-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WbztTy2P+UJ2PsubX5/AOw+5YvjwA2YQgQZzea8AaFUQBjAZVwQKRHsBn86Gco5U JwPxQ34Pl5iUMcmaV06/8g== 0000914039-02-000132.txt : 20020415 0000914039-02-000132.hdr.sgml : 20020415 ACCESSION NUMBER: 0000914039-02-000132 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACMAT CORP CENTRAL INDEX KEY: 0000002062 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 060682460 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-06234 FILM NUMBER: 02597020 BUSINESS ADDRESS: STREET 1: 233 MAIN ST STREET 2: P O BOX 2350 CITY: NEW BRITAIN STATE: CT ZIP: 06050-2350 BUSINESS PHONE: 2032299000 MAIL ADDRESS: STREET 1: 233 MAIN STREET STREET 2: P O BOX 2350 CITY: NEW BRITAIN STATE: CT ZIP: 06050-2350 10-K 1 y58760e10-k.txt FORM 10-K 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, 2001 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, 2002 of the Common Stock and Class A Stock held by non-affiliates of the registrant was $16,887,647. As of March 1, 2002 there were 553,355 shares of the registrant's Common Stock and 1,827,019 shares of registrant's Class A Stock, each without par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE: None PART I Item 1. Business 3 General 3 Financial Information about Operating Segments 3 United Coastal Liability Insurance 3 ACSTAR Bonding 5 Insurance and Bonding Performance Ratios 5 Underwriting 6 Reinsurance 6 Claims 6 Reserves for Losses and Loss Adjustment Expenses 6 IRIS Ratios 9 A.M. Best Ratings 9 Risk-Based Capital 9 ACMAT Contracting 9 General 9 Backlog 9 Materials 10 Contract Acquisition 10 Warranty 10 Asbestos Abatement Operations 10 Marketing 10 Competition 11 Regulation 11 Investments 12 Environmental Compliance 14 Employees 14 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder matters 15 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Reserves for Losses and Loss Adjustment Expenses 18 Liquidity and Capital Resources 18 Regulatory Environment 20 Item 7a. Quantitative and Qualitative Discussions about Market Risk 20 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 PART III Item 10. Directors and Executive Officers of the Registrant 49 Item 11. Executive Compensation 52 Item 12. Security Ownership of Certain Beneficial Owners and Management 54 Item 13. Certain Relationships and Related Transactions 55 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 55
PART I ITEM 1. BUSINESS General ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial insurance and bonding coverage for contractors, architects, engineers and other professionals in the construction and environmental fields and other specialty insurance such as products liability. The Company derives its underwriting expertise from its construction and remediation operations. Through United Coastal Insurance Company ("United Coastal Insurance"), the Company provides a broad line of general products, professional, environmental and other liability insurance primarily to general contractors and specialty trade contractors, manufacturers and distributors and architects, engineers and other professionals. Through ACSTAR Insurance Company ("ACSTAR Insurance"), the Company provides surety bonds for general building, specialty trade and environmental contractors and all forms of commercial surety. Both United Coastal Insurance and ACSTAR Insurance are rated A- (excellent) by A.M. Best Co., Inc. ("A.M. Best"). The Company is also engaged in construction contracting which consists of general building construction for new buildings and interior contracting services of building interiors and asbestos abatement services for commercial, industrial and institutional buildings. Financial Information about Operating Segments Financial information relating to the three business segments is set forth in Note 15 to the consolidated financial statements on page 40 of this document. The Company has three reportable operating segments: United Coastal Liability Insurance, ACSTAR Bonding and ACMAT Contracting. The Company's reportable segments are primarily the three main legal entities of the Company which offer different products and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The United Coastal Liability Insurance operating segment offers specific lines of liability insurance as an approved non-admitted excess and surplus lines insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of Columbia. United Coastal offers claims made and occurrence policies for specific specialty lines of liability insurance through certain excess and surplus lines brokers who are licensed and regulated by the state insurance department(s) in the state(s) in which they operate. United Coastal offers general, asbestos, lead, pollution and professional liability insurance nationwide to specialty trade contractors, environmental contractors, property owner, storage and treatment facilities and professionals. United Coastal also offers products liability insurance to manufacturers and distributors. The Bonding operating segment provides, primarily through ACSTAR, surety bonds written for prime, specialty trade, environmental, asbestos and lead abatement contractors and miscellaneous obligations. ACSTAR also offers other miscellaneous surety such as workers' compensation bonds, supply bonds, subdivision bonds and license and permit bonds. ACMAT Contracting provides construction contracting services to commercial and governmental customers. ACMAT Contracting also provides underwriting services to its insurance subsidiaries. In addition, ACMAT Contracting owns a commercial office building in New Britain, Connecticut and leases office space to its insurance subsidiaries as well as third parties. UNITED COASTAL LIABILITY INSURANCE The liability insurance lines of the Company, which consist primarily of contractor general liability policies, professional liability policies, and product 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. 3 - 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. 4 The Company customizes many of its insurance policies to suit the individual needs of its insureds. Combined policies insuring multiple exposures under one policy form and one combined policy limit are available. ACSTAR Bonding Surety bonds are written for general, specialty trade, environmental, asbestos and lead abatement contractors. The Company also offers a wide variety of miscellaneous bonds. Many bonds are supported by various levels of collateral based upon the financial condition of the customer. The Company often requires cash or irrevocable letters of credit to collateralize a portion of most bonds issued. In addition, the Company will only accept irrevocable letters of credit from financial institutions which have a rating of C "sound credit risk" or higher as determined by Fitch Ratings. However, no assurance can be made that such financial institutions will maintain their financial strength and, thus, that funds guaranteed under letters of credit will be available, if needed, to offset any potential claims. The Company provides the following types of bonds: - Payment and performance bonds - Bonds are provided for general building and specialty trade contractors, environmental remediation and asbestos abatement contractors and consultants, lead abatement contractors and solid waste disposal contractors. A payment and performance bond guarantees satisfactory performance and completion of the contractor's work and payment of the contractor's debts and obligations relating to the performance of the contract covered by the bond. - Closure and post-closure bonds - Bonds are provided for owners of solid and hazardous waste landfills as required to meet certain requirements under RCRA and remediation bonds in connection with the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). Closure bonds usually guarantee that a property owner will restore property to a specified level or condition. Post-closure bonds guarantee cultivation and maintenance of a closed site. - Supply and other specialty bonds - Bonds are provided for contractors, manufacturers and other owners in their normal course of operations, usually to guaranty the supply of equipment and material. - Miscellaneous surety, license, permit, self insurer, supersedeas and other bonds - Miscellaneous bonds are provided for applicants based on those requirements specified in the bond form and the applicant's financial strength. The underwriting department and management are responsible for the development of new insurance products and enhancements. Underwriting profitability is enhanced by the creation of niche products focused on classes of business which traditionally have provided underwriting profits. Insurance and Bonding Performance Ratios The following table sets forth the combined ratios of the Company, prepared in accordance with generally accepted accounting principles and statutory accounting principles prescribed or permitted by state insurance authorities. The combined ratio is a traditional measure of underwriting profitability. When the combined ratio is under 100%, underwriting results are generally considered profitable. Conversely, when the combined ratio is over 100%, underwriting results are considered unprofitable. The combined ratio does not reflect investment income, federal income taxes or other non-operating income or expense.
Year Ended December 31, -------------------------------- 2001 2000 1999 ---- ---- ---- GAAP Ratios: Loss ratio 20.3% 16.4% 17.6% Expense ratio 69.3 58.9 56.6 ---- ---- ---- GAAP combined ratio 89.6 75.3 74.2 ==== ==== ==== Statutory Ratios: Loss ratio 20.3 16.4 17.6 Expense ratio 77.3 63.6 63.3 ---- ---- ---- Statutory combined ratio 97.6% 80.0% 80.9% ==== ==== ====
The increase in the combined ratios over the past year results primarily from the decline in written premiums due to selective underwriting while expenses remained flat. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." 5 Underwriting The Company's underwriting practices rely heavily upon the knowledge base which it has developed in over fifty years of construction contracting. Accordingly, ACMAT, in addition to its construction contracting operations, provides risk evaluation, loss adjustment, underwriting, claims handling and monitoring services for its insurance subsidiaries, United Coastal Insurance and ACSTAR Insurance. Contractors seeking liability insurance and bonding through the Company are carefully reviewed with respect to their past practices, claims history and records. Other factors considered are the contractors' and professionals' financial conditions, training techniques, safety procedures, histories of violations, record keeping, supervisory qualifications and experience. Historically, the Company has issued policies and bonds to fewer than twenty-five percent of its applicants. Underwriting procedures for products liability insurance involve conducting an in-depth review of the product that is being manufactured or distributed. Such review involves examining an applicant's past record of recalls, claims history and litigation. The Company's underwriting and pricing strategy is designed to produce an underwriting profit resulting in a Company-wide combined ratio below 100%. The Company has a conservative underwriting philosophy which, in the opinion of management, is one of the primary reasons for the favorable loss ratios relative to the property and casualty insurance industry over the last three years. The Company continually monitors financial stability of contractors with surety bonds outstanding. Work in progress reports and updated financial information are reviewed by the Company to ensure that the contractor continues to meet the underwriting guidelines. Reinsurance In the normal course of business, the Company assumes and cedes reinsurance with other companies. Reinsurance ceded primarily represents excess of loss reinsurance with companies with "A" ratings from the insurance rating organization, A.M. Best. Reinsurance ceded also includes facultative reinsurance which is applicable to excess policies written over a primary policy issued by the Company for specific projects. Reinsurance is ceded to limit losses from large exposures and to permit recovery of a portion of direct losses; however, such a transfer does not relieve the originating insurer of its liability. The Company participates in assumed quota share reinsurance arrangements covering marine and property catastrophe risks with one of its excess of loss reinsurers. Effective May 1, 2000, the Company cedes significantly more of its bond exposure than under its previous reinsurance treaties. Such reinsurance is applicable on a per principal basis for losses in excess of $1,000,000 up to $13,000,000. Prior to May 1, 2000, reinsurance was applicable to losses in excess of $2,000,000 on a per bond basis with the Company retaining approximately $5,000,000 of losses up to $13,000,000. The availability and price of reinsurance fluctuates according to market conditions. Depending on the availability and cost of reinsurance, the Company may, from time to time, elect to cede greater or lesser portions of its underwriting risk. Claims The Company directly handles substantially all claims of its insureds, except that independent claims adjusters and/or counsel, selected for their experience and reputation in the locality of the claim, are retained to conduct initial fact-finding investigations. All decisions respecting payment of claims are made by experienced employees of the Company. Reserves for Losses and Loss Adjustment Expenses Reserves for losses and loss adjustment expenses are estimates at any given point in time of what the Company may have to ultimately pay on incurred losses, including related settlement costs, based on facts and circumstances then known. The Company also reviews its claims reporting patterns, past loss experience, risk factors and current trends and considers their effect in the determination of estimates of incurred but not reported losses. Ultimate losses and loss adjustment expenses are affected by many factors which are difficult to predict, such as claim severity and frequency, inflation levels and unexpected and unfavorable judicial rulings. Reserves for surety claims also consider the amount of collateral held as well as the financial strength of the contractor and its indemnitors. Management believes that the reserves for losses and loss adjustment expenses at December 31, 2001 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. 6 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.
2001 2000 1999 ------------ ------------ ------------ Balance at January 1 $ 29,310,606 $ 38,544,491 $ 43,115,062 Less reinsurance recoverable 2,580,388 3,924,064 2,224,116 ------------ ------------ ------------ Net balance at January 1 26,730,218 34,620,427 40,890,946 Incurred related to: Current year 4,144,000 2,441,000 3,091,120 Prior years (2,607,978) (934,092) (1,418,233) ------------ ------------ ------------ Total incurred 1,536,022 1,506,908 1,672,887 Payments related to: Current year 1,723,000 791,546 81,569 Prior years 6,730,282 8,605,571 7,861,837 ------------ ------------ ------------ Total Payments 8,453,282 9,397,117 7,943,406 Net balance at December 31 19,812,958 26,730,218 34,620,427 Plus reinsurance recoverable 2,772,668 2,580,388 3,924,064 ------------ ------------ ------------ Balance at December 31 $ 22,585,626 $ 29,310,606 $ 38,544,491 ============ ============ ============
The decrease in loss and loss adjustment expense reserves continues due to significant loss payments for surety and general liability claims, the release of net favorable development in surety loss reserves relating to older years that are no longer required partially offset by an increase in current year incurred loss and loss adjustment expenses. This increase reflects large surety losses which occurred during the year. While management continually evaluates the potential for changes in loss estimates, due to the uncertainty inherent in the surety business, the emergence of net favorable development may or may not continue to occur. Management believes that the reserves for losses and loss adjustment expense are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses, including losses incurred but not reported. The Company has no exposure to any asbestos or environmental claims associated with general liability policies issued with the pre-1986 pollution exclusion. Policies written with the exclusion are typically associated with mass tort environmental and asbestos claims. The Company has never issued a policy with the pre-1986 pollution exclusion. The Company's exposure to asbestos and environmental liability claims is primarily limited to asbestos and environmental liability insurance for contractors and consultants involved in the remediation, removal, storage, treatment and/or disposal of environmental and asbestos hazards. As of December 31, 2001, 2000 and 1999 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 $19,812,958, $29,375,218, and $40,715,475, respectively. As of December 31, 2001, 2000 and 1999 reserves determined in accordance with generally accepted accounting principles ("GAAP basis reserves") were $22,585,626, $29,310,606 and $38,544,491, 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 for 2000 and 1999. In 2001, revised statutory accounting principles removed the requirement for minimum statutory, or "Schedule P" reserves. The following losses and loss adjustment expense reserve runoff table is for the combined insurance operations of the Company's insurance subsidiaries. The data for 1992 and prior periods are presented on a net basis in the reserve run-off table. Restatement of prior periods is not practicable. Each column shows the reserve held at the indicated calendar year-end and cumulative data on payments and re-estimated liabilities for that accident year and all prior accident years making up that calendar year-end reserve. 7 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.
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (thousands) Liability for unpaid losses and loss adjustment expenses 26,234 29,240 30,437 36,726 41,363 44,119 45,423 40,891 34,620 26,730 19,813 Liability reestimated as of: One year later 26,234 29,240 30,437 35,825 40,193 43,282 43,106 37,816 33,503 26,735 Two years later 26,234 29,240 28,337 34,659 37,872 40,865 35,698 36,741 27,656 Three years later 26,234 26,000 27,170 29,913 35,354 33,359 33,735 31,108 Four years later 22,094 24,833 23,550 27,193 28,149 30,999 27,004 Five years later 20,927 22,284 20,880 19,486 25,057 25,663 Six years later 18,841 19,914 13,673 16,254 21,499 Seven years later 16,932 13,148 11,915 14,125 Eight years later 11,761 11,163 10,819 Nine years later 10,412 10,407 Ten years later 10,152 Cumulative Redundancy (deficiency): 16,082 18,833 19,618 22,601 19,864 18,456 18,419 9,783 6,964 (5) Paid (cumulative) as of: One year later 3,216 6,142 1,560 2,361 3,067 2,942 6,703 7,903 8,610 6,663 Two years later 8,699 7,574 3,655 4,582 5,256 8,951 13,928 14,843 13,766 Three years later 9,576 8,603 5,022 6,412 8,922 16,047 16,655 19,920 Four years later 10,488 9,554 6,189 7,969 15,601 18,597 20,208 Five years later 10,816 9,818 6,869 12,425 17,564 21,791 Six years later 10,856 10,034 9,723 13,094 19,885 Seven years later 10,949 10,761 10,296 13,902 Eight years later 11,445 10,787 11,058 Nine years later 11,449 11,357 Ten years later 11,579 Gross liability - end of year 34,730 40,955 45,235 47,960 48,901 43,115 38,544 29,311 22,586 Reinsurance recoverable 4,293 4,229 3,872 3,841 3,478 2,224 3,924 2,581 2,773 ------ ------ ------ -------- ----- ----- ------- ------ ------- Net liability - end of year 30,437 36,726 41,363 44,119 45,423 40,891 34,620 26,730 19,813
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 re-estimated 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. 8 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, 2001, none of the Company's insurance subsidiaries' IRIS ratios were designated an "unusual value". A.M. Best Ratings A.M. Best ratings are indications of the solvency of an insurer based on an analysis of the financial condition and operations of a company relative to the industry in general. Occasionally, the requirement for an A.M. Best's-rated insurer is a condition imposed upon the contractor by the party engaging the contractor. Certain insurance brokers also restrict the business they will place with insurers which are not A.M. Best's-rated. The 2001 Best letter ratings range from A++ (superior) to F (in liquidation). United Coastal Insurance and ACSTAR Insurance each have an A.M. Best's rating of A- (excellent). Risk-Based Capital Risk-based capital requirements are used as early warning tools by the National Association of Insurance Commissioners and the states to identify companies that require further regulatory action. The ratio for each of the Company's insurance subsidiaries as of December 31, 2001 was above the level which might require regulatory action. ACMAT CONTRACTING General The Company provides a broad range of general building construction and coordinated interior contracting services. The Company began to offer asbestos abatement services in the 1970's and the Company continues to be active in the asbestos abatement field. The Company provides new and renovation general construction and installs interiors for office buildings, retail establishments, schools, colleges, churches, hospitals and other buildings. The Company's general building construction and interior contracting is provided both in connection with new buildings and in connection with the remodeling and renovation of interiors of existing buildings usually under contracts with building owners and building occupants. The Company provides a broad range of coordinated interior contracting services, many of which are performed by subcontractors Backlog The following table sets forth the Company's backlog of unbilled contract amounts, the total number of contracts and the number of contracts with unbilled amounts in excess of $400,000 as of December 31, 2001 and 2000:
December 31, 2001 December 31, 2000 ----------------- ----------------- Total Number of Contracts. 7 20 Total unbilled contract amounts. $14,000,000 $16,800,000 Number of contracts with unbilled amounts in excess of $400,000. 5 3 Aggregate unbilled amount of contracts in excess of $400,000. $13,946,000 $15,900,000
The Company estimates that all of the December 31, 2001 backlog will be completed prior to December 31, 2002. 9 Materials The Company purchases the materials it installs in the course of its construction contracting operations from a number of suppliers. Most of the Company's materials are standard building components which historically have been readily available from several suppliers. Some components are manufactured to the Company's specifications. Most of the materials used by the Company are shipped directly to the job site by the manufacturer. Contract Acquisition The Company's work projects are obtained by lump sum fixed price bids, unit prices or are negotiated. Contract prices are usually determined by competition with other contractors. Warranty Each project usually contains a one-year warranty or guaranty period, wherein the Company and its subcontractors warrant that the work is free from defects and was performed in accordance with the plans and specifications. Occasionally, the Company is required to make minor corrections or adjustments, but has never incurred any significant costs in connection with any such work. Asbestos Abatement Operations Both the Company's insurance and construction contracting operations have involved risks associated with asbestos. The Company has in the past insured and continues to insure risks associated with asbestos abatement or containment operations on both a claims-made and occurrence basis. Since harm from exposure to asbestos fibers may not be detectable in humans for as much as thirty years, losses under insurance contracts written on an occurrence basis may not be known for some time. The Company's construction contracting operations involve the removal of asbestos. As asbestos containing materials deteriorate or become disturbed by incidental or intentional contact, asbestos fibers may enter the air and can circulate into the breathing zone of building occupants. Exposure to asbestos is thought by some to be a cause of cancer. In the mid 1970's, the Company became engaged in the removal of asbestos in addition to its other contracting operations. Since that time, it has been engaged in hundreds of contracts involving the removal of asbestos. Claims by non-employees related to asbestos have been made against the Company from time to time and are pending and there can be no assurance that claims will not be made in the future. The Company believes that it is fully covered by workers' compensation insurance with respect to any claims by current and former employees relating to asbestos operations. The Company currently obtains its workers' compensation insurance in those states in which it performs work either from state insurance funds or one of several insurance companies designated in accordance with the Assigned Risk Pool. The amount of workers' compensation insurance maintained varies from state to state but is generally greater than the maximum recovery limits established by law and is not subject to any aggregate policy limits. In the past, the Company has received a number of asbestos-related claims from employees, all of which have been fully covered by its workers' compensation insurance. The Company believes, although no assurances can be given, that workers' compensation insurance sufficient to cover all future claims will remain available in accordance with applicable state laws. MARKETING Insurance and Bonding As an excess and surplus lines carrier, United Coastal Insurance markets its policies through excess and surplus lines brokers only in those states in which it is permitted to write coverage. Currently, United Coastal Insurance is permitted to write excess and surplus lines insurance as a non-admitted insurer in forty-six states, the District of Columbia, Puerto Rico and the Virgin Islands. ACSTAR Insurance offers payment and performance bonds through carefully selected insurance agents which specialize in the needs of contractors. All underwriting approvals and issuance of policies and bonds are performed directly by the Company's insurance subsidiaries. The Company's insurance products are marketed in all 50 states. 10 ACMAT Contracting The Company markets its construction contracting services directly to building owners and building occupants. Project opportunities are brought to the attention of the Company through various sources such as F. W. Dodge Company, which publishes lists of projects available for bid, architects, owners, general contractors, or engineers who are familiar with the Company. The Company also depends upon repeat business and responses to the Company's advertising program which is intended to emphasize ACMAT's packaged interior renovation capability. ACMAT's sales force consists of its senior management and project managers, all of whom function as construction consultants and work closely with owners, tenants and architects. COMPETITION Insurance and Bonding The property and casualty insurance industry is highly competitive. The Company competes with large national and smaller regional insurers in each state in which it operates, as well as monoline specialty insurers. The Company's principal competitors include certain insurance subsidiaries of American International Group, Inc. ("AIG"), 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., 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. ACMAT Contracting Competition in the interior construction business serviced by ACMAT generally is intense. A majority of the Company's construction business is performed on projects on which the Company had been in competition with other contractors. The Company also focuses 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 non-admitted excess and surplus lines insurer, United Coastal Insurance is not subject to the comparatively more extensive state regulations to which ACSTAR Insurance is subject. The regulations and restrictions to which ACSTAR Insurance and United Coastal Insurance are subject include provisions intended to assure the solvency of ACSTAR Insurance and United Coastal Insurance and are primarily for the protection of policyholders and loss claimants rather than for the benefit of investors. 11 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, 2001, the Company's insurance subsidiaries had securities with an aggregate book value of approximately $10.4 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 2001, United Coastal Insurance paid $6,000,000 in dividends. At January 1, 2002, approximately $2,245,000 is available for the payment of dividends by United Coastal Insurance in 2002 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 2001, ACSTAR paid $2,500,000 in dividends to ACSTAR Holdings. At January 1, 2002, approximately $3,685,000 is available for the payment of dividends by ACSTAR Insurance in 2002 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. The Company's investment portfolio is subject to several risks including interest rate and reinvestment risk. Fixed maturity security values generally fluctuate inversely with movements in interest rates. The Company's corporate and municipal bond investments may contain call and sinking fund features which may result in early redemptions and the Company's mortgage-backed securities investments held by the Company are subject to prepayment risk. Declines in interest rates could cause early redemptions or prepayments which would require the Company to reinvest at lower rates. Investment securities are classified as held to maturity, available for sale or trading. The Company currently classifies all investment securities as available for sale. Investment securities available for sale are carried at fair value and unrealized gains and losses are included in other comprehensive income, net of estimated income taxes. 12 The Company invests in tax-exempt securities as part of its strategy to maximize after-tax income. Such strategy considers, among other factors, the impact of the alternative minimum tax. The following table summarizes the fair value fixed maturity investments portfolio at December 31, 2001 and 2000 (dollars in thousands):
December 31, ---------------------------------- 2001 2000 --------------- --------------- Percent Percent Of Of Amount Total Amount Total ------- ----- ------- ----- Fixed maturities available for sale (1): U.S. government and government agencies and authorities $21,112 31.3% $17,271 22.7% State and political subdivisions 12,297 18.2 28,341 37.2 Industrial and Miscellaneous 9,082 13.5 19,825 26.0 Mortgage-backed securities 19,720 29.2 4,934 6.5 ------- ----- ------- ----- Total fixed maturities available for sale 62,211 92.2 70,371 92.4 Equity securities(2) 4,917 7.3 2,221 2.9 Mortgages (3) -- -- 290 .4 Short-term investments (4) 372 .5 3,249 4.3 ------- ----- ------- ----- Total investments $67,500 100.0% $76,131 100.0% ======= ===== ======= =====
(1) Fixed maturities available for sale are carried at fair value. Total cost of fixed maturities was approximately $61,841,000 at December 31, 2001 and $70,488,000 at December 31, 2000. (2) Equity securities are carried at fair value. Total cost of equity securities was approximately $5,065,000 at December 31, 2001 and $2,560,000 at December 31, 2000. (3) Mortgages are carried at amortized cost which approximates fair value at December 31, 2000. (4) Short-term investments, consisting primarily of money market instruments maturing within one year are carried at cost which, along with accrued interest, approximates fair value. The following table sets forth our combined fair value of fixed maturity investment portfolio classified by maturity distribution at December 31, 2001 and 2000 (dollars in thousands):
December 31, --------------------------------------- 2001 2000 ----------------- ----------------- Percent Percent Of Of Amount Total Amount Total ------ ------ ------ ------ Due in (1): - ---------- One year or less $18,750 30.1% $23,926 34.0% After one year through five years 30,545 49.1 39,014 55.4 After five years through ten years 2,922 4.7 3,132 4.5 After ten years 9,994 16.1 4,299 6.1 ------ ------ ------ ------ $62,211 100.0% $70,371 100.0% ====== ====== ====== ======
(1) Based on effective maturity dates. Actual maturities may differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The Company's insurance subsidiaries are subject to state laws and regulations that require diversification of its investment portfolio and limit the amount of investments in certain investment categories. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, would require divestiture. As of December 31, 2001, the Company's investments complied with such laws and regulations. 13 Investment results for the years ended December 31, 2001, 2000 and 1999 are shown in the following table (dollars in thousands):
2001 2000 1999 -------- -------- -------- Invested assets (1) $ 83,403 $ 90,619 $111,559 Investment income (2) $ 4,032 $ 4,571 $ 5,390 Average yield 4.83% 5.04% 4.83%
(1) Average of the aggregate invested amounts at the beginning of the period and at end of each quarter 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 investing in high quality securities. In 2001, the interest rate environment decreased led by reduction in U.S. Treasury rates, reflected in the marginal drop in yield. 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, repurchase stock and pay claims. 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, 2001, the Company employed approximately 30 persons, all in the United States. None of its current employees are employed subject to collective bargaining agreements. The Company believes that its relations with all of its employees are excellent. ITEM 2. PROPERTIES The Company and its subsidiaries occupy a 7 story office building located at 233 Main Street, in New Britain, Connecticut. ACMAT leases approximately 67% of the building to unaffiliated tenants. The office building is suitable and adequate for ACMAT's current and future requirements. ITEM 3. LEGAL PROCEEDINGS The Company is a party to legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses respecting those actions where the Company is a defendant, has appropriate insurance reserves recorded, and does not believe that their settlement will materially affect the Company's operations or financial position. The Company has, together with many other defendants, been named as a defendant in actions brought by injured or deceased individuals or their representatives based on product liability claims relating to materials containing asbestos. No specific claims for monetary damages are asserted in these actions. Although it is early in the litigation process, the Company does not believe that its exposure in connection with these cases is significant. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2001. 14 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.
