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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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0 - 6234
ACMAT CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-0682460
(State of incorporation) (I.R.S. Employer Identification No.)
233 Main Street
New Britain, Connecticut 06050-2350
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(860) 229-9000
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, without par value
Class A Stock, without par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) or the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /XX/ No / /
The aggregate market value as of March 1, 1998 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $44,778,726.
As of March 1, 1998 there were 596,857 shares of the registrant's Common Stock
and 2,697,273 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 Industry Segments 3
Description of Business Segments 3
Insurance and Surety Bonding 3
General 3
Liability Insurance 4
Surety Bonding 5
Insurance 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
Construction 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 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 46
PART III
Item 10. Directors and Executive Officers of the Registrant 46
Item 11. Executive Compensation 48
Item 12. Security Ownership of Certain Beneficial Owners and Management 50
Item 13. Certain Relationships and Related Transactions 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 51
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PART I
ITEM 1. BUSINESS
General
ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial
insurance and bonding coverages for contractors, architects, engineers and other
professionals in the construction and environmental fields and other specialty
insurance. The Company derives its underwriting expertise from its construction
and remediation operations. Through United Coastal Insurance Company ("United
Coastal Insurance"), the Company provides a broad line of general, professional,
environmental and other liability insurance primarily to environmental
contractors and specialty trade contractors and architects, engineers and other
professionals. Through ACSTAR Insurance Company ("ACSTAR Insurance"), the
Company provides surety bonds for general building, specialty trade and
environmental contractors and others. Both United Coastal Insurance and ACSTAR
Insurance are rated A (excellent) by The A.M. Best Co., Inc. ("A.M. Best"). In
1997, insurance operations accounted for over 67% of the Company's consolidated
revenues.
The Company is also engaged in construction contracting which consists of
interior contracting services involving the design and furnishing of building
interiors and asbestos abatement services for commercial, industrial and
institutional buildings.
Effective September 16, 1996, the Company completed the merger of United Coasts
Corporation into ACMAT. United Coasts Corporation shareholders received one
share of ACMAT Class A stock for each approximately 1.536 shares of United
Coasts Corporation stock. As a result of the merger, ACMAT issued approximately
1,100,000 shares of its Class A stock amounting to a purchase price of
approximately $14 million for the 16% minority interest in the insurance holding
company subsidiary. As a result, United Coastal Insurance Company, formerly a
subsidiary of United Coasts, became a wholly-owned subsidiary of ACMAT and its
affiliates.
Financial Information about Industry Segments
Financial information relating to the two segments is set forth in Note 16 to
the consolidated financial statements on page 38 of this document.
In June 1997, Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 was developed jointly by the
FASB and the Accounting Standards Board of the Canadian Institute of Charted
Accountants in response to request from financial statement users for additional
and better segment information. This statement is effective for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated, unless it is
impracticable to do so. The Company does not anticipate that SFAS No. 131 will
significantly impact the composition of its current operating segments which are
consistent with the management approach. The Company anticipates that the
current insurance segment will be further disclosed as two segments as a result
of SFAS No. 131.
INSURANCE AND SURETY BONDING
General
The Company's insurance subsidiaries primarily provide liability insurance and
surety bonding for general, specialty trade, environmental remediation, asbestos
and lead abatement contractors and professional liability for architects,
engineers, environmental consultants and others. The Company also provides
products liability insurance for manufacturers and distributors. This highly
specialized insurance market includes general liability, pollution liability,
environmental consulting liability, hazardous waste storage and treatment
pollution liability and other related liabilities. Fewer property and casualty
insurers serve these markets due to the technical skills required in the
underwriting process and the high degree and intensive amount of service
required to tailor coverages to the special needs of policyholders and to
provide timely responses to individual contract requirements.
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Liability Insurance
The liability insurance lines of the Company, which consist primarily of
contractor policies and professional liability policies, are discussed more
fully below:
Contractors
- - General Liability - Policies are offered to general contractors and
specialty trade contractors involved in plumbing, heating, electrical,
framing, roofing, drilling, excavation, demolition, road work, and
other contracting activities. Coverage is also offered for other
specialized non-contractor general liability risks. Coverage is limited
to third-party bodily injury and property damage arising out of covered
operations. General liability insurance is offered on either a
claims-made or occurrence basis.
- - Contractor Pollution Liability - Policies are offered to contractors
involved in hazardous waste remediation or cleanup, installation or
removal of storage tanks, or the transportation of hazardous waste.
Coverage is provided for third party-bodily injury or property damage
liability caused by release of, or exposure to, pollutants as a result
of contractors' operations. Contractor pollution liability insurance is
offered on a claims-made basis.
- - Asbestos and Lead Abatement Liability - Policies are offered to
contractors involved in the removal or encapsulation of asbestos and/or
lead containing materials from structures or their containment through
appropriate encapsulation or repair. Coverage is provided for
third-party bodily injury and property damage liability as a result of
a release of asbestos or lead which arises out of the contractors'
operations. Asbestos and lead abatement liability insurance is provided
on either a claims-made or occurrence basis.
Professionals
- - Architects and Engineers Professional Liability - Policies are offered
to architects and engineers and consultants in the fields of
architecture; civil, electrical, mechanical, structural and process
engineering; construction/property management; design/build services;
laboratory testing and surveying. Project professional liability
policies are also offered for architect and engineer design teams and
owner controlled wrap-ups. All policies are written on a claims-made
basis.
- - Environmental Asbestos and/or Lead Consultants Professional Liability -
Policies are offered to consultants involved in providing services such
as environmental assessments, design/build services, asbestos or lead
consulting, remedial investigations and feasibility studies, and
storage tank consulting. Coverage is provided for liability arising out
of the acts, errors or omissions of a consultant in the performance of
professional services. All professional liability coverages are written
on a claims-made basis.
Owners and Lenders
- - Hazardous Waste Storage and Treatment Pollution Liability - Policies
are offered on a claims-made basis in response to the insurance
requirements of the Environmental Protection Agency in connection with
facilities subject to the Resource Conservation and Recovery Act of
1976 ("RCRA").
- - Site Specific Pollution Liability - These policies cover pollution
claims arising or emanating from a specific site and are provided on a
claims-made basis. Comprehensive site evaluations are required prior to
providing coverage for any site.
- - Lenders Pollution Liability - Policies are offered to financial
institutions for pollution occurring at property owned or controlled by
the institution as a result of foreclosure or otherwise. Lender
pollution liability coverage is offered on a claims-made basis.
Products Liability
- - Products Liability - Policies are offered on a claims-made or
occurrence basis to manufacturers for a variety of products including chemicals,
fertilizers, pesticides, pollution control devices, storage tanks and other.
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The Company customizes many of its insurance policies to suit the individual
needs of its insureds. Combined policies insuring multiple exposures under one
policy form and one combined policy limit are available.
Surety Bonding
Surety bonds are written for general, specialty trade, environmental, asbestos
and lead abatement contractors. The Company also offers a wide variety of
miscellaneous bonds. Most bonds are supported by various levels of collateral
based upon the financial condition of the customer.
The Company generally requires cash or irrevocable letters of credit to
collateralize a portion or all of most bonds issued. In addition, the Company
will only accept irrevocable letters of credit from financial institutions which
have a rating of C "sound credit risk" or higher as determined by Thomson
BankWatch, Inc. However, no assurance can be made that such financial
institutions will maintain their financial strength and, thus, that funds
guaranteed under letters of credit will be available, if needed, to offset any
potential future claims.
The Company provides the following types of bonds:
- - Payment and performance bonds - Bonds 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 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,
1997 1996 1995
---- ---- ----
GAAP Ratios:
Loss ratio 28.8% 30.0% 30.0%
Expense ratio 48.0 43.5 41.4
---- ---- ----
GAAP combined ratio 76.8 73.5 71.4
==== ==== ====
Statutory Ratios:
Loss ratio 29.5 30.5 30.5
Expense ratio 45.0 42.7 41.9
---- ---- ----
Statutory combined ratio 74.5 73.2 72.4
==== ==== ====
The increase in the combined ratio over the past three years results primarily
from the decline in premiums. See Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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Underwriting
The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over forty-eight 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
The Company reinsures the excess limit on each insurance policy above $2 million
up to $5 million for liability and reinsures $10 million of $15.5 million of
individual bond limits offered by the Company through a treaty with two
companies, Transatlantic Reinsurance Company, an affiliate of American
International Group, Inc. and United States Fidelity & Guaranty Company, each
rated "A+" and "A", respectively, by A. M. Best. The Company has additional
liability treaty excess of loss reinsurance which provides limits on a per
policy basis of $5,000,000 per occurrence or claim made and in the aggregate
excess of $5,000,000 per occurrence or claim made and in the aggregate. To date,
the Company's reinsurers have fulfilled their obligations under their
reinsurance contracts with the Company. Facultative reinsurance is also used for
current insureds seeking project specific excess insurance. In general, a
reinsurance transaction takes place when an insurance company cedes all or a
portion of its exposure to liability on insurance written or surety bonds issued
to another insurer which assumes such exposure, as if the ceding insurer were
itself purchasing insurance from the assuming insurer. Reinsurance does not
legally discharge an insurance carrier from its primary liability to a
policyholder for the face amount of coverage and, accordingly, the financial
stability of the Company's reinsurers is an important factor in determining the
Company's ultimate exposure to claims.
The availability and price of reinsurance fluctuates according to market
conditions. 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
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its indemnitors. Management believes that the reserves for losses and loss
adjustment expenses at December 31, 1997 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.
1997 1996 1995
------------ ------------ ------------
Balance at January 1 $ 47,960,084 $ 45,235,311 $ 40,954,783
Less reinsurance recoverable 3,841,001 3,872,099 4,228,879
------------ ------------ ------------
Net balance at January 1 44,119,083 41,363,212 36,725,904
Incurred related to:
Current year 5,176,030 7,137,183 8,015,877
Prior years (838,778) (1,167,203) (900,506)
------------ ------------ ------------
Total incurred 4,337,252 5,969,980 7,115,371
Payments related to:
Current year 94,398 153,514 111,989
Prior years 2,939,345 3,060,595 2,366,074
------------ ------------ ------------
Total Payments 3,033,743 3,214,109 2,478,063
Net balance at December 31 45,422,592 44,119,083 41,363,212
Plus reinsurance recoverable 3,478,121 3,841,001 3,872,099
------------ ------------ ------------
Balance at December 31 $ 48,900,713 $ 47,960,084 $ 45,235,311
============ ============ ============
The decrease of incurred losses and loss adjustment expenses of prior years
represents a reallocation of reserves among accident years. There can be no
assurance, however, that the Company's reserves will be sufficient to cover
ultimate losses and loss adjustment expenses or that future adjustments to
losses and loss adjustment expense reserves will not be required.
The Company has no exposure to any asbestos or environmental claims associated
with general liability policies issued with the pre-1986 pollution exclusion.
Policies written with the exclusion are typically associated with mass tort
environmental and asbestos claims. The Company has never issued a policy with
the pre-1986 pollution exclusion. The Company's exposure to asbestos and
environmental liability claims is primarily limited to asbestos and
environmental liability insurance for contractors and consultants involved in
the remediation, removal, storage, treatment and/or disposal of environmental
and asbestos hazards.
As of December 31, 1997, 1996 and 1995 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 $57,723,399,
$59,968,945 and $58,835,913, respectively. As of December 31, 1997, 1996 and
1995 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $48,900,713, $47,960,084 and
$45,235,311, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves result from the minimum statutory, or "Schedule P",
loss reserves required to be maintained by the Company's insurance subsidiaries,
partially offset by the netting of reinsurance recoverable against losses and
loss adjustment expense reserves for statutory purposes.
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The following losses and loss adjustment expense reserve runoff table is for the
combined insurance operations of the Company's insurance subsidiaries. ACSTAR
Insurance operations began in 1988. The run-off table presents the reserve
activity since the inception of United Coastal Insurance in 1985. The data for
1992 and prior periods are presented on a net basis in the reserve run-off
table. Restatement of prior periods is not practicable.
Each column shows the reserve held at the indicated calendar year-end and
cumulative data on payments and reestimated liabilities for that accident year
and all prior accident years making up that calendar year-end reserve.
Therefore, the redundancy (deficiency) is also a cumulative number for that year
and all prior years. It would not be appropriate to use this cumulative history
to project future performance.
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(thousands)
Liability for unpaid losses
and loss adjustment expenses 11,528 15,626 21,378 26,234 29,240 30,437 36,726 41,363 44,119 45,423
Liability reestimated as of:
One year later 11,528 15,476 21,378 26,234 29,240 30,437 35,825 40,193 43,282
Two years later 11,378 15,476 21,378 26,234 29,240 28,337 34,659 37,872
Three years later 11,378 15,476 21,378 26,234 26,000 27,170 29,913
Four years later 11,378 14,876 21,378 22,094 24,833 23,550
Five years later 10,778 14,876 16,642 20,927 22,284
Six years later 10,778 6,622 15,475 18,841
Seven years later 2,924 5,455 13,394
Eight years later 2,382 4,411
Nine years later 2,354
Cumulative Redundancy (deficiency): 9,174 11,215 7,984 7,393 6,956 6,887 6,813 3,491 839
Paid (cumulative) as of:
One year later 759 565 1,357 3,216 6,142 1,560 2,361 3,067 2,942
Two years later 1,026 743 4,067 8,699 7,574 3,655 4,582 5,256
Three years later 1,070 2,140 8,954 9,576 8,603 5,022 6,412
Four years later 1,178 3,460 10,233 10,488 9,554 6,189
Five years later 2,349 3,924 10,554 10,816 9,818
Six years later 2,355 4,010 10,858 10,856
Seven years later 2,238 4,012 10,874
Eight years later 2,354 4,011
Nine years later 2,354
Gross liability - end of year 34,730 40,955 45,235 47,960 48,901
Reinsurance recoverable 4,293 4,229 3,872 3,841 3,478
------ ------ ------ ------ ------
Net liability - end of year 30,437 36,726 41,363 44,119 45,423
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, 1997, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value", except
for the change in net writings for United Coastal. The change in net writings
was below the NAIC standard of 33% primarily due to a continuing soft insurance
market place and the Company's strategy to avoid current unfavorable pricing.
