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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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
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(Exact name of registrant as specified in its charter)
Connecticut 06-0682460
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(State of incorporation) (I.R.S. Employer Identification No.)
233 Main Street
New Britain, Connecticut 06050-2350
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(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 15, 2001 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $15,980,458.
As of March 15, 2001 there were 557,589 shares of the registrant's Common Stock
and 1,952,254 shares of registrant's Class A Stock, each without par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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PART I
Item 1. Business 3
General 3
Financial Information about Operating Segments 3
United Coastal 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
Regulation 11
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
Regulatory Environment 19
Item 7a. Quantatative and Qualitative Discussions about Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers of the Registrant 48
Item 11. Executive Compensation 51
Item 12. Security Ownership of Certain Beneficial Owners and Management 53
Item 13. Certain Relationships and Related Transactions 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 54
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PART I
ITEM 1. BUSINESS
General
ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial
insurance and bonding coverage 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").
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 15 to the consolidated financial statements on page 39 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 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.
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
The liability insurance lines of the Company, which consist primarily of
contractor policies and professional liability policies, are discussed more
fully below:
Contractors
- General Liability - Policies are offered to general contractors and
specialty trade contractors involved in plumbing, heating, electrical,
framing, roofing, drilling, excavation, demolition, road work, and other
contracting activities. Coverage is also offered for other specialized
non-contractor general liability risks. Coverage is limited to third-party
bodily injury and property damage arising out of covered operations.
General liability insurance is offered on either a claims-made or
occurrence basis.
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- Contractor Pollution Liability - Policies are offered to contractors
involved in hazardous waste remediation or cleanup, installation or
removal of storage tanks, or the transportation of hazardous waste.
Coverage is provided for third party-bodily injury or property damage
liability caused by release of, or exposure to, pollutants as a result of
contractors' operations. 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 claims.
The Company provides the following types of bonds:
- Payment and performance bonds - Bonds are provided for general building
and specialty trade contractors, environmental remediation and asbestos
abatement contractors and consultants, lead abatement contractors and
solid waste disposal contractors. A payment and performance bond
guarantees satisfactory performance and completion of the contractor's
work and payment of the contractor's debts and obligations relating to the
performance of the contract covered by the bond.
- Closure and post-closure bonds - Bonds are provided for owners of solid
and hazardous waste landfills as required to meet certain requirements
under RCRA and remediation bonds in connection with the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA").
Closure bonds usually guarantee that a property owner will restore
property to a specified level or condition. Post-closure bonds guarantee
cultivation and maintenance of a closed site.
- Supply and other specialty bonds - Bonds are provided for contractors,
manufacturers and other owners in their normal course of operations,
usually to guaranty the supply of equipment and material.
- Miscellaneous surety, license, permit, self insurer, supersedeas and other
bonds - Miscellaneous bonds are provided for applicants based on those
requirements specified in the bond form and the applicant's financial
strength.
The underwriting department and management are responsible for the development
of new insurance products and enhancements. Underwriting profitability is
enhanced by the creation of niche products focused on classes of business which
traditionally have provided underwriting profits.
Insurance and Bonding Performance Ratios
The following table sets forth the combined ratios of the Company, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense.
Year
Ended December 31,
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2000 1999 1998
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GAAP Ratios:
Loss ratio 16.4% 17.6% 19.6%
Expense ratio 58.9 56.6 51.8
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GAAP combined ratio 75.3 74.2 71.4
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Statutory Ratios:
Loss ratio 16.4 17.6 19.9
Expense ratio 63.6 63.3 59.2
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Statutory combined ratio 80.0% 80.9% 79.1%
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The increase in the combined GAAP ratio over the past three years results
primarily from the decline in written premiums partially 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."
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Underwriting
The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over fifty 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. 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.
Effective May 1, 2000, the Company cedes significantly more of its bond exposure
than under its previous reinsurance treaties. Such reinsurance is applicable on
a per principal basis for losses in excess of $1,000,000 up to $13,000,000.
Prior to May 1, 2000, reinsurance was applicable to losses in excess of
$2,000,000 on a per bond basis with the Company retaining approximately
$5,000,000 of losses up to $13,000,000.
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,
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
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31, 2000 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.
2000 1999 1998
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Balance at January 1 $ 38,544,491 $ 43,115,062 $ 48,900,713
Less reinsurance recoverable 3,924,064 2,224,116 3,478,121
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Net balance at January 1 34,620,427 40,890,946 45,422,592
Incurred related to:
Current year 2,441,000 3,091,120 4,508,667
Prior years (934,092) (1,418,233) (2,321,939)
------------ ------------ ------------
Total incurred 1,506,908 1,672,887 2,186,728
Payments related to:
Current year 791,546 81,569 18,260
Prior years 8,605,571 7,861,837 6,700,114
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Total Payments 9,397,117 7,943,406 6,718,374
Net balance at December 31 26,730,218 34,620,427 40,890,946
Plus reinsurance recoverable 2,580,388 3,924,064 2,224,116
------------ ------------ ------------
Balance at December 31 $ 29,310,606 $ 38,544,491 $ 43,115,062
============ ============ ============
The decrease of incurred losses and loss adjustment expenses of prior years
represents a release of surety loss reserves on older years that are no longer
needed and a reallocation of reserves among accident years. Management believes
that the reserves for losses and loss adjustment expense 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.
As of December 31, 2000, 1999 and 1998 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 $29,375,218,
$40,715,475 and $49,758,263, respectively. As of December 31, 2000, 1999 and
1998 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $29,310,606, $38,544,491 and
$43,115,062, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves result from the minimum statutory, or "Schedule P",
loss reserves required to be maintained by the Company's insurance subsidiaries,
partially offset by the netting of reinsurance recoverable against losses and
loss adjustment expense reserves for statutory purposes.
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.
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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.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(thousands)
Liability for unpaid
losses and loss
adjustment expenses 21,378 26,234 29,240 30,437 36,726 41,363 44,119 45,423 40,891 34,620 26,730
Liability reestimated
as of:
One year later 21,378 26,234 29,240 30,437 35,825 40,193 43,282 43,106 37,816 33,503
Two years later 21,378 26,234 29,240 28,337 34,659 37,872 40,865 35,698 36,741
Three years later 21,378 26,234 26,000 27,170 29,913 35,354 33,359 33,735
Four years later 21,378 22,094 24,833 23,550 27,193 28,149 30,999
Five years later 16,642 20,927 22,284 20,880 19,486 25,057
Six years later 15,475 18,841 19,914 13,673 16,254
Seven years later 13,394 16,932 13,148 11,915
Eight years later 12,845 11,761 11,163
Nine years later 10,138 10,412
Ten years later 9,588
Cumulative Redundancy
(deficiency): 11,790 15,822 18,077 18,522 20,472 16,306 13,122 11,688 4,152 1,125
Paid (cumulative)
as of:
One year later 1,357 3,216 6,142 1,560 2,361 3,067 2,942 6,703 7,903 8,610
Two years later 4,067 8,699 7,574 3,655 4,582 5,256 8,951 13,928 14,843
Three years later 8,954 9,576 8,603 5,022 6,412 8,922 16,047 16,655
Four years later 10,233 10,488 9,554 6,189 7,969 15,601 18,597
Five years later 10,554 10,816 9,818 6,869 12,425 17,564
Six years later 10,858 10,856 10,034 9,723 13,094
Seven years later 10,874 10,949 10,761 10,296
Eight years later 10,874 11,445 10,787
Nine years later 10,884 11,449
Ten years later 10,888
Gross liability -
end of year 34,730 40,955 45,235 47,960 48,901 43,115 38,544 29,311
Reinsurance recoverable 4,293 4,229 3,872 3,841 3,478 2,224 3,924 2,581
------ ------ ------ ------ ------ ------ ------ ------
Net liability - end of year 30,437 36,726 41,363 44,119 45,423 40,891 34,620 26,730
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, 2000, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value".
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 2000 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, 2000 was 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, 2000 and 1999:
December 31, 2000 December 31, 1999
----------------- -----------------
Total Number of Contracts. 20 13
Total unbilled contract amounts. $16,800,000 $10,100,000
Number of contracts with unbilled
amounts in excess of $400,000. 3 4
Aggregate unbilled amount of
contracts in excess of $400,000. $15,900,000 $ 9,800,000
The Company estimates that all of the December 31, 2000 backlog will be
completed prior to December 31, 2001.
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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.
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 non-admitted insurer
in forty-six states, the District of Columbia, Puerto Rico and the Virgin
Islands.
ACSTAR Insurance offers payment and performance bonds through carefully selected
insurance agents which specialize in the needs of contractors. All underwriting
approvals and issuance of policies and bonds are performed directly by the
Company's insurance subsidiaries.
The Company's insurance products are marketed in all 50 states.
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
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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.
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, 2000, the Company's insurance subsidiaries had securities with an aggregate
book value of approximately $10 million on deposit with various state regulatory
authorities.
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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 2000, United
Coastal Insurance paid $8,000,000 in dividends. At January 1, 2001,
approximately $2,350,000 is available for the payment of dividends by United
Coastal Insurance in 2001 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 2000, ACSTAR paid
$2,500,000 in dividends to ACSTAR Holdings. At January 1, 2001, approximately
$4,550,000 is available for the payment of dividends by ACSTAR Insurance in 2001
without the prior approval of the Illinois Insurance Department.
New regulations and legislation are being proposed to limit damage awards, to
control plaintiffs' counsel fees, to bring the industry under regulation by the
federal government and to control premiums, policy terminations and other policy
terms. It is not possible to predict whether these proposals will be adopted or
their likely effect, if any, on the Company.
INVESTMENTS
The Company's investment strategy is to maintain a conservative investment
policy by generally acquiring high quality securities, primarily bonds, with
fixed effective maturities of approximately three years or less. The investment
portfolio is well diversified and is in compliance with regulatory requirements.
The Company's bond portfolio is composed primarily of investments rated AA or
better by Standard and Poor's. Management has also decided to avoid long-term
investing at what management believes to be low long-term interest rates.
The Company's investment portfolio is subject to several risks including
interest rate and reinvestment risk. Fixed maturity security values generally
fluctuate inversely with movements in interest rates. The Company's corporate
and municipal bond investments may contain call and sinking fund features which
may result in early redemptions and the Company's mortgage-backed securities
investments held by the Company are subject to prepayment risk. Declines in
interest rates could cause early redemptions or prepayments which would require
the Company to reinvest at lower rates.
Investment securities are classified as held to maturity, available for sale or
trading. The Company currently classifies all investment securities as available
for sale. Investment securities available for sale are carried at fair value and
unrealized gains and losses are included in other comprehensive income, net of
estimated income taxes.
