSULTANT"), shall be subject to Lender's prior
written approval. Each request made to Lender for the disbursement of any
portion of the Insurance Proceeds shall be accompanied by a certificate of
Borrower's Consultant (in form reasonably acceptable to Lender) in respect of
that portion of the Restoration for which payment is claimed to be due. In
connection with each such disbursement, Lender also shall receive evidence
satisfactory to it that there are then no outstanding mechanics' or
materialmen's liens against the Property, that the amount of any previous
disbursement has been paid to and received by the party entitled to the same,
and that the funds remaining in Lender's possession shall be sufficient to
complete such repair, restoration or reconstruction. Lender will impose a ten
percent (10%) retainage on all funds advanced. The Restoration shall be
completed in a good and workmanlike manner in accordance with the Plans and
Specifications. Lender shall not be required to make disbursements more
frequently than monthly nor in amounts less than $50,000. In all other respects,
the disbursement of Insurance Proceeds shall be made in accordance with Lender's
customary procedures for the disbursement of construction advances. Upon the
occurrence of an Event of Default, Lender may apply the Insurance Proceeds to
the Mortgage Debt in such manner as it shall determine in its discretion.
(4) If the Insurance Proceeds received by Lender for any single
occurrence of damage to or destruction of the Property is $100,000 or less, and
no Event of Default has then occurred, such Insurance Proceeds shall be
disbursed by Lender to Borrower for the Restoration.
(5) The balance of any Insurance Proceeds held by Lender after
the completion of the Restoration shall, in Lender's discretion, be paid to
Borrower or applied by Lender to the Mortgage Debt.
(6) Nothing herein contained shall be deemed to excuse Borrower
from repairing or maintaining the Property as provided in SECTION 1.6 hereof or
from restoring all damage or destruction to the Property, regardless of whether
or not there are Insurance Proceeds available or whether such Insurance Proceeds
are sufficient in amount, nor shall anything provided hereinabove limit Lender's
right to take such actions as it may in its sole discretion choose to take
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to protect the security hereof pursuant to ARTICLE 3 hereinafter, and the
application or release by Lender of any Insurance Proceeds shall not cure or
waive any default or notice of default under this Mortgage or invalidate any act
done pursuant to such notice.
1.3 TAXES.
A. Borrower shall pay, before the same become delinquent, all taxes,
assessments, and governmental charges and impositions of any kind whatsoever for
which lien rights exist, which may now or hereafter be assessed or levied upon
any part of the Property, or in lieu of or in addition to a tax on the Property
(all such charges and payments collectively referred to herein as the "TAXES").
If Borrower fails to pay any such Taxes as aforesaid, Lender may pay same and
the amount of such payments shall constitute Lender Advances pursuant to SECTION
3.4 hereof. Borrower shall deliver to Lender, at its request, receipts for the
payment of each item specified above, prior to the date the item will become
delinquent. Borrower shall promptly notify Lender of the delinquency in the
payment of any Taxes due. Notwithstanding the foregoing, Borrower may contest in
good faith, by appropriate proceedings, the payment of Taxes for which Borrower
has either paid such Taxes (or portion thereof) as may be required as a
condition to instituting such a proceeding, or established on its books or by
deposit of cash with Lender, at the option of Lender, a reserve for the payment
thereof in such amount as Lender may require, so long as such contest: operates
to prevent collection, stay any proceedings which may be instituted to enforce
payment of such item, and prevent a sale of the Property to pay such item; is
maintained and prosecuted with due diligence; and shall not have been terminated
or discontinued adversely to Borrower.
B. Upon the request of Lender, Borrower shall pay to Lender, together
with and in addition to the monthly installments of principal and interest
provided in the Note, an amount (as estimated from time to time by Lender in its
sole discretion) equal to one-twelfth (1/12th) of the yearly Taxes assessed
against the Property and sufficient funds to pay the insurance premiums required
under SECTION 1.2 when due. Borrower agrees that any funds deposited with or
paid to Lender pursuant to this SUBSECTION B. shall create only an indebtedness,
and not a trust or agency relationship, between Borrower and Lender, which shall
be liquidated to the extent of Lender's payments as aforesaid. Unless otherwise
required by law, no interest shall be payable on such funds. If the tax escrow
payments are not sufficient to pay the Taxes on the date they become due and
payable, Borrower shall pay to Lender the amount necessary to make up the
deficiency on or before said date. Upon, and any time after, the occurrence of
an Event of Default, Lender may, at its option, apply the accumulated escrow
balance remaining as a credit against the Mortgage Debt. Notwithstanding the
foregoing, escrow payments shall not be required so long as there is no Event of
Default hereunder, Borrower pays all Taxes when due, and Borrower provides
Lender with copies of receipted tax bills, canceled checks or other evidence
reasonably satisfactory to Lender that such Taxes have been timely paid.
1.4 CONDEMNATION. Borrower shall give Lender immediate notice of the actual
or (if known to Borrower) threatened commencement of any eminent domain
proceedings
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affecting any part of the Property, and shall deliver to Lender copies of all
papers served in connection therewith. Borrower hereby appoints Lender as its
attorney-in-fact, coupled with an interest, and authorizes Lender to collect,
receive, and retain, the proceeds of any such award or payment, to give proper
receipts therefor and, if an Event of Default has occurred, to adjust,
compromise and settle the claim therefor. Lender shall have the right to
intervene and participate in any eminent domain proceedings, and Borrower shall
consult with Lender in all matters pertaining to the adjustment, compromise or
settlement of such proceedings and shall not enter into any agreement with
respect to such matters without the prior written consent of Lender, which shall
not be unreasonably withheld. Borrower agrees to execute and deliver upon
request any other instruments deemed necessary by Lender to confirm or assign to
Lender all awards and other compensation to be made for any taking of the
Property. Lender may, in its sole discretion, retain and apply any eminent
domain award or payment toward payment of the Mortgage Debt or pay same over
wholly or in part to Borrower. If a part of the Property shall have been taken
in any eminent domain proceedings and the remaining part of the Property shall
have been sold in foreclosure of this Mortgage prior to the receipt by Lender of
the award or payment, Lender, to the extent permitted by applicable law, shall
have the right to receive the award or payment to the extent of any deficiency
found to be due upon such sale, with legal interest thereon, and including
reasonable counsel fees, costs and disbursements incurred by Lender in
connection with the collection of such award or payment.
1.5 COMPLIANCE WITH LAW, ETC.
A. Borrower presently does, and shall continue to, observe and comply
with all laws, regulations, zoning and subdivision ordinances, building codes,
rules, and orders affecting the Property or the business operations thereon; the
terms of each insurance policy applicable to the Property; and all conditions
and requirements necessary to preserve and maintain all rights, licenses,
permits, privileges, franchises and concessions which are applicable to the
Property or business activities conducted at or from the Property, or which have
been granted to or contracted for by Borrower or by any tenant under the Leases.
Upon receipt, Borrower shall promptly furnish to Lender copies of all notices,
orders, summonses, correspondence and other similar items delivered to or served
upon Borrower pertaining to any of the foregoing.
B. Upon receipt, Borrower shall promptly furnish to Lender, or its
designee, copies of all correspondence from the Connecticut Department of
Environmental Protection (the "DEP"), the Federal Environmental Protection
Agency (the "EPA"), the Occupational Safety and Health Administration, or any
similar entity (individually, a "REGULATORY AUTHORITY") to Borrower (other than
routine mass informational mailings) and, upon request, shall direct such entity
to send copies of all such correspondence directly to Lender. Borrower shall
furnish to Lender copies of all correspondence, permit applications, and
property transfer related forms and reports from Borrower to any Regulatory
Authority, copies of all periodic reports required by any environmental law or
any permit, and copies of all records, forms and documents which Borrower is
required to produce or maintain pursuant to any environmental law or any permit.
If, as a result of a Spill (as defined below) or a release of hazardous waste,
Borrower may be legally obligated
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to report to or notify any Regulatory Authority, Borrower shall promptly notify
Lender in writing that such obligation has been triggered. Failure to comply
with this requirement shall constitute an Event of Default hereunder.
C. Lender may, at any time and from time to time, cause to be
conducted and completed by engineers, consultants and others selected by Lender,
such investigations, studies, sampling and testing of the condition of the
Property and the compliance by Borrower and all occupants of the Property with
applicable environmental laws as Lender, in its sole discretion, shall deem
reasonably appropriate. All such investigations, studies, sampling and testing
shall be at Borrower's expense, provided, however, that Borrower shall not be
required to bear such expense so long as there is no Event of Default hereunder,
and Lender has no cause to believe, in its reasonable judgment, that there has
been a Spill (as defined below) or threatened Spill at the Property or that
Borrower is in violation of any environmental law. Borrower agrees to cooperate
with Lender and all persons retained by Lender to conduct such investigations
and to provide them with access to the Property and the books and records of
Borrower.
D. Borrower shall indemnify Lender and hold Lender harmless from and
against all loss, liability, damage and expense, including attorneys' fees and
diminution in property value, suffered or incurred by Lender, whether as holder
of this Mortgage, as mortgagee in possession or as a successor in interest to
Borrower as owner of the Property by virtue of foreclosure or acceptance of a
deed in lieu of foreclosure under or on account of any remedial or other
environmental or health and safety related obligation imposed by laws such as
Chapter 446K of the Connecticut General Statutes Revision of 1958, as amended
(the "ACT") or related regulations, or any similar applicable federal laws or
regulations, including the assertion of any lien thereunder; with respect to any
release, discharge, spillage, uncontrolled loss, seepage or filtration of oil or
petroleum or chemical liquids or solid, liquid or gaseous products or hazardous
waste which, if contained or removed or mitigated by the State of Connecticut,
could give rise to a lien under Connecticut General Laws Section 22a-452a, as
amended (a "SPILL") affecting the Property (whether or not the same originates
or emanates from the Property or any contiguous real estate) including any loss
of value of the Property as a result of such Spill; and with respect to any
other matter affecting the Property and governed by the provisions of the Act,
other environmental or health and safety laws, their related regulations, or any
similar applicable federal laws or regulations.
E. In the event of any Spill or release affecting the Property,
whether or not the same originates or emanates from the Property or any
contiguous real estate, Borrower shall contain, remove or mitigate same in
accordance with applicable laws and regulations and any directives of the State
of Connecticut. If Borrower shall fail to remedy such Spill or otherwise comply
with any of the requirements of the Act or related regulations or any other
environmental law or regulation, Lender may at its election, but without the
obligation to do so, give such notices and/or cause such work to be performed at
the Property and/or take any and all other actions as Lender shall deem
necessary or advisable in order to remedy the Spill or cure such failure of
compliance in order to protect its security in interest in the Property, and any
amounts paid as a
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result thereof shall be reimbursed by Borrower upon demand by Lender, shall bear
interest at the "Default Rate" provided for in the Note, and shall be secured by
the lien of this Mortgage. Borrower shall provide Lender, its agents and
contractors access to the Property for such remedial work to occur. Borrower
hereby indemnifies and holds Lender harmless from all loss, expense and
liability arising out of such remedial activity.
1.6 MAINTENANCE AND REPAIR; INSPECTION
A. Borrower shall keep and maintain the Property in good condition,
working order and repair; not permit, commit or suffer any waste of the
Property; (i) not permit the Property or any part thereof to become vacant,
deserted or unguarded; (ii) repair, replace, rebuild or restore any part of the
Property which may be damaged or destroyed by any casualty or affected by
eminent domain, whether or not the proceeds of any insurance or eminent domain
proceedings are available therefor; (iii) complete and pay for when due any
construction undertaken on the Property; and (iv) make all other repairs and
replacements to the Property which Lender may reasonably require. All such work
shall be done promptly in good and workmanlike manner.
B. Lender and any person authorized by Lender shall have the right to
enter and inspect the Property at all reasonable times.
1.7 SALE, ENCUMBRANCE AND USE.
A. Borrower shall not, without Lender's prior written consent, which
may be withheld in Lender's sole discretion for any reason whatsoever, initiate
or allow any Transfer (as defined in subsection C. below) of title to all or any
part of the Property; voluntarily create or grant any liens, mortgages or
encumbrances against such title; initiate or allow any change in the nature of
the use and occupancy of the Property, including any such change which
materially increases the possibility of a Spill; or record any Declaration of
Common Interest Community.
B. Borrower shall keep and maintain the Property free from the claim
of all persons supplying labor or materials in connection with the construction
or repair of any Improvements constituting a part of the Property. Borrower
shall furnish, at Lender's request, all waivers and releases of liens or claims
upon or with respect to the Property or any Service Equipment.
C. The term "Transfer" as used in this SECTION 1.7 shall mean:
(1) any sale, conveyance, transfer, gift or other disposition of
the Property or any interest therein, whether voluntary, involuntary, or by
operation of law, or Borrower's entry into any contract or option agreement to
accomplish same;
(2) if Borrower is a corporation, a merger, consolidation,
division, recapitalization, spin-off, or other corporate reorganization of
Borrower;
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(3) any dissolution or liquidation of, or the filing of a suit to
dissolve or liquidate Borrower;
(4) a lease or leases of the Land, Improvements or Service
Equipment, wherein the proposed tenant or tenants do not intend to occupy the
Property but intend to sell, sublease or assign their interest to effectuate a
long-term lease or sale and leaseback for financing purposes;
(5) any other act by which the economic benefit, entrepreneurial
risk or management responsibility with respect to the Property is shifted to
someone other than Borrower.
D. Borrower shall promptly notify Lender if any lien, attachment or
encumbrance is recorded against the Property without Borrower's consent and will
cause the lien to be canceled and discharged of record within thirty (30) days
after its recording.
E. Any attempted action contrary to the provisions of this SECTION 1.7
shall be void, but shall constitute an Event of Default hereunder. Borrower
agrees that if the ownership of the Property or any part thereof becomes vested
in a person or entity other than Borrower, Lender may, upon notice to Borrower,
deal in any way with such successor or successors in interest without in any way
impairing or discharging Borrower's liability hereunder, under the Note or the
Mortgage Debt.
1.8 LEASES. Borrower shall not take any action, the effect of which would
be to cause any Lease with any affiliate or subsidiary of Borrower, including
without limitation, AMINS, Inc., ACMAT of Texas, Inc., ACSTAR Holdings, Inc.,
ACSTAR Insurance Company and United Coastal Insurance Company ("AFFILIATE
LEASE") to cease to be in full force and effect, and will not, except with the
prior written consent of Lender, cancel or terminate any Affiliate Lease, or
consent to any cancellation, termination or surrender thereof, or any assignment
thereof; amend, modify or subordinate any Affiliate Lease; enter into any new
Affiliate Lease; waive any default under or breach of any Lease; or consent to
any prepayment or discount of rent or advance rent under any Affiliate Lease.
Lender shall have the right to review and reasonably refuse written consent to
any of the above proposed actions of Borrower based upon the substance of the
proposed transaction, the creditworthiness of Borrower or the tenant, and the
financial condition of the Property.
1.9 PROPERTY INCOME. Borrower hereby assigns, transfers and grants a
security interest to Lender in and to the Property Income to secure the Mortgage
Debt. Borrower shall not otherwise assign, transfer or encumber the Property
Income in any manner. Borrower may, so long as no Event of Default has occurred
hereunder, collect and use the Property Income, as the same becomes due and
payable, but may not collect same more than thirty (30) days in advance of the
date the same becomes due. Upon the occurrence of an Event of Default, the
permission hereby given to Borrower to collect the Property Income shall
terminate. The foregoing
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provisions hereof shall constitute an absolute and present assignment of the
Property Income, subject, however, to the conditional permission given to
Borrower to collect and use such Property Income as hereinabove provided. The
existence or exercise of such right of Borrower shall not operate to subordinate
this assignment to any subsequent assignment, in whole or in part, and any such
subsequent assignment by Borrower shall be subject to the rights of Lender
hereunder.
1.10 REMOVALS, ALTERATIONS AND DEMOLITION. No Improvement or Service
Equipment shall be removed, altered, demolished or erected without the prior
written consent of Lender. All such changes, additions and alterations shall
become part of the Property immediately upon installation. Any replacement
equipment shall constitute Service Equipment and be subject to the lien of this
Mortgage.
1.11 PROTECTION OF LIEN AND OTHER EXPENSES. Borrower shall pay, indemnify,
defend and hold Lender harmless from: all costs, disbursements, expenses and
reasonable counsel fees incurred by Lender in connection with protecting or
sustaining the lien of this Mortgage; any proceeding, action, suit, hearing,
motion or application in which Lender is a party by reason hereof or in which,
in Lender's opinion, it becomes necessary to defend and uphold the terms or
priority of this Mortgage; the preparation for enforcement of the Loan Documents
after the occurrence of an Event of Default and negotiations with Borrower in
connection with the existence or cure of such an Event of Default; any proposed
refinancing by Lender of the Mortgage Debt; the transfer of the Property in lieu
of foreclosure; the approval by Lender of actions taken or proposed to be taken
by Borrower or others, which approval is required by the terms of this Mortgage
or other Loan Documents; and all damages, reasonable costs and expenses
(including, without limitation, attorney's fees) paid by or imposed upon Lender
in connection with any bodily injury, death or property damage occurring in or
upon, or in the vicinity of, the Property through any cause whatsoever or
asserted against Lender on account of any act performed or omitted to be
performed hereunder (other than such acts or omissions constituting the gross
negligence of Lender) or on account of any transaction arising out of or in any
way connected with the Property, this Mortgage or the Mortgage Debt.
1.12 ESTOPPEL CERTIFICATES; INSTRUMENTS OF FURTHER ASSURANCE. Borrower
shall deliver to Lender within ten (10) days after any request a duly
acknowledged certificate setting forth the amount of principal and interest due
and payable on the Loan and whether any offsets or defenses exist with respect
to this Mortgage or the Mortgage Debt. Upon Lender's request, Borrower shall use
its best efforts and due diligence to obtain delivery of the duly acknowledged
certificate of any person having or acquiring an interest in or encumbrance on
all or any part of the Property setting forth the nature and extent of the
interest and stating that the interest is subordinate to this Mortgage and
whether any offsets or defenses exist with respect to this Mortgage or the
Mortgage Debt.
1.13 ACCOUNTING; FINANCIAL STATEMENTS AND OTHER INFORMATION. Borrower shall
maintain a system of accounts established and administered in accordance with
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GAAP and practices consistently applied. Borrower shall deliver or cause to be
delivered to Lender:
A. Financial Reports.
(1) As soon as available and in any event within forty-five (45)
days after the end of each Fiscal Quarter after the date hereof, a balance sheet
of the Borrower, in consolidating and consolidated form, as of the end of such
period, and a statement of income and retained earnings of the Borrower, in
consolidated form, for the period commencing at the end of the previous Fiscal
Year and ending with the end of such quarter, all in reasonable detail, and duly
certified by the chief financial officer of the Borrower as having been prepared
in accordance with GAAP and fairly presenting the financial position and results
of operations of the Borrower for such period, together with a statement of such
individual preparing such statements to the effect that in the course of the
preparation of such statements said individual has gained no knowledge that an
Event of Default has occurred and is continuing or, if, in the opinion of said
individual, an Event of Default has occurred and is continuing, a statement as
to the nature thereof and the action which the Borrower proposes to take with
respect thereto (the provision for such a statement herein shall in no way be
construed as a consent to the existence of such an event nor the granting of
time to cure). In addition, said preparer shall complete and forward to Lender
together with such financial statements the completed Covenant Compliance
Certificate in the form attached as Exhibit E to certain Commercial Credit
Agreement by and between Borrower, Bank Boston, N.A. and ACSTAR Holdings, Inc.
