UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[MARK ONE]
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from to
---------- ----------
.
Commission File No. 0-19727
CUMBERLAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3094503
(State or other jurisdiction (I.R.S.Employer
of incorporation) Identification
No.)
4311 West Waters Avenue, Suite 501, Tampa, Florida 33614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 885-
2112
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which
registered:
------------------- ----------------------------------------
Common Stock NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
NONE
--------------------------------------------------
(Title of Class)
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<PAGE>
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]<PAGE>
Indicate by a check mark if disclosure of delinquent files
pursuant to Item 405 Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
$6,011,478
------------------------------------------------
Aggregate market value of voting stock (Common Stock) held by
nonaffiliates as of December 31, 1996.
5,763,070 shares of Common Stock $.001 par value
-------------------------------------------------
Number of shares of Common Stock outstanding as of
December 31, 1996.<PAGE>
PART I
Item 1. Business
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Cumberland Technologies, Inc. ("CTI" or "Cumberland"),
(f/k/a Cumberland Holdings, Inc.) 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 wholly-owned subsidiaries, Cumberland
Casualty & Surety Company ("CCS") and Surety Specialists, Inc.
("SSI") to CTI. KC then distributed to its stockholders CTI's
common stock on the basis of one share of common stock of CTI for
each five shares of KC common stock and Class B common stock
owned (the "Distribution"). CTI conducts its business through
its subsidiaries, CCS, SSI, Surety Group, Inc., Surety
Associates, Official Notary Service of Texas, Inc. ("ONS") and
Qualex Consulting Group, Inc. ("Qualex"), collectively, the
"Company." CCS, a Florida corporation formed in May 1988,
provides performance and payment bonds for contractors and
miscellaneous surety bonds to federal and local government
agencies. 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. 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 insurance
agencies which operate as independent agencies. ONS, a Texas
corporation formed in February 1994, provides registration and
sundry services to notaries. Qualex, a Florida corporation
formed in November 1995, provides claim and contracting
consulting services. Florida Credit & Collection Services, Inc.,
a Florida corporation formed in December 1996, provides
collection services.
During 1996, the Company introduced its bond software
program "Bond Pro". Cumberland conducts its business through
four of its subsidiaries and a number of independent agencies
which focus on selling and delivering surety insurance products
to consumers. Traditionally, the surety segment of the insurance
industry has provided their services in substantially the same
manner since inception. The need to advance technologically
created an opportunity for Cumberland to develop a software
product to organize its business. A management team of software
writers and insurance executives at Cumberland committed itself
to developing and distributing software that increases the speed
with which insurance companies deliver their products through
their agents and carriers to the consumer. It is Cumberland's
goal to reduce operating costs of insurance agents through the
use of the software Cumberland developed. Cumberland's business
strategy focuses on niche industry consolidation through the
implementation of communication technologies.<PAGE>
CCS is a property and casualty insurance company that was
incorporated in Texas on May 4, 1988. In September 1994, CCS
redomesticated from Texas to Florida. CCS is licensed to write
insurance in twenty-two states (Delaware, Florida, Georgia,
Idaho, Indiana, Kentucky, Louisiana, Maryland, Massachusetts,
Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South
Carolina, South Dakota, Tennessee, Texas, Washington, West
Virginia and Wyoming) and the District of Columbia and Guam and
currently has applications for admission pending in the following
ten states: Alabama, Arkansas, Illinois, Iowa, Kansas,
Mississippi, New York, Oklahoma, Pennsylvania, and Wisconsin.
Most of these states have a lengthy application process in which
filing must be updated with certain financial and nonfinancial
information until the Insurance Department decides to approve an
application. The Insurance Department is not restricted as to
the amount of time it may take to approve an application. All
applications are updated as new information becomes available,
and Cumberland is waiting for inquiries or actions by the states.
The states in which CCS has not yet applied for licensing
generally require additional years of operating history or
additional capital and surplus. Once CCS has met these
requirements, it is anticipated that CCS will apply in these
states.
CCS is currently attempting to obtain additional state
licenses to spread its risk geographically and increase its sales
of direct line insurance. Management believes, however, that CCS
can function profitably selling direct line insurance and
reinsurance in the states in which it is currently licensed.
Although licensed for all property and casualty lines of
insurance in the majority of the states, CCS has in the past, and
intends in the future, to primarily sell surety bonds to
contractors and miscellaneous surety bonds to federal and local
government agencies. Cumberland has been rated B+ (Very Good) by
A.M. Best, an insurance rating agency.
