<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                                    FORM 10-K

 X     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1999
                                       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                       06050-2350
           New Britain, Connecticut                    (Zip Code)
   (Address of principal executive offices)

               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, 2000 of the Common Stock and Class A
Stock held by non-affiliates of the registrant was $17,173,790.

As of March 1, 2000 there were 570,568 shares of the registrant's Common Stock
and 2,288,527 shares of registrant's Class A Stock, each without par value,
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  None
<PAGE>   2
<TABLE>
<CAPTION>
                                     PART I

<S>                                                                                                         <C>
Item 1.  Business                                                                                            3
       General                                                                                               3
       Financial Information about Operating Segments                                                        3
                United Coastal Liability Insurance                                                           3
                ACSTAR Bonding                                                                               5
                Insurance and Bonding Performance Ratios                                                     5
                Underwriting                                                                                 6
                Reinsurance                                                                                  6
                Claims                                                                                       6
                Reserves for Losses and Loss Adjustment Expenses                                             6
                IRIS Ratios                                                                                  9
                A.M. Best Ratings                                                                            9
                Risk-Based Capital                                                                           9
         ACMAT Contracting                                                                                   9
                General                                                                                      9
                Backlog                                                                                      9
                Materials                                                                                   10
                Contract Acquisition                                                                        10
                Warranty                                                                                    10
                Asbestos Abatement Operations                                                               10
         Marketing                                                                                          10
         Competition                                                                                        11
         Regulation                                                                                         11
         Investments                                                                                        12
         Environmental Compliance                                                                           14
         Employees                                                                                          14

Item 2. Properties                                                                                          14

Item 3. Legal Proceedings                                                                                   14

Item 4. Submission of Matters to a Vote of Security Holders                                                 14

                                     PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder matters                            15

Item 6. Selected Financial Data                                                                             15

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations               16
         Reserves for Losses and Loss Adjustment Expenses                                                   18
         Liquidity and Capital Resources                                                                    19
         Regulatory Environment                                                                             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                                                                             51

Item 12. Security Ownership of Certain Beneficial Owners and Management                                     53

Item 13. Certain Relationships and Related Transactions                                                     54

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                                    54
</TABLE>
<PAGE>   3
                                     PART I
                                ITEM 1. BUSINESS

General

ACMAT Corporation ("ACMAT" or the "Company") provides specialized commercial
insurance and bonding coverages for contractors, architects, engineers and other
professionals in the construction and environmental fields and other specialty
insurance such as products liability. The Company derives its underwriting
expertise from its construction and remediation operations. Through United
Coastal Insurance Company ("United Coastal Insurance"), the Company provides a
broad line of general, professional, environmental and other liability insurance
primarily to environmental contractors and specialty trade contractors and
architects, engineers and other professionals. Through ACSTAR Insurance Company
("ACSTAR Insurance"), the Company provides surety bonds for general building,
specialty trade and environmental contractors and all forms of commercial
surety. Both United Coastal Insurance and ACSTAR Insurance are rated A-
(excellent) by The A.M. Best Co., Inc. ("A.M. Best").

The Company is also engaged in construction contracting which consists of
interior contracting services involving the design and furnishing of building
interiors and asbestos abatement services for commercial, industrial and
institutional buildings.

Financial Information about Operating Segments

Financial information relating to the three business segments is set forth in
Note 15 to the consolidated financial statements on page 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 policies and professional liability policies, are discussed more
fully below:

Contractors

-    General Liability - Policies are offered to general contractors and
     specialty trade contractors involved in plumbing, heating, electrical,
     framing, roofing, drilling, excavation, demolition, road work, and other
     contracting activities. Coverage is also offered for other specialized
     non-contractor general liability risks. Coverage is limited to third-party
     bodily injury and property damage arising out of covered operations.
     General liability insurance is offered on either a claims-made or
     occurrence basis.


                                        3
<PAGE>   4
-    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
<PAGE>   5
The Company customizes many of its insurance policies to suit the individual
needs of its insureds. Combined policies insuring multiple exposures under one
policy form and one combined policy limit are available.

                                 ACSTAR Bonding

Surety bonds are written for general, specialty trade, environmental, asbestos
and lead abatement contractors. The Company also offers a wide variety of
miscellaneous bonds. Many bonds are supported by various levels of collateral
based upon the financial condition of the customer.

The Company often requires cash or irrevocable letters of credit to
collateralize a portion of most bonds issued. In addition, the Company will only
accept irrevocable letters of credit from financial institutions which have a
rating of C "sound credit risk" or higher as determined by Thomson BankWatch,
Inc. However, no assurance can be made that such financial institutions will
maintain their financial strength and, thus, that funds guaranteed under letters
of credit will be available, if needed, to offset any potential claims.

The Company provides the following types of bonds:

-    Payment and performance bonds - Bonds are provided for general building and
     specialty trade contractors, environmental remediation and asbestos
     abatement contractors and consultants, lead abatement contractors and solid
     waste disposal contractors. A payment and performance bond guarantees
     satisfactory performance and completion of the contractor's work and
     payment of the contractor's debts and obligations relating to the
     performance of the contract covered by the bond.

-    Closure and post-closure bonds - Bonds are provided for owners of solid and
     hazardous waste landfills as required to meet certain requirements under
     RCRA and remediation bonds in connection with the Comprehensive
     Environmental Response, Compensation and Liability Act of 1980 ("CERCLA").
     Closure bonds usually guarantee that a property owner will restore property
     to a specified level or condition. Post-closure bonds guarantee cultivation
     and maintenance of a closed site.

-    Supply and other specialty bonds - Bonds are provided for contractors,
     manufacturers and other owners in their normal course of operations,
     usually to guaranty the supply of equipment and material.

-    Miscellaneous surety, license, permit, self insurer, supersedeas and other
     bonds - Miscellaneous bonds are provided for applicants based on those
     requirements specified in the bond form and the applicant's financial
     strength.

The underwriting department and management are responsible for the development
of new insurance products and enhancements. Underwriting profitability is
enhanced by the creation of niche products focused on classes of business which
traditionally have provided underwriting profits.

Insurance and Bonding Performance Ratios

The following table sets forth the combined ratios of the Company, prepared in
accordance with generally accepted accounting principles and statutory
accounting principles prescribed or permitted by state insurance authorities.
The combined ratio is a traditional measure of underwriting profitability. When
the combined ratio is under 100%, underwriting results are generally considered
profitable. Conversely, when the combined ratio is over 100%, underwriting
results are considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense.

<TABLE>
<CAPTION>
                                                                    Year
                                                              Ended December 31,
                                                              ------------------
                                                     1999          1998          1997
                                                     ----          ----          ----
<S>                                                  <C>            <C>          <C>
GAAP Ratios:
    Loss ratio                                       17.6%          19.6%        28.8%
    Expense ratio                                    56.6           51.8         48.0
                                                     ----           ----         ----
    GAAP combined ratio                              74.2           71.4         76.8
                                                     ====           ====         ====
Statutory Ratios:
   Loss ratio                                        17.6           19.9         29.5
   Expense ratio                                     63.3           59.2         45.0
                                                     ----           ----         ----
   Statutory combined ratio                          80.9%          79.1%        74.5%
                                                     ====           ====         ====
</TABLE>

The increase in the combined statutory ratio over the past three years results
primarily from the decline in written premiums partially offset by the release
of reserves on older underwriting years. See Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations."


                                        5
<PAGE>   6
Underwriting

The Company's underwriting practices rely heavily upon the knowledge base which
it has developed in over forty-nine years of construction contracting.
Accordingly, ACMAT, in addition to its construction contracting operations,
provides risk evaluation, loss adjustment, underwriting, claims handling and
monitoring services for its insurance subsidiaries, United Coastal Insurance and
ACSTAR Insurance. Contractors seeking liability insurance and bonding through
the Company are carefully reviewed with respect to their past practices, claims
history and records. Other factors considered are the contractors' and
professionals' financial conditions, training techniques, safety procedures,
histories of violations, record keeping, supervisory qualifications and
experience. Historically, the Company has issued policies and bonds to fewer
than twenty-five percent of its applicants.

Underwriting procedures for products liability insurance involve conducting an
in-depth review of the product that is being manufactured or distributed. Such
review involves examining an applicant's past record of recalls, claims history
and litigation.

The Company's underwriting and pricing strategy is designed to produce an
underwriting profit resulting in a Company-wide combined ratio well below 100%.
The Company has a conservative underwriting philosophy which, in the opinion of
management, is one of the primary reasons for the favorable loss ratios relative
to the property and casualty insurance industry over the last three years.

The Company continually monitors financial stability of contractors with surety
bonds outstanding. Work in progress reports and updated financial information
are reviewed by the Company to ensure that the contractor continues to meet the
underwriting guidelines.

Reinsurance

In the normal course of business, the Company assumes and cedes reinsurance with
other companies. Reinsurance ceded primarily represents excess of loss
reinsurance with companies with "A" ratings from the insurance rating
organization, A.M. Best Company, Inc. Such reinsurance is applicable on a per
policy basis generally to those policies with per occurrence limits in excess of
$2 million up to $10 million for liability and for individual surety bonds, the
Company reinsures through various layered excess of loss agreements up to $10
million on a $14.5 million bond. Reinsurance ceded also includes a facultative
reinsurance treaty which is applicable to excess policies written over a primary
policy issued by the Company for specific projects. Reinsurance is ceded to
limit losses from large exposures and to permit recovery of a portion of direct
losses; however, such a transfer does not relieve the originating insurer of its
liability. The Company participates in assumed quota share reinsurance
arrangements covering marine and property catastrophe risks with one of its
excess of loss reinsurers.

The availability and price of reinsurance fluctuates according to market
conditions. Depending on the availability and cost of reinsurance, the Company
may, from time to time, elect to cede greater or lesser portions of its
underwriting risk.

Claims

The Company directly handles substantially all claims of its insureds, except
that independent claims adjusters and/or counsel selected for their experience
and reputation in the locality of the claim are retained to conduct initial
fact-finding investigations. All decisions respecting payment of claims are made
by experienced employees of the Company.

Reserves for Losses and Loss Adjustment Expenses

Reserves for losses and loss adjustment expenses are estimates at any given
point in time of what the Company may have to ultimately pay on incurred losses,
including related settlement costs, based on facts and circumstances then known.
The Company also reviews its claims reporting patterns, past loss experience,
risk factors and current trends and considers their effect in the determination
of estimates of incurred but not reported losses. Ultimate losses and loss
adjustment expenses are affected by many factors which are difficult to predict,
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, 1999 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
<PAGE>   7
Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
In determining appropriate adjustments to reserves historical data is reviewed
and consideration is given to the anticipated impact of various factors such as
legal developments and economic conditions, including the effects of inflation.
Reserves are monitored and recomputed periodically using new information on
reported claims.

The following table sets forth a reconciliation of beginning and ending reserves
for losses and loss adjustment expenses for the periods indicated on a GAAP
basis for the business of the Company.

<TABLE>
<CAPTION>
                                                          1999                  1998                  1997
                                                          ----                  ----                  ----
<S>                                                   <C>                  <C>                   <C>
Balance at January 1                                  $43,115,062          $48,900,713           $47,960,084
 Less reinsurance recoverable                           2,224,116            3,478,121             3,841,001
                                                        ---------            ---------             ---------
 Net balance at January 1                              40,890,946           45,422,592            44,119,083

Incurred related to:
          Current year                                  3,091,120            4,508,667             5,176,030
          Prior years                                  (1,418,233)          (2,321,939)             (838,778)
                                                       ----------           ----------              ---------
Total incurred                                          1,672,887            2,186,728             4,337,252
Payments related to:
          Current year                                     81,569               18,260                94,398
          Prior years                                   7,861,837            6,700,114             2,939,345
                                                        ---------            ---------             ---------
Total Payments                                          7,943,406            6,718,374             3,033,743

Net balance at December 31                             34,620,427           40,890,946            45,422,592
 Plus reinsurance recoverable                           3,924,064            2,224,116             3,478,121
                                                        ---------            ---------             ---------
 Balance at December 31                               $38,544,491          $43,115,062           $48,900,713
                                                       ==========           ==========            ==========
</TABLE>

The decrease of incurred losses and loss adjustment expenses of prior years
represents a release of surety loss reserves on older years that are no longer
needed and a reallocation of reserves among accident years. There can be no
assurance, however, that the Company's reserves will be sufficient to cover
ultimate losses and loss adjustment expenses or that future adjustments to
losses and loss adjustment expense reserves will not be required.

The Company has no exposure to any asbestos or environmental claims associated
with general liability policies issued with the pre-1986 pollution exclusion.
Policies written with the exclusion are typically associated with mass tort
environmental and asbestos claims. The Company has never issued a policy with
the pre-1986 pollution exclusion. The Company's exposure to asbestos and
environmental liability claims is primarily limited to asbestos and
environmental liability insurance for contractors and consultants involved in
the remediation, removal, storage, treatment and/or disposal of environmental
and asbestos hazards.

As of December 31, 1999, 1998 and 1997 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 $40,715,475,
$49,758,263, and $57,723,399, respectively. As of December 31, 1999, 1998 and
1997 reserves determined in accordance with generally accepted accounting
principles ("GAAP basis reserves") were $38,544,491, $43,115,062, and
$48,900,713, respectively. The difference between the Statutory basis reserves
and the GAAP basis reserves result from the minimum statutory, or "Schedule P",
loss reserves required to be maintained by the Company's insurance subsidiaries,
partially offset by the netting of reinsurance recoverable against losses and
loss adjustment expense reserves for statutory purposes.

The following losses and loss adjustment expense reserve runoff table is for the
combined insurance operations of the Company's insurance subsidiaries. The data
for 1992 and prior periods are presented on a net basis in the reserve run-off
table. Restatement of prior periods is not practicable.

Each column shows the reserve held at the indicated calendar year-end and
cumulative data on payments and reestimated liabilities for that accident year
and all prior accident years making up that calendar year-end reserve.
Therefore, the redundancy (deficiency) is also a cumulative number for that year
and all prior years. It would not be appropriate to use this cumulative history
to project future performance.


                                        7
<PAGE>   8
<TABLE>
<CAPTION>
                                    1990     1991    1992     1993     1994     1995    1996     1997     1998    1999
                                    ----     ----    ----     ----     ----     ----    ----     ----     ----    ----
                                                      (thousands)
<S>                                <C>      <C>      <C>      <C>     <C>      <C>      <C>      <C>     <C>      <C>
Liability for unpaid losses
 and loss adjustment expenses      21,378   26,234   29,240   30,437  36,726   41,363   44,119   45,423  40,891   34,620

Liability reestimated as of:

 One year later                    21,378   26,234   29,240   30,437  35,825   40,193   43,282   43,106  37,816
 Two years later                   21,378   26,234   29,240   28,337  34,659   37,872   40,865   35,698
 Three years later                 21,378   26,234   26,000   27,170  29,913   35,354   33,359
 Four years later                  21,378   22,094   24,833   23,550  27,193   28,149
 Five years later                  16,642   20,927   22,284   20,880  19,486
 Six years later                   15,475   18,841   19,914   13,673
 Seven years later                 13,394   16,932   13,148
 Eight years later                 12,845   11,761
 Nine years later                   9,472

Cumulative Redundancy
 (deficiency):                     11,906   14,473   16,092   16,764  17,240   13,214   10,762   9,725    3,077

Paid (cumulative) as of:

 One year later                     1,357    3,216    6,142    1,560   2,361    3,067    2,942    6,703   7,903
 Two years later                    4,067    8,699    7,574    3,655   4,582    5,256    8,951   13,928
 Three years later                  8,954    9,576    8,603    5,022   6,412    8,922   16,047
 Four years later                  10,233   10,488    9,554    6,189   7,969   15,601
 Five years later                  10,554   10,816    9,818    6,869  12,425
 Six years later                   10,858   10,856   10,034    9,723
 Seven years later                 10,874   10,949   10,761
 Eight years later                 10,874   11,445
 Nine years later                  10,884

Gross liability - end of year                                 34,730  40,955   45,235   47,960   48,901  43,115   38,544
Reinsurance recoverable                                        4,293   4,229    3,872    3,841    3,478   2,224    3,924
                                                               -----   -----    -----    -----    -----   -----    -----
Net liability - end of year                                   30,437  36,726   41,363   44,119   45,423  40,891   34,620
</TABLE>

In 1995, the Company changed its method of reporting estimated liabilities for
claims-made policies which is reflected in the reserve run-off table. For
calendar years 1994 and prior, reserves associated with claims-made policies
were reported based on accident year basis consistent with the Company's
treatment in Schedule P to the Company's Statutory Annual Statement. At the
request of the Arizona Insurance Department, ("Department") the Company was
required to change its method of reporting in Schedule P to the Annual
Statement, reserve and payment data associated with claims-made policies to a
report year basis versus an accident year basis in order to comply with the
National Association of Insurance Commissioners ("NAIC") guidelines. The
Company's prior treatment of claims-made loss data on an accident basis was
approved by the Department during years prior to 1995. For its 1995 statutory
filing, the Company restated loss data reported in Schedule P to comply with the
Department's request. As a result of the change to Schedule P for claims-made
policies, the Company has also changed the method for reporting claims-made loss
payment data in the reserve run-off table to conform to a report year basis for
claims-made policies. Occurrence policies were and continue to be reported on an
accident year basis. The 1995 reestimated liabilities for each calendar year
have been restated to reflect the new method of reporting.

Because of the change in reporting loss data for claims-made policies from an
accident year basis to a report year basis, prior accident year reserves have
been moved forward to fall within the report year resulting in no change to
total reserve amounts or estimates. Management believes that the aggregate
reserves for losses and loss adjustment expenses for all accident years are
adequate.




                                        8
<PAGE>   9
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, 1999, none of the Company's
insurance subsidiaries' IRIS ratios were designated an "unusual value", except
for the change in surplus for United Coastal and the investment yield for ACSTAR
Insurance Company. The investment yield for ACSTAR is above the NAIC standard of
10% primarily due to dividends received from ACSTAR's investment in United
Coastal. The decrease in surplus for United Coastal is greater than 10%
primarily due to dividends of $14,000,000 paid by United Coastal during 1999.

