SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------
FORM 10-Q
[Mark One]
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996.
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 No. 0-19727
---------------------------------------
CUMBERLAND HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3094503
(State of incorporation) (I.R.S. Employer Identification Number)
4311 West Waters Avenue, Suite 501, Tampa, Florida 33614
(Address of registrant's principal executive offices, including
zip code)
---------------------------------------
(Registrant's telephone number, including area code):(813)885-
2112
Not applicable
-----------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of 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 [X] No [ ]
Applicable Only to Corporate Issuers
The number of shares of the Registrant's Common Stock, $.001 par
value, outstanding as of September 30, 1996 was 3,739,307 shares.<PAGE>
CUMBERLAND HOLDINGS, INC.
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed consolidated balance
sheets at December 31, 1995 and
September 30, 1996 (unaudited) . . . . . 1-2
Condensed consolidated statements
of operation for the nine months
ended September 30, 1995 and
September 30, 1996 . . . . . . . . . . . . 3
Condensed consolidated statements
of operation for the three months
ended September 30, 1995 and
September 30, 1996 . . . . . . . . . . . . 4
Condensed consolidated statements
of cash flows for the nine months
ended September 30, 1995 and 1996
(unaudited) . . . . . . . . . . . . . . . 5-6
Notes to condensed consolidated
financial statements . . . . . . . . . 7-15
Item 2. Management's discussion and analysis
of financial condition and results
of operations . . . . . . . . . . . . . 16-19
PART II. OTHER INFORMATION
Item 1. Legal proceedings . . . . . . . . . . . . 20
Item 2. Changes in securities . . . . . . . . . . 20
Item 3. Defaults upon senior securities . . . . . 20
Item 4. Submission of matters to a vote
of security holders . . . . . . . . . . . 20
Item 5. Other information . . . . . . . . . . . . 20
Item 6. Exhibits and Reports of Form 8-K . . . . 20
Signatures . . . . . . . . . . . . . . . 21<PAGE>
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CUMBERLAND HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1995 1996
------------- -------------
ASSETS (unaudited)
------
Investments:
Securities available-for-sale
at fair value:
Fixed maturities . . . . . . $ 3,452,553 $ 3,046,700
Equity securities . . . . . 1,160,500 1,066,405
Fixed maturity securities
held-to-maturity, at
amortized cost . . . . . . . 1,294,758 1,664,285
Residential mortgage loan on
real estate, at unpaid
principal . . . . . . . . . 46,367 45,948
Short-term investments . . . 348,993 323,993
------------- -------------
Total investments . . . . . 6,303,171 6,147,331
------------- -------------
Cash and cash equivalents . . 1,235,930 550,712
Accrued investment income . . 87,231 65,910
Reinsurance recoverable . . . 1,697,417 1,299,181
Accounts receivable:
Trade, less allowance for
doubtful accounts of
December 31, 1995 and
September 30, 1996 . . . . . 428,376 949,118
Affiliate . . . . . . . . . 122,052 121,534
Deferred policy acquisition
costs . . . . . . . . . . 435,272 599,309
Intangibles, net . . . . . . 2,162,961 1,929,478
Other assets . . . . . . . . 236,566 262,023
------------- -------------
$ 12,708,976 $ 11,924,596
============= =============
See accompanying notes.<PAGE>
CUMBERLAND HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1995 1996
------------- -------------
LIABILITIES AND STOCKHOLDER'S (unaudited)
EQUITY
---------------------------------
Policy liabilities and accruals:
Loss and loss adjustments
expenses . . . . . . . . . . $ 2,351,804 $ 1,436,553
Unearned premiums . . . . . . 1,182,305 1,607,548
Ceded reinsurance payable . . . . 184,517
Accounts payable and other
liabilities . . . . . . . . . 1,116,815 1,224,433
Short-term borrowings . . . . . . 406,607
Long-term debt:
Affiliate, including accrued
interest . . . . . . . . . . 4,797,804 5,169,870
Nonaffiliate . . . . . . . . 1,563,870 1,533,488
------------- -------------
Total liabilities . . . . . 11,419,205 11,156,409
------------- -------------
Stockholders' equity:
Preferred stock, $.001 par
value; 10,000,000 shares
authorized, no shares issued
Common stock, $.001 par
value; 10,000,000 shares
authorized, 4,056,480 shares
issued . . . . . . . . . . . 4,040 4,056
Capital in excess of par
value . . . . . . . . . . . 2,044,794 2,069,727
Net unrealized (depreciation)
appreciation of available-
for-sale securities . . . . 63,045 76,357
Accumulated deficit . . . . . (681,193) (1,147,395)
------------- -------------
1,430,686 1,002,745
Less treasury stock, at cost,
224,263 and 317,173 shares
at December 31, 1995 and
September 30, 1996, (140,915) (234,558)
respectively ------------- -------------
Total stockholders' equity . 1,289,771 768,187
------------- -------------
$ 12,708,976 $ 11,924,596
============= =============
See accompanying notes.<PAGE>
CUMBERLAND HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
---------------------------
1995 1996
------------- -------------
(unaudited) (unaudited)
------------- -------------
REVENUES:
Reinsurance premiums assumed $ 4,047,088 $ 2,179,218
Direct premiums earned:
Affiliates . . . . . . . . .