SSI is a general lines agency that was incorporated in
Florida on August 22, 1988. SSI secures surety risks for
contractors as an agent and for other agents (as a broker) and
secures insurance or reinsurance with twelve insurance companies,
one of which is CCS, SG and SA are also general lines insurance
agencies. The insurance companies pay SSI, SG and SA a
commission ranging from 15 to 30 percent of premiums paid by the
policyholders.
Qualex is a consulting company which provides services to
the surety and construction industries.
The percentages of gross revenue generated by the Company's
subsidiaries for the year ended December 31, 1996 were as
follows:<PAGE>
Subsidiary Revenue Percentage
------------------------ ------------------------
CCS 63 %
SSI 14
SG 6
SA 7
Qualex 10
------------------------
100 %
========================
Insurance Products
------------------
Cumberland sells contract, landfill, notary, various
miscellaneous bonds and registered investment advisors liability
insurance. In addition, the Company provides reinsurance on
surety bonds sold by other small specialty insurance companies.
Cumberland also assumes underwriting risk from other surety
insurance companies.
Contract surety bonds guarantee satisfactory performance and
completion of a contractors' work and payment of the contractors'
debts and obligations relating to the performance of the contract
covered by the bond. A default in performance or payment on a
bonded contract results in the surety being primarily liable for
these obligations, to the extent of the penal amount of the bond.
On insurance or surety products sold directly by Cumberland,
the exposure to loss would be the entire amount of the loss less
any portion for which Cumberland has secured reinsurance. On
reinsurance, Cumberland's exposure to loss would be limited to
the amount of reinsurance provided. 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.
Contract surety bonds which the Company sells directly and
those for which it provides or assumes reinsurance are sold
primarily to contractors involved in asbestos abatement,
hazardous remediation and other small contractors in other lines
of business. Typically, the contracts for which surety bonds are
provided range from $100,000 to $250,000, and the amount of the
surety bond is for the entire project.<PAGE>
Miscellaneous bonds include license and permit, court,
fidelity, notary and bonds for public officials. The bonds are
primarily required by state statute and are used to satisfy
certain obligations and to guarantee compliance of certain laws.
The bond amounts are typically less than $25,000 and the average
amount is $5,000. The Company's emphasis is to write bonds which
historically have a low ratio in order to minimize loss exposure.
Registered Investment Advisors (RIA) Liability Insurance is
a claims - made professional liability insurance product which
insures specific written warranty's under the insured's risk
management program. Each account is limited to $500,000 maximum
coverage and loss exposure is not realized until five (5) years
after purchase.
The Company generates revenues from direct premiums on
surety bonds it writes and reinsurance premiums on surety bonds
for which it provides reinsurance. Typically, premiums range
from 1 percent to 3 percent of the bond amount, with the exact
premium being established based on established underwriting
procedures.
Nature of Customers - Underwriting Procedures
---------------------------------------------
Cumberland has established an underwriting philosophy that
centers on guidelines which seek to minimize the liability of
issuing surety bonds by focusing on three principal areas: the
financial strength, experience, and operating capacity of the
contractor.
Underwriting guidelines for financial strength provide that
a contractor must have a minimum net worth of $100,000, minimum
working capital of $50,000, minimum working capital to total
contract backlog of 10 percent, minimum net worth to total
contract backlog of 20 percent, net income for the past two
years, and a debt to equity ratio less than 5:1. In addition,
underwriters analyze the contractor's access to lines of credit,
as well as secondary personal assets which could be utilized to
provide additional financial support.
Underwriting guidelines related to experience provide that
all key managers of a contractor must have a minimum of five
years of experience in the following areas: project management,
project administration, accounting, and company management.
Underwriters also investigate the past performance of the firm by
contacting prior owners, subcontractors, and suppliers that have
been connected with past projects to investigate a firm's ability
to perform its work and to meet its financial obligations on a
daily basis.<PAGE>
When analyzing a contractor's capacity, underwriters look
for consistent growth patterns which take into consideration the
ratio of working capital to total contract amount and net worth
to total contract amount. Underwriters require the outstanding
backlog to be less than 150 percent of the largest previous
backlog undertaken by the firm. Underwriters also consider the
insurance carried by the firm for asbestos abatement and
environmental experience and the financial integrity of the
insurance carrier. The underwriting guidelines require the
carrier to have an A rating by A.M. Best (an insurance rating
service) and to provide coverage on an occurrence basis.