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 1999 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, 1999 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, 1999 and 1998:

<TABLE>
<CAPTION>
                                                       December 31, 1999                  December 31, 1998
                                                       -----------------                  -----------------
<S>                                                    <C>                                <C>
Total Number of Contracts.                                   13                                  4

Total unbilled contract amounts.                          $10,100,000                          $6,000,000

Number of contracts with unbilled amounts in
excess of $400,000.                                           4                                  2

Aggregate unbilled amount of contracts in
excess of $400,000.                                        $9,800,000                          $5,900,000
</TABLE>


The Company estimates that all of the December 31, 1999 backlog will be
completed prior to December 31, 2000.




Materials


                                        9
<PAGE>   10
The Company purchases the materials it installs in the course of its
construction contracting operations from a number of suppliers. Most of the
Company's materials are standard building components which historically have
been readily available from several suppliers. Some components are manufactured
to the Company's specifications. Most of the materials used by the Company are
shipped directly to the job site by the manufacturer.

Contract Acquisition

The Company's work projects are obtained by lump sum fixed price bids, unit
prices or are negotiated. Contract prices are usually determined by competition
with other contractors.

Warranty

Each project usually contains a one-year warranty or guaranty period, wherein
the Company and its subcontractors warrant that the work is free from defects
and was performed in accordance with the plans and specifications. Occasionally,
the Company is required to make minor corrections or adjustments, but has never
incurred any significant costs in connection with any such work.

Asbestos Abatement Operations

Both the Company's insurance and construction contracting operations have
involved risks associated with asbestos. The Company has in the past insured and
continues to insure risks associated with asbestos abatement or containment
operations on both a claims-made and occurrence basis. Since harm from exposure
to asbestos fibers may not be detectable in humans for as much as thirty years,
losses under insurance contracts written on an occurrence basis may not be known
for some time.

The Company's construction contracting operations involve the removal of
asbestos. As asbestos containing materials deteriorate or become disturbed by
incidental or intentional contact, asbestos fibers may enter the air and can
circulate into the breathing zone of building occupants. Exposure to asbestos is
thought by some to be a cause of cancer. In the mid 1970's, the Company became
engaged in the removal of asbestos in addition to its other contracting
operations. Since that time, it has been engaged in hundreds of contracts
involving the removal of asbestos. Claims by non-employees related to asbestos
have been made against the Company from time to time and are pending and there
can be no assurance that claims will not be made in the future.

The Company believes that it is fully covered by workers' compensation insurance
with respect to any claims by current and former employees relating to asbestos
operations. The Company currently obtains its workers' compensation insurance in
those states in which it performs work either from state insurance funds or one
of several insurance companies designated in accordance with the Assigned Risk
Pool. The amount of workers' compensation insurance maintained varies from state
to state but is generally greater than the maximum recovery limits established
by law and is not subject to any aggregate policy limits. In the past, the
Company has received a number of asbestos-related claims from employees, all of
which have been fully covered by its workers' compensation insurance. The
Company believes, although no assurances can be given, that workers'
compensation insurance sufficient to cover all future claims will remain
available in accordance with applicable state laws.

                                    MARKETING

Insurance and Bonding

As an excess and surplus lines carrier, United Coastal Insurance markets its
policies through excess and surplus lines brokers only in those states in which
it is permitted to write coverage. Currently, United Coastal Insurance is
permitted to write excess and surplus lines insurance as a non-admitted insurer
in forty-six states, the District of Columbia, Puerto Rico and the Virgin
Islands.

ACSTAR Insurance offers payment and performance bonds through carefully selected
insurance agents which specialize in the needs of contractors. All underwriting
approvals and issuance of policies and bonds are performed directly by the
Company's insurance subsidiaries.

The Company's insurance products are marketed in all 50 states.

ACMAT Contracting

The Company markets its construction contracting services directly to building
owners and building occupants. Project opportunities are brought to the
attention of the Company through various sources such as F. W. Dodge Company,


                                       10
<PAGE>   11
which publishes lists of projects available for bid, architects, owners, general
contractors, or engineers who are familiar with the Company. The Company also
depends upon repeat business and responses to the Company's advertising program
which is intended to emphasize ACMAT's packaged interior renovation capability.
ACMAT's sales force consists of its senior management and project managers, all
of whom function as construction consultants and work closely with owners,
tenants and architects.

                                   COMPETITION

Insurance and Bonding

The property and casualty insurance industry is highly competitive. The Company
competes with large national and smaller regional insurers in each state in
which it operates, as well as monoline specialty insurers. The Company's
principal competitors include certain insurance subsidiaries of American
International Group, Inc. ("AIG"), Reliance Insurance Group, Zurich Insurance
Group, Design Professionals Insurance Company, CNA Insurance Companies and
Lloyd's of London. Many of its competitors are larger and have greater financial
resources than the Company. Among other things, competition may take the form of
lower prices, broader coverage, greater product flexibility, higher quality
services or the insurer's rating by independent rating agencies. The Company
competes with admitted insurers, surplus line insurers, new forms of insurance
organizations such as risk retention groups, and alternative self-insurance
mechanisms.

Competition in the field of surety bonding is intense and many of the Company's
competitors are larger and have greater surplus than the Company, thereby
allowing them to provide bonds with higher limits than those which the Company
is able to provide. The Company's principal competitors include the St. Paul
Companies, Inc., Reliance Insurance Group, AIG, CNA and Frontier Insurance
Company. The Company's insurance subsidiaries hold primary and reinsurance
certificates of authority as acceptable sureties on Federal bonds as do
approximately 250 to 300 other surety companies. The certificates give the
Company an advantage over companies which are not certified by the United States
Treasury Department with respect to surety bonding on Federal projects in that
such certification has become a standard with respect to both Federal and other
bonds. Approximately one-half of the surety bonds written by the Company's
subsidiaries are required to be provided by a Treasury listed company. With
respect to other bonds, the Company faces competition from as many as 1,000
additional non-certified surety companies.

ACMAT Contracting

Competition in the interior construction business serviced by ACMAT generally is
intense. Historically, a majority of the Company's construction business was
performed on projects on which the Company had been in competition with other
contractors. The Company focuses its efforts on privately negotiated contracts
obtained through advertising and its reputation. Quality of service and pricing
are the Company's principal methods of competition.

The economic climate of the Northeast has increased the competitive pressure on
all aspects of the Company's contracting operations. The Company has responded
with marketing efforts seeking to obtain business when the Company's reputation
and experience allow it to privately negotiate contracts at prices which are
sufficiently profitable.

                                   REGULATION

The business of ACMAT's insurance subsidiaries is subject to comprehensive and
detailed regulation and supervision throughout the United States. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative authority which includes, but is not limited to, the power to
regulate licenses, to transact business, trade practices, agent licensing,
policy forms, claim practices, underwriting practices, reserve requirements, the
form and content of required financial statements and the type and amounts of
investments permitted. The insurance companies are required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
they do business, and their operations and accounts are subject to examination
by such agencies at regular intervals.

As a nonadmitted excess and surplus lines insurer, United Coastal Insurance is
not subject to the comparatively more extensive state regulations to which
ACSTAR Insurance is subject. The regulations and restrictions to which ACSTAR
Insurance and United Coastal Insurance are subject include provisions intended
to assure the solvency of ACSTAR Insurance and United Coastal Insurance and are
primarily for the protection of policyholders and loss claimants rather than for
the benefit of investors.

State insurance regulations impose certain restrictions upon the types of
investments that the Company's insurance subsidiaries can acquire and the
percentage of their capital or assets that may be placed in any particular
investment or type of investment. Certain states also require insurance
companies to furnish evidence of financial security by means of a deposit of
marketable securities with the state insurance regulatory authority. On December
31, 1999, the


                                       11
<PAGE>   12
Company's insurance subsidiaries had securities with an aggregate
book value of approximately $9.9 million on deposit with various state
regulatory authorities.

The insurance subsidiaries of ACMAT are restricted as to the amount of cash
dividends they may pay. United Coastal Insurance is restricted by the Arizona
Insurance Holding Company Systems Act as to the amount of dividends it may pay
without the prior approval of the Arizona Department. During 1999, United
Coastal Insurance paid $14,000,000 in dividends. At January 1, 2000,
approximately $2,390,000 is available for the payment of dividends by United
Coastal Insurance in 2000 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 1999, ACSTAR paid
$4,760,000 in dividends to ACSTAR Holdings. At January 1, 2000, approximately
$7,380,000 is available for the payment of dividends by ACSTAR Insurance in 2000
without the prior approval of the Illinois Insurance Department.

New regulations and legislation are being proposed to limit damage awards, to
control plaintiffs' counsel fees, to bring the industry under regulation by the
federal government and to control premiums, policy terminations and other policy
terms. It is not possible to predict whether these proposals will be adopted or
their likely effect, if any, on the Company.

                                   INVESTMENTS

The Company's investment strategy is to maintain a conservative investment
policy by generally acquiring high quality securities, primarily bonds, with
fixed effective maturities of approximately three years or less. The investment
portfolio is well diversified and is in compliance with regulatory requirements.
The Company's bond portfolio is composed primarily of investments rated AA or
better by Standard and Poor's. Management has also decided to avoid long-term
investing at what management believes to be low long-term interest rates.

The Company's investment portfolio is subject to several risks including
interest rate and reinvestment risk. Fixed maturity security values generally
fluctuate inversely with movements in interest rates. The Company's corporate
and municipal bond investments may contain call and sinking fund features which
may result in early redemptions and the Company's mortgage-backed securities
investments held by the Company are subject to prepayment risk. Declines in
interest rates could cause early redemptions or prepayments which would require
the Company to reinvest at lower rates.

Investment securities are classified as held to maturity, available for sale or
trading. The Company currently classifies all investment securities as available
for sale. Investment securities available for sale are carried at fair value and
unrealized gains and losses are included in other comprehensive income, net of
estimated income taxes.



                                       12
<PAGE>   13
The Company invests primarily in tax-exempt securities as part of its strategy
to maximize after-tax income. Such strategy considers, among other factors, the
impact of the alternative minimum tax. The following table summaries the fair
value fixed maturity investments portfolio at December 31, 1999 and 1998
(dollars in thousands):


<TABLE>
<CAPTION>
                                                                           December 31,
                                                                           ------------
                                                            1999                                1998
                                                   ------------------------         --------------------------
                                                                    Percent                            Percent
                                                                    of                                 of
                                                   Amount           Total             Amount           Total
                                                   ------           -----             ------           -----
<S>                                              <C>                <C>             <C>               <C>
Fixed maturities available for sale (1):
  U.S. government and government
    agencies and authorities                       $ 18,569           20.6%          $ 19,006           16.7%
  State and political subdivisions                   36,608           40.7             55,082           48.3
  Industrial and Miscellaneous                       27,007           30.0                 --             --
  Mortgage-backed securities                          5,643            6.3             24,795           21.8
                                                   --------          -----           --------          -----
Total fixed maturities available for sale            87,827           97.6             98,883           86.8
Equity securities(2)                                  1,615            1.8              2,061            1.8
Short-term investments(3)                               518             .6             12,948           11.4
                                                   --------          -----           --------          -----
Total investments                                  $ 89,960          100.0%          $113,892          100.0%
                                                   ========          =====           ========          =====
</TABLE>


(1)      Fixed maturities available for sale are carried at fair value. Total
         cost of fixed maturities was approximately $89,291,000 at December 31,
         1999 and $98,128,000 at December 31, 1998.

(2)      Equity securities are carried at fair value. Total cost of equity
         securities was approximately $2,065,000 at December 31, 1999 and 1998.

(3)      Short-term investments, consisting primarily of money market
         instruments maturing within one year are carried at cost which, along
         with accrued interest, approximates fair value.

The following table sets forth the fair value of fixed maturities in the fixed
maturity investment portfolio at December 31, 1999 and 1998 (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  ------------
                                                      1999                               1998
                                             ------------------------         -------------------------
                                                              Percent                           Percent
                                                              of                                of
                                             Amount           Total           Amount            Total
                                             ------           -----           ------            -----
<S>                                         <C>              <C>             <C>                <C>
Due in (1):
One year or less                             16,908            19.3%          $19,805            20.0%
After one year through five years            64,139            73.0%           72,805            73.6%
After five years through ten years            3,719             4.2%            5,225             5.3%
After ten years                               3,061             3.5%            1,048             1.1%
                                            -------           -----           -------           -----
                                            $87,827           100.0%          $98,883           100.0%
                                            =======           =====           =======           =====
</TABLE>

         (1) Based on effective maturity dates. Actual maturities may differ
             because borrowers may have the right to call or prepay obligations
             with or without call or prepayment penalties.

The Company's insurance subsidiaries are subject to state laws and regulations
that require diversification of its investment portfolio and limit the amount of
investments in certain investment categories. Failure to comply with these laws
and regulations would cause non-conforming investments to be treated as
non-admitted assets for purposes of measuring statutory surplus and, in some
instances, would require divestiture. As of December 31, 1999, the Company's
investments complied with such laws and regulations.





                                       13
<PAGE>   14
Investment results for the years ended December 31, 1999, 1998 and 1997 are
shown in the following table (dollars in thousands):

<TABLE>
<CAPTION>
                                                         1999            1998             1997
                                                         ----            ----             ----
<S>                                                    <C>             <C>               <C>
                      Invested assets (1)              $111,559        $126,371          $140,029

                      Investment income (2)              $5,390          $6,138            $6,505

                      Average yield                       4.83%           4.86%            4.65%
</TABLE>

(1)  Average of the aggregate invested amounts at the beginning and end of the
     period including cash and cash equivalents.
(2)  Investment income is net of investment expenses and does not include
     realized investment gains or losses or provision for income taxes.

The yields reflect the Company's investment strategy of acquiring high quality
tax-exempt securities with fixed effective maturities of approximately three
years or less. Invested assets are attributable to the net cash flow generated
by written premiums, cash collateral and the reinvestment of investment income
offset in part by cash used to repay debt and repurchase stock.

                            ENVIRONMENTAL COMPLIANCE

The Company does not expect that its compliance with federal, state or local
environmental laws or regulations will have any material effect upon its capital
expenditures, earnings or competitive position.

                                    EMPLOYEES

As of December 31, 1999, the Company employed approximately 35 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 50% 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 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 1999.





                                       14
<PAGE>   15
                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

ACMAT's Class A Stock trades on the Nasdaq Stock Market under the symbol ACMTA.
The Common Stock trades on the over-the-counter market. The following table sets
forth the quarterly high and low closing prices of the Company's Common Stock
and Class A Stock as reported by Nasdaq.

<TABLE>
<CAPTION>
                                1999                          1998

                         HIGH              LOW        HIGH              LOW
<S>                    <C>             <C>          <C>             <C>
COMMON STOCK
  1st Quarter           20-5/8          20-1/2       21-1/4          21-1/4
  2nd Quarter           20-1/2          19           21              21
  3rd Quarter          20-7/16          20           21              21
  4th Quarter          19               19           23              20-1/2

CLASS A STOCK
  1st Quarter           16-1/4          15           17-7/8          15-3/8
  2nd Quarter           15-1/4          14-3/4       15-3/4          15-1/8
  3rd Quarter           14-7/8          7-1/2        16-1/2          14-9/16
  4th Quarter            9              6-3/4        15-3/4          14-1/4
</TABLE>


No dividends have been paid in the past five years and there is no intention of
paying dividends in the near future. As of March 17, 2000, there were 330 Common
Stock shareholders of record and 934 Class A Stock shareholders of record.

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                       1999             1998             1997             1996             1995
                                       ----             ----             ----             ----             ----
<S>                                <C>               <C>               <C>             <C>              <C>
Revenues                           $ 25,500,249      $ 28,752,273      $ 33,552,135    $ 37,035,305     $ 41,857,398
Total Assets                        125,855,611       146,126,465       176,208,762     184,359,566      180,402,238
Long-Term Debt                       30,792,720        37,200,000        48,212,727      35,807,419       40,127,590
Stockholders'  Equity                36,126,992        37,622,926        39,577,739      49,702,404       37,587,259

Net Earnings                          3,013,723         2,120,529         4,456,949      5,293,111        5,350,280
Basic Earnings Per Share                   1.02               .66              1.29           1.56             1.49
Diluted Earnings Per Share                  .99               .65              1.12           1.22             1.17
</TABLE>

Note:  No cash dividends were paid during any of the periods above.




                                       15
<PAGE>   16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

CONSOLIDATED RESULTS OF OPERATIONS:

Net earnings were $3,013,723 in 1999, $2,120,529 in 1998 and $4,456,949 in 1997.
Net earnings included approximately $1,000,000 of loss in 1998 and approximately
$700,000 of gain in 1997 related to the Company's share of a limited
partnership. The limited partnership invested in small cap equities and incurred
the loss in 1998 due to volatility in the small cap market. The Company sold its
investment in the limited partnership on December 31, 1998. The increase in 1999
net earnings compared to the 1998 net earnings was due to the improved gross
margins in the contracting business, the elimination of the limited partnership
in 1998 and the reduction in interest expense related to the reduction of
long-term debt partially offset by the decrease in investment income.

Revenues were $25,500,249 in 1999, $28,752,273 in 1998 and $33,552,135 in 1997.
The decrease in revenues over the past two years reflects the Company's strategy
to avoid the current unfavorable pricing in the Company's casualty insurance
operations. Earned premiums were $9,414,192 in 1999, $10,962,663 in 1998 and
$15,045,844 in 1997. Contract revenue is difficult to predict and depends
greatly on the successful securement of contracts bid. Contract revenues were
$9,223,457 in 1999, $12,139,924 in 1998 and $10,056,322 in 1997.

Investment income was $5,389,732 in 1999, $6,138,105 in 1998 and $6,504,716 in
1997. 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 were $252,190 in 1999, $266,169 in 1998 and $282,667
in 1997.