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The Company invests 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 summarizes the fair value fixed
maturity investments portfolio at December 31, 2000 and 1999 (dollars in
thousands):
December 31,
-------------------------------------------------------------
2000 1999
------------------------ ------------------------
Percent Percent
Of Of
Amount Total Amount Total
------- ----- ------- -----
Fixed maturities available for sale (1):
U.S. government and government
agencies and authorities $17,271 22.7% $18,569 20.6%
State and political subdivisions 28,341 37.2 36,608 40.7
Industrial and Miscellaneous 19,825 26.0 27,007 30.0
Mortgage-backed securities 4,934 6.5 5,643 6.3
------- ----- ------- -----
Total fixed maturities available for sale 70,371 92.4 87,827 97.6
Equity securities(2) 2,221 2.9 1,615 1.8
Mortgages (3) 290 .4 -- --
Short-term investments (4) 3,249 4.3 518 .6
------- ----- ------- -----
Total investments $76,131 100.0% $89,960 100.0%
======= ===== ======= =====
(1) Fixed maturities available for sale are carried at fair value. Total
cost of fixed maturities was approximately $70,488,000 at December 31,
2000 and $89,291,000 at December 31, 1999.
(2) Equity securities are carried at fair value. Total cost of equity
securities was approximately $2,560,000 at December 31, 2000 and
$2,065,000 at December 31, 1999.
(3) Mortgage loans are carried at amortized cost which approximate fair
value at December 31, 2000.
(4) 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, 2000 and 1999 (dollars in
thousands):
December 31,
-------------------------------------------------------------
2000 1999
------------------------ ------------------------
Percent Percent
Of Of
Amount Total Amount Total
------- ----- ------- -----
Due in (1):
One year or less $23,926 34.0% 16,908 19.3%
After one year through five years 39,014 55.4 64,139 73.0%
After five years through ten years 3,132 4.5 3,719 4.2%
After ten years 4,299 6.1 3,061 3 5%
------- ----- ------- -----
$70,371 100.0% $87,827 100.0%
======= ===== ======= =====
(1) Based on effective maturity dates. Actual maturities may differ
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
The Company's insurance subsidiaries are subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 2000, the Company's
investments complied with such laws and regulations.
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Investment results for the years ended December 31, 2000, 1999 and 1998 are
shown in the following table (dollars in thousands):
2000 1999 1998
------- -------- --------
Invested assets (1) $90,619 $111,559 $126,371
Investment income (2) $ 4,571 $ 5,390 $ 6,138
Average yield 5.04% 4.83% 4.86%
(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, 2000, the Company employed approximately 30 persons, all in
the United States. None of its current employees are employed subject to
collective bargaining agreements. The Company believes that its relations with
all of its employees are excellent.
ITEM 2. PROPERTIES
The Company and its subsidiaries occupy a 7 story office building located at 233
Main Street, in New Britain, Connecticut. ACMAT leases approximately 67% 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 actions brought 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 2000.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ACMAT's Class A Stock trades on the Nasdaq Stock Market under the symbol ACMTA.
The Common Stock trades on the over-the-counter market. The following table sets
forth the quarterly high and low closing prices of the Company's Common Stock
and Class A Stock as reported by Nasdaq.
2000 1999
HIGH LOW HIGH LOW
COMMON STOCK
1st Quarter 19 19 20-5/8 20-1/2
2nd Quarter 19 19 20-1/2 19
3rd Quarter 19 17 20-7/16 20
4th Quarter 26 19 19 19
CLASS A STOCK
1st Quarter 13-1/16 6-1/8 16-1/4 15
2nd Quarter 8-3/4 7-1/8 15-1/4 14-3/4
3rd Quarter 8-3/8 6-1/2 14-7/8 7-1/2
4th Quarter 10 6-13/16 9 6-3/4
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 15, 2001, there were 285 Common
Stock shareholders of record and 639 Class A Stock shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Revenues $ 26,341,755 $ 25,500,249 $ 28,752,273 $ 33,552,135 $ 37,035,305
Total Assets 112,216,369 125,855,611 146,126,465 176,208,762 184,359,566
Long-Term Debt 27,696,587 30,792,720 37,200,000 48,212,727 35,807,419
Stockholders' Equity 37,483,665 36,126,992 37,622,926 39,577,739 49,702,404
Net Earnings 2,224,317 3,013,723 2,120,529 4,456,949 5,293,111
Basic Earnings Per Share .80 1.02 .66 1.29 1.56
Diluted Earnings Per Share .78 .99 .65 1.12 1.22
Note: No cash dividends were paid during any of the periods above.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONSOLIDATED RESULTS OF OPERATIONS:
Net earnings were $2,224,317 in 2000, $3,013,723 in 1999 and $2,120,529 in 1998.
The decrease in 2000 net earnings compared to the 1999 net earnings was due in
part to realized capital losses in 2000 compared with capital gains in 1999. The
increase in 1999 net earnings compared to the 1998 net earnings was due to the
improved gross margins in the contracting business, the elimination of the
limited partnership in 1998 and the reduction in interest expense related to the
reduction of long-term debt partially offset by the decrease in investment
income. Net earnings included approximately $1,000,000 of loss in 1998 related
to the Company's share of a limited partnership. The limited partnership
invested in small cap equities and incurred the loss in 1998 due to volatility
in the small cap market. The Company sold its investment in the limited
partnership on December 31, 1998.
Revenues were $26,341,755 in 2000, $25,500,249 in 1999 and $28,752,273 in 1998.
The increase in 2000 revenues compared to the 1999 revenues is due primarily to
an increase in contract revenues. Earned premiums were $9,215,904 in 2000,
$9,414,192 in 1999 and $10,962,663 in 1998. The decrease in earned premiums over
the past two years reflects the Company's strategy to avoid the
unfavorable pricing in the Company's casualty insurance operations. Contract
revenues were $11,790,207 in 2000, $9,223,457 in 1999 and $12,139,924 in 1998.
Contract revenue depends greatly on the successful securement of contracts bid.
Investment income was $4,570,927 in 2000, $5,389,732 in 1999 and $6,138,105 in
1998. The decrease in investment income was primarily related to a continued
decrease in invested assets as the Company continues to reduce long-term debt.
Net realized capital gains (losses) were ($123,125) in 2000, $252,190 in 1999
and $266,169 in 1998.
Other income (expense) was $887,842 in 2000, $1,220,678 in 1999 and ($754,588)
in 1998. Other income consists primarily of rental income. Other income in 1999
also included a one-time benefit of approximately $330,000. The fluctuations in
other income (expense) are attributable to a pre-tax loss of approximately
$1,400,000 in 1998 related to the Company's share of a limited partnership. The
Company sold its investment in the limited partnership on December 31, 1998.
Losses and loss adjustment expenses were $1,506,908 in 2000, $1,672,887 in 1999
and $2,186,728 in 1998. The decreases in losses and loss adjustment expenses are
attributable to the decline in earned premiums and the release of surety loss
reserves on older years that are no longer needed. Amortization of policy
acquisition costs were $2,375,038 in 2000, $2,223,918 in 1999 and $2,112,857 in
1998. The increase in amortization of policy acquisition costs is primarily
attributable to the increase in commissions paid to agents.
Costs of contract revenues were $11,006,382 in 2000, $8,261,408 in 1999 and
$11,635,879 in 1998. The gross profit margins on construction projects were 6.6%
in 2000, 10.4% in 1999 and 4.2% in 1998. Gross margins fluctuate each year based
upon the profitability of specific projects.
General and administrative expenses were $4,997,849 in 2000, $5,385,409 in 1999
and $5,355,183 in 1998. The decrease in general and administrative expenses in
2000 compared to 1999 is due primarily to the decrease in amortization expense.
The increase in general and administrative expenses in 1999 compared to 1998 is
due primarily to the increase in salary expense.
Interest expense was $2,982,824 in 2000, $3,738,740 in 1999 and $4,621,401 in
1998. The decrease in interest expense is due to the decrease in long-term debt.
Income tax expense was $1,248,437 in 2000, $1,204,164 in 1999 and $719,696 in
1998, representing effective tax rates of 35.9% 28.6% and 25.3%, respectively.
The fluctuation in the effective tax rate reflects a one-time charge related to
an IRS examination completed in 2000.
Results of Operations by Segment:
ACSTAR BONDING: 2000 1999 1998
---------- ---------- ----------
Revenue $6,284,212 $6,227,462 $5,286,955
---------- ---------- ----------
Operating Earnings $2,436,708 $2,968,882 $2,314,485
---------- ---------- ----------
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Revenues for the ACSTAR Bonding segment were $6,284,212 in 2000, $6,227,462 in
1999 and $5,286,955 in 1998. The 2000 increase in revenue reflects a slight
increase in earned premium. The 1999 increase in revenue reflects a slight
increase in earned premiums and investment income compared to 1998. Included in
1998 revenues is a pre-tax loss of approximately $570,000 for net loss of the
limited partnership investment.
Investment income was $1,253,329 in 2000, $1,268,175 in 1999 and $1,169,977 in
1998. The slight decrease in 2000 investment income was primarily related to a
continued decrease in invested assets offset in part by an increase in the
effective yield on those invested assets. Net realized capital gains (losses)
were $5,622 in 2000, $51,616 in 1999 and $68,040 in 1998.
Operating earnings for the ACSTAR Bonding segment were $2,436,708 in 2000,
$2,968,882 in 1999 and $2,314,485 in 1998. The decrease in 2000 operating
earnings compared to 1999 operating earnings reflects the Company's new
reinsurance program and an increase in the amortization of policy acquisition
costs. The increase in 1999 operating earnings compared to 1998 operating
earnings is due primarily to an increase in earned premiums and investment
income offset in part by an increase in the amortization of policy acquisition
costs.
Losses and loss adjustment expenses were $251,876 in 2000, $238,520 in 1999 and
$230,912 in 1998. Amortization of policy acquisition costs were $2,001,561 in
2000, $1,543,783 in 1999 and $1,225,718 in 1998. The increase in amortization of
policy acquisition costs in 2000 compared to 1999 is primarily attributable to
the increase in direct written premiums and commissions paid to agents.
General and administrative expenses were $1,594,067 in 2000, $1,476,277 in 1999
and $1,515,840 in 1998. The increase in general and administrative expenses in
2000 compared to 1999 is due primarily to the implementation of a Funds Control
Agreement with ACMAT. Under this agreement, ACMAT collects funds from certain
obligees of ACSTAR and makes payments directly to the vendors and subcontractors
of selected principals for certain bond obligations. The decrease in general and
administrative expenses in 1999 compared to 1998 is due primarily to the
decrease in bad debt expense.
United Coastal
LIABILITY INSURANCE: 2000 1999 1998
---------- ---------- -----------
Revenue $7,080,714 $8,529,279 $10,315,294
---------- ---------- -----------
Operating Earnings $3,549,472 $4,578,802 $ 5,176,870
---------- ---------- -----------
Revenues for the United Coastal Liability Insurance segment were $7,080,714 in
2000, $8,529,279 in 1999 and $10,315,294 in 1998. The 2000 decrease in revenue
reflects a 12% decrease in earned premiums and a 16% decrease in investment
income compared to 1999. The 1999 decrease in revenue reflects a 27% decrease in
earned premiums and a 20% decrease in investment income compared to 1998.