If the firm seeking surety bonding fails to meet the above
requirements, the surety requires collateral to offset the
additional risk. This option is utilized if the firm meets 80
percent to 99 percent of the requirements. If a firm fails to
meet 80 percent of the requirements, it is denied surety bonding.
Cumberland also requires corporate indemnification, as well
as personal indemnification when the ownership of the firm is
closely held in order to mitigate the liability of issuing surety
bonding. Management believes that Cumberland can achieve
profitable operating results with its current operations of the
company. Management has entered into negotiations and is
actively pursing additional customers to add to and diversify
current operations.
Marketing of Insurance Products
-------------------------------
Software
--------
Cumberland began its Bond Pro software development
initiative in 1995. The product is designed to service the
national agency base that sell primarily miscellaneous and
contract surety bonds.
Miscellaneous Bonds
-------------------
These bonds are primarily sold through agents issued in
small dollar amounts and written to governmental bodies as
part of a licensing requirement. There are numerous types
of miscellaneous bonds sold in the United States. The
collective revenue generated from these bonds is over $1
million annually.<PAGE>
Each state and municipality within each state have bond
requirements. For example, if you wanted to secure a
license to sell hot dogs from a vending cart, most
municipalities required a bond be posted before the
governmental body would issue a license. The bonds usually
run between $1,000 and $20,000 and are valid for one year.
There is a very low loss ratio for these bonds as they do
not guarantee performance and each individual risk is
relatively small.
The premium per bond ranging from $50 to $500 and the
number of bonds an agent might write can exceed one thousand
per month. Each state requires numerous bond forms and the
agent and issuing company must wrestle with the problems
associated with legal requirements, approval and insurance
which varies from state to state. Also, the billing,
collection and accounts receivable associated with large
numbers of small invoices must be managed.
Contract Bonds
--------------
Contract bonds center primarily on performance and
payment bonds issued for the construction industry. The
bonds guarantee that a contractor will fulfill their
obligations with respect to performing the scope of work
defined in the contract and fulfilling their financial
obligations. Cumberland's typical bond is less than $1.5
million with aggregate ongoing work of $3 million. The
bonds are provided to general contractors, subcontractors,
and specialty contractors and are marketed through insurance
agencies specializing in this type of coverage.
Cumberland's management has identified agencies which
specialize in bonds with the above parameters and solicit
their business by personal contact via agency visits. The
agency visits also allow for a demonstration of the Bond Pro
Software Program which helps to solidify a business
relationship due to advantages of automating the issuance of
bid, performance, and payment bonds. The efficiencies
gained in using the Bond Pro system for issuing, tracking,
and reporting bonds enhances Cumberland's ability to
increase premium and to develop relationships which may not
otherwise be possible due to competition for this class of
business.<PAGE>
Prior to Cumberland's software development initiative,
the insurance industry supplied their products through
agents on a manual basis, and made very little use of the
current technological advancements in communication methods.
Certainly billings and receivables in many instances, have
been automated but no integrated system existed which
effectively combined company approval, forms inventory, bond
issuance, invoicing, accounts receivable, collection,
renewals and management information reporting, as well as
conforming to the variety of state insurance regulations and
dealing with the issue that a single agent might deal with
ten to fifteen companies.
Starting in 1995, Cumberland's management elected to
initially focus on this neglected area. Since the launching
of the development of this product the company's software
team has written, applied for copyright, field tested and
began distributing the "Cumberland Bond Issuance Program" to
selected agents around the United States on October 1, 1996.
The full program encompasses all the required functions and
agency needs to run a full scale bond desk. The software
developed, when implemented inside the agency structure is
designed to reduce the labor required to provide the
service.
It is designed to assist the agency with the modules
they choose, and is structured to allow CTI to sell
components of the program to a board section of the surety
industry.
As of December 31, 1996 CTI has ten agencies using its
software and contracts for four installations.
It is CTI's intention in 1997 to create the first
simplified version of the software for sale through direct
mail to smaller agencies throughout the United States. This
product includes the basic forms and issuance sections of
the full program and will be marketed in a similar fashion
as America Online markets its service. CTI is producing a
software disk that will be mailed to the agents. All that
will be required for them to buy the service is to put the
mailed disk into their computer, review the demonstration
program and press a button to sign up for agency
authorization.