Other income (expense) was $1,220,678 in 1999, ($754,588) in 1998 and $1,662,586
in 1997. The fluctuations in other income (expense) are attributable to a
pre-tax loss of approximately $1,400,000 in 1998 and a pre-tax gain of
approximately $965,000 in 1997 related to the Company's share of a limited
partnership. The Company sold its investment in the limited partnership on
December 31, 1998.

Losses and loss adjustment expenses were $1,672,887 in 1999, $2,186,728 in 1998
and $4,337,252 in 1997. The decreases in losses and loss adjustment expenses are
attributable to the decline in earned premiums and the release of surety loss
reserves on older years that are no longer needed. Amortization of policy
acquisition costs were $2,223,918 in 1999, $2,112,857 in 1998 and $2,802,993 in
1997. The increase in amortization of policy acquisition costs is primarily
attributable to the increase in commissions paid to agents.

Costs of contract revenues were $8,261,408 in 1999, $11,635,879 in 1998 and
$9,331,103 in 1997. The gross profit margin on construction projects was 10.4%
in 1999, 4.2% in 1998 and 7.2% in 1997. Gross margin fluctuations each year
based upon the profitability of specific projects.

General and administrative expenses were $5,385,409 in 1999, $5,355,183 in 1998
and $5,767,808 in 1997. The increase in general and administrative expenses in
1999 compared to 1998 is due primarily to the increase in salary expense. The
decrease in general and administrative expenses in 1998 compared to 1997 is due
primarily to the decrease in bad debt expense.

Interest expense was $3,738,740 in 1999, $4,621,401 in 1998 and $5,116,414 in
1997. The decrease in interest expense is due to the decrease in long-term debt.
During 1999 and 1998, the Company repaid and refinanced long-term debt.

Income tax expense was $1,204,164 in 1999, $719,696 in 1998 and $1,739,616 in
1997, representing effective tax rates of 28.6%, 25.3% and 28.1%, respectively.
The fluctuation in the effective tax rate is due to tax exempt interest income
making up a larger portion of taxable income in 1998.





                                       16
<PAGE>   17
Results of Operations by Segment:

<TABLE>
<CAPTION>
ACSTAR BONDING:               1999                 1998                     1997
                              ----                 ----                     ----
<S>                       <C>                   <C>                      <C>
    Revenue               $6,227,462            $5,286,955               $7,209,863
    Operating Earnings    $2,968,882            $2,314,485               $2,305,342
</TABLE>


Revenues for the ACSTAR Bonding segment were $6,227,462 in 1999, $5,286,955 in
1998 and $7,209,863 in 1997. The 1999 increase in revenue reflects a slight
increase in earned premiums and investment income compared to 1998. Included in
1998 revenues is a pre-tax loss of approximately $570,000 for net loss of the
limited partnership investment. The decrease in 1998 revenue compared to the
1997 revenue is due primarily to a decrease in earned premiums in 1998.

Investment income was $1,268,175 in 1999, $1,169,977 in 1998 and $962,815 in
1997. The increase in investment income was primarily related to a continued
increase in invested assets and an increase in the effective yield on those
invested assets. Net realized capital gains were $51,616 in 1999, $68,040 in
1998 and $25,380 in 1997.

Operating earnings for the ACSTAR Bonding segment were $2,968,882 in 1999,
$2,314,485 in 1998 and $2,305,342 in 1997. The increase in 1999 operating
earnings compared to 1998 operating earnings is due primarily to an increase in
earned premiums and investment income offset in part by an increase in the
amortization of policy acquisition costs.

Losses and loss adjustment expenses were $238,520 in 1999, $230,912 in 1998 and
$1,577,766 in 1997. The lower losses and loss adjustment expenses for 1999 and
1998 compared to 1997 are attributable to the release of surety loss reserves on
older years that are no longer needed and a reallocation of reserves among
accident years. Amortization of policy acquisition costs were $1,543,783 in
1999, $1,225,718 in 1998 and $1,605,140 in 1997. The increase in amortization of
policy acquisition costs in 1999 compared to 1998 is primarily attributable to
the increase in commissions paid to agents. The decrease in amortization of
policy acquisition costs in 1998 compared to 1997 is primarily attributable to
the decrease in earned premiums.

General and administrative expenses were $1,476,277 in 1999, $1,515,840 in 1998
and $1,696,235 in 1997. The decrease in general and administrative expenses is
due primarily to the decrease in bad debt expense.


<TABLE>
<CAPTION>
UNITED COASTAL
 LIABILITY INSURANCE:                  1999            1998           1997
                                       ----            ----           ----
<S>                                 <C>            <C>            <C>
        Revenue                     $8,529,279     $10,315,294    $15,043,823
        Operating Earnings          $4,578,802     $ 5,176,870    $ 8,239,017
</TABLE>


Revenues for the United Coastal Liability Insurance segment were $8,529,279 in
1999, $10,315,294 in 1998 and $15,043,823 in 1997. The 1999 decrease in revenue
reflects a 27% decrease in earned premiums and a 20% decrease in investment
income compared to 1998. Included in 1998 revenues is a pre-tax loss of
approximately $830,000 for net loss of the limited partnership investment. The
decrease in 1998 revenue compared to the 1997 revenue is due primarily to a 29%
decrease in earned premiums in 1998. The decrease in revenues over the past two
years reflects the Company's strategy to avoid the current unfavorable pricing
in the Company's casualty insurance market.

Investment income was $3,557,332 in 1999, $4,430,026 in 1998 and $4,859,805 in
1997. 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 were $200,574 in 1999,
$198,129 in 1998 and $257,287 in 1997.

Operating earnings for the United Coastal Liability Insurance segment were
$4,578,802 in 1999, $5,176,870 in 1998 and $8,239,017 in 1997. The decrease in
1999 operating earnings compared to 1998 operating earnings is


                                       17
<PAGE>   18
due primarily to a decrease in earned premiums and investment income. The
decrease in 1998 operating earnings compared to 1997 is due to a decrease in
earned premiums.

Losses and loss adjustment expenses were $1,434,367 in 1999, $1,955,816 in 1998
and $2,759,486 in 1997. The decrease in losses and loss adjustment expenses are
attributable to the decrease in earned premiums. Amortization of policy
acquisition costs were $1,528,179 in 1999, $1,852,218 in 1998 and $2,564,959 in
1997. The decrease in amortization of policy acquisition costs is primarily
attributable to the decrease in earned premiums.

General and administrative expenses were $987,931 in 1999, $1,330,390 in 1998
and $1,505,741 in 1997. The decrease in general and administrative expenses is
due primarily to the overall decrease in business activities.

<TABLE>
<CAPTION>
ACMAT CONTRACTING:             1999             1998              1997
                               ----             ----              ----
<S>                         <C>             <C>                <C>
     Revenue                $13,154,753     $15,801,541        $14,218,660
     Operating Earnings     $   907,228       $ 501,712        $ 1,224,579
</TABLE>


Revenues for the ACMAT Contracting segment were $13,154,753 in 1999, $15,801,541
in 1998 and $14,218,660 in 1997. The 1999 decrease in revenue reflects a 24%
decrease in contract revenues compared to 1998. The increase in 1998 revenue
compared to the 1997 revenue is due primarily to a 21% increase in contract
revenues in 1998. Contract revenue is difficult to predict and depends greatly
on the successful securement of contracts bid.

Operating earnings for the ACMAT Contracting segment were $907,228 in 1999,
$501,712 in 1998 and $1,224,579 in 1997. The increase in 1999 operating earnings
compared to 1998 operating earnings is due primarily to improved gross margins
on the 1999 projects. The decrease in 1998 operating earnings compared to 1997
operating earnings is due to lower gross margins on 1998 projects.

Cost of contract revenues were $8,261,408 in 1999, $11,635,879 in 1998 and
$9,331,103 in 1997. The gross profit margin on construction projects was 10.4%
in 1999, 4.2% in 1998 and 7.2% in 1997. Gross margin fluctuations each year
based upon the profitability of specific projects.

General and administrative expenses were $3,886,117 in 1999, $3,488,950 in 1998
and $3,662,978 in 1997. The increase in general and administrative expenses in
1999 compared to 1998 is due primarily to the increase in salary expense and the
amortization of intangibles. The decrease in general and administrative expenses
in 1998 compared to 1997 is due primarily to the decrease in salary expense.

RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES:

Reserves for losses and loss adjustment expenses are established with respect to
both reported and incurred but not reported claims for insured risks. The amount
of loss reserves for reported claims is primarily based upon a case-by-case
evaluation of the type of risk involved, knowledge of the circumstances
surrounding each claim and the policy provisions relating to the type of claim.
As part of the reserving process, historical data is reviewed and consideration
is given to the anticipated impact of various factors such as legal developments
and economic conditions, including the effects of inflation. Reserves are
monitored and evaluated periodically using current information on reported
claims.

Management believes that the reserves for losses and loss adjustment expenses at
December 31, 1999 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


                                       18
<PAGE>   19
accounting principles ("GAAP") were 17.6%,19.6 and 28.8% for the years ended
December 31, 1999, 1998 and 1997, respectively. These loss ratios are below
industry averages and are believed to be the result of conservative
underwriting. The decrease in the loss ratios is due to the release of surety
reserves in 1999 and 1998. There can be no assurance that such loss ratios can
continue. The Company's insurance subsidiaries' expense ratios under GAAP were
56.6%, 51.8% and 48.0% for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in the expense ratios is due to the decline in
premiums. The Company's insurance subsidiaries' combined ratios under GAAP were
74.2%, 71.4% and 76.8% for the years ended December 31, 1999, 1998 and 1997,
respectively. The increase in the 1999 combined ratio results primarily from the
decline in premiums.

LIQUIDITY AND CAPITAL RESOURCES:

The Company internally generates sufficient funds for its current operations and
maintains a relatively high degree of liquidity in its investment portfolio. The
primary sources of funds to meet the demands of claim settlements and operating
expenses are premium collections, investment earnings and maturing investments.
The Company has no material commitments for capital expenditures and, in the
opinion of management, has adequate sources of liquidity to fund its operations
over the next 12 months.

ACMAT, exclusive of its subsidiaries, has incurred negative cash flows from
operating activities primarily because of interest expense related to notes
payable and long-term debt incurred by ACMAT to acquire and capitalize its
insurance subsidiaries and to repurchase Company stock. ACMAT has also incurred
negative working capital as a result of holding short-term debt related to its
operations.

ACMAT's principal sources of funds are dividends from its wholly owned
subsidiaries, intercompany and short-term borrowings, insurance underwriting
fees from its subsidiaries, construction contracting operations and rental
income. Management believes that these sources of funds are adequate to serve
its indebtedness. ACMAT has recently utilized short-term borrowings to
repurchase its stock. ACMAT has also relied on dividends from its insurance
subsidiaries to repay debt.

The Company used cash flow from other sources to support operations in the
amount of $7,065,427 in 1999, compared to cash flow realized from operations of
$530,977 in 1998 and $5,585,329 in 1997. The reduced cash flow from operations
is due primarily to the return of cash collateral and the payment of claims.
Substantially all of the Company's cash flow is used to repay short-term and
long-term debt, repurchase stock and purchase investments. Purchases of
investments are made based upon excess cash available after the payment of
losses and loss adjustment expenses and other operating and non-operating
expenses. The Company's short term investment strategy coincides with the
relatively short maturity of its liabilities which are comprised primarily of
reserves for losses covered by claims-made insurance policies, reserves related
to surety bonds and collateral held for surety obligations.

Net cash provided by investing activities was $20,580,662 in 1999, $21,326,746
in 1998 and $4,993,298 in 1997.

The terms of the Company's note agreements contain limitations on payment of
cash dividends, re-acquisition of shares, borrowings and investments and require
maintenance of specified ratios and minimum net worth levels, including cross
default provisions. The payment of future cash dividends and the re-acquisition
of shares are restricted each to amounts of an available fund ("Available
Fund"). The Available Fund is a cumulative fund which is increased each year by
20% of the Consolidated Net Earnings (as defined). The Company is in compliance
with all covenants at December 31, 1999.

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, 1999. Effective December 9, 1998, the Company
obtained a $5,000,000, five-year, term loan which is repayable in quarterly
installments commencing March 1, 1999. Portions of the proceeds of such term
loan were applied to the repayment of term debt and to the reduction of the
Company's short-term credit line.

During 1999, the Company purchased, in the open market and privately negotiated
transactions, 7,260 shares of its Common Stock at an average price of $20.93.
The Company also purchased, in open market and privately negotiated
transactions, 189,221 shares of its Class A Stock at an average price of $12.52
per share.

The Company's principal source of cash for repayment of long-term debt is
dividends from its two insurance companies. During 1999, ACMAT received
$14,000,000 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.


                                       19
<PAGE>   20
For 2000, the amount of dividends ACMAT's insurance subsidiaries may pay,
without prior approval of their domestic state insurance departments, is limited
to approximately $9,775,000.

In 2000, the Company anticipates that internally generated funds and short-term
borrowings will be utilized for repayment of long-term debt. Principal
repayments on long-term debt is scheduled to be approximately $1,600,000 in
2000.

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, 1999 was significantly above the level which
might require regulatory action.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK

MARKET RISK
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1999.
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, 1999
was $89,960,240, 98% of which was 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, 1998. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.

The primary market risk for all of the Company's long-term debt is interest rate
risk at the time of refinancing. As the majority of the Company's debt is fixed
rate debt, the Company's exposure to interest rate risk on its long-term debt is
not significant. The Company continually monitors the interest rate environment
and evaluates refinancing opportunities as the maturity dates approach.

SENSITIVITY ANALYSIS
Sensitivity analysis is defined as the measurement of potential loss in future
earnings, fair values or cash flows of market sensitive instruments resulting
from one or more selected hypothetical changes in interest rates and other
market rates or prices over a selected time. In the Company's sensitivity
analysis model, a hypothetical change in market rates is selected that is
expected to reflect reasonably possible near-term changes in those rates. The
term "near term" means a period of time going forward up to one year from the
date of the consolidated financial statements.

In this sensitivity analysis model, the Company uses fair values to measure its
potential loss. The sensitivity analysis model includes the following financial
instruments: fixed maturities, interest-bearing non-redeemable preferred stocks,
short-term securities, cash, investment income accrued, and long-term debt. The
primary market risk to the Company's market sensitive instruments is interest
rate risk. The sensitivity analysis model uses a 100 basis point change in
interest rates to measure the hypothetical change in fair value of financial
instruments included in the model.

For invested assets, duration modeling is used to calculate changes in fair
values. Durations on invested assets are adjusted for call, put and interest
rate reset features. Duration on tax exempt securities is adjusted for the fact
that the yield on such securities is less sensitive to changes in interest rates
compared to Treasury securities. Invested asset portfolio durations are
calculated on a market value weighted basis, including accrued investment
income, using holdings as of December 31, 1999.

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, 1999, 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 71% of total assets. As a result, the loss value excludes a


                                       20
<PAGE>   21
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.




                                       21
<PAGE>   22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Schedules

ACMAT Corporation and Subsidiaries:

The following Consolidated Financial Statements of the Company, related notes
and Independent Auditors' Report are included herein:

     Independent Auditors' Report

     Consolidated Statements of Earnings for the years ended December 31, 1999,
     1998 and 1997

     Consolidated Balance Sheets as of December 31, 1999 and 1998

     Consolidated Statements of Stockholders' Equity for the years ended
     December 31, 1999, 1998 and 1997

     Consolidated Statements of Cash Flows for the years ended December 31,
     1999, 1998 and 1997

     Notes to Consolidated Financial Statements - December 31, 1999, 1998 and
     1997

     Consolidated Schedules included in Part II of this Report - Years ended
     December 31, 1999, 1998 and 1997:

               I - Condensed Financial Information of Registrant
              II - Valuation and Qualifying Accounts and Reserves
               V - Supplemental Information Concerning Property-Casualty
                   Insurance Operations




                                       22
<PAGE>   23
INDEPENDENT AUDITORS' REPORT


The Board of Directors
ACMAT Corporation:


We have audited the consolidated financial statements of ACMAT Corporation and
subsidiaries as listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we also have audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACMAT Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.


KPMG LLP


Hartford, Connecticut
March 7, 2000







                                       23

<PAGE>   24

                       ACMAT CORPORATION AND SUBSIDIARIES


Consolidated Statements of Earnings
Years Ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>
                                                                    1999                1998                1997
                                                                    ----                ----                ----
<S>                                                              <C>                 <C>                  <C>
Earned premiums                                                  $ 9,414,192         10,962,663           15,045,844
Contract revenues                                                  9,223,457         12,139,924           10,056,322
Investment income, net                                             5,389,732          6,138,105            6,504,716
Net realized capital gains                                           252,190            266,169              282,667
Other income (expense)                                             1,220,678           (754,588)           1,662,586
                                                                 -----------        -----------          -----------
                                                                  25,500,249         28,752,273           33,552,135

Losses and loss adjustment expenses                                1,672,887          2,186,728            4,337,252
Cost of contract revenues                                          8,261,408         11,635,879            9,331,103
Amortization of policy acquisition costs                           2,223,918          2,112,857            2,802,993
General and administrative expenses                                5,385,409          5,355,183            5,767,808
Interest expense                                                   3,738,740          4,621,401            5,116,414
                                                                 -----------        -----------          -----------
                                                                  21,282,362         25,912,048           27,355,570
                                                                  ----------         ----------           ----------

Earnings before income taxes                                       4,217,887          2,840,225            6,196,565

Income taxes                                                       1,204,164            719,696            1,739,616
                                                                   ---------          ---------            ---------

Net earnings                                                      $3,013,723          2,120,529            4,456,949
                                                                   =========          =========            =========


Basic earnings per share                                              $1.02               .66                1.29
                                                                       ----               ---                ----

Diluted earnings per share                                             $.99               .65                1.12
                                                                        ---               ---                ----
</TABLE>



See Notes to Consolidated Financial Statements.