Nonaffiliates . . . . . . . 387,265 733,859
Less reinsurance ceded . . . (408,935) (203,254)
------------- -------------
Net premium income . . . . . 4,025,418 2,709,823
Net investment income . . . 389,703 304,757
Other income . . . . . . . . 985,241 1,627,910
------------- -------------
$ 5,400,362 $ 4,642,490
============= =============
Benefits and expenses:
Benefits and claims . . . . . 1,364,053 1,006,518
Amortization of deferred
policy acquisition costs . . 1,892,773 1,163,103
Operating expenses . . . . . 1,930,785 2,476,285
Interest expense to
affiliates, net . . . . . . 393,277 462,786
------------- -------------
$ 5,580,888 $ 5,108,692
============= =============
Income (loss) before income
taxes . . . . . . . . . . . . (180,526) (466,202)
Income taxes . . . . . . . . . .
------------- -------------
Net income (loss) . . . . . . . . $ (180,526) $ (466,202)
============= =============
Weighted average number of shares
outstanding . . . . . . . . . 3,830,619 3,776,172
============= =============
Net income (loss)per common . . . $ (.05) $ (.12)
============= =============
See accompanying notes.<PAGE>
CUMBERLAND HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
---------------------------
1995 1996
------------- -------------
(unaudited) (unaudited)
------------- -------------
REVENUES:
Reinsurance premiums assumed $ 1,475,774 $ 515,037
Direct premiums earned . . . 92,878 297,229
Less reinsurance ceded . . . (142,544) (48,369)
------------- -------------
Net premium income . . . . . 1,426,108 763,897
Net investment income . . . 177,583 68,018
Other income . . . . . . . . 467,986 601,777
------------- -------------
$ 2,071,677 $ 1,433,692
============= =============
Benefits and expenses:
Benefits and claims . . . . . 641,197 252,595
Amortization of deferred
policy acquisition costs . . 653,006 311,239
Operating expenses . . . . . 756,068 898,276
Interest expense to
affiliates, net . . . . . . 174,821 157,748
------------- -------------
$ 2,225,092 $ 1,619,858
============= =============
Income before income taxes . . . (153,415) (186,166)
Income taxes . . . . . . . . . .
------------- -------------
Net income . . . . . . . . . . . $ (153,415) $ (186,166)
============= =============
Net income per common share . . . $ (.04) $ (.05)
============= =============
Weighted average number of shares
outstanding . . . . . . . . . 3,830,619 3,776,172
============= =============
See accompanying notes.<PAGE>
CUMBERLAND HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
---------------------------
1995 1996
------------- -------------
(unaudited) (unaudited)
------------- -------------
Cash flows from operating
activities:
Net income . . . . . . . . . $ (180,526) $ (466,202)
Adjustments to reconcile net
income to net cash provided
(used) by operating
activities:
Amortization/accretion of
investment premiums and
discounts . . . . . . . . (6,052) (5,966)
Amortization of deferred
policy acquisition costs 1,892,773 (1,163,103)
Depreciation and
amortization . . . . . . 52,750 284,854
Net realized (gain) loss on
investments . . . . . . . (82,044) (25,933)
Accrued interest on term
note, net . . . . . . . . 336,799 395,986
(Increase) decrease in:
Reinsurance recoverable . 41,630 582,753
Accrued investment income 21,321
Trade receivables . . . . 1,155,691 (508,742)
Deferred income taxes . . 8,710
Deferred policy
acquisition costs . . . (1,739,694) 999,066
Other assets . . . . . . . . (55,889) (76,310)
Increase/(decrease) in:
Policy liabilities and
accruals . . . . . . . (2,589,509) (490,008)
Ceded reinsurance payable
Other liabilities . . . . 295,181 107,618
------------- -------------
Total adjustments . . . (689,654) 121,536
------------- -------------
Net cash provided (used) in
operating activities . . . . (870,180) (344,666)
------------- -------------
See accompanying notes.<PAGE>
CUMBERLAND HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Nine Months Ended
September 30,
---------------------------
1995 1996
------------- -------------
(unaudited) (unaudited)
------------- -------------
Investment activities:
Proceeds from sales and
maturities of investments . 3,392,615 3,383,038
Purchases of investments . . (4,039,201) (3,181,987)
Net advances from KC . . . .