2001 2000 HIGH LOW HIGH LOW COMMON STOCK 1st Quarter 20 19.25 19 19 2nd Quarter 25 19 19 19 3rd Quarter 19 19 19 17 4th Quarter 19 19 26 19 CLASS A STOCK 1st Quarter 11.88 7.38 13-1/16 6-1/8 2nd Quarter 9.98 7.85 8-3/4 7-1/8 3rd Quarter 11.20 7.15 8-3/8 6-1/2 4th Quarter 7.88 7.0 10 6-13/16
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 1, 2002, there were 280 Common Stock shareholders of record and 600 Class A Stock shareholders of record. ITEM 6. SELECTED FINANCIAL DATA
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenues $ 26,962,807 $26,341,755 $25,500,249 $28,752,273 $33,552,135 Total Assets 109,463,456 112,216,369 125,855,611 146,126,465 176,208,762 Long-Term Debt 24,550,361 27,696,587 30,792,720 37,200,000 48,212,727 Stockholders' Equity 37,972,175 37,483,665 36,126,992 37,622,926 39,577,739 Net Earnings 1,706,588 2,224,317 3,013,723 2,120,529 4,456,949 Basic Earnings Per Share .70 .80 1.02 .66 1.29 Diluted Earnings Per Share .68 .78 .99 .65 1.12
Note: No cash dividends were paid during any of the periods above. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: CONSOLIDATED RESULTS OF OPERATIONS: Net earnings were $1,706,588 in 2001, $2,224,317 in 2000 and $3,013,723 in 1999. The decrease in 2001 net earnings compared to the 2000 net earnings was due primarily to a decrease in earned premiums and an increase in the loss ratio partially offset by an increase in realized capital gains. The decrease in 2000 net earnings compared to the 1999 net earnings was due in part to realized capital losses in 2000 compared with capital gains in 1999. Revenues were $26,962,807 in 2001, $26,341,755 in 2000 and $25,500,249 in 1999. The increase in 2001 revenues compared to the 2000 revenues is due primarily to an increase in contract revenues and realized gains offset in part by a decrease in earned premiums and net investment income. Earned premiums were $7,581,276 in 2001, $9,215,904 in 2000 and $9,414,192 in 1999. The decrease in earned premiums over the past two years reflects the Company's strategy to selectively underwrite during uncertain economic times. Contract revenues were $14,074,878 in 2001, $11,790,207 in 2000 and $9,223,457 in 1999. Contract revenue depends greatly on the successful securement of contracts bid and execution. Investment income was $4,031,793 in 2001, $4,570,927 in 2000 and $5,389,732 in 1999. The decrease in investment income was primarily related to a continued decrease in invested assets as the Company continues to reduce long-term debt. Net realized capital gains (losses) were $374,301 in 2001, ($123,125) in 2000 and $252,190 in 1999. Other income was $900,559 in 2001, $887,842 in 2000 and $1,220,678 in 1999. Other income consists primarily of rental income. The increase in 2001 other incomes compared to 2000 reflects an increase in construction administration fees in 2001 offset by a lease termination fee received from a tenant in 2000. Other income in 1999 included a one-time benefit of approximately $330,000. Losses and loss adjustment expenses were $1,536,022 in 2001, $1,506,908 in 2000 and $1,672,887 in 1999. The increase in losses and loss adjustment expenses for 2001 are attributable to an increase in surety loss ratio offset in part by a decrease in current year earned premiums. Amortization of policy acquisition costs were $2,049,946 in 2001, $2,375,038 in 2000 and $2,223,918 in 1999. The decrease in amortization of policy acquisition costs in 2001 is primarily attributable to the decrease in commission rates for agents and decrease in earned premium. Costs of contract revenues were $13,183,057, in 2001, $11,006,382 in 2000 and $8,261,408 in 1999. The gross profit margins on construction projects were 6.3% in 2001, 6.6% in 2000 and 10.4% in 1999. Gross margins fluctuate each year based upon the profitability of specific projects. General and administrative expenses were $4,856,785 in 2001, $4,997,849 in 2000 and $5,385,409 in 1999. The decrease in general and administrative expenses in 2001 compared to 2000 is due primarily to a decrease in salary expense offset in part by an increase in depreciation expense. The decrease in general and administrative expenses in 2000 compared to 1999 is due primarily to the decrease in intangible amortization expense. Interest expense was $2,723,052 in 2001, $2,982,824 in 2000 and $3,738,740 in 1999. The decrease in interest expense is due to the decrease in long-term debt. Income tax expense was $907,357 in 2001, $1,248,437 in 2000 and $1,204,164 in 1999, representing effective tax rates of 34.7%, 35.9% and 28.6%, respectively. The fluctuation in the effective tax rate reflects a one-time charge related to an IRS examination completed in 2000. Results of Operations by Segment:
ACSTAR BONDING: 2001 2000 1999 ---------- ---------- ---------- Revenue $5,487,683 $6,284,212 $6,227,462 Operating Earnings $2,098,548 $2,436,708 $2,968,882
Revenues for the ACSTAR Bonding segment were $5,487,683 in 2001, $6,284,212 in 2000 and $6,227,462 in 1999. The 2001 decrease in revenue is primarily due to a 24% decrease in earned premiums and partly offset by 16 an increase in investment income and realized gains. The 2000 increase in revenue reflects a slight increase in earned premium compared to 1999. Investment income was $1,560,080 in 2001, $1,253,329 in 2000 and $1,268,175 in 1999. The increase in 2001 investment income was primarily related to a decrease in investment expenses. The slight decrease in 2000 investment income was primarily related to a continued decrease in invested assets offset in part by an increase in the effective yield on those invested assets. Net realized capital gains (losses) were $191,670 in 2001, ($5,622) in 2000 and $51,616 in 1999. Operating earnings for the ACSTAR Bonding segment were $2,098,548 in 2001, $2,436,708 in 2000 and $2,968,882 in 1999. The decrease in operating earning in 2001 is primarily related to lower earned premium and higher loss ratios partially offset by higher net investment income and capital gains. The decrease in operating earnings reflects the Company's new reinsurance program and an increase in the losses and loss adjustment expense. Losses and loss adjustment expenses were $404,260 in 2001, $251,876 in 2000 and $238,520 in 1999. The increase in 2001 losses and loss adjustment expense compared to 2000 reflects an increase in the loss and loss adjustment expense ratio, offset in part by a decrease in current year earned premiums and the release of net favorable development in surety loss reserves relating to older years. Amortization of policy acquisition costs were $1,601,377 in 2001, $2,001,561 in 2000 and $1,543,783 in 1999. The change in amortization of policy acquisition costs is primarily attributable to the change in direct written premiums and a change in the average commissions paid to agents. General and administrative expenses were $1,383,498 in 2001, $1,594,067 in 2000 and $1,476,277 in 1999. The decrease in general and administrative expenses in 2001 is primarily due to reduced funds control expenses in 2001 compared to 2000. The increase in general and administrative expenses in 2000 compared to 1999 is due primarily to the implementation of a Funds Control Agreement with ACMAT in 2000. Under this agreement, ACMAT collects funds from certain obligees of ACSTAR and makes payments directly to the vendors and subcontractors of selected principals for certain bond obligations for a fee.
UNITED COASTAL LIABILITY INSURANCE: 2001 2000 1999 ---------- ---------- ---------- Revenues $6,363,392 $7,080,714 $8,529,279 Operating Earnings $2,810,000 $3,549,472 $4,578,802
Revenues for the United Coastal Liability Insurance segment were $6,363,392 in 2001, $7,080,714 in 2000 and $8,529,279 in 1999. The 2001 decrease in revenue reflects a 10% decrease in earned premiums and a 21% decrease in investment income compared to 2000. The 2000 decrease in revenue reflects a 12% decrease in earned premiums and a 16% decrease in investment income compared to 1999. The decrease in revenues over the past two years reflects the Company's strategy to selectively underwrite during uncertain economic times and a reduction in invested assets to pay dividends to pay parent to reduce corporate debt. Investment income was $2,385,377 in 2001, $3,001,161 in 2000 and $3,557,332 in 1999. The decrease in investment income was primarily related to a decrease in invested assets as a result of dividends distributed to the parent company to reduce corporate debt. Net realized capital gains (losses) were $182,631 in 2001, ($117,503) in 2000 and $200,574 in 1999. Operating earnings for the United Coastal Liability Insurance segment were $2,810,000 in 2001, $3,549,472 in 2000 and $4,578,802 in 1999. The decrease in operating earnings is due primarily to a decrease in earned premiums and investment income. Losses and loss adjustment expenses were $1,131,762 in 2001, $1,255,032 in 2000 and $1,434,367 in 1999. The decrease in losses and loss adjustment expenses is attributable to the decrease in earned premiums. Amortization of policy acquisition costs were $1,286,409 in 2001, $1,303,916 in 2000 and $1,528,179 in 1999. The decrease in amortization of policy acquisition costs is primarily attributable to the decrease in earned premiums. General and administrative expenses were $1,135,221 in 2001, $972,294 in 2000 and $987,931 in 1999. The increase in general and administrative expenses is due primarily to an increase in expenses related to our tri-annual statutory audit in 2001. 17
ACMAT CONTRACTING: 2001 2000 1999 ----------- ----------- ----------- Revenues $17,540,369 $15,898,910 $13,154,753 Operating Earnings $ 912,376 $ 1,111,731 $ 907,228
Revenues for the ACMAT Contracting segment were $17,540,369 in 2001, $15,898,910 in 2000 and $13,154,753 in 1999. The 2001 increase in revenue reflects a 19% increase in contract revenues compared to 2000. The 2000 increase in revenue reflects a 28% increase in contract revenues compared to 1999. Contract revenue depends greatly on the successful securement of contracts bid and execution. Operating earnings for the ACMAT Contracting segment were $912,376 in 2001, $1,111,731 in 2000 and $907,228 in 1999. The decrease in 2001 operating earnings compared to 2000 operating earnings is due primarily to a decrease in funds control income and lower gross profit on contracts in 2001. The increase in 2000 operating earnings compared to 1999 operating earnings is due to implementation of the Funds Administration Agreement with ACSTAR offset in part by lower gross margins on 2000 projects. Cost of contract revenues were $13,183,057 in 2001, $11,006,382 in 2000 and $8,261,408 in 1999. The gross profit margin on construction projects was 6.3% in 2001, 6.6% in 2000 and 10.4% in 1999. Gross margin fluctuations each year based upon the profitability of specific projects. General and administrative expenses were $3,444,936 in 2001, $3,780,797 in 2000 and $3,886,117 in 1999. The decrease in general and administrative expenses in 2000 compared to 1999 is due primarily to the decrease in amortization of intangibles. The decrease in general and administrative expenses in 2001 compared to 2000 is due primarily to a decrease in salary expense in 2001. 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. This is a critical accounting policy for the insurance operations. Management believes that the reserves for losses and loss adjustment expenses at December 31, 2001 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 20.3%, 16.4% and 17.6% for the years ended December 31, 2001, 2000 and 1999, respectively. These loss ratios are below industry averages and are believed to be the result of conservative underwriting. The increase in the 2001 loss ratios is due to an increase in surety loss ratio. There can be no assurance that such loss ratios can continue. The Company's insurance subsidiaries' expense ratios under GAAP were 69.3%, 58.9% and 56.6% for the years ended December 31, 2001, 2000 and 1999, respectively. The increase in the expense ratios is due to the decline in premiums. The Company's insurance subsidiaries' combined ratios under GAAP were 89.6%, 75.3% and 74.2% for the years ended December 31, 2001, 2000 and 1999, respectively. REVENUE RECOGNITION: Revenue on construction contracts is recorded using the percentage of completion method. Under this method revenues with respect to individual contracts are recognized in the proportion that costs incurred to date relate to total estimated costs. Revenues and cost estimates are subject to revision during the terms of the contracts, and any required adjustments are made in the periods in which the revisions become known. Provisions are made, where applicable, for the entire amount of anticipated future losses on contracts in progress. Construction claims are recorded as revenue at the time of settlement and profit incentives and change orders are included in revenues when their realization is reasonably assured. Selling, general and administrative expenses are not allocated to contracts. This is a critical accounting policy for the ACMAT construction segment. 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 18 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'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 relied on dividends from its insurance subsidiaries to repay debt. The Company realized cash flow from operations in the amount of $1,465,272 in 2001, compared to cash flow used from other sources to support operations of $8,190,436 in 2000 and $7,065,427 in 1999. The cash flow from operations is due primarily to the increase of cash collateral partially offset by the payment of claims. Substantially all of the Company's cash flow is used to repay short-term and long-term debt, repurchase stock and purchase investments. Purchases of investments are made based upon excess cash available after the payment of losses and loss adjustment expenses and other operating and non-operating expenses. The Company's short term investment strategy coincides with the relatively short maturity of its liabilities which are comprised primarily of reserves for losses covered by claims-made insurance policies, reserves related to surety bonds and collateral held for surety obligations. Net cash provided by investing activities was $8,821,721 in 2001, $14,008,674 in 2000 and $20,580,662 in 1999. The terms of the Company's note agreements contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and minimum net worth levels, including cross default provisions. The payment of future cash dividends and the re-acquisition of shares are restricted each to amounts of an available fund ("Available Fund"). The Available Fund is a cumulative fund which is increased each year by 20% of the Consolidated Net Earnings (as defined). The Company is in compliance with all of these covenants at December 31, 2001, except for the ratio of Earnings Before Interest Expense, Taxes, Depreciation and Amortization to Fixed Charges. The Company has received a waiver for this covenant. The Company maintains a short-term unsecured bank credit line of $10 million to fund interim cash requirements. There were no borrowings outstanding under this line of credit as of December 31, 2001. During 2001, the Company purchased, in the open market and privately negotiated transactions, 234,235 shares of its Class A Stock at an average price of $7.80. The Company's principal source of cash for repayment of long-term debt is dividends from its two insurance companies. During 2001, ACMAT received $6,460,000 as dividends from its subsidiaries. Under applicable insurance regulations, ACMAT's insurance subsidiaries are restricted as to the amount of dividends they may pay to their respective holding companies, without the prior approval of their domestic state insurance department. For 2002, the amount of dividends ACMAT's insurance subsidiaries may pay, without prior approval of their domestic state insurance departments, is limited to approximately $5,930,000. In 2002, 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 $2,589,256 in 2002. 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, 2001 was above the level which might require regulatory action. CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS
Contractual Obligations at December 31, 2001 include the following: - ----------------------------------------------------------------------------------------------------- Less Payments due by Period than l 1 to 3 4 to 5 After 5 (in thousands) Total Year Years Years Years - ----------------------------------------------------------------------------------------------------- Long-Term Debt (principal) 24,550 2,589 3,780 3,758 14,423
The Company also has cash collateral of $15,948,636 at December 31, 2001 which it would be required to return at the end of expiration of applicable bond period subject to any claims. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK: MARKET RISK Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates, and other relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of 19 the Company's primary market risk exposures and how those exposures are currently managed as of December 31, 2001. The Company's market risk sensitive instruments are entered into for purposes other than trading. The carrying value of the Company's investment portfolio as of December 31, 2001 was $67,499,567, 92% of which is invested in fixed maturity securities. The primary market risk to the investment portfolio is interest rate risk associated with investments in fixed maturity securities. The Company's exposure to equity price risk and foreign exchange risk is not significant. The Company has no direct commodity risk. For the Company's investment portfolio, there were no significant changes in the Company's primary market risk exposures or in how those exposures are managed compared to the year December 31, 2000. The Company does not anticipate significant changes in the Company's primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods. The primary market risk for all of the Company's long-term debt is interest rate risk at the time of refinancing. As the majority of the Company's debt is fixed rate debt, the Company's exposure to interest rate risk on its long-term debt is not significant. The Company continually monitors the interest rate environment and evaluates refinancing opportunities as the maturity dates approach. SENSITIVITY ANALYSIS Sensitivity analysis is defined as the measurement of potential loss in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates and other market rates or prices over a selected time. In the Company's sensitivity analysis model, a hypothetical change in market rates is selected that is expected to reflect reasonably possible near-term changes in those rates. The term "near term" means a period of time going forward up to one year from the date of the consolidated financial statements. Actual results may differ from the hypothetical change in market rates assumed in this disclosure, especially since this sensitivity analysis does not reflect the results of any action that would be taken by us to mitigate such hypothetical losses in fair value. In this sensitivity analysis model, the Company uses fair values to measure its potential loss. The sensitivity analysis model includes the following financial instruments: fixed maturities, interest-bearing non-redeemable preferred stocks, short-term securities, cash, investment income accrued, and long-term debt. The primary market risk to the Company's market sensitive instruments is interest rate risk. The sensitivity analysis model uses a 100 basis point change in interest rates to measure the hypothetical change in fair value of financial instruments included in the model. For invested assets, duration modeling is used to calculate changes in fair values. Durations on invested assets are adjusted for call, put and interest rate reset features. Duration on tax exempt securities is adjusted for the fact that the yield on such securities is less sensitive to changes in interest rates compared to Treasury securities. Invested asset portfolio durations are calculated on a market value weighted basis, including accrued investment income, using holdings as of December 31, 2001. The sensitivity analysis model used by the Company produces a loss in fair value of market sensitive instruments of $1.9 million based on a 100 basis point increase in interest rates as of December 31, 2001, which is not considered material. This loss value only reflects the impact of an interest rate increase on the fair value of the Company's financial instruments, which constitute approximately 62% of total assets. As a result, the loss value excludes a significant portion of the Company's consolidated balance sheet which would partially mitigate the impact of the loss in fair value associated with a 100 basis point increase in interest rates. For example, certain non-financial instruments, primarily insurance accounts for which the fixed maturity portfolio's primary purpose is to fund future claims payments related thereto, are not reflected in the development of the above loss value. These non-financial instruments include premium balances receivable, reinsurance recoverables, claims and claim adjustment expense reserves and unearned premium reserves. 20 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, 2001, 2000 and 1999 Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements - December 31, 2001, 2000 and 1999 Consolidated Schedules included in Part II of this Report - Years ended December 31, 2001, 2000 and 1999 I - Condensed Financial Information of Registrant II - Valuation and Qualifying Accounts and Reserves V - Supplemental Information Concerning Property-Casualty Insurance Operations 21 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders ACMAT Corporation: We have audited the consolidated financial statements of ACMAT Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACMAT Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Hartford, Connecticut March 4, 2002 22 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999 ----------- ----------- ----------- Contract revenues $14,074,878 11,790,207 9,223,457 Earned premiums 7,581,276 9,215,904 9,414,192 Investment income, net 4,031,793 4,570,927 5,389,732 Net realized capital gains (losses) 374,301 (123,125) 252,190 Other income 900,559 887,842 1,220,678 ----------- ----------- ----------- 26,962,807 26,341,755 25,500,249 Cost of contract revenues 13,183,057 11,006,382 8,261,408 Losses and loss adjustment expenses 1,536,022 1,506,908 1,672,887 Amortization of policy acquisition costs 2,049,946 2,375,038 2,223,918 General and administrative expenses 4,856,785 4,997,849 5,385,409 Interest expense 2,723,052 2,982,824 3,738,740 ----------- ----------- ----------- 24,348,862 22,869,001 21,282,362 ----------- ----------- ----------- Earnings before income taxes 2,613,945 3,472,754 4,217,887 Income taxes 907,357 1,248,437 1,204,164 ----------- ----------- ----------- Net earnings $ 1,706,588 2,224,317 3,013,723 =========== =========== =========== Basic earnings per share $ .70 .80 1.02 ----------- ----------- ----------- Diluted earnings per share $ .68 .78 .99 ----------- ----------- -----------
See Notes to Consolidated Financial Statements. 23 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000
ASSETS 2001 2000 -------------- -------------- Investments: Fixed maturities - available for sale at fair value (Cost of $61,841,391 in 2001 and $70,487,764 in 2000) $ 62,210,923 70,370,912 Equity securities - available for sale at fair value (Cost of $5,065,262 in 2001 and $2,561,512 in 2000) 4,916,900 2,220,936 Mortgages -- 289,625 Short-term investments, at cost which approximates fair value 371,744 3,249,065 -------------- -------------- Total Investments 67,499,567 76,130,538 Cash and cash equivalents 12,784,806 7,446,941 Accrued interest receivable 750,078 1,033,411 Receivables, net of allowance for doubtful accounts of $82,355 in 2001 and $147,346 in 2000 4,839,559 4,140,363 Reinsurance recoverable 2,772,668 2,580,388 Prepaid expenses 125,731 133,018 Deferred income taxes 450,303 833,865 Property and equipment, net 12,273,656 12,624,792 Deferred policy acquisition costs 1,165,556 1,438,747 Other assets 4,881,172 3,612,239 Intangibles, net 1,920,360 2,242,067 -------------- -------------- $ 109,463,456 112,216,369 ============== ============== Liabilities & Stockholders' Equity Accounts payable $ 3,480,204 2,407,958 Reserves for losses and loss adjustment expenses 22,585,626 29,310,606 Unearned premiums 4,155,197 5,442,777 Collateral held 15,948,636 8,673,378 Income taxes 13,592 22,582 Other accrued liabilities 757,665 1,178,816 Long-term debt 24,550,361 27,696,587 -------------- -------------- Total Liabilities 71,491,281 74,732,704 Commitments and contingencies Stockholders' Equity: Common Stock (No par value; 3,500,000 shares authorized; 557,589 and 557,589 shares issued and outstanding) 557,589 557,589 Class A Stock (No par value; 10,000,000 shares authorized; 1,827,019 and 2,057,254 shares issued and outstanding) 1,827,019 2,057,254 Retained earnings 35,460,226 35,326,305 Accumulated other comprehensive income (loss) 127,341 (457,483) -------------- -------------- Total Stockholders' Equity 37,972,175 37,483,665 -------------- -------------- $ 109,463,456 112,216,369 ============== ==============
See Notes to Consolidated Financial Statements. 24 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity December 31, 2001, 2000 and 1999
Accumulated Common Class A Additional other Total Stock par Stock par paid-in Retained comprehensive stockholders' value value capital earnings income (loss) equity ----------- ----------- ----------- ----------- ----------- ----------- Balance as of December 31, 1998 $ 592,088 2,460,808 -- 34,074,538 495,492 37,622,926 Comprehensive income: Net unrealized losses on debt and equity securities, net of reclassification adjustment -- -- -- -- (2,409,881) (2,409,881) Net earnings -- -- -- 3,013,723 -- 3,013,723 ----------- Total comprehensive income 603,842 Acquisition and retirement of 7,260 shares of Common Stock $ (7,260) -- -- (144,658) -- (151,918) Acquisition and retirement of 189,221 shares of Class A Stock -- (189,221) (388,500) (1,791,637) -- (2,369,358) Issuance of 15,000 shares of Class A Stock pursuant to investment agreement -- 15,000 206,250 -- -- 221,250 Issuance of 18, 000 shares of Class A Stock pursuant to stock options -- 18,000 182,250 -- -- 200,250 ----------- ----------- ----------- ----------- ----------- ----------- Balance as of December 31, 1999 $ 584,828 2,304,587 -- 35,151,966 (1,914,389) 36,126,992 Comprehensive income: Net unrealized losses on debt and equity securities, net of reclassification adjustment -- -- -- -- 1,456,906 1,456,906 Net earnings -- -- -- 2,224,317 -- 2,224,317 ----------- Total comprehensive income 3,681,223 Acquisition and retirement of 27,239 shares of Common Stock (27,239) -- (38,025) (454,566) -- (519,830) Acquisition and retirement of 253,833 shares of Class A Stock -- (253,833) -- (1,595,412) -- (1,849,245) Issuance of 6,500 shares of Class A Stock pursuant to stock options -- 6,500 38,025 -- -- 44,525 ----------- ----------- ----------- ----------- ----------- ----------- Balance as of December 31, 2000 $ 557,589 2,057,254 -- 35,326,305 (457,483) 37,483,665 Comprehensive income: Net unrealized appreciation of debt and equity securities, net of reclassification adjustment -- -- -- -- 584,824 584,824 Net earnings -- -- -- 1,706,588 -- 1,706,588 ----------- Total comprehensive income 2,291,412 Acquisition and retirement of 234,235 shares of Class A Stock -- (234,235) (20,000) (1,572,667) -- (1,826,902) Issuance of 4,000 shares of Class A Stock pursuant to stock options -- 4,000 20,000 -- -- 24,000 ----------- ----------- ----------- ----------- ----------- ----------- Balance as of December 31, 2001 $ 557,589 1,827,019 -- 35,460,226 127,341 37,972,175 =========== =========== =========== =========== =========== ===========