A.M. Best Ratings
A.M. Best ratings are indications of the solvency of an insurer based on an
analysis of the financial condition and operations of a company relative to the
industry in general. Occasionally, the requirement for A.M. Best's-rated insurer
is a condition imposed upon the contractor by the party engaging the contractor.
Certain insurance brokers also restrict the business they will place with
insurers which are not A.M. Best's-rated. The 1997 Best letter ratings range
from A++ (superior) to F (in liquidation).
Since 1994, United Coastal Insurance and ACSTAR Insurance each have an A.M.
Best's rating of A (excellent).
Risk-Based Capital
Risk-based capital requirements are used as early warning tools by the National
Association of Insurance Commissioners and the states to identify companies that
require further regulatory action. The ratio for each of the Company's insurance
subsidiaries as of December 31, 1997 was significantly above the level which
might require regulatory action.
CONSTRUCTION CONTRACTING
General
The Company provides a broad range of coordinated interior contracting services.
The Company began to offer asbestos abatement services in the 1970's and the
Company continues to be active in the asbestos abatement field. The Company
installs interiors in office buildings, retail establishments, schools,
colleges, churches, hospitals and other buildings. The Company's interior
contracting is provided both in connection with new buildings and in connection
with the remodeling and renovation of interiors of existing buildings usually
under contracts with building owners and building occupants.
The interior design, construction and asbestos abatement industries are highly
fragmented. Many interior contractors, in contrast to the Company, specialize in
a particular interior component such as ceilings or partitions. The Company
provides a broad range of coordinated interior contracting services, many of
which are performed by subcontractors.
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, 1997 and 1996:
December 31, 1997 December 31, 1996
----------------- -----------------
Total Number of Contracts. 12 14
Total unbilled contract amounts. $4,800,000 $8,700,000
Number of contracts with unbilled amounts in
excess of $400,000. 2 3
Aggregate unbilled amount of contracts in
excess of $400,000. $4,000,000 $8,200,000
The Company estimates that all of the December 31, 1997 backlog will be
completed prior to December 31, 1998.
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Materials
The Company purchases the materials it installs in the course of its
construction contracting operations from a number of suppliers. Most of the
Company's materials are standard building components which historically have
been readily available from several suppliers. Some components are manufactured
to the Company's specifications. Most of the materials used by the Company are
shipped directly to the job site by the manufacturer.
Contract Acquisition
The Company's work projects are obtained by lump sum fixed price bids, unit
prices or are negotiated. Contract prices are usually determined by competition
with other contractors.
Warranty
Each project usually contains a one-year warranty or guaranty period, wherein
the Company and its subcontractors warrant that the work is free from defects
and was performed in accordance with the plans and specifications. Occasionally,
the Company is required to make minor corrections or adjustments, but has never
incurred any significant costs in connection with any such work.
Asbestos Abatement Operations
Both the Company's insurance and construction contracting operations have
involved risks associated with asbestos. The Company has in the past insured and
continues to insure risks associated with asbestos abatement or containment
operations on both a claims-made and occurrence basis. Since harm from exposure
to asbestos fibers may not be detectable in humans for as much as thirty years,
losses under insurance contracts written on an occurrence basis may not be known
for some time.
The Company's construction contracting operations involve the removal of
asbestos. As asbestos containing materials deteriorate or become disturbed by
incidental or intentional contact, asbestos fibers may enter the air and can
circulate into the breathing zone of building occupants. Exposure to asbestos is
thought by some to be a cause of cancer. In the mid 1970's, the Company became
engaged in the removal of asbestos in addition to its other contracting
operations. Since that time, it has been engaged in hundreds of contracts
involving the removal of asbestos. Claims by non-employees related to asbestos
have been made against the Company from time to time and are pending and there
can be no assurance that claims will not be made in the future.
While the Company currently has claims pending against it by employees, the
Company believes that it is fully covered by workers' compensation insurance
with respect to any claims by current and former employees relating to asbestos
operations. The Company currently obtains its workers' compensation insurance in
those states in which it performs work either from state insurance funds or one
of several insurance companies designated in accordance with the Assigned Risk
Pool. The amount of workers' compensation insurance maintained varies from state
to state but is generally greater than the maximum recovery limits established
by law and is not subject to any aggregate policy limits. In the past, the
Company has received a number of asbestos-related claims from employees, all of
which have been fully covered by its workers' compensation insurance. The
Company believes, although no assurances can be given, that workers'
compensation insurance sufficient to cover all future claims will remain
available in accordance with applicable state laws.
MARKETING
Insurance and Surety Bonding
As an excess and surplus lines carrier, United Coastal Insurance markets its
policies through excess and surplus lines brokers only in those states in which
it is permitted to write coverage. Currently, United Coastal Insurance is
permitted to write excess and surplus lines insurance as a nonadmitted insurer
in forty-six states, the District of Columbia, Puerto Rico and the Virgin
Islands.
ACSTAR Insurance offers payment and performance bonds through carefully selected
insurance agents which specialize in the needs of contractors. All underwriting
approvals and issuance of policies and bonds are performed directly by the
Company's insurance subsidiaries.
The Company's insurance products are marketed in all 50 states primarily through
several of the largest insurance brokers, including Johnson & Higgins, Marsh &
McLennan, Willis Corroon, AON, Inc. and Sedgwick.
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Construction Contracting
The Company markets its construction contracting services directly to building
owners and building occupants. Project opportunities are brought to the
attention of the Company through various sources such as F. W. Dodge Company,
which publishes lists of projects available for bid, architects, owners, general
contractors, or engineers who are familiar with the Company. The Company also
depends upon repeat business and responses to the Company's advertising program
which is intended to emphasize ACMAT's packaged interior renovation capability.
ACMAT's sales force consists of its senior management and project managers, all
of whom function as construction consultants and work closely with owners,
tenants and architects.
COMPETITION
Insurance and Surety Bonding
The property and casualty insurance industry is highly competitive. The Company
competes with large national and smaller regional insurers in each state in
which it operates, as well as monoline specialty insurers. The Company's
principal competitors include certain insurance subsidiaries of American
International Group, Inc. ("AIG"), Reliance Insurance Group, Zurich Insurance
Group, Design Professionals Insurance Company, CNA Insurance Companies and
Lloyd's of London. Many of its competitors are larger and have greater financial
resources than the Company. Among other things, competition may take the form of
lower prices, broader coverage, greater product flexibility, higher quality
services or the insurer's rating by independent rating agencies. The Company
competes with admitted insurers, surplus line insurers, new forms of insurance
organizations such as risk retention groups, and alternative self-insurance
mechanisms.
Competition in the field of surety bonding is intense and many of the Company's
competitors are larger and have greater surplus than the Company, thereby
allowing them to provide bonds with higher limits than those which the Company
is able to provide. The Company's principal competitors include the St. Paul
Companies, Inc., Reliance Insurance Group, AIG and CNA. The Company's insurance
subsidiaries hold primary and reinsurance certificates of authority as
acceptable sureties on Federal bonds as do approximately 250 to 300 other surety
companies. The certificates give the Company an advantage over companies which
are not certified by the United States Treasury Department with respect to
surety bonding on Federal projects in that such certification has become a
standard with respect to both Federal and other bonds. Approximately one-half of
the surety bonds written by the Company's subsidiaries are required to be
provided by a Treasury listed company. With respect to other bonds, the Company
faces competition from as many as 1,000 additional non-certified surety
companies.
Construction Contracting
Competition in the interior construction business serviced by ACMAT generally is
intense. Historically, a majority of the Company's construction business was
performed on projects on which the Company had been in competition with other
contractors. The Company 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
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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, 1997, the Company's insurance subsidiaries had securities with an aggregate
book value of approximately $9.9 million on deposit with various state
regulatory authorities.
The insurance subsidiaries of ACMAT are restricted as to the amount of cash
dividends they may pay. United Coastal Insurance is restricted by the Arizona
Insurance Holding Company Systems Act as to the amount of dividends it may pay
without the prior approval of the Arizona Department. During 1997, United
Coastal Insurance paid $10,001,200 in dividends. At January 1, 1998,
approximately $5,300,000 is available for the payment of dividends by United
Coastal Insurance in 1998 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 1997, ACSTAR paid
$5,600,000 in dividends to ACSTAR Holdings. At January 1, 1998, approximately
$4,732,000 is available for the payment of dividends by ACSTAR Insurance in 1998
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 excluded from earnings and recorded as a
separate component of stockholders' equity, net of estimated income taxes.
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The Company invests primarily in tax-exempt securities as part of its strategy
to maximize after-tax income. Such strategy considers, among other factors, the
impact of the alternative minimum tax. The following table summaries the fair
value fixed maturity investments portfolio at December 31, 1997 and 1996
(dollars in thousands):
December 31,
1997 1996
Percent Percent
of of
Amount Total Amount Total
-------- ----- -------- -----
Fixed maturities available for sale (1):
U.S. government and government
agencies and authorities $ 34,320 25.4% 38,322 27.3
State and political subdivisions 43,976 32.5 55,135 39.2
Industrial and Miscellaneous 15,137 11.2 -- --
Mortgage-backed securities 8,420 6.2 54 --
-------- ----- -------- -----
Total fixed maturities available for sale 101,853 75.3 93,511 66.5
Equity securities (2) 1,011 .7 11 --
Short-term investments (3) 32,422 24.0 46,969 33.5
-------- ----- -------- -----
Total investments $135,286 100.0% $140,491 100.0%
======== ===== ======== =====
(1) Fixed maturities available for sale are carried at fair value. Total
cost of fixed maturities was approximately $101,524,000 at December 31,
1997 and $93,398,000 at December 31, 1996.
(2) Equity securities are carried at fair value. Total cost of equity
securities was approximately $983,000 at December 31,1997 and $5,000 at
December 31, 1996.
(3) Short-term investments, consisting primarily of money market
instruments maturing within one year are carried at cost which, along
with accrued interest, approximates fair value.
The following table sets forth the fair value of fixed maturities in the fixed
maturity investment portfolio at December 31, 1997 and 1996 (dollars in
thousands):
December 31,
1997 1996
Percent Percent
of of
Amount Total Amount Total
-------- ----- -------- -----
Due in (1):
One year or less $ 46,296 45.5% $ 41,559 44.4%
After one year through five years 55,149 54.1 51,231 54.8
After five years through ten years 408 .4 372 .4
After ten years -- -- 349 .4
-------- ----- -------- -----
$101,853 100.0% $ 93,511 100.0%
======== ===== ======== =====
(1) Based on stated maturity dates with no prepayment assumptions.
Actual maturities may differ because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
The Company's insurance subsidiaries are subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1997, the Company's
investments complied with such laws and regulations.
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Investment results for the years ended December 31, 1997, 1996 and 1995 are
shown in the following table (dollars in thousands):
1997 1996 1995
-------- -------- --------
Invested assets (1) $140,029 $139,282 $129,719
Investment income (2) $ 6,505 $ 6,536 $ 6,036
Average yield 4.65% 4.69% 4.65%
(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, 1997, the Company employed approximately 30 persons, all in
the United States. None of its current employees are employed subject to
collective bargaining agreements. The Company believes that its relations with
all of its employees are excellent.
ITEM 2. PROPERTIES
The Company and its subsidiaries occupy a 7 story office building located at 233
Main Street, in New Britain, Connecticut. ACMAT leases approximately 40% of the
building to unaffiliated tenants. The office building is suitable and adequate
for ACMAT's current and future requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal actions arising in the ordinary course of its
business. In management's opinion, the Company has adequate legal defenses that
respecting those actions where the Company is a defendant, has appropriate
insurance reserves recorded, and does not believe their settlement will
materially affect the Company's operations or financial position.
The Company has, together with many other defendants, been named as a defendant
in approximately 183 actions brought in Connecticut state courts by injured or
deceased individuals or their representatives based on product liability claims
relating to materials containing asbestos. No specific claims for monetary
damages are asserted in these actions. Although it is early in the litigation
process, the Company does not believe that its exposure in connection with these
cases is significant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
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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.
1997 1996
HIGH LOW HIGH LOW
COMMON STOCK
1st Quarter 20 20 16 15
2nd Quarter 20 20 20 15
3rd Quarter 21-1/2 20-1/2 18-7/8 17
4th Quarter 21 21 20-1/2 18
CLASS A STOCK
1st Quarter 16-1/4 14-1/4 13-3/4 12-1/2
2nd Quarter 16-1/2 15 13 11-5/8
3rd Quarter 19-3/4 15-1/2 13 11-1/2
4th Quarter 19-1/2 17 14-3/4 12-1/2
No dividends have been paid in the past five years and there is no intention of
paying dividends in the near future. As of March 18, 1998, there were 360 Common
Stock shareholders of record and 980 Class A Stock shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Revenues $ 33,552,135 $ 37,035,305 $ 41,857,398 $ 40,755,676 $ 40,193,622
Total Assets 176,208,762 184,359,566 180,402,238 168,494,814 174,609,667
Long-Term Debt 48,212,727 35,807,419 40,127,590 43,405,266 49,832,463
Stockholders' Equity 39,577,739 49,702,404 37,587,259 38,004,935 36,686,002
Net Earnings 4,456,949 5,293,111 5,350,280 4,839,861 3,909,117
Basic Earnings Per Share 1.29 1.56 1.49 1.20 .93
Diluted Earnings Per Share 1.12 1.22 1.17 1.18 .91
Note: No cash dividends were paid during any of the periods above.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1997 AND 1996:
Earned Premiums
Earned premiums in 1997 were $15,045,844 compared to $19,899,936 in 1996. Net
written premiums were $12,680,197 in 1997 compared to $18,041,488 in 1996. The
decrease in earned premiums in 1997 reflects the 30% decrease in 1997 net
written premiums over 1996 net written premiums primarily due to a continuing
soft insurance market place and the Company's strategy to avoid current
unfavorable pricing in the Company's casualty operations. Variances in net
written premiums have historically occurred due to the fluctuations in size,
number and timing of bonds and policies bound by the Company. The Company will
maintain its existing pricing strategy and high level of service.