Also in development, is a marketing program which when
completed, will integrate with the full package and will
identify the customers in a given geographical area for the
product offered, and include various marketing programs for
the agents to use in securing the business. This program
will also be sold as a stand-alone product.<PAGE>
The Cumberland "Bond Pro" market penetration plan
directs four (4) sales field personnel to introduce the 400
largest surety agents to our program, install the program
and train the agents personnel in its use.
General
-------
Cumberland utilizes the services of its subsidiaries as
well as general agents for marketing, underwriting and
administration of its direct lines of business. Reinsurance
is provided on a treaty and facultative basis. Treaty
reinsurance involves providing reinsurance based on a
written agreement between the two sureties. The agreement
describes which business is covered and the amount covered
for each bond. Facultative reinsurance is provided on an
individual bond basis. Each bond is underwritten to
determine the acceptability of the risk and the amount of
reinsurance provided is determined by the underwriter's
evaluation of the risk.
Cumberland utilizes the independent agency system to
market its contract, landfill and miscellaneous bonds,
direct mail to market its notary bonds, and a general agency
to market it's registered investment advisor's insurance.
Utilizing its bond program, Cumberland markets its
insurance products through a direct sales force and a direct
mail system as well as the independent agency system.
Direct Insurance
----------------
During 1996, Cumberland Casualty & Surety Company
changed the focus of how it acquires surety premium. The
Company committed to enter the miscellaneous, license and
permit, probate, court and performance and payment bond
markets on a direct basis. The Company's emphasis will be
to market directly to agents for all classes of surety
business. This provides the Company with greater control
over marketing and underwriting functions which long-term,
will ensure a high quality and profitable book of business.<PAGE>
During 1994, 1995 and 1996 Cumberland had a Managing
General Agent Agreement with Midwest Indemnity Corp.
("Midwest"), (the "Managing General Agent"). Midwest is a
fifty-plus year old insurance agency which is primarily an
underwriter of surety bonds. Based in Illinois, Midwest
markets bonds nationally through a network of independent
agents which market to contractors in their geographic
areas. Midwest has been granted underwriting and binding
authority on bonds up to $500,000 and premium collection
authority, for which it receives a 35 percent commission to
cover overhead costs and the cost of commissions to
subagents. The profit from this agreement, after deductions
for commissions, reinsurance and losses is then split evenly
between Cumberland and the Managing General Agent. As of
December 31, 1996, the Company reported a profit split
recoverable from Midwest of approximately $.5 million.
Effective January 1, 1997 Cumberland dissolved its agreement
with Midwest Indemnity Corp.
Cumberland primarily writes direct surety bonds for KC
and its affiliates. Revenues attributable to direct surety
transactions with KC and its affiliates were $13,546, $4,535
and $2,873 for the years ended December 31, 1994, 1995 and
1996, respectively.
Reinsurance
-----------
Effective July 1, 1996, Cumberland Casualty & Surety
Company entered into a surety excess of loss reinsurance
agreement with Transatlantic Reinsurance Company which
provides the Company with the ability to write single bonds
up to $1,500,000 with a principal aggregate level of
$3,000,000. Transatlantic Reinsurance Company
(Transatlantic Re) is a carrier that specializes in
reinsurance treaties related to the surety business.
Established in 1952, Transatlantic Re is Best Rated A+
(Superior), with statutory surplus of $787,403,000 at
December 31, 1995. The reinsurance treaty provides the
Company the ability to actively pursue small to medium sized
contractors with revenues up to $5,000,000. It also allows
the Company to market and underwrite miscellaneous surety
bonds up to $1,500,000. The agreement is a principal excess
of loss agreement and Cumberland retains five percent (5%)
of $900,000 net loss, each principal excess of $100,000 net
loss, each principal. The Company retains ten percent (10%)
of the next $1,000,000 layer. This reinsurance treaty
effectively allows Cumberland Casualty & Surety Company to
market its products in all twenty-two (22) states they are
presently licensed in, which will lead to a better
geographic spread of risk and premium dollars.<PAGE>
A portion of Cumberland's reinsurance premiums written
were generated through a quota share reinsurance treaty (the
"Treaty") with an unaffiliated insurer, Indiana Lumbermen's
Mutual Insurance Company ("ILMIC"). ILMIC is a specialty
carrier that issues insurance policies related to the lumber
business and surety bonds. Established in 1897, ILMIC is
Best Rated B++ (Very Good) with statutory policyholders'
surplus of $25,242,000 at December 31, 1995. The terms of
this treaty provide that Cumberland assume 40 percent of all
bonds up to $250,000 written by ILMIC and also assume 40
percent of the losses and loss adjustment expenses
associated with the policies. ILMIC retained 40 percent
commission to cover agents' commissions, premium taxes and
general overhead expenses. This treaty has been replaced by
a pooling agreement, and although Cumberland is still
receiving residual revenues from this treaty, it does not
anticipate receiving significant future revenues from this
agreement.