                                       24
<PAGE>   25



                       ACMAT CORPORATION AND SUBSIDIARIES


Consolidated Balance Sheets
December 31, 1999 and 1998

<TABLE>
<CAPTION>
ASSETS                                                                   1999                1998
------                                                                   ----                ----
<S>                                                                 <C>                 <C>
Investments:
 Fixed maturities - available for sale at fair value
  (Cost of $89,290,810 in 1999 and $98,128,192 in 1998)             $  87,826,920          98,882,751
 Equity securities - available for sale at fair value
  (Cost of  $2,065,262 in 1999 and 1998 )                               1,614,763           2,061,448
 Short-term investments, at cost which approximates fair value            518,557          12,947,913
                                                                    -------------       -------------
  Total Investments                                                    89,960,240         113,892,112

Cash and cash equivalents                                               7,054,911           2,306,232
Accrued interest receivable                                             1,324,356           1,352,334
Receivables, net of allowance for doubtful accounts of
 $195,118 in 1999 and $257,617 in 1998                                  2,823,381           3,737,627
Reinsurance recoverable                                                 3,924,064           2,224,116
Income tax refund receivable                                              173,465             207,380
Prepaid expenses                                                          106,049             162,784
Deferred income taxes                                                   1,560,324           1,733,987
Property and equipment, net                                            12,675,956          12,894,191
Deferred policy acquisition costs                                       1,323,780           1,550,089
Other assets                                                            2,360,366           3,170,242
Intangibles, net                                                        2,568,719           2,895,371
                                                                    -------------       -------------
                                                                    $ 125,855,611         146,126,465
                                                                    =============       =============

Liabilities & Stockholders' Equity
Accounts payable                                                    $   1,923,081           3,200,965
Reserves for losses and loss adjustment expenses                       38,544,491          43,115,062
Unearned premiums                                                       5,262,468           6,795,435
Collateral held                                                        11,954,554          17,344,376
Other accrued liabilities                                               1,251,305             847,701
Long-term debt                                                         30,792,720          37,200,000
                                                                    -------------       -------------
 Total Liabilities                                                     89,728,619         108,503,539

Commitments and contingencies

Stockholders' Equity:
  Common Stock (No par value; 3,500,000 shares authorized;
  584,828 and 592,088 shares issued and outstanding)                      584,828             592,088
  Class A Stock (No par value; 10,000,000 shares authorized;
  2,304,587 and 2,460,808 shares issued and outstanding)                2,304,587           2,460,808
  Retained earnings                                                    35,151,966          34,074,538
  Accumulated other comprehensive income (loss)                        (1,914,389)            495,492
                                                                    -------------       -------------
   Total Stockholders' Equity                                          36,126,992          37,622,926
                                                                    -------------       -------------
                                                                    $ 125,855,611         146,126,465
                                                                    =============       =============
</TABLE>


See Notes to Consolidated Financial Statements.




                                       25
<PAGE>   26



                       ACMAT CORPORATION AND SUBSIDIARIES


Consolidated Statements of Stockholders' Equity
December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                      Common           Class A          Additional
                                                     Stock par         Stock par         paid-in           Retained
                                                       value             value           capital           earnings
                                                       -----             -----           -------           --------

<S>                                                <C>                 <C>              <C>             <C>
Balance as of December 31, 1996                    $   600,257         3,488,860         8,407,877        36,894,494

Comprehensive income:
   Net unrealized losses on debt and equity
     securities, net of reclassification
     adjustment                                           --                --                --                --
   Net earnings                                                                                            4,456,949

Total comprehensive income                                --                --                --                --

Acquisition and retirement of
   3,400 shares of Common Stock                    $    (3,400)             --             (66,096)             --
Acquisition and retirement of
   1,347,686 shares of Class A Stock                      --          (1,347,686)      (13,522,491)       (5,318,290)
Issuance of 450,000 shares
   of Class A Stock                                       --             450,000         4,050,000              --
Issuance of 121,000 shares of Class A Stock
   Pursuant to stock options                              --             121,000         1,130,710              --
                                                   -----------       -----------       -----------       -----------
Balance as of December 31, 1997                    $   596,857         2,712,174              --          36,033,153

Comprehensive income:
   Net unrealized appreciation of debt and
     equity securities, net of reclassification
     adjustment                                           --                --                --                --
   Net earnings                                           --                --                --           2,120,529

Total comprehensive income

Acquisition and retirement of
   4,769 shares of Common Stock                    $    (4,769)             --                --             (93,697)
Acquisition and retirement of
   342,366 shares of Class A Stock                        --            (342,366)         (841,980)       (3,985,447)
Issuance of 91,000 shares of Class A Stock
   Pursuant to stock options                              --              91,000           841,980              --
                                                   -----------       -----------       -----------       -----------
Balance as of December 31, 1998                    $   592,088         2,460,808              --          34,074,538

Comprehensive income:
   Net unrealized losses on debt and
     equity securities, net of reclassification
     adjustment                                           --                --                --                --
   Net earnings                                           --                --                --           3,013,723

Total comprehensive income

Acquisition and retirement of 7,260 shares of
  Common Stock                                    $    (7,260)             --                --            (144,658)
Acquisition and retirement of 189,221 shares
  of Class A Stock                                        --            (189,221)         (388,500)       (1,791,637)
Issuance of 15,000 shares of Class A Stock
  pursuant to investment agreement                        --              15,000           206,250              --
Issuance of 18,000 shares of Class A Stock
  Pursuant to stock options                               --              18,000           182,250              --
                                                   -----------       -----------       -----------       -----------
Balance as of December 31, 1999                    $   584,828         2,304,587              --          35,151,966
                                                   ===========       ===========       ===========       ===========


                                                   Accumulated
                                                       other           Total
                                                   comprehensive    stockholders'
                                                   income (loss)       equity
                                                   -------------       ------

<S>                                                <C>               <C>
Balance as of December 31, 1996                        310,916        49,702,404

Comprehensive income:
   Net unrealized losses on debt and equity
     securities, net of reclassification
     adjustment                                        (75,361)          (75,361)
   Net earnings                                           --           4,456,949
                                                                     -----------
Total comprehensive income                                             4,381,588

Acquisition and retirement of
   3,400 shares of Common Stock                           --             (69,496)
Acquisition and retirement of
   1,347,686 shares of Class A Stock                      --         (20,188,467)
Issuance of 450,000 shares
   of Class A Stock                                       --           4,500,000
Issuance of 121,000 shares of Class A Stock
   Pursuant to stock options                              --           1,251,710
                                                   -----------       -----------
Balance as of December 31, 1997                        235,555        39,577,739

Comprehensive income:
   Net unrealized appreciation of debt and
     equity securities, net of reclassification
     adjustment                                        259,937           259,937
   Net earnings                                           --           2,120,529
                                                                     -----------
Total comprehensive income                                             2,380,466

Acquisition and retirement of
   4,769 shares of Common Stock                           --             (98,466)
Acquisition and retirement of
   342,366 shares of Class A Stock                        --           (5,169,793)
Issuance of 91,000 shares of Class A Stock
   Pursuant to stock options                              --             932,980
                                                   -----------       -----------
Balance as of December 31, 1998                        495,492        37,622,926

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
                                                                     -----------
Total comprehensive income                                               603,842

Acquisition and retirement of 7,260 shares of
  Common Stock                                            --            (151,918)
Acquisition and retirement of 189,221 shares
  of Class A Stock                                        --          (2,369,358)
Issuance of 15,000 shares of Class A Stock
  pursuant to investment agreement                        --             221,250
Issuance of 18,000 shares of Class A Stock
  Pursuant to stock options                               --             200,250
                                                   -----------       -----------
Balance as of December 31, 1999                     (1,914,389)       36,126,992
                                                   ===========       ===========
</TABLE>




See Notes to Consolidated Financial Statements.



                                       26
<PAGE>   27



                                         ACMAT CORPORATION AND SUBSIDIARIES


Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                         1999                1998                1997
                                                                    -------------       -------------       -------------
<S>                                                                 <C>                 <C>                 <C>
Cash Flows From Operating Activities:
   Net earnings                                                     $   3,013,723           2,120,529           4,456,949
   Adjustments to reconcile net earnings to net
      Cash provided by (used for) operating activities:
      Depreciation and amortization                                     1,829,646           1,412,004           1,506,013
      Net realized capital gain                                          (252,190)           (266,169)           (282,667)
      Limited partnership investment                                         --             1,429,288            (966,315)
      Deferred income taxes                                               428,918              73,041             383,771
   Changes In:
      Accrued interest receivable                                          27,978             105,830             109,597
      Receivables, net                                                    914,246           3,380,900           1,263,063
      Reinsurance recoverable                                          (1,699,948)          1,254,005             362,880
      Deferred policy acquisition costs                                   226,309             528,316             827,470
      Prepaid expenses and other assets                                   741,366             951,605             351,384
      Accounts payable and other liabilities                             (874,280)           (389,056)          1,159,290
      Collateral held                                                  (5,389,822)         (2,931,326)         (1,554,864)
      Reserves for losses and loss adjustment expenses                 (4,570,571)         (5,785,651)            940,629
      Income taxes                                                         72,165             594,431            (434,388)
      Unearned premiums                                                (1,532,967)         (3,008,724)         (2,537,483)
                                                                    -------------       -------------       -------------
          Net cash provided by (used for) operating activities         (7,065,427)           (530,977)          5,585,329
                                                                    -------------       -------------       -------------

Cash Flows From Investing Activities:
   Proceeds from investments sold or matured:
      Fixed maturities - sold                                          63,593,712          40,118,160          41,501,401
      Fixed maturities - matured                                       11,692,000          38,383,281          35,221,999
      Equity securities                                                    24,405           1,022,466             774,349
      Short-term investments                                          143,866,543          79,604,384         155,255,106
   Purchases Of:
      Fixed maturities                                                (66,790,040)        (75,373,107)        (85,168,980)
      Equity securities                                                   (24,405)         (2,060,000)         (1,727,812)
      Short-term investments                                         (131,437,187)        (60,129,984)       (140,708,282)
   Capital expenditures                                                  (344,366)           (238,454)           (154,483)
                                                                    -------------       -------------       -------------
         Net cash provided by investing activities                     20,580,662          21,326,746           4,993,298
                                                                    -------------       -------------       -------------

Cash Flows From Financing Activities:
   Borrowings under line of credit                                      9,000,000           7,000,000           5,000,000
   Repayments under line of credit                                     (9,000,000)        (12,000,000)        (13,200,000)
   Repayments on long-term debt                                       (10,907,280)        (23,812,727)         (3,594,692)
   Issuance of long-term debt                                           4,500,000          12,800,000           8,500,000
   Issuance of Class A Stock                                              162,000             696,000             882,250
   Payments for acquisition and retirement of stock                    (2,521,276)         (5,268,259)         (8,257,963)
                                                                    -------------       -------------       -------------
         Net cash used for financing activities                        (8,766,556)        (20,584,986)        (10,670,405)
                                                                    -------------       -------------       -------------

Net increase (decrease) in cash and cash equivalents                    4,748,679             210,783             (91,778)

Cash and cash equivalents, beginning of year                            2,306,232           2,095,449           2,187,227
                                                                    -------------       -------------       -------------

Cash and cash equivalents, end of year                              $   7,054,911           2,306,232           2,095,449
                                                                    =============       =============       =============
</TABLE>



See Notes to Consolidated Financial Statements.






                                       27
<PAGE>   28




                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1999, 1998 AND 1997


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        (a)       Principles of Consolidation

                  The consolidated financial statements include ACMAT
                  Corporation ("ACMAT" or the "Company"), its subsidiaries,
                  AMINS, Inc., Geremia Electric Co., ACMAT of Texas, Inc.,
                  ACSTAR Holdings, Inc. ("ACSTAR Holdings") and ACSTAR Holdings'
                  wholly-owned subsidiary, ACSTAR Insurance Company ("ACSTAR");
                  and United Coastal Insurance Company ("United Coastal
                  Insurance").

                  These consolidated financial statements have been prepared in
                  conformity with generally accepted accounting principles
                  ("GAAP"). All significant intercompany accounts and
                  transactions have been eliminated in consolidation. Certain
                  re-classifications have been made to the 1998 and 1997
                  financial statements to conform to the classifications in
                  1999.

        (b)       Business

                  ACMAT operates as an insurance holding company and as an
                  interior contractor; designing, supplying, renovating and
                  installing interiors for commercial, industrial and
                  institutional buildings, including asbestos abatement
                  contracting.

                  ACMAT's Insurance Group includes United Coastal Insurance,
                  ACSTAR and AMINS, Inc. United Coastal Insurance is an excess
                  and surplus lines property and casualty insurer providing
                  specialty general and environmental liability insurance to
                  specialty trade and environmental contractors, property
                  owners, storage and treatment facilities and allied
                  professionals, as well as professional liability insurance to
                  architects, engineers and consultants. ACSTAR is licensed as
                  an admitted insurer in 50 states and the District of Columbia
                  and provides surety bonding for specialty trade, environmental
                  remediation and asbestos abatement contractors. AMINS, Inc. is
                  an insurance agency which acts primarily as a general agent
                  for ACSTAR and United Coastal Insurance. United Coastal
                  Insurance participates in a number of reinsurance arrangements
                  with other companies on a quota share basis. These
                  arrangements primarily cover marine and other property
                  catastrophic risks.

                  During 1999, 1998 and 1997, customers who individually
                  accounted for more than 10% of consolidated construction
                  contracting revenue are as follows; in 1999 - two customers
                  provided 51% and 24%, respectively. In 1998 - three customers
                  provided 52%, 19% and 17%, respectively. In 1997 - four
                  customers provided 28%, 21%, 19% and 11%, respectively. No
                  customers accounted for more than 10% of the consolidated
                  insurance revenues in any year.

        (c)       Investments

                  Investments are classified as "available for sale" and are
                  reported at fair value, with unrealized gains or losses
                  charged or credited directly to stockholders' equity.

                           The fair value of investment securities are based on
                  quoted market prices. Premiums and discounts on debt
                  securities are amortized into interest income over the term of
                  the securities in a manner that approximates the interest
                  method. Realized gains and losses on sales of securities are
                  computed using the specific identification method. Any
                  security which management believes has experienced a decline
                  in value which is other than temporary is written down to its
                  market value through a charge to income.

                           Short-term investments, consisting primarily of money
                  market instruments maturing within one year are carried at
                  cost which, along with accrued interest, approximates fair
                  value. Cash and cash equivalents include cash on hand and
                  short-term highly liquid investments of maturities of three
                  months or less when purchased. These investments are carried
                  at cost plus accrued interest which approximates fair value.





                                       28
<PAGE>   29




                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         (d)      Policy Acquisition Costs

                  Policy acquisition costs, representing commissions and certain
                  underwriting costs, are deferred and amortized on a
                  straight-line basis over the policy term. During the years
                  ended December 31, 1999, 1998 and 1997, deferrable costs
                  capitalized were $1,997,609, $1,584,541 and $1,975,523,
                  respectively. The amortization of deferred policy acquisition
                  costs charged to operations for the years ended December 31,
                  1999, 1998 and 1997 was $2,223,918, $2,112,857 and $2,802,993,
                  respectively.

         (e)      Property and Equipment

                  Property and equipment are reported at depreciated cost.
                  Depreciation is computed using the straight-line method at
                  rates based upon the respective estimated useful lives of the
                  assets. Maintenance and repairs are expensed as incurred.

         (f)      Intangibles

                  All intangibles are stated at amortized cost and are being
                  amortized using the straight-line method. Intangibles include
                  insurance operating licenses and goodwill, which represents
                  the excess of cost over the fair market value of net assets
                  acquired. These intangible assets are amortized over periods
                  ranging from 15 to 25 years. The carrying amounts of these
                  intangibles are regularly reviewed for indicators of
                  other-than-temporary impairments in value.

         (g)      Insurance Reserve Liabilities

                  Reserves for losses and loss adjustment expenses are
                  established with respect to both reported and incurred but not
                  reported claims for insured risks. The amount of loss reserves
                  for reported claims is primarily based upon a case-by-case
                  evaluation of the type of risk involved, knowledge of the
                  circumstances surrounding the claim and the policy provisions
                  relating to the type of claim. As part of the reserving
                  process, historical data are reviewed and consideration is
                  given to the anticipated impact of various factors such as
                  legal developments and economic conditions, including the
                  effects of inflation. Reserves are monitored and recomputed
                  periodically using new information on reported claims.

                  Reserves for losses and loss adjustment expenses are estimates
                  at any given point in time of what the Company may have to pay
                  ultimately on incurred losses, including related settlement
                  costs, based on facts and circumstances then known. The
                  Company also reviews its claims reporting patterns, past loss
                  experience, risk factors and current trends and considers
                  their effect in the determination of estimates of incurred but
                  not reported losses. Ultimate losses and loss adjustment
                  expenses are affected by many factors which are difficult to
                  predict, such as claim severity and frequency, inflation
                  levels and unexpected and unfavorable judicial rulings.
                  Reserves for surety claims also consider the amount of
                  collateral held as well as the financial strength of the
                  contractor and its indemnitors. Management believes that the
                  reserves for losses and loss adjustment expenses are adequate
                  to cover the unpaid portion of the ultimate net cost of losses
                  and loss adjustment expenses incurred, including losses
                  incurred but not reported.

         (h)      Collateral Held

                  The carrying amount of collateral held approximates its fair
                  value because of the short maturity of these instruments.
                  Collateral held represents cash and investments retained by
                  the Company for surety bonds issued by the Company.





                                       29
<PAGE>   30



                       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. Such reinsurance is applicable on a per
                  policy basis generally to those policies with per occurrence
                  limits in excess of $2 million up to $10 million for liability
                  and for individual surety bonds, the Company reinsures through
                  various layered excess of loss agreements up to $10 million on
                  a $14.5 million bond. Reinsurance ceded also includes a
                  facultative reinsurance treaty which is applicable to excess
                  policies written over a primary policy issued by the Company
                  for specific projects. Reinsurance is ceded to limit losses
                  from large exposures and to permit recovery of a portion of
                  direct losses; however, such a transfer does not relieve the
                  originating insurer of its liability. The Company participates
                  in assumed quota share reinsurance arrangements covering
                  marine and property catastrophe risks with one of its excess
                  of loss reinsurers.