Contract Revenues
Contract revenues were $10,056,322 in 1997 compared to $9,415,734 in 1996.
Construction revenue is difficult to predict in 1998 and depends greatly on the
successful securement of contracts bid. The Company's construction backlog at
December 31, 1997 was approximately $4,800,000 compared to $8,700,000 at
December 31, 1996.
Investment Income, Net
Net investment income was $6,504,716 in 1997 compared to $6,535,572 in 1996,
representing effective yields of 4.65% and 4.69%, respectively. Invested assets,
including cash and cash equivalents, were $137,381,669 and $142,677,985 at
December 31, 1997 and 1996, respectively. The decrease in invested assets is
attributable to the net cash flow used to purchase stock and repay debt offset
in part by written premiums, cash collateral and the reinvestment of investment
income offset by the purchase of stock and the repayment of debt.
Net Realized Capital Gains
Realized capital gains from the sale of investments during 1997 were $282,667
compared to realized capital gains of $257,774 in 1996.
Other Income
Other income was $1,662,586 in 1997 compared to $926,289 in 1996. The increase
in other income reflects earnings of $965,845 from the limited partnership
investments in 1997.
Cost of Contract Revenues
Cost of contract revenues were $9,331,103 in 1997 compared to $8,396,344 in
1996. The increase in cost of contract revenues during 1997 compared to 1996
reflects the increase in contract revenues. Costs of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues).
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $4,337,252 in 1997 compared to
$5,969,980 in 1996. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1996 to 1997. Losses and
loss adjustment expense reserves represent management's estimate of the ultimate
cost of unpaid losses incurred for these periods relative to premiums earned.
Amortization of Policy Acquisition Costs
Amortization of policy acquisition costs was $2,802,993 in 1997 as compared to
$3,617,308 in 1996. Policy acquisition costs, primarily commissions, are
deferred and amortized over the policy or bond term.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5,767,808 in 1997 compared to
$5,610,176 in 1996. The increase in selling, general and administrative expenses
from 1997 to 1996 reflects an increase in the bad debts expense.
Interest Expense
Interest expense has increased to $5,116,414 in 1997 from $4,946,418 in 1996.
The increase in interest expense in 1997 is due primarily to an increase in
long-term debt issued to purchase stock offset in part by a decrease in
short-term debt.
Income Taxes
Income tax expense was $1,739,616 in 1997 compared to $2,313,828 in 1996,
representing effective Federal tax rates of 27.3% and 26.5%, respectively. The
Federal effective tax rate fluctuates according to the mix of tax exempt and
taxable securities held by the Company.
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1996 AND 1995:
Earned Premiums
Earned premiums in 1996 were $19,899,936 compared to $23,492,905 in 1995. Net
written premiums were $18,041,488 in 1996 compared to $22,856,791 in 1995. The
decrease in earned premiums in 1996 reflects the 21% decrease in 1996 net
written premiums over 1995 net written premiums. The Company has written fewer
new accounts as a result of what is believed to be an inadequate pricing
environment in the market. Variances in net written premiums have historically
occurred due to the fluctuations in size, number and timing of bonds and
policies bound by the Company.
Contract Revenues
Contract revenues were $9,415,734 in 1996 compared to $11,614,632 in 1995.
In 1996, the Company has focused on fewer, more profitable projects.
Investment Income, Net
Net investment income was $6,535,572 in 1996 compared to $6,062,883 in 1995,
representing effective yields of 4.64% and 4.58%, respectively. The increase in
investment income in 1996 over 1995 was due substantially to an increase in
total invested assets. Invested assets, including cash and cash equivalents,
were $142,677,985 and $135,886,913 at December 31, 1996 and 1995, respectively.
The increase in invested assets is attributable to the net cash flow generated
by written premiums, cash collateral and the reinvestment of investment income
offset by the purchase of stock and the repayment of debt.
Net Realized Capital Gains
Realized capital gains from the sale of investments during 1996 were $257,774
compared to realized capital gains of $7,897 in 1995. In December, 1996, the
Company sold fixed maturity securities with a book value of approximately
$34,000,000 resulting in a realized gain of approximately $204,000.
Cost of Contract Revenues
Cost of contract revenues were $8,396,344 in 1996 compared to $10,774,758 in
1995. The decrease in cost of contract revenues during 1996 compared to 1995
reflects the decrease in contract revenues. Cost of contract revenues vary from
period to period as a function of contract revenues (See Contract Revenues). The
Company's construction backlog at December 31, 1996 was approximately $8,700,000
compared to $3,600,000 at December 31, 1995.
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Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses were $5,969,980 in 1996 compared to
$7,115,371 in 1995. The decreases in the losses and loss adjustment expenses are
attributable to the decline in earned premiums from 1995 to 1996 without any
fluctuations in the loss ratios. Losses and loss adjustment expense reserves
represent management's estimate of the ultimate cost of unpaid losses incurred
for these periods relative to premiums earned.
Amortization of Policy Acquisition Costs
Amortization of policy acquisition costs was $3,617,308 in 1996 as compared to
$3,939,008 in 1995. The decrease in amortization of policy acquisition costs is
primarily attributable to the decrease in premiums earned. Policy acquisition
costs, primarily commissions, are deferred and amortized over the policy or bond
term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5,610,176 in 1996 compared to
$6,097,322 in 1995. The decrease in selling, general and administrative expenses
from 1996 to 1995 reflects a decrease in salary expense.
Interest Expense
Interest expense has increased to $4,946,418 in 1996 from $4,810,578 in 1995.
The increase in interest expense in 1996 is due primarily to the increase in
short term borrowings offset, in part, by a decrease in long-term debt.
Income Taxes
Income tax expense was $2,313,828 in 1996 compared to $2,414,400 in 1995,
representing effective Federal tax rates of 26.5% and 25.1%, respectively. The
Federal effective tax rate fluctuates according to the mix of tax exempt and
taxable securities held by the Company.
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, 1997 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 28.8%,30.0% and 30.0% for the years ended December 31, 1997, 1996
and 1995, respectively. These loss ratios are below industry averages and are
believed to be the result of conservative underwriting. There can be no
assurance that such loss ratios can continue. The Company's insurance
subsidiaries' expense ratios under GAAP were 48.0%, 43.5% and 41.4% for the
years ended
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December 31, 1997, 1996 and 1995, respectively. The Company's insurance
subsidiaries' combined ratios under GAAP were 76.8%, 73.5% and 71.4% for the
years ended December 31, 1997, 1996 and 1995, respectively. The increase in the
1997 combined ratio results primarily from the decline in premiums.
LIQUIDITY AND CAPITAL RESOURCES:
The Company internally generates sufficient funds for its current operations and
maintains a relatively high degree of liquidity in its investment portfolio. The
primary sources of funds to meet the demands of claim settlements and operating
expenses are premium collections, investment earnings and maturing investments.
The Company has no material commitments for capital expenditures and, in the
opinion of management, has adequate sources of liquidity to fund its operations
over the next 12 months.
ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from
operating activities primarily because of interest expense related to notes
payable and long-term debt incurred by ACMAT to acquire and capitalize its
insurance subsidiaries and to repurchase Company stock. ACMAT has also incurred
negative working capital as a result of holding short-term debt related to its
operations.
ACMAT's principal sources of funds are dividends from its wholly-owned
subsidiaries, intercompany and short-term borrowings, insurance underwriting
fees from its subsidiaries, construction contracting operations and rental
income. Management believes that these sources of funds are adequate to 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 realized cash flow from operations of $5,585,329 in 1997 compared to
$14,260,264 in 1996 and $19,289,320 in 1995. Net cash flows provided by
operations in 1997 were derived principally from premium collections and
collateral held. Substantially all of the Company's cash flow was 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 $4,993,298 in 1997. Net cash used
for investing activities amounted to $11,392,397 in 1996 and $11,431,882 in
1995.
The terms of the Company's note agreements contain limitations on payment of
cash dividends, re-acquisition of shares, borrowings and investments and require
maintenance of specified ratios and minimum net worth levels, including cross
default provisions. The payment of future cash dividends and the re-acquisition
of shares are restricted each to amounts of an available fund ("Available
Fund"). The Available Fund is a cumulative fund which is increased each year by
20% of the Consolidated Net Earnings (as defined). The Company is in compliance
with all covenants at December 31, 1997.
The Company maintains a short-term unsecured bank credit line of $10 million to
fund interim cash requirements. There was $5,000,000 outstanding under this line
of credit as of December 31, 1997. Effective June 30, 1994, this credit line was
renewed and modified to include an additional $8,000,000, six-year, term loan
which is repayable in quarterly installments commencing September 30, 1994.
Portions of the proceeds of such term loan were applied to the repayment of
intercompany debt and to the reduction of the Company's short-term credit line.
On November 7, 1995, the Company obtained a $7,500,000 Demand Discretionary Line
of Credit with The Bank of Boston Connecticut which expired on November 6, 1997.
Under the terms of the line of credit, interest on the outstanding balance is
calculated based upon the LIBOR plus 160 basis points in effect during the
borrowing period. There was $5,200,000 outstanding under this line of credit at
December 31, 1996.
During 1997, the Company purchased, in the open market and privately negotiated
transactions, 3,400 shares of its Common Stock at an average price of $20.44.
The Company also purchased, in open market and privately negotiated
transactions, 1,347,686 shares of its Class A Stock at an average price of
$14.98 per share.
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The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. Under applicable insurance
regulations, ACMAT's insurance subsidiaries are restricted as to the amount of
dividends they may pay to their respective holding companies, without the prior
approval of their domestic state insurance department. For 1998, the amount of
dividends ACMAT's insurance subsidiaries may pay, without prior approval of
their domestic state insurance departments, is limited to approximately
$10,032,000.
In 1998, the Company anticipates that internally generated funds and short-term
borrowings will be utilized for repayment of long-term debt. Principal
repayments on long-term debt is scheduled to be approximately $4,365,000 in
1998.
YEAR 2000 ISSUE
In 1997, the Company began converting its computer systems to be Year 2000
compliant (e.g. to recognize the difference between '99 and '00 as one year
instead of negative 99 years). The total cost of the project is estimated to be
less than $100,000 and is being funded through operating cash flows. The Company
is expensing all costs associated with these system changes. At December 31,
1997, approximately 35% of the Company's systems were compliant, with all
systems expected to be compliant by the end of 1998. However, there can be no
assurance that the systems of other companies on which the Company's systems
rely also will be timely converted or that any such failure to convert by
another company would not have an adverse effect on the Company's systems.
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, 1997 was significantly above the level which
might require regulatory action.
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,
1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements - December 31, 1997, 1996
and 1995
Consolidated Schedules included in Part II of this Report - Years ended
December 31, 1997, 1996 and 1995:
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
ACMAT Corporation:
We have audited the consolidated financial statements of ACMAT Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACMAT Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
Hartford, Connecticut KPMG Peat Marwick LLP
February 23, 1998
22
23
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
----------- ----------- -----------
Earned Premiums $15,045,844 19,899,936 23,492,905
Contract Revenues 10,056,322 9,415,734 11,614,632
Investment Income, Net 6,504,716 6,535,572 6,062,883
Net Realized Capital Gains 282,667 257,774 7,897
Other Income 1,662,586 926,289 679,081
----------- ----------- -----------
33,552,135 37,035,305 41,857,398
Losses and Loss Adjustment Expenses 4,337,252 5,969,980 7,115,371
Cost of Contract Revenues 9,331,103 8,396,344 10,774,758
Amortization of Policy Acquisition Costs 2,802,993 3,617,308 3,939,008
Selling, General and Administrative Expenses 5,767,808 5,610,176 6,097,322
Interest Expense 5,116,414 4,946,418 4,810,578
----------- ----------- -----------
27,355,570 28,540,226 32,737,037
----------- ----------- -----------
Earnings Before Income Taxes and Minority Interest 6,196,565 8,495,079 9,120,361
Income Taxes 1,739,616 2,313,828 2,414,400
----------- ----------- -----------
Earnings Before Minority Interest 4,456,949 6,181,251 6,705,961
Minority Interest -- (888,140) (1,355,681)
----------- ----------- -----------
Net Earnings $ 4,456,949 5,293,111 5,350,280
=========== =========== ===========
Basic Earnings Per Share $ 1.29 1.56 1.49
----------- ----------- -----------
Diluted Earnings Per Share $ 1.12 1.22 1.17
----------- ----------- -----------
See Notes to Consolidated Financial Statements.