For the period October 1991 to September 1993,
Cumberland entered into a pooling agreement with ILMIC.
Connecticut Indemnity Company ("CIC") and American Surety
Company ("American Surety") which replaces the quota share
reinsurance agreement. CIC is a member of the Orion Capital
Companies which are specialty writers of property and
casualty coverages with an emphasis on workers'
compensation, professional liability for architects and
engineers, nonstandard automobile and surety business. CIC
was formed in 1917 and had statutory surplus of $90,381,000
at December 31, 1995. CIC is Best Rated A (Excellent),
based on the consolidated performance of the Orion Capital
Companies by A.M. Best, an insurance rating agency. The
Orion Capital Companies had statutory surplus of
$520,306,000 at December 31, 1995 and, based on its
consolidated performance, is Best Rated A (Excellent).
American Surety is a small nondomestic surety which is not
rated. This pooling arrangement increased Cumberland's
diversification geographically and reduced the amount of
dependence on ILMIC. Because of this agreement, management
does not believe that the loss of the quota share
reinsurance treaty with ILMIC had a material adverse effect
on the operation of Cumberland.<PAGE>
The Company entered into a new pooling agreement
(beginning October 1993). Under the provisions of the new
agreement, CIC and ILMIC were replaced by Gulf Insurance
Company ("Gulf"). Under this agreement, Cumberland assumes
10% (effective April 1, 1996); 12.5% (effective April 1,
1995; 25% prior to that date) of certain surety policies
underwritten by Gulf. Gulf is a member of the Gulf
Insurance Group which was formed in 1940 and is jointly
owned by Primerica Corporation and Travelers Corporation.
Gulf is rated A+ (Superior) and had policyholders' surplus
of $269,179,379 at December 31, 1995. Gulf is a niche
market underwriter which targets small to medium size
accounts and offers D&O, E&O, fidelity and surety and other
specialty liability products.
Cumberland assumes reinsurance on a facultative and
treaty basis from several small sureties. The loss of one
of these customers would not have a material impact on the
operations of Cumberland.
Investments
-----------
Investments activities are conducted by an investment
committee which manages assets pursuant to investment
objectives and guidelines established by senior management
of Cumberland. These objectives require that the portfolio
consist of debt and equity securities of the type and
quality mix which will enable Cumberland to compete
effectively in the property and casualty insurance market,
provide appropriate interest margins and assure Cumberland's
continued solvency and profitability. In addition,
investments in tax-free obligations are made to the extent
of any tax advantages available. Investment in any security
not stated in the investment committee's philosophy is
limited to five percent of statutory surplus.
Reserves for Losses and Loss Adjustment Expenses
------------------------------------------------
Reserves for losses and loss adjustment expenses are
established based upon reported claims and Cumberland's
historical record of loss percentages and trends. The
amount of loss reserves for reported claims is based on a
case by case evaluation of the claim. Additionally,
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. Amounts are adjusted periodically to reflect
these factors. In addition, Cumberland may incur additional
liability if its reinsurers do not meet their obligations.
Reinsurance does not discharge an insurance carrier from its
primary liability to a policy holder for the face amount of
the coverage.<PAGE>
Reserve for losses and loss adjustment expenses are
actuarial estimates of losses, including the related
settlement costs. Management believes that the reserves for
losses and loss adjustment expenses are adequate to cover
the losses and loss adjustment expenses, including the cost
of incurred but not reported losses. In accordance with
statutory requirements, CCS's reserves are certified
annually at year end by an independent actuary.
There has been no material change in the mix of
business, including the location of business, geographic
mix, and types of risks assumed. Incurred losses increased
in 1994 due to a single principal on business written
through the 1991/92 pooling agreement. This loss was
atypical in nature, and the Company does not expect this
trend to continue. An additional reserve increase was
recognized during 1996 due to the increase in claims on a
1993/1994 Pooling Agreement.