Included in 1998 revenues is a pre-tax loss of approximately $830,000 for net
loss of the limited partnership investment. The decrease in revenues over the
past two years reflects the Company's strategy to avoid the unfavorable
pricing in the Company's casualty insurance market.
Investment income was $3,001,161 in 2000, $3,557,332 in 1999 and $4,430,026 in
1998. The decrease in investment income was primarily related to a decrease in
invested assets as a result of dividends distributed to the parent company to
reduce corporate debt. Net realized capital gains (losses) were ($117,503) in
2000, $200,574 in 1999 and $198,129 in 1998.
Operating earnings for the United Coastal Liability Insurance segment were
$3,549,472 in 2000, $4,578,802 in 1999 and $5,176,870 in 1998. The decrease in
2000 operating earnings compared to 1999 operating earnings is due primarily to
a decrease in earned premiums and investment income. The decrease in 1999
operating earnings compared to 1998 is due to a decrease in earned premiums.
Losses and loss adjustment expenses were $1,255,032 in 2000, $1,434,367 in 1999
and $1,955,816 in 1998. The decrease in losses and loss adjustment expenses is
attributable to the decrease in earned premiums. Amortization of policy
acquisition costs were $1,303,916 in 2000, $1,528,179 in 1999 and $1,852,218 in
1998. The decrease in amortization of policy acquisition costs is primarily
attributable to the decrease in earned premiums.
General and administrative expenses were $972,294 in 2000, $987,931 in 1999 and
$1,330,390 in 1998. The decrease in general and administrative expenses is due
primarily to the overall decrease in business activities.
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ACMAT CONTRACTING: 2000 1999 1998
----------- ----------- -----------
Revenue $15,898,910 $13,154,753 $15,801,541
----------- ----------- -----------
Operating Earnings $ 1,111,731 $ 907,228 $ 501,712
----------- ----------- -----------
Revenues for the ACMAT Contracting segment were $15,898,910 in 2000, $13,154,753
in 1999 and $15,801,541 in 1998. The 2000 increase in revenue reflects a 28%
increase in contract revenues compared to 1999. The decrease in 1999 revenue
compared to the 1998 revenue is due primarily to a 24% decrease in contract
revenues in 1999. Contract revenue depends greatly on the successful
securement of contracts bid.
Operating earnings for the ACMAT Contracting segment were $1,111,731 in 2000,
$907,228 in 1999 and $501,712 in 1998. The increase in 2000 operating earnings
compared to 1999 operating earnings is due to implementation of the Funds
Administration Agreement with ACSTAR offset in part by lower gross margins on
2000 projects. The increase in 1999 operating earnings compared to 1998
operating earnings is due primarily to improved gross margins on the 1999
projects.
Cost of contract revenues were $11,006,382 in 2000, $8,261,408 in 1999 and
$11,635,879 in 1998. The gross profit margin on construction projects was 6.6%
in 2000, 10.4% in 1999 and 4.2% in 1998. Gross margin fluctuations each year
based upon the profitability of specific projects.
General and administrative expenses were $3,780,797 in 2000, $3,886,117 in 1999
and $3,488,950 in 1998. The decrease in general and administrative expenses in
2000 compared to 1999 is due primarily to the decrease in amortization of
intangibles. The increase in general and administrative expenses in 1999
compared to 1998 is due primarily to the increase in salary expense and the
amortization of intangibles.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal developments
and economic conditions, including the effects of inflation. Reserves are
monitored and evaluated periodically using current information on reported
claims.
Management believes that the reserves for losses and loss adjustment expenses at
December 31, 2000 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 16.4%, 17.6% and 19.6% for the years ended December 31, 2000, 1999
and 1998, 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. There can be no assurance that
such loss ratios can continue. The Company's insurance subsidiaries' expense
ratios under GAAP were 58.9%, 56.6% and 51.8% for the years ended December 31,
2000, 1999 and 1998, respectively. The increase in the expense ratios is due to
the decline in premiums. The Company's insurance subsidiaries' combined ratios
under GAAP were 75.3%, 74.2% and 71.4% for the years ended December 31, 2000,
1999 and 1998, respectively. The increase in the 2000 combined ratio results
primarily from the decline in premiums and an increase in commissions paid to
agents and brokers.
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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 $8,190,436 in 2000, compared to cash flow realized from operations of
$7,065,427 in 1999 and $530,977 in 1998. The cash flow 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 $14,008,674 in 2000, $20,580,662
in 1999 and $21,326,746 in 1998.
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 of these covenants at December 31, 2000, 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.
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, 2000.
During 2000, the Company purchased, in the open market and privately negotiated
transactions, 27,239 shares of its Common Stock at an average price of $19.08.
The Company also purchased, in open market and privately negotiated
transactions, 253,833 shares of its Class A Stock at an average price of $7.29
per share.
The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. During 2000, ACMAT received
$7,780,000 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 2001, the amount of
dividends ACMAT's insurance subsidiaries may pay, without prior approval of
their domestic state insurance departments, is limited to approximately
$6,900,000.
In 2001, 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 $3,143,108 in 2001.
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, 2000 was above the level which might require
regulatory action.
19
20
Item 7a. Quantatative and Qualitative Discussion 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, 2000.
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, 2000
was $76,130,538, 92% 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, 1999. 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 on its long-term debt is
not significant. The Company continually monitors the interest rate environment
and evaluates 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, 2000.
The sensitivity analysis model used by the Company produces a loss in fair value
of market sensitive instruments of $ .5 million based on a 100 basis point
increase in interest rates as of December 31, 2000, which is not considered
material. This loss value only reflects the impact of an interest rate increase
on the fair value of the Company's financial instruments, which constitute
approximately 68% of total assets. As a result, the loss value excludes a
significant portion of the Company's consolidated balance sheet which would
partially 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.
20
21
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, 2000,
1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements - December 31, 2000, 1999 and
1998
Consolidated Schedules included in Part II of this Report - Years ended
December 31, 2000, 1999 and 1998:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty
Insurance Operations
21
22
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. 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 23, 2001
22
23
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ---------- -----------
Earned premiums $ 9,215,904 9,414,192 10,962,663
Contract revenues 11,790,207 9,223,457 12,139,924
Investment income, net 4,570,927 5,389,732 6,138,105
Net realized capital gains (losses) (123,125) 252,190 266,169
Other income (expense) 887,842 1,220,678 (754,588)
------------ ---------- -----------
26,341,755 25,500,249 28,752,273
Losses and loss adjustment expenses 1,506,908 1,672,887 2,186,728
Cost of contract revenues 11,006,382 8,261,408 11,635,879
Amortization of policy acquisition costs 2,375,038 2,223,918 2,112,857
General and administrative expenses 4,997,849 5,385,409 5,355,183
Interest expense 2,982,824 3,738,740 4,621,401
------------ ---------- -----------
22,869,001 21,282,362 25,912,048
------------ ---------- -----------
Earnings before income taxes 3,472,754 4,217,887 2,840,225
Income taxes 1,248,437 1,204,164 719,696
------------ ---------- -----------
Net earnings $ 2,224,317 3,013,723 2,120,529
============ ========== ===========
Basic earnings per share $ .80 1.02 .66
------------ ---------- -----------
Diluted earnings per share $ .78 .99 .65
------------ ---------- -----------
See Notes to Consolidated Financial Statements.
23
24
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
2000 1999
------------- -------------
ASSETS
Investments:
Fixed maturities - available for sale at fair value
(Cost of $70,487,764 in 2000 and $89,290,810 in 1999) $ 70,370,912 87,826,920
Equity securities - available for sale at fair value
(Cost of $2,561,512 in 2000 and $2,065,262 in 1999 ) 2,220,936 1,614,763
Mortgages 289,625 --
Short-term investments, at cost which approximates fair value 3,249,065 518,557
------------- -------------
Total Investments 76,130,538 89,960,240
Cash and cash equivalents 7,446,941 7,054,911
Accrued interest receivable 1,033,411 1,324,356
Receivables, net of allowance for doubtful accounts of
$147,346 in 2000 and $195,118 in 1999 4,140,363 2,823,381
Reinsurance recoverable 2,580,388 3,924,064
Income tax refund receivable -- 173,465
Prepaid expenses 133,018 106,049
Deferred income taxes 833,865 1,560,324
Property and equipment, net 12,624,792 12,675,956
Deferred policy acquisition costs 1,438,747 1,323,780
Other assets 3,612,239 2,360,366
Intangibles, net 2,242,067 2,568,719
------------- -------------
$ 112,216,369 125,855,611
============= =============
Liabilities & Stockholders' Equity
Accounts payable $ 2,407,958 1,923,081
Reserves for losses and loss adjustment expenses 29,310,606 38,544,491
Unearned premiums 5,442,777 5,262,468
Collateral held 8,673,378 11,954,554
Income taxes 22,582 --
Other accrued liabilities 1,178,816 1,251,305
Long-term debt 27,696,587 30,792,720
------------- -------------
Total Liabilities 74,732,704 89,728,619
Commitments and contingencies
Stockholders' Equity:
Common Stock (No par value; 3,500,000 shares authorized;
557,589 and 584,828 shares issued and outstanding) 557,589 584,828
Class A Stock (No par value; 10,000,000 shares authorized;
2,057,254 and 2,304,587 shares issued and outstanding) 2,057,254 2,304,587
Retained earnings 35,326,305 35,151,966
Accumulated other comprehensive income (loss) (457,483) (1,914,389)
------------- -------------
Total Stockholders' Equity 37,483,665 36,126,992
------------- -------------
$ 112,216,369 $ 125,855,611
============= =============
See Notes to Consolidated Financial Statements.