23
24
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------------ ------------
Investments:
Fixed Maturities - Available for Sale at Fair Value
(Cost of $101,523,931 in 1997 and $93,397,819 in 1996) $101,852,980 93,511,048
Equity Securities - Available for Sale at Fair Value
(Cost of $983,074 in 1997 and $5,262 in 1996) 1,010,927 10,573
Short-term Investments, at Cost which Approximates Fair Value 32,422,313 46,969,137
------------ ------------
Total Investments 135,286,220 140,490,758
Cash and Cash Equivalents 2,095,449 2,187,227
Accrued Interest Receivable 1,458,164 1,567,761
Receivables, Net of Allowance for Doubtful Accounts of
$309,746 in 1997 and $322,406 in 1996 7,118,527 8,381,590
Reinsurance Recoverable 3,478,121 3,841,001
Income Tax Refund Receivable 564,829 --
Prepaid Expenses 204,642 206,562
Deferred Income Taxes 1,940,936 2,285,883
Limited Partnership Investment 2,052,475 1,439,174
Property and Equipment, Net 13,179,337 13,553,114
Deferred Policy Acquisition Costs 2,078,405 2,905,875
Other Assets 3,529,634 3,951,946
Intangibles, Net 3,222,023 3,548,675
------------ ------------
$176,208,762 184,359,566
============ ============
Liabilities & Stockholders' Equity
Notes Payable to Banks $ 5,000,000 13,200,000
Accounts Payable 3,188,554 1,873,611
Reserves for Losses and Loss Adjustment Expenses 48,900,713 47,960,084
Unearned Premiums 9,804,159 12,341,642
Collateral Held 20,275,702 21,830,566
Other Accrued Liabilities 1,249,168 1,404,821
Income Taxes -- 239,019
Long-term Debt 48,212,727 35,807,419
------------ ------------
Total Liabilities 136,631,023 134,657,162
Stockholders' Equity:
Common Stock (No Par Value; 3,500,000 Shares Authorized;
596,857 and 600,257 Shares Issued and Outstanding) 596,857 600,257
Class A Stock (No Par Value; 10,000,000 Shares Authorized;
2,712,174 and 3,488,860 Shares Issued and Outstanding) 2,712,174 3,488,860
Additional Paid-in Capital -- 8,407,877
Retained Earnings 36,033,153 36,894,494
Unrealized Gain on Securities, Net of Deferred Taxes
of $121,346 in 1997 and $160,169 in 1996 235,555 310,916
------------ ------------
Total Stockholders' Equity 39,577,739 49,702,404
------------ ------------
Commitments and Contingencies
$176,208,762 184,359,566
============ ============
See Notes to Consolidated Financial Statements.
24
25
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
December 31, 1997, 1996 and 1995
Net
unrealized
Common Class A gains
stock stock Additional (losses) Total
par par paid-in Retained on stockholders'
value value capital earnings securities equity
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1994 $ 652,920 3,313,067 9,358,948 26,251,103 (1,571,103) 38,004,935
Acquisition and retirement of
10,456 shares of Common Stock $ (10,456) -- (151,829) -- -- (162,285)
Acquisition and retirement of
797,228 shares of Class A Stock -- (797,228) (8,635,992) -- -- (9,433,220)
Issuance of 149,997 shares
of Class A Stock -- 149,997 1,349,973 -- -- 1,499,970
Net unrealized appreciation of
debt and equity securities -- -- -- -- 2,717,264 2,717,264
Deferred taxes on net unrealized gains
on debt and equity securities -- -- -- -- (389,685) (389,685)
Net earnings -- -- -- 5,350,280 -- 5,350,280
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1995 $ 642,464 2,665,836 1,921,100 31,601,383 756,476 37,587,259
Acquisition and retirement of
42,207 shares of Common Stock $ (42,207) -- (751,865) -- -- (794,072)
Acquisition and retirement of
872,975 shares of Class A Stock -- (872,975) (10,633,162) -- -- (11,506,137)
Issuance of 499,999 Shares of
Class A Stock -- 499,999 4,499,991 -- -- 4,999,990
Issuance of 85,000 Shares of Class A
Stock pursuant to stock options -- 85,000 644,150 -- -- 729,150
Issuance of 1,111,000 Shares of
Class A Stock -- 1,111,000 12,727,663 -- -- 13,838,663
Net unrealized losses on debt and
equity securities -- -- -- -- (675,077) (675,077)
Deferred taxes on net unrealized gains
on debt and equity securities -- -- -- -- 229,517 229,517
Net earnings -- -- -- 5,293,111 -- 5,293,111
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1996 $ 600,257 3,488,860 8,407,877 36,894,494 310,916 49,702,404
Acquisition and retirement of
3,400 shares of Common Stock $ (3,400) -- (66,096) -- -- (69,496)
Acquisition and retirement of
1,347,686 shares of Class A Stock -- (1,347,686) (13,522,491) (5,318,290) -- (20,188,467)
Issuance of 450,000 shares
of Class A Stock -- 450,000 4,050,000 -- -- 4,500,000
Issuance of 121,000 shares of
Class A Stock pursuant to stock options -- 121,000 1,130,710 -- -- 1,251,710
Net unrealized losses on debt and
equity securities -- -- -- -- (114,183) (114,183)
Deferred tax benefit on net unrealized
losses on debt and equity securities -- -- -- -- 38,822 38,822
Net earnings -- -- -- 4,456,949 -- 4,456,949
----------- ----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1997 $ 596,857 2,712,174 -- 36,033,153 235,555 39,577,739
=========== =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
25
26
ACMAT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, 1995
1997 1996 1995
------------- ------------- -------------
Cash Flows From Operating Activities:
Net Earnings $ 4,456,949 5,293,111 5,350,280
Adjustments to Reconcile Net Earnings to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 1,506,013 1,787,061 2,224,897
Minority Interests -- 888,140 1,355,681
Net Realized Capital Gains (282,667) (257,774) (7,897)
Limited Partnership Investment (966,315) 33,725 (23,092)
Changes In:
Accrued Interest Receivable 109,597 663,227 (340,162)
Receivables, Net 1,263,063 640,844 458,133
Reinsurance Recoverable 362,880 31,098 356,780
Deferred Policy Acquisition Costs 827,470 553,433 202,113
Prepaid Expenses and Other Assets 351,384 (183,343) (693,741)
Accounts Payable and Other Liabilities 1,159,290 (773,028) 67,992
Collateral Held (1,554,864) 4,062,611 7,364,249
Reserves for Losses and Loss Adjustment Expenses 940,629 2,724,773 4,280,528
Income Taxes (50,617) 757,357 (631,229)
Unearned Premiums (2,537,483) (1,960,971) (675,212)
------------- ------------- -------------
Net Cash Provided by Operating Activities 5,585,329 14,260,264 19,289,320
------------- ------------- -------------
Cash Flows From Investing Activities:
Proceeds From Investments Sold or Matured:
Fixed Maturities - Sold 41,501,401 39,094,153 12,902,187
Fixed Maturities - Matured 35,221,999 61,896,825 42,485,000
Equity Securities 774,349 298,568 614,340
Short-Term Investments 155,255,106 95,826,099 80,444,029
Purchases Of:
Fixed Maturities (85,168,980) (73,340,147) (67,587,026)
Equity Securities (1,727,812) (255,262) --
Short-term Investments (140,708,282) (134,436,189) (80,077,020)
Capital Expenditures (154,483) (140,838) (213,392)
Other -- (335,606) --
------------- ------------- -------------
Net Cash Provided by (Used for) Investing Activities 4,993,298 (11,392,397) (11,431,882)
------------- ------------- -------------
Cash Flows From Financing Activities:
Borrowings Under Line of Credit 5,000,000 9,200,000 4,200,000
Repayments Under Line of Credit (13,200,000) (3,500,000) (1,000,000)
Repayments on Long-term Debt (3,594,692) (1,820,181) (1,777,706)
Issuance of Long-term Debt 8,500,000 2,500,000 --
Issuance of Class A Stock 882,250 560,000 --
Payments for Subsidiaries' Stock -- (440,625) (35,000)
Payments for Acquisition and Retirement of Stock (8,257,963) (12,300,209) (9,595,505)
------------- ------------- -------------
Net Cash Used For Financing Activities (10,670,405) (5,801,015) (8,208,211)
------------- ------------- -------------
Net Decrease in Cash and Cash Equivalents (91,778) (2,933,148) (350,773)
Cash and Cash Equivalents, Beginning of Year 2,187,227 5,120,375 5,471,148
------------- ------------- -------------
Cash and Cash Equivalents, End of Year $ 2,095,449 2,187,227 5,120,375
============= ============= =============
See Notes to Consolidated Financial Statements.
26
27
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include ACMAT
Corporation ("ACMAT" or the "Company"), its subsidiaries,
AMINS, Inc., Geremia Electric Co., ACMAT of Texas, Inc.,
ACSTAR Holdings, Inc. ("ACSTAR Holdings") and ACSTAR Holdings'
wholly-owned subsidiary, ACSTAR Insurance Company ("ACSTAR");
and United Coastal Insurance Company ("United Coastal
Insurance").
These consolidated financial statements have been prepared in
conformity with generally accepted accounting principles
("GAAP"). All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain
re- classifications have been made to the 1996 and 1995
financial statements to conform with the classifications in
1997.
(b) Business
ACMAT operates as an insurance holding company and as an
interior contractor; designing, supplying, renovating and
installing interiors for commercial, industrial and
institutional buildings, including asbestos abatement
contracting.
ACMAT's Insurance Group includes United Coastal Insurance,
ACSTAR and AMINS, Inc. United Coastal Insurance is an excess
and surplus lines property and casualty insurer providing
specialty general and environmental liability insurance to
specialty trade and environmental contractors, property
owners, storage and treatment facilities and allied
professionals, as well as professional liability insurance to
architects, engineers and consultants. ACSTAR is licensed as
an admitted insurer in 49 states and the District of Columbia
and provides surety bonding for specialty trade, environmental
remediation and asbestos abatement contractors. AMINS, Inc. is
an insurance agency which acts primarily as a general agent
for ACSTAR and United Coastal Insurance. United Coastal
Insurance participates in a number of reinsurance arrangements
with other companies on a quota share basis. These
arrangements primarily cover marine and other property
catastrophic risks.
During 1997, 1996 and 1995, customers who individually
accounted for more than 10% of consolidated construction
contracting revenue for the respective years are as follows:
1997 - four customers provided 28%, 21%, 19% and 11%,
respectively; in 1996 - four customers provided 18%, 15%, 14%
and 10%, respectively; in 1995 - three customers provided 28%,
24% and 18%, respectively. No customers accounted for more
than 10% of the consolidated insurance revenues in any year.
(c) Investments
Securities are classified in one of three categories, held to
maturity, trading or available for sale. Debt securities for
which the Company has the ability and intent to hold to
maturity are classified as held to maturity and are stated at
amortized cost. Securities bought in anticipation of
short-term market movements, if any, are classified as trading
securities and are carried at market value with unrealized
gains or losses reflected in the statement of income.
Securities that are not classified as either held-to maturity
securities or trading securities are classified as available
for sale and are carried at market value with unrealized gains
or losses reported as a separate component of stockholders'
equity, net of income taxes.
The fair value of investment securities are based on quoted
market prices. Premiums and discounts on debt securities are
amortized into interest income over the term of the securities
in a manner that approximates the interest method. Realized
gains and losses on sales of securities are computed using the
specific identification method. Any security which management
believes has experienced a decline in value which is other
than temporary is written down to its market value through a
charge to income.
Short-term investments, consisting primarily of money market
instruments maturing within one year are carried at cost
which, along with accrued interest, approximates fair value.
Cash and cash equivalents include cash on hand and short-term
highly liquid investments of maturities of three months or
less when purchased. These investments are carried at cost
plus accrued interest which approximates fair value.
(d) Limited Partnership Investment
The limited partnership investment represents participation in
a joint venture, Grandview Partners, L.P., which invests
primarily in small capitalization stocks traded on national
market exchanges. The Company owns 11.2% of the Limited
Partnership. The limited partnership investment is carried on
the equity method of accounting in which the Company's share
of the net income of the limited partnership is recognized as
income in the Company's income statement and added to the
carrying value of the investment and distributions received
from the limited partnership are treated as a reduction of the
carrying value of the investment.
27
28
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Policy Acquisition Costs
Policy acquisition costs, representing commissions and certain
underwriting costs, are deferred and amortized on a
straight-line basis over the policy term. During the years
ended December 31, 1997, 1996 and 1995, deferrable costs
capitalized were $1,975,523, $3,063,875 and $3,736,895,
respectively. The amortization of deferred policy acquisition
costs charged to operations for the years ended December 31,
1997, 1996 and 1995 was $2,802,993, $3,617,308 and $3,939,008,
respectively.
(f) Property and Equipment
Property and equipment are reported at depreciated cost.
Depreciation is computed using the straight-line method at
rates based upon the respective estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred.
(g) Intangibles
All intangibles are stated at amortized cost and are being
amortized using the straight-line method. Intangibles include
insurance operating licenses and goodwill, which represents
the excess of cost over the fair market value of net assets
acquired. These intangible assets are amortized over periods
ranging from 15 to 25 years.
(h) Insurance Reserve Liabilities
Reserves for losses and loss adjustment expenses are
established with respect to both reported and incurred but not
reported claims for insured risks. The amount of loss reserves
for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the
circumstances surrounding the claim and the policy provisions
relating to the type of claim. As part of the reserving
process, historical data are reviewed and consideration is
given to the anticipated impact of various factors such as
legal developments and economic conditions, including the
effects of inflation. Reserves are monitored and recomputed
periodically using new information on reported claims.
Reserves for losses and loss adjustment expenses are estimates
at any given point in time of what the Company may have to pay
ultimately on incurred losses, including related settlement
costs, based on facts and circumstances then known. The
Company also reviews its claims reporting patterns, past loss
experience, risk factors and current trends and considers
their effect in the determination of estimates of incurred but
not reported losses. Ultimate losses and loss adjustment
expenses are affected by many factors which are difficult to
predict, such as claim severity and frequency, inflation
levels and unexpected and unfavorable judicial rulings.
Reserves for surety claims also consider the amount of
collateral held as well as the financial strength of the
contractor and its indemnitors. Management believes that the
reserves for losses and loss adjustment expenses are adequate
to cover the unpaid portion of the ultimate net cost of losses
and loss adjustment expenses incurred, including losses
incurred but not reported.