See Notes to Consolidated Financial Statements. 25 ACMAT CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000 and 1999
2001 2000 1999 ------------ ------------ ------------ Cash Flows From Operating Activities: Net earnings $ 1,706,588 2,224,317 3,013,723 Adjustments to reconcile net earnings to net cash provided by (used for) operating activities: Depreciation and amortization 1,535,057 1,547,144 1,829,646 Net realized capital (gains) losses (374,301) 123,125 (252,190) Deferred income taxes 383,562 726,459 428,918 Changes In: Accrued interest receivable 283,333 290,945 27,978 Receivables, net (699,196) (1,316,982) 914,246 Reinsurance recoverable (192,280) 1,343,676 (1,699,948) Deferred policy acquisition costs 273,191 (114,967) 226,309 Prepaid expenses and other assets (1,261,646) (1,293,362) 741,366 Accounts payable and other liabilities 651,095 412,388 (874,280) Collateral held 7,275,258 (3,281,176) (5,389,822) Reserves for losses and loss adjustment expenses (6,724,980) (9,233,885) (4,570,571) Income taxes (102,829) 201,573 72,165 Unearned premiums (1,287,580) 180,309 (1,532,967) ------------ ------------ ------------ Net cash provided by (used for) operating activities 1,465,272 (8,190,436) (7,065,427) ------------ ------------ ------------ Cash Flows From Investing Activities: Proceeds from investments sold or matured: Fixed maturities - sold 25,677,741 16,465,522 63,593,712 Fixed maturities - matured 28,261,000 13,431,000 11,692,000 Equity securities 3,568,173 325,000 24,405 Mortgages 289,625 -- -- Short-term investments 23,704,426 21,932,313 143,866,543 Purchases Of: Fixed maturities (45,430,756) (11,821,523) (66,790,040) Equity securities (6,000,000) (821,250) (24,405) Mortgages -- (289,625) -- Short-term investments (20,827,105) (24,662,821) (131,437,187) Capital expenditures (421,383) (549,942) (344,366) ------------ ------------ ------------ Net cash provided by investing activities 8,821,721 14,008,674 20,580,662 ------------ ------------ ------------ Cash Flows From Financing Activities: Borrowings under line of credit -- -- 9,000,000 Repayments under line of credit -- -- (9,000,000) Repayments on long-term debt (8,146,226) (3,096,133) (10,907,280) Issuance of long-term debt 5,000,000 -- 4,500,000 Issuance of Class A Stock 24,000 39,000 162,000 Payments for acquisition and retirement of stock (1,826,902) (2,369,075) (2,521,276) ------------ ------------ ------------ Net cash used for financing activities (4,949,128) (5,426,208) (8,766,556) ------------ ------------ ------------ Net change in cash and cash equivalents 5,337,865 392,030 4,748,679 Cash and cash equivalents, beginning of year 7,446,941 7,054,911 2,306,232 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 12,784,806 7,446,941 7,054,911 ============ ============ ============
See Notes to Consolidated Financial Statements. 26 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include ACMAT Corporation ("ACMAT" or the "Company"), its subsidiaries, including AMINS, Inc., ACSTAR Holdings, Inc. ("ACSTAR Holdings") and ACSTAR Holdings' wholly-owned subsidiary, ACSTAR Insurance Company ("ACSTAR"); and United Coastal Insurance Company ("United Coastal Insurance"). These consolidated financial statements have been prepared in conformity with accounting principles generally accepted ("GAAP") in the United States of America. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Business The Company has three reportable operating segments: ACMAT Contracting, ACSTAR Bonding and United Coastal Liability Insurance. The Company's reportable segments are primarily the three main legal entities of the Company which offer different products and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. ACMAT Contracting provides construction contracting services to commercial and governmental customers. ACMAT Contracting also provides underwriting services to its insurance subsidiaries. In addition, ACMAT Contracting owns a commercial office building in New Britain, Connecticut and leases office space to its insurance subsidiaries as well as to third parties. The United Coastal Liability Insurance operating segment offers specific lines of liability insurance as an approved non-admitted excess and surplus lines insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of Columbia. United Coastal offers claims made and occurrence policies for specific specialty lines of liability insurance through certain excess and surplus lines brokers who are licensed and regulated by the state insurance department(s) in the state(s) in which they operate. United Coastal offers general, asbestos, lead, pollution and professional liability insurance nationwide to specialty trade contractors, environmental contractors, property owner, storage and treatment facilities and professionals. United Coastal also offers products liability insurance to manufacturers and distributors. The Bonding operating segment provides, primarily through ACSTAR, surety bonds written for prime, specialty trade, environmental, asbestos and lead abatement contractors and miscellaneous obligations. ACSTAR also offers other miscellaneous surety such as workers' compensation bonds, supply bonds, subdivision bonds and license and permit bonds. During 2001, 2000 and 1999, customers who individually accounted for more than 10% of consolidated construction contracting revenue are as follows; in 2001 - three customers provided 33%, 27%, and 20%, respectively. In 2000 - three customers provided 33%, 22% and 19%, respectively. In 1999 - two customers provided 51% and 24%, respectively. One customer accounted for more than 10% of the United Coastal insurance revenues in 2001. (c) Investments Fixed maturities include bonds, notes and redeemable preferred stocks. Equity securities reflect investment in common stock, non-redeemable preferred stock and mutual funds. Investments are classified as "available for sale" and are reported at fair value, with unrealized gains or losses charged or credited directly to stockholders' equity. The fair value of investment securities are based on quoted market prices. Premiums and discounts on debt securities are amortized into interest income over the term of the securities in a manner that approximates the interest method. Realized gains and losses on sales of securities are computed using the specific identification method. Any security which management believes has experienced a decline in value which is other than temporary is written down to its fair 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. Reinsurance recoverable amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The Company evaluates and monitors the financial condition of reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. 27 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (d) Deferred Policy Acquisition Costs Deferred policy acquisition costs, representing commissions and certain underwriting costs, are deferred and amortized on a straight-line basis over the policy term. (e) Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method at rates based upon the respective estimated useful lives of the assets. Maintenance and repairs are expensed as incurred. (f) Intangibles Prior to adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", intangibles are stated at amortized cost and are being amortized using the straight-line method. Intangibles include insurance operating licenses and goodwill, which represents the excess of cost over the fair market value of net assets acquired. These intangible assets are amortized over periods ranging from 15 to 25 years. The carrying amounts of these intangibles are regularly reviewed for indicators of other-than-temporary impairments in value. Amortization expense included in the consolidated statement of income was $321,707, $326,652 and $632,339 for the years ended December 31, 2001, 2000 and 1999, respectively. Upon adoption of SFAS No. 142, the Company will stop amortizing intangible assets related to licenses which is deemed to have an indefinite useful life. Instead, this asset will be subject to an annual review for impairment. See Note 1, Summary of Significant Accounting Policies, Accounting Standards Not Yet Adopted. (g) Insurance Reserve Liabilities Reserves for losses and loss adjustment expenses are established with respect to both reported and incurred but not reported claims for insured risks. The amount of loss reserves for reported claims is primarily based upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding the claim and the policy provisions relating to the type of claim. As part of the reserving process, historical data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments and economic conditions, including the effects of inflation. Reserves are monitored and recomputed periodically using new information on reported claims. Reserves for losses and loss adjustment expenses are estimates at any given point in time of what the Company may have to pay ultimately on incurred losses, including related settlement costs, based on facts and circumstances then known. The Company also reviews its claims reporting patterns, past loss experience, risk factors and current trends and considers their effect in the determination of estimates of incurred but not reported losses. Ultimate losses and loss adjustment expenses are affected by many factors which are difficult to predict, such as claim severity and frequency, inflation levels and unexpected and unfavorable judicial rulings. Reserves for surety claims also consider the amount of collateral held as well as the financial strength of the contractor and its indemnitors. Management believes that the reserves for losses and loss adjustment expenses are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses incurred, including losses incurred but not reported. (h) Collateral Held Collateral held represents cash and investments retained by the Company for surety bonds issued by the Company. The carrying amount of collateral held approximates its fair value because of the short maturity of these instruments. 28 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (i) Reinsurance In the normal course of business, the Company assumes and cedes reinsurance with other companies. Reinsurance ceded primarily represents excess of loss reinsurance with companies with "A" ratings from the insurance rating organization, A.M. Best Company, Inc. Reinsurance ceded also includes a facultative reinsurance treaty which is applicable to excess policies written over a primary policy issued by the Company for specific projects. Reinsurance is ceded to limit losses from large exposures and to permit recovery of a portion of direct losses; however, such a transfer does not relieve the originating insurer of its liability. The Company participates in assumed quota share reinsurance arrangements covering marine and property catastrophe risks with one of its excess of loss reinsurers. Effective May 1, 2000, the Company cedes significantly more of its bond exposure than under its previous reinsurance treaties. Such reinsurance is applicable on a per principal basis for losses in excess of $1,000,000 up to $13,000,000. Prior to May 1, 2000, reinsurance was applicable to losses in excess of $2,000,000 on a per bond basis with the Company retaining approximately $5,000,000 of losses up to $13,000,000. Reinsurance recoverables include ceded reserves for losses and loss adjustment expenses. Ceded unearned premiums of $600,174 and $938,797 at December 31, 2001 and 2000, 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 -------------------------------------------------- -------------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ ------------ Direct $ 8,350,916 10,453,335 8,968,024 $ 9,639,764 10,247,698 10,528,702 Assumed 47,491 12,743 124,763 32,795 40,897 97,052 Ceded (1,766,087) (1,555,074) (1,002,787) (2,091,283) (1,072,691) (1,211,562) ------------ ------------ ------------ ------------ ------------ ------------ Totals $ 6,632,320 8,911,004 8,090,000 $ 7,581,276 9,215,904 9,414,192 ============ ============ ============ ============ ============ ============
Ceded incurred losses and loss adjustment expenses totaled $423,709, $175,397 and $215,292 for the years ended December 31, 2001, 2000 and 1999, respectively. (j) Revenue Recognition Revenue on construction contracts is recorded using the percentage of completion method. Under this method revenues with respect to individual contracts are recognized in the proportion that costs incurred to date relate to total estimated costs. Revenues and cost estimates are subject to revision during the terms of the contracts, and any required adjustments are made in the periods in which the revisions become known. Provisions are made, where applicable, for the entire amount of anticipated future losses on contracts in progress. Construction claims are recorded as revenue at the time of settlement and profit incentives and change orders are included in revenues when their realization is reasonably assured. Selling, general and administrative expenses are not allocated to contracts. Insurance premiums are recognized over the coverage period. Unearned premiums represent the portion of premiums written that is applicable to the unexpired terms of policies in force, calculated on a prorata basis. (k) Income Taxes The provision for taxes comprises two components, current income taxes and deferred income-taxes. Deferred income taxes arise from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (l) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. 29 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (m) Comprehensive Income (Loss) The following table summarizes reclassification adjustments for other comprehensive income (loss) and the related tax effects for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 ---------- ---------- ---------- Unrealized gains (losses) on investments: Unrealized holding gain (loss) arising during period net of income tax expense $ 831,863 1,373,644 (2,243,436) Less reclassification adjustment for gains included in net earnings, net of income tax expense (benefit) of $127,262, ($41,863) and $85,745 for 2001, 2000 and 1999, respectively 247,039 (81,262) 166,445 ---------- ---------- ---------- Other comprehensive income (loss) $ 584,824 1,456,906 (2,409,881) ========== ========== ==========
(n) Accounting Changes Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", (FAS 133 was issued in June 1998 and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The cumulative effect of adopting FAS 133, as amended, on January 1, 2001 had no effect. There were no derivative transactions during 2001. (o) Accounting Standards Not Yet Adopted In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 142 addresses the initial recognition and measurement of intangible assets acquired either singly or with a group of other assets, as well as the measurement of goodwill and other intangible assets subsequent to their initial acquisition. FAS 142 changes the accounting for goodwill and intangible assets that have indefinite useful lives from an amortization approach to an impairment-only approach that requires that those assets be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without an arbitrary ceiling on their useful lives. Upon adoption of SFAS No. 142, on January 1, 2002 the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS No. 141 for recognition separate from goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle. As of January 1, 2002, the Company has an unamortized intangible asset in the amount of $1,920,360 which will be subject to the transition provisions of SFAS No. 142. Amortization expense related to goodwill was $321,707 for the year ended December 31, 2001. the Company will cease amortization of goodwill, effective January 1, 2002. This would reduce general and administrative expenses and increase earnings before tax by $152,290 in 2002. In addition, the Company has performed the transitional impairment tests using the fair value approach required by the new standard. Based on these tests, the Company did not impair any intangible asset. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). FAS 143 changes the measurement of an asset retirement obligation from a cost-accumulation approach to a fair value approach, where the fair value (discounted value) of an asset retirement obligation is recognized as a liability in the period in which it is incurred and accretion expense is recognized using the credit-adjusted risk-free interest rate in effect when the liability was initially recognized. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently amortized into expense. The pre-FAS 143 prescribed practice of reporting a retirement obligation as a contra-asset will no longer be allowed. The Company is in the process of assessing the impact that will take effect on January 1, 2003. 30 In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 establishes a single accounting model for long-lived assets to be disposed of by sale. A long lived asset classified as held for sale is to be measured at the lower of its carrying amount or fair value less cost to sell and depreciation (amortization) is to cease. Impairment is recognized only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and fair value of the asset. Long-lived assets to be abandoned, exchanged for a similar productive asset, or distributed to owners in a spin-off are considered held and used until disposed of. Accordingly, discontinued operations are no longer to be measured on a net realizable value basis, and future operating losses are no longer recognized before they occur. The Company is required to adopt FAS 144 effective January 1, 2002. The provisions of the new standard are generally to be applied prospectively and are not expected to significantly affect the Company's results of operations, financial condition or liquidity. (p) Subsequent Event On January 13, 2002, the Founder, Chairman, President and Chief Executive Officer of the Corporation died at the age of 82. At the time of his death, Mr. Nozko, Sr. owned of record or beneficially shares of the Corporation's Common Stock and Class A Stock having approximately 53% of the total voting power of the Corporation's voting capital stock. During the pendency of Mr. Nozko's estate, such voting power has been vested in the executors of the estate who are his son, Henry W. Nozko, Jr., the current Chairman, President and Chief Executive Officer of the Corporation, and his daughter Pamela N. Cosmas. In connection with the passing of Henry W. Nozko, Sr., the Company incurred certain obligations to his estate and spouse that are payable only from the proceeds of several key-man life insurance policies held by the Company. ACMAT Corporation is the beneficiary of approximately $8,900,000 from these life insurance policies. After payment of such obligations, the Company expects that earnings for the quarter ending March 31, 2002 will reflect a one-time, net after-tax benefit of approximately $3,100,000 attributable to the portion of such insurance proceeds which the Company will retain. 31 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) INVESTMENTS
INVESTMENTS AT DECEMBER 31, 2001 AND 2000 FOLLOWS: AMORTIZED ESTIMATED COST FAIR VALUE ----------- ----------- 2001 Fixed maturities - available for sale: Bonds: States, municipalities and political subdivisions $12,182,673 12,296,763 United States government and government agencies 20,948,080 21,111,908 Mortgage-backed securities 19,658,127 19,720,478 Industrial and miscellaneous 9,052,511 9,081,774 ----------- ----------- Total fixed maturities 61,841,391 62,210,923 Equity securities - common stocks: Banks, trusts and insurance 5,262 18,100 Equity securities - redeemable preferred stocks: Banks, trusts and insurance 1,560,000 1,481,000 Industrial and miscellaneous 3,500,000 3,417,800 ----------- ----------- Total equity securities 5,065,262 4,916,900 Short-term investments 371,744 371,744 ----------- ----------- Total investments $67,278,397 67,499,567 =========== =========== 2000 Fixed maturities - available for sale: Bonds: States, municipalities and political subdivisions $28,385,622 $28,340,477 United States government and government agencies 17,215,078 17,270,789 Mortgage-backed securities 4,938,654 4,934,265 Industrial and miscellaneous 19,948,410 19,825,381 ----------- ----------- Total fixed maturities 70,487,764 70,370,912 Equity securities - common stocks: Banks, trusts and insurance 5,262 15,926 Equity securities - redeemable preferred stocks: Banks, trusts and insurance 1,060,000 908,760 Industrial and miscellaneous 1,496,250 1,296,250 ----------- ----------- Total equity securities 2,561,512 2,220,936 Mortgage 289,625 289,625 Short-term investments 3,249,065 3,249,065 ----------- ----------- Total investments $76,587,966 76,130,538 =========== ===========
Fair value estimates are made based on quoted market prices and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. On December 31, 2001, the Company's insurance subsidiaries had securities with an aggregate book value of approximately $10.4 million on deposit with various state regulatory authorities. 32 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and fair value of fixed maturities at December 31, 2001 and 2000, by effective maturity, follows:
2001 2000 --------------------------------- -------------------------------- Amortized Cost Fair Value Amortized Cost Fair Value ------------------ ----------- ----------------- ---------- Due in one year or less $18,640,246 18,750,095 24,468,676 23,925,468 Due after one year through five years 30,157,413 30,545,391 38,570,751 39,014,149 Due after five years through ten years 2,966,530 2,921,982 3,125,942 3,131,895 Due after ten years 10,077,202 9,993,455 4,322,395 4,299,400 ----------- ----------- ----------- ----------- Total $61,841,391 62,210,923 70,487,764 70,370,912 =========== =========== =========== ===========
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, 2001 and 2000 follows:
2001 2000 ------------------------------- ------------------------------- Gains Losses Gains Losses -------- -------- -------- -------- States, municipalities and political subdivisions $116,027 (1,937) 33,854 (78,999) United States government and government agencies 261,299 (97,471) 77,320 (21,609) Industrial and miscellaneous 32,518 (3,255) -- (123,029) Mortgage-backed securities 158,973 (96,622) 6,356 (10,745) -------- -------- -------- -------- Total 568,817 (199,285) 117,530 (234,382) Equity securities 33,838 (182,200) 10,664 (351,240) -------- -------- -------- -------- Total $602,655 (381,485) 128,194 (585,622) ======== ======== ======== ========
(3) INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES A summary of net investment income for the years ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999 ----------- ----------- ----------- Tax-exempt interest $ 851,666 1,268,898 1,680,051 Taxable interest 3,050,142 3,279,902 3,680,987 Dividends on equity securities 156,067 112,639 112,130 Investment expenses (26,082) (90,512) (83,436) ----------- ----------- ----------- Net investment income $ 4,031,793 4,570,927 5,389,732 =========== =========== ===========
Realized capital gains (losses) for the years ended December 31, 2001, 2000 and 1999 follows:
2001 2000 1999 -------- -------- -------- Fixed maturities $302,378 (123,125) 252,190 Equity securities 71,923 -- -- Other -- -- -- -------- -------- -------- Net realized capital gains (losses) $374,301 (123,125) 252,190 ======== ======== ========
33 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Gross gains of $314,351, $14,162 and $349,413 and gross losses of $11,973, $137,287 and $97,223 were realized on fixed maturity sales for the years ended December 31, 2001, 2000 and 1999, respectively. Gross gains of $71,923 were realized on the sale of equity securities and no losses were realized on equity security sales for the year ended December 31, 2001. There were no gross gains or losses realized on equity security sales for the years ended December 31, 2000 and 1999. (4) RECEIVABLES A summary of receivables at December 31, 2001 and 2000 follows:
2001 2000 ----------- ----------- Insurance premiums due from agents $ 863,260 1,531,017 Receivables under construction contracts: Amounts billed 1,927,100 2,162,875 Recoverable costs in excess of billings on uncompleted contracts 846,037 152,897 Billings in excess of costs on uncompleted contracts (74,430) (294,055) Retainage, due on completion of contracts 1,198,486 552,624 ----------- ----------- Total receivables under construction contracts 3,897,193 2,574,341 Other 161,461 182,351 ----------- ----------- Total receivables 4,921,914 4,287,709 Less allowances for doubtful accounts (82,355) (147,346) ----------- ----------- Total receivables, net $ 4,839,559 $ 4,140,363 =========== ===========
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 2002. Recoverable costs in excess of billings on uncompleted contracts are comprised principally of amounts of revenue recognized on contracts for which billings had not been presented to the contract owners as of the balance sheet date. These amounts will be billed in accordance with the contract terms. (5) PROPERTY AND EQUIPMENT Useful lives for depreciation purposes are as follows: Equipment and vehicles 5 years Building 40 years Furniture and fixtures 15 years A summary of property and equipment at December 31, 2001 and 2000 follows:
2001 2000 ----------- ----------- Building $15,268,423 15,039,038 Land 800,000 800,000 Equipment and vehicles 1,279,360 1,512,260 Furniture and fixtures 843,380 840,114 ----------- ----------- 18,191,163 18,191,412 Less accumulated depreciation 5,917,507 5,566,620 ----------- ----------- $12,273,656 $12,624,792 =========== ===========
Future minimum rental income to be generated by leasing a portion of the building under non-cancelable operating leases as of December 31, 2001 are estimated to be $549,890 for 2002, $428,690 for 2003 and $53,200 for 2004. Rental income earned in 2001, 2000 and 1999 was $593,573, $768,496 and $688,102, respectively. (6) INTANGIBLES A summary of intangibles, acquired primarily in connection with purchases of the Company's insurance subsidiaries, at December 31, 2001 and 2000 follows:
2001 2000 ---------- ---------- Insurance licenses $4,188,926 4,188,926 Goodwill -- 2,441,310 ---------- ---------- 4,188,926 6,630,236 Less accumulated amortization 2,268,566 4,388,169 ---------- ---------- $1,920,360 2,242,067 ========== ==========
Intangible assets are written off when they become fully amortized 34 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The following table sets forth a reconciliation of beginning and ending reserves for unpaid losses and loss adjustment expenses for the periods indicated on a GAAP basis for the business of the Company.