24
25
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
December 31, 2000, 1999 and 1998
Accumulated
other
Common Class A Additional comprehensive Total
Stock par Stock paid-in Retained income stockholders'
value par value capital earnings (loss) equity
--------- ---------- -------- ----------- ---------- -----------
Balance as of December 31, 1997 $ 596,857 2,712,174 -- 36,033,153 235,555 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 -- 2,120,529
-----------
Total comprehensive income -- -- -- -- -- 2,380,466
Acquisition and retirement of
4,769 shares of Common Stock $ (4,769) -- -- (93,697) -- (98,466)
Acquisition and retirement of
342,366 shares of Class A Stock -- (342,366) (841,980) (3,985,447) -- (5,169,793)
Issuance of 91,000 shares of Class A Stock
pursuant to stock options -- 91,000 841,980 -- -- 932,980
--------- ---------- -------- ----------- ---------- -----------
Balance as of December 31, 1998 $ 592,088 2,460,808 -- 34,074,538 495,492 37,622,926
Comprehensive income:
Net unrealized losses on debt and
equity securities, net of reclassification
adjustment -- -- -- -- (2,409,881) (2,409,881)
Net earnings -- -- -- 3,013,723 -- 3,013,723
-----------
Total comprehensive income -- -- -- -- -- 603,842
Acquisition and retirement of 7,260
shares of Common Stock $ (7,260) -- -- (144,658) -- (151,918)
Acquisition and retirement of 189,221
shares of Class A Stock -- (189,221) (388,500) (1,791,637) -- (2,369,358)
Issuance of 15,000 shares of Class A
Stock pursuant to investment agreement -- 15,000 206,250 -- -- 221,250
Issuance of 18, 000 shares of Class A
Stock pursuant to stock options -- 18,000 182,250 -- -- 200,250
--------- ---------- -------- ----------- ---------- -----------
Balance as of December 31, 1999 $ 584,828 2,304,587 -- 35,151,966 (1,914,389) 36,126,992
Comprehensive income:
Net unrealized losses on debt and
equity securities, net of reclassification
adjustment -- -- -- -- 1,456,906 1,456,906
Net earnings -- -- -- 2,224,317 -- 2,224,317
-----------
Total comprehensive income -- -- -- -- -- 3,681,223
Acquisition and retirement of 27,239 shares
of Common Stock (27,239) -- (38,025) (454,566) -- (519,830)
Acquisition and retirement of 253,833
shares of Class A Stock -- (253,833) -- (1,595,412) -- (1,849,245)
Issuance of 6,500 shares of Class A Stock
pursuant to stock options -- 6,500 38,025 -- -- 44,525
--------- ---------- -------- ----------- ---------- -----------
Balance as of December 31, 2000 $ 557,589 2,057,254 -- 35,326,305 (457,483) 37,483,665
========= ========== ======== =========== ========== ===========
See Notes to Consolidated Financial Statements.
25
26
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ -----------
Cash Flows From Operating Activities:
Net earnings $ 2,224,317 3,013,723 2,120,529
Adjustments to reconcile net earnings to net
Cash provided by (used for) operating activities:
Depreciation and amortization 1,547,144 1,829,646 1,412,004
Net realized capital (gains) losses 123,125 (252,190) (266,169)
Limited partnership investment -- -- 1,429,288
Deferred income taxes 726,459 428,918 73,041
Changes In:
Accrued interest receivable 290,945 27,978 105,830
Receivables, net (1,316,982) 914,246 3,380,900
Reinsurance recoverable 1,343,676 (1,699,948) 1,254,005
Deferred policy acquisition costs (114,967) 226,309 528,316
Prepaid expenses and other assets (1,293,362) 741,366 951,605
Accounts payable and other liabilities 412,388 (874,280) (389,056)
Collateral held (3,281,176) (5,389,822) (2,931,326)
Reserves for losses and loss adjustment expenses (9,233,885) (4,570,571) (5,785,651)
Income taxes 201,573 72,165 594,431
Unearned premiums 180,309 (1,532,967) (3,008,724)
------------ ------------ -----------
Net cash used for operating activities (8,190,436) (7,065,427) (530,977)
------------ ------------ -----------
Cash Flows From Investing Activities:
Proceeds from investments sold or matured:
Fixed maturities - sold 16,465,522 63,593,712 40,118,160
Fixed maturities - matured 13,431,000 11,692,000 38,383,281
Equity securities 325,000 24,405 1,022,466
Short-term investments 21,932,313 143,866,543 79,604,384
Purchases Of:
Fixed maturities (11,821,523) (66,790,040) (75,373,107)
Equity securities (821,250) (24,405) (2,060,000)
Mortgages (289,625) -- --
Short-term investments (24,662,821) (131,437,187) (60,129,984)
Capital expenditures (549,942) (344,366) (238,454)
------------ ------------ -----------
Net cash provided by investing activities 14,008,674 20,580,662 21,326,746
------------ ------------ -----------
Cash Flows From Financing Activities:
Borrowings under line of credit -- 9,000,000 7,000,000
Repayments under line of credit -- (9,000,000) (12,000,000)
Repayments on long-term debt (3,096,133) (10,907,280) (23,812,727)
Issuance of long-term debt -- 4,500,000 12,800,000
Issuance of Class A Stock 39,000 162,000 696,000
Payments for acquisition and retirement of stock (2,369,075) (2,521,276) (5,268,259)
------------ ------------ -----------
Net cash used for financing activities (5,426,208) (8,766,556) (20,584,986)
------------ ------------ -----------
Net change in cash and cash equivalents 392,030 4,748,679 210,783
Cash and cash equivalents, beginning of year 7,054,911 2,306,232 2,095,449
------------ ------------ -----------
Cash and cash equivalents, end of year $ 7,446,941 7,054,911 2,306,232
============ ============ ===========
See Notes to Consolidated Financial Statements.
26
27
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include ACMAT Corporation ("ACMAT" or the
"Company"), its subsidiaries, including AMINS, 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.
(b) Business
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.
During 2000, 1999 and 1998, customers who individually accounted for more than
10% of consolidated construction contracting revenue are as follows; in 2000 -
three customers provided 33%, 22% and 19%, respectively. In 1999 - two customers
provided 51% and 24%, respectively. In 1998 - three customers provided 52%, 19%
and 17%, respectively. No customers accounted for more than 10% of the
consolidated insurance revenues in any year.
(c) Investments
Investments are classified as "available for sale" and are reported at fair
value, with unrealized gains or losses charged or credited directly to
stockholders' equity.
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.
27
28
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Policy Acquisition Costs
Policy acquisition costs, representing commissions and certain underwriting
costs, are deferred and amortized on a straight-line basis over the policy term.
During the years ended December 31, 2000, 1999 and 1998, deferrable costs
capitalized were $2,490,005, $1,997,609, and $1,584,541, respectively. The
amortization of deferred policy acquisition costs charged to operations for the
years ended December 31, 2000, 1999 and 1998 was $2,375,038, $2,223,918 and
$2,112,857, respectively.
(e) Property and Equipment
Property and equipment are reported at depreciated cost. Depreciation is
computed using the straight-line method at rates based upon the respective
estimated useful lives of the assets. Maintenance and repairs are expensed as
incurred.
(f) Intangibles
All intangibles are stated at amortized cost and are being amortized using the
straight-line method. Intangibles include insurance operating licenses and
goodwill, which represents the excess of cost over the fair market value of net
assets acquired. These intangible assets are amortized over periods ranging from
15 to 25 years. The carrying amounts of these intangibles are regularly reviewed
for indicators of other-than-temporary impairments in value.
(g) Insurance Reserve Liabilities
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding the claim and the policy provisions relating to the type of claim.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal developments
and economic conditions, including the effects of inflation. Reserves are
monitored and recomputed periodically using new information on reported claims.
Reserves for losses and loss adjustment expenses are estimates at any given
point in time of what the Company may have to pay ultimately on incurred losses,
including related settlement costs, based on facts and circumstances then known.
The Company also reviews its claims reporting patterns, past loss experience,
risk factors and current trends and considers their effect in the determination
of estimates of incurred but not reported losses. Ultimate losses and loss
adjustment expenses are affected by many factors which are difficult to predict,
such as claim severity and frequency, inflation levels and unexpected and
unfavorable judicial rulings. Reserves for surety claims also consider the
amount of collateral held as well as the financial strength of the contractor
and its indemnitors. Management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the unpaid portion of the ultimate net
cost of losses and loss adjustment expenses incurred, including losses incurred
but not reported.
(h) Collateral Held
The carrying amount of collateral held approximates its fair value because of
the short maturity of these instruments. Collateral held represents cash and
investments retained by the Company for surety bonds issued by the Company.
28
29
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Reinsurance
In the normal course of business, the Company assumes and cedes reinsurance with
other companies. Reinsurance ceded primarily represents excess of loss
reinsurance with companies with "A" ratings from the insurance rating
organization, A.M. Best Company, Inc. 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.
Effective May 1, 2000, the Company cedes significantly more of its bond exposure
than under its previous reinsurance treaties. Such reinsurance is applicable on
a per principal basis for losses in excess of $1,000,000 up to $13,000,000.
Prior to May 1, 2000, reinsurance was applicable to losses in excess of
$2,000,000 on a per bond basis with the Company retaining approximately
$5,000,000 of losses up to $13,000,000.
Reinsurance recoverables include ceded reserves for losses and loss adjustment
expenses. Ceded unearned premiums of $938,797 and $453,588 at December 31, 2000
and 1999, respectively, are included in other assets. All reinsurance contracts
maintained by the Company qualify as short-duration prospective contracts. A
summary of reinsurance premiums written and earned is provided below:
Premiums Written Premiums Earned
---------------------------------------------- ------------------------------------------------
2000 1999 1998 2000 1999 1998
------------ ---------- ---------- ------------ ----------- -----------
Direct $ 10,453,336 8,968,024 8,324,506 $ 10,247,698 10,528,702 11,211,803
Assumed 12,743 124,763 528,220 40,897 97,052 656,023
Ceded (1,555,074) (1,002,787) (649,109) (1,072,691) (1,211,562) (905,163)
------------ ---------- ---------- ------------ ----------- -----------
Totals $ 8,911,004 8,090,000 8,203,617 $ 9,215,904 9,414,192 10,962,663
============ ========== ========== ============ =========== ===========
Ceded incurred losses and loss adjustment expenses totaled $175,397, $215,292
and $180,553 for the years ended December 31, 2000, 1999 and 1998, respectively.
(j) Revenue Recognition
Revenue on construction contracts is recorded using the percentage of completion
method. Under this method revenues with respect to individual contracts are
recognized in the proportion that costs incurred to date relate to total
estimated costs. Revenues and cost estimates are subject to revision during the
terms of the contracts, and any required adjustments are made in the periods in
which the revisions become known. Provisions are made, where applicable, for the
entire amount of anticipated future losses on contracts in progress.
Construction 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.
(k) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.
29
30
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(m) Comprehensive Income (Loss)
The following table summarizes reclassification adjustments for other
comprehensive income (loss) and the related tax effects for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
----------- ---------- -------
Unrealized gains (losses) on investments:
Unrealized holding gain (loss) arising during period net of income tax
expense of $224,405 for 1998 $ 1,538,168 (2,243,436) 435,609
Less reclassification adjustment for gains included in net earnings,
net of income tax expense (benefit) of ($41,863), $85,745 and $90,497
for 2000, 1999 and 1998, respectively (81,262) 166,445 175,672
----------- ---------- -------
Other comprehensive income (loss) $ 1,456,906 (2,409,881) 259,937
=========== ========== =======
(n) Future Accounting Standard
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133).