(i) Collateral Held
The carrying amount of collateral held approximates its fair
value because of the short maturity of these instruments.
Collateral held represents cash and investments retained by
the Company for surety bonds issued by the Company.
(j) Reinsurance
In the normal course of business, the Company assumes and
cedes reinsurance with other companies. Reinsurance ceded
primarily represents excess of loss reinsurance with companies
with "A" ratings from the insurance rating organization, A.M.
Best Company, Inc. Such reinsurance is applicable on a per
policy basis generally to those policies with per occurrence
limits in excess of $2 million up to $5 million for liability
and $10 million of $15.5 million of individual surety bond
limit. Effective April 1, 1995, the Company secured additional
liability treaty excess of loss reinsurance which provides
limits on a per policy basis of $5,000,000 per occurrence or
claim made and in the aggregate excess of $5,000,000 per
occurrence or claim made and in the aggregate. Reinsurance
ceded also includes a facultative reinsurance treaty which is
applicable to excess policies written over a primary policy
issued by the Company for specific projects. Reinsurance is
ceded to limit losses from large exposures and to permit
recovery of a portion of direct losses; however, such a
transfer does not relieve the originating insurer of its
liability. The Company participates in assumed quota share
reinsurance arrangements covering marine and property
catastrophe risks with one of its excess of loss reinsurers.
28
29
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance recoverables include ceded reserves for losses and
loss adjustment expenses. Ceded unearned premiums of $912,039
and $1,083,877 at December 31, 1997 and 1996, 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
1997 1996 1995 1997 1996 1995
------------ ----------- ----------- ------------ ----------- -----------
Direct $ 12,851,647 17,954,271 22,810,600 $ 15,164,588 19,834,586 23,171,614
Assumed 686,935 1,516,988 1,427,542 1,144,017 1,470,043 1,582,138
Ceded (858,385) (1,429,771) (1,381,351) (1,262,761) (1,404,693) (1,260,847)
------------ ----------- ----------- ------------ ----------- -----------
Totals $ 12,680,197 18,041,488 22,856,791 $ 15,045,844 19,899,936 23,492,905
============ =========== =========== ============ =========== ===========
There were no reinsurance recoveries on ceded paid losses and
loss adjustment expenses for the year ended December 31, 1997.
Reinsurance recoveries on ceded paid losses and loss
adjustment expenses totaled approximately $98,000 and $30,000
for the years ended December 31, 1996 and 1995, respectively.
Ceded incurred losses and loss adjustment expenses totaled
$364,015 and $421,408 for the years ended December 31, 1997
and 1996, respectively.
(k) Revenue Recognition
Revenue on construction contracts is recorded using the
percentage of completion method. Under this method revenues
with respect to individual contracts are recognized in the
proportion that costs incurred to date relate to total
estimated costs. Revenues and cost estimates are subject to
revision during the terms of the contracts, and any required
adjustments are made in the periods in which the revisions
become known. Provisions are made, where applicable, for the
entire amount of anticipated future losses on contracts in
progress. Claims are recorded as revenue at the time of
settlement and profit incentives and change orders are
included in revenues when their realization is reasonably
assured. Selling, general and administrative expenses are not
allocated to contracts.
Insurance premiums are recognized over the terms of the
respective policy contracts. Unearned premiums represent the
portion of premiums written that is applicable to the
unexpired terms of policies in force, calculated on a prorata
basis.
(l) Income Taxes
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
(m) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those
estimates.
(n) Future Accounting Standards
In June 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 130, "Reporting Comprehensive
Income". The objective of Statement of Financial Accounting
Standards ("SFAS") No. 130 is to report comprehensive income
which is defined as all changes in equity of an enterprise
that result from transactions and other economic events of the
period other than transactions with owners. SFAS No. 130
establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. This Statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company is
currently evaluating the presentation alternatives provided by
the Statement.
29
30
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 1997, FASB issued SFAS No. 131, "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 was developed jointly
by the FASB and the Accounting Standards Board of the Canadian
Institute of Charted Accountants in response to request from financial
statement users for additional and better segment information. This
statement is effective for periods beginning after December 15, 1997.
In the initial year of application, comparative information for earlier
years is to be restated, unless it is impracticable to do so. The
Company does not anticipate that SFAS No. 131 will significantly impact
the composition of its current operating segments which are consistent
with the management approach. The Company anticipates that the current
insurance segment will be further disclosed as two segments as a result
of SFAS No. 131.
(2) ACQUISITIONS
Effective September 16, 1996, the Company completed the merger of
United Coasts Corporation into ACMAT. United Coasts Corporation
shareholders received one share of ACMAT Class A stock for each
approximately 1.536 shares of United Coasts Corporation stock. As a
result of the merger, ACMAT issued approximately 1,100,000 shares of
its Class A stock amounting to a purchase price of approximately $14
million for the 16% minority interest in the insurance holding company
subsidiary. As a result, United Coastal Insurance, formerly a
subsidiary of United Coasts Corporation, has become a wholly-owned
subsidiary of ACMAT and its affiliates. The merger was a non-cash
transaction that is not reflected in the Statements of Cash Flow.
(3) INVESTMENTS
INVESTMENTS AT DECEMBER 31, 1997 AND 1996 FOLLOWS: AMORTIZED ESTIMATED CARRYING
COST FAIR VALUE VALUE
------------ ------------ ------------
1997
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political Subdivision $ 43,928,817 43,975,620 43,975,620
United States Government and Government Agencies 34,183,314 34,319,976 34,319,976
Industrial and Miscellaneous 15,057,614 15,136,895 15,136,895
Mortgage-Backed Securities 8,354,186 8,420,489 8,420,489
------------ ------------ ------------
Total Fixed Maturities 101,523,931 101,852,980 101,852,980
Equity Securities - Common Stocks:
Banks, Trusts and Insurance 5,262 15,927 15,927
Equity Securities - Redeemable Preferred Stocks:
Industrial and Miscellaneous 977,812 995,000 995,000
------------ ------------ ------------
Total Equity Securities 983,074 1,010,927 1,010,927
Short-Term Investments 32,422,313 32,422,313 32,422,313
------------ ------------ ------------
Total Investments $134,929,318 135,286,220 135,286,220
============ ============ ============
1996
Fixed Maturities Available for Sale:
Bonds:
States, Municipalities and Political Subdivisions $ 54,988,633 55,135,319 55,135,319
United States Government and Government Agencies 38,409,186 38,375,729 38,375,729
------------ ------------ ------------
Total Fixed Maturities 93,397,819 93,511,048 93,511,048
Equity Securities - Common Stocks:
Banks, Trusts and Insurance 5,262 10,573 10,573
------------ ------------ ------------
Total Equity Securities 5,262 10,573 10,573
------------ ------------ ------------
Short-Term Investments 46,969,137 46,969,137 46,969,137
------------ ------------ ------------
Total Investments $140,372,218 140,490,758 140,490,758
============ ============ ============
Fair value estimates are made at a specific point in time, based on
quoted market prices and information about the financial instrument.
These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Company's entire holdings
of a particular financial instrument. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses have not been considered in any of the estimates. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.
On December 31, 1997, the Company's insurance subsidiaries had
securities with an aggregate book value of approximately $9.9 million
on deposit with various state regulatory authorities.
30
31
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of fixed maturities at December 31,
1997 and 1996, by effective maturity, follows:
1997 1996
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ----------- ---------- ----------
Due In One Year or Less $ 46,284,844 46,296,200 41,537,975 41,558,524
Due After One Year Through Five Years 54,904,724 55,148,780 51,207,347 51,231,119
Due After Five Years Through Ten Years 334,363 408,000 306,286 372,000
Due After Ten Years -- -- 346,211 349,405
------------ ----------- ---------- ----------
Total $101,523,931 101,852,980 93,397,819 93,511,048
============ =========== ========== ==========
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,
1997 and 1996 follows:
1997 1996
Gains Losses Gains Losses
-------- ------- ------- --------
States, Municipalities and
Political Subdivisions $ 71,667 (24,864) 191,053 (44,367)
United States Government and
Government Agencies 221,346 (18,381) 83,642 (117,099)
Industrial and Miscellaneous 79,280 -- 352,544 --
-------- ------- ------- --------
Total 372,293 (43,245) 627,239 (161,466)
Equity Securities 27,853 -- 5,311 --
-------- ------- ------- --------
Total $400,146 (43,245) 632,550 (161,466)
======== ======= ======= ========
(4) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES
A summary of net investment income for the years ended December 31,
1997, 1996 and 1995 follows:
1997 1996 1995
----------- ---------- ----------
Tax-Exempt Interest $ 1,996,969 2,912,844 3,317,887
Taxable Interest 4,639,758 3,768,102 2,769,577
Dividends on Equity Securities 10,283 750 7,617
Other -- (33,725) 23,094
Investment Expenses (142,294) (112,399) (55,292)
----------- ---------- ----------
Net Investment Income $ 6,504,716 6,535,572 6,062,883
=========== ========== ==========
Realized capital gains (losses) for the years ended December 31, 1997,
1996 and 1995 follows:
1997 1996 1995
-------- -------- --------
Fixed Maturities $258,318 209,918 810
Equity Securities 24,349 48,568 7,087
Sales of Property and Equipment -- (712) --
-------- -------- --------
Net Realized Capital Gains $282,667 257,774 7,897
======== ======== ========
31
32
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross gains of $261,005, $237,726 and $25,235 and gross losses of
$2,687, $27,808 and $24,425 were realized on fixed maturity sales for
the years ended December 31, 1997, 1996, and 1995, respectively. Gross
gains of $24,349, $48,568 and $56,926 and gross losses of $0, $0 and
$49,839 were realized on sale of equity securities for the years ended
December 31, 1997, 1996 and 1995, respectively.
(5) RECEIVABLES
A summary of receivables at December 31, 1997 and 1996 follows:
1997 1996
----------- ----------
Insurance Premiums Due From Agents $ 4,469,243 6,299,560
Receivables Under Long-term Contracts:
Amounts Billed 1,834,994 1,139,034
Recoverable Costs in Excess of Billings on Uncompleted Contracts 588,009 594,062
Billings in Excess of Costs on Uncompleted Contracts (5,400) (203,200)
Retainage, Due on Completion of Contracts 264,067 235,382
----------- ----------
Total Receivables Under Long-term Contracts 2,681,670 1,765,278
Other 277,360 639,158
----------- ----------
Total Receivables 7,428,273 8,703,996
Less Allowances for Doubtful Accounts (309,746) (322,406)
----------- ----------
Total Receivables, Net $ 7,118,527 8,381,590
=========== ==========
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 1998.
Recoverable costs in excess of billings on uncompleted contracts are
comprised principally of amounts of revenue recognized on contracts for
which billings had not been presented to the contract owners as of the
balance sheet date. These amounts will be billed in accordance with the
contract terms.
(6) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1997 and 1996
follows:
1997 1996
----------- ----------
Building $14,657,155 14,617,842
Land 800,000 800,000
Equipment and Vehicles 1,073,059 1,250,233
Furniture and Fixtures 914,187 892,858
----------- ----------
17,444,401 17,560,933
Less Accumulated Depreciation 4,265,064 4,007,819
----------- ----------
$13,179,337 13,553,114
=========== ==========
Future minimum rental income to be generated by leasing a portion of
the building under noncancelable operating leases as of December 31,
1997 are estimated to be $612,548 for 1998, $654,548 for 1999, $591,845
for 2000, $570,944 for 2001, and $570,944 for 2002. Rental income
earned in 1997, 1996 and 1995 was $561,852, $504,063 and $543,507,
respectively.
(7) INTANGIBLES
A summary of intangibles, acquired primarily in connection with
purchases of the Company's insurance subsidiaries, at December 31, 1997
and 1996 follows:
1997 1996
---------- ---------
Insurance Licenses $4,188,926 4,188,926
Goodwill 2,524,872 2,524,872
---------- ---------
6,713,798 6,713,798
Less Accumulated Amortization 3,491,775 3,165,123
---------- ---------
$3,222,023 3,548,675
========== =========
Intangible assets are written off when they become fully amortized.
32
33
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid losses and loss adjustment expenses for the periods
indicated on a GAAP basis for the business of the Company.
1997 1996 1995
------------ ----------- -----------
Balance at January 1 $ 47,960,084 45,235,311 40,954,783
Less reinsurance recoverable 3,841,001 3,872,099 4,228,879
------------ ----------- -----------
Net balance at January 1 44,119,083 41,363,212 36,725,904
Incurred related to:
Current year 5,176,030 7,137,183 8,015,877
Prior years (838,778) (1,167,203) (900,506)
------------ ----------- -----------
Total incurred 4,337,252 5,969,980 7,115,371
Payments related to:
Current year 94,398 153,514 111,989
Prior years 2,939,345 3,060,595 2,366,074
------------ ----------- -----------
Total payments 3,033,743 3,214,109 2,478,063
Net balance at December 31 45,422,592 44,119,083 41,363,212
Plus reinsurance recoverable 3,478,121 3,841,001 3,872,099
------------ ----------- -----------
Balance at December 31 $ 48,900,713 47,960,084 45,235,311
============ =========== ===========
The decrease of incurred losses and loss adjustment expenses of prior
years represents a reallocation of reserves among accident years.
Management believes that the reserves for losses and loss adjustment
expenses are adequate to cover the unpaid portion of the ultimate net
cost of losses and loss adjustment expenses, including losses incurred
but not reported.
The Company has no exposure to any asbestos or environmental claims
associated with general liability policies issued with the pre-1986
pollution exclusion. Policies written with the exclusion are typically
associated with mass tort environmental and asbestos claims. The
Company has never issued a policy with the pre-1986 pollution
exclusion. The Company's exposure to asbestos and environmental
liability claims is primarily limited to asbestos and environmental
liability insurance for contractors and consultants involved in the
remediation, removal, storage, treatment and/or disposal of
environmental and asbestos hazards.