2001 2000 1999 ------------ ------------ ------------ Balance at January 1 $ 29,310,606 38,544,491 43,115,062 Less reinsurance recoverable 2,580,388 3,924,064 2,224,116 ------------ ------------ ------------ Net balance at January 1 26,730,218 34,620,427 40,890,946 Incurred related to: Current year 4,144,000 2,441,000 3,091,120 Prior years (2,607,978) (934,092) (1,418,233) ------------ ------------ ------------ Total incurred 1,536,022 1,506,908 1,672,887 Payments related to: Current year 1,723,000 791,546 81,569 Prior years 6,730,282 8,605,571 7,861,837 ------------ ------------ ------------ Total payments 8,453,282 9,397,117 7,943,406 Net balance at December 31 19,812,958 26,730,218 34,620,427 Plus reinsurance recoverable 2,772,668 2,580,388 3,924,064 ------------ ------------ ------------ Balance at December 31 $ 22,585,626 29,310,606 38,544,491 ============ ============ ============
The decrease in loss and loss adjustment expense reserves continues due to significant loss payments for surety and general liability claims, the release of net favorable development in surety loss reserves relating to older years that are no longer required partially offset by an increase in current year incurred loss and loss adjustment expenses. This increase reflects large surety losses which occurred during the year. While management continually evaluates the potential for changes in loss estimates, due to the uncertainty inherent in the surety business, the emergence of net favorable development may or may not continue to occur. Management believes that the reserves for losses and loss adjustment expense are adequate to cover the unpaid portion of the ultimate net cost of losses and loss adjustment expenses, including losses incurred but not reported. The Company has no exposure to any asbestos or environmental claims associated with general liability policies issued with the pre-1986 pollution exclusion. Policies written with the exclusion are typically associated with mass tort environmental and asbestos claims. The Company has never issued a policy with the pre-1986 pollution exclusion. The Company's exposure to asbestos and environmental liability claims is primarily limited to asbestos and environmental liability insurance for contractors and consultants involved in the remediation, removal, storage, treatment and/or disposal of environmental and asbestos hazards. (8) NOTES PAYABLE TO BANKS At December 31, 2001, the Company has a $10,000,000 bank line of credit with a financial institution. The line of credit does not require the Company to maintain a compensating balance. There were no outstanding borrowings under this line of credit at December 31, 2001 and 2000. Under the terms of the line of credit, interest on the outstanding balance is calculated based upon the London Inter-Bank Offering Rate (LIBOR) plus 160 basis points in effect during the borrowing period. (9) LONG-TERM DEBT A summary of long-term debt at December 31, 2001 and 2000 follows:
2001 2000 ----------- ----------- Term Loan due 2004 $ 2,250,000 3,250,000 Senior Notes due 2005 900,000 2,400,000 Term Loan due 2009 5,000,000 -- Mortgage Note due 2009 6,005,361 6,646,587 Convertible Note due 2022 10,395,000 15,400,000 ----------- ----------- $24,550,361 27,696,587 =========== ===========
35 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 17, 2001, the Company obtained a $5,000,000 term loan from a financial institution, which is payable in quarterly installments of $250,000 which is to commence March 1, 2004. The term loan, due 2009 has a balance of $5,000,000 at December 31, 2001. The interest rate varies based on LIBOR plus 190 basis points in effect during the borrowing period. The interest rate cannot exceed 5.5%. The loan agreement contains certain limitations on borrowings, minimum statutory capital levels and requires maintenance of certain ratios. The proceeds were used to prepay $5,005,000 of the Convertible Notes due 2022. On September 1, 1999, the Company obtained a $4,500,000 term loan from a financial institution, which is payable in quarterly installments of $250,000 which commenced December 1, 1999. The term loan, due 2004 has a balance of $2,250,000 at December 31, 2001. The interest rate is fixed at 7.25%. The loan agreement contains certain limitations on borrowings, minimum statutory capital levels and requires maintenance of certain ratios. The proceeds were used to replace a $5,000,000, five year term loan obtained on December 9, 1998. On December 23, 1998, the Company obtained a permanent mortgage loan from a financial institution. The $7,800,000 mortgage note, with interest fixed at 6.95% is payable in monthly installments of principal and interest over 10 years. The mortgage note, due 2009, has a balance of $6,005,361 at December 31, 2001. The loan agreements contain certain limitations on borrowings, minimum statutory capital levels and require maintenance of certain ratios. The proceeds were used to repay the existing mortgage note. On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of Class A Stock which AIG Life Insurance Company (366,663 shares) and American International Life Assurance Company of New York, (733,333) had acquired over the last three years through conversion options (See Note 12). The shares were purchased at an average price of $14.70 per share, for a total purchase price of $16,174,942. The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory notes totaling $12,000,000. The promissory notes are with AIG Life Insurance Company and American International Life Assurance Company of New York and are payable over eight years with annual payments of $1,500,000 which commenced on January 31, 1998, with interest at prime rate (7-1/4%). The Company voluntarily prepaid the installments due January 31 on December 31 in 2001, 2000 and 1999. The Company also made a voluntary prepayment of $3,600,000 on December 31, 1999. The interest rate is equal to the prime rate, however, the interest rate shall not exceed 9-1/4% and it shall not be less than 7-1/4%. The senior notes have a balance of $900,000 at December 31, 2001. The terms of the note agreements with AIG Life Insurance Company and American International Life Assurance Company of New York contain limitations on payment of cash dividends, re-acquisition of shares, borrowings and investments and require maintenance of specified ratios and a minimum tangible net worth of $12,000,000. ACMAT may also require its insurance subsidiaries to pay dividends to the extent of funds legally available therefore, in order to enable ACMAT to have funds to pay on a timely basis all amounts due with respect to the notes. The Company is in compliance with all of these covenants at December 31, 2001, except for the ratio of Earnings Before Interest Expense, Taxes, Depreciation and Amortization to Fixed Charges. The Company has received a waiver for this covenant. On July 1, 1992, the Company issued a 30-year unsecured $16,500,000, 11.5% subordinated Convertible Note to the Sheet Metal Workers' National Pension Fund ("Fund") to purchase 3,000,000 shares of United Coasts Corporation's outstanding common stock held by the Fund. Annual principal payments of $1,650,000 per year for ten years are due beginning on July 1, 2012. The note is convertible into ACMAT Class A stock at $11 per share. The conversion price of $11 per share would be adjusted at the time of conversion to reflect any stock dividends, recapitalizations or additional stock issuance. The Company can prepay the note and the Fund has the option to accept the prepayment or convert the note to stock. The Company made voluntary principal payment of $1,100,000 on July 31, 1998 and $5,005,000 on December 31, 2001. At December 31, 2001, the Company had reserved 945,000 shares of Class A Stock for issuance pursuant to such conversion option. The unsecured debenture has a balance of $10,395,000 at December 31, 2001. Principal payments on long-term debt are $2,589,256, $1,738,716, $2,041,724, $1,848,536, $1,909,425 and $1,974,682 for the years 2002 through 2006, respectively. Interest expense paid in 2001, 2000 and 1999 amounted to $2,804,927, $2,815,876 and $3,751,313, respectively. The fair value at December 31, 2001 of the mortgage, the term loan and the senior notes approximate carrying value. It is not practicable to estimate the fair value of convertible note at December 31, 2001 because of the complex and unique terms associated with this debt instrument. 36 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) INCOME TAXES The components of income tax expense for each year follows:
2001 2000 1999 --------- --------- --------- Current Taxes: Federal $ 542,635 456,978 725,246 State 75,000 65,000 50,000 --------- --------- --------- 617,635 521,978 775,246 --------- --------- --------- Deferred Taxes: Federal 289,723 726,459 428,918 --------- --------- --------- Total $ 907,358 1,248,437 1,204,164 ========= ========= =========
The effective income tax rate, as a percentage of earnings before income taxes follows:
2001 2000 1999 ---- ---- ---- Federal statutory tax rate 34.0% 34.0% 34.0% State income tax 1.9 1.2 .8 Effect of tax-exempt interest (9.0) (10.6) (11.5) Amortization of goodwill 4.2 3.4 2.8 Officers life insurance premiums 2.4 2.6 2.0 Other, net 1.2 5.3 .5 ---- ---- ---- Effective income tax rate 34.7% 35.9% 28.6% ==== ==== ====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below:
2001 2000 ---------- ---------- Deferred Tax Assets: Reserves for losses and loss adjustment expenses, Principally due to reserve discounting $1,105,700 1,404,681 Unearned premiums 241,742 306,271 Accounts receivable, principally due to allowance for doubtful accounts 28,001 50,098 Unrealized losses on investments -- 155,544 State net operating loss carryforward 6,027,401 6,717,085 Other 62,436 77,476 ---------- ---------- Total gross deferred tax assets 7,465,280 8,711,155 Less valuation allowance 6,027,401 6,872,629 ---------- ---------- Net deferred tax assets $1,437,879 1,838,526 Deferred Tax Liabilities: Plant and equipment 497,448 515,487 Deferred policy acquisition costs 396,289 489,174 Unrealized gains on investments 93,839 -- ---------- ---------- Total gross deferred tax liabilities 987,576 1,004,661 ---------- ---------- Net deferred tax assets $ 450,303 833,865 ========== ==========
In 2001 and 2000, a valuation allowance is provided to offset the deferred tax asset related to the state net operating loss carryforward as management believes it is more likely than not that the deferred tax asset is unrealizable. Also, in 2000, a valuation allowance was provided to offset the deferred tax asset related to net unrealized losses which are a component of stockholders' equity. Due to the reversal of net unrealized losses during 2001, this valuation allowance has been eliminated. 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 difference become deductible. Management considers the scheduled reversal of deferred tax liabilities, tax planning strategies and anticipated future taxable income in making this assessment and believes it is more likely than not the Company will realize the benefits of its deductible temporary differences, net of the valuation allowance, at December 31, 2001. State net operating loss carryforwards as of December 31, 2001, 2000 and 1999 are $17,727,650, $15,634,692 and $13,448,084 expiring through 2021, 2020 and 2003, respectively. Taxes paid in 2001, 2000 and 1999 were $626,625, $320,405 and $703,081, respectively. 37 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) PENSION AND PROFIT SHARING PLANS Effective January 1, 2000, the Company adopted the ACMAT 401(k) plan for the benefit of non-union employees. The Company contributed $75,000 to the ACMAT 401(k) Plan in 2001 and 2000. The Thrift, Profit Sharing and Retirement Plan was terminated on February 29, 2000. The Company's contributions, established by the Board of Directors, were $85,000 in 1999. The Company participated in various multi-employer defined contribution plans for its union employees. Upon withdrawal from these plans, the Company may be liable for its share of the unfunded vested liabilities of the plans. Such obligations, if any, of the Company are not determinable at December 31, 2001. (12) STOCKHOLDERS' EQUITY The Company has two classes of common stock; the Common Stock and the Class A Stock, each without par value. The rights of the Common Stock and the Class A Stock are identical, except with respect to voting rights. Holders of the Class A Stock are entitled to one-tenth vote per share in relation to the Common Stock, holders of which are entitled to one vote per share. During 2000 and 1999, ACMAT repurchased, in open market and privately negotiated transactions, 27,239 and 7,260, respectively, shares of its Common Stock at an average price of $19.08 and $20.93 per share, respectively. The Company also repurchased during 2001, 2000 and 1999, in open market and privately negotiated transactions 234,235, 253,833 and 189,221, respectively, shares of its Class A Stock at an average price of $7.80, $7.29 and $12.52 per share, respectively. On April 1, 1999, the Company purchased a 40% interest in Allied Surety Agency, Inc. The Company issued 15,000 shares of Class A Stock for the ownership interest. The purchase was a non-cash transaction and is not reflected in the Consolidated Statements of Cash Flow. The stockholders have periodically approved the distribution of non-qualified stock options to certain officers and directors giving such individuals the right to purchase restricted shares of the Company's Common Stock and Class A Stock. Transactions regarding these stock options are summarized below:
2001 2000 1999 ------- ------- ------- Options outstanding at December 31 333,500 337,500 274,000 Weighted average price per share of options outstanding $ 8.30 $ 8.27 $ 8.48 Expiration dates 1/2001-12/2010 1/2001-7/2006 Options exercisable at December 31 333,500 267,500 -- Options granted -- 70,000 -- Options exercised or surrendered 4,000 6,500 18,000 Price ranges of options exercised or surrendered $ 6.00 $ 6.00 $ 6.00
The exercise price of each option equals the market price of the Company's stock on the date of grant and the option's term is ten years. The options vest six months after the date of grant. The Board of Directors granted 70,000 options to certain directors and officers on December 16, 2000. There were no stock options granted in 2001 or 1999, however, the exercise price of the Class A Stock options were re-priced at $7.25 on December 16, 1999. 38 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Under applicable insurance regulations, ACMAT's insurance subsidiaries are restricted as to the amount of dividends they may pay, without the prior approval of any insurance department and are limited to approximately $5,930,000 in 2002. The Company's insurance subsidiaries, United Coastal Insurance and ACSTAR, are domiciled in Arizona and Illinois, respectively. The statutory financial statements of United Coastal Insurance and ACSTAR are prepared in accordance with accounting practices prescribed by the Arizona Department of Insurance and the Illinois Department of Insurance, respectively. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as the state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. In 2001, United Coastal Insurance paid dividends of $6,000,000, a portion of which is considered extraordinary. United Coastal Insurance applied and received approval from the Arizona Insurance Department for the extraordinary portion of dividends paid. In accordance with statutory accounting principles, ACMAT's insurance subsidiaries' statutory capital and surplus was $50,735,332, and $50,646,755 at December 31, 2001 and 2000, respectively, and their statutory net income for the years ended December 31, 2001, 2000 and 1999 was $6,048,222, $7,641,075 and $11,231,410, respectively. Effective January 1, 2001, the insurance subsidiaries began preparing its statutory basis financial statements in accordance with the revised manual subject to any deviation prescribed or permitted by its domicilary insurance commissioner. The impact of this change was an increase to the statutory capital and surplus of approximately $3.9 million. The primary differences between amounts reported in accordance with GAAP and amounts reported in accordance with statutory accounting principles are 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 recognized for GAAP only. Pursuant to various debt covenants, previously described, ACMAT is restricted from purchasing treasury stock and paying dividends greater than 20% of consolidated net earnings. (13) EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ("EPS") computations for the years ended December 31, 2001, 2000 and 1999:
Average Shares Per-Share 2001: Earnings Outstanding Amount ---------- ---------- ---------- Basic EPS: Earnings available to stockholders $1,706,588 2,438,996 .70 Effect of Dilutive Securities: -- 55,094 Stock options ---------- ---------- Diluted EPS: Earnings available to stockholders $1,706,588 2,494,090 .68 ========== ========== ========== 2000: Basic EPS: Earnings available to stockholders $2,224,317 2,796,654 .80 Effect of Dilutive Securities: Stock options -- 38,554 ---------- ---------- Diluted EPS: Earnings available to stockholders $2,224,317 2,835,208 .78 ========== ========== ==========
39 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average Shares Per-Share 1999: Earnings Outstanding Amount ---------- ---------- ---------- Basic EPS: Earnings available to stockholders $3,013,723 2,961,817 $ 1.02 Effect of Dilutive Securities: Stock options -- 80,323 ---------- ---------- Diluted EPS: Earnings available to stockholders $3,013,723 3,042,140 $ .99 ========== ========== ==========
The Convertible Notes were anti-dilutive in 2001, 2000 and 1999. (14) COMMITMENTS AND CONTINGENCIES The Company is a party to legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses respecting those actions where the Company is a defendant, has appropriate insurance reserves recorded, and does not believe that their settlement will materially affect the Company's operations or financial position. Many construction projects in which the Company has been engaged have included asbestos exposures which the Company believes to involve a particularly high degree of risk because of the hazardous nature of asbestos. The Company believes it has reduced the risks associated with asbestos through proper training of its employees and by maintaining general liability and workers' compensation insurance. From 1986 to 1996, the Company obtained its general liability insurance from its insurance subsidiaries. Since 1996, the Company obtained its general liability insurance from unaffiliated insurance companies. Since 1989, the Company has obtained its surety bonds from its insurance subsidiary. The Company has, together with many other defendants, been named as a defendant in actions by injured or deceased individuals or their representatives based on product liability claims relating to materials containing asbestos. No specific claims for monetary damages are asserted in these actions. Although it is early in the litigation process, the Company does not believe that its exposure in connection with these cases is significant. (15) SEGMENT REPORTING The Company has three reportable operating segments: ACMAT Contracting, ACSTAR Bonding and United Coastal Liability Insurance. The Company's reportable segments are primarily the three main legal entities of the Company which offer different products and services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. ACMAT Contracting provides construction contracting services to commercial and governmental customers. ACMAT Contracting also provides underwriting services to its insurance subsidiaries. In addition, ACMAT Contracting owns a commercial office building in New Britain Connecticut and leases office space to its insurance subsidiaries as well as third parties. The United Coastal Liability Insurance operating segment offers specific lines of liability insurance as an approved non-admitted excess and surplus lines insurer in forty-six states, Puerto Rico, the Virgin Islands and the District of Columbia. United Coastal offers claims made and occurrence policies for specific specialty lines of liability insurance through certain excess and surplus lines brokers who are licensed and regulated by the state insurance department(s) in the state(s) in which they operate. United Coastal offers general, asbestos, lead, pollution and professional liability insurance nationwide to specialty trade contractors, environmental contractors, property owner, storage and treatment facilities and professionals. United Coastal also offers products liability insurance to manufacturers and distributors. The Bonding operating segment provides, primarily through ACSTAR, surety bonds written for prime, specialty trade, environmental, asbestos and lead abatement contractors and miscellaneous obligations. ACSTAR also offers other miscellaneous surety such as workers' compensation bonds, supply bonds, subdivision bonds and license and permit bonds. 40 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company evaluates performance based on earnings before income taxes and excluding interest expense. The Company accounts for intersegment revenue and expenses as if the products/services were to third parties. Information relating to the three segments is summarized as follows:
2001 2000 1999 ------------ ------------ ------------ Revenues: ACSTAR Bonding $ 5,487,683 6,284,212 6,227,462 United Coastal Liability Insurance 6,363,392 7,080,714 8,529,279 ACMAT Contracting 17,540,369 15,898,910 13,154,753 ------------ ------------ ------------ $ 29,391,444 29,263,836 27,911,494 ============ ============ ============ Operating Earnings: ACSTAR Bonding $ 2,098,548 2,436,708 2,968,882 United Coastal Liability Insurance 2,810,000 3,549,472 4,578,802 ACMAT Contracting 912,376 1,111,731 907,228 ------------ ------------ ------------ $ 5,820,924 7,097,911 8,454,912 ============ ============ ============ Depreciation and Amortization: ACSTAR Bonding $ 578,967 535,913 451,506 United Coastal Liability Insurance 299,353 371,721 385,502 ACMAT Contracting 656,737 639,510 992,638 ------------ ------------ ------------ $ 1,535,057 1,547,144 1,829,646 ============ ============ ============ Identifiable Assets: ACSTAR Bonding $ 48,282,555 41,801,164 44,594,402 United Coastal Liability Insurance 42,801,086 52,781,561 63,335,872 ACMAT Contracting 18,379,815 17,633,644 17,925,337 ------------ ------------ ------------ $109,463,456 112,216,369 125,855,611 ============ ============ ============ Capital Expenditures: ACSTAR Bonding $ 55,596 298,558 250,475 United Coastal Liability Insurance 105,678 92,143 6,969 ACMAT Contracting 260,109 159,241 86,922 ------------ ------------ ------------ $ 421,383 549,942 344,366 ============ ============ ============
The components of revenue for each segment are as follows:
2001 2000 1999 ------------ ------------ ------------ ACSTAR Bonding: Premiums $ 3,808,737 5,032,465 4,770,401 Investment income, net 1,560,080 1,253,329 1,268,175 Capital gains (losses) 191,670 (5,622) 51,616 Other (72,804) 4,040 137,270 ------------ ------------ ------------ $ 5,487,683 6,284,212 6,227,462 ============ ============ ============ United Coastal Liability Insurance: Premiums $ 3,772,539 4,183,439 4,743,791 Investment income, net 2,385,377 3,001,161 3,557,332 Capital gains (losses) 182,631 (117,503) 200,574 Other 22,845 13,617 27,582 ------------ ------------ ------------ $ 6,363,392 7,080,714 8,529,279 ============ ============ ============ ACMAT Contracting: Contract revenues $ 14,074,878 11,790,207 9,223,457 Investment income, net 44,707 91,655 78,702 Inter-segment revenue: Rental income 1,277,794 1,260,434 1,258,637 Underwriting services and agency commissions 1,192,472 1,596,960 1,538,131 Other 950,518 1,159,654 1,055,826 ------------ ------------ ------------ $ 17,540,369 15,898,910 13,154,753 ============ ============ ============
41 ACMAT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a reconciliation of segment totals for revenue and operating income to corresponding amounts in the Company's statement of earnings:
Revenue: 2001 2000 1999 ------------ ------------ ------------ Total revenue for reportable segments $ 29,391,444 29,263,836 27,911,494 Inter-segment eliminations (2,428,637) (2,922,081) (2,411,245) ------------ ------------ ------------ $ 26,962,807 26,341,755 25,500,249 ============ ============ ============ Operating Earnings: Total operating earnings for reportable segments $ 5,820,924 7,097,911 8,454,912 Interest expense (2,723,052) (2,982,824) (3,738,740) Intersegment interest expense (128,188) (207,194) -- Other operating expenses (355,739) (435,139) (498,285) ------------ ------------ ------------ $ 2,613,945 3,472,754 4,217,887 ============ ============ ============
Operating earnings for ACMAT contracting are operating revenues less cost of contract revenues and identifiable selling, general and administrative expenses. Operating earnings for the bonding and liability insurance segments are revenues less losses and loss adjustment expenses, amortization of policy acquisition costs and identifiable selling, general and administrative expenses. The adjustments and eliminations required to arrive at consolidated amounts shown above consist principally of the elimination of the intersegment revenues related to the performance of certain services and rental charges. Identifiable assets are those assets that are used by each segment's operations. Foreign revenues are not significant. (16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) A summary of the unaudited quarterly results of operations for 2001 and 2000 follows:
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ---------- ---------- ---------- ---------- 2001 Operating Revenues $5,976,915 7,195,080 7,290,131 6,500,681 ---------- ---------- ---------- ---------- Operating Earnings $1,458,592 1,477,871 1,254,539 1,145,995 ---------- ---------- ---------- ---------- Net Earnings $ 518,899 502,964 418,630 266,095 ---------- ---------- ---------- ---------- Basic Earnings Per Share $ .21 .21 .17 .11 ---------- ---------- ---------- ---------- Diluted Earnings Per Share $ .20 .20 .17 .10 ---------- ---------- ---------- ---------- 2000 Operating Revenues $6,081,307 6,775,713 7,664,456 5,820,279 ---------- ---------- ---------- ---------- Operating Earnings $1,619,190 1,520,220 1,715,735 1,600,433 ---------- ---------- ---------- ---------- Net Earnings $ 610,307 562,609 547,359 504,042 ---------- ---------- ---------- ---------- Basic Earnings Per Share $ .21 .20 .20 .19 ---------- ---------- ---------- ---------- Diluted Earnings Per Share $ .21 .19 .20 .18 ---------- ---------- ---------- ----------
Operating earnings represent operating revenues less the cost of contract revenues, losses and loss adjustment expenses and amortization of policy acquisition costs and selling, general and administrative expenses. 42 Schedule I ACMAT CORPORATION AND SUBSIDIARIES Condensed Financial Information of Registrant As of December 31, 2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999 The following presents the condensed financial position of ACMAT Corporation (parent company only) as of December 31, 2001 and 2000 and its condensed statements of earnings and cash flows for the years ended December 31, 2001, 2000 and 1999. BALANCE SHEETS
Assets 2001 2000 ----------- ----------- Current assets: Cash $ 434,640 $ 1,058,211 Receivables 4,053,259 2,751,297 Other current assets 677,108 493,003 ----------- ----------- Total current assets 5,165,007 4,302,511 Property and equipment, net 11,770,910 11,998,123 Investments in and advance from subsidiaries 47,521,294 50,630,763 Intangibles 54,810 214,912 Other assets 2,261,974 1,836,562 ----------- ----------- $66,773,995 $68,982,871 =========== =========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 2,589,256 3,143,108 Other current liabilities 4,251,459 3,802,619 ----------- ----------- Total current liabilities 6,840,715 6,945,727 Long-term debt 21,961,105 24,553,479 ----------- ----------- Total liabilities 28,801,820 31,499,206 Commitments and contingencies Stockholders' equity 37,972,175 37,483,665 ----------- ----------- $66,773,995 $68,982,871 =========== ===========
See Notes to Condensed Financial Statements. 43 Schedule I, continued ACMAT CORPORATION AND SUBSIDIARIES Condensed Financial Information of Registrant, Continued STATEMENT OF EARNINGS
2001 2000 1999 ------------ ------------ ------------ Contract revenues $ 14,074,878 $ 11,790,207 9,223,457 Cost of contract revenues 13,183,057 11,006,382 8,361,408 ------------ ------------ ------------ Gross profit 891,821 783,825 862,049 Selling, general and administrative expenses 3,674,476 4,096,369 4,206,660 ------------ ------------ ------------ Operating loss (2,782,655) (3,312,544) (3,344,611) Interest expense (2,851,240) (3,190,018) (3,738,740) Interest income 44,707 91,655 78,622 Underwriting fees 836,694 1,268,243 1,214,697 Other income 2,228,312 2,420,088 2,335,099 ------------ ------------ ------------ Loss before income taxes and equity in net earnings of subsidiaries (2,524,182) (2,722,576) (3,454,933) Income tax benefit (695,000) (585,000) (1,010,000) ------------ ------------ ------------ Loss before equity in net earnings of subsidiaries (1,829,182) (2,137,576) (2,465,569) Equity in net earnings of subsidiaries 3,535,770 4,361,893 5,479,292 ------------ ------------ ------------ Net earnings $ 1,706,588 $ 2,224,317 3,013,723 ============ ============ ============
See Notes to Condensed Financial Statements. 44 Schedule I, Continued ACMAT CORPORATION AND SUBSIDIARIES Condensed Financial Information of Registrant, Continued STATEMENTS OF CASH FLOWS
Cash flows from operating activities: 2001 2000 1999 ----------- ----------- ----------- Net earnings $ 1,706,588 2,224,317 3,013,723 Depreciation and amortization 656,737 650,304 990,461 Equity in undistributed earnings of subsidiaries (3,535,770) (4,361,893) (5,479,292) (Increase) decrease in accounts receivable (1,301,962) (1,264,338) 62,054 (Increase) decrease in other assets (528,767) (548,201) (51,879) Increase (decrease) in other liabilities 448,840 614,632 (659,180) ----------- ----------- ----------- Net cash used for operating activities (2,554,334) (2,685,179) (2,124,113) ----------- ----------- ----------- Cash flows from investing activities: Capital expenditures (260,109) (159,241) (86,922) Decrease in investment in subsidiaries 7,140,000 6,910,000 13,000,000 ----------- ----------- ----------- Net cash provided by investing activities 6,879,891 6,750,759 12,913,078 ----------- ----------- ----------- Cash flows from financing activities: Borrowings under lines of credit -- -- 9,000,000 Repayments of lines of credit -- -- (9,000,000) Repayment of long-term debt (8,146,226) (3,096,133) (10,907,280) Issuance of long-term debt 5,000,000 -- 4,500,000 Issuance of Class A stock, net of taxes 24,000 39,000 162,000 Payments for acquisition and retirement of stock (1,826,902) (2,369,075) (2,521,276) ----------- ----------- ----------- Net cash used for financing activities (4,949,128) (5,426,208) (8,766,556) ----------- ----------- ----------- Net change in cash (623,571) (1,360,628) 2,022,409 Cash, beginning of year 1,058,211 2,418,839 396,430 ----------- ----------- ----------- Cash, end of year $ 434,640 1,058,211 2,418,839 =========== =========== ===========
See Notes to Condensed Financial Statements. 45 Schedule I, Continued ACMAT CORPORATION AND SUBSIDIARIES Condensed Financial Information Notes to Condensed Financial Statements The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto in the Company's 2001 Annual Report. (1) SUPPLEMENTAL CASH FLOW INFORMATION Income taxes received from subsidiaries during the years ended December 31, 2001, 2000 and 1999 were $516,173, $118,150, and $1,157,813, respectively. Interest paid during the years ended December 31, 2001, 2000 and 1999 was $2,933,115, $3,023,070 and $3,751,313, respectively. Interest paid in 2001 and 2000 included $128,188 and $207,194, respectively, paid to subsidiaries for intercompany loans. (2) LONG-TERM DEBT A summary of long-term debt at December 31, 2001 and 2000 follows:
2001 2000 ----------- ----------- Term Loan Due 2004 $ 2,250,000 3,250,000 Senior Notes Due 2005 900,000 2,400,000 Term Loan Due 2009 5,000,000 -- Mortgage Note Due 2008 6,005,361 6,646,587 Convertible Note Due 2022 10,395,000 15,400,000 ----------- ----------- $24,550,361 27,696,587 =========== ===========
See Note 9 to the Consolidated Financial Statements in the Annual Report for a description of the long-term debt and aggregate maturities for 2002 to 2006 and thereafter. (3) INCOME TAXES See Note 10 to the Consolidated Financial Statements in the Annual Report for a description of income taxes. (4) COMMITMENTS AND CONTINGENCIES See Note 14 to the Consolidated Financial Statements in the Annual Report for a description of the commitments and contingencies. 46 SCHEDULE II ACMAT CORPORATION AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Years ended December 31, 2001, 2000 and 1999
Balance Additions at charged Balance beginning to costs At of and end of Description period expenses Deductions(a) period -------- -------- -------- -------- Allowance for doubtful accounts: 2001 $147,346 (69,312) (4,321) $ 82,355 ======== ======== ======== ======== 2000 $195,118 (21,702) 26,070 $147,346 ======== ======== ======== ======== 1999 $257,617 180,000 242,499 $195,118 ======== ======== ======== ========
(a) Deductions represent accounts written off. 47 Schedule V ACMAT CORPORATION AND SUBSIDIARIES Supplemental Information concerning property-casualty insurance operations As of and for the years ended December 31, 2001, 2000 and 1999
Discount Ded. Reserves for from Unpaid Deferred Unpaid Losses Losses Affiliation Policy and Loss and Loss Net with Acquisition Adjustment Adjustment Unearned Earned Investment Registrant Costs Expenses Expenses Premiums Premiums Income ---------- ----- -------- -------- -------- -------- ------ United Coastal Liability Insurance: 2001 $531,015 16,463,542 - 2,368,912 3,772,539 2,385,377 ======== ========== ========== ========= ========= ========= 2000 $700,835 21,367,394 - 3,061,557 4,183,439 3,001,161 ======== ========== ========== ========= ========= ========= 1999 $692,351 27,889,335 - 3,290,024 4,743,791 3,557,332 ======== ========== ========== ========= ========= ========= ACSTAR Bonding: 2001 $634,541 9,309,961 - 1,906,026 3,808,737 1,560,080 ======== ========== ========== ========= ========= ========= 2000 $737,912 7,943,212 - 2,831,843 5,032,465 1,253,329 ======== ========== ========== ========= ========= ========= 1999 $631,429 12,571,156 - 2,193,118 4,770,401 1,268,175 ======== ========== ========== ========= ========= =========
Amortization Paid Losses & Loss Adjustment of Deferred Losses Affiliation Expenses Incurred Policy and Loss with Related to Acquisition Adjustment Premiums Registrant Current Year Prior Years Costs Expenses Written ---------- ------------ ----------- ----- -------- ------- United Coastal Liability Insurance: 2001 1,024,000 107,762 1,286,409 5,665,869 3,133,460 ========= ========== ========= ========= ========= 2000 1,070,000 185,032 1,303,916 7,252,037 3,887,000 ========= ========== ========= ========= ========= 1999 1,660,000 (225,633) 1,528,179 5,315,006 3,544,657 ========= ========= ========= ========= ========= ACSTAR Bonding: 2001 1,397,000 (992,740) 1,601,377 2,787,413 3,498,860 ========= ============= ========= ========= ========= 2000 1,371,000 (1,119,124) 2,001,561 2,145,080 5,024,005 ========= ============ ========= ========= ========= 1999 1,431,120 (1,192,600) 1,543,783 2,669,290 4,645,343 ========= =========== ========= ========= =========
48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE: None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table shows for each director (a) his or her age, (b) the year in which the director first served as a director of the Company, (c) position with the Company and business experience during the past five years, including principal occupation, (d) his or her committee assignments, and (e) his or her other directorships. Each director is elected for a term of one year and until his or her successor shall be elected.
DIRECTOR POSITION WITH THE COMPANY AND BUSINESS EXPERIENCE NAME AGE SINCE DURING LAST FIVE YEARS, INCLUDING OCCUPATION HENRY W. NOZKO, JR. (1) 55 1971 President, Chief Executive Officer, Treasurer, Director and Chairman of the Board of the Company. President, Chief Executive Officer and Treasurer of United Coastal Insurance Company. President and Treasurer of ACSTAR Holdings, Inc. and ACSTAR Insurance Company. Member, Boards of Directors of United Coastal Insurance Company, ACSTAR Holdings, Inc., ACSTAR Insurance Company. VICTORIA C. NOZKO (1) 83 1982 Housewife during past five years. JOHN C. CREASY 82 1987 Retired Chief Executive Officer of Danbury Hospital, Member, Board of United Coastal Insurance Company. Member of the Compensation Committee and Audit Committee. ARTHUR R. MOORE 68 1999 Former General President of Sheet Metal Workers' International Association. Member of the Audit Committee. ALFRED T. ZLOTOPOLSKI 55 1999 General Secretary-Treasurer of the Sheet Metal Workers' International Association as of March 1, 1999. Previously was the Business Manager and President of Local 36 of the Sheet Metal Workers' International Association. Member of the Audit Committee.
(1) Mrs. Victoria C. Nozko is the mother of Mr. Henry W. Nozko, Jr. 49 Executive Officers of the Registrant: The following are the Company's Executive Officers, their age, and offices held. Officers are appointed to serve until the meeting of the Board of Directors following the next Annual Meeting of Stockholders and until their successors have been elected.