                  Reinsurance recoverables include ceded reserves for losses and
                  loss adjustment expenses. Ceded unearned premiums of $453,588
                  and $662,363 at December 31, 1999 and 1998, respectively, are
                  included in other assets. All reinsurance contracts maintained
                  by the Company qualify as short-duration prospective
                  contracts. A summary of reinsurance premiums written and
                  earned is provided below:

<TABLE>
<CAPTION>
                                                Premiums Written                                   Premiums Earned
                                                ----------------                                   ---------------
                                      1999             1998             1997              1999             1998            1997
                                      ----             ----             ----              ----             ----            ----
<S>                               <C>               <C>             <C>                <C>             <C>             <C>
                  Direct          $8,968,024        8,324,506       12,851,647         $10,528,702     11,211,803      15,164,588
                  Assumed            124,763          528,220          686,935              97,052        656,023       1,144,017
                  Ceded           (1,002,787)        (649,109)        (858,385)         (1,211,562)      (905,163)     (1,262,761)
                                   ---------       ----------      -----------          -----------   ------------     -----------
                      Totals      $8,090,000        8,203,617       12,680,197         $ 9,414,192     10,962,663      15,045,844
                                   =========        =========       ==========          ==========     ==========      ==========
</TABLE>


                  Ceded incurred losses and loss adjustment expenses totaled
                  $215,292, $180,553 and $364,015 for the years ended December
                  31, 1999, 1998 and 1997, respectively.

         (j)      Revenue Recognition

                  Revenue on construction contracts is recorded using the
                  percentage of completion method. Under this method revenues
                  with respect to individual contracts are recognized in the
                  proportion that costs incurred to date relate to total
                  estimated costs. Revenues and cost estimates are subject to
                  revision during the terms of the contracts, and any required
                  adjustments are made in the periods in which the revisions
                  become known. Provisions are made, where applicable, for the
                  entire amount of anticipated future losses on contracts in
                  progress. Claims are recorded as revenue at the time of
                  settlement and profit incentives and change orders are
                  included in revenues when their realization is reasonably
                  assured. Selling, general and administrative expenses are not
                  allocated to contracts.

                  Insurance premiums are recognized over the coverage period.
                  Unearned premiums represent the portion of premiums written
                  that is applicable to the unexpired terms of policies in
                  force, calculated on a prorata basis.

         (k)      Income Taxes

                  Deferred tax assets and liabilities are recognized for the
                  future tax consequences attributable to differences between
                  the financial statement carrying amounts of existing assets
                  and liabilities and their respective tax bases. Deferred tax
                  assets and liabilities are measured using enacted tax rates
                  expected to apply to taxable income in the years in which
                  those temporary differences are expected to be recovered or
                  settled. The effect on deferred tax assets and liabilities of
                  a change in tax rates is recognized in income in the period
                  that includes the enactment date.

         (l)      Use of Estimates

                  The preparation of financial statements in conformity with
                  generally accepted accounting principles requires management
                  to make estimates and assumptions that affect the amounts
                  reported in the financial statements and accompanying notes.
                  Actual results could differ from reported results using those
                  estimates.





                                       30
<PAGE>   31



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         (m)      Comprehensive Income


                  The following table summarizes reclassification adjustments
                  for other comprehensive income (loss) and the related tax
                  effects for the years ended December 31, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                                                                               1999           1998          1997
                                                                                               ----           ----          ----
<S>                                                                                        <C>                <C>          <C>
                 Unrealized gains (losses) on investments:
                 Unrealized holding gain (loss) arising during period net of income
                 tax expense of $224,405 and $57,163 for 1998 and 1997, respectively.      $(2,243,436)       435,609      111,199
                 Less reclassification adjustment for gains included in net earnings,
                 net of income tax expense of $85,745, $90,497 and $96,107 for 1999,
                 1998 and 1997, respectively.                                                  166,445        175,672      186,560
                                                                                            ----------        -------      -------
                 Other comprehensive income (loss)                                         $(2,409,881)       259,937      (75,361)
                                                                                           ===========        =======      =======
</TABLE>


         (n)      New Accounting Standards

                  Statement of Position ("SOP") 97-3, "Accounting by Insurance
                  and Other Enterprises for Insurance-Related Assessments", was
                  issued in December 1997 and provides guidance for determining
                  when an entity should recognize a liability for guaranty-fund
                  and other insurance-related assessments, how to measure that
                  liability, and when an asset may be recognized for the
                  recovery of such assessments through premium tax offsets or
                  policy surcharges. SOP 97-3 became effective for financial
                  statements for fiscal years beginning after December 15, 1998,
                  and the effect of initial adoption is to be reported as a
                  cumulative catch-up adjustment. Restatement of previously
                  issued financial statements is not allowed. The adoption of
                  this SOP did not have a material effect on the Company's
                  results of operations or financial condition.

                  Statement of Position ("SOP") 98-1, "Accounting for the Costs
                  of Computer Software Developed or Obtained for Internal Use,"
                  was issued in March 1998 and provides guidance on accounting
                  for the costs of computer software developed or obtained for
                  internal use and for determining when specific costs should be
                  capitalized and when they should be expensed. SOP 98-1 became
                  effective for financial statements for fiscal years beginning
                  after December 15, 1998. Costs incurred prior to initial
                  application of this SOP, whether capitalized or not, are not
                  be adjusted to the amounts that would have been capitalized
                  had this SOP been in effect when those costs were incurred and
                  therefore, the adoption of this SOP did not have a material
                  effect on the Company's result of operations or financial
                  condition.

         (o)      Future Accounting Standard

                  SFAS No. 133, "Accounting for Derivative Instruments and
                  Hedging Activities", was issued in June 1998 and establishes
                  accounting and reporting standards for derivative instruments,
                  including certain derivative instruments embedded in other
                  contracts, (collectively referred to as derivatives) and for
                  hedging activities. It requires that an entity recognize all
                  derivatives as either assets or liabilities in the statement
                  of financial position and measure those instruments at fair
                  value. This statement was to be effective for all fiscal
                  quarters of fiscal years beginning after June 15, 1999.
                  However, in June 1999, SFAS No. 137, "Deferral of the
                  Effective Date of FASB Statement No. 133" was issued. SFAS No
                  137 allows entities which have not adopted SFAS No. 133 to
                  defer its effective date to all fiscal quarters of all fiscal
                  years beginning after June 15, 2000. This Statement should not
                  be applied retroactively to financial statements of prior
                  periods. The Company adopted the deferral provisions of SFAS
                  No. 137, effective January 1, 2000 and has not completed its
                  evaluation of the effect SFAS No. 133 will have on the
                  Company's results of operations or financial condition.





                                       31
<PAGE>   32



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(2)     INVESTMENTS

        INVESTMENTS AT DECEMBER 31, 1999 AND 1998 FOLLOWS:
<TABLE>
<CAPTION>
                                                                              AMORTIZED         ESTIMATED         CARRYING
                                                                                 COST           FAIR VALUE          VALUE
                                                                                 ----           ----------          -----
<S>                                                                           <C>               <C>             <C>
        1999
        Fixed maturities - available for sale:
        Bonds:
         States, municipalities and political subdivisions                      $37,020,634      36,607,995      36,607,995
         United States government and government agencies                        18,885,440      18,568,888      18,568,888
         Mortgage-backed securities                                               5,816,255       5,642,888       5,642,888
         Industrial and miscellaneous                                            27,568,481      27,007,149      27,007,149
                                                                                -----------      ----------      ----------
          Total fixed maturities                                                 89,290,810      87,826,920      87,826,920
        Equity securities - common stocks:
         Banks, trusts and insurance                                                  5,262          14,763          14,763
        Equity securities - redeemable preferred stocks:
         Banks, trusts and insurance                                              1,060,000         860,000         860,000
         Industrial and miscellaneous                                             1,000,000         740,000         740,000
                                                                                  ---------         -------         -------
          Total equity securities                                                 2,065,262       1,614,763       1,614,763
        Short-term investments                                                      518,557         518,557         518,557
                                                                                -----------      ----------      ----------
          Total investments                                                     $91,874,629      89,960,240      89,960,240
                                                                                ===========      ==========      ==========

        1998
        Fixed maturities - available for sale:
        Bonds:
         States, municipalities and political subdivisions                      $54,679,758      55,081,641      55,081,641
         United States government and government agencies                        18,809,228      19,005,763      19,005,763
         Mortgage-backed securities                                              24,639,206      24,795,347      24,795,347
                                                                                -----------      ----------      ----------
          Total fixed maturities                                                 98,128,192      98,882,751      98,882,751
        Equity securities - common stocks:
         Banks, trusts and insurance                                                  5,262          18,948          18,948
        Equity securities - redeemable preferred stocks:
         Banks, trusts and insurance                                              1,060,000       1,060,000       1,060,000
         Industrial and miscellaneous                                             1,000,000         982,500         982,500
                                                                                -----------      ----------      ----------
          Total equity securities                                                 2,065,262       2,061,448       2,061,448
        Short-term investments                                                   12,947,913      12,947,913      12,947,913
                                                                               ------------      ----------      ----------
          Total investments                                                    $113,141,367     113,892,112     113,892,112
                                                                               ============     ===========     ===========
</TABLE>



         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, 1999, the Company's insurance subsidiaries had
         securities with an aggregate book value of approximately $9.9 million
         on deposit with various state regulatory authorities.





                                       32
<PAGE>   33




                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          The amortized cost and fair value of fixed maturities at December 31,
          1999 and 1998, by effective maturity, follows:

<TABLE>
<CAPTION>
                                                                    1999                                  1998
                                                      ------------------------------         ------------------------------
                                                       Amortized             Fair             Amortized             Fair
                                                         Cost               Value                Cost               Value
                                                         ----               -----                ----               -----
<S>                                                   <C>                <C>                  <C>               <C>
Due in one year or less                                $16,692,346        16,907,611           19,661,604        19,804,671
Due after one year through five years                   65,642,615        64,139,194           72,227,199        72,805,247
Due after five years through ten years                   3,843,840         3,719,256            5,198,529         5,225,378
Due after ten years                                      3,112,009         3,060,859            1,040,860         1,047,455
                                                       -----------       -----------          -----------        ----------
    Total                                              $89,290,810        87,826,920           98,128,192        98,882,751
                                                       ==========        ===========           ==========        ==========
</TABLE>


          The Company's portfolio is comprised primarily of fixed maturity
          securities rated AA or better by Standard and Poor's and includes
          mostly U.S. Treasuries and tax-free municipal securities

          A summary of gross unrealized gains and losses at December 31, 1999
          and 1998 follows:


<TABLE>
<CAPTION>
                                             1999                             1998
                                  --------------------------       --------------------------
                                    Gains            Losses           Gains          Losses
                                    -----            ------           -----          ------
<S>                               <C>            <C>               <C>             <C>
States, municipalities and
  political subdivisions          $    8,870        (421,509)         413,730         (11,847)
United States government and
  government agencies                    103        (316,655)         232,849         (36,314)
Industrial and miscellaneous            --          (173,367)            --              --
Mortgage-backed securities              --          (561,332)         156,767            (626)
                                  ----------      ----------       ----------      ----------
  Total                                8,973      (1,472,863)         803,346         (48,787)

Equity securities                      9,501        (460,000)          13,686         (17,500)
                                  ----------      ----------       ----------      ----------

  Total                           $   18,474      (1,932,863)         817,032         (66,287)
                                  ==========      ==========       ==========      ==========
</TABLE>


(3)      INVESTMENT INCOME AND REALIZED CAPITAL GAINS AND LOSSES

         A summary of net investment income for the years ended December 31,
1999, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                        1999              1998              1997
                                    -----------       -----------       -----------
<S>                                 <C>               <C>               <C>
Tax-exempt interest                 $ 1,680,051         2,045,722         1,996,969
Taxable interest                      3,680,987         4,080,814         4,639,758
Dividends on equity securities          112,130            56,603            10,283
Investment expenses                     (83,436)          (45,034)         (142,294)
                                    -----------       -----------       -----------

  Net investment income             $ 5,389,732         6,138,105         6,504,716
                                    ===========       ===========       ===========
</TABLE>


         Realized capital gains (losses) for the years ended December 31, 1999,
1998 and 1997 follows:

<TABLE>
<CAPTION>
                                           1999           1998            1997
                                         --------       --------        --------
<S>                                      <C>            <C>             <C>
Fixed maturities                         $252,190        225,701         258,318
Equity securities                            --           44,653          24,349
Other                                        --           (4,185)           --
                                         --------       --------        --------

   Net realized capital gains            $252,190        266,169         282,667
                                         ========       ========        ========
</TABLE>




                                       33
<PAGE>   34



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Gross gains of $349,413, $229,063 and $261,005 and gross losses of
         $97,223, $3,362 and $2,687 were realized on fixed maturity sales for
         the years ended December 31, 1999, 1998 and 1997, respectively. Gross
         gains of $0, $44,653 and $24,349 were realized on sale of equity
         securities for the years ended December 31, 1999, 1998 and 1997,
         respectively. There were no losses realized on equity security sales
         for the years ended December 31, 1999, 1998 and 1997.

(4)      RECEIVABLES

                  A summary of receivables at December 31, 1999 and 1998
follows:

<TABLE>
<CAPTION>
                                                                            1999              1998
                                                                        -----------       -----------
<S>                                                                     <C>               <C>
Insurance premiums due from agents                                      $ 1,526,145         2,440,836
Receivables under construction contracts:
  Amounts billed                                                          1,335,451         2,662,501
  Recoverable costs in excess of billings on uncompleted contracts           67,885           173,324
  Billings in excess of costs on uncompleted contracts                     (489,650)       (1,957,000)
  Retainage, due on completion of contracts                                 463,959           504,857
                                                                        -----------       -----------
     Total receivables under construction contracts                       1,377,645         1,383,682
Other                                                                       114,709           170,726
                                                                        -----------       -----------
     Total receivables                                                    3,018,499         3,995,244
Less allowances for doubtful accounts                                      (195,118)         (257,617)
                                                                        -----------       -----------
     Total receivables, net                                             $ 2,823,381         3,737,627
                                                                        ===========       ===========
</TABLE>


         The balances billed but not paid by customers pursuant to retainage
         provisions in construction contracts will be due upon completion of the
         contracts and acceptance by the owner. In management's opinion, the
         majority of contract retainage is expected to be collected in 2000.

         Recoverable costs in excess of billings on uncompleted contracts are
         comprised principally of amounts of revenue recognized on contracts for
         which billings had not been presented to the contract owners as of the
         balance sheet date. These amounts will be billed in accordance with the
         contract terms.

(5)      PROPERTY AND EQUIPMENT

         A summary of property and equipment at December 31, 1999 and 1998
follows:

<TABLE>
<CAPTION>
                                                       1999                       1998
                                                       ----                       ----
<S>                                                 <C>                         <C>
        Building                                    $14,912,042                 14,843,201
        Land                                            800,000                    800,000
        Equipment and vehicles                        1,255,128                  1,008,966
        Furniture and fixtures                          888,824                    892,663
                                                    -----------               ------------
                                                     17,855,994                 17,544,830
        Less accumulated depreciation                 5,180,038                  4,650,639
                                                    -----------                -----------
                                                    $12,675,956                 12,894,191
                                                    ===========                 ==========
</TABLE>


         Future minimum rental income to be generated by leasing a portion of
         the building under non-cancelable operating leases as of December 31,
         1999 are estimated to be $651,344 for 2000, $656,144 for 2001, $660,944
         for 2002 $581,744 for 2003 and $99,600 for 2004. Rental income earned
         in 1999, 1998 and 1997 was $688,102, $626,730 and $561,852,
         respectively.

(6)      INTANGIBLES

         A summary of intangibles, acquired primarily in connection with
         purchases of the Company's insurance subsidiaries, at December 31, 1999
         and 1998 follows:

<TABLE>
<CAPTION>
                                                           1999                       1998
                                                           ----                       ----
<S>                                                      <C>                         <C>
        Insurance licenses                               $4,188,926                  4,188,926
        Goodwill                                          2,524,872                  2,524,872
                                                          ---------                  ---------
                                                          6,713,798                  6,713,798
        Less accumulated amortization                     4,145,079                  3,818,427
                                                          ---------                  ---------
                                                         $2,568,719                  2,895,371
                                                         ==========                  =========
</TABLE>


        Intangible assets are written off when they become fully amortized.



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(7)      RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES





                                       34
<PAGE>   35



         The following table sets forth a reconciliation of beginning and ending
         reserves for unpaid losses and loss adjustment expenses for the periods
         indicated on a GAAP basis for the business of the Company.

<TABLE>
<CAPTION>
                                                      1999                   1998                  1997
                                                      ----                   ----                  ----
<S>                                               <C>                     <C>                   <C>
         Balance at January 1                      $43,115,062             48,900,713            47,960,084
           Less reinsurance recoverable              2,224,116              3,478,121             3,841,001
                                                    ----------             ----------            ----------
         Net balance at January 1                   40,890,946             45,422,592            44,119,083

         Incurred related to:
           Current year                              3,091,120              4,508,667             5,176,030
           Prior years                              (1,418,233)            (2,321,939)             (838,778)
                                                    -----------            -----------           -----------
         Total incurred                              1,672,887              2,186,728             4,337,252

         Payments related to:
           Current year                                 81,569                 18,260                94,398
           Prior years                               7,861,837              6,700,114             2,939,345
                                                     ---------              ---------             ---------
         Total payments                              7,943,406              6,718,374             3,033,743

         Net balance at December 31                 34,620,427             40,890,946            45,422,592
           Plus reinsurance recoverable              3,924,064              2,224,116             3,478,121
                                                   -----------             ----------            ----------
         Balance at December 31                    $38,544,491             43,115,062            48,900,713
                                                   ===========             ==========            ==========
</TABLE>



         The decrease of incurred losses and loss adjustment expenses of prior
         years represents a release of surety loss reserves on older years that
         are no longer needed and a reallocation of reserves among accident
         years. Management believes that the reserves for losses and loss
         adjustment expenses are adequate to cover the unpaid portion of the
         ultimate net cost of losses and loss adjustment expenses, including
         losses incurred but not reported.