(2) As soon as available and in any event within ninety (90) days
after the end of the Fiscal Year of the Borrower, a copy of the annual audited
report for such year for the Borrower, including therein, a balance sheet of the
Borrower as of the end of such Fiscal Year and a statement of income, retained
earnings and statement of changes in financial position of the Borrower for such
Fiscal Year, in each case on a consolidated basis, and in each case "Certified"
by a firm of independent certified public accountants selected by the Borrower,
together with the unqualified opinion of such accounting firm to Lender stating
that the financial statements audited by such firm present fairly, in all
material respects, the financial position of Borrower as of the date of such
financial statements and the results of its operations and its cash flow for the
Fiscal Year then ended, all in conformity with GAAP, together with the
certificate of such accounting firm that, in the course of its audit of
Borrower, it has obtained no knowledge that an Event of Default has occurred and
is continuing, or if in the opinion of such accounting firm an Event of Default
has occurred and is continuing, a statement as to the nature thereof (the
provision for such a statement herein shall in no way be construed as a consent
to the existence of such an event nor the granting of time to cure) and together
with the Management Letter (so called) of such firm and Borrower's written
response thereto detailing actions to be taken relating to matters discussed in
said Management Letter, and together with a completed Covenant Compliance
Certificate. In addition, Borrower shall provide all financial statements for
the Insurance Subsidiaries (as defined in the Note) required by the laws of any
jurisdiction in which the Insurance Subsidiary conducted business.
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(3) Such other data and information (financial and otherwise)
bearing upon or related to the Borrower's or ACSTAR Holdings, Inc. financial
condition, results of operations or assets, as Lender from time to time may
reasonably request.
B. Projections/Budgets. As soon as available and in any event within
thirty (30) days prior to the end of each Fiscal Year of Borrower, financial
projections prepared by Borrower on a consolidated and consolidating basis for
the next Fiscal Year of Borrower, profit and loss statements projected for each
Fiscal Quarter and for the end of the next Fiscal Year.
1.14 FINANCING STATEMENT AND SECURITY AGREEMENT.
A. This Mortgage constitutes a security agreement and is intended to
be effective as a financing statement pursuant to the Connecticut Uniform
Commercial Code. Borrower hereby grants to Lender a security interest in the
Service Equipment, Leases, Property Income and other personal property included
in the Property, and all replacements thereof, substitutions therefor, additions
thereto and proceeds thereof, as well as the personal property described on
SCHEDULE D attached hereto and made a part hereof as security for the Mortgage
Debt. Lender is the secured party and Borrower is the debtor with respect to
this financing statement and the mailing addresses of the secured party and the
debtor for the purpose of this financing statement are set forth in SECTION 4.4
hereof. Upon request, Borrower shall execute and deliver to Lender any security
agreement, financing or continuation statement or other document Lender deems
necessary to protect or perfect its lien on the Service Equipment, and pay all
filing fees and other costs, disbursements, expenses and reasonable counsel fees
incurred by Lender in connection therewith. Borrower authorizes Lender, to the
extent permitted by applicable law, to sign and file any financing or
continuation statement at any time with respect to the Service Equipment in the
absence of any signature by or on behalf of Borrower.
B. Borrower hereby warrants, represents and covenants as follows:
except for the security interest granted hereby, Borrower is, and as to the
portions of the Service Equipment to be acquired after the date hereof will be,
the sole owner of the Service Equipment free from any lien, security interest,
encumbrance or claim thereon of any kind whatsoever. Borrower will notify Lender
of, and will defend the Service Equipment against, all claims and demands of all
persons at any time claiming the Service Equipment or any interest therein;
Borrower will not assign, pledge, encumber, lease, sell, convey or in any manner
transfer the Service Equipment or portions thereof without the prior written
consent of Lender, except as otherwise permitted under the Loan Documents, and
all of the Service Equipment attached to, incorporated into or to be
incorporated into the Property will be kept free and clear of all chattel
mortgages, liens, conditional vendor's liens, encumbrances and security
interests, except as expressly waived in writing by Lender; the Service
Equipment is not and will not be used or acquired for personal, family or
household purposes; the Service Equipment will be kept on or at the Property,
and Borrower will not remove any portion or item of Service Equipment affixed or
attached to the Property without the prior written consent of Lender, except
such portions or items of Service
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Equipment which are consumed or worn out in ordinary usage, and are promptly
replaced by Borrower with new items of equal or greater quality; and
notwithstanding any release of any or all of the Property which is deemed "real
property", any proceedings to foreclose this Mortgage or the release of this
Mortgage of record, the terms hereof shall survive as a security agreement with
respect to the security interest created hereby until the repayment or
satisfaction in full of the Mortgage Debt.
1.15 REQUIRED NOTICES. Borrower shall notify Lender promptly of the
occurrence of any of the following: (i) an event requiring notice with respect
to the following matters under the following subsections of this Mortgage:
1.2.C. (Loss or Damage to Property)
1.3.B. (Taxes)
1.4.A. (Condemnation)
1.5.B. (Compliance with Law)
1.7.D. (Recordation of Liens)
1.10. (Removal of Improvements and Service Equipment)
(ii) receipt of notice from any governmental authority relating to the Property;
(iii) receipt of any notice from the holder of any other lien or security
interest in the Property; (iv) any modification or amendment to any loan
agreements to which Borrower is a party, including without limitation, any
agreements with BankBoston, N.A.; (v) any default under any indebtedness of
Borrower to any other party, including without limitation, BankBoston, N.A.; or
(v) commencement of any judicial or administrative proceedings by or against or
otherwise affecting Borrower, the Property or any entity controlled by or under
common control of Borrower, or any other action by any creditor as a result of
any default under the terms of any loan.
1.16 OTHER DOCUMENTS. Borrower upon request shall deliver to Lender copies
or originals of all reports, licenses, permits, approvals, orders, contracts,
agreements, rights, options, franchises and applications relating to or
affecting the Property and all business operations conducted at or from the
Property.
1.17 GENERAL REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants that as of the date of this Mortgage:
A. Borrower is generally paying its debts as such debts become due,
the fair market value of its assets exceeds its liabilities and no bankruptcy or
insolvency proceedings are pending or contemplated by or against Borrower.
B. All reports, statements and other data furnished by Borrower to
Lender in connection with the Loan are true, correct and complete in all
material respects and do not omit any fact or circumstance which would make the
statements contained therein misleading; present fairly the financial position
of Borrower as of the date stated therein, and the results of Borrower's
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operation and changes in financial position for the years then ended and the
statements are prepared in conformity with generally accepted accounting
principles applied on a consistent basis; and that no material adverse change
has occurred in the financial condition of Borrower or the Property since the
date of said financial statement.
C. The Property and all Improvements thereon have not suffered any
damage from fire or other casualty, no part of the Property has been condemned
or taken by eminent domain and no condemnation or other taking of the Property
or any part thereof is threatened or pending, or has been threatened with, any
other title proceedings.
D. To Borrower's best knowledge, there does not now exist on, under or
within the Property (or any contiguous land included in the legal description of
the Property within three years prior to the date hereof) any Spill. To
Borrower's best knowledge, there does not now exist any condition, nor will the
current or proposed operations cause there to exist any condition upon the
Property or said contiguous land which would materially increase the possibility
of the occurrence of a Spill, or a material violation of the Act or any related
regulations or any similar federal laws or regulations.
E. Borrower if a corporation, is a valid corporation in good standing
under the laws of the jurisdiction of incorporation and is authorized to do
business in the State of Connecticut, if a limited liability company, is a valid
limited liability company, legally existing under the laws of the jurisdiction
of its formation, and is authorized to do business in the State of Connecticut,
or if a limited partnership, is a valid limited partnership legally existing
under the laws of the jurisdiction of its formation and is authorized to do
business in the State of Connecticut.
F. Borrower has the legal capacity and is authorized to execute and
deliver all Loan Documents; the Loan Documents are valid and binding obligations
enforceable in accordance with their respective terms, and the execution and
delivery thereof do not contravene any contract or agreement to which Borrower
is a party or by which Borrower or any of its respective properties may be
bound, and do not contravene any law, order, decree, rule or regulation to which
Borrower is subject.
G. There is no action, suit or proceeding pending, or, to the
knowledge of Borrower, threatened against or materially affecting Borrower or
the Property or the business operations conducted at or from the Property or
which involve the possibility of any judgment or liability not fully covered by
insurance or which, in Borrower's opinion, might result in any adverse change in
the business, assets or operations of Borrower which would, in any way,
materially and adversely affect the Property or the validity or enforceability
of the Loan Documents.
H. Borrower is not a party to or bound by any contract, agreement or
other instrument, or subject to any charter or other restriction or any
judgment, order, writ, injunction,
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decree, rule or regulation which now or in the future may materially and
adversely affect the business, operations, properties, assets or condition,
financial or otherwise, of Borrower.
I. Borrower has filed all required federal, state and local tax
returns, and no claims have been asserted and/or unpaid with respect to such
taxes.
J. The Property has frontage on, and direct access for ingress and
egress to, the public street(s) appurtenant thereto.
K. Electric, gas, sewer, septic, water facilities and any other
necessary utilities are or will be, available in sufficient capacity to service
the Property satisfactorily, and any easements necessary to the furnishing of
such utility service by Borrower have been or will be obtained and duly
recorded.
L. Borrower is not in default under the terms of any instrument
evidencing or securing any indebtedness of Borrower and there has occurred no
event which would, if uncured or uncorrected, constitute a default under any
such instrument with the giving of notice, passage of time, or both.
M. Borrower (and the undersigned representative of Borrower, if any)
has full power and authority to subject the Property to this Mortgage and to
execute and deliver the Note, this Mortgage, the Loan Documents and all other
documents and instruments required of it by Lender. No consent of any person or
entity and no consent, approval, or authorization is required by Borrower in
connection with the foregoing.
1.18 PREJUDGMENT REMEDY WAIVER. Borrower hereby represents and agrees that
the transaction of which this Mortgage is a part is a commercial transaction as
defined by the statutes of the State of Connecticut. BORROWER HEREBY WAIVES ALL
RIGHTS TO NOTICE, JUDICIAL HEARING OR PRIOR COURT ORDER UNDER CONNECTICUT
GENERAL STATUTES SECTION 52-278a et seq., AS AMENDED, OR UNDER ANY OTHER STATE
OR FEDERAL LAW WITH RESPECT TO ANY AND ALL PREJUDGMENT REMEDIES LENDER MAY
EMPLOY TO ENFORCE ITS RIGHTS AND REMEDIES HEREUNDER. MORE SPECIFICALLY, BORROWER
ACKNOWLEDGES THAT LENDER'S ATTORNEY MAY, PURSUANT TO CONNECTICUT GENERAL
STATUTES SECTION 52-278f, ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT SECURING
A COURT ORDER. BORROWER ACKNOWLEDGES AND RESERVES ITS RIGHT TO NOTICE AND A
HEARING SUBSEQUENT TO THE ISSUANCE OF A WRIT FOR PREJUDGMENT REMEDY BY LENDER'S
ATTORNEY, AND LENDER ACKNOWLEDGES BORROWER'S RIGHT TO SAID HEARING SUBSEQUENT TO
THE ISSUANCE OF SAID WRIT. BORROWER FURTHER HEREBY WAIVES ANY REQUIREMENT OR
OBLIGATION OF LENDER TO POST A BOND OR OTHER SECURITY IN CONNECTION WITH ANY
PREJUDGMENT REMEDY OBTAINED BY LENDER BASED ON ANY OFFSETS, CLAIMS, DEFENSES OR
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COUNTERCLAIMS OF BORROWER OR ANY OTHER OBLIGATED PARTY TO ANY ACTION BROUGHT BY
LENDER. BORROWER ALSO WAIVES ANY AND ALL OBJECTION WHICH IT MIGHT OTHERWISE
ASSERT, NOW OR IN THE FUTURE, TO THE EXERCISE OR USE BY LENDER OF ANY RIGHT OF
SETOFF, REPOSSESSION OR SELF HELP AS MAY PRESENTLY EXIST UNDER STATUTE OR COMMON
LAW, AND TO THE EXTENT PERMITTED BY LAW, THE BENEFITS OF ALL PRESENT AND FUTURE
VALUATION, APPRAISEMENT, HOMESTEAD, EXEMPTION, STAY, REDEMPTION AND MORATORIUM
LAWS. BORROWER ACKNOWLEDGES AND AGREES THAT ALL OF THE WAIVERS CONTAINED IN THIS
SECTION HAVE BEEN MADE KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND INTELLIGENTLY,
AND WITH THE ADVICE OF ITS COUNSEL.
ARTICLE 2
DEFAULT
2.1 EVENTS OF DEFAULT
Any one or more of the following shall constitute an "EVENT OF
DEFAULT" hereunder:
A. The failure to pay the Mortgage Debt in full by the "Maturity Date"
as defined in Schedule C hereto, or the failure to pay any other installment of
principal and/or interest or any other sums due with respect to the Mortgage
Debt when such installment is due and payable after ten (10) days prior written
notice and opportunity to cure, unless Lender believes such prior notice and
opportunity to cure will have a material adverse effect on its rights and
remedies.
B. The occurrence of an Event of Default (as defined therein) under,
or demand for the payment of, any Loan Documents beyond any grace periods set
forth in said agreements, if any.
C. The breach of any covenant or obligation of Borrower contained in
SECTIONS 1.2, 1.3, 1.7, 1.8, 1.9, or 3.4 hereof after ten (10) days prior
written notice and opportunity to cure, unless Lender believes such prior notice
and opportunity to cure will have a material adverse effect on its rights and
remedies.
D. The actual or threatened waste, removal or demolition of, or
material alteration to, any part of the Property without Lender's prior written
consent.
E. The failure to observe or perform any other agreements, covenants
or representations of Borrower contained in this Mortgage for a period of thirty
(30) days after the occurrence of such failure.
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F. The occurrence of a default under, or demand for the payment of,
any other note or obligation of Borrower to any other party, including without
limitation, BankBoston, N.A., beyond any applicable grace or cure periods.
G. The cancellation, revocation, suspension or failure to receive a
grant or renewal of any and all franchises, concessions, licenses and permits
pertaining to or necessary for the construction and operation of the
Improvements on the Property.
H. The taking of all or any part of the Property through condemnation,
or if the value of the Property shall be impaired by condemnation or casualty,
either temporarily for a period in excess of thirty (30) days, or permanently.
I. If Borrower shall be deprived of title, possession or control of
the Property by process or operation of law or order of any court, or if any
foreclosure proceeding shall be instituted with regard to any lien or mortgage
of any kind affecting the Property.
ARTICLE 3
REMEDIES
Whenever an Event of Default shall have occurred, Lender may take any one
or more of the following remedial steps:
3.1 ACCELERATION. Lender may declare, without demand or notice to Borrower,
the outstanding principal amount of the Loan and the interest accrued thereon,
and the Mortgage Debt, to be due and payable immediately, and upon such
declaration such principal and interest and other sums shall immediately become,
and be, due and payable.
3.2 FORECLOSURE. Lender may foreclose this Mortgage and exercise its rights
as a secured party for all or any portion of the Mortgage Debt which is then due
and payable, subject to the continuing lien of this Mortgage for the balance not
then due and payable. If this Mortgage is foreclosed there shall be included in
the Mortgage Debt, to the extent permitted by law, the costs, disbursements, and
fees paid or incurred by Lender in connection with such foreclosure.
3.3 POSSESSION OF PROPERTY; APPOINTMENT OF RECEIVER.
A. Without notice to Borrower, and without regard to the adequacy of
the security for the Mortgage Debt, proof of depreciation of the value of the
Property or the financial condition of Borrower, Lender may, at its option: by
itself or by agent, with or without bringing any action, suit or proceeding,
immediately enter upon and take possession and control of the Property and the
Property Income with those rights and powers more particularly set forth in
SUBSECTION 3.3 C. hereof; make application to a court of competent jurisdiction
for and obtain the immediate ex parte appointment of a receiver authorized to
immediately enter upon and take possession and control of the Property and the
Property Income with those rights and powers more
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particularly set forth in SUBSECTION 3.3 C. hereof; without taking possession
and control of the Property, collect directly all Property Income due to
Borrower with full rights and powers to notify all parties liable to make
payments of Property Income to make said payments directly to Lender or its
agents, and Lender or its agents shall have the further power and authority to
sue for or otherwise collect and receive all Property Income; or (iv) exercise
any or all of the remedies available to a secured party under the Uniform
Commercial Code, including, without limitation:
(1) Either personally or by means of a court appointed receiver,
taking possession of all or any of the Service Equipment and thereafter holding,
storing, using, operating, maintaining and controlling the Service Equipment,
and exercising all rights and powers of Borrower in respect thereof. If Lender
demands or attempts to take possession of the Service Equipment, Borrower shall
promptly to turn over and deliver complete possession thereof to Lender;
(2) Without notice to or demand upon Borrower, making such
payments and doing such acts as Lender may deem necessary to protect its
security interest in the Service Equipment;
(3) Requiring Borrower to assemble the Service Equipment, or any
portion thereof, and make it available to Lender at a place designated by Lender
and reasonably convenient to both parties. Lender and its agents and
representatives shall have the right to enter upon any or all of Borrower's
property to exercise Lender's rights hereunder; and
(4) Selling, leasing or otherwise disposing of the Service
Equipment at public sale, with or without having the Service Equipment at the
place of sale, and upon such terms and in such manner as Lender may determine.
Lender may be a purchaser at any such sale. Borrower agrees that sales for cash
or on credit to a wholesaler, retailer, or user of property of the type of the
Service Equipment, or at public or private auction, are all commercially
reasonable. Notwithstanding any other notice provision in this Mortgage or the
Loan Documents, unless the Service Equipment is perishable or threatens to
decline speedily in value, or is of a type customarily sold on a recognized
market, Lender shall give Borrower reasonable notice of the time and place of
any public sale thereof, or of the time after which any private sale or any
other intended disposition thereof is to be made. The requirements of reasonable
notice shall be met if such notice is mailed to Borrower as provided in SECTION
4.4 hereof, at least five (5) days before the time of the sale or other
disposition.
B. Borrower hereby waives to the fullest extent permitted by law all
rights to prior notice or court hearing in connection with any action by Lender
of the types set forth in SUBSECTIONS 3.3 A.(1), (2), and (3) above, and
Borrower further waives any requirement that Lender provide any bond, surety, or
other security in connection with any said action.
C. If Lender, Lender's agent and/or a receiver enters upon and takes
possession and control of the Property and/or the Property Income pursuant to
SUBSECTIONS 3.3 A.(1), (2)
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and/or (3), such person or entity shall have all of Borrower's rights and powers
with respect to the Property and/or the Property Income in addition to such
other rights and powers as may subsequently be authorized including without
limitation the right and power to: hold, store, use, operate, manage and control
the Property and conduct the business which is or may be conducted therefrom;
make all necessary and proper maintenance, repairs, renewals, replacements,
additions, betterments and improvements to the Property and purchase or
otherwise acquire additional fixtures, personalty and other property; obtain
such insurance with respect to the Property and the business operations
conducted therefrom as may be determined necessary; manage and operate the
Property and the business conducted therefrom and exercise all the rights and
powers of Borrower in its name or otherwise with respect to the same; enter into
agreements with others to exercise the powers herein granted, all as Lender, its
agents or a receiver from time to time may determine; collect and receive all
Property Income; enforce all terms of existing Leases at the Property and all
other contracts or agreements pertaining to the Property or the business
operations conducted therefrom; and enter into such new or additional leases and
such other contracts or agreements pertaining to the Property or the business
operations conducted at or from the Property from time to time as Lender, its
agents or the receiver may determine necessary in its sole discretion.
D. All Property Income collected by Lender, Lender's agent or a
receiver pursuant to SUBSECTIONS 3.3 A.(1), (2) or (3) above, shall be applied
to the following in such order of priority as Lender may determine in its sole
discretion: (i) interest and principal due on the Mortgage Debt; (ii) taxes,
assessments and insurance premiums due with respect to the Property and/or the
business operations conducted from the Property; (iii) all costs and expenses of
constructing the Improvements, operating, maintaining, repairing and improving
the Property and conducting the business operations which are or may be
conducted at the Property; and (iv) the compensation, salaries, expenses and
disbursements of any agents, employees, attorneys or other representatives of
Lender, Lender's agent or the receiver in connection with the possession,
control, construction of the Improvements and/or operation of the Property and
the business operations conducted therefrom, expressly including the payment of
any management agent's fees, and in the event Lender manages the Property itself
with its own employees, Lender shall be entitled to charge and collect a
management fee equal to the customary management agent's fee charged for
performing similar management functions in the area where the Property is
located.