(9) NOTES PAYABLE TO BANKS
The Company has available a $10,000,000 bank line of credit with Fleet
Bank, N.A. which expires in June 1999. The line of credit requires the
Company to maintain, on deposit with the bank, a compensating balance
equal to 5% of the line of credit. Borrowings outstanding under this
line were $5,000,000 at December 31, 1997 and $8,000,000 at December
31, 1996.
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
(7.2% and 7.4% at December 31, 1997 and 1996, respectively).
The Company had available a $7,500,000 Demand Discretionary Line of
Credit with The Bank of Boston Connecticut which expired on November 6,
1997. Under the terms of the line of credit, interest on the
outstanding balance is calculated based upon the LIBOR plus 160 basis
points in effect during the borrowing period (7.4% at December 31,
1996). Borrowings outstanding under this line was $5,200,000 at
December 31, 1996.
The fair value of notes payable to banks approximates cost.
(10) LONG-TERM DEBT
A summary of long-term debt at December 31, 1997 and 1996 follows:
1997 1996
----------- ----------
Term Loan Due 2004 $ 6,690,000 --
Senior Notes Due 2005 12,000,000 --
Term Loan Due 2003 1,874,998 2,232,142
Term Loan Due 2000 3,333,333 4,666,667
Mortgage Note Due 2000 7,814,396 7,908,610
Convertible Note Due 2022 16,500,000 16,500,000
Convertible Senior Notes Due 1999 -- 4,500,000
----------- ----------
$48,212,727 35,807,419
=========== ==========
33
34
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 3, 1997, the Company obtained a $7,500,000, seven-year term loan
from a financial institution, which is payable in quarterly installments of
$270,000 commencing March 31, 1997 with a final payment of $210,000 on March 31,
2004. The interest rate is equal to the LIBOR plus 160 basis points for each
90-day interest period. The proceeds were used to purchase shares of Class A
Stock.
On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of Class A
Stock which AIG Life Insurance Company (366,663 shares) and American
International Life Assurance Company of New York, (733,333) had acquired over
the last three years through conversion options (See Note 13). The shares were
purchased at an average price of $14.70 per share for a total purchase price of
$16,174,942. The purchase price of $16,174,942 consisted of $4,174,942 in cash
and promissory notes totaling $12,000,000. The promissory notes are with AIG
Life Insurance Company and American International Life Assurance Company of New
York and are payable over eight years with annual payments of $1,500,000
commencing January 31, 1998, with interest at prime rate (8-1/2%). The interest
rate is equal to the prime rate, however, the interest rate shall not exceed
9-1/4% and it shall not be less than 7-1/4%. The purchase of stock with the
$12,000,000 promissory notes is a non-cash transaction that is not reflected in
the Consolidated Statement of Cash Flows.
The terms of the note agreements with AIG and American International Life
contain limitations on payment of cash dividends, re-acquisition of shares,
borrowings and investments and require maintenance of specified ratios and a
minimum tangible net worth of $12,000,000. ACMAT may also require its insurance
subsidiaries to pay dividends to the extent of funds legally available therefor,
in order to enable ACMAT to have funds to pay on a timely basis all amounts due
with respect to the notes. The Company is in compliance with all of these
covenants at December 31, 1997.
On April 1, 1996, the Company obtained a $2,500,000, seven-year term loan from a
financial institution, which is repayable in quarterly installments of $89,286
commencing June 30, 1996. The Term Loan shall bear interest as follows: (a)
sixty percent (60%) of the outstanding principal balance of the Term Loan shall
bear interest at a fixed rate of 8.22% and (b) forty percent (40%) of the
outstanding principal balance of the Term Loan shall bear interest at LIBOR plus
180 basis points for each 90-day interest period (7.34%). The proceeds were used
to repay the line of credit.
On June 30, 1994, the Company obtained an $8,000,000, six-year term loan from a
financial institution, which is repayable in quarterly installments of $333,333
commencing September 30, 1994. The Term Loan shall bear interest as follows: (a)
sixty percent (60%) of the outstanding principal balance of the Term Loan shall
bear interest at a fixed rate of 8.51% and (b) forty percent (40%) of the
outstanding principal balance of the Term Loan shall bear interest at LIBOR plus
180 basis points for each 90-day interest period (7.32%). Portions of the
proceeds of this term loan were applied to the repayment of intercompany debt
and to the reduction of the Company's line of credit.
On April 18, 1990, the Company obtained a permanent mortgage loan from The
Manufacturer's Life Insurance Company. The $8,350,000 mortgage note, with
interest at 9.69%, is payable in monthly installments over 10 years based on a
thirty year amortization schedule. The outstanding principal balance is payable
on April 1, 2000. The proceeds were used to repay an existing construction loan
and to fund completion of the Company's headquarters.
On July 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's. At December 31, 1995, the
Company had reserved 1,500,000 shares of Class A Stock for issuance pursuant to
such conversion option.
Principal payments on long-term debt are $4,365,381, $4,375,894, $11,191,393,
$2,928,287 and $2,660,421 the years 1998 through 2002, respectively. Interest
expense paid in 1997, 1996 and 1995 amounted to $4,630,502, $4,980,833 and
$4,791,005, respectively.
It is not practicable to estimate the fair value of long-term debt at December
31, 1997 because of the complex and unique terms associated with these debt
instruments.
34
35
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) INCOME TAXES
The components of income tax expense for each year follows:
1997 1996 1995
----------- ---------- ----------
Current Taxes:
Federal $ 1,310,845 2,288,025 2,415,594
State 45,000 60,000 125,000
----------- ---------- ----------
1,355,845 2,348,025 2,540,594
----------- ---------- ----------
Deferred Taxes (Credits):
Federal 383,771 (34,197) (126,194)
State -- -- --
----------- ---------- ----------
383,771 (34,197) (126,194)
----------- ---------- ----------
Total $ 1,739,616 2,313,828 2,414,400
=========== ========== ==========
The effective Federal income tax rate, as a percentage of earnings
before income taxes and minority interest follows:
1997 1996 1995
---- ---- ----
Federal Statutory Tax Rate 34.0% 34.0% 34.0%
State Income Tax Benefit (.3) (.2) (.5)
Effect of Tax-Exempt Interest (9.4) (9.9) (10.5)
Amortization of Goodwill 1.8 1.3 1.2
Officers Life Insurance Premiums 1.2 .8 .7
Other, Net -- .5 .2
---- ---- ----
Effective Federal Income Tax Rate 27.3% 26.5% 25.1%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
1997 1996
---------- ---------
Deferred Tax Assets:
Reserves for Losses and Loss Adjustment Expenses,
Principally Due to Reserve Discounting $2,848,237 2,984,252
Unearned Premiums 604,664 765,529
Accounts Receivable, Principally Due to Allowance for Doubtful Accounts 105,314 109,619
Other 26,505 22,073
---------- ---------
Total Gross Deferred Tax Assets 3,584,720 3,881,473
Less Valuation Allowance -- --
---------- ---------
Net Deferred Tax Assets $3,584,720 3,881,473
Deferred Tax Liabilities:
Plant and Equipment 461,118 441,031
Deferred Policy Acquisition Costs 706,658 987,998
Unrealized Gains on Investments 121,346 160,169
Limited Partnership Investment 352,659 --
Other 2,003 6,392
---------- ---------
Total Gross Deferred Tax Liabilities 1,643,784 1,595,590
---------- ---------
Net Deferred Tax Assets $1,940,936 2,285,883
========== =========
There was no valuation allowance for deferred income tax assets as of
December 31, 1997 and 1996. In assessing the realization of deferred
tax assets, management considers whether it is more likely than not
that the deferred tax assets will be realized. The ultimate realization
of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of
deferred tax liabilities, tax planning strategies and anticipated
future taxable income in making this assessment and believes it is more
likely than not the Company will realize the benefits of its deductible
differences at December 31, 1997.
Taxes paid in 1997, 1996 and 1995 were $1,790,253, $1,556,471 and
$3,045,627, respectively.
35
36
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) PENSION AND PROFIT SHARING PLANS
The Company and its subsidiaries maintain, for the benefit of non-union
employees, a qualified thrift, profit sharing and retirement plan.
Participants are required to contribute three percent of their
compensation to the plan annually. The Company's contributions,
established by the Board of Directors, were $85,000, $100,000 and
$100,000, for 1997, 1996 and 1995, respectively.
The Company participated in various multi-employer defined contribution
plans for its union employees. Charges to expense with respect to the
Company's contributions to the various plans were approximately $13,593
in 1996 and $42,000 in 1995. No payments were made in 1997. 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, 1997.
(13) STOCKHOLDERS' EQUITY
The Company has two classes of common stock; the Common Stock and the
Class A Stock, each without par value. The rights of the Common Stock
and the Class A Stock are identical, except with respect to voting
rights. Holders of the Class A Stock are entitled to one-tenth vote per
share in relation to the Common Stock, holders of which are entitled to
one vote per share.
During 1997, 1996 and 1995, ACMAT repurchased, in open market and
privately negotiated transactions 3,400, 42,207 and 10,456,
respectively, shares of its Common Stock at an average price of $20.44,
$18.81 and $15.52 per share, respectively. The Company also repurchased
during 1997, 1996 and 1995, in open market and privately negotiated
transactions 1,347,686, 872,975 and 797,228, respectively, of its Class
A Stock at an average price of $14.98, $13.18 and $11.83 per share,
respectively.
During 1997, 1996 and 1995, the Company issued 450,000, 499,999 and
149,997, respectively, shares of Class A Stock at $10 per share
pursuant to the conversion options of the Convertible Senior Notes to
AIG Life Insurance Company and American International Life Assurance
Company of New York, all of which was repurchased by the Company in
1997, see note 10. The issuance of stock pursuant to the conversion
option of the Convertible Senior Notes is a non-cash transaction that
is not reflected in the Consolidated Statement of Cash Flows.
The stockholders have periodically approved the distribution of
nonstatutory stock options to certain officers and directors giving
such individuals the right to purchase restricted shares of the
Company's Common and Class A Stock. Transactions regarding these stock
options are summarized below:
1997 1996 1995
------------- ------------- -------------
Options outstanding at December 31 383,000 504,000 490,000
Weighted average price per share of
options outstanding $ 9.59 $ 9.04 $ 8.12
Expiration dates 1/2001-7/2006 1/2001-7/2006 1/2001-9/2004
Options exercisable at December 31 383,000 405,000 490,000
Options granted -- 99,000 --
Options exercised or surrendered 121,000 85,000 15,000
Price ranges of options exercised or surrendered $ 6.00-$8.50 $ 6.00-$8.50 $ 8.50
The exercise price of each option equals the market price of the
Company's stock on the date of grant and the option's term is ten
years. The options vest six months after the date of grant.
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, which requires compensation
expense to be recognized only if the fair value of the underlying stock
at the grant date exceeds the exercise price of the option.
Accordingly, no compensation cost has been recognized for stock
options. Had compensation cost for the Company's stock options issued
in 1996 been determined consistent with SFAS No. 123, "Accounting for
Stock Based Compensation" the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below:
There were no stock options granted in 1997 or 1995.
1996
-------------
Net Earnings As Reported $ 5,293,111
Pro Forma $ 4,946,617
Basic Earnings per share As Reported $ 1.56
Pro Forma $ 1.46
Diluted Earnings per share As Reported $ 1.22
Pro Forma $ 1.16
36
37
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for the options granted in 1996: no dividend yield;
expected volatility of 20%; risk free interest rate of 6.7%; and
expected life of ten years for the options. The weighted average fair
value of options granted in 1996 was $5.99 per share.
Under applicable insurance regulations, ACMAT's insurance subsidiaries
are restricted as to the amount of dividends they may pay, without the
prior approval of any insurance department, and are limited to
approximately $10,032,000 in 1998.
The Company's insurance subsidiaries, United Coastal Insurance and
ACSTAR, are domiciled in the States of Arizona and Illinois,
respectively. The statutory financial statements of United Coastal
Insurance and ACSTAR are prepared in accordance with accounting
practices prescribed by the Arizona Department of Insurance and the
Illinois Department of Insurance, respectively. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as the state
laws, regulations, and general administrative rules. As of December 31,
1997, the Company does not utilize any statutory accounting practices
which are not prescribed by insurance regulators that individually or
in the aggregate materially affect statutory shareholders' equity.
In accordance with statutory accounting principles, ACMAT's insurance
subsidiaries' statutory capital and surplus was $70,989,140 and
$70,109,199 at December 31, 1997 and 1996, respectively, and their
statutory net income for the years ended December 31, 1997, 1996 and
1995 was $12,383,045, $8,778,843 and $9,072,104, respectively. The
primary differences between amounts reported in accordance with GAAP
and amounts reported in accordance with statutory accounting principles
are excess statutory reserves over statement reserves (Schedule P
Liability), carrying value of fixed maturity investments; assets not
admitted for statutory purposes such as agents balances over 90 days,
furniture and fixtures and certain notes receivable; and deferred
acquisition costs and deferred taxes which are recognized for GAAP
only.
Pursuant to various debt covenants, previously described, ACMAT is
restricted from purchasing treasury stock and paying dividends greater
than 20% of consolidated net earnings.
(14) EARNINGS PER SHARE
The Company adopted SFAS No. 128, Earnings per Share, on December 31,
1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share,
and replaces primary earnings per share and fully diluted earnings per
share with basic earnings per share and diluted earnings per share,
respectively. The Company has restated earnings per share for all prior
periods presented to comply with the provisions of SFAS No. 128.