Payments for business
acquired, net . . . . . . . (498,797) (12,000)
------------- -------------
Net cash provided by (used)
investing activities . . . . (1,145,383) 189,051
Financing activities:
Insurance of common stock 24,949
Purchases of treasury stock . (27,666) (93,643)
Payments on short-term
borrowings and long-term
debt . . . . . . . . . . . . (106,635) (54,302)
Net proceeds from short-term
borrowings . . . . . . . . . 672,535 (406,607)
------------- -------------
Net cash provided by financing
activities . . . . . . . . . 538,234 (529,603)
Net increase/decrease in cash and
cash equivalents . . . . . . (1,477,329) (685,218)
Cash and cash equivalents,
beginning of period . . . . . 1,700,901 1,235,930
------------- -------------
Cash and cash equivalents, end of
period . . . . . . . . . . . $ 223,572 $ 550,712
============= =============
See accompanying notes.<PAGE>
CUMBERLAND HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organizations and summary of significant accounting policies
Organization - Cumberland Holdings, Inc., ("CHI") a Florida
corporation, was formed on November 18, 1991, to be a
holding company and a wholly-owned subsidiary of Kimmins
Corp. ("KC"). Effective October 1, 1992, KC contributed all
of the outstanding common stock of two of its other wholly-
owned subsidiaries, Cumberland Casualty & Surety Company
("CCS") and Surety Specialists, Inc. ("SSI") to CHI. KC
then distributed to its stockholders CHI's common stock on
the basis of one share of common stock of CHI for each five
shares of KC common stock and Class B common stock owned
(the Distribution). CHI conducts its business through six
subsidiaries. CCS, a Florida corporation formed in May
1988, provides reinsurance for speciality sureties and
performance and payment bonds for contractors. The surety
services provided include reinsurance and, to a lesser
extent, direct surety. SSI, a Florida corporation formed in
August 1988, is a general lines agency which operates as an
independent agent. The Surety Group (SG), a Georgia
corporation, and Associates Acquisition Corp. d/b/a Surety
Associates (SA), a South Carolina corporation, purchased in
February and July 1995, respectively, are general lines
agencies which operate as independent agencies. Official
Notary Service of Texas, Inc., (ONS), a Texas corporation
formed in February 1994, provides registration and sundry
services to notaries. Qualex Consulting, Inc. (Qualex), a
Florida corporation formed in November 1994, provides claims
and contracting consulting services. CHI and its
subsidiaries are referred to herein as the "Company".
Principles of consolidation - The consolidated financial
statements include the accounts of CHI and its wholly-owned
subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Basis of Presentation - The accompanying unaudited
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles
which, as to the subsidiary insurance company, differ from
statutory accounting practices prescribed or permitted by
regulatory authorities. The significant accounting policies
followed by CHI and subsidiaries that materially affect the
financial statements are summarized in this note.<PAGE>
CUMBERLAND HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Net income per share
Net income per share for the three and nine months ended
September 30, 1996 is based on the weighted average number
of shares outstanding, adjusted for the dilative effect of
stock options, and is the same on both a primary diluted
basis.
3. Term note due affiliate
In 1988, CCS issued a surplus debenture to KC in exchange
for $3,000,000 which bore interest at 10 percent per annum.