E. Lender, its agents, or any receiver acting pursuant to SUBSECTIONS
3.3 A.(1), (2) or (3) hereof shall in no event be liable or accountable for more
monies than actually are received from the Property during the period during
which Lender, its agent or any receiver actually is in possession and control of
the Property. Neither Lender, its agents nor any receiver shall be liable or
accountable in any manner for the failure to collect Property Income for any
reason whatsoever.
F. All costs, expenses and liabilities of every character incurred by
Lender in managing, operating and maintaining the Property, not paid from
Property Income as hereinabove provided, shall constitute and be treated as
Lender Advances pursuant to SECTION 3.4 hereof.
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G. Borrower shall pay monthly, in advance, to Lender, its agent or any
receiver in possession and control of the Property pursuant to SUBSECTIONS 3.3
A.(1), (2) or (3) above, the fair and reasonable rental value for all or any
part of the Property which is in the use, occupancy and possession of Borrower.
H. In the event of foreclosure, Lender, its agent or any receiver
acting pursuant to SUBSECTIONS 3.3 A.(1), (2) or (3) above, may remain in
possession of the Property until (i) the foreclosure sale; (ii) the redemption
of the Property; or (iii) the expiration of any redemption period of the United
States of America extending subsequent to the foreclosure sale, if a deficiency
exists. Lender, its agents or the receiver shall incur no liability for, nor
shall Borrower assert any claim or setoff as a result of, any action taken while
Lender, its agent or a receiver is in possession of the Property.
3.4 LENDER ADVANCES
A. Lender may, without notice or demand, pay any amount which Borrower
has failed to pay, or perform any act which Borrower has failed to perform
hereunder, including, without limitation, (i) the payment of insurance premiums
and/or the furnishing of insurance required under SECTION 1.2 hereof; (ii) the
payment of Taxes required under SECTION 1.3 hereof; (iii) the performance of and
the payment for repairs and replacements required under SECTION 1.6. hereof;
(iv) the cost of discharging any liens or encumbrances under SUBSECTION 1.7.D.
hereof; (v) all expenses incurred or other amounts paid by Lender pursuant to
SECTION 1.11 and 1.14 and ARTICLE 3 hereof; (vi) the payment of costs attendant
to Lender's possession as set forth in SUBSECTION 3.3.F. hereof; and (vii) the
payment of sums for all purposes for which Loan Advances are otherwise allowed
under the Note. The costs, disbursements, expenses and reasonable counsel fees
incurred by Lender in connection with the foregoing, together with interest
thereon from the date the expense is paid or incurred at the highest interest
rate allowed under the Note ("LENDER ADVANCES"), shall be (x) added to the
Mortgage Debt, (y) payable on demand to Lender, and (z) secured by the lien of
this Mortgage, prior to any right, title, interest, lien or claim attaching or
accruing to the Property subsequent to the lien hereof.
B. Lender, in making any Lender Advances which relate to Taxes
asserted against the Property, may do so according to any bill, statement or
estimate procured from the appropriate public office without inquiry into the
accuracy or validity thereof; insurance premiums, may do so according to any
notice, bill, statement or estimate procured from the appropriate insurer
without inquiry into the accuracy or validity thereof; any apparent or
threatened adverse title, lien or encumbrance, shall be the sole judge of the
legality or validity of same; the expense of repairs or replacement of any
Property, shall be the sole judge of the state of repairs and the necessity for
incurring the expense of any such repairs or replacement; any other purpose
referred to in SUBSECTION 3.4.A. above, may do so whenever, in its sole judgment
and discretion, such payment shall seem necessary or desirable to protect the
full security intended to be created by this Mortgage.
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3.5 NO MARSHALLING. Lender shall not be compelled to release, or be
prevented from foreclosing or enforcing this Mortgage upon all or any part of
the Property, unless the entire Mortgage Debt shall be paid; required to accept
any part or parts of the Property, as distinguished from the entire whole
thereof, as payment of or upon the Mortgage Debt to the extent of the value of
such part or parts; compelled to accept or allow any apportionment of the
Mortgage Debt to or among any separate parts of the Property; or prevented from
selling the Property in one or more parcels or as an entirety, and in such
manner and order, as Lender in its sole discretion may elect.
3.6 LENDER'S DISCRETION. Lender, in exercising any remedy provided herein
under which it may make payments or perform actions which Borrower has failed to
do or make, may do so in its sole discretion whenever in its opinion such
payment or performance is necessary or desirable to protect the full security
intended by this Mortgage.
3.7 REMEDIES CUMULATIVE. No remedy herein conferred upon or reserved to
Lender is intended to be exclusive of any other available remedy or remedies,
but each and every such remedy shall be cumulative and shall be in addition to
every other remedy given under this Mortgage or now or hereafter existing at law
or in equity.
3.8 DELAY OR OMISSION NO WAIVER. No delay or omission on the part of Lender
to exercise any of its rights hereunder or under any of the Loan Documents shall
impair or operate as a waiver of Lender's right to exercise such right or any
other right of Lender hereunder or under the Loan Documents. In order to entitle
Lender to exercise any remedy reserved to it in this Mortgage, it shall not be
necessary to give any notice, other than such notice as may be herein expressly
required. Any waiver, express or implied, of any breach or default hereunder
shall not constitute a waiver of any subsequent or different breach or default.
3.9 POWER OF ATTORNEY. Borrower hereby irrevocably appoints, grants and
constitutes Lender its attorney-in-fact, coupled with an interest, to so
execute, deliver and submit all applications, requests, forms or reports of any
kind for all applicable, desirable or necessary licenses, permits, approvals,
authorization, tax credits or abatements or benefits, of any kind relating,
applicable to or affecting the use and enjoyment of, or construction on, or the
business operations conducted at or from the Property; provided, the foregoing
power of attorney shall be exercisable by Lender only after the occurrence of
one or more Events of Default. Any party dealing with Lender shall not be
required to investigate the right of Lender to exercise its authority or to take
any action under or pursuant to this power of attorney nor inquire as to whether
or not any Event of Default exists or has occurred.
3.10 NO MERGER. If Lender shall acquire title to the Property by conveyance
from Borrower or as a result of the foreclosure of any other mortgage which
Lender at any time holds with respect to the Property, this Mortgage shall not
merge in the fee of the Property but shall
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remain and continue as an existing and enforceable lien for the Mortgage Debt
secured hereby until the same shall be released of record by Lender in writing.
ARTICLE 4
MISCELLANEOUS PROVISIONS
4.1 GOVERNING LAW; BINDING EFFECT. The rights and duties of Borrower and
Lender under this Mortgage shall be governed by the internal laws of the State
of Connecticut. All covenants, conditions and agreements herein shall run with
the land, and shall bind the heirs, executors, administrators, successors and
assigns of Borrower, and shall inure to the benefit of Lender and its successors
and assigns.
4.2 MODIFICATIONS, ETC. No provision of this Mortgage may be waived,
modified or discharged, including, without limitation, by conduct, custom or
course of dealing, other than by an express writing signed by the party against
whom enforcement of such waiver, modification or discharge is sought.
4.3 NOTICE. Any notice, report, demand or other written instrument required
under SECTION 1.15 hereof, or otherwise permitted or required to be given, made,
or sent under this Mortgage, shall be in writing, signed by the party giving or
making the same, and shall be sent hand-delivered, effective upon receipt, sent
by United States Express Mail or by overnight courier, effective upon receipt,
or sent by certified mail, postage prepaid, return receipt requested, deemed
effective on the earlier of the day of actual delivery as shown by the
addressee's return receipt or the expiration of three (3) business days after
the date of mailing, addressed to the party intended to receive the same at the
address set forth below:
If to Lender: with a copy to:
Webster Bank Pepe & Hazard LLP
150 Main Street Goodwin Square
Bristol, CT 06010 Hartford, CT 06103
Attn: Peter F. Samson Attn: John C. Bombara, Esq.
If to Borrower:
ACMAT Corporation
233 Main Street
New Britain, CT 06050-2350
Attn: Henry W. Nozko, Jr.
Any party hereto shall have the right to change the place to which any such
notice shall be sent by a similar notice sent in like manner to all parties
hereto.
4.4 NO AGENCY OR JOINT VENTURE. Nothing contained in this Mortgage shall be
construed to cause Borrower to become the agent for, or a joint venturer with,
Lender for any
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purpose whatsoever, nor shall Lender be responsible for any shortage,
discrepancy, damage, loss or destruction of any part of the Property for
whatever cause unless same is the direct result of the gross negligence of
Lender. Whether or not Lender elects to employ any or all remedies available to
it upon demand or after the occurrence of an Event of Default under the Loan
Documents, Lender shall not be liable for the payment of any expense incurred in
connection with the exercise of any remedy available to Lender or for the
performance or nonperformance of any other obligation of Borrower.
4.5 SEVERANCE. The invalidity or unenforceability of any one or more
phrases, sentences, clauses or sections contained in this Mortgage shall not
affect the validity or enforceability of the remaining portions of this
Mortgage, or any part thereof.
4.6 INTERPRETATION. In this Mortgage, unless the context otherwise
requires, (i) the term "Borrower" shall mean and include any guarantor of all or
any part of the Mortgage Debt or any other person directly or indirectly
responsible for the payment of all or any part of the Mortgage Debt; and (ii)
the use of any gender shall include the other genders and either the singular or
the plural shall include the other. This Mortgage shall be interpreted without
regard to any presumption or other rule requiring construction against the party
which drafted this Mortgage.
4.7 CAPITALIZED TERMS. Any capitalized words used in this Mortgage and not
herein defined shall have the meanings ascribed to such terms in the Loan
Documents.
NOW, THEREFORE, if all agreements and provisions contained herein are fully
kept and performed by Borrower, and all the Mortgage Debt shall be fully paid in
all respects, then this deed shall be void; otherwise to remain in full force
and effect.
IN WITNESS WHEREOF, Borrower has caused this instrument to be executed and
delivered as of the date first above written.
Signed, sealed and delivered BORROWER:
in the presence of: ACMAT CORPORATION
/s/ John C. Bombara By: /s/ Henry W. Nozko, Jr.
- - -------------------------- -------------------------
John C. Bombara Name: Henry W. Nozko, Jr.
Executive Vice President
/s/ Peter F. Samson
- - --------------------------
Peter F. Samson
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STATE OF CONNECTICUT )
) ss.: Hartford
COUNTY OF HARTFORD )
On this 23rd day of December, 1998, before me, the undersigned officer,
personally appeared Henry W. Nozko, Jr., Executive Vice President of ACMAT
Corporation signer and sealer of the foregoing instrument and acknowledged the
same to be his free act and deed and the free act and deed of said corporation.
/s/ John C. Bombara
----------------------------------
Commissioner of the Superior Court
Notary Public John C. Bombara
--------------------
My Commission Expires: -----------
24
<PAGE> 1
EXHIBIT 4(d)
(1)
COMMERCIAL CREDIT AGREEMENT
THIS IS A COMMERCIAL CREDIT AGREEMENT made this 9th day of December, 1998
by and among
BANKBOSTON, N.A.
a national banking association
with a place of business at
100 Pearl Street
Hartford, Connecticut 06103 ("Lender")
and
ACMAT CORPORATION
a Connecticut corporation
with a place of business at
233 Main Street
New Britain, CT 06050
("Borrower")
and
ACSTAR HOLDINGS, INC.
a Delaware corporation
with a place of business at
233 Main Street
New Britain, CT 06050
("Guarantor")
The liability of the Borrower and of the Guarantor hereunder shall be joint
and several.
THE PARTIES AGREE AS FOLLOWS (reference being hereby made to Appendix I
appended hereto for the definition of certain capitalized terms used herein):
SECTION 1. LOANS; INTEREST; GUARANTY.
1.1 The Loans. Subject to all of the terms and conditions of this
Agreement:
(A) Revolving Credit.
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(i) Lender shall from time to time, until the Termination
Date, at the request of Borrower, and provided that all of the Conditions
Precedent have been met by Borrower at the time of such request, make advances
(each an "Advance" and collectively "Advances") to Borrower as a Revolving
Credit (the "Revolving Credit"), which Advances may be repaid and readvanced
from time to time, and which shall bear interest at the rate set forth in
Section 1.5 provided that the aggregate amount of all outstanding Advances shall
not (except in the sole and absolute discretion of Lender) at any time exceed
the amount of $10,000,000.00. The Revolving Credit shall be evidenced by the
Revolving Credit Note delivered to Lender in form and substance set forth as
Exhibit A attached (together with any note which from time to time extends,
amends, supplements, modifies, renews or substitutes such note, the "Revolving
Note").
(ii) On and before the Termination Date, Lender shall
determine in its sole and absolute discretion whether it is willing to extend
the Termination Date. On and after the Termination Date, as extended, if at all,
any obligation of Lender to make Advances shall automatically terminate and all
Advances, together with accrued and unpaid interest thereon and expenses related
thereto, shall become immediately due and payable in full.
(B) Term Loan. Lender is lending to Borrower and Borrower is
borrowing from Lender the sum of $5,000,000.00 as a Term Loan (the "Term Loan"),
which Term Loan is payable in quarterly payments of principal, each in the
amount of $250,000.00 payable on the first day of each March, June, September
and December after the date hereof, each to be accompanied by a payment of
interest at the rate set forth in Section 1.5 hereof until the Maturity Date,
when the entire unpaid balance of the Term Loan, together with all accrued and
unpaid interest, shall be due and payable, all as more particularly set forth in
the Term Loan Note delivered to Lender in form and substance as set forth in
Exhibit B attached hereto, (together with any note which from time to time
extends, amends, supplements, modifies, renews or substitutes for such note, the
"Term Note"); and
1.2 Conditions Precedent to Advances. Lender's obligation to make any
Advance shall be subject to the conditions precedent ("Conditions Precedent")
that on the date on which Lender makes the Advance:
(A) Borrower must have received and provided to Lender such
approvals, opinions, consents or documents evidencing compliance with this
Agreement as Lender may reasonably request; and
(B) Borrower must have submitted all financial statements
required hereunder to Lender showing an availability for Advances under the
Revolving Credit, and such Advance when added to all outstanding Advances must
be within such availability; and
(C) The following statements must be true, and each request for
an Advance shall be deemed to be a representation and warranty by Borrower to
the effect that, at and as of the date of such request:
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(i) the representations and warranties contained in Section
2 are true and correct on and as of the date of such request as though made on
and as of such date; and
(ii) no Default nor Event of Default has occurred and/or is
continuing or would result from the Advance.
1.3 Procedures for Requesting Advances. Provided that all Conditions
Precedent have been satisfied, Borrower may from time to time request Advances
by a telephone call from such person as Borrower may hereafter designate in
writing, each of which request must be for an amount in excess of $100,000.00.
Any request for an Advance made prior to 12:00 noon on a Business Day shall
result in the Advance being made on such Business Day as to Base Rate Advances
and on the second (2nd) London Business Day following such request as to LIBOR
Advances. Any request made after 12:00 noon shall result in such Advance being
made on the next Business Day as to Base Rate Advances and on the third (3rd)
London Business Day following such request as to LIBOR Advances. Any and all
Advances to be made by Lender under this Agreement shall be deposited in Account
#81601154 maintained by Borrower with Lender. Borrower specifically agrees that
Lender shall not be required to but shall be entitled to rely on such telephone
instructions and that Borrower shall be bound thereby. Borrower shall provide to
Lender such documentation respecting each request for Advance, including,
without limitation, the form of Request for Advance attached hereto as Exhibit
C, as Lender shall require.
1.4 Loans. It is specifically contemplated by the parties to this
Agreement that the banking relationship evidenced hereby may, in Lender's
discretion, involve financial accommodations of various types to Borrower,
including, but not limited to, letters of credit, term loans, coverage of
overdrafts, time loans, demand loans, over loans under the Revolving Credit, and
the like, in addition to any and all loans and/or Advances previously made by
Lender to Borrower and in addition to the Revolving Note and the Term Note.
Consequently, the parties intend that this Agreement shall govern any and all
financial accommodations now or hereafter extended by Lender to Borrower and all
other liabilities of the Borrower to the Lender of any kind or nature including,
without limitation, fees, charges, indemnities and penalties. In extension of
the foregoing, all loans and advances now or hereafter made by Lender to or on
behalf of Borrower pursuant to this Agreement and/or any of the documents
executed in connection herewith, or otherwise, whether or not evidenced by
notes, and all liabilities of the Borrower to the Lender (primary, secondary,
direct, indirect, absolute, contingent, sole, joint or several, whether similar
or dissimilar or related or unrelated) whether previously incurred, now existing
or hereafter arising, including, without limitation under guarantees or other
form of surety now or hereafter provided by Borrower in favor of Lender, whether
pursuant to this Agreement or any of the Documents or otherwise, any renewals or
extensions thereof, to the extent the same are outstanding from time to time,
are herein collectively called the "Loans".
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<PAGE> 4
1.5 Interest.
(A) Revolving Credit.
(i) All amounts outstanding from time to time under the
Revolving Credit shall bear interest at a per annum variable rate which at all
times is equal to the Base Rate, said rate to change when and as said Base Rate
changes; provided however, that
(ii) At the election of Borrower made pursuant to a Notice
of Interest Rate Election (in form and substance as set forth in Exhibit D,
attached hereto), outstanding amounts under the Revolving Credit shall bear
interest at the LIBOR Rate plus one and sixtenths (1.6) percentage points. Such
amounts must be in increments of $50,000.00 and remain outstanding for the
Interest Period selected by Borrower at the time such election is made, which
period of time shall be in increments of one month but not to exceed three
months; and
(iii) Notwithstanding the foregoing, not more than three (3)
separate interest rate tranches shall be outstanding at any time under the
Revolving Credit at any time.
(B) Term Loan.
(i) All amounts outstanding from time to time under the Term
Loan shall bear interest at a fixed rate equal to seven and one quarter
(7 1/4%) percent per annum.
1.6 Payment. Except as otherwise provided in any note now or hereafter
executed which evidences any Loan, interest on all Loans shall be payable by
Borrower monthly on the first (1st) day of each calendar month for interest
accrued during the preceding month on the Loans at the rate or rates of interest
applicable during said preceding month. With respect to the Term Loan, interest
payments shall accompany payments of principal. Interest on all Loans shall be
computed using a per diem rate which shall be a fraction, the numerator of which
shall be the rate of interest calculated in accordance with Section 1.5(A) or
(B) above and the denominator of which shall be three hundred sixty (360),
multiplied by the actual number of days elapsed. For the purposes of computing
interest earned on the Loans, including without limitation interest payments
which are paid by an Advance (in which case such advance shall constitute a
Loan) or interest payments which are withdrawn directly from Borrowers' accounts
maintained with Lender or are made by other current funds (and each Borrower
hereby consents to any and all such advances and/or withdrawals, and/or payments
by any other means availed of by Lender, and further consents to payments of
principal and/or interest on any of the Loans and/or other sum owing to Lender
by such advances and/or withdrawals), credit for checks deposited, wire
transfers received or payment by any other means shall be given on the third
(3rd) business day following the receipt of such check, wire transfer or other
form of payment. In the event any payment of principal and/or interest shall be
returned unpaid for any reason, any credit given on account of such payment
shall be deleted, interest shall accrue retroactively to the date such credit
was given and such payment shall be deemed for all purposes under this
Agreement, never to have
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<PAGE> 5
been made. Any interest not paid as aforesaid may, in Lender's sole discretion,
accrue and be added to the principal and continue to bear interest at the rate
being borne by such principal.
1.7 Prepayment. Any amounts outstanding bearing interest at the LIBOR
Rate may only be prepaid if any such prepayment is accompanied by the Prepayment
Premium.
1.8 Guaranty. Guarantor is simultaneously herewith executing and
delivering to Lender its Guaranty Agreement (the "Guaranty") unconditionally
guaranteeing to Lender the payment of all Indebtedness and obligations now or
hereafter owing by Borrower to Lender, including, without limitation, the Loans.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS.
Borrower and Guarantor each jointly and severally represent and warrant to
Lender as of the date hereof, and as of the date of each Advance that:
2.1 Borrower Incorporation and Qualification. Borrower is a corporation
duly organized and validly existing and in good standing under the laws of the
State of Connecticut, has the corporate power to own its properties and conduct
its business, as presently conducted, and is duly qualified to do business in
each jurisdiction, wherein the nature of the business conducted by it or the
property owned or held under lease by it makes such qualification necessary in
order to avoid any limitation, penalty, forfeiture or restriction under the laws
of such jurisdiction.