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Deferral of the Effective Date of FASB Statement No. 133", which allows
entities which have not yet adopted FAS 133 to defer its effective date to all
fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000,
the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities, an amendment
of FASB Statement No. 133", which amends the accounting and reporting standards
of FAS 133. FAS 133 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 consolidated balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized asset or liability
or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash
flows of a recognized asset or liability or of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. Upon initial
application of FAS 133, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. The Company will adopt
FAS 133, as amended, as of January 1, 2001. The Company has determined that the
cumulative effect of FAS 133, as amended, will not be significant.
30
31
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) INVESTMENTS
INVESTMENTS AT DECEMBER 31, 2000 AND 1999 FOLLOWS:
AMORTIZED ESTIMATED CARRYING
COST FAIR VALUE VALUE
----------- ----------- -----------
2000
Fixed maturities - available for sale:
Bonds:
States, municipalities and political subdivisions $28,385,622 $28,340,477 $28,340,477
United States government and government agencies 17,215,078 17,270,789 17,270,789
Mortgage-backed securities 4,938,654 4.934,265 4,934,265
Industrial and miscellaneous 19,948,410 19,825,381 19,825,381
----------- ----------- -----------
Total fixed maturities 70,487,764 70,370,912 70,370,912
Equity securities - common stocks:
Banks, trusts and insurance 5,262 15,926 15,926
Equity securities - redeemable preferred stocks:
Banks, trusts and insurance 1,060,000 908,760 908,760
Industrial and miscellaneous 1,496,250 1,296,250 1,296,250
----------- ----------- -----------
Total equity securities 2,561,512 2,220,936 2,220,936
Mortgage 289,625 289,625 289,625
Short-term investments 3,249,065 3,249,065 3,249,065
----------- ----------- -----------
Total investments $76,587,966 76,130,538 76,130,538
=========== =========== ===========
1999
Fixed maturities - available for sale:
Bonds:
States, municipalities and political subdivisions $37,020,634 36,607,995 36,607,995
United States government and government agencies 18,885,440 18,568,888 18,568,888
Mortgage-backed securities 5,816,255 5,642,888 5,642,888
Industrial and miscellaneous 27,568,481 27,007,149 27,007,149
----------- ----------- -----------
Total fixed maturities 89,290,810 87,826,920 87,826,920
Equity securities - common stocks:
Banks, trusts and insurance 5,262 14,763 14,763
Equity securities - redeemable preferred stocks:
Banks, trusts and insurance 1,060,000 860,000 860,000
Industrial and miscellaneous 1,000,000 740,000 740,000
----------- ----------- -----------
Total equity securities 2,065,262 1,614,763 1,614,763
Short-term investments 518,557 518,557 518,557
----------- ----------- -----------
Total investments $91,874,629 89,960,240 89,960,240
=========== =========== ===========
Fair value estimates are made 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, 2000, the Company's insurance subsidiaries had securities with
an aggregate book value of approximately $10 million on deposit with various
state regulatory authorities.
31
32
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of fixed maturities at December 31, 2000 and
1999, by effective maturity, follows:
2000 1999
------------------------------- ------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ---------- ----------
Due in one year or less $24,468,676 23,925,468 16,692,346 16,907,611
Due after one year through five years 38,570,751 39,014,149 65,642,615 64,139,194
Due after five years through ten years 3,125,942 3,131,895 3,843,840 3,719,256
Due after ten years 4,322,395 4,299,400 3,112,009 3,060,859
----------- ---------- ---------- ----------
Total $70,487,764 70,370,912 89,290,810 87,826,920
=========== ========== ========== ==========
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, 2000 and 1999
follows:
2000 1999
-------------------------- --------------------------
Gains Losses Gains Losses
-------- -------- ------ ----------
States, municipalities and
political subdivisions $ 33,854 (78,999) 8,870 (421,509)
United States government and
government agencies 77,320 (21,609) 103 (316,655)
Industrial and miscellaneous -- (123,029) -- (173,367)
Mortgage-backed securities 6,356 (10,745) -- (561,332)
-------- -------- ------ ----------
Total 117,530 (234,382) 8,973 (1,472,863)
Equity securities 10,664 (351,240) 9,501 (460,000)
-------- -------- ------ ----------
Total $128,194 (585,622) 18,474 (1,932,863)
======== ======== ====== ==========
(3) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES
A summary of net investment income for the years ended December 31, 2000, 1999
and 1998 follows:
2000 1999 1998
----------- ---------- ----------
Tax-exempt interest $ 1,268,898 1,680,051 2,045,722
Taxable interest 3,279,902 3,680,987 4,080,814
Dividends on equity securities 112,639 112,130 56,603
Investment expenses (90,512) (83,436) (45,034)
----------- ---------- ----------
Net investment income $ 4,570,927 5,389,732 6,138,105
=========== ========== ==========
Realized capital gains (losses) for the years ended December 31, 2000, 1999 and
1998 follows:
2000 1999 1998
--------- ------- --------
Fixed maturities $(123,125) 252,190 225,701
Equity securities -- -- 44,653
Other -- -- (4,185)
--------- ------- --------
Net realized capital gains (losses) $(123,125) 252,190 266,169
========= ======= ========
32
33
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross gains of $14,162, $349,413 and $229,063 and gross losses of $137,287,
$97,223 and $3,362 were realized on fixed maturity sales for the years ended
December 31, 2000, 1999 and 1998, respectively. There were no gross gains
realized on the sale of equity securities for the years ended December 31, 2000
and 1999. Gross gains of $44,653 were realized on sale of equity securities for
the year ended December 31, 1998. There were no losses realized on equity
security sales for the years ended December 31, 2000, 1999 and 1998.
(4) RECEIVABLES
A summary of receivables at December 31, 2000 and 1999 follows:
2000 1999
----------- ----------
Insurance premiums due from agents $ 1,531,017 1,526,145
Receivables under construction contracts:
Amounts billed 2,162,875 1,335,451
Recoverable costs in excess of billings on uncompleted contracts 152,897 67,885
Billings in excess of costs on uncompleted contracts (294,055) (489,650)
Retainage, due on completion of contracts 552,624 463,959
----------- ----------
Total receivables under construction contracts 2,574,341 1,377,645
Other 182,351 114,709
----------- ----------
Total receivables 4,287,709 3,018,499
Less allowances for doubtful accounts (147,346) (195,118)
----------- ----------
Total receivables, net $ 4,140,363 2,823,381
=========== ==========
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 2001.
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.
(5) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 2000 and 1999 follows:
2000 1999
----------- ----------
Building 15,039,038 14,912,042
Land 800,000 800,000
Equipment and vehicles 1,512,260 1,255,128
Furniture and fixtures 840,114 888,824
----------- ----------
18,191,412 17,855,994
Less accumulated depreciation 5,566,620 5,180,038
----------- ----------
$12,624,792 12,675,956
=========== ==========
Future minimum rental income to be generated by leasing a portion of the
building under non-cancelable operating leases as of December 31, 2000 are
estimated to be $545,090 for 2001, $549,890 for 2002, $428,690 for 2003 and
$53,200 for 2004. Rental income earned in 2000, 1999 and 1998 was $768,496,
$688,102 and $626,730, respectively.
(6) INTANGIBLES
A summary of intangibles, acquired primarily in connection with purchases of the
Company's insurance subsidiaries, at December 31, 2000 and 1999 follows:
2000 1999
---------- ---------
Insurance licenses $4,188,926 4,188,926
Goodwill 2,441,310 2,524,872
---------- ---------
6,630,236 6,713,798
Less accumulated amortization 4,388,169 4,145,079
---------- ---------
$2,242,067 2,568,719
========== =========
Intangible assets are written off when they become fully amortized.
33
34
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) 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.
2000 1999 1998
------------ ----------- -----------
Balance at January 1 $ 38,544,491 43,115,062 48,900,713
Less reinsurance recoverable 3,924,064 2,224,116 3,478,121
------------ ----------- -----------
Net balance at January 1 34,620,427 40,890,946 45,422,592
Incurred related to:
Current year 2,441,000 3,091,120 4,508,667
Prior years (934,092) (1,418,233) (2,321,939)
------------ ----------- -----------
Total incurred 1,506,908 1,672,887 2,186,728
Payments related to:
Current year 791,546 81,569 18,260
Prior years 8,605,571 7,861,837 6,700,114
------------ ----------- -----------
Total payments 9,397,117 7,943,406 6,718,374
Net balance at December 31 26,730,218 34,620,427 40,890,946
Plus reinsurance recoverable 2,580,388 3,924,064 2,224,116
------------ ----------- -----------
Balance at December 31 $ 29,310,606 38,544,491 43,115,062
============ =========== ===========
The decrease of incurred losses and loss adjustment expenses of prior years
represents a release of surety loss reserves on older years that are no longer
needed and 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.
(8) NOTES PAYABLE TO BANKS
At December 31, 2000, 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, 2000 and 1999. 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.
(9) LONG-TERM DEBT
A summary of long-term debt at December 31, 2000 and 1999 follows:
2000 1999
----------- ----------
Term Loan due 2004 $ 3,250,000 4,250,000
Senior Notes due 2005 2,400,000 3,900,000
Mortgage Note due 2009 6,646,587 7,242,720
Convertible Note due 2022 15,400,000 15,400,000
----------- ----------
$27,696,587 30,792,720
=========== ==========
34
35
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 1, 1999, the Company obtained a $4,500,000 term loan from a
financial institution, which is currently payable in quarterly installments of
$250,000 which commenced December 1, 1999. The term loan, due 2004 has a balance
of $3,250,000 at December 31, 2000. The interest rate is fixed at 7.25%. The
loan agreement contains certain limitations on borrowings, minimum statutory
capital levels and requires maintenance of certain ratios. The proceeds were
used to replace a $5,000,000, five year term loan obtained on December 9, 1998.
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 mortgage note, due 2009, has a balance of $6,646,587 at December 31,
2000. 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 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 12). 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 (8-1/2%). The Company
voluntarily prepaid the installments due January 31 on December 31 in 2000, 1999
and 1998. The Company also made a voluntary prepayment of $3,600,000 on December
31, 1999. 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 senior
notes have a balance of $2,400,000 at December 31, 2000.
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, 2000,
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, 2000, 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 $3,143,108, $2,589,256, $1,738,716,
$1,041,724 and $848,536 for the years 2001 through 2005, respectively. Interest
expense paid in 2000, 1999 and 1998 amounted to $2,815,876, $3,751,313, and
$5,121,093, respectively.
The fair value at December 31, 2000 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, 2000 because of the complex and
unique terms associated with this debt instrument.