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share ("EPS") computations for the
years ended December 31, 1997, 1996 and 1995:
Average
Shares Per-Share
1997: Earnings Outstanding Amount
---------- ----------- ----------
Basic EPS:
Earnings available to stockholders $4,456,949 3,443,976 $ 1.29
Effect of Dilutive Securities:
Stock options -- 128,917
Convertible Senior Notes $ 29,903 43,150
Convertible Note $1,252,350 1,500,000
---------- ----------
Diluted EPS:
Earnings available to stockholders $5,739,202 5,116,043 $ 1.12
========== ========== ==========
1996:
Basic EPS:
Earnings available to stockholders $5,293,111 3,397,197 $ 1.56
Effect of Dilutive Securities:
Stock options -- 132,333
Convertible Senior Notes $ 502,425 725,000
Convertible Note $1,252,350 1,500,000
---------- ----------
Diluted EPS:
Earnings available to stockholders $7,047,886 5,754,530 $ 1.22
========== ========== ==========
37
38
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average
Shares Per-Share
1995: Earnings Outstanding Amount
---------- ----------- ----------
Basic EPS:
Earnings available to stockholders $5,350,280 3,581,660 $ 1.49
Effect of Dilutive Securities:
Stock options -- 110,592
Convertible Senior Notes $ 744,974 1,075,000
Convertible Note $1,252,350 1,500,000
---------- ----------
Diluted EPS:
Earnings available to stockholders $7,347,604 6,267,252 $ 1.17
========== ========== ==========
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to legal actions arising in the ordinary course
of its business. In management's opinion, the Company has adequate
legal defenses respecting those actions where the Company is a
defendant, has appropriate insurance reserves recorded, and does not
believe that their settlement will materially affect the Company's
operations or financial position.
Many construction projects in which the Company has been engaged have
included asbestos exposures which the Company believes to involve a
particularly high degree of risk because of the hazardous nature of
asbestos. The Company believes it has reduced the risks associated with
asbestos through proper training of its employees and by maintaining
general liability and workers' compensation insurance. From 1986 to
1996, the Company obtained its general liability insurance from its
insurance subsidiary. Since 1989, the Company has obtained its surety
bonds from its insurance subsidiary.
(16) SEGMENT REPORTING
The Company operates in two industry segments: Construction contracting
and insurance. Information relating to the two segments is summarized
as follows:
1997 1996 1995
------------- ------------- ------------
Operating Revenues:
Insurance $ 22,842,746 27,099,143 30,715,995
Construction Contracting 13,629,600 13,629,218 15,787,715
Eliminations and Adjustments (2,920,211) (3,693,056) (4,646,312)
------------- ------------- ------------
$ 33,552,135 37,035,305 41,857,398
============= ============= ============
Operating Earnings:
Insurance $ 10,997,398 12,104,805 13,398,956
Construction Contracting 315,581 1,336,692 531,983
------------- ------------- ------------
11,312,979 13,441,497 13,930,939
Interest Expense (5,116,414) (4,946,418) (4,810,578)
------------- ------------- ------------
Earnings Before Income Taxes and Minority
Interest
$ 6,196,565 8,495,079 9,120,361
============= ============= ============
Depreciation and Amortization:
Insurance $ 821,482 1,104,895 1,547,490
Construction Contracting 684,531 682,166 677,407
------------- ------------- ------------
$ 1,506,013 1,787,061 2,224,897
============= ============= ============
Identifiable Assets:
Insurance $ 155,844,674 164,764,249
Construction Contracting 20,364,088 19,595,317
------------- ------------
$ 176,208,762 184,359,566
============= ============
Capital Expenditures:
Insurance $ 94,361 55,732
Construction Contracting 60,122 85,106
------------- ------------
$ 154,483 140,838
============= ============
38
39
ACMAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating earnings for construction contracting is operating revenues
less cost of contract revenues and identifiable selling, general and
administrative expenses. Operating earnings for the insurance segment
is operating revenues less losses and loss adjustment expenses,
amortization of policy acquisition costs and identifiable selling,
general and administrative expenses. Interest expense has not been
included in the computation of operating earnings. The adjustments and
eliminations required to arrive at consolidated amounts shown above
consist principally of the elimination of the intersegment revenues
related to the performance of certain services and rental charges.
Identifiable assets are those assets that are used by each segment's
operations.
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
A summary of the unaudited quarterly results of operations for 1997 and
1996 follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- --------- ---------
1997
Operating Revenues $8,263,809 8,642,065 8,056,863 8,589,398
---------- ---------- --------- ---------
Operating Earnings $2,935,909 3,315,024 2,614,952 2,447,094
---------- ---------- --------- ---------
Net Earnings $1,149,226 1,409,415 1,013,071 885,237
---------- ---------- --------- ---------
Basic Earnings Per Share $ .31 .41 .30 .27
---------- ---------- --------- ---------
Diluted Earnings Per Share $ .27 .34 .27 .24
---------- ---------- --------- ---------
1996
Operating Revenues $8,458,973 10,083,327 9,658,242 8,834,763
---------- ---------- --------- ---------
Operating Earnings $3,164,711 3,520,217 3,419,530 3,337,039
---------- ---------- --------- ---------
Net Earnings $1,140,114 1,330,331 1,402,372 1,420,294
---------- ---------- --------- ---------
Basic Earnings Per Share $ .36 .46 .41 .34
---------- ---------- --------- ---------
Diluted Earnings Per Share $ .28 .33 .33 .29
---------- ---------- --------- ---------
Note: The Company adopted SFAS No. 128, Earnings per Share, on December 31,
1997. SFAS No. 128 supersedes APB Opinion No. 15, Earnings per Share,
and replaces primary earnings per share and fully diluted earnings per
share with basic earnings per share and diluted earnings per share,
respectively. The Company has restated earnings per share for all prior
periods presented to comply with the provisions of SFAS No. 128. Annual
earnings per share for 1996 does not equate to the sum of the quarters
due to the timing of stock purchases during the year.
Operating earnings represent operating revenues less the cost of
contract revenues, losses and loss adjustment expenses and amortization
of policy acquisition costs and selling, general and administrative
expenses.
39
40
Schedule I
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant
As of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995
The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 1997 and 1996 and its condensed
statements of earnings and cash flows for the years ended December 31, 1997,
1996 and 1995.
BALANCE SHEETS
Assets 1997 1996
------------ -----------
Current assets:
Cash $ 822,100 1,021,946
Receivables 2,953,635 2,114,041
Other current assets 192,842 194,762
------------ -----------
Total current assets 3,968,577 3,330,749
Property and equipment, net 12,927,465 13,304,686
Investments in and advance from subsidiaries 76,576,942 82,608,954
Intangibles 692,495 866,855
Other assets 2,549,472 2,400,640
------------ -----------
$ 96,714,951 102,511,884
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable to banks $ 5,000,000 13,200,000
Current portion of long-term debt 4,365,381 6,284,692
Other current liabilities 3,924,485 3,802,061
------------ -----------
Total current liabilities 13,289,866 23,286,753
Long-term debt 43,847,346 29,522,727
------------ -----------
Total liabilities 57,137,212 52,809,480
Stockholders' equity 39,577,739 49,702,404
------------ -----------
$ 96,714,951 102,511,884
============ ===========
See Notes to Condensed Financial Statements.
40
41
Schedule I, continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENT OF EARNINGS
1997 1996 1995
------------ ---------- -----------
Contract revenues $ 10,056,322 9,415,734 11,614,632
Cost of contract revenues 9,331,103 8,396,344 10,999,758
------------ ---------- -----------
Gross profit 725,219 1,019,390 614,874
Selling, general and administrative expenses 3,982,916 3,896,182 4,255,974
------------ ---------- -----------
Operating loss (3,257,697) (2,876,792) (3,641,100)
Interest expense (5,116,414) (6,064,964) (6,087,231)
Interest income 43,101 52,999 27,576
Underwriting fees 1,718,281 2,132,685 2,433,587
Other income 1,811,896 2,027,800 1,711,920
------------ ---------- -----------
Loss before income taxes and equity in net
earnings of subsidiaries (4,800,833) (4,728,272) (5,555,248)
Income tax benefit (1,500,000) (1,473,000) (1,750,000)
------------ ---------- -----------
Loss before equity in net earnings of subsidiaries (3,300,833) (3,255,272) (3,805,248)
Equity in net earnings of subsidiaries 7,757,782 8,548,383 9,155,528
------------ ---------- -----------
Net earnings $ 4,456,949 5,293,111 5,350,280
============ ========== ===========
(Continued)
See Notes to Condensed Financial Statements.
41
42
Schedule I, Continued
ACMAT CORPORATION AND SUBSIDIARIES
Condensed Financial Information of Registrant, Continued
STATEMENTS OF CASH FLOWS
Cash flows from operating activities: 1997 1996 1995
------------ ------------ -----------
Net earnings $ 4,456,949 5,293,111 5,350,280
Depreciation and amortization 684,521 682,166 677,407
Equity in undistributed earnings of subsidiaries (7,757,782) (8,548,383) (9,155,528)
(Increase) decrease in accounts receivable (839,594) (174,311) 42,888
(Increase) decrease in other assets 149,711 (182,424) (139,069)
Increase (decrease) in other liabilities 122,424 (587,169) 643,844
------------ ------------ -----------
Net cash used for operating activities (3,183,771) (3,517,010) (2,580,178)
------------ ------------ -----------
Cash flows from investing activities:
Capital expenditures (60,122) (85,108) (155,700)
Decrease in investment in subsidiaries 13,714,452 9,834,721 10,768,258
Other -- (335,606) --
------------ ------------ -----------
Net cash provided by investing activities 13,654,330 9,414,007 10,612,558
------------ ------------ -----------
Cash flows from financing activities:
Borrowings under lines of credit 5,000,000 9,200,000 4,200,000
Repayments of lines of credit (13,200,000) (3,500,000) (1,000,000)
Repayment of long-term debt (3,594,692) (1,820,181) (1,777,706)
Issuance of long-term debt 8,500,000 2,500,000 --
Issuance of Class A stock, net of taxes 882,250 560,000 --
Payments for acquisition and retirement of stock (8,257,963) (12,300,209) (9,595,505)
------------ ------------ -----------
Net cash used for financing activities (10,670,405) (5,360,390) (8,173,211)
------------ ------------ -----------
Net increase (decrease) in cash (199,846) 536,607 (140,831)
Cash, beginning of year 1,021,946 485,339 626,170
------------ ------------ -----------
Cash, end of year $ 822,100 $ 1,021,946 485,339
============ ============ ===========
See Notes to Condensed Financial Statements.
42
43
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
1997 Annual Report.
(1) SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes received from subsidiaries during the years ended December
31, 1997, 1996 and 1995 were $112,995, $1,990,201 and $2,214,656,
respectively. Interest paid during the years ended December 31, 1997,
1996 and 1995 was $4,630,502, 6,099,379 and $5,769,404, respectively.
Interest paid in 1996 and 1995 included $1,118,546 and $978,399,
respectively, paid to subsidiaries for intercompany loans.
During 1997, 1996 and 1995, the Company issued 450,000, 499,999 and
149,997 shares of Class A Stock respectively at $10 per share pursuant
to the conversion options of the Convertible Senior Notes to AIG Life
Insurance Company and American International Life Assurance Company of
New York. The issuance of stock pursuant to the conversion option of
the Convertible Senior Notes is a non-cash transaction that is not
reflected in the Consolidated Statement of Cash Flows.
On February 5, 1997, ACMAT Corporation purchased the 1,099,996 shares
of Class A Stock which AIG Life Insurance Company (366,663 shares) and
American International Life Assurance Company of New York, (733,333)
had acquired over the last three years through conversion options. The
shares were purchased at an average price of $14.70 per share for a
total purchase price of $16,174,942. The purchase price of $16,174,942
consisted of $4,174,942 in cash and promissory notes totaling
$12,000,000. The purchase of stock with the $12,000,000 promissory
notes is a non-cash transaction that is not reflected in the
Consolidated Statement of Cash Flows.
(2) LONG-TERM DEBT
A summary of long-term debt at December 31, 1997 and 1996 follows:
1997 1996
----------- ----------
Term Loan Due 2004 $ 6,690,000 --
Senior Notes Due 2005 12,000,000 --
Term Loan Due 2003 1,874,998 2,232,142
Term Loan Due 2000 3,333,333 4,666,667
Mortgage Note Due 2000 7,814,396 7,908,610
Convertible Note Due 2022 16,500,000 16,500,000
Convertible Senior Notes Due 1999 -- 4,500,000
----------- ----------
$48,212,727 35,807,419
=========== ==========
See Note 10 to the Consolidated Financial Statements in the Annual
Report for a description of the long-term debt and aggregate maturities
for 1998 to 2002 and thereafter.
(3) INCOME TAXES
See Note 11 to the Consolidated Financial Statements in the Annual
Report for a description of income taxes.
(4) COMMITMENTS AND CONTINGENCIES
See Note 15 to the Consolidated Financial Statements in the Annual
Report for a description of the commitments and contingencies.
43
44
SCHEDULE II
ACMAT CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1997, 1996 and 1995
Balance Additions
at charged Balance
beginning to costs at
of and end of
Description period expenses Deductions (a) period
Allowance for
doubtful accounts:
1997 $322,406 620,000 632,660 309,746
======== ======= ======= =======
1996 $340,844 400,904 419,342 322,406
======== ======= ======= =======
1995 $271,519 340,000 270,675 340,844
======== ======= ======= =======
(a) Deductions represent accounts written off.
44
45
ACMAT CORPORATION AND SUBSIDIARIES Schedule V
Supplemental Information concerning property-casualty insurance operations
As of and for the years ended December 31, 1997, 1996 and 1995
Discount Ded.