2.2 Guarantor Incorporation and Qualification. Guarantor is a corporation
duly organized and validly existing and in good standing under the laws of
Delaware, has the corporate power to own its properties and conduct its
business, as presently conducted, and is duly qualified to do business in each
jurisdiction, wherein the nature of the business conducted by it or the property
owned or held under lease by it makes such qualification necessary in order to
avoid any limitation, penalty, forfeiture or restriction under the laws of such
jurisdiction.
2.3 Borrower Capitalization, Business and Subsidiaries. Borrower does not
own stock or other ownership interest of any other business entity, active or
inactive except as set forth on Schedule to 2.3. The information set forth on
Schedule to 2.3 attached with respect to the Borrower's authorized, issued and
outstanding capital stock, all of which stock has been duly authorized and
validly issued and is fully paid and non-assessable, the holders of such stock,
its principal and other places of business, the place where its inventories,
equipment and records of its accounts receivable are kept, and its present
business activities and status, is complete and accurate. It has no place of
business and does not maintain or store any of its assets at any location,
including without limitation Inventory at a vender or subcontractor, other than
those set forth in Schedule to 2.3 attached.
2.4 Guarantor Capitalization, Business and Subsidiaries. Guarantor does not
own stock or other ownership interest of any other business entity, active or
inactive except as set forth on Schedule to 2.4. The information set forth on
Schedule to 2.4 attached with respect to the Guarantor's authorized, issued and
outstanding capital stock, all of which stock has been duly
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<PAGE> 6
authorized and validly issued and is fully paid and non-assessable, the holders
of such stock, its principal and other places of business, the place where its
inventories, equipment and records of its accounts receivable are kept, and its
present business activities and status, is complete and accurate. It has no
place of business and does not maintain or store any of its assets at any
location, including without limitation Inventory at a vender or subcontractor,
other than those set forth in Schedule to 2.4 attached.
2.5 Authority. Each of Borrower and Guarantor has the corporate power
to execute, deliver and carry out the terms and provisions of this Agreement and
the other Documents to which it is a party and has taken all necessary corporate
and legal action with respect thereto (including, without limitation, obtaining
any consent of stockholders required by the law of any applicable jurisdiction
or its Certificate of Incorporation or By-Laws and this Agreement and such other
Documents to which it is a party have been duly authorized, executed and
delivered by it and constitute its valid, legal and binding agreement and
obligation enforceable in accordance with the terms thereof) and Lender is
entitled to the benefits thereof in accordance with such terms.
2.6 Compliance with Instruments, Charter and Law. Each of Borrower and
Guarantor and each of their Subsidiaries is in full compliance with and is not
in violation or default of any term or provision of (1) its Certificate of
Incorporation or by-laws, (2) any loan agreement, debt instrument, mortgage or
indenture except for the coverage ratio set forth in the Fleet Agreements, (C)
any other material contract, agreement or instrument, (3) any judgment, decree
or order or statute, rule or regulation, law, or ordinance, including without
limitation ERISA, OSHA, all state and federal environmental laws and those of
the Internal Revenue Service. (4) any licensing or governmental requirement, or
(5) any state or federal environmental act. The execution and delivery and
performance and compliance with this Agreement or any of the other Documents
will not result in any such violation or default by Borrower or Guarantor, or be
in conflict with any such term or provision or result in the creation of any
mortgage, lien, encumbrance or charge upon any of its properties or assets and
there is no such term or provision which materially adversely affects or in the
future may (so far as it can now foresee) materially adversely affect its
business, prospects, profits, properties, liabilities, operations or condition
(financial or otherwise) or its ability to perform this Agreement or any of the
other Documents executed by it.
2.7 Financial Statements.
(A) The consolidated balance sheet of the Borrower and its
consolidated subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, cash flows and stockholders' equity for the Fiscal
Year then ended, reported on by KPMG Peat Marwick and set forth in the
Borrower's 1997 Form 10-K, fairly present, in conformity with GAAP, the
consolidated financial position of the Borrower and its consolidated
subsidiaries as of such date and their consolidated results of operations and
cash flows for such Fiscal Year.
(B) The unaudited consolidated balance sheet of the Borrower and
its consolidated subsidiaries as of September 30, 1998 and the related unaudited
consolidated statements of operations, cash flows and stockholders' equity for
the nine months then ended, set forth in the Borrower's latest Form 10-Q, fairly
present, on a basis consistent with the financial
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<PAGE> 7
statements referred to in subsection (A), the consolidated financial position of
the Borrower and its consolidated subsidiaries as of such date and their
consolidated results of operations and cash flows for such three month period
(subject to normal year-end adjustments).
2.8 Indebtedness. Borrower has no outstanding Indebtedness, except for
liabilities to trade creditors incurred in the ordinary course of business
and/or except as described or set forth in the financial statements referred to
in Section 2.7 hereof except the coverage ratio set forth in the Fleet
Agreements, and has performed and complied with all of the terms of such
Indebtedness and all instruments and agreements relating thereto and no default
exists as of the date hereof or would after notice or lapse of time, or both,
exist with respect to any such Indebtedness, instruments or agreements.
2.9 Title to Properties and Assets; Liens, Etc. Borrower has good and
marketable title to its properties and assets free and clear of any mortgage,
pledge, lien, lease, encumbrance or charge, other than those set forth on
Schedule to 2.9 attached and other than those permitted under Section 4.2 . No
financing statement under the Uniform Commercial Code which names Borrower as a
debtor has been filed in any state or other jurisdiction which has not been
terminated and it has not signed any such financing statement or any security
agreement authorizing any secured party thereunder to file any such financing
statement, other than as set forth on Schedule to 2.9 attached.
2.10 Patents, Trademarks, Etc. Borrower, Guarantor and each of its
Subsidiaries owns or holds licenses for the use of or has the right to use all
patents, trademarks, service marks, trade names, copyrights and other
intellectual property rights necessary for the conduct of its business as now
conducted and as contemplated, including those identified in Schedule to 2.10
attached.
2.11 Litigation, Etc. Except as set forth in Schedule to 2.11 attached
and in the ordinary course of business of the Insurance Subsidiaries respecting
claims which in the aggregate do not materially adversely affect their business,
there are no equitable, legal, arbitration or administrative proceedings, suits,
actions or investigations pending against Borrower or Guarantor or any
Subsidiary thereof or in any other way relating to the Borrower's or Guarantor's
or any such Subsidiary's business, assets or other properties or to its
knowledge threatened (or any basis therefor known to it) which, either in any
case or in the aggregate, might result in any material adverse change in its
business, prospects, profits, properties, liabilities, operations or conditions
(financial or otherwise), or which might materially adversely affect its ability
to perform this Agreement or any other Documents executed by it.
2.12 Changes in Condition. Since the date of the financial statements
referred to in Section 2.7, there has been no material adverse change, by reason
of any matter or cause whatsoever, in Borrower's , Guarantor's or any of their
Subsidiaries, business, prospects, profits, properties, liabilities, operations
or condition (financial or otherwise).
2.13 Tax Returns and Payments. All tax returns and reports required by
law to be filed by Borrower, Guarantor and each of their Subsidiaries have been
duly filed and all taxes, assessments, fees and other governmental charges
(U.S., foreign, state or local or other) upon it or
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<PAGE> 8
upon any of its properties, assets, income or franchises, which are due and
payable, have been paid. The reserves on the Borrower's, Guarantor's or any of
their Subsidiaries books, in respect of taxes, reserves, risk based capital and
the like for all fiscal periods to date, are adequate. Its Federal and State
income and payroll tax returns have been examined and reported on by the taxing
authorities or closed by applicable statutes and satisfied for all fiscal years
prior to and including the fiscal years set forth in Schedule to 2.13 attached.
2.14 Governmental Consents, Etc. No consent, approval or authorization
of or designation, declaration or filing with any governmental authority,
federal, foreign or other, is required in connection with the execution and
delivery of this Agreement or the Documents or the consummation of any
transaction contemplated hereby or thereby.
2.15 Solvency. Borrower, after giving effect to the transactions
described herein, is solvent, having assets of a value which exceeds the amount
of its liabilities, and is able to and anticipates that it will be able to meet
its debts as they mature and has adequate capital to conduct the business in
which it is engaged and is about to engage.
2.16 Names. Borrower currently conducts all business only under its
legal name as set forth above. During the preceding five years Borrower has not
(i) been known as or used any other corporate, fictitious or trade name, (ii)
been the surviving entity of a merger or consolidation or (iii) acquired all or
substantially all of the assets from any Person.
2.17 No Default nor Event of Default. No Default nor Event of Default
has occurred or exists except for the coverage ratio set forth in the Fleet
Agreements.
2.18 Shareholder Agreements. Borrower is not a party to any written
executive employment, management or shareholder agreement, except as described
in Schedule to 2.18 attached.
2.19 Place of Business; Records. Borrower's chief place of business is
the address shown above and Borrower shall give Lender at least sixty (60) days
prior written notice of any change.
2.20 Year 2000 Compliance. Borrower, Guarantor and each of their
Subsidiaries has taken all necessary action to assess, evaluate and correct all
hardware, software, embedded microchips and other processing capabilities it
uses, directly or indirectly, to ensure that it will be able to function
accurately and without interruption or ambiguity using date information, before,
during and after January 1, 2000.
2.21 Judgments. Neither Borrower nor Guarantor nor any of their
Subsidiaries, nor any of the assets of any such party is subject to any unpaid
judgment (whether or not stayed) or any judgment lien in any jurisdiction.
2.22 No Regulatory Restrictions on Borrowing. Neither Borrower nor
Guarantor nor any of their Subsidiaries is (i) an "investment company" within
the meaning of the Investment
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Company Act of 1940, as amended, (ii) a "holding company" or a "subsidiary
company" of a holding company within the meaning of the Public Utility Holding
Company Act of 1935, as amended, or (iii) otherwise subject to any regulatory
scheme which restricts its ability to incur or guarantee debt.
2.23 Insider. Borrower is not, and no Person having "control" (as
defined in 12 U.S.C. 375(b)(5) or in regulations promulgated thereto) of
Borrower is an "executive officer", "director" or "principal shareholder" (as
those terms are defined in 12 U.S.C. 375(b)(5) or in regulations promulgated
thereto) of Lender, of a bank holding company (or Subsidiary thereof) of which
Lender is a Subsidiary.
2.24 Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of the
Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan, or made any amendment
to any Plan, which has resulted or could result in the imposition of a Lien or
the posting of a bond or other security under ERISA or the Internal Revenue Code
or (iii) incurred any liability under Title IV of ERISA other than a liability
to the PBGC for premiums under Section 4007 of ERISA.
2.25 Environmental Matters. (A) Except as set forth in Schedule to
2.25 and to the extent that the liabilities of the Borrower and its
Subsidiaries, taken as a whole (and after considering any applicable third party
indemnification which has been provided and remains in full force and effect
and/or to the extent a solvent insurer has agreed in writing to provide
coverage), relating to or resulting from the matters referred to in clauses (i)
through (vi) below, inclusive, would not reasonably be expected to exceed
$250,000.00 for any one occurrence or $500,000.00 in the aggregate.
(i) no notice, notification, demand, request for
information, citation, summons, complaint or order has been received, no penalty
has been assessed and no investigation or review is pending, or to the
Borrower's knowledge, threatened by any governmental or other entity relating to
the Borrower or any Subsidiary and relating to or arising out of any applicable
Environmental Law;
(ii) there are no liabilities of the Borrower or any
Subsidiary of any kind whatsoever, whether accrued, contingent, absolute,
determined, determinable or otherwise, arising under or relating to any
Environmental Law;
(iii) no polychlorinated biphenyls, radioactive material,
lead, lead paint, asbestos-containing material, incinerator, sump, surface
impoundment, lagoon, landfill, septic, wastewater treatment or other disposal
system or underground storage tank (active or inactive) that requires
remediation, or could reasonably be expected to lead to liability under,
applicable
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Environmental Laws is or has been present at any property now or previously
owned, operated or leased by the Borrower or any Subsidiary;
(iv) no Hazardous Substance has been discharged, disposed
of, dumped, injected, pumped, deposited, spilled, leaked, emitted or released
at, on or under any property now or previously owned, operated or leased by the
Borrower or any Subsidiary other than in compliance in all material respects
with, and in a manner that could not reasonably be expected to lead to liability
under, applicable Environmental Laws;
(v) no property now or previously owned, leased or operated
by the Borrower or any Subsidiary nor any property to which the Borrower or any
Subsidiary has, directly or indirectly, transported or arranged for the
transportation of any Hazardous Substances, is listed or, to the Borrower's
knowledge, proposed for listing, on the National Priorities List promulgated
pursuant to CERCLA, or CERCLIS (as defined in CERECLA) or on any similar
federal, state or foreign list of sites requiring investigation or clean-up; and
(vi) the Borrower and its Subsidiaries are in compliance
with all Environmental Laws and have obtained and are in compliance with all
permits, licenses, authorizations, certificates and approvals of governmental
authorities relating to or required by applicable Environmental Laws and
necessary or property for the business of the Borrower or any Subsidiary as
currently conducted.
(B) There has been no material environmental investigation,
study, audit, test, review or other analysis conducted of which the Borrower or
any Subsidiary has control or possession in relation to the current or prior
business of the Borrower or any Subsidiary or any property or facility now or
previously owned, leased or operated by the Borrower or any Subsidiary, which
has not been delivered to the Lenders at least five days prior to the date
hereof.
(C) For purposes of this Section, the terms "Borrower" and
"Subsidiary" shall include any business or business entity (including a
corporation) which is, in whole or in part, a predecessor of the Borrower or any
Subsidiary.
2.26 Subsidiaries. Each of the Borrower's Subsidiaries is duly
organized, validly existing and, where applicable, in good standing under the
laws of its jurisdiction of organization, and has all powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. The Borrower has no Subsidiaries other than
those listed on Schedule to 2.26.
2.27 Full Disclosure. All information (excluding projections)
heretofore furnished by the Borrower to Lender for purposes of or in connection
with the Loan Documents or any transaction contemplated thereby is, and all such
information hereafter furnished by the Borrower to Lender will be, true and
accurate in all material respects on the date as of which such information is
stated or certified. The Borrower and Guarantor have disclosed to Lender any and
all facts (other than general economic or political conditions) which materially
and adversely affect, or may affect (to the extent the Borrower and Guarantor
can now reasonably foresee), the business, operations or
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financial condition of the Borrower and its Subsidiaries, taken as a whole, or
the ability of any Borrower of Guarantor to perform its obligations under the
Loan Documents. All projections heretofore furnished by the Borrower to Lender
for purposes of or in connection with the Loan Documents or any transaction
contemplated thereby were, and all projections hereafter furnished by the
Borrower to Lender will be, based on reasonable assumptions and as of their date
represented the Borrower's best estimate of future performance of the Borrower
and its Subsidiaries.
2.28 Special Representations and Warranties re Insurance Subsidiaries.
(A) United Coastal Insurance Company ("Coastal") is and will
continue to be duly licensed in the State of Arizona and is qualified to do
business in all states other than Maine, New Hampshire, Vermont and Tennessee .
Coastal was last audited by the Department of Insurance of the State of Arizona
on December 31, 1994. Coastal has not currently applied for permission to grant
any extraordinary dividends and no such application has ever been denied.
(B) ACSTAR INSURANCE COMPANY ("ACSTAR") is and will continue to
be duly licensed in the State of Illinois and is qualified to do business in all
states. ACSTAR was last audited by the Department of Insurance of the State of
Illinois on December 31, 1995. ACSTAR has not currently applied for permission
to grant any extraordinary dividends and no such application has ever been
denied.
(C) Each Insurance Subsidiary is and will continue to be in
compliance with the laws and regulations of each state in which it is approved
to sell insurance, specifically including, without limitation, the State of New
York.
(D) Each Insurance Subsidiary maintains and will continue to
maintain adequate reserves as determined by its outside auditors and is at or
above state regulatory requirements and those determined by NAIC.
(E) Each Insurance Subsidiary has and will at all times maintain
risk based capital ratio which complies with the guidelines of NAIC and complies
with all applicable state regulatory guidelines including, without limitation,
the State of New York. Each Insurance Subsidiary has and will continue to have
actual capital equal to or in excess of its required risk based capital.
(F) Coastal has not incurred losses in excess of 15% of its
statutory surplus in any year.
(G) ACSTAR has not incurred losses in excess of 15% of its
statutory surplus in any year.
(H) None of Coastal's reinsurance recoverables are more than 90
days past due.
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(I) None of ACSTAR's reinsurance recoverables are more than 90
days past due.
(J) No Insurance Subsidiary has entered into transactions with
Affiliates during the last three years except as disclosed on Schedule to 2.28
attached hereto.
(K) On and as of the date hereof the rating of Coastal by A.M.
Best is A-. Borrower knows of no basis for any reduction of such rating nor any
action to evidence such rating.
(L) On and as of the date hereof the rating of ACSTAR by A.M.
Best is A-. Borrower knows of no basis for any reduction of such rating nor any
action to evidence such rating.
SECTION 3. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that so long as there is outstanding any
portion of the Loans, Borrower will comply or cause compliance with the
following:
3.1 Punctual Payment. Borrower shall duly and punctually pay all principal,
interest and charges which are owing by it in accordance with the provisions of
the Revolving Note and the Term Note and also in accordance with the provisions
hereof and of the other Documents. If any Loan is not evidenced by a writing
specifying a due date, Borrower shall pay the same ON DEMAND. All Loans shall be
paid in U.S. Dollars at the address of Lender shown above. Borrower shall pay on
demand all charges customarily levied by lender in making loans of the type
herein or incurred by Lender in connection with the Loans.
3.2 Prompt Payment of Taxes, Mortgages, Leases and Indebtedness. Borrower
shall promptly pay and discharge, or cause to be paid and discharged, prior to
the date when due (unless contested in good faith and reserves against the
payment of which, satisfactory to Lender, are deposited with Lender), all lawful
taxes, assessments and governmental charges or levies imposed upon assets owned
by it or in which it has an interest or upon the Borrower's Business premises or
upon the income, profits, property or business of itself or Guarantor or any of
its or their Subsidiaries, or upon any of its or their other assets. Borrower
shall promptly pay or cause to be paid when due (or in conformity with customary
trade terms) all other Indebtedness of itself incident to its operations and
will promptly pay and perform all obligations under leases of real and personal
property and under material contracts and shall notify Lender promptly of any
default or notice of alleged default received with respect to any such
Indebtedness, lease or contract.
3.3 Conduct of Business. Borrower shall do all things necessary to
preserve, renew and keep in full force and effect in good standing the
Borrower's, Guarantor's and each of its or their Subsidiaries' corporate
existence, qualification and any franchises, licenses, patents, trademarks and
items necessary to continue its business. Borrower shall maintain its properties
and assets and those of the Guarantor and those of Borrower's and/or Guarantor's
Subsidiaries in good order and repair, all in compliance with applicable
federal, state, and local judgments, decrees,
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orders, statutes, rules and regulations, including, but not limited to, state
and federal environmental regulations and those of the Occupational Safety and
Health Administration.
3.4 Insurance.
(A) Borrower, Guarantor, and each of its or their Subsidiaries shall
maintain, with insurers satisfactory to Lender, insurance with respect to the
assets owned by it or in which it has an interest and its other properties and
business against loss or damage to the extent that is currently in force. Such
insurance shall include:
(i) public and product liability insurance in such amounts and
covering such risks, as Lender may reasonably require,
(ii) all worker's compensation and other employees' liability
insurance as may be required by law,
(iii) insurance with respect to its assets constituting tangible
personal property and fixtures, and with respect to its other properties both
real and personal, including, without limitation, the Borrower's business
premises, to the full extent of the insurable value thereof, and including All
Risk coverage (so-called) covering such other risks, as Lender may require, and
(iv) business interruption insurance in amounts sufficient to
cover the reasonable needs of the Borrower's business during periods of partial
or complete interruption of the Borrower's business.
(B) Borrower shall furnish evidence satisfactory to Lender confirming
to Lender the insurance at the time in force pursuant to this Section specifying
the amount and character of coverage, identifying the insurers and certifying as
to no default in the payment of current premiums thereon and will furnish Lender
with original or duplicate original copies of all policies.