35
36
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) INCOME TAXES
The components of income tax expense for each year follows:
2000 1999 1998
---------- --------- -------
Current Taxes:
Federal $ 456,978 725,246 584,655
State 65,000 50,000 62,000
---------- --------- -------
521,978 775,246 646,655
---------- --------- -------
Deferred Taxes:
Federal 726,459 428,918 73,041
Total $1,248,437 1,204,164 719,696
========== ========= =======
The effective income tax rate, as a percentage of earnings before income taxes
follows:
2000 1999 1998
------ ------ ------
Federal statutory tax rate 34.0% 34.0% 34.0%
State income tax 1.2 .8 1.4
Effect of tax-exempt interest (10.6) (11.5) (20.8)
Dividend received deduction -- -- (4.8)
Amortization of goodwill 3.4 2.8 3.9
Officers life insurance premiums 2.6 2.0 2.8
Other, net 5.3 .5 8.8
------ ------ ------
Effective income tax rate 35.9% 28.6% 25.3%
====== ====== ======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999 are presented below:
2000 1999
---------- ----------
Deferred Tax Assets:
Reserves for losses and loss adjustment expenses,
Principally due to reserve discounting $1,404,681 2,037,064
Unearned premiums 306,271 327,004
Accounts receivable, principally due to allowance for doubtful accounts 50,098 66,340
Unrealized losses on investments 155,544 650,892
State net operating loss carryforward 6,717,085 8,709,178
Other 77,476 60,020
---------- ----------
Total gross deferred tax assets 8,711,155 11,850,498
Less valuation allowance 6,872,629 9,360,070
---------- ----------
Net deferred tax assets $1,838,526 2,490,428
Deferred Tax Liabilities:
Plant and equipment 515,487 480,019
Deferred policy acquisition costs 489,174 450,085
---------- ----------
Total gross deferred tax liabilities 1,004,661 930,104
---------- ----------
Net deferred tax assets $ 833,865 1,560,324
========== ==========
A valuation allowance is provided for the state net operating loss carryforward
and the unrealized loss on investments 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, 2000.
State net operating loss carryforwards as of December 31, 2000, 1999 and 1998
were $19,756,132, $23,081,405 and $25,615,231 expiring through 2020, 2003 and
2002, respectively.
Taxes paid in 2000, 1999 and 1998 were $320,405, $703,081 and $52,227,
respectively.
36
37
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) PENSION AND PROFIT SHARING PLANS
Effective January 1, 2000, the Company adopted the ACMAT 401(k) plan for the
benefit of non-union employees. The Company contributed $75,000 to the ACMAT
401(k) Plan in 2000. The thrift, profit sharing and retirement plan was
terminated on February 29, 2000. The Company's contributions, established by the
Board of Directors, were $85,000 in 1999 and 1998.
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, 2000.
(12) 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 2000, 1999 and 1998, ACMAT repurchased, in open market and privately
negotiated transactions 27,239, 7,260, and 4,769 respectively, shares of its
Common Stock at an average price of $19.08, $20.93 and $20.65 per share,
respectively. The Company also repurchased during 2000, 1999 and 1998, in open
market and privately negotiated transactions 253,833, 189,221, and 342,366,
respectively, shares of its Class A Stock at an average price of $7.29, $12.52
and $15.10 per share, respectively.
On April 1, 1999, the Company purchased a 40% interest in Allied Surety Agency,
Inc. The Company issued 15,000 shares of Class A Stock for the ownership
interest. The Company may issue an additional 20,000 shares of Class A Stock if
certain performance goals are met by Allied Surety Agency, Inc. The purchase was
a non-cash transaction and is not reflected in the Consolidated Statements of
Cash Flow.
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:
2000 1999 1998
------- ----------- -------
Options outstanding at December 31 337,500 274,000 292,000
Weighted average price per share of
options outstanding $ 8.27 $ 8.48 $ 10.20
Expiration dates 1/2001-12/2010 1/2001-7/2006 1/2001-7/2006
Options exercisable at December 31 267,500 -- 292,000
Options granted 70,000 -- --
Options exercised or surrendered 6,500 18,000 91,000
Price ranges of options exercised or surrendered $ 6.00 $ 6.00 $ 8.50
The exercise price of each option equals the market price of the Company's stock
on the date of grant and the option's term is ten years. The options vest six
months after the date of grant. The Board of Directors granted 70,000 options to
certain directors and officers on December 16, 2000. There were no stock options
granted in 1999 or 1998, however, the exercise price of the Class A Stock
options were re-priced at $7.25 on December 16, 1999.
37
38
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under applicable insurance regulations, ACMAT's insurance subsidiaries are
restricted as to the amount of dividends they may pay, without the prior
approval of any insurance department and are limited to approximately $6,900,000
in 2001.
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. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. In 2000, United
Coastal Insurance paid dividends of $8,000,000, a portion of which is considered
extraordinary. United Coastal Insurance applied and received approval from the
Arizona Insurance Department for the extraordinary portion of dividends paid.
The NAIC recently completed a process intended to codify statutory accounting
practices for certain insurance enterprises. As a result, the NAIC issued a
revised statutory Accounting Practices and Procedures Manual - version effective
January 1, 2001 (the revised Manual) that will be effective for years beginning
January 1, 2001. The States of Illinois and Arizona will require that, effective
January 1, 2001, insurance companies domiciled in Illinois and Arizona prepare
their statutory basis financial statements in accordance with the revised Manual
subject to any deviations prescribed or permitted by the Illinois and Arizona
insurance commissioner. The Company has determined the change on the statutory
capital and surplus of its insurance subsidiaries will be to increase statutory
capital and surplus by approximately $3,900,000.
In accordance with statutory accounting principles, ACMAT's insurance
subsidiaries' statutory capital and surplus was $50,646,755 and $49,130,735 at
December 31, 2000 and 1999, respectively, and their statutory net income for the
years ended December 31, 2000, 1999 and 1998 was $7,641,075, $11,231,410 and
$12,078,378, 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.
(13) EARNINGS PER SHARE
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, 2000, 1999 and 1998:
Average
Shares Per-Share
Earnings Outstanding Amount
-------- ----------- ------
2000:
Basic EPS:
Earnings available to stockholders $2,224,317 2,796,654 .80
Effect of Dilutive Securities:
Stock options -- 38,554
---------- ---------
$2,224,317 2,835,208 .78
========== ========= =====
Diluted EPS:
Earnings available to stockholders
1999:
Basic EPS:
Earnings available to stockholders $3,013,723 2,961,817 $1.02
Effect of Dilutive Securities:
Stock options -- 80,323
---------- ---------
Diluted EPS:
Earnings available to stockholders $3,013,723 3,042,140 $ .99
========== ========= =====
38
39
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average
Shares Per-Share
Earnings Outstanding Amount
-------- ----------- ------
1998:
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
========== ========= ====
The Convertible Notes were anti-dilutive in 2000, 1999 and 1998.
(14) 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 1996, the Company obtained its
general liability insurance from unaffiliated insurance companies. 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 actions 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.
(15) SEGMENT REPORTING
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.
39
40
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:
2000 1999 1998
------------- ------------ -----------
Revenues:
ACSTAR Bonding $ 6,284,212 6,227,462 5,286,955
United Coastal Liability Insurance 7,080,714 8,529,279 10,315,294
ACMAT Contracting 15,898,910 13,154,753 15,801,541
------------- ------------ -----------
$ 29,263,836 27,911,494 31,403,790
============= ============ ===========
Operating Earnings:
ACSTAR Bonding $ 2,436,708 2,968,882 2,314,485
United Coastal Liability Insurance 3,549,472 4,578,802 5,176,870
ACMAT Contracting 1,111,731 907,228 501,712
------------- ------------ -----------
$ 7,097,911 8,454,912 7,993,067
============= ============ ===========
Depreciation and Amortization:
ACSTAR Bonding $ 535,913 451,506 442,457
United Coastal Liability Insurance 371,721 385,502 279,422
ACMAT Contracting 639,510 992,638 690,125
------------- ------------ -----------
$ 1,547,144 1,829,646 1,412,004
============= ============ ===========
Identifiable Assets:
ACSTAR Bonding $ 41,801,164 44,594,402 50,312,769
United Coastal Liability Insurance 52,781,561 63,335,872 78,888,156
ACMAT Contracting 17,633,644 17,925,337 16,925,540
------------- ------------ -----------
$ 112,216,369 125,855,611 146,126,465
============= ============ ===========
Capital Expenditures:
ACSTAR Bonding $ 298,558 250,475 3,364
United Coastal Liability Insurance 92,143 6,969 49,044
ACMAT Contracting 159,241 86,922 186,046
------------- ------------ -----------
$ 549,942 344,366 238,454
============= ============ ===========
The components of revenue for each segment are as follows:
2000 1999 1998
------------- ------------ -----------
ACSTAR Bonding:
Premiums $ 5,032,465 4,770,401 4,618,281
Investment income, net 1,253,329 1,268,175 1,169,977
Equity income (loss) from limited partnership investment -- -- (569,343)
Capital gains (losses) (5,622) 51,616 68,040
Other 4,040 137,270 --
------------- ------------ -----------
$ 6,284,212 6,227,462 5,286,955
============= ============ ===========
United Coastal Liability Insurance:
Premiums $ 4,183,439 4,743,791 6,519,382
Investment income, net 3,001,161 3,557,332 4,430,026
Equity income (loss) from limited partnership investment -- (832,243)
Capital gains (losses) (117,503) 200,574 198,129
Other 13,617 27,582 --
------------- ------------ -----------
$ 7,080,714 8,529,279 10,315,294
============= ============ ===========
ACMAT Contracting:
Contract revenues $ 11,790,207 9,223,457 12,139,924
Investment income, net 91,655 78,702 65,342
Inter-segment revenue:
Rental income 1,260,434 1,258,637 1,251,299
Underwriting services and agency commissions 1,596,960 1,538,131 1,697,978
Other 1,159,654 1,055,826 646,998
------------- ------------ -----------
$ 15,898,910 13,154,753 15,801,541
============= ============ ===========
40
41
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:
2000 1999 1998
------------ ----------- -----------
Revenue:
Total revenue for reportable segments $ 29,263,836 27,911,494 31,403,790
Inter-segment eliminations (2,922,081) (2,411,245) (2,651,517)
------------ ----------- -----------
$ 26,341,755 25,500,249 28,752,273
============ =========== ===========
Operating Earnings:
Total operating earnings for reportable segments $ 7,097,911 8,454,912 7,993,067
Interest expense (2,982,824) (3,738,740) (4,621,401)
Intersegment interest expense (207,194) -- (52,774)
Other operating expenses (435,139) (498,285) (478,667)
------------ ----------- -----------
$ 3,472,754 4,217,887 2,840,225
============ =========== ===========
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.