Interest and principal payments were due quarterly only if
and when CCS's surplus, as defined below, exceeded
$4,000,000 and are limited to an amount equal to one-half of
the statutory net income before dividends and federal and
foreign income taxes of CCS during that year.
In 1992, the debenture due to KC from CCS was assigned to
CHI. CHI entered into a term note agreement with KC for the
outstanding amount of the debenture, including interest
arrearage ($4,291,049) at September 30, 1992. The term note
is pari passi with the other debts of CHI, bears interest at
10 percent and is due on October 1, 2002. Interest and
principal are due quarterly with minimum payments equal to
one half of net earnings before interest and federal income
taxes. Payments for the second five years are due quarterly
and are payable in equal installments to amortize the
remaining balance over the next 20 quarters. Each of these
payments will be credited first to the accrued interest and
then to principal.
Interest arrearage on these two term notes at December 31,
1995 and September 30, 1996 is $1,797,804 and $2,169,870
respectively, which is due when the CCS surplus funds
exceeds $4,000,000.
The term note was subordinate in right of payment to all
policyholders of CCS. Surplus funds are defined as funds of
CCS remaining after deduction of capital, insurance reserves
and all other liabilities, in accordance with accounting
practices prescribed or permitted by the Florida Insurance
Department.<PAGE>
CUMBERLAND HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes payable to nonaffiliates
In connection with the acquisition of certain agencies
during 1995 (see Note 10), the Company entered into two
notes payable with the agencies' previous owners. One note
is due March 1, 2002 and bears interest at 8% through
February 28, 2001 and 10% thereafter. Principal payments of
$150,000 are due annually beginning March 1, 2000. The
other is due September 30, 2010 and bears interest at 8%
through July 31, 1999 and 9% thereafter. Principal payments
of $40,000 are due annually for three years beginning
January 5, 1996 and then principal payments of $7,803 are
due monthly beginning July 31, 1999.
5. Short-term borrowings
During 1995, the Company entered in to a margin loan
agreement with an investment firm which enables the Company
to borrow funds up to a percentage of the Company's invested
funds. At December 31, 1995 the Company had $406,607
outstanding under the agreement. At December 31, 1995 the
Company had preferred and common stocks with a fair market
value of $1,160,500 on account with the investment firm.
The loan was liquidated August 31, 1996.
6. Intangibles
Intangible assets are stated at cost and principally
represent purchased customer accounts, noncompete
agreements, purchased contract agreements, and the excess of
costs over the fair value of identifiable net assets
acquired (goodwill). Purchased customer accounts,
noncompete agreements, and purchased contract agreements are
being amortized on a straight-line basis over the related
estimated lives and contract periods, which range from 3 to
15 years. The excess of costs over the fair value of
identifiable net assets acquired is being amortized on a
straight-line basis over 15 years. Purchased customer
accounts are records and files obtained from acquired
businesses that contain information on insurance policies
and the related insured parties that is essential to policy
renewals.<PAGE>
CUMBERLAND HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value of goodwill and other intangible assets
will be reviewed if circumstances suggest that they may be
impaired. If this review indicates that the intangible
assets will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value
of the goodwill will be reduced by the estimated shortfall
of cash flows.
7. Loss and loss adjustment expenses
The liability for unpaid claims including incurred but not
reported losses is based on the estimated ultimate cost of
settling the claim (including the effects of inflation and
other societal and economic factors), using past experience
adjusted for current trends and any other factors that would
modify past experience. These estimates are subject to the
effects of trends in loss severity and frequency. Although
considerable variability is inherent in such estimates,
management believes that the reserve for loss and loss
adjustment expenses are adequate. The estimates are
continually reviewed and adjusted as necessary as experience
develops or new information becomes known. Such adjustments
are included in current operations. A liability for all
costs expected to be incurred in connection with the
settlement of unpaid claims (claim adjustment expense) is
accrued when the related liability for unpaid claims is
accrued. Claim adjustment expenses include costs associated
directly with specific claims paid or in the process of
settlement, such as legal and adjusters' fees. Claim
adjustment expenses also include other costs that cannot be
associated with specific claims but are related to claims
paid or in the process of settlement, such as internal costs
of the claims function.
The Company does not discount its reserves for losses and
loss adjustment expenses. The Company writes primarily
surety contracts which are of short duration.