3.5 Accounting; Financial Statements and Other Information. Borrower shall
maintain a system of accounts established and administered in accordance with
GAAP and practices consistently applied. Borrower shall deliver or cause to be
delivered to Lender:
(A) Financial Reports.
(i) As soon as available and in any event within forty-five (45)
days after the end of each Fiscal Quarter after the date hereof, a balance sheet
of the Borrower, in consolidating and consolidated form, as of the end of such
period, and a statement of income and retained earnings of the Borrower, in
consolidated form, for the period commencing at the end of the previous Fiscal
Year and ending with the end of such quarter, all in reasonable detail, and duly
certified by the chief financial officer of the Borrower as having been prepared
in accordance with GAAP and fairly presenting the financial position and results
of operations of the Borrower for such
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period, together with a statement of such individual preparing such statements
to the effect that in the course of the preparation of such statements said
individual has gained no knowledge that a Default or Event of Default has
occurred and is continuing or, if, in the opinion of said individual, a Default
or Event of Default has occurred and is continuing, a statement as to the nature
thereof and the action which the Borrower proposes to take with respect thereto
(the provision for such a statement herein shall in no way be construed as a
consent to the existence of such an Event nor the granting of time to cure). In
addition, said preparer shall complete and forward to Lender together with such
financial statements the completed Covenant Compliance Certificate in the form
attached hereto as Exhibit E.
(ii) As soon as available and in any event within ninety (90)
days after the end of each Fiscal Year of the Borrower, a copy of the annual
audited report for such year for the Borrower, including therein, a balance
sheet of the Borrower as of the end of such Fiscal Year and a statement of
income, retained earnings and statement of changes in financial position of the
Borrower for such Fiscal Year, in each case on a consolidated basis, and in each
case "Certified" by a firm of independent certified public accountants selected
by the Borrower but acceptable to Lender, together with the unqualified opinion
of such accounting firm to Lender stating that the financial statements audited
by such firm present fairly, in all material respects, the financial position of
Borrower as of the date of such financial statements and the results of its
operations and its cash flow for the Fiscal Year then ended, all in conformity
with GAAP, together with the certificate of such accounting firm that, in the
course of its audit of Borrower, it has obtained no knowledge that a Default or
Event of Default has occurred and is continuing or if, in the opinion of such
accounting firm, a Default or Event of Default has occurred and is continuing, a
statement as to the nature thereof (the provision for such a statement herein
shall in no way be construed as a consent to the existence of such an Event nor
the granting of time to cure) and together with the Management Letter (so
called) of such firm and Borrower's written response thereto detailing actions
to be taken relating to matters discussed in said Management Letter, and
together with a completed Covenant Compliance Certificate. In addition, Borrower
shall provide all financial statements for the Insurance Subsidiaries required
by the laws of any jurisdiction in which the Insurance Subsidiary conducted
business.
(iii) Such other data and information (financial and otherwise)
bearing upon or related to the Borrower's or the Guarantor's financial
condition, results of operations or assets, as Lender from time to time may
reasonably request.
(B) Projections/Budgets. As soon as available and in any event within
thirty (30) days prior to the end of each Fiscal Year of Borrower, financial
projections prepared by Borrower on a consolidated and consolidating basis for
the next Fiscal Year of Borrower, profit and loss statements projected for each
Fiscal Quarter and for the end of the next Fiscal Year, including without
limitation a projection of all drawings under, paydowns of and anticipated
quarterly availability under, the Revolving Credit and a capital expenditure
budget for the next Fiscal Year.
3.6 Financial Covenants. Borrower shall maintain the following, calculated
in accordance with GAAP, as shown on the financial statements required to be
provided pursuant to Section 3.5;
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(A) a ratio of Borrower's consolidated total Indebtedness to
Borrower's (i) cash on hand and cash equivalents on hand plus (ii) marketable
securities (including amounts owing to Borrower in connection therewith but not
yet paid) plus (iii) accrued interest receivable of not more than 1.05 to 1.0
measured at the end of each Fiscal Quarter; and
(B) an Interest Coverage Ratio (being the ratio of Adjusted Cash Flow
to consolidated Interest Expense) of at least 2.25 to 1.0 measured: (i) on a
calendar year basis at the end of each Fiscal Quarter commencing with the Fiscal
Quarter ending March 31, 1999 and continuing through the Fiscal Quarter ending
September 30, 1999, and (ii) at the end of each Fiscal Quarter over the
immediate preceding four (4) Fiscal Quarters commencing with the Fiscal Quarter
ending December 31, 1999 and for each Fiscal Quarter thereafter.
(C) a Debt Service Coverage Ratio (being the ratio of Adjusted Cash
Flow to Debt Service) of not less than 1.25 to 1.0 measured: (i)on a calendar
year basis at the end of each Fiscal Quarter commencing with the Fiscal Quarter
ending March 31, 1999 and continuing through the Fiscal Quarter ending September
30, 1999, and (ii) at the end of each Fiscal Quarter over the immediate
preceding four (4) Fiscal Quarters commencing with the Fiscal Quarter ending
December 31, 1999 and for each Fiscal Quarter thereafter.
(D) a ratio of Borrower's total Funded Debt to Statutory Operating
Earnings of not more than 5.0 to 1.0 measured: (i) on a calendar year basis at
the end of each Fiscal Quarter commencing with the Fiscal Quarter ending March
31, 1999 and continuing through the Fiscal Quarter ending September 30, 1999,
and (ii) at the end of each Fiscal Quarter over the immediate preceding four (4)
Fiscal Quarters commencing with the Fiscal Quarter ending December 31, 1999 and
for each Fiscal Quarter thereafter.
(E) a ratio of Borrower's total Funded Debt to Statutory Capital of
not more than 0.70 to 1.0 measured at the end of each Fiscal Quarter.
Borrower acknowledges that it has assisted Lender in the formation of each
of the foregoing financial performance criteria and fully understands each of
said criteria.
3.7 Notice of Certain Events and Changes; Governmental Notices.
(A) Promptly after becoming aware of any condition, event or state of
facts which constitutes a Default or Event of Default, Borrower shall give
written notice to Lender specifying the nature and period of existence thereof.
Borrower shall give Lender prompt written notice of any condition, event or
state of facts which causes or may cause material loss or depreciation in the
value of the assets or Borrower's business premises and of the commencement or
threat of any action, proceeding or investigation or the occurrence or existence
of any other event, matter or cause whatsoever, which, either in any case or in
the aggregate results or might result in any material adverse change in its
business, prospects, profits, properties, operations or condition (financial or
otherwise). Borrower shall give Lender at least sixty (60) days' prior written
notice of
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<PAGE> 16
any proposed change in its place or places of business, any proposed change of
location of any of the assets and any proposed changes in its name.
(B) As soon as reasonably practicable, after the issuance thereof,
Borrower shall send to Lender a copy of all notices of investigation, claims of
violation or possible violation and/or orders issued by any federal, state or
municipal regulatory authority under any laws or regulations adopted thereby
which are directed to and received by Borrower. Further, as soon as reasonably
practicable, Borrower shall send to Lender copies of all reports or other
materials filed by it with or issued or sent to it by the Securities and
Exchange Commission and all reports, notices or statements sent by it to its
stockholders.
3.8 Unused Fee. Borrower shall pay Lender, in current funds, quarterly in
arrears, a fee equal to 3/8 per cent per annum (but calculated based on the
actual number of days elapsed) of the average daily unused amount of the
Revolving Credit.
3.9 Environmental Compliance.
(A) Borrower shall comply with all applicable Environmental Laws,
regulations, rules, standards, orders and agreements. Whenever, pursuant to any
such legal requirement, Borrower is obligated to report to any party the
existence of a Spill (as such term is defined in Section 1 of Public Act
85-443), "Release" (as defined in 42 U.S. Code 9601 et seq.), "Hazardous Waste"
(as defined in Section 22a-115 of Connecticut General Statutes), "Hazardous
Substance" (as defined in 42 U.S. Code 9601 et seq.) or other environmental
contamination on or emanating from Borrower's business premises, Borrower shall,
simultaneously and in writing, report the existence of such conditions to Lender
at the address set forth in Section 13 hereof.
(B) In addition to any and all other liability of Borrower to Lender
hereunder, Borrower shall indemnify the Lender against any loss or damage that
shall occur to Lender as a result of the application of the Super Lien Act
(Section 22a-452a of the Connecticut General Statutes) or any other federal,
state, local or quasi-governmental law, rule, regulation, ordinance or the like.
(C) The Lender and/or its authorized representatives has the right, at
reasonable times and upon reasonable notice to Borrower, to enter upon
Borrower's business premises for the purpose of conducting inspections and/or
audits of Borrower's environmental compliance and/or of Borrower's methods
and/or procedures for disposal of waste products used in the course of
Borrower's business. Borrower shall correct any discrepancies found during such
inspections or audits promptly.
(D) In the event that any lien is filed against any of Borrower's
properties or any claim is made against Borrower by any governmental entity in
connection with the discharge of hazardous substances or wastes then Borrower
shall either (i) pay the claim and remove any lien from the applicable property
or (ii) furnish to such governmental entity that imposed the lien a bond, cash
deposit or other security reasonably satisfactory to such governmental entity in
an amount sufficient to discharge the lien.
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3.10 Intentionally left blank.
3.11 Use of Proceeds. Borrower shall use the proceeds of the Loans to repay
indebtedness owing by Borrower to Fleet National Bank and for general working
capital purposes. Borrower shall not, directly or indirectly, apply any part of
any proceeds or advance from any loan to the purchasing or carrying of any
"margin stock" within the meaning of Regulation U or Regulation G of the Board
of Governors of the Federal Reserve System, or for any use which will cause a
violation of any other regulation of the Board of Governors of the Federal
Reserve System or of any regulations, interpretations or rulings thereunder,
including without limitation Regulations G, U, T and X.
3.12 Deposit Accounts. Borrower shall maintain its primary disbursement
account with Lender.
3.13 Pension Plans.
(A) As soon as reasonably practicable, upon the filing, issuance or
receipt thereof, Borrower will send to Lender copies of (i) all annual reports
filed by it or on its behalf with respect to all pension or other employee
benefit plans, subject to ERISA, (hereinafter collectively referred to as the
"Plans" and individually as the "Plan"), with the Secretary of Labor, the
Internal Revenue Service, or the Pension Benefit Guaranty Corporation ("PBGC"),
(ii) all notices, reports, determinations or statements to or from the PBGC with
respect to the occurrence of a reportable event, as defined in Subsections (1),
(2), (3), (4), (5), (6), (7), (8) or (9) of Section 4043(b) of ERISA and
regulations issued thereunder, (iii) all reports submitted to it and/or the
Internal Revenue Service by any actuary with respect to any of the Plans, (iv)
all notices of Plan termination or requests for determination letters in
connection therewith filed by Borrower, any Plan Administrator (as such term is
defined in ERISA,) or trustee or custodian of any accounts of any Plan with the
PBGC and/or Internal Revenue Service, and (v) all requests to waive the minimum
funding standard or extension of amortization periods submitted to the Secretary
of the Treasury.
(B) Borrower (to the extent applicable to it) shall be and remain in
compliance with the provisions of ERISA or the applicable provisions of the
Internal Revenue Code of 1986, as amended, (hereinafter referred to as the
"Revenue Code"), including, without limitation, (i) the payment of all premiums
to the PBGC when and as the same shall be due and payable, pursuant to Section
4007 of ERISA, and (ii) the taking of such action as may be necessary from time
to time to meet all minimum funding standards for each of the Plans under
Section 412 of the Revenue Code. In furtherance of the foregoing, it shall, on
or before the date in each year required by ERISA and/or the Revenue Code for
any Plan, (hereinafter referred to as "Plan Year"), cause the actuary for such
Plan to deliver to Lender a true and correct copy of its report to the Internal
Revenue Service relating to (a) the actuary's methods and assumptions for
determining all costs, accrued liabilities, past service liabilities and
experience gains and losses, and (b) the amount to be contributed by it to the
funding standard account on account of such Plan for such Plan Year.
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3.14 Special Covenants re Insurance Subsidiaries. The Borrower shall:
(A) Notify the Lender annually of the allowable dividend which may be
paid by each Insurance Subsidiary to the Borrower.
(B) Notify the Lender promptly if any Insurance Subsidiary has applied
for permission to grant any special dividends.
(C) Notify the Lender of any allegation of non-compliance by any
Insurance Subsidiary with the laws and regulations of each state in which it is
approved to sell insurance, specifically including, without limitation, the
State of New York, except this notification does not apply to any non-compliance
matter if such non-compliance matter does not have a material effect.
(D) Furnish to the Lender annually all reports issued by its outside
auditors which analyze the adequacy of the level of each Insurance Subsidiary's
reserves.
(E) Notify the Lender of any material change in any Insurance
Subsidiary's risk based capital ratio.
(F) Maintain in each Insurance Subsidiary actual capital equal to or
in excess of its required risk based capital.
(G) Notify the Lender, promptly upon becoming aware, of the following:
(i) any material increase in the levels of primary liability of each Insurance
Subsidiary which is ceded to reinsurers, (ii) the occurrence of any default in
any such contract of reinsurance and (iii) the occurrence of any insolvency of
any reinsurer or any non-compliance by any reinsurer with the NAIC risk based
capital guidelines.
(H) Notify the Lender, promptly upon becoming aware, of the following:
(i) any material increase in the levels of primary liability of each Insurance
Subsidiary which is co-insured with others, (ii) the occurrence of any default
in any such contract of co-insurance and (iii) the occurrence of any insolvency
of any co-insurer or any non-compliance by any co-insurer with the NAIC risk
based capital guidelines.
(I) Notify the Lender within 90 days of the fiscal year end each
Insurance Subsidiary's (i) net investment income for the year then ended, (ii)
the statutory surplus for the year then ended, (iii) the "Combined Ratio" for
each such Insurance Subsidiary for the year then ended, (iv) the loss, if any,
of any Insurance Subsidiary in excess of 15% of its statutory surplus for the
year then ended, (v) a listing of each Insurance Subsidiary's reinsurance
recoverables which are more than 90 days past due as at the end of any year and
(vi) a listing of all transactions with Affiliates entered into by any Insurance
Subsidiary during the year then ended.
(J) Notify the Lender of any reduction in the rating by A.M. Best and
Company of any Insurance Subsidiary.
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3.15 Upstream Dividends. Borrower shall, among other things, cause its
Subsidiaries to pay to Borrower such profits, excess capital and other sums as
may be necessary to comply with the financial covenants set forth in Section
3.6. In extension of the foregoing, Borrower shall diligently apply for and
pursue any approvals from any state or regulatory authority having jurisdiction
over each such Subsidiary if such approvals are necessary to comply with the
financial covenants set forth in Section 3.6
3.16 Rating. The Insurance Subsidiaries shall at all times maintain a
rating by A.M. Best and Company of at least B+.
SECTION 4. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as there is outstanding any
portion of the Loans, or so long as this Agreement has not been mutually
terminated after all amounts owing under the Loans have been paid, Borrower
shall not, and Guarantor shall not, to the extent set forth in each of the
following Sections:
4.1 Restrictions on Liens. Directly or indirectly, create, incur,
assume or permit to exist any mortgage, lien, charge or encumbrance on or pledge
or deposit of or conditional sale, lease or other title retention agreement with
respect to any property or asset, whether now owned or hereafter acquired, or be
bound by or subject to any agreement or option to do so, provided that the
foregoing restrictions do not apply to:
(A) liens for taxes, assessments or governmental charges or
levies the payment of which is not at the time required by Section 3.2;
(B) liens incurred or deposits made in the ordinary course of
business in connection with worker's compensation or unemployment insurance or
to secure the performance of tenders, statutory obligations, surety and appeal
bonds, performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(C) zoning restrictions, easements, rights-of-way, restrictions
and/or minor irregularities in title and other liens, charges and encumbrances
incidental to the conduct of its business or the ownership of its properties or
assets which are not incurred in connection with the borrowing of money and
which in the aggregate are not material;
(D) statutory or common law possessory liens for charges incurred
in the ordinary course of business the payment of which is not yet due;
(E) the mortgages, liens and encumbrances referred to or
described in Schedules to 4.1 attached and/or the replacement thereof;
(F) liens in favor of Lender.
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4.2 Restrictions on Indebtedness. Directly or indirectly, create,
incur, assume, guarantee, agree to purchase or repurchase, pay or provide funds
in respect of, or otherwise become or be or remain liable, contingently,
directly or indirectly, with respect to, any Indebtedness other than:
(A) Indebtedness to Lender;
(B) current liabilities for trade and other obligations incurred
in the ordinary course of its business not yet past due and not as a result of
borrowing;
(C) Indebtedness arising under leases permitted hereby;
(D) Indebtedness in respect of endorsements made in connection
with the deposit of items for credit or collection in the normal and ordinary
course of business; and
(E) Indebtedness described in the financial statements described
in Section 2.8 or refinancing of such Indebtedness in amounts not to exceed such
refinanced Indebtedness.
(F) Indebtedness otherwise in conformity with all of the other
terms hereof incurred in order to fund the loan, advance or capital contribution
described in Section 4.3 (F) below.
Borrower shall not guarantee or otherwise assure any obligation of any
other party including, without limitation, that of any Guarantor.
4.3 Restrictions on Investments, Loans, Etc. Make or permit to be
outstanding any loan or advance or capital contribution to any other Person,
other than:
(A) presently outstanding loans, advances and investments
incurred in the ordinary course of Borrower's business;
(B) Indebtedness of customers for merchandise sold or services
rendered in the ordinary course of business; and
(C) investments in bills or bonds issued or guaranteed by the
government of the United States of America and/or Certificates of Deposit issued
by Lender or any other bank having a net worth of at least $50,000,000.00; and
(D) loans to employees of Borrower for travel and entertainment
advances not to exceed $250,000.00 in the aggregate outstanding at any one time.
(E) the portfolios of the Insurance Subsidiaries maintained
pursuant to Borrower's guidelines attached hereto as Schedule to 4.3.
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(F) any other loan, advance or capital contribution to any other
business entity not set forth herein for Borrower's or the Insurance
Subsidiaries' legitimate business purposes in an amount not to exceed
$10,000,000 outstanding in the aggregate provided that (i) no proceeds of any
Loan shall be used for such purpose and (ii) no Default or Event of Default
shall exist or be created thereby.
4.4 Dividends, Distributions and Redemptions. Directly or indirectly,
declare, order, pay, make or set apart any sum or property for the redemption,
retirement, purchase or other acquisition, direct or indirect, of any shares of
its stock of any class now or hereafter outstanding in an aggregate amount
exceeding $10,000,000 and/or the purchase of shares in the Borrower held by
Henry Nozko, Sr., with the proceeds of insurance policies held by Borrower on
the life of such person.
4.5 Sale of Assets, Consolidation, Merger, Acquisition of Assets.
Directly or indirectly, sell, abandon or otherwise dispose of any material asset
or any part thereof (except for the sale of Inventory in the ordinary course of
Borrower's business) or of all or any portion of its properties or assets, or
consolidate with or merge into any other corporation, or permit any other
corporation to consolidate with or merge into it, or acquire all or a
substantial portion of the assets of another Person, or form any Subsidiary, or,
directly or indirectly, suffer any change in ownership.
4.6 Management Agreements. Enter into any executive employment,
management or consulting agreement or renew, extend or amend any presently
existing executive employment, management or consulting agreement, except
agreements with Henry Nozko, Sr. and Henry Nozko, Jr.
4.7 Expenditures for Capital Assets. Make any expenditure for capital
assets (other than for routine repairs and maintenance which are not required to
be capitalized, as hereinafter set forth) unless, immediately after giving
effect thereto, the aggregate amount expended or to be expended on account of
all such expenditures by Borrower in any Fiscal Year would not exceed
$1,500,000.00 on a non-cumulative basis. The following are deemed to be
expenditures for capital assets and subject to the limitations of this section:
(A) Expenditures for major repairs and maintenance which, in
accordance with GAAP, are or should be capitalized; and
(B) All lease rentals and other amounts payable under leases
entered into after the date hereof, whether "true" leases or finance leases
(other than renewals and extensions of leases existing on the date hereof), and
all amounts payable under contracts or arrangements for the purchase of property
wherein payment of the purchase price for such property is deferred in whole or
in part.