Reserves for from Unpaid
Deferred Unpaid Losses Losses Losses & Loss
Affiliation Policy and Loss and Loss Net Expenses
with Acquisition Adjustment Adjustment Unearned Earned Investment Related
Registrant Costs Expenses Expenses Premiums Premiums Income Current Year
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Insurance
Segment
1997 $2,078,405 48,900,713 -- 9,804,159 15,045,844 6,461,615 5,176,030
========== ========== ========== ========== ========== ========== ==========
1996 $2,905,875 47,960,084 -- 12,341,642 19,899,936 6,482,573 7,137,183
========== ========== ========== ========== ========== ========== ==========
1995 $3,459,308 45,253,311 -- 14,302,613 23,492,905 6,035,307 8,015,877
========== ========== ========== ========== ========== ========== ==========
Amortization Paid
Adjustment of Deferred Losses
Affiliation Incurred Policy and Loss
with to Acquisition Adjustment Premiums
Registrant Prior Years Costs Expenses Written
- ---------- ---------- ---------- ---------- ----------
Insurance
Segment
1997 (838,778) 2,802,993 3,033,743 12,680,197
========== ========== ========== ==========
1996 (1,167,203) 3,617,308 3,214,109 18,041,488
========== ========== ========== ==========
1995 (900,506) 3,939,008 2,478,063 22,856,791
========== ========== ========== ==========
45
46
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) 78 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) 51 1971 Executive Vice President, Chief Operating Officer,
and Treasurer of the Company. Member of the Audit
Committee. President, Co-Chief Executive Officer and
Treasurer of United Coastal Insurance Company.
President and Treasurer of ACSTAR Holdings, Inc. and
ACSTAR Insurance Company. Member, Boards of
Directors of United Coastal Insurance Company, ACSTAR
Holdings, Inc., ACSTAR Insurance Company and Three D
Departments, Inc.
VICTORIA C. NOZKO (1) 79 1982 Housewife during past five years. Member of the
Audit Committee.
JOHN C. CREASY 78 1987 Retired Chief Executive Officer of Danbury Hospital,
Member, Board of United Coastal Insurance Company.
Member of the Compensation Committee and Audit
Committee.
MICHAEL J. SULLIVAN 53 1993 Business Manager, Financial Secretary/Treasurer of
Sheet Metal Workers' Local Union No. 20; General
Secretary-Treasurer of Sheet Metal Workers'
International Association.
(1) Mr. Henry W. Nozko, Sr. and Mrs. Victoria C. Nozko are husband and wife and
Mr. Henry W. Nozko, Jr. is their son.
46
47
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. 78 President, Chief Executive Officer, Director
and Chairman of the Board since 1951.
Henry W. Nozko, Jr. 51 Executive Vice President since 1982.
Treasurer since 1973. Director since 1971,
and Chief Operating Officer since 1985.
Robert H. Frazer 51 Vice President since 1982. Secretary since
1992. General Counsel since 1977.
Michael P. Cifone 39 Vice President-Finance since 1990. Corporate
Controller since 1989.
47
48
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 LONG-TERM ALL OTHER
POSITION COMPENSATION (A) COMPENSATION (B) COMPENSATION (C)
YEAR SALARY BONUS CLASS A OPTIONS
Henry W. Nozko, Sr 1997 $430,000 $ 86,000 -- $ 10,591
Chairman, President 1996 $428,292 $172,000 46,000 $ 10,345
and Chief Executive Officer 1995 $407,875 $184,275 -- $ 9,876
Henry W. Nozko, Jr 1997 $310,000 $ 62,000 -- $ 10,488
Executive Vice President and Chief 1996 $334,500 $124,000 26,000 $ 10,238
Operating Officer 1995 $292,833 $132,300 -- $ 9,774
Robert H. Frazer, Esq 1997 $165,000 $ 33,000 -- $ 10,450
Vice President, Secretary and 1996 $164,375 $ 49,500 -- $ 10,198
General Counsel 1995 $156,875 $ 70,875 -- $ 9,736
Michael P. Cifone 1997 $110,000 $ 22,000 -- $ 9,253
Vice President-Finance 1996 $109,583 $ 33,000 -- $ 10,090
1995 $104,583 $ 47,250 -- $ 9,608
(A) Amounts shown include cash compensation earned and received by the executive
officers. There are no other forms of non-cash compensation or other perquisites
for any executive officer.
The Company has a Management Compensation Plan based upon earnings of the
Company. As a guideline, the plan provides that participants may share in an
incentive fund equal to 12% of pretax earnings, provided such pretax earnings
amount to at least a 10% return on the Company's equity. However, both the
participants and the amount of bonus are discretionary, provided the total
amount of bonuses paid do not exceed the total incentive fund available. In
addition, the Company may offer separate incentives and commissions on an
individual basis.
(B) Options were granted for ACMAT Class A Stock.
(C) The amounts shown in this column represent contributions made by the Company
to the Company's Thrift, Profit Sharing and Retirement Plan ("Plan"). The Plan
provides that all nonunion employees employed on a full time or part time
salaried basis are eligible to participate on the first day of January or July
after twelve consecutive months of employment. The Company contributes amounts,
as determined by the Board of Directors, to be allocated among the participants
according to a formula based upon the employee's years of service and
compensation. A participant becomes vested at the rate of 20% per year
commencing after two years of service.
48
49
The following table provides information on options exercised during
1997 by the named Executive Officers and the value of their unexercised
options at December 31, 1997. No options were granted in 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR
END 1997 OPTION VALUES
Number of
Shares Unexercised Value of Unexercised
Acquired Value Options at In-the-Money Options
Name on Exercise Realized 12/31/97 (1) at 12/31/97 (2)
----------- -------- ------------ --------------------
Henry W. Nozko, Sr
- ACMAT Class A Stock Options -- -- 61,000 $380,500
- ACMAT Common Stock Options -- -- 50,000 $512,500
Henry W. Nozko, Jr
- ACMAT Class A Stock Options 20,000 $195,000 61,000 $490,500
- ACMAT Common Stock Options -- -- 50,000 $512,500
Robert H. Frazer
- ACMAT Class A Stock Options 30,000 $293,438 50,000 $462,500
Michael P. Cifone
- ACMAT Class A Stock Options 35,000 $277,500 10,000 $ 85,000
(1) Represents the number of options held at year end. All options
were exercisable at December 31, 1997.
(2) Represents the total gain which would have been realized if
all options for which the year-end stock price was greater
than the exercise price were exercised on the last day of the
year.
49
50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
As of March 1, 1998, 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 (16)
---------------- -------- ---------------------- ------------ -----------------
Henry W. Nozko, Sr Common 444,000(2)(5) 68.64% 43.41%
Class A 76,200(2)(4) 2.76
Henry W. Nozko, Jr Common 189,274(2)(3)(5) 29.26 20.00
Class A 187,574(2)(3)(4) 6.80
Victoria C. Nozko Class A 42,000(6) 1.55 .43
John C. Creasy Common 3,300 .55 .52
Class A 18,453(7) .68
Michael J. Sullivan Class A 18,390(8) .68 .19
Sheet Metal Workers'
National Pension Fund Class A 1,500,000(9) 35.74 13.23
Franklin Resources, Inc. Class A 495,000(10) 16.50 4.52
First Manhattan Co. Class A 348,550(11) 12.92 3.54
Queensway Financial
Holdings Limited Class A 311,000(12) 11.53 3.16
Investment Counselor of
Maryland, Inc. Class A 190,000(13) 7.04 1.93
EQSF Advisors, Inc. Class A 189,978(14) 7.04 1.93
U.S. Bancorp Class A 179,800(15) 6.67 1.83
All Directors and
Officers (7 persons)
as a Group Common 636,574 91.35 61.14
Class A 404,232 13.80
(1) The person listed has the sole power to vote the shares of Common Stock
and Class A Stock listed above as beneficially owned by such person and
has sole investment power with respect to such shares.
(2) Does not include 14,260 shares of Common Stock nor 16,060 shares of
Class A Stock held of record by ACMAT's qualified Thrift, Profit
Sharing & Retirement Plan, of which Messrs. Nozko, Sr. and Nozko, Jr.
are trustees. Address is 233 Main Street, New Britain, Connecticut
06050-2350.
(3) Does not include 24,250 shares of Class A Stock and 5,500 shares of
Common Stock held by Mr. Nozko, Jr. as custodian for his minor children
nor 1,900 shares of Class A Stock and 2,750 shares of Common Stock held
by his wife, Gloria C. Nozko.
(4) Includes options to purchase 61,000 shares of Class A Stock.
(5) Includes options to purchase 50,000 shares of Common Stock.
(6) Includes options to purchase 15,000 shares of Class A Stock.
(7) Includes options to purchase 16,500 shares of Class A Stock.
(8) Includes options to purchase 18,000 shares of Class A Stock.
(9) Assumes the full conversion of $16,500,000 principal amount of 11.5%
Convertible Note into 1,500,000 shares of Class A Stock. The Address of
the Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314.
(10) Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
Mateo, CA 94404
(11) Address of First Manhattan Co. is 437 Madison Avenue, New York, NY
10022.
(12) Address of Queensway Financial Holdings Limited is 90 Adelaide Street
West, Toronto, Ontario M5H3V9.
(13) Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
Street, Baltimore, MD 21201.
(14) Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
10017-2023.
(15) Address of U.S. Bancorp is 601 2nd Avenue South, Minneapolis, MN
55402-4302.
(16) Based upon one vote for each share of Common Stock and one-tenth vote
for each share of Class A Stock.
50
51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
Sheet Metal Workers' National Pension Fund
The Pension Fund has the right to convert indebtedness of ACMAT to the Pension
Fund in the principal amount of $16,500,000 into shares of Class A Stock at the
current conversion price of $11.00 per share pursuant to the terms of a 30-year
unsecured, $16,500,000 subordinated debenture dated July 1, 1992 and bearing
interest at the annual rate of 11.5%.
Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a
voting agreement pursuant to which the parties have agreed to vote their
respective shares of Class A Stock in favor of the Pension Fund's nominees to
the ACMAT Board of Directors. Michael J. Sullivan, a director of ACMAT,
currently serves as the Business Manager and Financial Secretary/Treasurer of
the Sheet Metal Workers' Local Union No. 20 and as First General Vice President
of the Sheetmetal Workers' International Association.
AIG Life Insurance Company
On 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 (8-1/2%). 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 $199,266 in
reinsurance premiums in the year ended December 31, 1997.
Other Relationships
During the year ended December 31, 1997, the Company paid to Dr. Arthur Cosmas
$114,690 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, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements - December 31,
1997, 1996 and 1995
51
52
2. Financial Statement Schedules
Consolidated Schedules included in Part II of this Report-Years ended
December 31, 1996, 1995 and 1994:
I - Condensed Financial Information of Registrant
II - Valuation and Qualifying Accounts and Reserves
V - Supplemental Information Concerning Property-Casualty Insurance
Operations
All other schedules are omitted as the required information is not applicable or
the information is presented in the Consolidated Financial Statements or related
notes.
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the fourth quarter
of 1997.
(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 The Manufacturers
Life Insurance Company filed as an Exhibit to the Company's Form
10-Q for the Quarter ended March 31, 1990 are incorporated by
reference.
(4c) Open-end Mortgage Deed and Security Agreement between ACMAT
Corporation and The Manufacturers Life Insurance Company filed as
an Exhibit to the Company's Form 10-Q for the Quarter ended March
31, 1990 are incorporated by reference.
(4d) Loan Agreement dated as of June 30, 1994 between ACMAT Corporation
and Shawmut Bank Connecticut, N.A. filed as an Exhibit to the
Company's Amendment No. 1 to Form S-1 dated July 13, 1994 is
incorporated by reference.
(10a) Annual Management Compensation Plan filed as an Exhibit to the
Company's 1984 Form 10-K is incorporated herein by reference.
(10b) Stock Purchase Agreement dated as of July 1, 1992 between ACMAT
Corporation and the Sheet Metal Workers' National Pension Fund
together with Note Agreement Re: $16,500,000 11 1/2% Convertible
Subordinated Notes due 2012 filed as Exhibit 10g to the Company's
Form 10-K for the year ended December 31, 1992 is incorporated
herein by reference.
(21) Subsidiaries of ACMAT.
(27) Financial Data Schedule.
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities. Schedule P of the Annual Statements of ACSTAR
Insurance Company and United Coastal Insurance Company for 1997.
(99) Agreement to furnish copies of long-term debt instruments.
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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 25, 1998 By:________________________
Henry W. Nozko, Sr., President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Chairman of the Board,
President, Chief Executive
____________________ Officer and Director March 25, 1998
Henry W. Nozko, Sr.
Chief Operating Officer,
Executive Vice President
____________________ Treasurer and Director March 25, 1998
Henry W. Nozko, Jr.
Vice President - Finance
(Principal Financial and
____________________ Accounting Officer) March 25, 1998
Michael P. Cifone
____________________ Director March 25, 1998
Victoria C. Nozko
____________________ Director March 25, 1998
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 4 - Note Purchase Agreements Incorporated by Reference
Exhibit 4b - Promissory Note between ACMAT Incorporated by Reference
and The Manufacturers Life
Insurance Company
Exhibit 4c - Open-end Mortgage Deed/Security Incorporated by Reference
Agreement between ACMAT and The
Manufacturers Life Insurance Co.
Exhibit 4d - Loan Agreement between ACMAT and Incorporated by Reference
Shawmut Bank
Exhibit 10a - Annual Management Incorporated by Reference
Compensation Plan
Exhibit 10b - Stock Purchase and Note Agreement Incorporated by Reference
between ACMAT Corporation
and The Sheet Metal Workers'
National Pension Fund
Exhibit 21 - Subsidiaries of ACMAT Page 55
Exhibit 27 - Financial Data Schedule Page 56
Exhibit 28 - Information from Reports Page 57
Furnished to State Insurance
Regulatory Authorities
Exhibit 99 - Agreement to furnish copies of long-term Page 62
debt instruments
54