The Company does not consider investment income in
determining if a premium deficiency relating to short
duration contracts exists.
8. Unearned premiums
Unearned premiums are calculated using the monthly pro rata
basis.<PAGE>
CUMBERLAND HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Reinsurance
The Company assumes and cedes reinsurance and participates
in various pools. The accompanying financial statements
reflect premiums, benefits and settlement expenses, and
deferred policy acquisition costs, net of reinsurance ceded.
Amounts recoverable from reinsurers are estimated in a
manner consistent with the future policy benefit and claim
lability associated with the reinsured policies. Accounts
recoverable from reinsurers are presented as an asset in the
accompanying consolidated financial statements.
CCS also cedes reinsurance from other insurance companies.
Reinsurance does not relieve an insurer of its liability to
the policyholder for the full amount of the policy, however,
the reinsurer is obligated to the insurer for the portion
assumed by such reinsurer. Reinsured risks give rise to
liability to CCS as the insurer only in the event that the
reinsurer is unable to meet its obligation under the
reinsurance agreement in force.
10. Acquisitions
Effective February 28, 1995, the Company acquired
substantially all of the assets of The Surety Group, a
Georgia insurance agency specializing in the sales of surety
bond policies. The purchase price of $850,000 is comprised
of $325,000 paid at closing, the assumption of $25,000 of
capital lease obligations and a $500,000 note to the seller.
The purchase agreement provides that the purchase price may
be reduced, but not increased, based on the agency's
operating results during the three-year period ending
February 28, 1998. The balance at September 30, 1996 is
$423,488.
Effective July 1, 1995 the Company acquired substantially
all of the assets of Surety Associates, Inc., a South
Carolina insurance agency specializing in the sales of
surety bond and certain types of property and casualty
insurance policies. The purchase price of $1,330,241 is
comprised of $180,241 paid at closing, and a $1,150,000 note
payable to the seller. The balance at September 30, 1996 is
$1,110,000.
Both acquisitions have been accounted for using the purchase
method. The results of operations of the acquired entities
have been included in the accompanying consolidated
statements of operations since their respective purchase
date.<PAGE>
CUMBERLAND HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. On November 5, 1996 the Company converted its term note
payable to Kimmins Corp. The Company issued 1,723,290
shares to Kimmins Corp. in exchange for full payment of the
note. The stock was issued at the fair market value of
$3.00 per share. The following pro forma balance sheet
represents the effect of the term note conversion.<PAGE>
CUMBERLAND HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
As filed Pro Forma Pro Forma
September 30 Adjustments September 30
1996 1996
------------- --------------------------
ASSETS
------
Investments:
Securities available-
for-sale at fair value:
Fixed maturities $ 3,046,700 $ $ 3,046,700
Equity securities 1,066,405 1,066,405
Fixed maturity
securities held to
maturity . . . . . . 1,664,285 1,664,285
Mortgage loan . . . . . 45,948 45,948
Short term investments 323,993 323,993
Cash and cash
equivalents . . . . . 550,712 550,712
Reinsurance recoverable 1,299,181 1,299,181
Deferred policy
acquisition costs 599,309 599,309
Intangibles, net . . . 1,929,478 1,929,478
Other assets . . . . . 1,398,585 1,398,585
------------- --------------------------
$ 11,924,596 $ 0 $ 11,924,596
============= ==========================<PAGE>
CUMBERLAND HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(continued)
As filed Pro Forma Pro Forma
September 30 Adjustments September 30
1996 1996
------------- -------------------------
LIABILITIES
-----------
Policy liabilities and
accruals:
Loss and loss
adjustment expenses . 1,436,553 1,436,553
Unearned premiums . . . 1,607,548 1,607,548
Ceded reinsurance
payable . . . . . . . 184,517 184,517
Accounts payable and
other liabilities 1,224,433 1,224,433
Long-term debt:
Affiliate, including
accrued interest . . 5,169,870 5,169,870(1) 0
Nonaffiliate . . . . . 1,533,488 1,533,488
------------- -------------------------
Total liabilities . . .$ 11,156,409 $ 5,169,870 $ 5,986,539
============= =========================
(1) Elimination of term note payable to Kimmins Corp.<PAGE>
CUMBERLAND HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
UNAUDITED
(continued)
As filed Pro Forma Pro Forma
September 30 Adjustments September 30
1996 1996
------------- --------------------------
STOCKHOLDERS' EQUITY
--------------------
Common stock, $.001 par
value; 10,000,000
shares authorized,