4.8 Management. Suffer any material change in executive management,
including without limitation the day to day involvement of Henry Nozko, Sr. and
Henry Nozko, Jr. nor suffer a change in day to day management;
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4.9 Ownership. Suffer a change in ownership of Borrower's capital
stock except for trades in the ordinary course, of Borrower's stock on
nationally recognized markets, nor issue additional shares thereof except for
stock options or equity financing provided that in any case Henry Nozko, Sr. And
Henry Nozko, Jr. shall always own or control at least 51% of the combined voting
power of all issued and outstanding shares of all classes of stock.
4.10 E.R.I.S.A. Engage in any "Prohibited Transaction", so-called,
incur any so-called "Accumulated Funding Deficiency", or create or terminate any
pension or profit sharing plan or suffer the existence of any Reportable Event
or the appointment by any United States District Court of a trustee to
administer any Plan or if the PBGC shall institute proceedings to terminate any
plan or to administer any Plan, or otherwise not be in full compliance.
4.11 Judgments. Suffer any final judgment (exclusive of judgments
insured against by adequate liability insurance policies) against it which is
not discharged or execution thereof stayed pending appeal, within ninety (90)
days after the entry of such judgment, or if, within ninety (90) days after the
expiration of any such stay, such judgment shall not have been discharged.
4.12 Uninsured Losses, Etc. Suffer, during any consecutive twelve (12)
month period, one or more material uninsured losses, thefts, damage or
destruction of any material portion of its assets (other than bad debts incurred
in the ordinary course of business).
4.13 Fiscal Year. Change the fiscal year of Borrower.
4.14 No Sale, Leaseback. Enter into any sale-and-leaseback or similar
transaction.
4.15 Negative/Negative Pledges. Agree with any party other than Lender
that it will not pledge and/or grant a lien or security interest in any of its
assets.
SECTION 5. EVENTS OF DEFAULT.
If any of the following events (each an "Event of Default") occurs:
5.1 If Borrower defaults in the payment of any part of the Loans,
including, without limitation, payments due under the Revolving Credit or the
Term Loan, owing by it when the same becomes due and payable, whether at any
stated maturity, or by declaration, acceleration or otherwise;
5.2 If the Guarantor or any Subsidiary of the Borrower or Guarantor
defaults in the payment of any Indebtedness owing by it when the same becomes
due and payable, at any stated maturity, by declaration, acceleration or
otherwise;
5.3 If Borrower fails to perform or comply with any term or covenant
applicable to it contained in this Agreement, or contained in any other
Documents;
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5.4 If any representation or warranty made by or on behalf of
Borrower, in this Agreement or in the Schedules hereto, or in any of the other
Documents, or in connection with the transactions contemplated hereby and
thereby proves to be false or incorrect in any material respect;
5.5 If a draw is made under any payment or performance bond issued for
the account of Borrower;
5.6 If Borrower, Guarantor or any of their Subsidiaries defaults in
the payment of any Indebtedness for borrowed money or defaults with respect to
any of the terms of any evidence of such Indebtedness or of any indenture or
other agreement relating thereto, or if Borrower commits any breach or defaults
under any material contract to which it is or becomes a party or by which it is
or becomes bound;
5.7 If Borrower , Guarantor or any of their Subsidiaries makes an
assignment for the benefit of creditors, or admits in writing an inability to
pay debts as they become due, or files a voluntary petition in bankruptcy, or is
adjudicated a bankruptcy or insolvent, or files any petition or answer seeking
for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any present or future statute,
law or regulation, or files any answer admitting or fails to deny the material
allegations of a petition filed against it for any such relief, or seeks or
consents to or acquiesces in the appointment of any trustee, receiver or
liquidator of itself or of all or any substantial part of its properties, or its
directors or majority stockholders takes any action looking to its dissolution
or liquidation, or it ceases doing business as a going concern;
5.8 If, within thirty (30) days after the commencement of any
proceeding against Borrower, Guarantor or any of their Subsidiaries seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any present or future statute, law or regulation, such
proceeding has not been dismissed, or if, within thirty (30) days after the
appointment, without Borrower's, Guarantor's or such Subsidiary's consent or the
acquiescence of any trustee, receiver or liquidator of itself or of all or any
substantial part of its properties, such appointment has not been vacated;
then, and in any such event, in addition to its rights and remedies under this
Agreement, or the other Documents and any other instruments, but after ten (10)
days prior written notice and opportunity to cure, unless Lender believes such
prior notice and opportunity to cure will have a material adverse effect on its
rights and remedies, Lender may, at its option, declare all Term Loans and/or
the Loans or any portion thereof to be immediately due and payable, whereupon
the same shall forthwith mature and become due and payable, together with
interest accrued thereon and together with any and all costs of collection,
including, but not limited to, reasonable attorneys fees, and without
presentment, demand or protest, all of which are hereby waived.
SECTION 6. SET-OFF RIGHTS.
In addition to any rights now or hereafter granted under applicable law and
not by way of limitation of any such rights, each Lender and any affiliate of
Lender is hereby authorized by Borrower and the Guarantor at any time or from
time to time, without notice to Borrower or to any other Person, any such notice
being hereby expressly waived by Borrower and Guarantor to set off and to
appropriate and to apply any and all balances, deposits, credits, Collateral and
property of
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Borrower held at, or in transit to, any of its offices for the account of
Borrower and/or Guarantor (regardless of whether then due to Borrower and/or
Guarantor) and any other property at any time held or in transit or owing by
that Lender or that holder to or for the credit or for the account of Borrower
or Guarantor against and on account of any of the Loans which remain unpaid.
Borrower and Guarantor agree, to the fullest extent permitted by law, that (a)
Lender or any holder may exercise its right to set off with respect to the Loans
and may sell participations in such set off to other lenders and holders and (b)
any lender or holder so purchasing a participation in the Loans made or held by
other lenders or holders may exercise all rights of set-off, bankers' lien,
counterclaim or similar rights with respect to such participation as fully as if
such Lender or holder were a direct holder of Loans in the amount of such
participation and (3) the rights contained in this paragraph exist regardless of
whether the Loan to which they are applied has matured.
SECTION 7. REMEDIES ON DEFAULT, ETC.
7.1 If a Default or Event of Default occurs, Lender may withhold all
subsequent Advances and, in addition, may accelerate and declare to be
immediately due and payable all Loans and may proceed to protect and enforce its
rights by suit in equity, action at law or other appropriate proceedings,
whether for the specific performance of any agreement contained herein or in any
other Document, or for an injunction against a violation of any of the terms
hereof or thereof, or in aid of the exercise of any right, power or remedy
granted thereby or by law, equity or otherwise.
7.2 Upon the occurrence of a Default or Event of Default the Borrower
grants a royalty-free license to the Lender for all patents, service marks,
trademarks, tradenames, copyrights, computer programs and other intellectual
property rights sufficient to permit the Lender to exercise all rights granted
to the Lender pursuant to this Agreement.
SECTION 8. CUMULATIVE REMEDIES; NO WAIVERS, ETC.
No right, power or remedy granted to Lender in this Agreement or in the
other Documents is intended to be exclusive, but each shall be cumulative and in
addition to any other rights, powers or remedies referred to in this Agreement,
in the other Documents or otherwise available to Lender at law or in equity; and
the exercise or beginning of exercise by Lender of any one or more of such
rights, powers or remedies, shall not preclude the simultaneous or later
exercise by Lender of any or all of such other rights, powers or remedies. No
waiver by, nor any failure or delay on the part of Lender in any one or more
instances to insist upon strict performance or observance of one or more
covenants or conditions hereof, or of the other Documents shall in any way be,
or be construed to be, a waiver of such covenant in any other instance or to
prevent Lender's rights to later require the strict performance or observance of
such covenants or conditions, or otherwise prejudice Lender's rights, powers or
remedies.
SECTION 9. PARTIAL INVALIDITY; WAIVERS.
9.1 If any term or provision of this Agreement or any of the other
Documents or the application thereof to any Person or circumstance shall, to any
extent, be invalid or unenforceable by reason of any applicable law, the
remainder of this Agreement and the other Documents, or
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application of such term or provision to Persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement and the other Documents
shall be valid and be enforced to the fullest extent permitted by law. To the
full extent, however, that the provisions of any such applicable law may be
waived, they are hereby waived by Borrower to the end that this Agreement and
the other Documents shall be deemed to be valid and binding obligations
enforceable in accordance with their terms.
9.2 To the extent permitted by applicable law, Borrower and Guarantor
hereby waives protest, prior notice of protest, or dishonor, notice of payments
and non-payments, or of any default.
9.3 WITH RESPECT TO ANY CONTROVERSY, ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THE TRANSACTIONS DESCRIBED
HEREIN OR CONTEMPLATED HEREBY, INCLUDING, WITHOUT LIMITATION, IN CONNECTION WITH
THE LOANS AND/OR ANY OF THE OTHER DOCUMENTS BORROWER, GUARANTOR AND LENDER EACH
VOLUNTARILY AND KNOWINGLY WAIVES ANY RIGHT TO OR CLAIM FOR A TRIAL BY JURY.
9.4 BORROWER ACKNOWLEDGES THAT THE WITHIN AGREEMENT EVIDENCES A
COMMERCIAL TRANSACTION AND THAT IT COULD, UNDER CERTAIN CIRCUMSTANCES HAVE THE
RIGHT UNDER CHAPTER 903a, AS FROM TIME TO TIME AMENDED, OF THE CONNECTICUT
GENERAL STATUTES, SUBJECT TO CERTAIN LIMITATIONS, TO NOTICE OF AND HEARING ON
THE RIGHT OF THE LENDER TO OBTAIN A PREJUDGMENT REMEDY, SUCH AS ATTACHMENT,
GARNISHMENT AND/OR REPLEVIN, UPON COMMENCING ANY LITIGATION AGAINST BORROWER.
NOTWITHSTANDING, BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE, JUDICIAL HEARING
OR PRIOR COURT ORDER TO WHICH IT MIGHT OTHERWISE HAVE THE RIGHT UNDER SAID
CHAPTER 903a, AS FROM TIME TO TIME AMENDED, OR UNDER ANY OTHER STATE OR FEDERAL
STATUTE OR CONSTITUTION IN CONNECTION WITH THE OBTAINING BY THE LENDER OF ANY
PREJUDGMENT REMEDY BY REASON OF THIS COMMERCIAL REVOLVING CREDIT AND SECURITY
AGREEMENT, OR BY REASON OF BORROWER'S OBLIGATIONS OR ANY RENEWALS OR EXTENSIONS
OF THE SAME. BORROWER ALSO WAIVES ANY AND ALL OBJECTION WHICH IT MIGHT OTHERWISE
ASSERT, NOW OR IN THE FUTURE, TO THE EXERCISE OR USE BY LENDER OF ANY RIGHT OF
SETOFF, REPOSSESSION OR SELF HELP AS MAY PRESENTLY EXIST UNDER STATUTE OR COMMON
LAW.
9.5 BORROWER SPECIFICALLY WAIVES AND RELINQUISHES ANY CLAIM TO
INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES ARISING IN ANY WAY OUT OF AN ALLEGED
BREACH HEREOF BY LENDER AND AGREES THAT DAMAGES FOR WHICH LENDER MAY BE LIABLE,
IF ANY, SHALL BE LIMITED TO THOSE DIRECT DAMAGES PROVEN TO HAVE BEEN SUFFERED BY
BORROWER ARISING DIRECTLY FROM SUCH BREACH.
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SECTION 10. EXPENSES/INDEMNITY.
Borrower agrees that it shall:
10.1 pay or reimburse Lender on demand for any and all reasonable
charges, costs and taxes incurred in the preparation, documentation and
implementation of this Agreement, and all Documents, and any amendment thereto,
including, without limitation, all recording and filing fees, appraisal fees and
reasonable fees and disbursements of Lender's special counsel retained in
connection therewith, including payment upon the Closing hereof of any portion
of such charges, costs and fees for which an invoice shall be rendered;
10.2 indemnify and save Lender harmless from, and pay or reimburse
Lender for, all charges, costs, damages, liabilities and expenses, including
reasonable attorneys' fees, if any, incurred by Lender relating to:
(A) the Notes or any of the other Documents;
(B) the exercise by the Lender of any of its rights, remedies or
powers hereunder, the Notes or any of the other Documents;
(C) any misrepresentation, inaccuracy, or breach of any
representation, warranty, covenant, or agreement contained or referred to herein
or any other Document, the security interests and liens granted pursuant to this
Agreement or the other Documents;
(D) the performance of any obligation of Borrower or Guarantor in
connection herewith;
(E) the attempted enforcement or enforcement of this Agreement or
the other Documents, or the collection or attempted collection of any of the
obligations owing under any thereof, including, without limitation, the Loans,
or the realization or attempted realization of any right or remedy;
(F) the prosecution or defense of any action or proceeding
concerning any matter growing out of or connected with this Agreement or the
other Documents;
(G) any Hazardous Substance at, on, in, under, or about all or
any portion of any property owned, occupied and/or operated by the Borrower or
any environmental condition within, on, from, related to, or attaching to any
such property;
(H) any Release or threatened Release of any Hazardous Substance
from any property owned, occupied or operated by the Borrower or from the
Borrower's operations or other activities, including without limitation any
Release by any prior owner, occupant or operator of any such property;
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(I) any violation or claim of violation of any Environmental Law
by the Borrower or their operations or other activities;
(J) any other environmental condition or matter within, on, from
or related to or affecting any property owned, leased or operated by the
Borrowers or Borrowers' operations or other activities;
(K) any other operations or activities of the Borrowers or
conditions or occurrences on the Borrowers' properties
(all the foregoing under this paragraph collectively, the "Indemnified
Liabilities")
In addition, at Lender's discretion, Borrower shall defend (with
counsel satisfactory to the Lender) Lender against those Indemnified Liabilities
which the Lender shall choose Borrower to defend Lender against (provided, that,
it is understood and agreed that all reasonable costs and expenses of counsel
incurred by Lender in defending itself against any Indemnified Liability shall
be Indemnified Liabilities for which Borrower is responsible for payment under
this subparagraph). The agreements in this section shall survive any payment of
the Loans or any other amounts payable hereunder or under any other Document
and/or any termination of this Agreement or any Document. All amounts payable
under this Section shall be payable by the Borrower on demand by the Lender.
10.3 allow Lender, in Lender's discretion, after ten (10) days prior
written notice and Borrowers failure to pay the same, to receive payment of any
of the foregoing by a charge to the Revolving Credit (which charge shall
thereupon become a Loan) or by deduction from any account maintained by Borrower
or Guarantor with Lender.
SECTION 11. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND WARRANTIES, ETC.
All agreements, covenants, representations and warranties contained herein
or made in writing by or on behalf of Borrower, in connection with the
transactions contemplated hereby, shall survive the execution and delivery of
this Agreement and the related documents and, to the extent applicable, shall be
deemed to be made anew by each of them each time an Advance is made, pursuant
hereto or pursuant to the other Documents and shall continue until all Loans
have been paid in full and this Agreement has been terminated. All statements
contained in any certificate or other instrument delivered by or on behalf of
Borrower, pursuant hereto or in connection with the transactions contemplated
hereby, shall be deemed representations and warranties made hereunder.
SECTION 12. FAILURE TO PERFORM.
If Borrower fails to observe or perform any of the covenants hereof, Lender
may pay amounts or incur liabilities to remedy or attempt to remedy any such
failure (including, without limitation, any sums payable under any statute
relating to the environment) and all such payments made and liabilities incurred
shall be for the account of Borrower, may be paid, at Lender's option, by the
making of additional advances, including without limitation, Revolving
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Credit Advances, and, consequently, shall be included in the Loans and all such
amounts shall be repaid by Borrower on demand, together with interest thereon at
the rate of 18% per annum, or may be repaid by a withdrawal from any of
Borrower's accounts maintained with Lender. The provisions of this Section and
any such action by Lender shall not prevent any default in the observance or
performance of any covenant hereof from constituting an Event of Default
hereunder.
SECTION 13. NOTICES, ETC.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to be duly delivered if mailed, postage prepaid,
by first class registered mail, return receipt requested, or by any nationally
recognized receipted delivery or courier service:
(A) if to Lender:
BankBoston, N.A.
100 Pearl Street
Hartford, Connecticut 06103
Attention: Scott Barnett, Director
with a copy to:
Berman & Sable
195 Church Street
New Haven, Connecticut 06510
Attention: Steven A. Berman, Esq.
or at such other address as may have been furnished in writing by Lender to
Borrowers; or
(B) if to Borrower or Guarantor:
ACMAT Corporation
233 Main Street
New Britain, CT 06050
Attention: Henry Nozko, Jr.
or at such other address as may have been furnished in writing by Borrower to
Lender.
SECTION 14. AMENDMENTS AND WAIVERS. Neither this Agreement nor any other
Document nor any term hereof or thereof may be changed, waived, discharged or
terminated, except by a writing signed by all of the parties hereto.
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SECTION 15. GOVERNING LAW. This Agreement and the documents contemplated
hereby shall be construed and enforced in accordance with and governed by the
laws of the State of Connecticut. Borrower and Guarantor hereby specifically
consent(s) to the jurisdiction of the Courts of the State of Connecticut and
agree(s) to be personally bound by the decisions of the Court of the State of
Connecticut.
SECTION 16. SUPERCEDURE. To the extent there is any inconsistency between
the terms of this Agreement and any other Document, this Agreement shall
control.
SECTION 17. SUCCESSORS AND ASSIGNS. All of the terms of this Agreement and
such other documents shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto,
whether so expressed or not, and by any other holder or holders at the time of
any of the Loans or any part thereof.
SECTION 18. HEADINGS. The headings in this Agreement are for the purposes
of reference only and shall not limit or otherwise affect any of the terms
hereof.
SECTION 19. GENDER AND NUMBER; NO RULE OF STRICT CONSTRUCTION. Whenever the
context herein so requires, the neuter gender includes the masculine and
feminine, and the singular number includes the plural and vice-versa. Borrower
acknowledges that Borrower and Borrower's counsel have had an opportunity to
review and negotiate the terms of this agreement and the other Loan Documents
and that no rule of strict construction shall be used against the Lender with
respect to any of the Loan Documents.
SECTION 20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and by the several
parties hereto in separate counterparts, but all of which together shall
constitute one and the same instrument.
SECTION 21. THIRD PARTIES. This Agreement is between each Lender and
Borrower and Guarantor only and shall not be relied upon by any third party.
Without limiting the foregoing, Lender shall have no liability to any party
whatever (including, without limitation, Borrower or Guarantor, or anyone
conducting business with any of the foregoing) in the event Lender, for any
reason and at any time, determines not to make Advances for any reason or
otherwise exercises its rights under this Agreement and/or the other documents
contemplated hereby.
SECTION 22. TIME OF THE ESSENCE. Time is of the essence for the performance
by the Borrower of any of Borrower's obligations set forth in this Agreement.
SECTION 23. NO FIDUCIARY RELATIONSHIP. Borrower acknowledges that Lender
does not have a fiduciary relationship to the Borrower and the relationship
between Lender and Borrower is solely that of creditor and debtor.
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IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement
on the day first above mentioned.
BANKBOSTON, N.A.
By /s/ Scott Barnett
-----------------------------------
Scott Barnett
Its Director
ACMAT CORPORATION
By /s/ Henry Nozko Jr.
-----------------------------------
Its COO
ACSTAR HOLDINGS, INC.
By /s/ Henry Nozko Jr.
-----------------------------------
Its Pres.
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SCHEDULE OF EXHIBITS
Section
Reference Exhibit Subject
1.1(A) A Revolving Note
1.1(B) B Term Note
1.3 C Request for Advance
1.5(A) D Notice of Interest Rate Election
3.5 E Covenant Compliance Certificate
SCHEDULE OF SCHEDULES
2.3 Borrower Capitalization, Business and Subsidiaries
2.4 Guarantor Capitalization, Business and Subsidiaries
2.9 Title to Properties and Assets, Liens, etc.
2.10 Patents, Trademarks
2.11 Litigation
2.13 Tax Returns and Payments
2.18 Shareholder Agreements
2.25 Environmental
2.26 Subsidiaries
2.28 Special Representations and Warranties re insurance subsidiaries
2.30 Environmental
4.1 Restrictions on Liens
4.3 Restrictions on Investments, Loans, etc.
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APPENDIX I
As used herein, the following terms have the following meanings:
ADVANCE: an advance under the Revolving Credit.