NAME AGE OFFICES HELD ---- --- ------------ Henry W. Nozko, Jr. 55 President, Chief Executive Officer, Treasurer, Director and Chairman of the Board since January 2002. Executive Vice President since 1982. Treasurer since 1973. Director since 1971, and Chief Operating Officer since 1985. Robert H. Frazer 55 Vice President since 1982. Secretary since 1992. General Counsel since 1977. Michael P. Cifone 43 Senior Vice President and Chief Financial Officer since March 2002. Vice President-Finance since 1990. Corporate Controller since 1989.
50 ITEM 11. EXECUTIVE COMPENSATION Directors who are not employees of the Company are paid an annual fee of $4,000. The following table provides certain summary information regarding compensation of the Company's Chief Executive Officer and each of the four most highly compensated executive officers of the Company for the periods indicated.
NAME AND PRINCIPAL ANNUAL ALL OTHER POSITION COMPENSATION(A) COMPENSATION(B) YEAR SALARY BONUS Henry W. Nozko, Sr 2001 $466,833 $ -- $ 8,633 Chairman, President 2000 $460,700 $200,000 $ 10,432 And Chief Executive Officer 1999 $447,200 $395,000 $ 10,532 Henry W. Nozko, Jr 2001 $337,833 $ -- $ 8,633 Executive Vice President and 2000 $332,000 $150,000 $ 10,432 Chief Operating Officer 1999 $322,500 $315,000 $ 10,430 Michael P. Cifone 2001 $160,333 $ -- $ 8,633 Vice President-Finance 2000 $154,500 $100,000 $ 10,432 1999 $150,000 $155,000 $ 10,289 Robert H. Frazer, Esq 2001 $115,185 $ -- $ 4,987 Vice President, Secretary and 2000 $136,069 $ -- $ 6,648 General Counsel 1999 $171,600 $ 25,000 $ 10,392
(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. Individual discretionary bonuses are paid to various officers and employees. (B) The amounts shown in this column represent contributions made by the Company to the Company's 401(k) Plan and Thrift, Profit Sharing and Retirement Plan ("Plan"). The Plan was terminated on February 29, 2000. On January 1, 2000, the Company adopted the ACMAT 401(k) Plan for all nonunion employees. All nonunion employees employed on a full time or part time salaried basis are eligible to participate on the first day of January or July after twelve consecutive months of employment. The Company contributes amounts, as determined by the Board of Directors, to be allocated among the participants according to a formula based upon the employee's years of service and compensation. A participant becomes vested at the rate of 20% per year commencing after two years of service. 51 The following table provides information on options during 2001 by the named Executive Officers and the value of their unexercised options at December 31, 2001. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END 2001 OPTION VALUES
Number of Unexercised Value of Unexercised Options at In-the-Money Options Name 12/31/01 (1) at 12/31/01 (2) ------------------------- ------------------------- Exercisable/Unexercisable Exercisable/Unexercisable Estate of Henry W. Nozko, Sr. - ACMAT Class A Stock Options 56,000/- -/- - ACMAT Common Stock Options 50,000/- $412,500/- Henry W. Nozko, Jr. - ACMAT Class A Stock Options 51,000/- -/- - ACMAT Common Stock Options 50,000/- $412,500/- Robert H. Frazer - ACMAT Class A Stock Options 35,000/- -/- Michael P. Cifone - ACMAT Class A Stock Options 20,000/- -/-
(1) Represents the number of options held at year end. (2) Represents the total gain that would have been realized if all options for which the year-end stock price was greater than the exercise price were exercised on the last day of the year. 52 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT: As of March 1, 2002, no person was known to the Company to be the beneficial owner of more than five percent of its outstanding shares of Common Stock or Class A Stock except as set forth in the following table which also shows, as of that date, the total number of shares of each class of stock of the Company beneficially owned, and the percent of the outstanding class of stock so owned, by each director, and by all directors and officers of the Company, as a group:
PERCENTAGE PERCENTAGE CLASS NUMBER OF SHARES OF CLASS OF TOTAL BENEFICIAL OWNER OF STOCK BENEFICIALLY OWNED (1) OUTSTANDING VOTING POWER (15) ---------------- -------- ---------------------- ----------- ----------------- Estate of Henry W. Nozko, Sr. Common 417,605 (4) 67.56% 51.88% Class A 61,000 (3) 3.24 Henry W. Nozko, Jr. Common 198,099 (2)(4) 32.83 26.91 Class A 163,674 (2)(5) 8.72 Victoria C. Nozko Class A 52,000 (6) 2.81 .70 John C. Creasy Class A 19,000 (7) 1.03 .26 Arthur R. Moore Class A 10,000 (8) .51 .13 Alfred T. Zlotopolski Class A 10,000 (8) .51 .13 Sheet Metal Workers' National Pension Fund Class A 945,000 (9) 34.09 11.30 Franklin Resources, Inc. Class A 443,500 (10) 22.72 5.89 Queensway Financial Holdings Limited Class A 204,814(11) 11.21 2.76 EQSF Advisors, Inc. Class A 200,678 (12) 10.98 2.70 First Manhattan Co. Class A 165,513 (13) 9.06 2.23 Old Kent Financial Corp. Class A 130,000 (14) 6.66 1.73 All Directors and Officers (8 persons) As a Group Common 605,704 92.71 74.40 Class A 375,090 18.27
(1) The person listed has the sole power to vote the shares of Common Stock and Class A Stock listed above as beneficially owned by such person and has sole investment power with respect to such shares. (2) Does not include 400 shares of Class A Stock and 5,925 shares of Common Stock held by his wife, Gloria C. Nozko. (3) Includes options to purchase 56,000 shares of Class A Stock. (4) Includes options to purchase 50,000 shares of Common Stock. (5) Includes options to purchase 51,000 shares of Class A Stock. (6) Includes options to purchase 25,000 shares of Class A Stock. (7) Includes options to purchase 19,000 shares of Class A Stock. (8) Includes option to purchase 10,000 shares of Class A Stock. (9) Assumes the full conversion of $10,395,000 principal amount of 11.5% Convertible Note into 945,000 shares of Class A Stock. The Address of the Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314. (10) Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San Mateo, CA 94404 (11) Address of Queensway Financial Holdings Limited is 90 Adelaide Street West, Toronto, Ontario M5H3V9. (12) Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY 10017-2023. (13) Address of First Manhattan Co. is 437 Madison Avenue, New York, NY 10022. (14) Address of Old Kent Financial Corp. is 111 Lyon Street N.W., Grand Rapids, MI 49503. (15) Based upon one vote for each share of Common Stock and one-tenth vote for each share of Class A Stock. 53 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 $10,395,000 into shares of Class A Stock at the current conversion price of $11.00 per share pursuant to the terms of a 30-year unsecured, subordinated debenture dated July 1, 1992 and bearing interest at the annual rate of 11.5%. The estate of Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a voting agreement pursuant to which the parties have agreed to vote their respective shares of Class A Stock in favor of the Pension Fund's nominees to the ACMAT Board of Directors. AIG Life Insurance Company On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its own Class A Stock from AIG Life Insurance Company (366,663 shares) and American International Life Assurance Company of New York (733,333 shares). The 1,099,996 shares of Class A Stock were acquired throughout the past two years by AIG Life Insurance Company and American International Life Assurance Company of New York pursuant to the conversion options of the Convertible Senior Notes. The shares were purchased by the Company at an average price of $14.70 per share for a total purchase price of $16,174,942. The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory notes totaling $12,000,000. The promissory notes are with AIG Life Insurance Company and American International Life Assurance Company of New York and are payable over eight years with interest at prime rate. The interest rate is equal to the prime rate, however, it shall not exceed 9-1/4% and it shall not be less than 7-1/4%. American International Group, Inc., a holding company for AIG Life Insurance Company and American International Life Assurance Company of New York, is a substantial owner of Transatlantic Reinsurance Company, a reinsurer to which the Company, through Coastal Insurance and ACSTAR Insurance, ceded approximately $394,000 in reinsurance premiums in the year ended December 31, 2001. Other Relationships During the year ended December 31, 2001, the Company paid to Dr. Arthur Cosmas $156,075 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 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, 2001, 2000 and 1999 Consolidated Balance Sheets as of December 31, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements - December 31, 2001, 2000 and 1999 54 2. Financial Statement Schedules Consolidated Schedules included in Part II of this Report-Years ended December 31, 2001, 2000 and 1999: 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 2001. (c) Exhibits (3) Certificate Amending and Restating the Company's Bylaws as filed as an Exhibit to the Company's Form 10-Q for the Quarter ended March 31, 1989 is incorporated herein by reference. (3a) Certificate Amending and Restating the Company's Certificate of Incorporation as amended May 1, 1991 as filed as an Exhibit to the Company's Form 10-Q for the Quarter ended March 31, 1991 is incorporated by reference. (4b) Promissory Note between ACMAT Corporation and Webster Bank as filed as an Exhibit to the Company's Form 10-k for the year ended December 31, 1998 is incorporated by reference. (4c) Open-end Mortgage Deed and Security Agreement between ACMAT Corporation and Webster Bank as filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 1999 is incorporated by reference. (4d) Amended and Restated Commercial Credit Agreement between ACMAT Corporation and Webster Bank is attached hereto as Exhibit 4(d). (4e) Revolving Credit Note between ACMAT Corporation and Webster Bank as filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 1999 is incorporated by reference. (4f) Term Note between ACMAT Corporation and Webster Bank as filed as an Exhibit to the Company's Form 10-K for the year ended December 31, 1999 is incorporated by reference. (4g) Term Note II between ACMAT Corporation and Webster Bank is attached hereto as Exhibit 4(g). (10b) Stock Purchase Agreement dated as of July 1, 1992 between ACMAT Corporation and the Sheet Metal Workers' National Pension Fund together with Note Agreement Re: 11 1/2% Convertible Subordinated Notes due 2012 filed as Exhibit 10g to the Company's Form 10-K for the year ended December 31, 1992 is incorporated herein by reference. (21) Subsidiaries of ACMAT. 55 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 29, 2002 By: /s/ Henry W. Nozko, Jr. -------------------------- Henry W. Nozko, Jr., 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 /s/ Henry W. Nozko, Jr Officer and Director March 29, 2002 - ------------------------------ Henry W. Nozko, Jr. Senior Vice President and Chief Financial Officer (Principal Financial and /s/ Michael P. Cifone Accounting Officer) March 29, 2002 - ---------------------- Michael P. Cifone /s/ Victoria C. Nozko Director March 29, 2002 - ---------------------- Victoria C. Nozko /s/ John C. Creasy Director March 29, 2002 - ------------------- John C. Creasy
56 INDEX TO EXHIBITS
Regulation S-K Exhibit Page Number ---------------------- ----------- Exhibit 3 - Bylaws Incorporated by Reference Exhibit 3a - Certificate of Incorporation as amended May 1, 1991 Incorporated by Reference Exhibit 4b - Promissory Note between ACMAT and Webster Bank Incorporated by Reference Exhibit 4c - Open-end Mortgage Deed/Security Agreement between ACMAT and Webster Bank. Incorporated by Reference Exhibit 4d - Amended and Restated Commercial Credit Agreement between ACMAT and Webster Bank Page 58 Exhibit 4e - Revolving Credit Note between ACMAT and Webster Bank Incorporated by Reference Exhibit 4f - Term Note between ACMAT and Webster Bank Incorporated by Reference Exhibit 4g - Term Note II between ACMAT and Webster Bank Page 98 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 104
57 EX-4.D 3 y58760ex4-d.txt EXHIBIT 4D (1) AMENDED AND RESTATED COMMERCIAL CREDIT AGREEMENT THIS IS AN AMENDED AND RESTATED COMMERCIAL CREDIT AGREEMENT which amends and restates in full that certain Commercial Credit Agreement made on the ___ day of _____, 1999. This AMENDED AND RESTATED COMMERCIAL CREDIT AGREEMENT is made this 17th day of December, 2001 by and among WEBSTER BANK a federally chartered savings bank with a place of business at Webster Plaza 145 Bank Street Waterbury, Connecticut 06720 ("Lender") and ACMAT CORPORATION a Connecticut corporation with a place of business at 233 Main Street New Britain, CT 06050 ("Borrower") and ACSTAR HOLDINGS, INC. a Delaware corporation with a place of business at 233 Main Street New Britain, CT 06050 ("Guarantor") The liability of the Borrower and of the Guarantor hereunder shall be joint and several. THE PARTIES AGREE AS FOLLOWS (reference being hereby made to Appendix I appended hereto for the definition of certain capitalized terms used herein): SECTION 1. LOANS; INTEREST; GUARANTY. 1.1 The Loans. Subject to all of the terms and conditions of this Agreement: (A) Revolving Credit. (i) Lender shall from time to time, until the Termination Date, at the request of Borrower, and provided that all of the Conditions Precedent have been met by Borrower at the time of such request, make advances (each an "Advance" and collectively "Advances") to Borrower as a Revolving Credit (the "Revolving Credit"), which Advances may be repaid and readvanced from time to time, and which shall bear interest at the rate set forth in Section 1.5 provided that the aggregate amount of all outstanding Advances shall not (except in the sole and absolute discretion of Lender) at any time exceed the amount of $10,000,000.00. The Revolving Credit shall be evidenced by the Revolving Credit Note delivered to Lender in form and substance set forth as Exhibit A attached (together with any note which from time to time extends, amends, supplements, modifies, renews or substitutes such note, the "Revolving Note"). (ii) On and before the Termination Date, Lender shall determine in its sole and absolute discretion whether it is willing to extend the Termination Date. On and after the Termination Date, as extended, if at all, any obligation of Lender to make Advances shall automatically terminate and all Advances, together with accrued and unpaid interest thereon and expenses related thereto, shall become immediately due and payable in full. (B) Term Loan. Lender is lending to Borrower and Borrower is borrowing from Lender the sum of $4,500,000.00 as a Term Loan (the "Term Loan"), which Term Loan is payable in quarterly payments of principal, each in the amount of $250,000.00 payable on the first day of each March, June, September and December after the date hereof, each to be accompanied by a payment of interest at the rate set forth in Section 1.5 hereof until the Term Loan Maturity Date, when the entire unpaid balance of the Term Loan, together with all accrued and unpaid interest, shall be due and payable, all as more particularly set forth in the Term Loan Note delivered to Lender in form and substance as set forth in Exhibit B attached hereto, (together with any note which from time to time extends, amends, supplements, modifies, renews or substitutes for such note, the "Term Note"); and (C) Term Loan II. Lender is lending to Borrower and Borrower is borrowing from Lender the sum of $5,000,000.00 as a second Term Loan (the "Term Loan II"), which Term Loan II is payable in quarterly payments of principal, each in the amount of $__________ payable on the first day of each March, June, September and December after the date hereof, each to be accompanied by a payment of interest at the rate set forth in Section 1.5 hereof until the Term Loan II Maturity Date, when the entire unpaid balance of Term Loan II, together with all accrued and unpaid interest, shall be due and payable, all as more particularly set forth in the Term Loan II Note delivered to Lender in form and substance as set forth in Exhibit F attached hereto, (together with any note which from time to time extends, amends, supplements, modifies, renews or substitutes for such note, the "Term Note II"). (C) The Mortgage Loan. The Lender has lent to Borrower and Borrower has borrowed from Lender the original principal amount of $7,800,000.00 dated December 23, 1998 as a Mortgage Loan (the "Mortgage Loan"), which Mortgage Loan is evidenced by a promissory note delivered to Lender in form and substance as set forth in Exhibit G attached hereto, (together with any note which from time to time extends, amends, supplements, modifies, renews or substitutes for such promissory note, the "Mortgage Note"), which Mortgage Note is payable in 2 monthly payments of principal and interest each in the amount of $90,749.64 payable on the first day of each month, until January 1, 2009, when the entire unpaid balance of the Mortgage Loan, together with all accrued and unpaid interest, shall be due and payable. 1.2 Conditions Precedent to Advances. Lender's obligation to make any Advance shall be subject to the conditions precedent ("Conditions Precedent") that on the date on which Lender makes the Advance: (A) Borrower must have received and provided to Lender such approvals, opinions, consents or documents evidencing compliance with this Agreement as Lender may reasonably request; and (B) Borrower must have submitted all financial statements required hereunder to Lender showing an availability for Advances under the Revolving Credit, and such Advance when added to all outstanding Advances must be within such availability; and (C) The following statements must be true, and each request for an Advance shall be deemed to be a representation and warranty by Borrower to the effect that, at and as of the date of such request: (i) the representations and warranties contained in Section 2 are true and correct on and as of the date of such request as though made on and as of such date; and (ii) no Default nor Event of Default has occurred and/or is continuing or would result from the Advance. 1.3 Procedures for Requesting Advances. Provided that all Conditions Precedent have been satisfied, Borrower may from time to time request Advances by a telephone call from such person as Borrower may hereafter designate in writing, each of which request must be for an amount in excess of $100,000.00. Any request for an Advance made prior to 12:00 noon on a Business Day shall result in the Advance being made on such Business Day as to Prime Rate Advances and on the second (2nd) London Business Day following such request as to LIBOR Advances. Any request made after 12:00 noon shall result in such Advance being made on the next Business Day as to Prime Rate Advances and on the third (3rd) London Business Day following such request as to LIBOR Advances. Any and all Advances to be made by Lender under this Agreement shall be deposited in Account #81601154 maintained by Borrower with Lender. Borrower specifically agrees that Lender shall not be required to but shall be entitled to rely on such telephone instructions and that Borrower shall be bound thereby. Borrower shall provide to Lender such documentation respecting each request for Advance, including, without limitation, the form of Request for Advance attached hereto as Exhibit C, as Lender shall require. 1.4 Loans. It is specifically contemplated by the parties to this Agreement that the banking relationship evidenced hereby may, in Lender's discretion, involve financial accommodations of various types to Borrower, including, but not limited to, letters of credit, term loans, coverage of overdrafts, time loans, demand loans, over loans under the Revolving Credit, the 3 Term Loan, the Term Loan II and the Mortgage Loan and the like, in addition to the forgoing, any and all other loans and/or Advances previously made by Lender to Borrower in addition to the Revolving Note, the Term Note, the Term Note II and the Mortgage Note. Consequently, the parties intend that this Agreement shall govern any and all financial accommodations now or hereafter extended by Lender to Borrower and all other liabilities of the Borrower to the Lender of any kind or nature including, without limitation, fees, charges, indemnities and penalties. In extension of the foregoing, all loans and advances now or hereafter made by Lender to or on behalf of Borrower pursuant to this Agreement and/or any of the documents executed in connection herewith, or otherwise, whether or not evidenced by notes, and all liabilities of the Borrower to the Lender (primary, secondary, direct, indirect, absolute, contingent, sole, joint or several, whether similar or dissimilar or related or unrelated) whether previously incurred, now existing or hereafter arising, including, without limitation under guarantees or other form of surety now or hereafter provided by Borrower in favor of Lender, whether pursuant to this Agreement or any of the Documents or otherwise, any renewals or extensions thereof, to the extent the same are outstanding from time to time, are herein collectively called the "Loans". 1.5 Interest. (A) Revolving Credit. (i) All amounts outstanding from time to time under the Revolving Credit shall bear interest at a per annum variable rate which at all times is equal to the Prime Rate, said rate to change when and as said Prime Rate changes; provided however, that (ii) At the election of Borrower made pursuant to a Notice of Interest Rate Election (in form and substance as set forth in Exhibit D, attached hereto), outstanding amounts under the Revolving Credit shall bear interest at the LIBOR Rate plus one hundred sixty (160) basis points. Such amounts must be in increments of $50,000.00 and remain outstanding for the Interest Period selected by Borrower at the time such election is made, which period of time shall be in increments of one month but not to exceed three months; and (iii) Notwithstanding the foregoing, not more than three (3) separate interest rate tranches shall be outstanding at any time under the Revolving Credit at any time. (B) Term Loan. (i) All amounts outstanding from time to time under the Term Loan shall bear interest at a fixed rate equal to seven and one quarter (7 1/4%) percent per annum. (C) Term Loan II. (i) All amounts outstanding from time to time under the Term Loan II shall bear interest at a per annum variable rate which at all times is equal to the Prime Rate, said rate to change when and as said Prime Rate changes; provided however, that 4 (ii) At the election of Borrower made pursuant to a Notice of Interest Rate Election (in form and substance as set forth in Exhibit D-1, attached hereto), outstanding amounts under the Term Loan II shall bear interest at the LIBOR Rate plus one hundred ninety (190) basis points. Such election shall apply to the entire outstanding amount of Term Loan II and must remain outstanding for an Interest Period equal to three months. (D) Mortgage Loan. (i) All amounts outstanding from time to time under the Mortgage Loan shall bear interest at a fixed rate equal to six and 95/100 (6.954%) percent per annum as set forth therein. 1.6 Payment. Except as otherwise provided in any note now or hereafter executed which evidences any Loan, interest on all Loans shall be payable by Borrower monthly on the first (1st) day of each calendar month for interest accrued during the preceding month on the Loans at the rate or rates of interest applicable during said preceding month. With respect to the Term Loan, Term Loan II and the Mortgage Loan, interest payments shall accompany payments of principal. Interest on all Loans shall be computed using a per diem rate which shall be a fraction, the numerator of which shall be the rate of interest calculated in accordance with Section 1.5(A) or (B) above and the denominator of which shall be three hundred sixty (360), multiplied by the actual number of days elapsed. For the purposes of computing interest earned on the Loans, including without limitation interest payments which are paid by an Advance (in which case such advance shall constitute a Loan) or interest payments which are withdrawn directly from Borrowers' accounts maintained with Lender or are made by other current funds (AND EACH BORROWER HEREBY CONSENTS TO ANY AND ALL SUCH ADVANCES AND/OR WITHDRAWALS, AND/OR PAYMENTS BY ANY OTHER MEANS AVAILED OF BY LENDER, AND FURTHER CONSENTS TO PAYMENTS OF PRINCIPAL AND/OR INTEREST ON ANY OF THE LOANS AND/OR OTHER SUM OWING TO LENDER BY SUCH ADVANCES AND/OR WITHDRAWALS), credit for checks deposited, wire transfers received or payment by any other means shall be given on the third (3rd) business day following the receipt of such check, wire transfer or other form of payment. In the event any payment of principal and/or interest shall be returned unpaid for any reason, any credit given on account of such payment shall be deleted, interest shall accrue retroactively to the date such credit was given and such payment shall be deemed for all purposes under this Agreement, never to have been made. Any interest not paid as aforesaid may, in Lender's sole discretion, accrue and be added to the principal and continue to bear interest at the rate being borne by such principal 1.7 Prepayment. Any amounts outstanding bearing interest at the LIBOR Rate may only be prepaid if any such prepayment is accompanied by the Prepayment Premium. 1.8 Guaranty. Guarantor is simultaneously herewith executing and delivering to Lender its Guaranty Agreement (the "Guaranty") unconditionally guaranteeing to Lender the payment of all Indebtedness and obligations now or hereafter owing by Borrower to Lender, including, without limitation, the Loans. 5 SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower and Guarantor each jointly and severally represent and warrant to Lender as of the date hereof, and as of the date of each Advance that: 2.1 Borrower Incorporation and Qualification. Borrower is a corporation duly organized and validly existing and in good standing under the laws of the State of Connecticut, has the corporate power to own its properties and conduct its business, as presently conducted, and is duly qualified to do business in each jurisdiction, wherein the nature of the business conducted by it or the property owned or held under lease by it makes such qualification necessary in order to avoid any limitation, penalty, forfeiture or restriction under the laws of such jurisdiction. 2.2 Guarantor Incorporation and Qualification. Guarantor is a corporation duly organized and validly existing and in good standing under the laws of Delaware, has the corporate power to own its properties and conduct its business, as presently conducted, and is duly qualified to do business in each jurisdiction, wherein the nature of the business conducted by it or the property owned or held under lease by it makes such qualification necessary in order to avoid any limitation, penalty, forfeiture or restriction under the laws of such jurisdiction. 2.3 Borrower Capitalization, Business and Subsidiaries. Borrower does not own stock or other ownership interest of any other business entity, active or inactive except as set forth on Schedule to 2.3. The information set forth on Schedule to 2.3 attached with respect to the Borrower's authorized, issued and outstanding capital stock, all of which stock has been duly authorized and validly issued and is fully paid and non-assessable, the holders of such stock, its principal and other places of business, the place where its inventories, equipment and records of its accounts receivable are kept, and its present business activities and status, is complete and accurate. It has no place of business and does not maintain or store any of its assets at any location, including without limitation Inventory at a vender or subcontractor, other than those set forth in Schedule to 2.3 attached. 2.4 Guarantor Capitalization, Business and Subsidiaries. Guarantor does not own stock or other ownership interest of any other business entity, active or inactive except as set forth on Schedule to 2.4. The information set forth on Schedule to 2.4 attached with respect to the Guarantor's authorized, issued and outstanding capital stock, all of which stock has been duly authorized and validly issued and is fully paid and non-assessable, the holders of such stock, its principal and other places of business, the place where its inventories, equipment and records of its accounts receivable are kept, and its present business activities and status, is complete and accurate. It has no place of business and does not maintain or store any of its assets at any location, including without limitation Inventory at a vender or subcontractor, other than those set forth in Schedule to 2.4 attached. 2.5 Authority. Each of Borrower and Guarantor has the corporate power to execute, deliver and carry out the terms and provisions of this Agreement and the other Documents to which it is a party and has taken all necessary corporate and legal action with respect thereto (including, without limitation, obtaining any consent of stockholders required by the law of any 6 applicable jurisdiction or its Certificate of Incorporation or By-Laws and this Agreement and such other Documents to which it is a party have been duly authorized, executed and delivered by it and constitute its valid, legal and binding agreement and obligation enforceable in accordance with the terms thereof) and Lender is entitled to the benefits thereof in accordance with such terms. 2.6 Compliance with Instruments, Charter and Law. Each of Borrower and Guarantor and each of their Subsidiaries is in full compliance with and is not in violation or default of any term or provision of (1) its Certificate of Incorporation or by-laws, (2) any loan agreement, debt instrument, mortgage or indenture, (C) any other material contract, agreement or instrument, (3) any judgment, decree or order or statute, rule or regulation, law, or ordinance, including without limitation ERISA, OSHA, all state and federal environmental laws and those of the Internal Revenue Service. (4) any licensing or governmental requirement, or (5) any state or federal environmental act. The execution and delivery and performance and compliance with this Agreement or any of the other Documents will not result in any such violation or default by Borrower or Guarantor, or be in conflict with any such term or provision or result in the creation of any mortgage, lien, encumbrance or charge upon any of its properties or assets and there is no such term or provision which materially adversely affects or in the future may (so far as it can now foresee) materially adversely affect its business, prospects, profits, properties, liabilities, operations or condition (financial or otherwise) or its ability to perform this Agreement or any of the other Documents executed by it. 2.7 Financial Statements. (A) The consolidated balance sheet of the Borrower and its consolidated subsidiaries as of December 31, 1997 and the related consolidated statements of operations, cash flows and stockholders' equity for the Fiscal Year then ended, reported on by KPMG Peat Marwick and set forth in the Borrower's 1997 Form 10-K, fairly present, in conformity with GAAP, the consolidated financial position of the Borrower and its consolidated subsidiaries as of such date and their consolidated results of operations and cash flows for such Fiscal Year. (B) The unaudited consolidated balance sheet of the Borrower and its consolidated subsidiaries as of December 31, 2000 and the related unaudited consolidated statements of operations, cash flows and stockholders' equity for the nine months then ended, set forth in the Borrower's latest Form 10-Q, fairly present, on a basis consistent with the financial statements referred to in subsection (A), the consolidated financial position of the Borrower and its consolidated subsidiaries as of such date and their consolidated results of operations and cash flows for such three month period (subject to normal year-end adjustments). 