4,056,480 shares issued
September 30, 1996;
5,779,770 shares issued
on pro forma . . . . . 4,056 1,724(2) 5,780
Capital in excess of par
value . . . . . . . . . . 2,069,727 5,168,146(2) 7,237,873
Net unrealized
appreciation of
available-for-sale
securities . . . . . . . 76,357 76,357
Accumulated deficit . . . (1,147,395) (1,147,395)
------------- --------------------------
1,002,745 5,169,870 6,172,615
Less treasury stock at
cost, 317,173 shares at
September 30, 1996 . . (234,558) (234,558)
------------- --------------------------
Total Stockholders'
equity . . . . . . . . 768,187 5,169,870 5,938,057
$ 11,924,596 $ 0 $ 11,924,596
============= ==========================
(2) Issue of 1,723,290 shares of stock at $3.00 per share.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The capacity of a surety company to underwrite insurance and
reinsurance is based on maintaining liquidity and capital
resources sufficient to pay claims and expenses as they become
due. Based on standards established by the National Association
of Insurance Commissioners (NAIC) and promulgated by the Florida
State Board of Insurance, CCS could write premiums up to an
amount equal to six times the statutory surplus, or approximately
$30,000,000 at September 30, 1996. The primary sources of
liquidity for the Company are funds generated from surety
premiums, investment income, and proceeds from sales and
maturities of portfolio investments. The principal expenditures
are payment of losses and loss adjustment expenses, insurance
operating expenses, and commissions.
At September 30, 1996, the Company's $11,924,596 of total
assets calculated based on generally accepted accounting
principles were distributed primarily as follows: 56.2 percent
in cash and investments 20.4 percent in receivables, 5.0 percent
in deferred policy acquisition costs, 16.2 percent in intangibles
and 2.2 percent in other assets.
The Company maintains a liquid operating position and follows
investment guidelines that are intended to provide for an
acceptable return on investment while maintaining sufficient
liquidity to meet its obligations.
Net cash (used) in operating activities was $(344,666) and
$(870,180) for the nine months ended September 30, 1996 and 1995,
respectively. The cash used in both periods was primarily the
results of an increase in trade accounts receivable and a
decrease in policy liabilities and accruals.
Net cash provided by (used in) investing activities was
$(189,051) and $(1,145,383) for the nine months ended September
30, 1996 and 1995, respectively. The cash used in both periods
primarily related to the net increase in investment purchases and
during 1995 for the purchase of one of the two insurance agencies
purchased during 1995.
The Company believes that its available investments, its
short term borrowing availability and its cash flow from
operations in the future will be sufficient to meet its normal
operating needs in the near term.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
During the nine months ended September 30, 1996, net premium
income totaled $1,315,595 representing a decrease of 33 percent
from that of the same period in 1995 ($4,025,418). The decrease
is due to the decrease in the amount of premiums assumed through
a pooling agreement $1,662,189 which is offset by a $346,594
increase in direct premiums.
During the nine months ended September 30, 1996, net
investment income of $304,758 decreased by 22 percent from that
of the same period in 1995 ($389,704). The fluctuation of
investment income is attributed to a decrease in short term
investment earnings of approximately $46,500; a decrease in
realized capital gains of $56,100 which is offset by a decrease
of approximately $17,600 in investment expenses.
During 1996, other income, which is comprised primarily of
commissions earned by the insurance agencies, increased $642,669
representing a 65% change to $1,627,910 (1996) from $985,241
(1995). The increase is a result of agencies purchased in 1995.
During the nine months ended September 30, 1996, benefits and
claims expenses ($1,006,518) decreased $357,535 as compared to
the same period in 1995 ($1,364,053). The ratio of benefit and
claim expenses to net premium income increased to 37 percent in
1996 from 34 percent when compared to the same period in 1995,
but the decrease in benefit expenses is primarily attributed to
the reinsurance pools.
During the nine months ended September 30, 1996, the
amortization of deferred policy acquisition costs decreased to
$1,163,103 from $1,892,773 for the same period in the preceding
year. The ratio of amortization of deferred policy acquisition
costs to net premium income for 1996 of 43% decreased from that
of 1995 of 47%. The decrease is attributed to the decrease in
premiums assumed through a pooling agreement.