         The Company has no exposure to any asbestos or environmental claims
         associated with general liability policies issued with the pre-1986
         pollution exclusion. Policies written with the exclusion are typically
         associated with mass tort environmental and asbestos claims. The
         Company has never issued a policy with the pre-1986 pollution
         exclusion. The Company's exposure to asbestos and environmental
         liability claims is primarily limited to asbestos and environmental
         liability insurance for contractors and consultants involved in the
         remediation, removal, storage, treatment and/or disposal of
         environmental and asbestos hazards.

(8)      NOTES PAYABLE TO BANKS

         At December 31, 1999, 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, 1999 and 1998.
         Under the terms of the line of credit, interest on the outstanding
         balance is calculated based upon the London Inter-Bank Offering Rate
         (LIBOR) plus 160 basis points in effect during the borrowing period.

         The fair value of notes payable to banks approximates cost.


(9)      LONG-TERM DEBT

                  A summary of long-term debt at December 31, 1999 and 1998
         follows:

<TABLE>
<CAPTION>
                                                   1999                        1998
                                                   ----                        ----
<S>                                           <C>                           <C>
        Term Loan due 2004                     $  4,250,000                           -
        Term Loan due 2003                                -                   5,000,000
        Senior Notes due 2005                     3,900,000                   9,000,000
        Mortgage Note due 2009                    7,242,720                   7,800,000
        Convertible Note due 2022                15,400,000                  15,400,000
                                                 ----------                  ----------
                                                $30,792,720                  37,200,000
                                                ===========                  ==========
</TABLE>






                                       35
<PAGE>   36



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         On September 1, 1999, the Company obtained a $4,500,000 term loan from
         a financial institution, which is currently payable in quarterly
         installments of $250,000 which commenced December 1, 1999. The 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 the
         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 loan agreements contain certain
         limitations on borrowings, minimum statutory capital levels and require
         maintenance of specified ratios. The proceeds were used to repay the
         existing mortgage note.

         On September 1, 1999, the Company replaced a $5,000,000, five-year term
         loan that was obtained from a financial institution on December 9,
         1998. The loan agreements contained certain limitations on borrowings,
         minimum statutory capital levels and require maintenance of specified
         ratios. The proceeds, along with internal funds, were used to refinance
         existing debt which existed at December 31, 1998.

         On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of
         Class A Stock which AIG Life Insurance Company (366,663 shares) and
         American International Life Assurance Company of New York, (733,333)
         had acquired over the last three years through conversion options (See
         Note 12). The shares were purchased at an average price of $14.70 per
         share, for a total purchase price of $16,174,942. The purchase price of
         $16,174,942 consisted of $4,174,942 in cash and promissory notes
         totaling $12,000,000. The promissory notes are with AIG Life Insurance
         Company and American International Life Assurance Company of New York
         and are payable over eight years with annual payments of $1,500,000
         which commenced on January 31, 1998, with interest at prime rate
         (8-1/2%). The Company voluntarily prepaid the installments due January
         31 on December 31 in both 1999 and 1998. The Company also made a
         voluntary prepayment of $3,600,000 on December 31, 1999. The interest
         rate is equal to the prime rate, however, the interest rate shall not
         exceed 9-1/4% and it shall not be less than 7-1/4%. The purchase of
         stock in 1997 with the $12,000,000 promissory notes is a non-cash
         transaction that is not reflected in the Consolidated Statement of Cash
         Flows.

         The terms of the note agreements with AIG Life Insurance Company and
         American International Life Assurance Company of New York contain
         limitations on payment of cash dividends, re-acquisition of shares,
         borrowings and investments and require maintenance of specified ratios
         and a minimum tangible net worth of $12,000,000. ACMAT may also require
         its insurance subsidiaries to pay dividends to the extent of funds
         legally available therefore, in order to enable ACMAT to have funds to
         pay on a timely basis all amounts due with respect to the notes. The
         Company is in compliance with all of these covenants at December 31,
         1999.

         On July 1, 1992, the Company issued a 30-year unsecured $16,500,000,
         11.5% subordinated debenture to the Sheet Metal Workers' National
         Pension Fund ("Fund") to purchase 3,000,000 shares of United Coasts
         Corporation's outstanding common stock held by the Fund. Annual
         principal payments of $1,650,000 per year for ten years are due
         beginning on July 1, 2012. The note is convertible into ACMAT Class A
         stock at $11 per share. The conversion price of $11 per share would be
         adjusted at the time of conversion to reflect any stock dividends,
         recapitalizations or additional stock issuance. The Company can prepay
         the note and the Fund has the option to accept the prepayment or
         convert the note to stock. The Company made a voluntary principal
         payment of $1,100,000 on July 31, 1998. At December 31, 1999, the
         Company had reserved 1,400,000 shares of Class A Stock for issuance
         pursuant to such conversion option.

         Principal payments on long-term debt are $1,600,052, $3,143,108,
         $3,189,256, $2,638,716 and $1,041,724 for the years 2000 through 2004,
         respectively. Interest expense paid in 1999, 1998 and 1997 amounted to
         $3,751,313, $5,121,093 and $4,630,502, respectively.

         The fair value at December 31, 1999 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, 1999
         because of the complex and unique terms associated with this debt
         instrument.






                                       36
<PAGE>   37



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(10)     INCOME TAXES

         The components of income tax expense for each year follows:

<TABLE>
<CAPTION>
                                        1999             1998             1997
                                    ----------       ----------       ----------
<S>                                <C>              <C>              <C>
        Current Taxes:
          Federal                   $  725,246          584,655        1,310,845
          State                         50,000           62,000           45,000
                                    ----------       ----------       ----------
                                       775,246          646,655        1,355,845
                                    ----------       ----------       ----------
        Deferred Taxes:
          Federal                      428,918           73,041          383,771
          State                           --               --               --
                                    ----------       ----------       ----------
                                       428,918           73,041          383,771
                                    ----------       ----------       ----------
        Total                       $1,204,164          719,696        1,739,616
                                    ==========       ==========       ==========
</TABLE>


         The effective income tax rate, as a percentage of earnings before
       income taxes and minority interest follows:

<TABLE>
<CAPTION>
                                               1999          1998          1997
                                              ------        ------        ------
<S>                                           <C>           <C>           <C>
        Federal statutory tax rate              34.0%         34.0%         34.0%
        State income tax                          .8           1.4            .5
        Effect of tax-exempt interest          (11.5)        (20.8)         (9.4)
        Dividend received deduction             --            (4.8)         --
        Amortization of goodwill                 2.8           3.9           1.8
        Officers life insurance premiums         2.0           2.8           1.2
        Other, net                                .5           8.8            --
                                              ------        ------        ------
          Effective income tax rate             28.6%         25.3%         28.1%
                                              ======        ======        ======
</TABLE>



         The tax effects of temporary differences that give rise to significant
         portions of the deferred tax assets and deferred tax liabilities at
         December 31, 1999 and 1998 are presented below:

<TABLE>
<CAPTION>
                                                                                  1999             1998
                                                                               -----------      -----------
<S>                                                                            <C>              <C>
Deferred Tax Assets:
  Reserves for losses and loss adjustment expenses,
     Principally due to reserve discounting                                    $ 2,037,064        2,455,519
  Unearned premiums                                                                327,004          417,049
  Accounts receivable, principally due to allowance for doubtful accounts           66,340           87,590
  Unrealized losses on investments                                                 650,892             --
  State net operating loss carryforward                                          8,709,178        8,895,440
  Other                                                                             60,020           22,073
                                                                               -----------      -----------
     Total gross deferred tax assets                                            11,850,498       11,877,671
     Less valuation allowance                                                    9,360,070        8,895,440
                                                                               -----------      -----------
     Net deferred tax assets                                                   $ 2,490,428        2,982,231
Deferred Tax Liabilities:
  Plant and equipment                                                              480,019          461,970
  Deferred policy acquisition costs                                                450,085          527,030
  Unrealized gains on investments                                                     --            255,254
  Other                                                                               --              3,990
                                                                               -----------      -----------
     Total gross deferred tax liabilities                                          930,104        1,248,244
                                                                               -----------      -----------

     Net deferred tax assets                                                   $ 1,560,324        1,733,987
                                                                               ===========      ===========
</TABLE>


         A valuation allowance is provided for the state net operating loss
         carryforward and the unrealized loss on investments which is not
         considered realizable. In assessing the realization of deferred tax
         assets, management considers whether it is more likely than not that
         the deferred tax assets will be realized. The ultimate realization of
         deferred tax assets is dependent upon the generation of future taxable
         income during the periods in which those temporary differences become
         deductible. Management considers the scheduled reversal of deferred tax
         liabilities, tax planning strategies and anticipated future taxable
         income in making this assessment and believes it is more likely than
         not the Company will realize the benefits of its deductible temporary
         differences, net of the valuation allowance, at December 31, 1999.

         Taxes paid in 1999, 1998 and 1997 were $703,081, $52,227 and
$1,790,253, respectively.






                                       37
<PAGE>   38



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(11)     PENSION AND PROFIT SHARING PLANS

         The Company and its subsidiaries maintain, for the benefit of non-union
         employees, a qualified thrift, profit sharing and retirement plan.
         Participants are required to contribute three percent of their
         compensation to the plan annually. The Company's contributions,
         established by the Board of Directors, were $85,000 in 1999, 1998 and
         1997.

         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, 1999.


(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 1999, 1998 and 1997, ACMAT repurchased, in open market and
         privately negotiated transactions 7,260, 4,769, and 3,400 respectively,
         shares of its Common Stock at an average price of $20.93, $20.65 and
         $20.44 per share, respectively. The Company also repurchased during
         1999, 1998 and 1997, in open market and privately negotiated
         transactions 189,221, 342,366 and 1,347,686, respectively, shares of
         its Class A Stock at an average price of $12.52, $15.10 and $14.98 per
         share, respectively.

         On April 1, 1999, the Company purchased a 40% interest in Allied Surety
         Agency, Inc. The Company issued 15,000 shares of Class A Stock for the
         ownership interest. The Company may issue an additional 20,000 shares
         of Class A Stock if certain performance goals are met by Allied Surety
         Agency, Inc. The purchase was a non-cash transaction and is not
         reflected in the Consolidated Statements of Cash Flow.

         During 1997, the Company issued 450,000 shares of Class A Stock at $10
         per share pursuant to the conversion options of the Convertible Senior
         Notes to AIG Life Insurance Company and American International Life
         Assurance Company of New York, all of which was repurchased by the
         Company in 1997 (see Note 9). The issuance of stock pursuant to the
         conversion option of the Convertible Senior Notes is a non-cash
         transaction that is not reflected in the Consolidated Statement of Cash
         Flows.

         The stockholders have periodically approved the distribution of
         non-qualified stock options to certain officers and directors giving
         such individuals the right to purchase restricted shares of the
         Company's Common and Class A Stock. Transactions regarding these stock
         options are summarized below:

<TABLE>
<CAPTION>
                                                                  1999             1998             1997
                                                              -----------      -----------      -----------
<S>                                                           <C>              <C>              <C>
        Options outstanding at December 31                        274,000          292,000          383,000
        Weighted average price per share of
           options outstanding                                $      8.48      $     10.20      $      9.59
        Expiration dates                                      1/2001-7/2006    1/2001-7/2006    1/2001-7/2006
        Options exercisable at December 31                           --            292,000          383,000
        Options granted                                              --               --               --
        Options exercised or surrendered                           18,000           91,000          121,000
        Price ranges of options exercised or surrendered      $     15.25      $6.00-$8.50      $6.00-$8.50
</TABLE>


         The exercise price of each option equals the market price of the
         Company's stock on the date of grant and the option's term is ten
         years. The options vest six months after the date of grant. There were
         no stock options granted in 1999, 1998 or 1997, however, the exercise
         price of the Class A Stock options were re-priced at $7.25 on December
         16, 1999.




                                       38
<PAGE>   39



                       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 $9,775,000 in 2000.

         The Company's insurance subsidiaries, United Coastal Insurance and
         ACSTAR, are domiciled in Arizona and Illinois, respectively. The
         statutory financial statements of United Coastal Insurance and ACSTAR
         are prepared in accordance with accounting practices prescribed by the
         Arizona Department of Insurance and the Illinois Department of
         Insurance, respectively. Prescribed statutory accounting practices
         include a variety of publications of the National Association of
         Insurance Commissioners (NAIC), as well as the state laws, regulations,
         and general administrative rules. As of December 31, 1999, the Company
         does not utilize any statutory accounting practices which are not
         prescribed by insurance regulators that individually or in the
         aggregate materially affect statutory shareholders' equity.

         The NAIC recently completed a process intended to codify statutory
         accounting practices for certain insurance enterprises. As a result,
         the NAIC issued a revised statutory Accounting Practices and Procedures
         Manual - version effective January 1, 2001 (the revised Manual) that
         will be effective for years beginning January 1, 2001. The States of
         Illinois and Arizona will require that, effective January 1, 2001,
         insurance companies domiciled in Illinois and Arizona prepare their
         statutory basis financial statements in accordance with the revised
         Manual subject to any deviations prescribed or permitted by the
         Illinois and Arizona insurance commissioner. The Company has not yet
         determined the impact that this change will have on the statutory
         capital and surplus of its insurance subsidiaries.

         In accordance with statutory accounting principles, ACMAT's insurance
         subsidiaries' statutory capital and surplus was $49,130,735 and
         $55,124,801 at December 31, 1999 and 1998, respectively, and their
         statutory net income for the years ended December 31, 1999, 1998 and
         1997 was $11,231,410, $12,078,378 and $12,383,045, respectively. The
         primary differences between amounts reported in accordance with GAAP
         and amounts reported in accordance with statutory accounting principles
         are excess statutory reserves over statement reserves (Schedule P
         Liability), carrying value of fixed maturity investments; assets not
         admitted for statutory purposes such as agents balances over 90 days,
         furniture and fixtures and certain notes receivable; and deferred
         acquisition costs and deferred taxes which are recognized for GAAP
         only.

         Pursuant to various debt covenants, previously described, ACMAT is
         restricted from purchasing treasury stock and paying dividends greater
         than 20% of consolidated net earnings.

(13)     EARNINGS PER SHARE

         The following is a reconciliation of the numerators and denominators of
         the basic and diluted earnings per share ("EPS") computations for the
         years ended December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                             Average
                                                              Shares       Per-Share
1999:                                        Earnings       Outstanding     Amount
-----                                        --------       -----------     ------
<S>                                         <C>             <C>            <C>
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
                                            ==========      ==========      =====
1998:
-----
Basic EPS:
    Earnings available to stockholders      $2,120,529       3,199,906      $ .66

Effect of Dilutive Securities:
    Stock options                                 --            79,029
                                            ----------      ----------

Diluted EPS:
    Earnings available to stockholders      $2,120,529       3,278,935      $ .65
                                            ==========      ==========      =====
</TABLE>





                                       39
<PAGE>   40



                       ACMAT CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                         Average
                                                                                          Shares         Per-Share
         1997:                                                      Earnings           Outstanding        Amount
         -----                                                      --------           -----------        ------
<S>                                                                 <C>                <C>               <C>
         Basic EPS:
             Earnings available to stockholders                      $4,456,949         3,443,976          $1.29

         Effect of Dilutive Securities:
             Stock options                                                   --           128,917
             Convertible senior notes                              $     29,903            43,150
             Convertible Notes                                        $1,252,350         1,500,000
                                                                      ---------         ---------

         Diluted EPS:
             Earnings available to stockholders                      $5,739,202         5,116,043          $1.12
                                                                      =========         =========           ====
</TABLE>


         The Convertible Notes were anti-dilutive in 1999 and 1998.

(14)     COMMITMENTS AND CONTINGENCIES

         The Company is a party to legal actions arising in the ordinary course
         of its business. In management's opinion, the Company has adequate
         legal defenses respecting those actions where the Company is a
         defendant, has appropriate insurance reserves recorded, and does not
         believe that their settlement will materially affect the Company's
         operations or financial position.

         Many construction projects in which the Company has been engaged have
         included asbestos exposures which the Company believes to involve a
         particularly high degree of risk because of the hazardous nature of
         asbestos. The Company believes it has reduced the risks associated with
         asbestos through proper training of its employees and by maintaining
         general liability and workers' compensation insurance From 1986 to
         1996, the Company obtained its general liability insurance from its
         insurance subsidiaries. Since 1996, the Company obtained its general
         liability insurance from unaffiliated insurance companies. Since 1989,
         the Company has obtained its surety bonds from its insurance
         subsidiary.

         The Company has, together with many other defendants, been named as a
         defendant in actions 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.