2.8 Indebtedness. Borrower has no outstanding Indebtedness, except for liabilities to trade creditors incurred in the ordinary course of business and/or except as described or set forth in the financial statements referred to in Section 2.7 hereof, and has performed and complied with all of the terms of such Indebtedness and all instruments and agreements relating thereto and no default exists as of the date hereof or would after notice or lapse of time, or both, exist with respect to any such Indebtedness, instruments or agreements. 7 2.9 Title to Properties and Assets; Liens, Etc. Borrower has good and marketable title to its properties and assets free and clear of any mortgage, pledge, lien, lease, encumbrance or charge, other than those set forth on Schedule to 2.9 attached and other than those permitted under Section 4.2 . No financing statement under the Uniform Commercial Code which names Borrower as a debtor has been filed in any state or other jurisdiction which has not been terminated and it has not signed any such financing statement or any security agreement authorizing any secured party thereunder to file any such financing statement, other than as set forth on Schedule to 2.9 attached. 2.10 Patents, Trademarks, Etc. Borrower, Guarantor and each of its Subsidiaries owns or holds licenses for the use of or has the right to use all patents, trademarks, service marks, trade names, copyrights and other intellectual property rights necessary for the conduct of its business as now conducted and as contemplated, including those identified in Schedule to 2.10 attached. 2.11 Litigation, Etc. Except as set forth in Schedule to 2.11 attached and in the ordinary course of business of the Insurance Subsidiaries respecting claims which in the aggregate do not materially adversely affect their business, there are no equitable, legal, arbitration or administrative proceedings, suits, actions or investigations pending against Borrower or Guarantor or any Subsidiary thereof or in any other way relating to the Borrower's or Guarantor's or any such Subsidiary's business, assets or other properties or to its knowledge threatened (or any basis therefor known to it) which, either in any case or in the aggregate, might result in any material adverse change in its business, prospects, profits, properties, liabilities, operations or conditions (financial or otherwise), or which might materially adversely affect its ability to perform this Agreement or any other Documents executed by it. 2.12 Changes in Condition. Since the date of the financial statements referred to in Section 2.7, there has been no material adverse change, by reason of any matter or cause whatsoever, in Borrower's , Guarantor's or any of their Subsidiaries, business, prospects, profits, properties, liabilities, operations or condition (financial or otherwise). 2.13 Tax Returns and Payments. All tax returns and reports required by law to be filed by Borrower, Guarantor and each of their Subsidiaries have been duly filed and all taxes, assessments, fees and other governmental charges (U.S., foreign, state or local or other) upon it or upon any of its properties, assets, income or franchises, which are due and payable, have been paid. The reserves on the Borrower's, Guarantor's or any of their Subsidiaries books, in respect of taxes, reserves, risk based capital and the like for all fiscal periods to date, are adequate. Its Federal and State income and payroll tax returns have been examined and reported on by the taxing authorities or closed by applicable statutes and satisfied for all fiscal years prior to and including the fiscal years set forth in Schedule to 2.13 attached. 2.14 Governmental Consents, Etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority, federal, foreign or other, is required in connection with the execution and delivery of this Agreement or the Documents or the consummation of any transaction contemplated hereby or thereby. 8 2.15 Solvency. Borrower, after giving effect to the transactions described herein, is solvent, having assets of a value which exceeds the amount of its liabilities, and is able to and anticipates that it will be able to meet its debts as they mature and has adequate capital to conduct the business in which it is engaged and is about to engage. 2.16 Names. Borrower currently conducts all business only under its legal name as set forth above. During the preceding five years Borrower has not (i) been known as or used any other corporate, fictitious or trade name, (ii) been the surviving entity of a merger or consolidation or (iii) acquired all or substantially all of the assets from any Person. 2.17 No Default nor Event of Default. No Default nor Event of Default has occurred or exists. 2.18 Shareholder Agreements. Borrower is not a party to any written executive employment, management or shareholder agreement, except as described in Schedule to 2.18 attached. 2.19 Place of Business; Records. Borrower's chief place of business is the address shown above and Borrower shall give Lender at least sixty (60) days prior written notice of any change. 2.20 Judgments. Neither Borrower nor Guarantor nor any of their Subsidiaries, nor any of the assets of any such party is subject to any unpaid judgment (whether or not stayed) or any judgment lien in any jurisdiction. 2.21 No Regulatory Restrictions on Borrowing. Neither Borrower nor Guarantor nor any of their Subsidiaries is (i) an "investment company" within the meaning of the Investment Company Act of 1940, as amended, (ii) a "holding company" or a "subsidiary company" of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) otherwise subject to any regulatory scheme which restricts its ability to incur or guarantee debt. 2.22 Insider. Borrower is not, and no Person having "control" (as defined in 12 U.S.C. 375(b)(5) or in regulations promulgated thereto) of Borrower is an "executive officer", "director" or "principal shareholder" (as those terms are defined in 12 U.S.C. 375(b)(5) or in regulations promulgated thereto) of Lender, of a bank holding company (or Subsidiary thereof) of which Lender is a Subsidiary. 2.23 Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which has resulted or could result 9 in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. 2.25 Environmental Matters. (A) Except as set forth in Schedule to 2.25 and to the extent that the liabilities of the Borrower and its Subsidiaries, taken as a whole (and after considering any applicable third party indemnification which has been provided and remains in full force and effect and/or to the extent a solvent insurer has agreed in writing to provide coverage), relating to or resulting from the matters referred to in clauses (i) through (vi) below, inclusive, would not reasonably be expected to exceed $250,000.00 for any one occurrence or $500,000.00 in the aggregate. (i) no notice, notification, demand, request for information, citation, summons, complaint or order has been received, no penalty has been assessed and no investigation or review is pending, or to the Borrower's knowledge, threatened by any governmental or other entity relating to the Borrower or any Subsidiary and relating to or arising out of any applicable Environmental Law; (ii) there are no liabilities of the Borrower or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, arising under or relating to any Environmental Law; (iii) no polychlorinated biphenyls, radioactive material, lead, lead paint, asbestos-containing material, incinerator, sump, surface impoundment, lagoon, landfill, septic, wastewater treatment or other disposal system or underground storage tank (active or inactive) that requires remediation, or could reasonably be expected to lead to liability under, applicable Environmental Laws is or has been present at any property now or previously owned, operated or leased by the Borrower or any Subsidiary; (iv) no Hazardous Substance has been discharged, disposed of, dumped, injected, pumped, deposited, spilled, leaked, emitted or released at, on or under any property now or previously owned, operated or leased by the Borrower or any Subsidiary other than in compliance in all material respects with, and in a manner that could not reasonably be expected to lead to liability under, applicable Environmental Laws; (v) no property now or previously owned, leased or operated by the Borrower or any Subsidiary nor any property to which the Borrower or any Subsidiary has, directly or indirectly, transported or arranged for the transportation of any Hazardous Substances, is listed or, to the Borrower's knowledge, proposed for listing, on the National Priorities List promulgated pursuant to CERCLA, or CERCLIS (as defined in CERECLA) or on any similar federal, state or foreign list of sites requiring investigation or clean-up; and (vi) the Borrower and its Subsidiaries are in compliance with all Environmental Laws and have obtained and are in compliance with all permits, licenses, authorizations, certificates and approvals of governmental authorities relating to or required by 10 applicable Environmental Laws and necessary or property for the business of the Borrower or any Subsidiary as currently conducted. (B) There has been no material environmental investigation, study, audit, test, review or other analysis conducted of which the Borrower or any Subsidiary has control or possession in relation to the current or prior business of the Borrower or any Subsidiary or any property or facility now or previously owned, leased or operated by the Borrower or any Subsidiary, which has not been delivered to the Lenders at least five days prior to the date hereof. (C) For purposes of this Section, the terms "Borrower" and "Subsidiary" shall include any business or business entity (including a corporation) which is, in whole or in part, a predecessor of the Borrower or any Subsidiary. 2.26 Subsidiaries. Each of the Borrower's Subsidiaries is duly organized, validly existing and, where applicable, in good standing under the laws of its jurisdiction of organization, and has all powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Borrower has no Subsidiaries other than those listed on Schedule to 2.26. 2.27 Full Disclosure. All information (excluding projections) heretofore furnished by the Borrower to Lender for purposes of or in connection with the Loan Documents or any transaction contemplated thereby is, and all such information hereafter furnished by the Borrower to Lender will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower and Guarantor have disclosed to Lender any and all facts (other than general economic or political conditions) which materially and adversely affect, or may affect (to the extent the Borrower and Guarantor can now reasonably foresee), the business, operations or financial condition of the Borrower and its Subsidiaries, taken as a whole, or the ability of any Borrower of Guarantor to perform its obligations under the Loan Documents. All projections heretofore furnished by the Borrower to Lender for purposes of or in connection with the Loan Documents or any transaction contemplated thereby were, and all projections hereafter furnished by the Borrower to Lender will be, based on reasonable assumptions and as of their date represented the Borrower's best estimate of future performance of the Borrower and its Subsidiaries. 2.28 Special Representations and Warranties re Insurance Subsidiaries. (A) United Coastal Insurance Company ("Coastal") is and will continue to be duly licensed in the State of Arizona and is qualified to do business in all states other than Maine, New Hampshire, Vermont and Tennessee . Coastal was last audited by the Department of Insurance of the State of Arizona on December 31, 1994. Coastal has not currently applied for permission to grant any extraordinary dividends and no such application has ever been denied. (B) ACSTAR INSURANCE COMPANY ("ACSTAR") is and will continue to be duly licensed in the State of Illinois and is qualified to do business in all states. ACSTAR was last audited by the Department of Insurance of the State of Illinois on December 31, 11 1995. ACSTAR has not currently applied for permission to grant any extraordinary dividends and no such application has ever been denied. (C) Each Insurance Subsidiary is and will continue to be in compliance with the laws and regulations of each state in which it is approved to sell insurance, specifically including, without limitation, the State of New York. (D) Each Insurance Subsidiary maintains and will continue to maintain adequate reserves as determined by its outside auditors and is at or above state regulatory requirements and those determined by NAIC. (E) Each Insurance Subsidiary has and will at all times maintain risk based capital ratio which complies with the guidelines of NAIC and complies with all applicable state regulatory guidelines including, without limitation, the State of New York. Each Insurance Subsidiary has and will continue to have actual capital equal to or in excess of its required risk based capital. (F) Coastal has not incurred losses in excess of 15% of its statutory surplus in any year. (G) ACSTAR has not incurred losses in excess of 15% of its statutory surplus in any year. (H) None of Coastal's reinsurance recoverables are more than 90 days past due. (I) None of ACSTAR's reinsurance recoverables are more than 90 days past due. (J) No Insurance Subsidiary has entered into transactions with Affiliates during the last three years except as disclosed on Schedule to 2.28 attached hereto. (K) On and as of the date hereof the rating of Coastal by A.M. Best is A-. Borrower knows of no basis for any reduction of such rating nor any action to evidence such rating. (L) On and as of the date hereof the rating of ACSTAR by A.M. Best is A-. Borrower knows of no basis for any reduction of such rating nor any action to evidence such rating. SECTION 3. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that so long as there is outstanding any portion of the Loans, Borrower will comply or cause compliance with the following: 12 3.1 Punctual Payment. Borrower shall duly and punctually pay all principal, interest and charges which are owing by it in accordance with the provisions of the Revolving Note and the Term Note and also in accordance with the provisions hereof and of the other Documents. If any Loan is not evidenced by a writing specifying a due date, Borrower shall pay the same ON DEMAND. All Loans shall be paid in U.S. Dollars at the address of Lender shown above. Borrower shall pay on demand all charges customarily levied by lender in making loans of the type herein or incurred by Lender in connection with the Loans. 3.2 Prompt Payment of Taxes, Mortgages, Leases and Indebtedness. Borrower shall promptly pay and discharge, or cause to be paid and discharged, prior to the date when due (unless contested in good faith and reserves against the payment of which, satisfactory to Lender, are deposited with Lender), all lawful taxes, assessments and governmental charges or levies imposed upon assets owned by it or in which it has an interest or upon the Borrower's Business premises or upon the income, profits, property or business of itself or Guarantor or any of its or their Subsidiaries, or upon any of its or their other assets. Borrower shall promptly pay or cause to be paid when due (or in conformity with customary trade terms) all other Indebtedness of itself incident to its operations and will promptly pay and perform all obligations under leases of real and personal property and under material contracts and shall notify Lender promptly of any default or notice of alleged default received with respect to any such Indebtedness, lease or contract. 3.3 Conduct of Business. Borrower shall do all things necessary to preserve, renew and keep in full force and effect in good standing the Borrower's, Guarantor's and each of its or their Subsidiaries' corporate existence, qualification and any franchises, licenses, patents, trademarks and items necessary to continue its business. Borrower shall maintain its properties and assets and those of the Guarantor and those of Borrower's and/or Guarantor's Subsidiaries in good order and repair, all in compliance with applicable federal, state, and local judgments, decrees, orders, statutes, rules and regulations, including, but not limited to, state and federal environmental regulations and those of the Occupational Safety and Health Administration. 3.4 Insurance. (A) Borrower, Guarantor, and each of its or their Subsidiaries shall maintain, with insurers satisfactory to Lender, insurance with respect to the assets owned by it or in which it has an interest and its other properties and business against loss or damage to the extent that is currently in force. Such insurance shall include: (i) public and product liability insurance in such amounts and covering such risks, as Lender may reasonably require, (ii) all worker's compensation and other employees' liability insurance as may be required by law, (iii) insurance with respect to its assets constituting tangible personal property and fixtures, and with respect to its other properties both real and personal, including, without limitation, the Borrower's business premises, to the full extent of the insurable 13 value thereof, and including All Risk coverage (so-called) covering such other risks, as Lender may require, and (iv) business interruption insurance in amounts sufficient to cover the reasonable needs of the Borrower's business during periods of partial or complete interruption of the Borrower's business. (B) Borrower shall furnish evidence satisfactory to Lender confirming to Lender the insurance at the time in force pursuant to this Section specifying the amount and character of coverage, identifying the insurers and certifying as to no default in the payment of current premiums thereon and will furnish Lender with original or duplicate original copies of all policies. 3.5 Accounting; Financial Statements and Other Information. Borrower shall maintain a system of accounts established and administered in accordance with GAAP and practices consistently applied. Borrower shall deliver or cause to be delivered to Lender: (i) As soon as available and in any event within forty-five (45) days after the end of each Fiscal Quarter after the date hereof, a balance sheet of the Borrower, in consolidating and consolidated form, as of the end of such period, and a statement of income and retained earnings of the Borrower, in consolidated form, for the period commencing at the end of the previous Fiscal Year and ending with the end of such quarter, all in reasonable detail, and duly certified by the chief financial officer of the Borrower as having been prepared in accordance with GAAP and fairly presenting the financial position and results of operations of the Borrower for such period, together with a statement of such individual preparing such statements to the effect that in the course of the preparation of such statements said individual has gained no knowledge that a Default or Event of Default has occurred and is continuing or, if, in the opinion of said individual, a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto (the provision for such a statement herein shall in no way be construed as a consent to the existence of such an Event nor the granting of time to cure). In addition, said preparer shall complete and forward to Lender together with such financial statements the completed Covenant Compliance Certificate in the form attached hereto as Exhibit E. (ii) As soon as available and in any event within ninety (90) days after the end of each Fiscal Year of the Borrower, a copy of the annual audited report for such year for the Borrower, including therein, a balance sheet of the Borrower as of the end of such Fiscal Year and a statement of income, retained earnings and statement of changes in financial position of the Borrower for such Fiscal Year, in each case on a consolidated basis, and in each case "Certified" by a firm of independent certified public accountants selected by the Borrower but acceptable to Lender, together with the unqualified opinion of such accounting firm to Lender stating that the financial statements audited by such firm present fairly, in all material respects, the financial position of Borrower as of the date of such financial statements and the results of its operations and its cash flow for the Fiscal Year then ended, all in conformity with GAAP, together with the certificate of such accounting firm that, in the course of its audit of Borrower, it has obtained no knowledge that 14 a Default or Event of Default has occurred and is continuing or if, in the opinion of such accounting firm, a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof (the provision for such a statement herein shall in no way be construed as a consent to the existence of such an Event nor the granting of time to cure) and together with the Management Letter (so called) of such firm and Borrower's written response thereto detailing actions to be taken relating to matters discussed in said Management Letter, and together with a completed Covenant Compliance Certificate. In addition, Borrower shall provide all financial statements for the Insurance Subsidiaries required by the laws of any jurisdiction in which the Insurance Subsidiary conducted business. (iii) Such other data and information (financial and otherwise) bearing upon or related to the Borrower's or the Guarantor's financial condition, results of operations or assets, as Lender from time to time may reasonably request. 3.6 Financial Covenants. Borrower shall maintain the following, calculated in accordance with GAAP, as shown on the financial statements required to be provided pursuant to Section 3.5; (A) a ratio of Borrower's consolidated total Indebtedness to Borrower's (i) cash on hand and cash equivalents on hand plus (ii) marketable securities (including amounts owing to Borrower in connection therewith but not yet paid) plus (iii) accrued interest receivable of not more than 1.05 to 1.0 measured at the end of each Fiscal Quarter; and (B) an Adjusted Interest Coverage Ratio (being the ratio of Adjusted Cash Flow taking into account only 75% of the allowable dividend permitted to be paid to Borrower by its Subsidiaries to consolidated Interest Expense) of not less than 2.25 to 1.0 and thereafter an Interest Coverage Ratio (being the ratio of Adjusted Cash Flow to consolidated Interest Expense) of at least 2.25 to 1.0 measured at the end of each Fiscal Quarter over the immediate preceding four (4) Fiscal Quarters. (C) an Adjusted Debt Service Coverage Ratio (being the ratio of Adjusted Cash Flow taking into account only 75% of the allowable dividend permitted to be paid to Borrower by its Subsidiaries to Debt Service) of not less than 1.25 to 1.0 and thereafter a Debt Service Coverage Ratio (being the ratio of Adjusted Cash Flow to Debt Service) of not less than 1.25 to 1.0 measured at the end of each Fiscal Quarter over the immediate preceding four (4) Fiscal Quarters. (D) a ratio of Borrower's total Funded Debt to Statutory Operating Earnings of not more than 5.0 to 1.0 measured at the end of each Fiscal Quarter over the immediate preceding four (4) Fiscal Quarters. (E) a ratio of Borrower's total Funded Debt to Statutory Capital of not more than 0.70 to 1.0 measured at the end of each Fiscal Quarter. Borrower acknowledges that it has assisted Lender in the formation of each of the foregoing financial performance criteria and fully understands each of said criteria. 15 3.7 Notice of Certain Events and Changes; Governmental Notices. (A) Promptly after becoming aware of any condition, event or state of facts which constitutes a Default or Event of Default, Borrower shall give written notice to Lender specifying the nature and period of existence thereof. Borrower shall give Lender prompt written notice of any condition, event or state of facts which causes or may cause material loss or depreciation in the value of the assets or Borrower's business premises and of the commencement or threat of any action, proceeding or investigation or the occurrence or existence of any other event, matter or cause whatsoever, which, either in any case or in the aggregate results or might result in any material adverse change in its business, prospects, profits, properties, operations or condition (financial or otherwise). Borrower shall give Lender at least sixty (60) days' prior written notice of any proposed change in its place or places of business, any proposed change of location of any of the assets and any proposed changes in its name. (B) As soon as reasonably practicable, after the issuance thereof, Borrower shall send to Lender a copy of all notices of investigation, claims of violation or possible violation and/or orders issued by any federal, state or municipal regulatory authority under any laws or regulations adopted thereby which are directed to and received by Borrower. Further, as soon as reasonably practicable, Borrower shall send to Lender copies of all reports or other materials filed by it with or issued or sent to it by the Securities and Exchange Commission and all reports, notices or statements sent by it to its stockholders. 3.8 Unused Fee. Borrower shall pay Lender, in current funds, quarterly in arrears, within ten (10) days after the commencement of each calendar quarter, a fee equal to one quarter of one (.25) percentage point per annum (but calculated based on the actual number of days elapsed) of the average daily unused amount of the Revolving Credit. In the event Borrower fails to make such payment within such time, Lender may (but shall not be obligated to) either charge such amount to the Revolving Credit or withdraw such amount from any account maintained by Borrower with Lender. 3.9 Environmental Compliance. (A) Borrower shall comply with all applicable Environmental Laws, regulations, rules, standards, orders and agreements. Whenever, pursuant to any such legal requirement, Borrower is obligated to report to any party the existence of a Spill (as such term is defined in Section 1 of Public Act 85-443), "Release" (as defined in 42 U.S. Code 9601 et seq.), "Hazardous Waste" (as defined in Section 22a-115 of Connecticut General Statutes), "Hazardous Substance" (as defined in 42 U.S. Code 9601 et seq.) or other environmental contamination on or emanating from Borrower's business premises, Borrower shall, simultaneously and in writing, report the existence of such conditions to Lender at the address set forth in Section 13 hereof. (B) In addition to any and all other liability of Borrower to Lender hereunder, Borrower shall indemnify the Lender against any loss or damage that shall occur to Lender as a result of the application of the Super Lien Act (Section 22a-452a of the Connecticut 16 General Statutes) or any other federal, state, local or quasi-governmental law, rule, regulation, ordinance or the like. (C) The Lender and/or its authorized representatives has the right, at reasonable times and upon reasonable notice to Borrower, to enter upon Borrower's business premises for the purpose of conducting inspections and/or audits of Borrower's environmental compliance and/or of Borrower's methods and/or procedures for disposal of waste products used in the course of Borrower's business. Borrower shall correct any discrepancies found during such inspections or audits promptly. (D) In the event that any lien is filed against any of Borrower's properties or any claim is made against Borrower by any governmental entity in connection with the discharge of hazardous substances or wastes then Borrower shall either (i) pay the claim and remove any lien from the applicable property or (ii) furnish to such governmental entity that imposed the lien a bond, cash deposit or other security reasonably satisfactory to such governmental entity in an amount sufficient to discharge the lien. 3.10 Use of Proceeds. Borrower shall use the proceeds of the Loans for general working capital purposes and Term Loan II is to be used to pay a note due to the Sheet Metal Workers National Pension Fund. Borrower shall not, directly or indirectly, apply any part of any proceeds or advance from any loan to the purchasing or carrying of any "margin stock" within the meaning of Regulation U or Regulation G of the Board of Governors of the Federal Reserve System, or for any use which will cause a violation of any other regulation of the Board of Governors of the Federal Reserve System or of any regulations, interpretations or rulings thereunder, including without limitation Regulations G, U, T and X. 3.11 Deposit Accounts. Borrower shall maintain its primary disbursement account with Lender. 3.12 Pension Plans. (A) As soon as reasonably practicable, upon the filing, issuance or receipt thereof, Borrower will send to Lender copies of (i) all annual reports filed by it or on its behalf with respect to all pension or other employee benefit plans, subject to ERISA, (hereinafter collectively referred to as the "Plans" and individually as the "Plan"), with the Secretary of Labor, the Internal Revenue Service, or the Pension Benefit Guaranty Corporation ("PBGC"), (ii) all notices, reports, determinations or statements to or from the PBGC with respect to the occurrence of a reportable event, as defined in Subsections (1), (2), (3), (4), (5), (6), (7), (8) or (9) of Section 4043(b) of ERISA and regulations issued thereunder, (iii) all reports submitted to it and/or the Internal Revenue Service by any actuary with respect to any of the Plans, (iv) all notices of Plan termination or requests for determination letters in connection therewith filed by Borrower, any Plan Administrator (as such term is defined in ERISA,) or trustee or custodian of any accounts of any Plan with the PBGC and/or Internal Revenue Service, and (v) all requests to waive the minimum funding standard or extension of amortization periods submitted to the Secretary of the Treasury. 