ADJUSTED CASH FLOW: Cash Flow plus allowable dividends permitted to be paid
to Borrower by its Subsidiaries plus management and underwriting fees paid to
Borrower by its Subsidiaries plus rent paid to Borrower by its Subsidiaries plus
tax sharing payments paid to Borrower by its Subsidiaries (in all cases, not
requiring regulatory approval).
AFFILIATE: with reference to any Person, any director, officer or employee
of such Person, any corporation, association, firm or other entity in which such
Person has a direct or indirect controlling interest or by which such Person is
directly or indirectly controlled or is under direct or indirect common control
with such Person.
AGREEMENT: this Commercial Credit Agreement, as it may be amended from time
to time.
BASE RATE: an Index Lender uses to set interest rates on certain types of
loans and is not necessarily the lowest rate Lender charges its customers.
Lender's Base Rate is increased and decreased by Lender from time to time in
response to changes in conditions. Borrower's interest rate will be adjusted
automatically on each occasion on which the Lender's Base Rate changes.
BASE RATE ADVANCE: any Loan or portion thereof bearing interest at the Base
Rate.
BORROWER(S): the meaning specified on page one of this Agreement.
BUSINESS DAY: any day other than a Saturday, Sunday or legal holiday on
which commercial banks are open for the normal transaction of business in the
State of Connecticut and in the State of Massachusetts.
CASH FLOW: Borrower's unconsolidated net income for an accounting period
before provision for payment of Interest Expense and all income taxes plus
depreciation and amortization to the extent deducted from such net income during
such accounting period, all as determined by GAAP less capital expenditures less
income taxes paid in cash less dividends paid.
CONDITIONS PRECEDENT: the meaning specified in Section 1.2.
DEBT SERVICE: for any period, the sum of (i) Interest Expense, (ii)
Principal Amortization and (iii) scheduled payments by Borrower on its
capitalized leases.
DEFAULT: the occurrence of any event which with the giving of notice or
passage of time (other than stated grace periods), or both, might become an
Event of Default.
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DOCUMENTS: this Agreement, the Revolving Note, Term Note, the Guaranty, and
all other instruments heretofore, now or hereafter executed and delivered
pursuant to this Agreement or any of the aforesaid documents.
ENVIRONMENTAL LAWS: any and all applicable foreign, Federal, state and
local statutes, laws, regulations, rules, ordinances, orders, guidances,
policies or common law (whether now existing or hereafter enacted or
promulgated) pertaining to the environment, of any and all Federal, state or
local governments and governmental and quasi-governmental agencies, bureaus,
subdivisions, commissions or departments which may now or hereafter have
jurisdiction over Debtor and all applicable judicial and administrative and
regulatory decrees, judgments and orders, including common law rulings and
determinations, relating to injury to, or the protection of, real or personal
property or human health or the environment, including, without limitation, all
requirements pertaining to reporting, licensing, permitting, investigation,
remediation and removal of emissions, discharges, releases or threatened
releases of Hazardous Substances, chemicals substances, pollutants or
contaminants whether solid liquid or gaseous in nature, into the environmental
or relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of such Hazardous Substances, chemical
substances, pollutants or contaminants.
Without limiting the generality of the foregoing, the term "Environmental
Laws" shall encompass each of the following statutes, and regulations
promulgated thereunder, and amendments and successors to such statutes and
regulations, as may be enacted and promulgated from time to time: Federal
Occupational Safety and Health Act ("OSHA"); the Clean Air Act ("CAA"); the
Toxic Substances Control Act ("TSCA"); the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"); the Clean Water Act
("CWA"); the Resource Conservation and Recovery Act, as amended by the Hazardous
and Solid Waste Amendments of 1984 ("RCRA"); the Hazardous Materials
Transportation Act; and all applicable Environmental Laws of each state and
municipality in which Debtor conducts business or locates assets and all rules
and regulations thereunder and amendments thereto and all similar state and
local laws, rules and regulations.
ERISA: The Employee Retirement Income Security Act of 1974, as amended.
ERISA GROUP: the Borrower, any Subsidiary and all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with the Borrower or any Subsidiary, are
treated as a single employer under Section 414 of the Internal Revenue Code.
EUROCURRENCY RESERVE REQUIREMENT: for any day, as applied to any Loan
bearing interest in relation to the LIBOR Rate, the aggregate (without
duplication) of the rates (expressed as a decimal fraction) of the maximum
reserve percentages in effect on such day (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other Governmental Authority
having jurisdiction with respect thereto) dealing with reserve requirements
proscribed for eurocurrency funding (currently referred to as "Eurocurrency
liabilities" in Regulation D of such Board) and required to be maintained by a
member bank of such system.
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EVENT OF DEFAULT: the meaning specified in Section 5.
FISCAL QUARTER: the three (3) month periods ending each March, June,
September and December.
FISCAL YEAR: a twelve (12) month year ending on December 31.
FLEET AGREEMENTS: various documents evidencing present indebtedness of
Borrower to Fleet National Bank, all of which shall be fully discharged with the
proceeds of the Loans.
FUNDED DEBT: aggregate consolidated Indebtedness of Borrower for borrowed
money but excluding Indebtedness owing to the Sheetmetal Workers National
Pension Fund or any refinance of the same.
GAAP: generally accepted accounting principals and practices consistently
applied from accounting period to accounting period.
GOVERNMENTAL AUTHORITIES: any federal, state or local governmental
authority or any political subdivision of any of them and any court, agency,
department, commission, board, bureau or instrumentality of any of them which
now or hereafter has jurisdiction over the Borrower's business premises.
GUARANTOR: the meaning specified on Page 1.
GUARANTY: the meaning specified in Section 1.8.
HAZARDOUS SUBSTANCE: any chemical, compound, material, mixture or
substance: (i) the presence of which requires or may hereafter require
notification, investigation, monitoring or remediation under any Environmental
Law; (ii) which is or becomes defined as a "Hazardous Waste", "Hazardous
Material" or "Hazardous Substance" or "Toxic Substance" or "Pollutant" or
"Contaminant" under any present or future applicable Federal, state or local law
or under the rules and regulations adopted or promulgated pursuant thereto,
including, without limitation, the Environmental Laws; (iii) which is toxic,
explosive, corrosive, reactive, ignitable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by
any governmental authority, agency, department, commission, board, agency or
instrumentality of any foreign country, the United States, any state of the
United States, or any political division thereof to the extent any of the
foregoing has or had jurisdiction over Debtor; (iv) without limitation, which
contains gasoline, diesel fuel or other petroleum products, asbestos or
polychlorinated biphenyls ("PBCs"); or (v) any other chemical, material or
substance, exposure to, or disposal of, which is now or hereafter prohibited,
limited or regulated by any federal, state or local governmental body,
instrumentality or agency.
INDEBTEDNESS: as applied to a Person, (a) all items, except items of
capital stock or of surplus or of general contingency reserves or of reserves
for deferred income taxes if in compliance with
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Section 3.2, which in accordance with generally accepted accounting principles
and practices would be included in determining total liabilities as shown on the
liability side of a balance sheet of such person as at the date of which
indebtedness is to be determined, (b) all indebtedness secured by any mortgage,
pledge, lease, lien or conditional sale or other title retention agreement
existing on any property or asset owned or held by such person subject thereto,
whether or not such indebtedness shall have been assumed, and (c) all
indebtedness of others which such Person has directly or indirectly guaranteed,
endorsed, discounted or agreed (contingently or otherwise) to purchase or
repurchase or otherwise acquire, or in respect of which such Person has agreed
to supply or advance funds (whether by way of loan, stock purchase, capital
contribution or otherwise) or otherwise to become liable directly or indirectly
with respect thereto.
INTEREST EXPENSE: for any period, all amounts accrued by Borrower, whether
as interest, late charges, service fees or other charge for money borrowed on
account of or in connection with Borrower's indebtedness for money borrowed or
with respect to which Borrower or any of their respective properties are liable
by assumption, operation of law or otherwise, including, without limitation, any
leases which are required, in accordance with generally accepted accounting
principles, to be carried as a liability on Borrower's balance sheet.
INTEREST PERIOD: with respect to each LIBOR Advance, the period commencing
on the date of the making or continuation of, or conversion to, such LIBOR
Advance and ending one (1), two (2) or three (3) months thereafter, as Borrower
may elect in the applicable Notice of Interest Rate Election.
provided, however, that:
(i) any Interest Period (other than an Interest Period determined
pursuant to clause (iii) below) that would otherwise end on a day that is not a
Business Day shall be extended to the next succeeding Business Day unless such
Business Day falls in the next calendar month, in which case such Interest
Period shall end on the immediately preceding Business Day;
(ii) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall, subject to
clause (iii) below, end on the last Business Day of a calendar month;
(iii) any Interest Period that would otherwise end after the
Termination Date or the Maturity Date shall end on the Termination Date or the
Maturity Date as the case may be; and
(iv) notwithstanding clause (iii) above, no Interest Period shall have
a duration of less than one (1) month and if any Interest Period applicable to
such Loan would be for a shorter Interest Period, such Interest Period shall not
be available hereunder.
INSURANCE SUBSIDIARY: ACSTAR INSURANCE COMPANY and/or United Coastal
Insurance Company.
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LENDER: the meaning specified on page one of this Agreement.
LIBOR ADVANCES: Any Loan or part thereof bearing interest at a rate in
relation to the LIBOR.
LIBOR RATE: the rate per annum (rounded upward, if necessary, to the
nearest 1/16 of 1%), determined by Lender to be equal to the quotient of (x) the
London Interbank Offered Rate (hereinafter defined) for such LIBOR Advance for
such Interest Period, divided by (y) 1 - Eurocurrency Reserve Requirements for
such Interest Period.
Provided, however:
(i) If Borrower requests that all or any portion of the Loans with
respect to which a LIBOR option applies shall bear interest at the LIBOR Rate
and (a) Lender determines that, by reason of circumstances affecting the
interbank Eurodollar market generally, deposits in U.S. Dollars (in the
applicable amounts) are not being offered to banks in the interbank Eurodollar
market for the selected Interest Period, or (b) that the LIBOR Rate does not
accurately reflect the cost to Lender of making or maintaining LIBOR Advances
for the Interest Period or therefor, then Lender shall forthwith give notice
thereof to Borrower, whereupon, (1) the obligation of Lender to permit the LIBOR
Advances to bear interest at the LIBOR Rate shall be suspended so long as such
circumstances exist, and (2) Borrower shall convert the interest rates on the
applicable portions of the outstanding Advances to the rate in relation to the
Base Rate set forth above for the current Interest Period. Such suspension shall
continue until Lender notifies Borrower that the circumstances giving rise to
such suspension no longer exist.
(ii) If, after the date of this Agreement, the adoption of or any
change in rules, or change in the interpretation or administration thereof, by a
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency shall make it unlawful or
impossible for Lender to make or maintain or fund LIBOR Advances, the interest
rates on the applicable portions of the outstanding LIBOR Advances shall be
deemed to have been converted to the rate relating to the Base Rate set forth
above, on either (a) the last day of the then current Interest Period if Lender
may lawfully continue to maintain loans at the LIBOR Interest Rate to such day,
or (b) immediately if Lender may not lawfully continue to maintain Advances at
the LIBOR Interest Rate.
(iii) Upon notice to Borrower, the Borrower shall pay to the Lender
for the account of Lender, such amount or amounts as shall be sufficient (in the
reasonable opinion of Lender) to compensate it for any loss, cost, liability or
expense incurred as a result of (x) any repayment of a LIBOR Advance on a date
other than the last day of the Interest Period for such LIBOR Advance,
including, but not limited to that resulting from acceleration of all amounts
outstanding under any Loan following the occurrence of any Default or Event of
Default and/or (y) any failure by Borrower to borrow or convert or prepay, as
the case may be, a LIBOR Advance on the date for borrowing or conversion or
prepayment, as the case may be, which is specified in the Notice of Interest
Rate Election.
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LOANS: the meaning specified in Section 1.4.
LONDON BUSINESS DAY: any day other than a Saturday or Sunday on which
dealing in dollar deposits are carried on in the London interbank market and on
which banks are open for business in London and which must be a Business Day.
LONDON INTERBANK OFFERED RATE: the arithmetic average of the rates per
annum quoted at approximately 11:00 A.M. London time by the principal branch of
each of the Reference Banks (hereinafter defined) two (2) London Business Days
(hereinafter defined) prior to the first day of such Interest Period for the
offering to leading banks in the London interbank market of dollar deposits for
a period and in an amount comparable to the Interest Period and principal amount
of the particular LIBOR Advance to which the LIBOR Rate is to apply. "Reference
Banks" means banks appearing in the display designated as page "LIBOR" on the
Reuters' Monitor Money Rates Service (or such other page as may replace the
LIBOR page on that service for the purpose of displaying London Interbank
Offered Rates of major banks); provided that if no such offered rate shall
appear on such display, "Reference Banks" shall mean one or more major banks in
the London interbank market as selected by the Lender in its sole discretion.
MATURITY DATE: December 31, 2003.
NAIC: National Association of Insurance Commissioners.
NOTE(S): the Revolving Note and/or the Term Note.
NOTICE OF INTEREST RATE ELECTION: Whenever Borrower desires to elect,
change or continue the LIBOR Interest Rate on all or a portion of any
Advance(s), Borrower shall deliver to Lender a written Notice of Interest Rate
Election in form provided by Lender and substance as that attached hereto as
Exhibit D (the "Notice of Interest Rate Election") with respect to a Loan or
Advance received no later than 11:00 A.M. at least three (3) Business Days in
advance of the proposed date of election, change or continuation, which
election, change or continuation must be confirmed by telephone. The Notice of
Interest Rate Election shall be irrevocable and shall specify: (i) the proposed
date of change or continuation (which shall be a Business Day); (ii) the amount
with respect to which such election is being made; and (iii) the Interest
Periods.
If an Advance shall be outstanding for which Borrower has not elected a
LIBOR Rate or if at the termination of any Interest Period, Borrower fails to
submit a Notice of Interest Rate Election to convert or to continue any
outstanding Advance, then such Advance, regardless of the dollar amount, shall
automatically accrue interest in relation to the Base Rate as of the applicable
date.
LIBOR Advances may be converted into advances bearing interest relating to
the Base Rate only on the expiration date of an Interest Period applicable
thereto. In addition, no outstanding Advances may be continued as, or converted
into LIBOR Advances and no change in Interest Rate may be exercised when any
Default or Event of Default has occurred.
PBGC: The Pension Benefit Guaranty Corporation.
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PERSON: a corporation, an association, a partnership, an organization, a
limited liability company, a business, an individual or a government or
political subdivision thereof or any governmental agency.
PREPAYMENT PREMIUM: (i) on the prepayment date, the remaining payments of
principal and interest that would otherwise have become payable at the
expiration of the Interest Period pertaining to the principal being prepaid
shall be discounted to a present value at a rate per annum equal to the
"Prepayment Yield to Maturity", as hereinafter defined, plus any costs for
reserves or assessments or for reinvesting the amount being prepaid, and if such
discounted value shall exceed the unpaid principal amount being prepaid, then
the Prepayment Premium shall be an amount equal to such excess; otherwise no
Prepayment Premium shall be payable; (ii) the "Prepayment Yield to Maturity"
shall mean the yield to maturity of the debt obligation of the United States
Treasury (excluding those commonly known as "Flower Bonds") having a term
substantially equal to the term of the relevant Interest Period maturity date
nearest in expiration of the relevant Interest Period. The maturity date and
yield to maturity of such United States Treasury obligation shall be determined
by Lender on the basis of quotations appearing in the Reuter Monitor Money Rates
Service or other repository service reasonably satisfactory to Lender on the
prepayment date. If there shall be more than one such debt obligation of the
United States Treasury maturing nearest in time to the expiration of the
relevant Interest Period, the Prepayment Yield to Maturity shall be the
arithmetic average of the yields to maturity of all such obligations. Said
prepayment shall be irrevocable once Borrower has notified Lender of such
prepayment and Borrower will reimburse Lender for any and all loss, cost,
liability and expense incurred by Lender in the event Borrower for any reason
does not make such prepayment.
A determination by Lender as to the amounts payable pursuant to this
Subsection shall be conclusive absent arithmetical error.
PRINCIPAL AMORTIZATION: for any period all amounts which Borrower is
required to pay whether regularly scheduled or as a result of a default
excluding payments of principal under the Revolving Credit and whether or not
actually paid by Borrower in reduction of Borrower's Indebtedness including
without limitation payments on capitalized leases.
RELEASE: any release, emission, disposal, leaching or migration into the
environment (including, without limitation, the abandonment or disposal of any
barrels, containers, or other closed receptacles containing any Hazardous
Substances) or into or out of any property owned, occupied or used by Debtor.
REVENUE CODE: the meaning specified in Section 3.13(B).
REVOLVING CREDIT: the credit facility described in Section 1.1(A).
REVOLVING NOTE: the meaning specified in Section 1.1(A)
SPILL: the meaning specified in Section 3.9(A).
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STATUTORY CAPITAL: means Statutory Capital plus Statutory Surplus of the
Insurance Subsidiaries as shown on the statutory financial statements filed with
the states of Illinois and Arizona.
STATUTORY OPERATING EARNINGS: means the Statutory Operating Earnings of the
Insurance Subsidiaries as shown on the statutory financial statements filed with
the states of Illinois and Arizona.
SUBSIDIARY: with reference to any Person, a corporation, or similar
association or entity not less than a majority of the outstanding shares of the
class or classes of stock, having by the terms thereof ordinary voting power to
elect a majority of the directors, managers or trustees of such corporation,
association or entity, of which are at the time owned or controlled, directly or
indirectly, by such Person or by a Subsidiary of such Person.
TERM LOAN: the meaning specified in Section 1.1(B)
TERM NOTE: the meaning specified in Section 1.1(B)
TERMINATION DATE: December 31, 2000.
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EXHIBIT 4(e)
REVOLVING CREDIT NOTE
$10,000,000.00 Hartford, Connecticut
December 9th, 1998
FOR VALUE RECEIVED, ACMAT Corporation, a Connecticut corporation with a
place of business in New Britain, Connecticut ("Maker") promises to pay to the
order of BankBoston, N.A., a national banking association having a place of
business in Hartford, Connecticut ("Payee"), or other holder of this Note, the
principal sum of TEN MILLION ($10,000,000.00) DOLLARS, or so much thereof as
shall from time to time be advanced by the Payee to the Maker and remain
outstanding, as conclusively evidenced by the books and records of Payee,
together with interest on the outstanding balance hereof before and after
maturity, at the rate hereinafter set forth until this Note shall have been
fully paid, all as hereinafter provided. Advances hereunder may be repaid by
Maker and readvanced by Payee from time to time.
Interest Rate. The from time to time outstanding balance hereof shall
bear interest at a rate per annum (the "Rate") which is at all times equal to
the Base Rate. The Base Rate is an index Payee uses to set interest rates on
certain types of loans and is not necessarily the lowest rate Payee charges to
its customers. Payee's Base Rate is increased and decreased from time to time
in response to changes in conditions. The Rate will be adjusted automatically
on each occasion on which the Payee's Base Rate changes.
LIBOR Option. At any time after the date hereof, provided no default
hereunder shall have occurred, the Maker may elect, pursuant to a Notice of
Interest Rate Election (as defined in the Agreement hereinafter referenced) to
have amounts outstanding hereunder bear interest at a rate per annum equal to
one and six tenths (1.6) percentage points per annum in excess of the LIBOR
Rate (as defined in the Agreement) for the Interest Period (as defined in the
Agreement) elected by Maker. No election may be made for a period that extends
beyond the maturity date of this Note.
Amounts outstanding hereunder shall bear interest at the Base Rate unless
otherwise so elected by Maker.