(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
<PAGE>   41




ACMAT CORPORATION AND SUBSIDIARIES
                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The Company evaluates performance based on earnings before income taxes
         and excluding interest expense. The Company accounts for intersegment
         revenue and expenses as if the products/services were to third parties.
         Information relating to the three segments is summarized as follows:

<TABLE>
<CAPTION>
                                                      1999              1998              1997
                                                  ------------      ------------      ------------
<S>                                               <C>               <C>               <C>
        Revenues:
          ACSTAR Bonding                          $  6,227,462         5,286,955         7,209,863
          United Coastal Liability Insurance         8,529,279        10,315,294        15,043,823
          ACMAT Contracting                         13,154,753        15,801,541        14,218,660
                                                  ------------      ------------      ------------
                                                  $ 27,911,494        31,403,790        36,472,346
                                                  ============      ============      ============
        Operating Earnings:
          ACSTAR Bonding                          $  2,968,882         2,314,485         2,305,342
          United Coastal Liability Insurance         4,578,802         5,176,870         8,239,017
          ACMAT Contracting                            907,228           501,712         1,224,579
                                                  ------------      ------------      ------------
                                                  $  8,454,912         7,993,067        11,768,938
                                                  ============      ============      ============

        Depreciation and Amortization:
          ACSTAR Bonding                          $    451,506           442,457           307,453
          United Coastal Liability Insurance           385,502           279,422           512,769
          ACMAT Contracting                            992,638           690,125           685,791
                                                  ------------      ------------      ------------
                                                  $  1,829,646         1,412,004         1,506,013
                                                  ============      ============      ============

        Identifiable Assets:
          ACSTAR Bonding                          $ 44,594,402        50,312,769        53,220,508
          United Coastal Liability Insurance        63,335,872        78,888,156       100,524,851
          ACMAT Contracting                         17,925,337        16,925,540        20,463,403
                                                  ------------      ------------      ------------
                                                  $125,855,611       146,126,465       176,208,762
                                                  ============      ============      ============

        Capital Expenditures:
          ACSTAR Bonding                          $    250,475             3,364               652
          United Coastal Liability Insurance             6,969            49,044            93,709
          ACMAT Contracting                             86,922           186,046            60,122
                                                  ------------      ------------      ------------
                                                  $    344,366           238,454           154,483
                                                  ============      ============      ============
</TABLE>



        The components of revenue for each segment are as follows:

<TABLE>
<CAPTION>
                                                                               1999             1998              1997
                                                                           -----------      -----------       -----------
<S>                                                                        <C>              <C>               <C>
           ACSTAR Bonding:
             Premiums                                                      $ 4,770,401        4,618,281         5,847,558
             Investment income, net                                          1,268,175        1,169,977           962,815
             Equity income (loss) from limited partnership investment             --           (569,343)          244,302
             Capital gains                                                      51,616           68,040            25,380
             Other                                                             137,270             --             129,808
                                                                           -----------      -----------       -----------
                                                                           $ 6,227,462        5,286,955         7,209,863
                                                                           -----------      -----------       -----------
           United Coastal Liability Insurance:
             Premiums                                                      $ 4,743,791        6,519,382         9,198,286
             Investment income, net                                          3,557,332        4,430,026         4,859,805
             Equity income (loss) from limited partnership investment             --           (832,243)          591,735
             Capital gains                                                     200,574          198,129           257,287
             Other                                                              27,582             --             136,710
                                                                           -----------      -----------       -----------
                                                                           $ 8,529,279       10,315,294        15,043,823
                                                                           -----------      -----------       -----------
           ACMAT Contracting:
             Contract revenues                                             $ 9,223,457       12,139,924        10,056,322
             Investment income, net                                             78,702           65,342            55,071
             Inter-segment revenue:
               Rental income                                                 1,258,637        1,251,299         1,251,955
               Underwriting services and agency commissions                  1,538,131        1,697,978         2,295,371
             Other                                                           1,055,826          646,998           559,941
                                                                           -----------      -----------       -----------
                                                                           $13,154,753       15,801,541        14,218,660
                                                                           -----------      -----------       -----------
</TABLE>





                                       41
<PAGE>   42



ACMAT CORPORATION AND SUBSIDIARIES
                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following is a reconciliation of segment totals for revenue and
         operating income to corresponding amounts in the Company's statement of
         earnings:

<TABLE>
<CAPTION>
                                                                        1999               1998               1997
                                                                    ------------       ------------       ------------
<S>                                                                 <C>                <C>                <C>
         Revenue:
              Total revenue for reportable segments                 $ 27,911,494         31,403,790         36,472,346
              Inter-segment eliminations                              (2,411,245)        (2,651,517)        (2,920,211)
                                                                    ------------       ------------       ------------
                                                                    $ 25,500,249         28,752,273         33,552,135
                                                                    ============       ============       ============

         Operating Earnings:
              Total operating earnings for reportable segments      $  8,454,912          7,993,067         11,768,938
              Interest expense                                        (3,738,740)        (4,621,401)        (5,116,414)
              Intersegment interest expense                                 --              (52,774)              --
              Other operating expenses                                  (498,285)          (478,667)          (455,959)
                                                                    ------------       ------------       ------------
                                                                    $  4,217,887          2,840,225          6,196,565
                                                                    ============       ============       ============
</TABLE>


         Operating earnings for ACMAT contracting are operating revenues less
         cost of contract revenues and identifiable selling, general and
         administrative expenses. Operating earnings for the bonding and
         liability insurance segments are revenues less losses and loss
         adjustment expenses, amortization of policy acquisition costs and
         identifiable selling, general and administrative expenses. The
         adjustments and eliminations required to arrive at consolidated amounts
         shown above consist principally of the elimination of the intersegment
         revenues related to the performance of certain services and rental
         charges. Identifiable assets are those assets that are used by each
         segment's operations. Foreign revenues are not significant.

(16)     QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

                  A summary of the unaudited quarterly results of operations for
1999 and 1998 follows:

<TABLE>
<CAPTION>
                                         MARCH 31         JUNE 30       SEPTEMBER 30    DECEMBER 31
                                         --------         -------       ------------    -----------
<S>                                     <C>              <C>           <C>              <C>
1999

        Operating Revenues              $6,575,571       6,265,327       7,002,716        5,656,65
                                        ----------      ----------      ----------      ----------

        Operating Earnings              $2,108,544       2,119,645       2,033,631       1,694,807
                                        ----------      ----------      ----------      ----------

        Net Earnings                    $  881,058         894,276         683,046         555,343
                                        ----------      ----------      ----------      ----------

        Basic Earnings Per Share        $      .30             .30             .23             .19
                                        ----------      ----------      ----------      ----------

        Diluted Earnings Per Share      $      .26             .27             .22             .19
                                        ----------      ----------      ----------      ----------

1998

        Operating Revenues              $7,402,497       6,963,358       7,504,575       6,881,843
                                        ----------      ----------      ----------      ----------

        Operating Earnings              $2,608,244       1,990,413       1,199,983       1,662,986
                                        ----------      ----------      ----------      ----------

        Net Earnings                    $1,003,526         620,254          66,538         430,211
                                        ----------      ----------      ----------      ----------

        Basic Earnings Per Share        $      .30             .19             .02             .14
                                        ----------      ----------      ----------      ----------

        Diluted Earnings Per Share      $      .27             .19             .02             .14
                                        ----------      ----------      ----------      ----------
</TABLE>



Note:    Operating earnings represent operating revenues less the cost of
         contract revenues, losses and loss adjustment expenses and amortization
         of policy acquisition costs and selling, general and administrative
         expenses.





                                       42
<PAGE>   43



Schedule I
                       ACMAT CORPORATION AND SUBSIDIARIES


                  Condensed Financial Information of Registrant

                  As of December 31, 1999 and 1998 and for the

                  years ended December 31, 1999, 1998 and 1997



The following presents the condensed financial position of ACMAT Corporation
(parent company only) as of December 31, 1999 and 1998 and its condensed
statements of earnings and cash flows for the years ended December 31, 1999,
1998 and 1997.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                    Assets                         1999             1998
                                                               -----------      -----------
<S>                                                            <C>              <C>
Current assets:
      Cash                                                     $ 2,418,839      $   396,430
      Receivables                                                1,486,959        1,549,013
      Other current assets                                          94,249          150,984
                                                               -----------      -----------
                     Total current assets                        4,000,047        2,096,427

Property and equipment, net                                     12,289,154       12,671,837
Investments in and advance from subsidiaries                    51,721,904       61,652,491
Intangibles                                                        394,959          518,135
Other assets                                                     1,701,635        1,731,203
                                                               -----------      -----------
                                                               $70,107,699      $78,670,093
                                                               ===========      ===========


                     Liabilities and Stockholders' Equity

Current liabilities:
      Current portion of long-term debt                        $ 1,600,052        1,559,871
      Other current liabilities                                  3,187,987        3,847,167
                                                               -----------      -----------
                     Total current liabilities                   4,788,039        5,407,038
Long-term debt                                                  29,192,668       35,640,129
                                                               -----------      -----------
Total liabilities                                               33,980,707       41,047,167

Commitments and contingencies
Stockholders' equity                                            36,126,992       37,622,926
                                                               -----------      -----------
                                                               $70,107,699      $78,670,093
                                                               ===========      ===========
</TABLE>




See Notes to Condensed Financial Statements.





                                       43
<PAGE>   44



                                                           Schedule I, continued

                       ACMAT CORPORATION AND SUBSIDIARIES

            Condensed Financial Information of Registrant, Continued

                              STATEMENT OF EARNINGS


<TABLE>
<CAPTION>
                                                                    1999              1998              1997
                                                                    ----              ----              ----
<S>                                                             <C>               <C>               <C>
Contract revenues                                               $ 9,223,457        12,139,924        10,056,322
Cost of contract revenues                                         8,361,408        11,810,879         9,331,103
                                                                -----------       -----------       -----------
        Gross profit                                                862,049           329,045           725,219


Selling, general and administrative expenses                      4,206,660         3,841,623         3,982,916
                                                                -----------       -----------       -----------
        Operating loss                                           (3,344,611)       (3,512,578)       (3,257,697)


Interest expense                                                 (3,738,740)       (4,674,175)       (5,116,414)
Interest income                                                      78,622            46,854            43,101
Underwriting fees                                                 1,214,697         1,260,399         1,718,281
Other income                                                      2,335,099         1,898,297         1,811,896
                                                                -----------       -----------       -----------
        Loss before income taxes and equity in net
              earnings of subsidiaries                           (3,454,933)       (4,981,203)       (4,800,833)


Income tax benefit                                               (1,010,000)       (1,435,000)       (1,500,000)
                                                                -----------       -----------       -----------

        Loss before equity in net earnings of subsidiaries       (2,465,569)       (3,546,203)       (3,300,833)

Equity in net earnings of subsidiaries                            5,479,292         5,666,732         7,757,782
                                                                -----------       -----------       -----------

        Net earnings                                            $ 3,013,723         2,120,529         4,456,949
                                                                ===========       ===========       ===========
</TABLE>




See Notes to Condensed Financial Statements.





                                       44
<PAGE>   45



                                                           Schedule I, Continued

                       ACMAT CORPORATION AND SUBSIDIARIES

            Condensed Financial Information of Registrant, Continued

                            STATEMENTS OF CASH FLOWS


Cash flows from operating activities:

<TABLE>
<CAPTION>
                                                                     1999               1998               1997
                                                                     ----               ----               ----
<S>                                                             <C>                <C>                <C>
          Net earnings                                          $  3,013,723          2,120,529          4,456,949
          Depreciation and amortization                              990,461            688,862            684,521
          Equity in undistributed earnings of subsidiaries        (5,479,292)        (5,666,732)        (7,757,782)
          (Increase) decrease in accounts receivable                  62,054          1,404,622           (839,594)
          (Increase) decrease in other assets                        (51,879)           787,299            149,711
          Increase (decrease) in other liabilities                  (659,180)           159,662            122,424
                                                                ------------       ------------       ------------
                 Net cash used for operating activities           (2,124,113)          (505,758)        (3,183,771)
                                                                ------------       ------------       ------------

Cash flows from investing activities:
          Capital expenditures                                       (86,922)          (186,046)           (60,122)
          Decrease in investment in subsidiaries                  13,000,000         20,851,120         13,714,452
                                                                ------------       ------------       ------------
                 Net cash provided by investing activities        12,913,078         20,665,074         13,654,330

Cash flows from financing activities:
          Borrowings under lines of credit                         9,000,000          7,000,000          5,000,000
          Repayments of lines of credit                           (9,000,000)       (12,000,000)       (13,200,000)
          Repayment of long-term debt                            (10,907,280)       (23,812,727)        (3,594,692)
          Issuance of long-term debt                               4,500,000         12,800,000          8,500,000
          Issuance of Class A stock, net of taxes                    162,000            696,000            882,250
          Payments for acquisition and retirement of stock        (2,521,276)        (5,268,259)        (8,257,963)
                                                                ------------       ------------       ------------
                 Net cash used for financing activities           (8,766,556)       (20,584,986)       (10,670,405)
                                                                ------------       ------------       ------------

Net increase (decrease) in cash                                    2,022,409           (425,670)          (199,846)

Cash, beginning of year                                              396,430            822,100          1,021,946
                                                                ------------       ------------       ------------

Cash, end of year                                               $  2,418,839            396,430            822,100
                                                                ============       ============       ============
</TABLE>





See Notes to Condensed Financial Statements.





                                       45
<PAGE>   46



                                                           Schedule I, Continued

                       ACMAT CORPORATION AND SUBSIDIARIES
                         Condensed Financial Information
                     Notes to Condensed Financial Statements


The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Company's
1999 Annual Report.

(1)      SUPPLEMENTAL CASH FLOW INFORMATION

         Income taxes received from subsidiaries during the years ended December
         31, 1999, 1998 and 1997 were $1,157,813, $2,355,403, and $112,995,
         respectively. Interest paid during the years ended December 31, 1999,
         1998 and 1997 was $3,751,313, $5,173,867, and $4,630,502, respectively.
         Interest paid in 1998 included $52,774 paid to subsidiaries for
         intercompany loans.

 (2)     LONG-TERM DEBT

         A summary of long-term debt at December 31, 1999 and 1998 follows:

<TABLE>
<CAPTION>
                                                         1999                        1998
                                                         ----                        ----
<S>                                                  <C>                         <C>
        Term Loan Due 2004                            $ 4,250,000                         --
        Term Loan Due 2003                                     --                  5,000,000
        Senior Notes Due 2005                           3,900,000                  9,000,000
        Mortgage Note Due 2008                          7,242,720                  7,800,000
        Convertible Note Due 2022                      15,400,000                 15,400,000
                                                       ----------                 ----------
                                                      $30,792,720                $37,200,000
                                                       ==========                 ==========
</TABLE>


         See Note 9 to the Consolidated Financial Statements in the Annual
         Report for a description of the long-term debt and aggregate maturities
         for 2000 to 2004 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
<PAGE>   47



                                                                     SCHEDULE II


                       ACMAT CORPORATION AND SUBSIDIARIES

                 Valuation and Qualifying Accounts and Reserves

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                      Balance          Additions
                        at             charged                           Balance
                      beginning        to costs                            At
                        of               and                             end of
   Description        period           expenses       Deductions (a)     period
                      ------           --------       --------------     ------
  Allowance for
doubtful accounts:

<S>                 <C>               <C>              <C>              <C>
        1999         $257,617          180,000          242,499          195,118
                     ========         ========         ========         ========


        1998         $309,746          293,149          345,278          257,617
                     ========         ========         ========         ========


        1997         $322,406          620,000          632,660          309,746
                     ========         ========         ========         ========
</TABLE>





(a) Deductions represent accounts written off.





                                       47
<PAGE>   48



ACMAT CORPORATION AND SUBSIDIARIES                                   Schedule V

   Supplemental Information concerning property-casualty insurance operations

         As of and for the years ended December 31, 1999, 1998 and 1997


<TABLE>
<CAPTION>
                                                  Discount Ded.
                                Reserves for       from Unpaid
                  Deferred      Unpaid Losses        Losses
 Affiliation       Policy         and Loss          and Loss
     with       Acquisition      Adjustment        Adjustment            Unearned         Earned
  Registrant       Costs          Expenses          Expenses             Premiums        Premiums
  ----------       -----          --------          --------             --------        --------
<S>             <C>             <C>                <C>                 <C>             <C>

      1999      $  692,351      27,889,335              --               3,290,024       4,743,791
                ==========      ==========          ==========          ==========      ==========

      1998      $1,004,850      31,471,445              --               4,650,438       6,519,382
                ==========      ==========          ==========          ==========      ==========

      1997      $1,432,358      35,994,240              --               6,846,846       9,198,286
                ==========      ==========          ==========          ==========      ==========


ACSTAR Bonding:
      1999      $  631,429      12,571,156              --               2,193,118       4,770,401
                ==========      ==========          ==========          ==========      ==========

      1998      $  545,239      14,512,333              --               2,889,186       4,618,281
                ==========      ==========          ==========          ==========      ==========

      1997      $  646,047      16,093,222              --               3,587,126       5,847,558
                ==========      ==========          ==========          ==========      ==========


                                Losses & Loss    Adjustment     Amortization        Paid
                                  Expenses       Incurred       of Deferred        Losses
  Affiliation      Net           Related          to              Policy          and Loss
      with      Investment       -------         -----------     Acquisition      Adjustment       Premiums
  Registrant      Income        Current Year     Prior Years        Costs         Expenses         Written
  ----------      ------        ------------     -----------        -----         --------         -------
<S>             <C>             <C>              <C>             <C>             <C>             <C>
United Coastal Liability Insurance:
      1999        3,557,332       1,660,000        (225,633)       1,528,179       5,315,006       3,544,657
                 ==========      ==========      ==========       ==========      ==========      ==========

      1998        4,430,026       3,123,183      (1,167,367)       1,852,218       6,572,054       4,351,983
                 ==========      ==========      ==========       ==========      ==========      ==========

      1997        4,859,805       3,421,762        (662,276)       2,564,959       3,011,873       7,026,051
                 ==========      ==========      ==========       ==========      ==========      ==========


ACSTAR Bonding:
      1999        1,268,175       1,431,120      (1,192,600)       1,543,783       2,669,290       4,645,343
                 ==========      ==========      ==========       ==========      ==========      ==========

      1998        1,169,977       1,385,484      (1,154,572)       1,225,718         146,320       4,026,634
                 ==========      ==========      ==========       ==========      ==========      ==========

      1997          962,815       1,754,268        (176,502)       1,605,140          21,870       5,654,146
                 ==========      ==========      ==========       ==========      ==========      ==========
</TABLE>




                                       48
<PAGE>   49



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table shows for each director (a) his or her age, (b) the year in
which the director first served as a director of the Company, (c) position with
the Company and business experience during the past five years, including
principal occupation, (d) his or her committee assignments, and (e) his or her
other directorships. Each director is elected for a term of one year and until
his or her successor shall be elected.