During the nine months ended September 30, 1996, operating
expenses increased by 28% to $2,476,285 from $1,930,785 for the
nine months ended September 30, 1995. This increase is due to
additional expenses associated with the operation of the agencies
acquired during 1995 and the 1996 direct marketing operations of
the insurance company.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Net interest expense increased to $462,786 in 1996 from
$393,277 in 1995. The increase during 1996 is due to interest
payments on the loans in connection with the agencies purchased
in 1995. Interest expense for affiliated loans are $372,066 and
$338,221 during 1996 and 1995, respectively. 1996 interest
expense attributed to agencies purchased in 1995 is $90,720 as
compared to $55,056 during 1995.
The Cumberland Group's effective tax rate was 38.5 percent
the nine months ended September 30, 1995 and (-0-) for the nine
months ended September 30, 1996 due to the net operating loss in
1996. The tax benefit generated for the 1996 period has been
offset in its entirety by a valuation allowance.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATION
COMPARISON OF THREE MONTHS ENDED September 30, 1996 AND 1995
During the three months ended September 30, 1996, net premium
income totaled $763,897 representing a decrease of 46 percent
from that of the same period in 1995 ($1,426,108). The decrease
is due primarily to the decrease in the amount of premiums
assumed through the pooling agreements of approximately $866,562
and is offset by an increase of $204,351 in direct premiums
earned.
During the three months ended September 30, 1996, net
investment income of $68,018 decreased by 62 percent from that in
1995 ($177,583). The decrease is due primarily to net realized
losses of $25,496 during 1996 as compared to net realized gains
of $74,675 during the same period in 1995.
During the three months ended September 30, 1996, other
income of $601,777 increased by 28 percent from $467,986 in 1995,
and is attributed to commission income earned from the two
agencies purchased during 1995.
During the three months ended September 30, 1996, benefits
and claims expenses decreased to $252,595 from $641,197 for the
three months ended September 30, 1995. This decrease is due
primarily to a decrease in benefits and claims associated with
the reinsure pooling agreements.
During the three months ended September 30, 1996, the
amortization of deferred policy acquisition costs decreased
$341,767 due primarily to a decrease in assumed premiums.
During the three months ended September 30, 1996, operating
expenses increased $142,208 when compared to the three months
ended September 1995. The increase is primarily attributed to
operating associated with the direct marketing operations of the
insurance company.
Net interest expense is consistent with the rates charged on
the long-term affiliates notes payable and on notes payable
related to agencies purchased during 1995.
Due to the Company's net operating loss position, the
effective tax rate was zero for the three months ended September
30, 1996 and 1995.<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
Item 6. Exhibits and reports on Form 8-K
(a) The following document is filed as an exhibit to
this Quarterly Report on Form 10-Q.
27 - Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed during the
quarter for which this report is filed.<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CUMBERLAND HOLDINGS, INC.
Date: November 13, 1996 By: /s/ Joseph M. Williams
------------------------ -------------------------
Joseph M. Williams
President and
Chief Executive Officer
(Principle Executive
Officer)
Date: November 13, 1996 By: /s/ Carol S. Black
------------------------ -------------------------
Carol S. Black
Controller and
Chief Financial Officer
(Principle Accounting and
Financial Officer)<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 3,046,700
<DEBT-CARRYING-VALUE> 1,664,285
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,066,405
<MORTGAGE> 45,948
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,147,331
<CASH> 550,712
<RECOVER-REINSURE> 1,299,181
<DEFERRED-ACQUISITION> 599,309
<TOTAL-ASSETS> 11,924,596
<POLICY-LOSSES> 1,436,553
<UNEARNED-PREMIUMS> 1,607,548
<POLICY-OTHER> 184,517
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 6,703,358
0
0
<COMMON> 4,056
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,924,596
2,709,823
<INVESTMENT-INCOME> 278,824
<INVESTMENT-GAINS> 25,933
<OTHER-INCOME> 1,627,910
<BENEFITS> 1,006,518
<UNDERWRITING-AMORTIZATION> 1,394,216
<UNDERWRITING-OTHER> 2,245,172
<INCOME-PRETAX> (466,202)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (280,035)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
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</TABLE>