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results of operations for 2000 and 1999
follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000
Operating Revenues $6,081,307 6,775,713 7,664,456 5,820,279
---------- --------- --------- ---------
Operating Earnings $1,619,190 1,520,220 1,715,735 1,600,433
---------- --------- --------- ---------
Net Earnings $ 610,307 562,609 547,359 504,042
---------- --------- --------- ---------
Basic Earnings Per Share $ .21 .20 .20 .19
---------- --------- --------- ---------
Diluted Earnings Per Share $ .21 .19 .20 .18
---------- --------- --------- ---------
1999
Operating Revenues $6,575,571 6,265,327 7,002,716 5,656,65
---------- --------- --------- ---------
Operating Earnings $2,108,544 2,119,645 2,033,631 1,694,807
---------- --------- --------- ---------
Net Earnings $ 881,058 894,276 683,046 555,343
---------- --------- --------- ---------
Basic Earnings Per Share $ .30 .30 .23 .19
---------- --------- --------- ---------
Diluted Earnings Per Share $ .26 .27 .22 .19
---------- --------- --------- ---------
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.
41
42
Schedule I
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant
As of December 31, 2000 and 1999 and for the
years ended December 31, 2000, 1999 and 1998
The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 2000 and 1999 and its condensed
statements of earnings and cash flows for the years ended December 31, 2000,
1999 and 1998.
BALANCE SHEETS
2000 1999
----------- -----------
Assets
Current assets:
Cash $ 1,058,211 $ 2,418,839
Receivables 2,751,297 1,486,959
Other current assets 493,003 94,249
----------- -----------
Total current assets 4,302,511 4,000,047
Property and equipment, net 11,998,123 12,289,154
Investments in and advance from subsidiaries 50,630,763 51,721,904
Intangibles 214,912 394,959
Other assets 1,836,562 1,701,635
----------- -----------
68,982,871 $70,107,699
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt 3,143,108 1,600,052
Other current liabilities 3,802,619 3,187,987
----------- -----------
Total current liabilities 6,945,727 4,788,039
Long-term debt 24,553,479 29,192,668
----------- -----------
Total liabilities 31,499,206 33,980,707
Commitments and contingencies
Stockholders' equity 37,483,665 36,126,992
----------- -----------
$68,982,871 $70,107,699
=========== ===========
See Notes to Condensed Financial Statements.
42
43
Schedule I, continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENT OF EARNINGS
2000 1999 1998
------------ ---------- -----------
Contract revenues $ 11,790,207 9,223,457 12,139,924
Cost of contract revenues 11,006,382 8,361,408 11,810,879
------------ ---------- -----------
Gross profit 783,825 862,049 329,045
Selling, general and administrative expenses 4,096,369 4,206,660 3,841,623
------------ ---------- -----------
Operating loss (3,312,544) (3,344,611) (3,512,578)
Interest expense (3,190,018) (3,738,740) (4,674,175)
Interest income 91,655 78,622 46,854
Underwriting fees 1,268,243 1,214,697 1,260,399
Other income 2,420,088 2,335,099 1,898,297
------------ ---------- -----------
Loss before income taxes and equity in net
earnings of subsidiaries (2,722,576) (3,454,933) (4,981,203)
Income tax benefit (585,000) (1,010,000) (1,435,000)
------------ ---------- -----------
Loss before equity in net earnings of subsidiaries (2,137,576) (2,465,569) (3,546,203)
Equity in net earnings of subsidiaries 4,361,893 5,479,292 5,666,732
------------ ---------- -----------
Net earnings $ 2,224,317 3,013,723 2,120,529
============ ========== ===========
See Notes to Condensed Financial Statements.
43
44
Schedule I, Continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENTS OF CASH FLOWS
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities:
Net earnings $ 2,224,317 3,013,723 2,120,529
Depreciation and amortization 650,304 990,461 688,862
Equity in undistributed earnings of subsidiaries (4,361,893) (5,479,292) (5,666,732)
(Increase) decrease in accounts receivable (1,264,338) 62,054 1,404,622
(Increase) decrease in other assets (548,201) (51,879) 787,299
Increase (decrease) in other liabilities 614,632 (659,180) 159,662
----------- ----------- -----------
Net cash used for operating activities (2,685,179) (2,124,113) (505,758)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (159,241) (86,922) (186,046)
Decrease in investment in subsidiaries 6,910,000 13,000,000 20,851,120
----------- ----------- -----------
Net cash provided by investing activities 6,750,759 12,913,078 20,665,074
Cash flows from financing activities:
Borrowings under lines of credit -- 9,000,000 7,000,000
Repayments of lines of credit -- (9,000,000) (12,000,000)
Repayment of long-term debt (3,096,133) (10,907,280) (23,812,727)
Issuance of long-term debt -- 4,500,000 12,800,000
Issuance of Class A stock, net of taxes 39,000 162,000 696,000
Payments for acquisition and retirement of stock (2,369,075) (2,521,276) (5,268,259)
----------- ----------- -----------
Net cash used for financing activities (5,426,208) (8,766,556) (20,584,986)
----------- ----------- -----------
Net increase (decrease) in cash (1,360,628) 2,022,409 (425,670)
Cash, beginning of year 2,418,839 396,430 822,100
----------- ----------- -----------
Cash, end of year $ 1,058,211 2,418,839 396,430
=========== =========== ===========
See Notes to Condensed Financial Statements.
44
45
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
2000 Annual Report.
(1) SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes received from subsidiaries during the years ended December
31, 2000, 1999 and 1998 were $118,150, $1,157,813, and $2,355,403,
respectively. Interest paid during the years ended December 31, 2000, 1999
and 1998 was $3,023,070, $3,751,313 and $5,173,867, respectively. Interest
paid in 2000 included $207,194 paid to subsidiaries for intercompany
loans.
(2) LONG-TERM DEBT
A summary of long-term debt at December 31, 2000 and 1999 follows:
2000 1999
----------- ----------
Term Loan Due 2004 $ 3,250,000 4,250,000
Senior Notes Due 2005 2,400,000 3,900,000
Mortgage Note Due 2008 6,646,587 7,242,720
Convertible Note Due 2022 15,400,000 15,400,000
----------- ----------
$27,696,587 30,792,720
=========== ==========
See Note 9 to the Consolidated Financial Statements in the Annual Report
for a description of the long-term debt and aggregate maturities for 2001
to 2005 and thereafter.
(3) INCOME TAXES
See Note 10 to the Consolidated Financial Statements in the Annual Report
for a description of income taxes.
(4) COMMITMENTS AND CONTINGENCIES
See Note 14 to the Consolidated Financial Statements in the Annual Report
for a description of the commitments and contingencies.
45
46
SCHEDULE II
ACMAT CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 2000, 1999 and 1998
Balance Additions
at charged Balance
beginning to costs At
of and end of
Description period expenses Deductions (a) period
-------- ------- -------------- -------
Allowance for
doubtful accounts:
2000 $195,118 (21,702) 26,070 147,346
======== ======== ======= =======
1999 $257,617 180,000 242,499 195,118
======== ======== ======= =======
1998 $309,746 293,149 345,278 257,617
======== ======== ======= =======
(a) Deductions represent accounts written off.
46
47
ACMAT CORPORATION AND SUBSIDIARIES Schedule V
Supplemental Information concerning property-casualty insurance operations
As of and for the years ended December 31, 2000, 1999 and 1998
Discount Ded.
Reserves for from Unpaid
Deferred Unpaid Losses Losses
Affiliation Policy and Loss and Loss Net
with Acquisition Adjustment Adjustment Unearned Earned Investment
Registrant Costs Expenses Expenses Premiums Premiums Income
------------ ------------ -------------- ------------ -------- --------- ----------
United Coastal
Liability Insurance:
2000 $ 700,835 21,367,394 -- 3,061,557 4,183,439 3,001,161
========== ========== ======== ========= ========= =========
1999 $ 692,351 27,889,335 -- 3,290,024 4,743,791 3,557,332
========== ========== ======== ========= ========= =========
1998 $1,004,850 31,471,445 -- 4,650,438 6,519,382 4,430,026
========== ========== ======== ========= ========= =========
ACSTAR Bonding:
2000 $ 737,912 7,943,212 -- 2,831,843 5,032,465 1,253,329
========== ========== ======== ========= ========= =========
1999 $ 631,429 12,571,156 -- 2,193,118 4,770,401 1,268,175
========== ========== ======== ========= ========= =========
1998 $ 545,239 14,512,333 -- 2,889,186 4,618,281 1,169,977
========== ========== ======== ========= ========= =========
Amortization Paid
Losses & Loss Adjustment of Deferred Losses
Affiliation Expenses Incurred Policy and Loss
with Related to Acquisition Adjustment Premiums
Registrant Current Year Prior Years Costs Expenses Written
------------ -------------- ------------ ------------ ----------- ----------
United Coastal
Liability Insurance:
2000 1,070,000 185,032 1,303,916 7,252,037 3,887,000
========= ========== ========= ========= =========
1999 1,660,000 (225,633) 1,528,179 5,315,006 3,544,657
========= ========== ========= ========= =========
1998 3,123,183 (1,167,367) 1,852,218 6,572,054 4,351,983
========= ========== ========= ========= =========
ACSTAR Bonding:
2000 1,371,000 (1,119,124) 2,001,561 2,145,080 5,024,005
========= ========== ========= ========= =========
1999 1,431,120 (1,192,600) 1,543,783 2,669,290 4,645,343
========= ========== ========= ========= =========
1998 1,385,484 (1,154,572) 1,225,718 146,320 4,026,634
========= ========== ========= ========= =========
47
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows for each director (a) his or her age, (b) the year in
which the director first served as a director of the Company, (c) position with
the Company and business experience during the past five years, including
principal occupation, (d) his or her committee assignments, and (e) his or her
other directorships. Each director is elected for a term of one year and until
his or her successor shall be elected.
NAME AGE DIRECTOR POSITION WITH THE COMPANY AND BUSINESS EXPERIENCE
SINCE DURING LAST FIVE YEARS, INCLUDING OCCUPATION
HENRY W. NOZKO, SR. (1) 81 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) 54 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) 82 1982 Housewife during past five years.
JOHN C. CREASY 81 1987 Retired Chief Executive Officer of Danbury Hospital,
Member, Board of United Coastal Insurance Company.
Member of the Compensation Committee and Audit
Committee.
ARTHUR R. MOORE 67 1999 Former General President of Sheet Metal Workers'
International Association. Member of the Audit
Committee.
ALFRED T. ZLOTOPOLSKI 54 1999 General Secretary-Treasurer of the Sheet Metal
Workers' International Association as of March 1,
1999. Previously was the Business Manager and
President of Local 36 of the Sheet Metal Workers'
International Association. Member of the Audit
Committee.
(1) Mr. Henry W. Nozko, Sr. and Mrs. Victoria C. Nozko are husband and wife
and Mr. Henry W. Nozko, Jr. is their son.
48
49
Executive Officers of the Registrant:
The following are the Company's Executive Officers, their age, and offices held.
Officers are appointed to serve until the meeting of the Board of Directors
following the next Annual Meeting of Stockholders and until their successors
have been elected.
NAME AGE OFFICES HELD
---- --- ------------
Henry W. Nozko, Sr. 81 President, Chief Executive
Officer, Director and
Chairman of the Board
since 1951.