<TABLE>
<CAPTION>
             NAME                         AGE      DIRECTOR      POSITION WITH THE COMPANY AND BUSINESS EXPERIENCE
                                                   SINCE         DURING LAST FIVE YEARS, INCLUDING OCCUPATION
<S>                                      <C>       <C>           <C>
    HENRY W. NOZKO, SR. (1)               80           1951      Chairman of the Board, President and Chief Executive
                                                                 Officer of the Company.  Chairman of the Board and
                                                                 Director of United Coastal Insurance Company, ACSTAR
                                                                 Holdings, Inc. and ACSTAR Insurance Company.
                                                                 Co-Chief Executive Officer of United Coastal
                                                                 Insurance Company.

    HENRY W. NOZKO, JR. (1)                53          1971      Executive Vice President, Chief Operating Officer,
                                                                 and Treasurer of the Company.  Member of the Audit
                                                                 Committee.  President, Co-Chief Executive Officer and
                                                                 Treasurer of United Coastal Insurance Company.
                                                                 President and Treasurer of ACSTAR Holdings, Inc. and
                                                                 ACSTAR Insurance Company.  Member, Boards of
                                                                 Directors of United Coastal Insurance Company, ACSTAR
                                                                 Holdings, Inc., ACSTAR Insurance Company.

    VICTORIA C. NOZKO (1)                  81          1982      Housewife during past five years.  Member of the
                                                                 Audit Committee.

    JOHN C. CREASY                         80          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                        66         1999       Former General President of Sheet Metal Workers'
                                                                 International Association.

    ALFRED T. ZLOTOPOLSKI                  53         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.
</TABLE>


(1) Mr. Henry W. Nozko, Sr. and Mrs. Victoria C. Nozko are husband and wife and
Mr. Henry W. Nozko, Jr. is their son.






                                       49
<PAGE>   50




     EXECUTIVE OFFICERS OF THE REGISTRANT:

     The following are the Company's Executive Officers, their age, and offices
     held. Officers are appointed to serve until the meeting of the Board of
     Directors following the next Annual Meeting of Stockholders and until their
     successors have been elected.

<TABLE>
<CAPTION>
NAME                       AGE        OFFICES HELD
----                       ---        ------------
<S>                       <C>         <C>
Henry W. Nozko, Sr.         80        President, Chief Executive
                                      Officer, Director and
                                      Chairman of the Board
                                      since 1951.

Henry W. Nozko, Jr.         53        Executive Vice President since
                                      1982. Treasurer since 1973.
                                      Director since 1971, and Chief
                                      Operating Officer since 1985.

Robert H. Frazer            53        Vice President since 1982.
                                      Secretary since 1992. General
                                      Counsel since 1977.

Michael P. Cifone           41        Vice President-Finance since
                                      1990. Corporate Controller
                                      since 1989.
</TABLE>





                                       50
<PAGE>   51



ITEM 11. EXECUTIVE COMPENSATION

Directors who are not employees of the Company are paid an annual fee of $4,000.

The following table provides certain summary information regarding compensation
of the Company's Chief Executive Officer and each of the four most highly
compensated executive officers of the Company for the periods indicated.

<TABLE>
<CAPTION>

NAME AND PRINCIPAL POSITION            ANNUAL COMPENSATION (A)                       ALL OTHER
                                      YEAR         SALARY            BONUS        COMPENSATION (B)
<S>                                  <C>         <C>              <C>              <C>
Henry W. Nozko, Sr.                   1999        $447,200         $395,000           $10,532
Chairman, President                   1998        $447,200               --           $12,238
And Chief Executive Officer           1997        $430,000        $  86,000           $10,591


Henry W. Nozko, Jr.                   1999        $322,500         $315,000           $10,430
Executive Vice President and Chief    1998        $322,500               --           $12,120
Operating Officer                     1997        $310,000          $62,000           $10,488


Robert H. Frazer, Esq.                1999        $171,600          $25,000           $10,392
Vice President, Secretary and         1998        $171,600               --           $12,075
General Counsel                       1997        $165,000          $33,000           $10,450


Michael P. Cifone                     1999        $150,000         $155,000           $10,289
Vice President-Finance                1998        $114,400               --           $10,202
                                      1997        $110,000          $22,000           $ 9,253
</TABLE>



(A) Amounts shown include cash compensation earned and received by the executive
officers. There are no other forms of non-cash compensation or other perquisites
for any executive officer.

The Company has a Management Compensation Plan based upon earnings of the
Company. As a guideline, the plan provides that participants may share in an
incentive fund equal to 12% of pretax earnings, provided such pretax earnings
amount to at least a 10% return on the Company's equity. However, both the
participants and the amount of bonus are discretionary, provided the total
amount of bonuses paid do not exceed the total incentive fund available. In
addition, the Company may offer separate incentives and commissions on an
individual basis.

(B) The amounts shown in this column represent contributions made by the Company
to the Company's Thrift, Profit Sharing and Retirement Plan ("Plan"). The Plan
provides that all nonunion employees employed on a full time or part time
salaried basis are eligible to participate on the first day of January or July
after twelve consecutive months of employment. The Company contributes amounts,
as determined by the Board of Directors, to be allocated among the participants
according to a formula based upon the employee's years of service and
compensation. A participant becomes vested at the rate of 20% per year
commencing after two years of service.





                                       51
<PAGE>   52



       The following table provides information on options during 1999 by the
       named Executive Officers and the value of their unexercised options at
       December 31, 1999. No options were granted in 1999.


AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END 1999 OPTION
VALUES

<TABLE>
<CAPTION>
                                             Number of
                                            Unexercised           Value of Unexercised
                                             Options at            In-the-Money Options
Name                                        12/31/99 (1)                at 12/31/99 (2)
----                                       ------------           --------------------
<S>                                        <C>                   <C>
Henry W. Nozko, Sr.
    - ACMAT Class A Stock Options             46,000                         -
    - ACMAT Common Stock Options              50,000                   412,500

Henry W. Nozko, Jr.
    - ACMAT Class A Stock Options             46,000                         -
    - ACMAT Common Stock Options              50,000                   412,500

Robert H. Frazer
    - ACMAT Class A Stock Options             35,000                         -

Michael P. Cifone
    - ACMAT Class A Stock Options             10,000                         -
</TABLE>



(1)      Represents the number of options held at year end. All options were
         exercisable at December 31, 1999.

(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.



                           TEN-YEAR OPTION REPRICINGS

<TABLE>
<CAPTION>
                                                                                                         Length of
                                           Number of                                                     Original
                                           Securities      Market Price      Exercise                    Option Term
                                           Underlying      Of Stock at       Price At      New           Remaining at
                                           Options         Time of           Time of       Exercise      Date of
Name                           Date        Repriced        Repricing         Repricing     Price         Repricing
----                           ----        ----------      ------------      ---------     -----         ---------
<S>                            <C>          <C>            <C>               <C>           <C>          <C>
Henry W. Nozko, Sr.            12/16/99      46,000          $7.25              $11.50       $7.25       79 months

Henry W. Nozko, Jr.            12/16/99      15,000          $7.25               $8.50       $7.25       57 months
                               12/16/99      26,000          $7.25              $11.50       $7.25       79 months

Robert H. Frazer               12/16/99      35,000          $7.25               $8.50       $7.25       57 months

Michael P. Cifone              12/16/99      10,000          $7.25               $8.50       $7.25       57 months
</TABLE>


On December 16, 1999, the Board of Directors repriced the outstanding options at
the current market price of the Class A Stock at $7.25.




                                       52
<PAGE>   53




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

As of March 1, 2000, no person was known to the Company to be the beneficial
owner of more than five percent of its outstanding shares of Common Stock or
Class A Stock except as set forth in the following table which also shows, as of
that date, the total number of shares of each class of stock of the Company
beneficially owned, and the percent of the outstanding class of stock so owned,
by each director, and by all directors and officers of the Company, as a group:


<TABLE>
<CAPTION>
                                                                                  PERCENTAGE            PERCENTAGE
                                      CLASS             NUMBER OF SHARES           OF CLASS              OF TOTAL
          BENEFICIAL OWNER           OF STOCK         BENEFICIALLY OWNED (1)      OUTSTANDING        VOTING POWER (14)
          ----------------           --------         ----------------------      ------------       -----------------
<S>                                  <C>             <C>                          <C>                  <C>
Henry W. Nozko, Sr                    Common               432,000(4)                 69.61%              49.35%
                                      Class A               51,000(3)                  2.18
Henry W. Nozko, Jr                    Common               191,274(2)(4)              30.82               23.49
                                      Class A              167,074(2)(5)               7.16
Victoria C. Nozko                     Class A               42,000(6)                  1.82                 .50
John C. Creasy                        Common                 3,300                      .58                 .62
                                      Class A               18,453(7)                   .80
Sheet Metal Workers'
National Pension Fund                 Class A            1,400,000(8)                 37.96               14.42
Franklin Resources, Inc.              Class A              445,000(9)                 19.44                5.35
First Manhattan Co.                   Class A              208,913(10)                 9.13                2.51
Queensway Financial
   Holdings Limited                   Class A              454,050(11)                19.84                5.46
Investment Counselor of
Maryland, Inc.                        Class A              175,000(12)                 7.65                2.11
EQSF Advisors, Inc.                   Class A              200,678(13)                 8.77                2.41
All Directors and
Officers (8 persons)
As a Group                            Common               626,574                    93.44               69.53
                                      Class A              324,242                    13.20
</TABLE>


(1)      The person listed has the sole power to vote the shares of Common Stock
         and Class A Stock listed above as beneficially owned by such person and
         has sole investment power with respect to such shares.
(2)      Does not include 24,250 shares of Class A Stock and 7,500 shares of
         Common Stock held by Mr. Nozko, Jr. as custodian for his minor child
         nor 500 shares of Class A Stock and 4,750 shares of Common Stock held
         by his wife, Gloria C. Nozko.
(3)      Includes options to purchase 46,000 shares of Class A Stock.
(4)      Includes options to purchase 50,000 shares of Common Stock.
(5)      Includes options to purchase 45,000 shares of Class A Stock.
(6)      Includes options to purchase 15,000 shares of Class A Stock.
(7)      Includes options to purchase 16,500 shares of Class A Stock.
(8)      Assumes the full conversion of $15,400,000 principal amount of 11.5%
         Convertible Note into 1,400,000 shares of Class A Stock. The Address of
         the Fund is Suite 500, 601 North Fairfax Street, Alexandria, VA 22314.
(9)      Address of Franklin Resources, Inc. is 777 Mariners Island Blvd. San
         Mateo, CA 94404
(10)     Address of First Manhattan Co. is 437 Madison Avenue, New York, NY
         10022.
(11)     Address of Queensway Financial Holdings Limited is 90 Adelaide Street
         West, Toronto, Ontario M5H3V9.
(12)     Address of Investment Counselor's of Maryland, Inc. is 803 Cathedral
         Street, Baltimore, MD 21201.
(13)     Address of EQSF Advisors, Inc. is 767 Third Avenue, New York, NY
         10017-2023.
(14)     Based upon one vote for each share of Common Stock and one-tenth vote
         for each share of Class A Stock.





                                       53
<PAGE>   54



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

Sheet Metal Workers' National Pension Fund

The Pension Fund has the right to convert indebtedness of ACMAT to the Pension
Fund in the principal amount of $15,400,000 into shares of Class A Stock at the
current conversion price of $11.00 per share pursuant to the terms of a 30-year
unsecured, subordinated debenture dated July 1, 1992 and bearing interest at the
annual rate of 11.5%.

Henry W. Nozko, Sr., Henry W. Nozko, Jr. and the Pension Fund are parties to a
voting agreement pursuant to which the parties have agreed to vote their
respective shares of Class A Stock in favor of the Pension Fund's nominees to
the ACMAT Board of Directors.

AIG Life Insurance Company

On February 5, 1997, ACMAT Corporation purchased 1,099,996 shares of its own
Class A Stock from AIG Life Insurance Company (366,663 shares) and American
International Life Assurance Company of New York (733,333 shares). The 1,099,996
shares of Class A Stock were acquired throughout the past two years by AIG Life
Insurance Company and American International Life Assurance Company of New York
pursuant to the conversion options of the Convertible Senior Notes. The shares
were purchased by the Company at an average price of $14.70 per share for a
total purchase price of $16,174,942.

The purchase price of $16,174,942 consisted of $4,174,942 in cash and promissory
notes totaling $12,000,000. The promissory notes are with AIG Life Insurance
Company and American International Life Assurance Company of New York and are
payable over eight years with interest at prime rate (8-1/2%). The interest rate
is equal to the prime rate, however, it shall not exceed 9-1/4% and it shall not
be less than 7-1/4%.

American International Group, Inc., a holding company for AIG Life Insurance
Company and American International Life Assurance Company of New York, is a
substantial owner of Transatlantic Reinsurance Company, a reinsurer to which the
Company, through Coastal Insurance and ACSTAR Insurance, ceded approximately
$270,000 in reinsurance premiums in the year ended December 31, 1999.

Other Relationships

During the year ended December 31, 1999, the Company paid to Dr. Arthur Cosmas
$134,790 in fees in connection with consulting services rendered by Dr. Cosmas
with respect to inspection and engineering services relating to ACMAT's asbestos
abatement activities. Dr. Cosmas is the son-in-law of Henry W. Nozko, Sr. and
Victoria C. Nozko and the brother-in-law of Henry W. Nozko, Jr.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)      1. Consolidated Financial Statements

                  Included in Part II of this Report:

                  Independent Auditors' Report

                  Consolidated Statements of Earnings for the years ended
                  December 31, 1999, 1998 and 1997

                  Consolidated Balance Sheets as of December 31, 1999 and 1998

                  Consolidated Statements of Stockholders' Equity for the years
                  ended December 31, 1999, 1998 and 1997

                  Consolidated Statements of Cash Flows for the years ended
                  December 31, 1999, 1998 and 1997

                  Notes to Consolidated Financial Statements - December 31,
                  1999, 1998 and 1997





                                       54
<PAGE>   55




                  2. Financial Statement Schedules

                  Consolidated Schedules included in Part II of this
                  Report-Years ended December 31, 1999, 1998 and 1997:

                  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 1999.

(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 is attached hereto as Exhibit 4(c).

(4d)     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 is
         attached hereto as Exhibit 4(e).

(4f)     Term Note between ACMAT Corporation and Webster Bank is attached hereto
         as Exhibit 4(f). (10a) Annual Management Compensation Plan filed as an
         Exhibit to the Company's 1984 Form 10-K is incorporated herein by
         reference.

(10b)    Stock Purchase Agreement dated as of July 1, 1992 between ACMAT
         Corporation and the Sheet Metal Workers' National Pension Fund together
         with Note Agreement Re: 11 1/2% Convertible Subordinated Notes due 2012
         filed as Exhibit 10g to the Company's Form 10-K for the year ended
         December 31, 1992 is incorporated herein by reference.

(21)     Subsidiaries of ACMAT.

(27)     Financial Data Schedule.






                                       55
<PAGE>   56



                                   SIGNATURES


      Pursuant to the requirements of Section 13 or 15 (d) of the Securities
      Exchange Act of 1934, the Registrant had duly caused this Report to be
      signed on its behalf by the undersigned, thereunto duly authorized.




                                            ACMAT CORPORATION


      Dated:  March 30, 2000                By:/s/ Henry W. Nozko, Sr.
                                               ------------------------------
                                            Henry W. Nozko, Sr., President
                                            and Chief Executive Officer


      Pursuant to the requirements of the Securities Exchange Act of 1934, this
      Report has been signed below by the following persons on behalf of the
      Registrant and in the capacities and on the dates indicated.


<TABLE>
<S>                                                  <C>                                        <C>
                                                     Chairman of the Board,
                                                     President, Chief Executive
       /s/ Henry W. Nozko, Sr                        Officer and Director                        March 30, 2000
      -------------------
      Henry W. Nozko, Sr.



                                                     Chief Operating Officer,
                                                     Executive Vice President
       /s/ Henry W. Nozko, Jr.                       Treasurer and Director                      March 30, 2000
      -------------------
      Henry W. Nozko, Jr.



                                                     Vice President - Finance
                                                     (Principal Financial and
       /s/ Michael P. Cifone                         Accounting Officer)                         March 30, 2000
      -------------------
      Michael P. Cifone



       /s/ Victoria C. Nozko                         Director                                    March 30, 2000
      -------------------
      Victoria C. Nozko



       /s/ John C. Creasy                             Director                                   March 30, 2000
      -------------------
      John C. Creasy
</TABLE>





                                       56
<PAGE>   57



                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Regulation S-K Exhibit                    Page Number
----------------------                    -----------
<S>                                 <C>                                                          <C>
    Exhibit 3                       -  Bylaws                                                    Incorporated by
                                                                                                 Reference

    Exhibit 3a                      -  Certificate of Incorporation
                                        as amended May 1, 1991                                   Incorporated by
                                                                                                 Reference

    Exhibit 4b                      -  Promissory Note between ACMAT
                                        and Webster Bank                                         Incorporated by
                                                                                                 Reference

    Exhibit 4c                      -  Open-end Mortgage Deed/Security
                                        Agreement between ACMAT and
                                        Webster Bank.                                            Incorporated by
                                                                                                 Reference

    Exhibit 4d                      -  Commercial Credit Agreement between
                                        ACMAT and Webster Bank                                   Page 58

    Exhibit 4e                      -  Revolving Credit Note between ACMAT
                                        and Webster Bank                                         Page 96

    Exhibit 4f                      -  Term Note between ACMAT and Webster Bank                  Page 101

    Exhibit 10a                     -  Annual Management                                         Incorporated by
                                       Compensation Plan                                         Reference


    Exhibit 10b                     -  Stock Purchase and Note Agreement                         Incorporated by
                                        between ACMAT Corporation                                Reference
                                        and The Sheet Metal Workers'
                                        National Pension Fund

    Exhibit 21                      -  Subsidiaries of ACMAT                                     Page 106

    Exhibit 27                      -  Financial Data Schedule                                   Page 107
</TABLE>




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