17 (B) Borrower (to the extent applicable to it) shall be and remain in compliance with the provisions of ERISA or the applicable provisions of the Internal Revenue Code of 1986, as amended, (hereinafter referred to as the "Revenue Code"), including, without limitation, (i) the payment of all premiums to the PBGC when and as the same shall be due and payable, pursuant to Section 4007 of ERISA, and (ii) the taking of such action as may be necessary from time to time to meet all minimum funding standards for each of the Plans under Section 412 of the Revenue Code. In furtherance of the foregoing, it shall, on or before the date in each year required by ERISA and/or the Revenue Code for any Plan, (hereinafter referred to as "Plan Year"), cause the actuary for such Plan to deliver to Lender a true and correct copy of its report to the Internal Revenue Service relating to (a) the actuary's methods and assumptions for determining all costs, accrued liabilities, past service liabilities and experience gains and losses, and (b) the amount to be contributed by it to the funding standard account on account of such Plan for such Plan Year. 3.13 Special Covenants re Insurance Subsidiaries. The Borrower shall: (A) Notify the Lender annually of the allowable dividend which may be paid by each Insurance Subsidiary to the Borrower. (B) Notify the Lender promptly if any Insurance Subsidiary has applied for permission to grant any special dividends. (C) Notify the Lender of any allegation of non-compliance by any Insurance Subsidiary with the laws and regulations of each state in which it is approved to sell insurance, specifically including, without limitation, the State of New York, except this notification does not apply to any non-compliance matter if such non-compliance matter does not have a material effect. (D) Furnish to the Lender annually all reports issued by its outside auditors which analyze the adequacy of the level of each Insurance Subsidiary's reserves. (E) Notify the Lender of any material change in any Insurance Subsidiary's risk based capital ratio. (F) Maintain in each Insurance Subsidiary actual capital equal to or in excess of its required risk based capital. (G) Notify the Lender, promptly upon becoming aware, of the following: (i) any material increase in the levels of primary liability of each Insurance Subsidiary which is ceded to reinsurers, (ii) the occurrence of any default in any such contract of reinsurance and (iii) the occurrence of any insolvency of any reinsurer or any non-compliance by any reinsurer with the NAIC risk based capital guidelines. (H) Notify the Lender, promptly upon becoming aware, of the following: (i) any material increase in the levels of primary liability of each Insurance Subsidiary which is co-insured with others, (ii) the occurrence of any default in any such contract of co-insurance and (iii) 18 the occurrence of any insolvency of any co-insurer or any non-compliance by any co-insurer with the NAIC risk based capital guidelines. (I) Notify the Lender within 90 days of the fiscal year end each Insurance Subsidiary's (i) net investment income for the year then ended, (ii) the statutory surplus for the year then ended, (iii) the "Combined Ratio" for each such Insurance Subsidiary for the year then ended, (iv) the loss, if any, of any Insurance Subsidiary in excess of 15% of its statutory surplus for the year then ended, (v) a listing of each Insurance Subsidiary's reinsurance recoverables which are more than 90 days past due as at the end of any year and (vi) a listing of all transactions with Affiliates entered into by any Insurance Subsidiary during the year then ended. (J) Notify the Lender of any reduction in the rating by A.M. Best and Company of any Insurance Subsidiary. 3.14 Upstream Dividends. Borrower shall, among other things, cause its Subsidiaries to pay to Borrower such profits, excess capital and other sums as may be necessary to comply with the financial covenants set forth in Section 3.6. In extension of the foregoing, Borrower shall diligently apply for and pursue any approvals from any state or regulatory authority having jurisdiction over each such Subsidiary if such approvals are necessary to comply with the financial covenants set forth in Section 3.6 3.15 Rating. The Insurance Subsidiaries shall at all times maintain a rating by A.M. Best and Company of at least B+. SECTION 4. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as there is outstanding any portion of the Loans, or so long as this Agreement has not been mutually terminated after all amounts owing under the Loans have been paid, Borrower shall not, and Guarantor shall not, to the extent set forth in each of the following Sections: 4.1 Restrictions on Liens. Directly or indirectly, create, incur, assume or permit to exist any mortgage, lien, charge or encumbrance on or pledge or deposit of or conditional sale, lease or other title retention agreement with respect to any property or asset, whether now owned or hereafter acquired, or be bound by or subject to any agreement or option to do so, provided that the foregoing restrictions do not apply to: (A) liens for taxes, assessments or governmental charges or levies the payment of which is not at the time required by Section 3.2; (B) liens incurred or deposits made in the ordinary course of business in connection with worker's compensation or unemployment insurance or to secure the performance of tenders, statutory obligations, surety and appeal bonds, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); 19 (C) zoning restrictions, easements, rights-of-way, restrictions and/or minor irregularities in title and other liens, charges and encumbrances incidental to the conduct of its business or the ownership of its properties or assets which are not incurred in connection with the borrowing of money and which in the aggregate are not material; (D) statutory or common law possessory liens for charges incurred in the ordinary course of business the payment of which is not yet due; (E) the mortgages, liens and encumbrances referred to or described in Schedules to 4.1 attached and/or the replacement thereof; (F) liens in favor of Lender. 4.2 Restrictions on Indebtedness. Directly or indirectly, create, incur, assume, guarantee, agree to purchase or repurchase, pay or provide funds in respect of, or otherwise become or be or remain liable, contingently, directly or indirectly, with respect to, any Indebtedness other than: (A) Indebtedness to Lender; (B) current liabilities for trade and other obligations incurred in the ordinary course of its business not yet past due and not as a result of borrowing; (C) Indebtedness arising under leases permitted hereby; (D) Indebtedness in respect of endorsements made in connection with the deposit of items for credit or collection in the normal and ordinary course of business; and (E) Indebtedness described in the financial statements described in Section 2.8 or refinancing of such Indebtedness in amounts not to exceed such refinanced Indebtedness. (F) Indebtedness otherwise in conformity with all of the other terms hereof incurred in order to fund the loan, advance or capital contribution described in Section 4.3 (F) below. Borrower shall not guarantee or otherwise assure any obligation of any other party including, without limitation, that of any Guarantor. 4.3 Restrictions on Investments, Loans, Etc. Make or permit to be outstanding any loan or advance or capital contribution to any other Person, other than: (A) presently outstanding loans, advances and investments incurred in the ordinary course of Borrower's business; 20 (B) Indebtedness of customers for merchandise sold or services rendered in the ordinary course of business; and (C) investments in bills or bonds issued or guaranteed by the government of the United States of America and/or Certificates of Deposit issued by Lender or any other bank having a net worth of at least $50,000,000.00; and (D) loans to employees of Borrower for travel and entertainment advances not to exceed $250,000.00 in the aggregate outstanding at any one time. (E) the portfolios of the Insurance Subsidiaries maintained pursuant to Borrower's guidelines attached hereto as Schedule to 4.3. (F) any other loan, advance or capital contribution to any other business entity not set forth herein for Borrower's or the Insurance Subsidiaries' legitimate business purposes in an amount not to exceed $10,000,000 outstanding in the aggregate provided that (i) no proceeds of any Loan shall be used for such purpose and (ii) no Default or Event of Default shall exist or be created thereby. 4.4 Dividends, Distributions and Redemptions. Directly or indirectly, declare, order, pay, make or set apart any sum or property for the redemption, retirement, purchase or other acquisition, direct or indirect, of any shares of its stock of any class now or hereafter outstanding in an aggregate amount exceeding more than $3,000,000 in any Fiscal Year in the aggregate on a non-cumulative basis and/or the purchase of shares in the Borrower held by Henry Nozko, Sr., with the proceeds of insurance policies held by Borrower on the life of such person. 4.5 Sale of Assets, Consolidation, Merger, Acquisition of Assets. Directly or indirectly, sell, abandon or otherwise dispose of any material asset or any part thereof (except for the sale of Inventory in the ordinary course of Borrower's business) or of all or any portion of its properties or assets, or consolidate with or merge into any other corporation, or permit any other corporation to consolidate with or merge into it, or acquire all or a substantial portion of the assets of another Person, or form any Subsidiary, or, directly or indirectly, suffer any change in ownership. 4.6 Management Agreements. Enter into any executive employment, management or consulting agreement or renew, extend or amend any presently existing executive employment, management or consulting agreement, except agreements with Henry Nozko, Sr. and Henry Nozko, Jr. 4.7 Expenditures for Capital Assets. Make any expenditure for capital assets (other than for routine repairs and maintenance which are not required to be capitalized, as hereinafter set forth) unless, immediately after giving effect thereto, the aggregate amount expended or to be expended on account of all such expenditures by Borrower in any Fiscal Year would not exceed $1,500,000.00 on a non-cumulative basis. The following are deemed to be expenditures for capital assets and subject to the limitations of this section: 21 (A) Expenditures for major repairs and maintenance which, in accordance with GAAP, are or should be capitalized; and (B) All lease rentals and other amounts payable under leases entered into after the date hereof, whether "true" leases or finance leases (other than renewals and extensions of leases existing on the date hereof), and all amounts payable under contracts or arrangements for the purchase of property wherein payment of the purchase price for such property is deferred in whole or in part. 4.8 Management. Suffer any material change in executive management, including without limitation the day to day involvement of Henry Nozko, Sr. and Henry Nozko, Jr. nor suffer a change in day to day management; 4.9 Ownership. Suffer a change in ownership of Borrower's capital stock except for trades in the ordinary course, of Borrower's stock on nationally recognized markets, nor issue additional shares thereof except for stock options or equity financing provided that in any case Henry Nozko, Sr. And Henry Nozko, Jr. shall always own or control at least 51% of the combined voting power of all issued and outstanding shares of all classes of stock. 4.10 E.R.I.S.A. Engage in any "Prohibited Transaction", so-called, incur any so-called "Accumulated Funding Deficiency", or create or terminate any pension or profit sharing plan or suffer the existence of any Reportable Event or the appointment by any United States District Court of a trustee to administer any Plan or if the PBGC shall institute proceedings to terminate any plan or to administer any Plan, or otherwise not be in full compliance. 4.11 Judgments. Suffer any final judgment (exclusive of judgments insured against by adequate liability insurance policies) against it which is not discharged or execution thereof stayed pending appeal, within ninety (90) days after the entry of such judgment, or if, within ninety (90) days after the expiration of any such stay, such judgment shall not have been discharged. 4.12 Uninsured Losses, Etc. Suffer, during any consecutive twelve (12) month period, one or more material uninsured losses, thefts, damage or destruction of any material portion of its assets (other than bad debts incurred in the ordinary course of business). 4.13 Fiscal Year. Change the fiscal year of Borrower. 4.14 No Sale, Leaseback. Enter into any sale-and-leaseback or similar transaction. 4.15 Negative/Negative Pledges. Agree with any party other than Lender that it will not pledge and/or grant a lien or security interest in any of its assets. SECTION 5. EVENTS OF DEFAULT. If any of the following events (each an "Event of Default") occurs: 22 5.1 If Borrower defaults in the payment of any part of the Loans, including, without limitation, payments due under the Revolving Credit, the Term Loan, the Term Loan II or the Mortgage Loan, owing by it when the same becomes due and payable, whether at any stated maturity, or by declaration, acceleration or otherwise; 5.2 If the Guarantor or any Subsidiary of the Borrower or Guarantor defaults in the payment of any Indebtedness owing by it when the same becomes due and payable, at any stated maturity, by declaration, acceleration or otherwise; 5.3 If Borrower fails to perform or comply with any term or covenant applicable to it contained in this Agreement, or contained in any other Documents; 5.4 If any representation or warranty made by or on behalf of Borrower, in this Agreement or in the Schedules hereto, or in any of the other Documents, or in connection with the transactions contemplated hereby and thereby proves to be false or incorrect in any material respect; 5.5 If a draw is made under any payment or performance bond issued for the account of Borrower; 5.6 If Borrower, Guarantor or any of their Subsidiaries defaults in the payment of any Indebtedness for borrowed money or defaults with respect to any of the terms of any evidence of such Indebtedness or of any indenture or other agreement relating thereto, or if Borrower commits any breach or defaults under any material contract to which it is or becomes a party or by which it is or becomes bound; 5.7 If Borrower, Guarantor or any of their Subsidiaries makes an assignment for the benefit of creditors, or admits in writing an inability to pay debts as they become due, or files a voluntary petition in bankruptcy, or is adjudicated a bankruptcy or insolvent, or files any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any present or future statute, law or regulation, or files any answer admitting or fails to deny the material allegations of a petition filed against it for any such relief, or seeks or consents to or acquiesces in the appointment of any trustee, receiver or liquidator of itself or of all or any substantial part of its properties, or its directors or majority stockholders takes any action looking to its dissolution or liquidation, or it ceases doing business as a going concern; 5.8 If, within thirty (30) days after the commencement of any proceeding against Borrower, Guarantor or any of their Subsidiaries seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding has not been dismissed, or if, within thirty (30) days after the appointment, without Borrower's, Guarantor's or such Subsidiary's consent or the acquiescence of any trustee, receiver or liquidator of itself or of all or any substantial part of its properties, such appointment has not been vacated; then, and in any such event, in addition to its rights and remedies under this Agreement, or the other Documents and any other instruments, but after ten (10) days prior written notice and opportunity 23 to cure, unless Lender believes such prior notice and opportunity to cure will have a material adverse effect on its rights and remedies, Lender may, at its option, declare all Loans or any portion thereof, including without limitation, the Revolving Credit, the Term Loan, the Term Loan II and/or the Mortgage Loan, to be immediately due and payable, whereupon the same shall forthwith mature and become due and payable, together with interest accrued thereon and together with any and all costs of collection, including, but not limited to, reasonable attorneys fees, and without presentment, demand or protest, all of which are hereby waived. SECTION 6. SET-OFF RIGHTS. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, each Lender and any affiliate of Lender is hereby authorized by Borrower and the Guarantor at any time or from time to time, without notice to Borrower or to any other Person, any such notice being hereby expressly waived by Borrower and Guarantor to set off and to appropriate and to apply any and all balances, deposits, credits, Collateral and property of Borrower held at, or in transit to, any of its offices for the account of Borrower and/or Guarantor (regardless of whether then due to Borrower and/or Guarantor) and any other property at any time held or in transit or owing by that Lender or that holder to or for the credit or for the account of Borrower or Guarantor against and on account of any of the Loans which remain unpaid. Borrower and Guarantor agree, to the fullest extent permitted by law, that (a) Lender or any holder may exercise its right to set off with respect to the Loans and may sell participations in such set off to other lenders and holders and (b) any lender or holder so purchasing a participation in the Loans made or held by other lenders or holders may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender or holder were a direct holder of Loans in the amount of such participation and (3) the rights contained in this paragraph exist regardless of whether the Loan to which they are applied has matured. SECTION 7. REMEDIES ON DEFAULT, ETC. 7.1 If a Default or Event of Default occurs, Lender may withhold all subsequent Advances and, in addition, may accelerate and declare to be immediately due and payable all Loans and may proceed to protect and enforce its rights by suit in equity, action at law or other appropriate proceedings, whether for the specific performance of any agreement contained herein or in any other Document, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any right, power or remedy granted thereby or by law, equity or otherwise. 7.2 Upon the occurrence of a Default or Event of Default the Borrower grants a royalty-free license to the Lender for all patents, service marks, trademarks, tradenames, copyrights, computer programs and other intellectual property rights sufficient to permit the Lender to exercise all rights granted to the Lender pursuant to this Agreement. SECTION 8. CUMULATIVE REMEDIES; NO WAIVERS, ETC. No right, power or remedy granted to Lender in this Agreement or in the other Documents is intended to be exclusive, but each shall be cumulative and in addition to any other rights, powers 24 or remedies referred to in this Agreement, in the other Documents or otherwise available to Lender at law or in equity; and the exercise or beginning of exercise by Lender of any one or more of such rights, powers or remedies, shall not preclude the simultaneous or later exercise by Lender of any or all of such other rights, powers or remedies. No waiver by, nor any failure or delay on the part of Lender in any one or more instances to insist upon strict performance or observance of one or more covenants or conditions hereof, or of the other Documents shall in any way be, or be construed to be, a waiver of such covenant in any other instance or to prevent Lender's rights to later require the strict performance or observance of such covenants or conditions, or otherwise prejudice Lender's rights, powers or remedies. SECTION 9. PARTIAL INVALIDITY; WAIVERS. 9.1 If any term or provision of this Agreement or any of the other Documents or the application thereof to any Person or circumstance shall, to any extent, be invalid or unenforceable by reason of any applicable law, the remainder of this Agreement and the other Documents, or application of such term or provision to Persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement and the other Documents shall be valid and be enforced to the fullest extent permitted by law. To the full extent, however, that the provisions of any such applicable law may be waived, they are hereby waived by Borrower to the end that this Agreement and the other Documents shall be deemed to be valid and binding obligations enforceable in accordance with their terms. 9.2 To the extent permitted by applicable law, Borrower and Guarantor hereby waives protest, prior notice of protest, or dishonor, notice of payments and non-payments, or of any default. 9.3 WITH RESPECT TO ANY CONTROVERSY, ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THE TRANSACTIONS DESCRIBED HEREIN OR CONTEMPLATED HEREBY, INCLUDING, WITHOUT LIMITATION, IN CONNECTION WITH THE LOANS AND/OR ANY OF THE OTHER DOCUMENTS BORROWER, GUARANTOR AND LENDER EACH VOLUNTARILY AND KNOWINGLY WAIVES ANY RIGHT TO OR CLAIM FOR A TRIAL BY JURY. 9.4 BORROWER ACKNOWLEDGES THAT THE WITHIN AGREEMENT EVIDENCES A COMMERCIAL TRANSACTION AND THAT IT COULD, UNDER CERTAIN CIRCUMSTANCES HAVE THE RIGHT UNDER CHAPTER 903a, AS FROM TIME TO TIME AMENDED, OF THE CONNECTICUT GENERAL STATUTES, SUBJECT TO CERTAIN LIMITATIONS, TO NOTICE OF AND HEARING ON THE RIGHT OF THE LENDER TO OBTAIN A PREJUDGMENT REMEDY, SUCH AS ATTACHMENT, GARNISHMENT AND/OR REPLEVIN, UPON COMMENCING ANY LITIGATION AGAINST BORROWER. NOTWITHSTANDING, BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE, JUDICIAL HEARING OR PRIOR COURT ORDER TO WHICH IT MIGHT OTHERWISE HAVE THE RIGHT UNDER SAID CHAPTER 903a, AS FROM TIME TO TIME AMENDED, OR UNDER ANY OTHER STATE OR FEDERAL STATUTE OR CONSTITUTION IN CONNECTION WITH THE OBTAINING BY THE LENDER OF ANY PREJUDGMENT 25 REMEDY BY REASON OF THIS COMMERCIAL REVOLVING CREDIT AND SECURITY AGREEMENT, OR BY REASON OF BORROWER'S OBLIGATIONS OR ANY RENEWALS OR EXTENSIONS OF THE SAME. BORROWER ALSO WAIVES ANY AND ALL OBJECTION WHICH IT MIGHT OTHERWISE ASSERT, NOW OR IN THE FUTURE, TO THE EXERCISE OR USE BY LENDER OF ANY RIGHT OF SETOFF, REPOSSESSION OR SELF HELP AS MAY PRESENTLY EXIST UNDER STATUTE OR COMMON LAW. 9.5 BORROWER SPECIFICALLY WAIVES AND RELINQUISHES ANY CLAIM TO INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES ARISING IN ANY WAY OUT OF AN ALLEGED BREACH HEREOF BY LENDER AND AGREES THAT DAMAGES FOR WHICH LENDER MAY BE LIABLE, IF ANY, SHALL BE LIMITED TO THOSE DIRECT DAMAGES PROVEN TO HAVE BEEN SUFFERED BY BORROWER ARISING DIRECTLY FROM SUCH BREACH. SECTION 10. EXPENSES/INDEMNITY. Borrower agrees that it shall: 10.1 pay or reimburse Lender on demand for any and all reasonable charges, costs and taxes incurred in the preparation, documentation and implementation of this Agreement, and all Documents, and any amendment thereto, including, without limitation, all recording and filing fees, appraisal fees and reasonable fees and disbursements of Lender's special counsel retained in connection therewith, including payment upon the Closing hereof of any portion of such charges, costs and fees for which an invoice shall be rendered; 10.2 indemnify and save Lender harmless from, and pay or reimburse Lender for, all charges, costs, damages, liabilities and expenses, including reasonable attorneys' fees, if any, incurred by Lender relating to: (A) the Notes or any of the other Documents; (B) the exercise by the Lender of any of its rights, remedies or powers hereunder, the Notes or any of the other Documents; (C) any misrepresentation, inaccuracy, or breach of any representation, warranty, covenant, or agreement contained or referred to herein or any other Document, the security interests and liens granted pursuant to this Agreement or the other Documents; (D) the performance of any obligation of Borrower or Guarantor in connection herewith; (E) the attempted enforcement or enforcement of this Agreement or the other Documents, or the collection or attempted collection of any of the obligations owing under any thereof, including, without limitation, the Loans, or the realization or attempted realization of any right or remedy; 26 (F) the prosecution or defense of any action or proceeding concerning any matter growing out of or connected with this Agreement or the other Documents; (G) any Hazardous Substance at, on, in, under, or about all or any portion of any property owned, occupied and/or operated by the Borrower or any environmental condition within, on, from, related to, or attaching to any such property; (H) any Release or threatened Release of any Hazardous Substance from any property owned, occupied or operated by the Borrower or from the Borrower's operations or other activities, including without limitation any Release by any prior owner, occupant or operator of any such property; (I) any violation or claim of violation of any Environmental Law by the Borrower or their operations or other activities; (J) any other environmental condition or matter within, on, from or related to or affecting any property owned, leased or operated by the Borrowers or Borrowers' operations or other activities; (K) any other operations or activities of the Borrowers or conditions or occurrences on the Borrowers' properties (all the foregoing under this paragraph collectively, the "Indemnified Liabilities") In addition, at Lender's discretion, Borrower shall defend (with counsel satisfactory to the Lender) Lender against those Indemnified Liabilities which the Lender shall choose Borrower to defend Lender against (provided, that, it is understood and agreed that all reasonable costs and expenses of counsel incurred by Lender in defending itself against any Indemnified Liability shall be Indemnified Liabilities for which Borrower is responsible for payment under this subparagraph). The agreements in this section shall survive any payment of the Loans or any other amounts payable hereunder or under any other Document and/or any termination of this Agreement or any Document. All amounts payable under this Section shall be payable by the Borrower on demand by the Lender. 10.3 allow Lender, in Lender's discretion, after ten (10) days prior written notice and Borrowers failure to pay the same, to receive payment of any of the foregoing by a charge to the Revolving Credit (which charge shall thereupon become a Loan) or by deduction from any account maintained by Borrower or Guarantor with Lender. SECTION 11. SURVIVAL OF AGREEMENTS, REPRESENTATIONS AND WARRANTIES, ETC. All agreements, covenants, representations and warranties contained herein or made in writing by or on behalf of Borrower, in connection with the transactions contemplated hereby, shall survive the execution and delivery of this Agreement and the related documents and, to the extent applicable, shall be deemed to be made anew by each of them each time an Advance is 27 made, pursuant hereto or pursuant to the other Documents and shall continue until all Loans have been paid in full and this Agreement has been terminated. All statements contained in any certificate or other instrument delivered by or on behalf of Borrower, pursuant hereto or in connection with the transactions contemplated hereby, shall be deemed representations and warranties made hereunder. SECTION 12. FAILURE TO PERFORM. If Borrower fails to observe or perform any of the covenants hereof, Lender may pay amounts or incur liabilities to remedy or attempt to remedy any such failure (including, without limitation, any sums payable under any statute relating to the environment) and all such payments made and liabilities incurred shall be for the account of Borrower, may be paid, at Lender's option, by the making of additional advances, including without limitation, Revolving Credit Advances, and, consequently, shall be included in the Loans and all such amounts shall be repaid by Borrower on demand, together with interest thereon at the rate of 18% per annum, or may be repaid by a withdrawal from any of Borrower's accounts maintained with Lender. The provisions of this Section and any such action by Lender shall not prevent any default in the observance or performance of any covenant hereof from constituting an Event of Default hereunder. SECTION 13. NOTICES, ETC. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to be duly delivered if mailed, postage prepaid, by first class registered mail, return receipt requested, or by any nationally recognized receipted delivery or courier service: (A) if to Lender: Webster Bank Webster Plaza 145 Bank Street Hartford, Connecticut 06720 Attention: Business Banking Group Richard A. O'Brien, Senior Vice President with a copy to: Webster Bank Webster Plaza 145 Bank Street Hartford, Connecticut 06720 Attention: Ellen S. Levine, Esq. or at such other address as may have been furnished in writing by Lender to Borrowers; or 28 (B) if to Borrower or Guarantor: ACMAT Corporation 233 Main Street New Britain, CT 06050 Attention: Henry Nozko, Jr. or at such other address as may have been furnished in writing by Borrower to Lender. SECTION 14. AMENDMENTS AND WAIVERS. Neither this Agreement nor any other Document nor any term hereof or thereof may be changed, waived, discharged or terminated, except by a writing signed by all of the parties hereto. SECTION 15. GOVERNING LAW. This Agreement and the documents contemplated hereby shall be construed and enforced in accordance with and governed by the laws of the State of Connecticut. Borrower and Guarantor hereby specifically consent(s) to the jurisdiction of the Courts of the State of Connecticut and agree(s) to be personally bound by the decisions of the Court of the State of Connecticut. SECTION 16. SUPERCEDURE. To the extent there is any inconsistency between the terms of this Agreement and any other Document, this Agreement shall control. SECTION 17. SUCCESSORS AND ASSIGNS. All of the terms of this Agreement and such other documents shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, whether so expressed or not, and by any other holder or holders at the time of any of the Loans or any part thereof. SECTION 18. HEADINGS. The headings in this Agreement are for the purposes of reference only and shall not limit or otherwise affect any of the terms hereof. SECTION 19. GENDER AND NUMBER; NO RULE OF STRICT CONSTRUCTION. Whenever the context herein so requires, the neuter gender includes the masculine and feminine, and the singular number includes the plural and vice-versa. Borrower acknowledges that Borrower and Borrower's counsel have had an opportunity to review and negotiate the terms of this agreement and the other Loan Documents and that no rule of strict construction shall be used against the Lender with respect to any of the Loan Documents. SECTION 20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and by the several parties hereto in separate counterparts, but all of which together shall constitute one and the same instrument. SECTION 21. THIRD PARTIES. This Agreement is between each Lender and Borrower and Guarantor only and shall not be relied upon by any third party. Without limiting the foregoing, 29 Lender shall have no liability to any party whatever (including, without limitation, Borrower or Guarantor, or anyone conducting business with any of the foregoing) in the event Lender, for any reason and at any time, determines not to make Advances for any reason or otherwise exercises its rights under this Agreement and/or the other documents contemplated hereby. SECTION 22. TIME OF THE ESSENCE. Time is of the essence for the performance by the Borrower of any of Borrower's obligations set forth in this Agreement. SECTION 23. NO FIDUCIARY RELATIONSHIP. Borrower acknowledges that Lender does not have a fiduciary relationship to the Borrower and the relationship between Lender and Borrower is solely that of creditor and debtor. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement on the day first above mentioned. WEBSTER BANK By ----------------------------------- Richard A. O'Brien Its Senior Vice President ACMAT CORPORATION By ----------------------------------- Henry Nozko, Jr. Its Executive Vice President ACSTAR HOLDINGS, INC. By ----------------------------------- Henry Nozko, Jr. Its 30 SCHEDULE OF EXHIBITS
Section Reference Exhibit Subject - --------- ------- -------- 1.1(A) A Revolving Note 1.1(B) B Term Note 1.3 C Request for Advance 1.5(A) D Notice of Interest Rate Election 1.5(C) D-1 Notice of Interest Rate Election 3.5 E Covenant Compliance Certificate 1.1(C) F Term Note II 1.1(D) F Mortgage Note
31 SCHEDULE OF SCHEDULES
2.3 Borrower Capitalization, Business and Subsidiaries 2.4 Guarantor Capitalization, Business and Subsidiaries 2.9 Title to Properties and Assets, Liens, etc. 2.10 Patents, Trademarks 2.11 Litigation 2.13 Tax Returns and Payments 2.18 Shareholder Agreements 2.25 Environmental 2.26 Subsidiaries 2.28 Special Representations and Warranties re insurance subsidiaries 2.30 Environmental 4.1 Restrictions on Liens 4.3 Restrictions on Investments, Loans, etc.