Henry W. Nozko, Jr. 54 Executive Vice President since
1982. Treasurer since 1973.
Director since 1971, and Chief
Operating Officer since 1985.
Robert H. Frazer 54 Vice President since 1982.
Secretary since 1992. General
Counsel since 1977.
Michael P. Cifone 42 Vice President-Finance since
1990. Corporate Controller
since 1989.
49
50
The following table provides information on option grants during 2000 to the
named Executive Officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
STOCK PERCENTAGES OF TOTAL EXERCISE EXPIRATION POTENTIAL REALIZABLE VALUE AT
OPTIONS OPTIONS GRANTED TO PRICE DATE ASSUMED ANNUAL RATES OF STOCK PRICE
GRANTED INDIVIDUALS IN FISCAL ($/SH) APPRECIATION FOR OPTION TERM (B)
(A) YEAR
5% 10%
------- --------
Henry W. Nozko, Sr. 10,000 14.29% $7.25 12/14/2010 $46,720 $115,546
Henry W. Nozko, Jr. 10,000 14.29% $7.25 12/14/2010 $46,720 $115,546
Michael P. Cifone 10,000 14.29% $7.25 12/14/2010 $46,720 $115,546
(A) Options were granted at an exercise price equal to the fair market value
per share of ACMAT Corporation's Class A Stock as of the date of grant and
are exercisable starting six months after the grant date.
(B) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could
be achieved for the respective options if exercised at the end of the
option term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future stock price. Actual gains, if any, on stock option exercises
are dependent on the future performance of the stock, overall market
conditions and the option holders' continued employment through the
vesting period. This table does not take into account any appreciation in
the price of the Class A Stock from the date of grant to date.
50
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.
NAME AND PRINCIPAL ANNUAL ALL OTHER
POSITION COMPENSATION (A) COMPENSATION (B)
YEAR SALARY BONUS
Henry W. Nozko, Sr. 2000 $460,700 $200,000 $10,432
Chairman, President 1999 $447,200 $395,000 $10,532
And Chief Executive Officer 1998 $447,200 $ -- $12,238
Henry W. Nozko, Jr. 2000 $332,000 $150,000 $10,432
Executive Vice President and Chief 1999 $322,500 $315,000 $10,430
Operating Officer 1998 $322,500 $ -- $12,120
Robert H. Frazer, Esq 2000 $136,069 $ -- $ 6,648
Vice President, Secretary and 1999 $171,600 $ 25,000 $10,392
General Counsel 1998 $171,600 $ -- $12,075
Michael P. Cifone 2000 $154,500 $100,000 $10,432
Vice President-Finance 1999 $150,000 $155,000 $10,289
1998 $114,400 $ -- $10,202
(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) 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
52
The following table provides information on options during 2000 by the named
Executive Officers and the value of their unexercised options at December 31,
2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END 2000 OPTION VALUES
Number of
Unexercised Value of Unexercised
Options at In-the-Money Options
Name 12/31/00 (1) at 12/31/00 (2)
---- ------------ ----------------------
Exercisable/Unexercisable Exercisable/Unexercisable
Henry W. Nozko, Sr.
- ACMAT Class A Stock Options 46,000/10,000 -/-
- ACMAT Common Stock Options 50,000/- $412,500/-
Henry W. Nozko, Jr.
- ACMAT Class A Stock Options 45,000/10,000 -/-
- ACMAT Common Stock Options 50,000/- $412,500/-
Robert H. Frazer
- ACMAT Class A Stock Options 35,000/- -/-
Michael P. Cifone
- ACMAT Class A Stock Options 10,000/10,000 -/-
(1) Represents the number of options held at year end.
(2) Represents the total gain that 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
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
As of March 15, 2001, no person was known to the Company to be the beneficial
owner of more than five percent of its outstanding shares of Common Stock or
Class A Stock except as set forth in the following table which also shows, as of
that date, the total number of shares of each class of stock of the Company
beneficially owned, and the percent of the outstanding class of stock so owned,
by each director, and by all directors and officers of the Company, as a group:
PERCENTAGE PERCENTAGE
CLASS NUMBER OF SHARES OF CLASS OF TOTAL
BENEFICIAL OWNER OF STOCK BENEFICIALLY OWNED (1) OUTSTANDING VOTING POWER (15)
---------------- -------- ---------------------- ------------ -----------------
Henry W. Nozko, Sr. Common 417,980 (4) 68.79% 52.46%
Class A 61,000 (3) 3.04
Henry W. Nozko, Jr. Common 196,924 (2)(4) 32.41 26.45
Class A 169,074 (2)(5) 8.42
Victoria C. Nozko Class A 52,000 (6) 2.63 .69
John C. Creasy Common -- -- .35
Class A 26,500 (7) 1.34
Arthur R. Moore Class A 10,000 (8) .51 .13
Alfred T. Zlotopolski Class A 10,000 (8) .51 .13
Sheet Metal Workers'
National Pension Fund Class A 1,400,000 (9) 41.76 15.68
Franklin Resources, Inc. Class A 443,500 (10) 22.72 5.89
Queensway Financial
Holdings Limited Class A 314,050(11) 16.09 4.17
EQSF Advisors, Inc. Class A 200,678 (12) 10.28 2.67
First Manhattan Co. Class A 175,513 (13) 8.99 2.33
Old Kent Financial Corp. Class A 130,000 (14) 6.66 1.73
All Directors and
Officers (8 persons)
As a Group Common 614,904 93.51 74.53
Class A 384,289 17.55
(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 400 shares of Class A Stock and 5,925 shares of Common
Stock held by his wife, Gloria C. Nozko.
(3) Includes options to purchase 56,000 shares of Class A Stock.
(4) Includes options to purchase 50,000 shares of Common Stock.
(5) Includes options to purchase 55,000 shares of Class A Stock.
(6) Includes options to purchase 25,000 shares of Class A Stock.
(7) Includes options to purchase 26,500 shares of Class A Stock.
(8) Includes option to purchase 10,000 shares of Class A Stock.
(9) 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.
(10) Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
Mateo, CA 94404.
(11) Address of Queensway Financial Holdings Limited is 90 Adelaide Street
West, Toronto, Ontario M5H3V9.
(12) Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
10017-2023.
(13) Address of First Manhattan Co. is 437 Madison Avenue, New York, NY 10022.
(14) Address of Old Kent Financial Corp. is 111 Lyon Street N.W., Grand Rapids,
MI 49503.
(15) Based upon one vote for each share of Common Stock and one-tenth vote for
each share of Class A Stock.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Sheet Metal Workers' National Pension Fund
The Pension Fund has the right to convert indebtedness of ACMAT to the Pension
Fund in the principal amount of $15,400,000 into shares of Class A Stock at the
current conversion price of $11.00 per share pursuant to the terms of a 30-year
unsecured, subordinated debenture dated July 1, 1992 and bearing interest at the
annual rate of 11.5%.
Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a
voting agreement pursuant to which the parties have agreed to vote their
respective shares of Class A Stock in favor of the Pension Fund's nominees to
the ACMAT Board of Directors.
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. 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
$389,000 in reinsurance premiums in the year ended December 31, 2000.
Other Relationships
During the year ended December 31, 2000, the Company paid to Dr. Arthur Cosmas
$157,781 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, 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements - December 31, 2000,
1999 and 1998
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2. Financial Statement Schedules
Consolidated Schedules included in Part II of this Report-Years
ended December 31, 2000, 1999 and 1998:
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 2000.
(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 as filed
as an Exhibit to the Company's Form 10-k for the year ended December
31, 1998 is incorporated by reference.
(4c) Open-end Mortgage Deed and Security Agreement between ACMAT
Corporation and Webster Bank as filed as an Exhibit to the Company's
Form 10-K for the year ended December 31, 1999 is incorporated by
reference.
(4d) Commercial Credit Agreement between ACMAT Corporation and Webster
Bank as filed as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1999 is incorporated by reference.
(4e) Revolving Credit Note between ACMAT Corporation and Webster Bank as
filed as an Exhibit to the Company's Form 10-K for the year ended
December 31, 1999 is incorporated by reference.
(4f) Term Note between ACMAT Corporation and Webster Bank as filed as an
Exhibit to the Company's Form 10-K for the year ended December 31,
1999 is incorporated by reference.
(10a) Annual Management Compensation Plan as filed as an Exhibit to the
Company's 1984 Form 10-K is incorporated herein by reference.
(10b) Stock Purchase Agreement dated as of July 1, 1992 between ACMAT
Corporation and the Sheet Metal Workers' National Pension Fund
together with Note Agreement Re: 11 1/2% Convertible Subordinated
Notes due 2012 filed as Exhibit 10g to the Company's Form 10-K for
the year ended December 31, 1992 is incorporated herein by
reference.
(21) Subsidiaries of ACMAT.
(27) Financial Data Schedule.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant had duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACMAT CORPORATION
Dated: March 30, 2001 By: /s/ Henry W. Nozko, Sr.
------------------------------
Henry W. Nozko, Sr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Chairman of the Board,
/s/ Henry W. Nozko, Sr President, Chief Executive
------------------------------ Officer and Director March 30, 2001
Henry W. Nozko, Sr.
Chief Operating Officer,
/s/ Henry W. Nozko, Jr. Executive Vice President
------------------------------ Treasurer and Director March 30, 2001
Henry W. Nozko, Jr.
Vice President - Finance
/s/ Michael P. Cifone (Principal Financial and
---------------------- Accounting Officer) March 30, 2001
Michael P. Cifone
/s/ Victoria C. Nozko Director
------------------------------ March 30, 2001
Victoria C. Nozko
/s/ John C. Creasy Director March 30, 2001
-----------------------------
John C. Creasy
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INDEX TO EXHIBITS
Regulation S-K Exhibit Page Number
---------------------- -----------
Exhibit 3 - Bylaws Incorporated by Reference
Exhibit 3a - Certificate of Incorporation
as amended May 1, 1991 Incorporated by Reference
Exhibit 4b - Promissory Note between ACMAT
and Webster Bank Incorporated by Reference
Exhibit 4c - Open-end Mortgage Deed/Security
Agreement between ACMAT and
Webster Bank. Incorporated by Reference
Exhibit 4d - Commercial Credit Agreement between
ACMAT and Webster Bank Incorporated by Reference
Exhibit 4e - Revolving Credit Note between ACMAT
and Webster Bank Incorporated by Reference
Exhibit 4f - Term Note between ACMAT and Webster Bank Incorporated by Reference
Exhibit 10a - Annual Management Incorporated by Reference
Compensation Plan
Exhibit 10b - Stock Purchase and Note Agreement Incorporated by Reference
between ACMAT Corporation
and The Sheet Metal Workers'
National Pension Fund
Exhibit 21 - Subsidiaries of ACMAT Page 58
57