Payments. Commencing on January 1, 1999, and on the same day of each and
every month thereafter, Maker shall make payments of interest only, in arrears,
on the unpaid balance hereof at the Rate(s) aforesaid applicable during such
prior month, calculated based on a year of three hundred sixty (360) days but
for the actual number of days elapsed.
Maturity Date. The final maturity date of this Note shall be December 31,
2000, on which date the entire indebtedness evidenced by this Note, including
without limitation, the unpaid principal balance and unpaid interest accrued
thereon, shall be due and payable without notice or
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demand. The maturity of this Note shall in no way be affected or altered as a
result of any increase or decrease in the Rate.
Prepayment. The Maker may prepay amounts outstanding under this Note
accruing interest at the Base Rate in whole or in part without prepayment
penalty or premium. Amounts outstanding hereunder accruing interest in relation
to the LIBOR Rate may only be prepaid if such prepayment is accompanied by the
Prepayment Premium as more particularly set forth in the Agreement.
Late Payments. In the event that any payment of principal or interest due
hereunder is not received by Payee within five (5) days after the same is due,
then the Maker agrees to pay to the Payee the additional sum of five (5%)
percent of the amount of such late payment to cover the additional expense of
Payee's handling of such late payment (but not as consideration for making such
late payment). Maker and Payee hereby agree that an exact computation of
Payee's damages relating to such late payment is impossible to ascertain, and
further agree that the percentage stated above is a reasonable estimation of
Payee's damages. Such estimation is based upon, inter alia, Payee's additional
expenses relating to (i) sending late notices, (ii) referring the matter to
Payee's collection department and (iii) providing for any necessary regulatory
compliance and reserve requirements.
Application of Payments. All payments hereon shall be applied to expenses
as provided herein, interest and principal in such order as Payee shall, in its
discretion, determine. Said sums shall be payable together with all lawful
taxes and assessments levied thereon, or upon this Note, or upon the Payee with
respect to the same, and together with all costs and expenses related to
collecting this Note and together with all costs and expenses of foreclosing or
protecting or sustaining the lien of any security which may be given to secure
the payment of this Note, and/or in any litigation or controversy arising from
or connected with this Note and/or any collateral securing this Note and/or the
Agreement hereinafter referred to and/or incurred in any action brought by the
holder of a prior lien in which the Payee is a party defendant, including
without limitation reasonable attorneys' fees. Said obligation to pay the
reasonable attorneys' fees of the Payee in connection with protecting,
enforcing or realizing of the rights and remedies above described shall exist
whether or not proceedings are instituted or court appearance is made on behalf
of the Payee.
Set Off. Upon the occurrence of an Event of Default the Payee shall have
and may exercise a right of set-off for the payment of this Note and the
aforesaid costs and expenses against, and Maker hereby gives and grants to
Payee a security interest (perfected by Payee's possession thereof) in, all
deposits, monies, securities and property left with the Payee and/or any
affiliate of the Payee by the Maker or by any guarantor, endorser or otherwise
to the credit of or belonging to the Maker or any such party, and the Payee
shall have full power and authority at any time and without prior notice to
sell, assign and deliver any such property at public or private sale, and apply
the proceeds in satisfaction hereof.
Commercial Credit Agreement. This Note is issued under and pursuant to
the terms of a Commercial Credit Agreement of even date (the "Agreement") by
and among the Maker, the Payee and ACSTAR Holdings, Inc., a Delaware
corporation, as Guarantor, which Agreement is in the possession of the Payee.
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Guarantee. Additionally, payment of this Note is guaranteed pursuant
to Guaranty Agreement of even date executed and delivered by ACSTAR Holdings,
Inc.
Default. Upon the occurrence of any Event of Default, as such term is
defined in the Agreement or if any payment specified herein shall remain in
arrears and unpaid for a period of ten (10) days after the same shall become
due, at the option of Payee, (i) the interest rate accruing hereunder shall,
from such default, be increased by three (3%) percentage points per annum above
the Base Rate (the "Default Rate"), such Default Rate to change when and as
said Base Rate changes, and (ii) this Note shall become forthwith due and
payable without presentment, demand, protest or notice of any kind, all of
which being hereby expressly waived by the undersigned. Without in any way
limiting the generality of the foregoing the interest rate accruing hereunder
shall be the Default Rate (i) upon the option of Payee and (ii) only during the
period when Payee is not also collecting a late payment charge hereunder. Maker
and Payee hereby agree that any Event of Default or default in any payments of
principal or interest hereunder results in, inter alia, additional
administrative costs, regulatory costs, reserve requirements, and credit costs
to Payee. Maker and Payee further agree that such Default Rate approximates the
interest rate Payee might charge to borrowers with sub-standard credit. In the
event the Default Rate exceeds the maximum rate of interest allowed by law, the
Default Rate shall be reduced so as to equal the maximum rate of interest
allowed by law.
Reimbursement for Costs. If the Payee shall deem applicable to this
Note (including, in each case, the borrowed and the unused portion thereof, if
any) any requirement of any law of the United States of America, any
regulation, order, interpretation, ruling, official directive or guideline
(whether or not having the force of law) of the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency, the Federal Deposit
Insurance Corporation or any other board or governmental or administrative
agency of the United States of America which shall impose, increase, modify or
make applicable to this Note or cause this Note to be included in, any reserve,
special deposit, calculation used in the computation of regulatory capital
standards, assessment or other requirement which imposes on the Payee any cost
that is attributable to the maintenance thereof, then, and in each such event,
the Maker shall promptly pay the Payee, upon its demand, such amount as will
compensate the Payee for any such cost. In the event any such cost is a
continuing cost, a fee payable to the Payee may be imposed upon the Maker
periodically for so long as any such cost is deemed applicable by the Payee, in
an amount determined by the Payee to be necessary to compensate the Payee for
any such cost, which determination may be based upon the Payee's reasonable
allocation of the aggregate of such costs resulting from such events. The
determination by the Payee of the existence and amount of any such costs shall,
in the absence of manifest error, be conclusive.
Successors and Assigns. This Note shall bind the Maker and the Maker's
successors and assigns and all endorsers hereto and shall inure to the benefit
of Payee and/or any subsequent holder of this Note and/or their respective
successors and assigns.
Partial Invalidity. In the event that any one or more of the
provisions of this Note shall for any reason be held to be invalid, illegal or
unenforceable, in whole or in part, or in any respect, or
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in the event that any one or more of the provisions of this Note shall operate,
or would prospectively operate, to invalidate this Note, then, and in such
event, such provision or provisions only shall be deemed to be null and void and
of no force nor effect and shall not affect any other provision of this Note,
and the remaining provisions of this Note shall remain in full force and effect,
shall be valid, legal and enforceable, and shall in no way be affected,
prejudiced or disturbed thereby.
JOINT AND SEVERAL. The obligations of the Maker and of each and every
endorser, guarantor, and surety shall be joint and several.
MAKER ACKNOWLEDGES THAT THIS NOTE EVIDENCES A COMMERCIAL TRANSACTION AS
THAT TERM IS DEFINED IN CONNECTICUT GENERAL STATUTES SECTION 52-278a(a) AND
PURSUANT TO CONNECTICUT GENERAL STATUTES SECTIONS 52-278b AND 52-278f, MAKER
DOES HEREBY WAIVE ITS RIGHTS TO NOTICE AND HEARING PRIOR TO THE ISSUANCE BY THE
PAYEE OF ANY PREJUDGMENT REMEDY, AND MAKER FURTHER WAIVES ANY RIGHTS AS MAY
EXIST UNDER FEDERAL LAW TO ANY NOTICE AND/OR HEARING PRIOR TO THE PAYEE'S
OBTAINING AND EXERCISING ANY PREJUDGMENT REMEDY.
ADDITIONALLY, MAKER AND PAYEE HEREBY EACH WAIVES THE RIGHT TO TRIAL BY JURY
IN ANY ACTION, DEFENSE, COUNTERCLAIM, CROSSCLAIM AND/OR ANY FORM OF PROCEEDING
BROUGHT IN CONNECTION WITH THIS NOTE OR RELATING TO ANY INDEBTEDNESS EVIDENCED
HEREBY AND/OR ANY COLLATERAL NOW OR HEREAFTER SECURING THIS NOTE.
THIS NOTE HAS BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF CONNECTICUT
AND SHALL BE CONSTRUED AND ENFORCED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CONNECTICUT.
The Maker hereby expressly waives to the full extent and for the maximum
period permitted by applicable law, the right to plead any statute of
limitations or any similar bar as a defense to any demand, claim or cause of
action based upon or arising from such failure to pay any part of the principal
of this Note or any interest thereon, which waiver as to each such failure shall
be separate and distinct from any such waivers or to each other such failure.
The waivers of notice and hearing for prejudgment remedies made herein are made
by the Maker on behalf of the Maker and the Maker's successors and assigns and
shall apply to any and all actions against such successors and assigns.
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The Maker hereby waives presentment, demand, protest, notice of protest or
other notice of dishonor of any kind in any action to collect this Note or
relating to any collateral securing this Note.
ACMAT CORPORATION
By /s/ Henry Nozko Jr.
-----------------------------
Its COO
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EXHIBIT 4(f)
TERM NOTE
$5,000,000.00 Hartford, Connecticut
December 9th, 1998
FOR VALUE RECEIVED, ACMAT CORPORATION, a Connecticut corporation with a
place of business in New Britain, Connecticut ("Maker"), promises to pay to the
order of BANKBOSTON, N.A., a national banking association having a place of
business in Hartford, Connecticut ("Payee") or other holder of this Note the
principal sum of FIVE MILLION ($5,000,000.00) DOLLARS, together with interest on
the outstanding balance hereof before and after maturity, at the rate
hereinafter set forth until this Note shall have been fully paid, all as
hereinafter provided.
INTEREST RATE. The from time to time outstanding balance hereof shall bear
interest at the rate of seven and one quarter (7 1/4%) percent per annum (the
"Rate").
Amounts outstanding hereunder shall bear interest at the Base Rate unless
otherwise so elected by Maker.
PAYMENTS. Commencing on March 1, 1999, and on the first day of each March,
June, September and December thereafter, Maker shall make payments of principal,
each in the amount of $250,000.00, each to be accompanied by a payment of
interest in arrears on the unpaid balance at the Rate(s) aforesaid applicable
during the prior three month period, calculated on the basis of a year of three
hundred and sixty (360) days but for the actual number of days elapsed.
MATURITY DATE. The final maturity date of this Note shall be December 31,
2003, on which date the entire indebtedness evidenced by this Note, including
without limitation, the unpaid principal balance and unpaid interest accrued
thereon, shall be due and payable without notice of demand. The maturity date of
this Note shall in no way be affected or altered as a result of any increase or
decrease in the Rate.
PREPAYMENT. Amounts outstanding hereunder may only be prepaid if such
prepayment is accompanied by the Prepayment Premium as more particularly set
forth in the Agreement.
LATE PAYMENTS. In the event that any payment of principal or interest due
hereunder is not received by Payee within five (5) days after the same is due,
then the Maker agrees to pay to the Payee the additional sum of five (5%)
percent of the amount of such late payment to cover the additional expense of
Payee's handling of such late payment (but not as consideration for making such
late payment). Maker and Payee hereby agree that an exact computation of Payee's
damages relating to such late payment is impossible to ascertain, and further
agree that the percentage stated above is a reasonable estimation of Payee's
damages. Such estimation is based upon, inter alia.
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Payee's additional expenses relating to (i) sending late notices, (ii) referring
the matter to Payee's collection department and (iii) providing for any
necessary regulatory compliance and reserve requirements.
Application of Payments. All payments hereon shall be applied to expenses
as provided herein, interest and principal in such order as Payee shall, in its
discretion, determine. Said sums shall be payable together will all lawful taxes
and assessments levied thereon, or upon this Note, or upon the Payee with
respect to the same, and together with all costs and expenses related to
collecting this Note and together with all costs and expenses of foreclosing or
protecting or sustaining the lien of any security which may be given to secure
the payment of this Note, and/or in any litigation or controversy arising from
or connected with this Note and/or any collateral securing this Note and/or the
Agreement hereinafter referred to and/or incurred in any action brought by the
holder of a prior lien in which the Payee is a party defendant, including
without limitation reasonable attorneys' fees. Said obligation to pay the
reasonable attorneys' fees of the Payee in connection with protecting, enforcing
or realizing of the rights and remedies above described shall exist whether or
not proceedings are instituted or court appearance is made on behalf of the
Payee.
Set Off. Upon the occurrence of an Event of Default the Payee shall have
and may exercise a right of set-off for the payment of this Note and the
aforesaid costs and expenses against, and Maker hereby gives and grants to Payee
a security interest (perfected by Payee's possession thereof) in, all deposits,
monies, securities and property left with the Payee and/or any affiliate of the
Payee by the Maker or by any guarantor, endorser or otherwise to the credit of
or belonging to the Maker or any such party, and the Payee shall have full power
and authority at any time and without prior notice to sell, assign and deliver
any such property at public or private sale, and apply the proceeds in
satisfaction hereof.
Commercial Credit Agreement. This Note is issued under and pursuant to the
terms of a Commercial Credit Agreement of even date (the "Agreement") by and
among the Maker, the Payee and ACSTAR Holdings, Inc., a Delaware corporation, as
Guarantor, which Agreement is in the possession of the Payee.
Guarantee. Additionally, payment of this Note is guaranteed pursuant to a
Guaranty Agreement of even date executed and delivered by ACSTAR Holdings, Inc.
Default. Upon the occurrence of any Event of Default, as such term is
defined in the Agreement or if any payment specified herein shall remain in
arrears and unpaid for a period of ten (10) days after the same shall become
due, at the option of Payee, (i) the interest rate accruing hereunder shall,
from such default, be increased by three (3) percentage points per annum above
the Base Rate (the "Default Rate"), such Default Rate to change when and as said
Base Rate changes, and (ii) this Note shall become forthwith due and payable
without presentment, demand, protest or notice of any kind, all of which being
hereby expressly waived by the undersigned. Without in any way limiting the
generality of the foregoing the interest rate accruing hereunder shall be the
Default Rate (i) upon the option of Payee and (ii) only during the period when
Payee is not also collecting a late payment charge hereunder. Maker and Payee
hereby agree that any Event of Default or default in any payments of principal
or interest hereunder results in, inter alia, additional administrative
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<PAGE> 3
costs, regulatory costs, reserve requirements, and credit costs to Payee. Maker
and Payee further agree that such Default Rate approximates the interest rate
Payee might charge to borrowers with sub-standard credit. In the event the
Default Rate exceeds the maximum rate of interest allowed by law, the Default
Rate shall be reduced so as to equal the maximum rate of interest allowed by
law.
Reimbursement for Costs. If the Payee shall deem applicable to this Note
(including, in each case, the borrowed and the unused portion thereof, if any)
any requirement of any law of the United States of America, any regulation,
order, interpretation, ruling, official directive or guideline (whether or not
having the force of law) of the Board of Governors of the Federal Reserve
System, the Comptroller of the Currency, the Federal Deposit Insurance
Corporation or any other board or governmental or administrative agency of the
United States of America which shall impose, increase, modify or make applicable
to this Note or cause this Note to be included in, any reserve, special deposit,
calculation used in the computation of regulatory capital standards, assessment
or other requirement which imposes on the Payee any cost that is attributable to
the maintenance thereof, then, and in each such event, the Maker shall promptly
pay the Payee, upon its demand, such amount as will compensate the Payee for any
such cost. In the event any such cost is a continuing cost, a fee payable to the
Payee may be imposed upon the Maker periodically for so long as any such cost is
deemed applicable by the Payee, in an amount determined by the Payee to be
necessary to compensate the Payee for any such cost, which determination may be
based upon the Payee's reasonable allocation of the aggregate of such costs
resulting from such events. The determination by the Payee of the existence and
amount of any such costs shall, in the absence of manifest error, be conclusive.
Successors and Assigns. This Note shall bind the Maker's and the Maker's
successors and assigns and all endorsers hereto and shall inure to the benefit
of Payee and/or any subsequent holder of this Note and/or their respective
successors and assigns.
Partial Invalidity. In the event that any one or more of the provisions of
this Note shall for any reason be held to be invalid, illegal or unenforceable,
in whole or in part, or in any respect, or in the event that any one or more of
the provisions of this Note shall operate, or would prospectively operate, to
invalidate this Note, then, and in such event, such provision or provisions only
shall be deemed to be null and void and of no force nor effect and shall not
affect any other provision of this Note, and the remaining provisions of this
Note shall remain in full force and effect, shall be valid, legal and
enforceable, and shall in no way be affected, prejudiced or disturbed thereby.
Joint and Several. The obligations of the Maker and of each and every
endorser, guarantor, and surety shall be joint and several.
Headings. The headings used herein are for the purpose of reference only
and shall not affect any of the terms hereof.
MAKER ACKNOWLEDGES THAT THIS NOTE EVIDENCES A COMMERCIAL TRANSACTION AS
THAT TERM IS DEFINED IN CONNECTICUT GENERAL STATUTES SECTION 52-278a(a) AND
PURSUANT TO CONNECTICUT GENERAL STATUTES
3
<PAGE> 4
SECTIONS 52-278b AND 52-278f, MAKER DOES HEREBY WAIVE ITS RIGHTS TO NOTICE AND
HEARING PRIOR TO THE ISSUANCE BY THE PAYEE OF ANY PREJUDGMENT REMEDY, AND MAKER
FURTHER WAIVES ANY RIGHTS AS MAY EXIST UNDER FEDERAL LAW TO ANY NOTICE AND/OR
HEARING PRIOR TO THE PAYEE'S OBTAINING AND EXERCISING ANY PREJUDGMENT REMEDY.
ADDITIONALLY, MAKER AND PAYEE HEREBY EACH WAIVES THE RIGHT TO TRIAL BY JURY
IN ANY ACTION, DEFENSE, COUNTERCLAIM, CROSSCLAIM AND/OR ANY FORM OF PROCEEDING
BROUGHT IN CONNECTION WITH THIS NOTE OR RELATING TO ANY INDEBTEDNESS EVIDENCED
HEREBY AND/OR ANY COLLATERAL NOW OR HEREAFTER SECURING THIS NOTE.
THIS NOTE HAS BEEN MADE, EXECUTED AN DELIVERED IN THE STATE OF CONNECTICUT
AND SHALL BE CONSTRUED AND ENFORCED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CONNECTICUT.
The Maker hereby expressly waives to the full extent and for the maximum
period permitted by applicable law, the right to plead any statute of
limitations or any similar bar as a defense to any demand, claim or cause of
action based upon or arising from such failure to pay any part of the principal
of this Note or any interest thereon, which waiver as to each such failure shall
be separate and distinct from any such waivers or to each other such failure.
The waivers of notice and hearing for prejudgment remedies made herein are made
by the Maker on behalf of the Maker and the Maker's successors and assigns and
shall apply to any and all actions against such successors and assigns.
4
<PAGE> 5
The Maker hereby waives presentment, demand, protest, notice of protest or
other notice or notice of dishonor of any kind in any action to collect this
Note or relating to any collateral securing this Note.
ACMAT CORPORATION
By /s/ Henry Nozko Jr.
-----------------------------
Its COO
5
<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
58
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,306,232
<SECURITIES> 113,892,112
<RECEIVABLES> 3,995,244
<ALLOWANCES> (257,617)
<INVENTORY> 0
<CURRENT-ASSETS> 125,616,572
<PP&E> 17,544,830
<DEPRECIATION> (4,650,639)
<TOTAL-ASSETS> 146,126,465
<CURRENT-LIABILITIES> 71,303,539
<BONDS> 37,200,000
0
0
<COMMON> 3,052,896
<OTHER-SE> 34,570,030
<TOTAL-LIABILITY-AND-EQUITY> 146,126,465
<SALES> 23,102,587
<TOTAL-REVENUES> 28,752,273
<CGS> 15,935,464
<TOTAL-COSTS> 15,935,464
<OTHER-EXPENSES> 5,355,183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,621,401
<INCOME-PRETAX> 2,840,225
<INCOME-TAX> 719,696
<INCOME-CONTINUING> 2,120,529
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,120,529
<EPS-PRIMARY> .66
<EPS-DILUTED> .65
</TABLE>