32 APPENDIX I As used herein, the following terms have the following meanings: ADVANCE: an advance under the Revolving Credit. ADJUSTED CASH FLOW: Cash Flow plus allowable dividends permitted to be paid to Borrower by its Subsidiaries plus management and underwriting fees paid to Borrower by its Subsidiaries plus rent paid to Borrower by its Subsidiaries plus tax sharing payments paid to Borrower by its Subsidiaries (in all cases, not requiring regulatory approval). AFFILIATE: with reference to any Person, any director, officer or employee of such Person, any corporation, association, firm or other entity in which such Person has a direct or indirect controlling interest or by which such Person is directly or indirectly controlled or is under direct or indirect common control with such Person. AGREEMENT: this Amended and Restated Commercial Credit Agreement, as it may be amended from time to time. BANKBOSTON AGREEMENTS: various documents evidencing present indebtedness of Borrower to BankBoston, N. A., all of which shall be fully discharged with the proceeds of the Loans. BORROWER(S): the meaning specified on page one of this Agreement. BUSINESS DAY: any day other than a Saturday, Sunday or legal holiday on which commercial banks are open for the normal transaction of business in the State of Connecticut and in the State of Massachusetts. CASH FLOW: Borrower's unconsolidated net income for an accounting period before provision for payment of Interest Expense and all income taxes plus depreciation and amortization to the extent deducted from such net income during such accounting period, all as determined by GAAP less capital expenditures less income taxes paid in cash less dividends paid. CONDITIONS PRECEDENT: the meaning specified in Section 1.2. DEBT SERVICE: for any period, the sum of (i) Interest Expense, (ii) Principal Amortization and (iii) scheduled payments by Borrower on its capitalized leases. DEFAULT: the occurrence of any event which with the giving of notice or passage of time (other than stated grace periods), or both, might become an Event of Default. DOCUMENTS: this Agreement, the Revolving Note, Term Note, the Guaranty, and all other instruments heretofore, now or hereafter executed and delivered pursuant to this Agreement or any of the aforesaid documents. 33 ENVIRONMENTAL LAWS: any and all applicable foreign, Federal, state and local statutes, laws, regulations, rules, ordinances, orders, guidances, policies or common law (whether now existing or hereafter enacted or promulgated) pertaining to the environment, of any and all Federal, state or local governments and governmental and quasi-governmental agencies, bureaus, subdivisions, commissions or departments which may now or hereafter have jurisdiction over Debtor and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations, relating to injury to, or the protection of, real or personal property or human health or the environment, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation, remediation and removal of emissions, discharges, releases or threatened releases of Hazardous Substances, chemicals substances, pollutants or contaminants whether solid liquid or gaseous in nature, into the environmental or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of such Hazardous Substances, chemical substances, pollutants or contaminants. Without limiting the generality of the foregoing, the term "Environmental Laws" shall encompass each of the following statutes, and regulations promulgated thereunder, and amendments and successors to such statutes and regulations, as may be enacted and promulgated from time to time: Federal Occupational Safety and Health Act ("OSHA"); the Clean Air Act ("CAA"); the Toxic Substances Control Act ("TSCA"); the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"); the Clean Water Act ("CWA"); the Resource Conservation and Recovery Act, as amended by the Hazardous and Solid Waste Amendments of 1984 ("RCRA"); the Hazardous Materials Transportation Act; and all applicable Environmental Laws of each state and municipality in which Debtor conducts business or locates assets and all rules and regulations thereunder and amendments thereto and all similar state and local laws, rules and regulations. ERISA: The Employee Retirement Income Security Act of 1974, as amended. ERISA GROUP: the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. EUROCURRENCY RESERVE REQUIREMENT: for any day, as applied to any Loan bearing interest in relation to the LIBOR Rate, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of the maximum reserve percentages in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements proscribed for eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of such Board) and required to be maintained by a member bank of such system. EVENT OF DEFAULT: the meaning specified in Section 5. 34 FISCAL QUARTER: the three (3) month periods ending each March, June, September and December. FISCAL YEAR: a twelve (12) month year ending on December 31. FUNDED DEBT: aggregate consolidated Indebtedness of Borrower for borrowed money but excluding Indebtedness owing to the Sheetmetal Workers National Pension Fund or any refinance of the same. GAAP: generally accepted accounting principals and practices consistently applied from accounting period to accounting period. GOVERNMENTAL AUTHORITIES: any federal, state or local governmental authority or any political subdivision of any of them and any court, agency, department, commission, board, bureau or instrumentality of any of them which now or hereafter has jurisdiction over the Borrower's business premises. GUARANTOR: the meaning specified on Page 1. GUARANTY: the meaning specified in Section 1.8. HAZARDOUS SUBSTANCE: any chemical, compound, material, mixture or substance: (i) the presence of which requires or may hereafter require notification, investigation, monitoring or remediation under any Environmental Law; (ii) which is or becomes defined as a "Hazardous Waste", "Hazardous Material" or "Hazardous Substance" or "Toxic Substance" or "Pollutant" or "Contaminant" under any present or future applicable Federal, state or local law or under the rules and regulations adopted or promulgated pursuant thereto, including, without limitation, the Environmental Laws; (iii) which is toxic, explosive, corrosive, reactive, ignitable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of any foreign country, the United States, any state of the United States, or any political division thereof to the extent any of the foregoing has or had jurisdiction over Debtor; (iv) without limitation, which contains gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls ("PBCs"); or (v) any other chemical, material or substance, exposure to, or disposal of, which is now or hereafter prohibited, limited or regulated by any federal, state or local governmental body, instrumentality or agency. INDEBTEDNESS: as applied to a Person, (a) all items, except items of capital stock or of surplus or of general contingency reserves or of reserves for deferred income taxes if in compliance with Section 3.2, which in accordance with generally accepted accounting principles and practices would be included in determining total liabilities as shown on the liability side of a balance sheet of such person as at the date of which indebtedness is to be determined, (b) all indebtedness secured by any mortgage, pledge, lease, lien or conditional sale or other title retention agreement existing on any property or asset owned or held by such person subject thereto, whether or not such indebtedness shall have been assumed, and (c) all indebtedness of others which such Person has directly or 35 indirectly guaranteed, endorsed, discounted or agreed (contingently or otherwise) to purchase or repurchase or otherwise acquire, or in respect of which such Person has agreed to supply or advance funds (whether by way of loan, stock purchase, capital contribution or otherwise) or otherwise to become liable directly or indirectly with respect thereto. INTEREST EXPENSE: for any period, all amounts accrued by Borrower, whether as interest, late charges, service fees or other charge for money borrowed on account of or in connection with Borrower's indebtedness for money borrowed or with respect to which Borrower or any of their respective properties are liable by assumption, operation of law or otherwise, including, without limitation, any leases which are required, in accordance with generally accepted accounting principles, to be carried as a liability on Borrower's balance sheet. INTEREST PERIOD: with respect to each LIBOR Advance under the Revolving Credit, the period commencing on the date of the making or continuation of, or conversion to, such LIBOR Advance and ending one (1), two (2) or three (3) months thereafter, as Borrower may elect in the applicable Notice of Interest Rate Election and with respect to Term Loan II the period commencing on the date of the making of the initial advance thereunder, or on the date of a continuation of, or a conversion to, such LIBOR Advance and ending three (3) months thereafter as set forth in the applicable Notice of Interest Rate Election provided, however, that: (i) any Interest Period (other than an Interest Period determined pursuant to clause (iii) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Termination Date or the Term Loan II Maturity Date shall end on the Termination Date or the Term Loan II Maturity Date, as the case may be; and (iv) notwithstanding clause (iii) above, no Interest Period shall have a duration of less than one (1) month and if any Interest Period applicable to such Loan would be for a shorter Interest Period, such Interest Period shall not be available hereunder. INSURANCE SUBSIDIARY: ACSTAR INSURANCE COMPANY and/or United Coastal Insurance Company. LENDER: the meaning specified on page one of this Agreement. 36 LIBOR ADVANCES: Any Loan or part thereof bearing interest at a rate in relation to the LIBOR. LIBOR RATE: the rate per annum (rounded upward, if necessary, to the nearest 1/16 of 1%), determined by Lender to be equal to the quotient of (x) the London Interbank Offered Rate (hereinafter defined) for such LIBOR Advance for such Interest Period, divided by (y) 1 - Eurocurrency Reserve Requirements for such Interest Period. Provided, however: (i) If Borrower requests that all or any portion of the Loans with respect to which a LIBOR option applies shall bear interest at the LIBOR Rate and (a) Lender determines that, by reason of circumstances affecting the interbank Eurodollar market generally, deposits in U.S. Dollars (in the applicable amounts) are not being offered to banks in the interbank Eurodollar market for the selected Interest Period, or (b) that the LIBOR Rate does not accurately reflect the cost to Lender of making or maintaining LIBOR Advances for the Interest Period or therefor, then Lender shall forthwith give notice thereof to Borrower, whereupon, (1) the obligation of Lender to permit the LIBOR Advances to bear interest at the LIBOR Rate shall be suspended so long as such circumstances exist, and (2) Borrower shall convert the interest rates on the applicable portions of the outstanding Advances to the rate in relation to the PRIME RATE set forth above for the current Interest Period. Such suspension shall continue until Lender notifies Borrower that the circumstances giving rise to such suspension no longer exist. (ii) If, after the date of this Agreement, the adoption of or any change in rules, or change in the interpretation or administration thereof, by a governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for Lender to make or maintain or fund LIBOR Advances, the interest rates on the applicable portions of the outstanding LIBOR Advances shall be deemed to have been converted to the rate relating to the PRIME RATE set forth above, on either (a) the last day of the then current Interest Period if Lender may lawfully continue to maintain loans at the LIBOR Interest Rate to such day, or (b) immediately if Lender may not lawfully continue to maintain Advances at the LIBOR Interest Rate. (iii) Upon notice to Borrower, the Borrower shall pay to the Lender for the account of Lender, such amount or amounts as shall be sufficient (in the reasonable opinion of Lender) to compensate it for any loss, cost, liability or expense incurred as a result of (x) any repayment of a LIBOR Advance on a date other than the last day of the Interest Period for such LIBOR Advance, including, but not limited to that resulting from acceleration of all amounts outstanding under any Loan following the occurrence of any Default or Event of Default and/or (y) any failure by Borrower to borrow or convert or prepay, as the case may be, a LIBOR Advance on the date for borrowing or conversion or prepayment, as the case may be, which is specified in the Notice of Interest Rate Election. LOANS: the meaning specified in Section 1.4. 37 LONDON BUSINESS DAY: any day other than a Saturday or Sunday on which dealing in dollar deposits are carried on in the London interbank market and on which banks are open for business in London and which must be a Business Day. LONDON INTERBANK OFFERED RATE: the arithmetic average of the rates per annum quoted at approximately 11:00 A.M. London time by the principal branch of each of the Reference Banks (hereinafter defined) two (2) London Business Days (hereinafter defined) prior to the first day of such Interest Period for the offering to leading banks in the London interbank market of dollar deposits for a period and in an amount comparable to the Interest Period and principal amount of the particular LIBOR Advance to which the LIBOR Rate is to apply. "Reference Banks" means banks appearing in the display designated as page "LIBOR" on the Reuters' Monitor Money Rates Service (or such other page as may replace the LIBOR page on that service for the purpose of displaying London Interbank Offered Rates of major banks); provided that if no such offered rate shall appear on such display, "Reference Banks" shall mean one or more major banks in the London interbank market as selected by the Lender in its sole discretion. MORTGAGE LOAN: the meaning specified in Section 1.1(D) NAIC: National Association of Insurance Commissioners. NOTE(S): the Revolving Note and/or the Term Note. NOTICE OF INTEREST RATE ELECTION: Whenever Borrower desires to elect, change or continue the LIBOR Interest Rate on all or a portion of any Advance(s), Borrower shall deliver to Lender a written Notice of Interest Rate Election in form provided by Lender and substance as that attached hereto as Exhibit D (the "Notice of Interest Rate Election") with respect to a Loan or Advance received no later than 11:00 A.M. at least three (3) Business Days in advance of the proposed date of election, change or continuation, which election, change or continuation must be confirmed by telephone. The Notice of Interest Rate Election shall be irrevocable and shall specify: (i) the proposed date of change or continuation (which shall be a Business Day); (ii) the amount with respect to which such election is being made; and (iii) the Interest Periods. If an Advance shall be outstanding for which Borrower has not elected a LIBOR Rate or if at the termination of any Interest Period, Borrower fails to submit a Notice of Interest Rate Election to convert or to continue any outstanding Advance, then such Advance, regardless of the dollar amount, shall automatically accrue interest in relation to the Prime Rate as of the applicable date. LIBOR Advances may be converted into advances bearing interest relating to the Prime Rate only on the expiration date of an Interest Period applicable thereto. In addition, no outstanding Advances may be continued as, or converted into LIBOR Advances and no change in Interest Rate may be exercised when any Default or Event of Default has occurred. PBGC: The Pension Benefit Guaranty Corporation. 38 PERSON: a corporation, an association, a partnership, an organization, a limited liability company, a business, an individual or a government or political subdivision thereof or any governmental agency. PREPAYMENT PREMIUM: (i) on the prepayment date, the remaining payments of principal and interest that would otherwise have become payable at the expiration of the Interest Period pertaining to the principal being prepaid shall be discounted to a present value at a rate per annum equal to the "Prepayment Yield to Maturity", as hereinafter defined, plus any costs for reserves or assessments or for reinvesting the amount being prepaid, and if such discounted value shall exceed the unpaid principal amount being prepaid, then the Prepayment Premium shall be an amount equal to such excess; otherwise no Prepayment Premium shall be payable; (ii) the "Prepayment Yield to Maturity" shall mean the yield to maturity of the debt obligation of the United States Treasury (excluding those commonly known as "Flower Bonds") having a term substantially equal to the term of the relevant Interest Period maturity date nearest in expiration of the relevant Interest Period. The maturity date and yield to maturity of such United States Treasury obligation shall be determined by Lender on the basis of quotations appearing in the Reuter Monitor Money Rates Service or other repository service reasonably satisfactory to Lender on the prepayment date. If there shall be more than one such debt obligation of the United States Treasury maturing nearest in time to the expiration of the relevant Interest Period, the Prepayment Yield to Maturity shall be the arithmetic average of the yields to maturity of all such obligations. Said prepayment shall be irrevocable once Borrower has notified Lender of such prepayment and Borrower will reimburse Lender for any and all loss, cost, liability and expense incurred by Lender in the event Borrower for any reason does not make such prepayment. A determination by Lender as to the amounts payable pursuant to this Subsection shall be conclusive absent arithmetical error. PRIME RATE: an Index Lender uses to set interest rates on certain types of loans and is not necessarily the lowest rate Lender charges its customers. Lender's PRIME RATE is increased and decreased by Lender from time to time in response to changes in conditions. Borrower's interest rate will be adjusted automatically on each occasion on which the Lender's PRIME RATE changes. PRIME RATE ADVANCE: any Loan or portion thereof bearing interest at the PRIME RATE. PRINCIPAL AMORTIZATION: for any period all amounts which Borrower is required to pay whether regularly scheduled or as a result of a default excluding payments of principal under the Revolving Credit and whether or not actually paid by Borrower in reduction of Borrower's Indebtedness including without limitation payments on capitalized leases. RELEASE: any release, emission, disposal, leaching or migration into the environment (including, without limitation, the abandonment or disposal of any barrels, containers, or other closed receptacles containing any Hazardous Substances) or into or out of any property owned, occupied or used by Debtor. REVENUE CODE: the meaning specified in Section 3.13(B). 39 REVOLVING CREDIT: the credit facility described in Section 1.1(A). REVOLVING NOTE: the meaning specified in Section 1.1(A) SPILL: the meaning specified in Section 3.9(A). STATUTORY CAPITAL: means Statutory Capital plus Statutory Surplus of the Insurance Subsidiaries as shown on the statutory financial statements filed with the states of Illinois and Arizona. STATUTORY OPERATING EARNINGS: means the Statutory Operating Earnings of the Insurance Subsidiaries as shown on the statutory financial statements filed with the states of Illinois and Arizona. SUBSIDIARY: with reference to any Person, a corporation, or similar association or entity not less than a majority of the outstanding shares of the class or classes of stock, having by the terms thereof ordinary voting power to elect a majority of the directors, managers or trustees of such corporation, association or entity, of which are at the time owned or controlled, directly or indirectly, by such Person or by a Subsidiary of such Person. TERM LOAN: the meaning specified in Section 1.1(B) TERM LOAN MATURITY DATE: March 31, 2004. TERM LOAN II: the meaning specified in Section 1.1(C) TERM LOAN II MATURITY DATE: December 1, 2008. TERM NOTE: the meaning specified in Section 1.1(B) TERM NOTE II: the meaning specified in Section 1.1(C) TERMINATION DATE: June 30 2003. 40 EX-4.G 4 y58760ex4-g.txt EXHIBIT 4G TERM NOTE II $5,000,000.00 December 17, 2001 New Britain, Connecticut FOR VALUE RECEIVED, ACMAT CORPORATION, a Connecticut corporation with a place of business in New Britain, Connecticut ("Maker"), promises to pay to the order of WEBSTER BANK, a federally chartered savings bank having a place of business in Waterbury, Connecticut ("Payee") or other holder of this Note the principal sum of FIVE MILLION ($5,000,000.00) DOLLARS, together with interest on the outstanding balance hereof before and after maturity, at the rate hereinafter set forth until this Note shall have been fully paid, all as hereinafter provided. Interest Rate. The outstanding balance hereof shall bear interest at a rate per annum (the "Rate") which is at all times equal to the Prime Rate. The Prime Rate is an annual rate of interest announced from time to time by Payee as its Prime Rate; it is not necessarily the Payee's lowest or most favorable rate. The interest rate hereunder shall change simultaneously with each change in the Payee's Prime Rate without notice or demand of any kind. LIBOR Option. At any time after the date hereof, provided no default hereunder shall have occurred, the Maker may elect, pursuant to a Notice of Interest Rate Election (as defined in the Agreement hereinafter referenced) to have amounts outstanding hereunder bear interest at a rate per annum equal to one hundred ninety (190) basis points per annum in excess of the LIBOR Rate (as defined in the Agreement) for an Interest Period (as defined in the Agreement) equal to three months elected by Maker. No election may be made for a period that extends beyond the maturity date of this Note. Amounts outstanding hereunder shall bear interest at the Prime Rate unless otherwise so elected by Maker. Payments of Principal and Interest. Commencing on March 1, 2002, and on the first day of each June, September, December and March thereafter, Maker shall make payments of interest as set forth herein. Commencing on March 1, 2004, and on the first day of each June, September, December and March thereafter, Maker shall make payments of principal, each in the amount of $250,000.00 (each to be accompanied by a payment of interest in arrears on the unpaid balance at the Rate(s) aforesaid applicable during the prior three month period, calculated on the basis of a year of three hundred and sixty (360) days but for the actual number of days elapsed). Maturity Date. The final maturity date of this Note shall be December 1, 2008, on which date the entire indebtedness evidenced by this Note, including without limitation, the unpaid principal balance and unpaid interest accrued thereon, shall be due and payable without notice or demand. 1 Prepayment. Amounts outstanding hereunder may only be prepaid if such prepayment is accompanied by the Prepayment Premium as more particularly set forth in the Agreement. Late Payments. In the event that any payment of principal or interest due hereunder is not received by Payee within five (5) days after the same is due, then the Maker agrees to pay to the Payee the additional sum of five (5%) percent of the amount of such late payment to cover the additional expense of Payee's handling of such late payment (but not as consideration for making such late payment). Maker and Payee hereby agree that an exact computation of Payee's damages relating to such late payment is impossible to ascertain, and further agree that the percentage stated above is a reasonable estimation of Payee's damages. Such estimation is based upon, inter alia, Payee's additional expenses relating to (i) sending late notices, (ii) referring the matter to Payee's collection department and (iii) providing for any necessary regulatory compliance and reserve requirements. Application of Payments. All payments hereon shall be applied to expenses as provided herein, interest and principal in such order as Payee shall, in its discretion, determine. Said sums shall be payable together with all lawful taxes and assessments levied thereon, or upon this Note, or upon the Payee with respect to the same, and together with all costs and expenses related to collecting this Note and together with all costs and expenses of foreclosing or protecting or sustaining the lien of any security which may be given to secure the payment of this Note, and/or in any litigation or controversy arising from or connected with this Note and/or any collateral securing this Note and/or the Agreement hereinafter referred to and/or incurred in any action brought by the holder of a prior lien in which the Payee is a party defendant, including without limitation reasonable attorneys' fees. Said obligation to pay the reasonable attorneys' fees of the Payee in connection with protecting, enforcing or realizing of the rights and remedies above described shall exist whether or not proceedings are instituted or court appearance is made on behalf of the Payee. Set Off. Upon the occurrence of an Event of Default the Payee shall have and may exercise a right of set-off for the payment of this Note and the aforesaid costs and expenses against, and Maker hereby gives and grants to Payee a security interest (perfected by Payee's possession thereof) in, all deposits, monies, securities and property left with the Payee and/or any affiliate of the Payee by the Maker or by any guarantor, endorser or otherwise to the credit of or belonging to the Maker or any such party, and the Payee shall have full power and authority at any time and without prior notice to sell, assign and deliver any such property at public or private sale, and apply the proceeds in satisfaction hereof. Commercial Credit Agreement. This Note is issued under and pursuant to the terms of a Commercial Credit Agreement of even date (the "Agreement") by and among the Maker, the Payee and ACSTAR Holdings, Inc., a Delaware corporation, as Guarantor, which Agreement is in the possession of the Payee. Guarantee. Additionally, payment of this Note is guaranteed pursuant to a Guaranty Agreement of even date executed and delivered by ACSTAR Holdings, Inc. 2 Default. Upon the occurrence of any Event of Default, as such term is defined in the Agreement or if any payment specified herein shall remain in arrears and unpaid for a period of ten (10) days after the same shall become due, at the option of Payee, (i) the interest rate accruing hereunder shall, from such default, be increased by five (5) percentage points per annum above the Prime Rate (the "Default Rate") and (ii) this Note shall become forthwith due and payable without presentment, demand, protest or notice of any kind, all of which being hereby expressly waived by the undersigned. Without in any way limiting the generality of the foregoing the interest rate accruing hereunder shall be the Default Rate (i) upon the option of Payee and (ii) only during the period when Payee is not also collecting a late payment charge hereunder. Maker and Payee hereby agree that any Event of Default or default in any payments of principal or interest hereunder results in, inter alia, additional administrative costs, regulatory costs, reserve requirements, and credit costs to Payee. Maker and Payee further agree that such Default Rate approximates the interest rate Payee might charge to borrowers with sub-standard credit. In the event the Default Rate exceeds the maximum rate of interest allowed by law, the Default Rate shall be reduced so as to equal the maximum rate of interest allowed by law. Reimbursement for Costs. If the Payee shall deem applicable to this Note (including, in each case, the borrowed and the unused portion thereof, if any) any requirement of any law of the United States of America, any regulation, order, interpretation, ruling, official directive or guideline (whether or not having the force of law) of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Federal Deposit Insurance Corporation or any other board or governmental or administrative agency of the United States of America which shall impose, increase, modify or make applicable to this Note or cause this Note to be included in, any reserve, special deposit, calculation used in the computation of regulatory capital standards, assessment or other requirement which imposes on the Payee any cost that is attributable to the maintenance thereof, then, and in each such event, the Maker shall promptly pay the Payee, upon its demand, such amount as will compensate the Payee for any such cost. In the event any such cost is a continuing cost, a fee payable to the Payee may be imposed upon the Maker periodically for so long as any such cost is deemed applicable by the Payee, in an amount determined by the Payee to be necessary to compensate the Payee for any such cost, which determination may be based upon the Payee's reasonable allocation of the aggregate of such costs resulting from such events. The determination by the Payee of the existence and amount of any such costs shall, in the absence of manifest error, be conclusive. Successors and Assigns. This Note shall bind the Maker's and the Maker's successors and assigns and all endorsers hereto and shall inure to the benefit of Payee and/or any subsequent holder of this Note and/or their respective successors and assigns. Partial Invalidity. In the event that any one or more of the provisions of this Note shall for any reason be held to be invalid, illegal or unenforceable, in whole or in part, or in any respect, or in the event that any one or more of the provisions of this Note shall operate, or would prospectively operate, to invalidate this Note, then, and in such event, such provision or provisions only shall be 3 deemed to be null and void and of no force nor effect and shall not affect any other provision of this Note, and the remaining provisions of this Note shall remain in full force and effect, shall be valid, legal and enforceable, and shall in no way be affected, prejudiced or disturbed thereby. Joint and Several. The obligations of the Maker and of each and every endorser, guarantor, and surety shall be joint and several. Headings The headings used herein are for the purpose of reference only and shall not affect any of the terms hereof. MAKER ACKNOWLEDGES THAT THIS NOTE EVIDENCES A COMMERCIAL TRANSACTION AS THAT TERM IS DEFINED IN CONNECTICUT GENERAL STATUTES SECTION 52-278a(a) AND PURSUANT TO CONNECTICUT GENERAL STATUTES SECTIONS 52-278b AND 52-278f, MAKER DOES HEREBY WAIVE ITS RIGHTS TO NOTICE AND HEARING PRIOR TO THE ISSUANCE BY THE PAYEE OF ANY PREJUDGMENT REMEDY, AND MAKER FURTHER WAIVES ANY RIGHTS AS MAY EXIST UNDER FEDERAL LAW TO ANY NOTICE AND/OR HEARING PRIOR TO THE PAYEE'S OBTAINING AND EXERCISING ANY PREJUDGMENT REMEDY. ADDITIONALLY, MAKER AND PAYEE HEREBY EACH WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION, DEFENSE, COUNTERCLAIM, CROSSCLAIM AND/OR ANY FORM OF PROCEEDING BROUGHT IN CONNECTION WITH THIS NOTE OR RELATING TO ANY INDEBTEDNESS EVIDENCED HEREBY AND/OR ANY COLLATERAL NOW OR HEREAFTER SECURING THIS NOTE. THIS NOTE HAS BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF CONNECTICUT AND SHALL BE CONSTRUED AND ENFORCED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT. The Maker hereby expressly waives to the full extent and for the maximum period permitted by applicable law, the right to plead any statute of limitations or any similar bar as a defense to any demand, claim or cause of action based upon or arising from such failure to pay any part of the principal of this Note or any interest thereon, which waiver as to each such failure shall be separate and distinct from any such waivers or to each other such failure. The waivers of notice and hearing for prejudgment remedies made herein are made by the Maker on behalf of the Maker and the Maker's successors and assigns and shall apply to any and all actions against such successors and assigns. 4 The Maker hereby waives presentment, demand, protest, notice of protest or other notice or notice of dishonor of any kind in any action to collect this Note or relating to any collateral securing this Note. ACMAT CORPORATION By: ---------------------------------- Henry Nozko, Jr. Its Executive Vice President Duly Authorized 5 EX-21 5 y58760ex21.txt EXHIBIT 21 EXHIBIT 21 Subsidiaries of ACMAT Corporation Listed are the subsidiaries of ACMAT Corporation:
STATE OF NAME OWNERSHIP INCORPORATION ---- --------- ------------- ACMAT Companies, Inc. 100% Delaware AMINS, Inc. 100% Connecticut Geremia Electric Co. 100% Connecticut ACSTAR Holdings, Inc. 100% Delaware ACSTAR Insurance Co. (1) 100% Illinois ACMAT of Texas, Inc. 100% Delaware United Coastal Insurance Company (2) 66% Arizona
(1) Owned 100% by ACSTAR Holdings, Inc. (2) Owned 66% by ACMAT Corporation and 34% by ACSTAR Insurance Company 104 -----END PRIVACY-ENHANCED MESSAGE-----