Current fluctuations in inflation have not had a
material effect on the financial statements and there are no
explicit provisions in the financial statements for the
effects of inflation that may cause future changes in claim
severity.
Other than certain classification differences, there
are no material differences between statutory reserves and
Generally Accepted Accounting Principle ("GAAP") reserves.
The Company does not discount its loss reserves for
financial reporting purposes.
Claims Adjustment
-----------------
In addition to management's active participation in
claims administration, Cumberland has historically relied
upon outside claims adjusters and attorneys to help minimize
the cost of claims administration. Due to management's
active participation and the increased direct premium,
Cumberland believes it has the expertise to manage its
claims administration.
Regulation
----------
Cumberland is subject to regulation by various
supervising agencies which exercise broad administrative
powers with respect to licensing to transact business,
overseeing trade practices, licensing agents, approving
policy and bond forms, establishing reserve requirements,
prescribing dividend limitations, approving rates,
prescribing the form and content of required financial
statements, regulating the types and amount of investments
permitted and other matters, all as set forth in<PAGE>
regulations.<PAGE>
State laws regulating insurance holding companies, such
as Cumberland, may significantly limit the ability of CCS to
pay dividends to Cumberland, therefore affecting
Cumberland's ability to pay or KC's ability to require
Cumberland to pay loans or advances from KC. Under
insurance guaranty fund laws, insurers doing business in
states having such laws can be assessed up to prescribed
limits for policyholder losses incurred by insolvent
companies. The amount of any future assessments on
Cumberland under these laws cannot be reasonably estimated
at this time.
All of the states in which Cumberland is licensed
regulate insurers and their affiliates under insurance
holding company legislation. Under such laws, transactions
with related parties may be subject to prior notice or
approval depending on the size of the transaction in
relation to the Company's financial position. There can be
no assurance that such transactions will be approved in the
future.
Although the federal government generally does not
directly regulate the insurance industry, federal
initiatives often have an impact on the industry in a
variety of ways. Current and proposed federal measures
which may significantly affect the insurance industry
include employee benefit regulation, securities regulation
concerning insurance products, tax law changes affecting the
taxation of insurance companies, changes in the tax
treatment of insurance products, and proposed legislation to
more fully subject insurance companies to antitrust laws.
Changes in federal, state, and local regulations could have
a materially adverse effect on Cumberland's future
operations.
Cumberland believes it is substantially in compliance
with all material statutory regulations concerning its
primary business operations.
Competition
-----------
The insurance industry is highly competitive due to the
number and size of insurers and agencies. However, because
Cumberland markets its products in the specialty contract
surety and landfill market, Cumberland believes that its
competition is limited to a few regional surety companies
which have also targeted this market. The larger sureties
and insurance companies have chosen historically not to
enter this market.
Cumberland has aligned itself with other small sureties
as a reinsurer. Therefore, Cumberland is able to write
larger bonds than some competitors of the same financial<PAGE>
size because of the availability of reinsurance from these
sureties.<PAGE>
Cumberland operates in a highly competitive market for
miscellaneous bonds, and competes with its competition on
price and service.
Cumberland believes that the principal competitive
factors in the industry are reputation, managerial
experience, price, and breadth of services offered.
Cumberland believes that the experience of senior
management, together with their reputation and the use of
their bond program as a marketing tool, provides it with a
competitive advantage in the industry in which its products
are marketed.
Employees
---------
Cumberland employs thirty-one employees, of which two
are employed in an executive capacity, eight are employed in
professional capacities, and twenty-nine are employed in a
variety of administrative and clerical positions.
Cumberland believes that it can continue to operate
effectively with the current number of employees.
None of the Company's employees are union members and
none are subject to collective bargaining agreements. The
Company believes that its relationship with its employees is
satisfactory.
Surplus Debentures/Term Note
----------------------------
In 1988, CCS issued a surplus debenture to KC in
exchange for $3,000,000 which bears interest at 10 percent
per annum. Interest and principal payments are due
quarterly only if and when CCS's surplus, as defined below,
exceeds $4,000,000 and are limited to an amount equal to
one-half of the statutory net income before dividends and
federal and foreign and income taxes of CCS during that
year. As of December 31, 1996, no payments could be made
under the terms of the debenture.
In 1992, the debenture due to KC from CCS was assigned
to CTI. CTI 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 as part of the
Distribution. The term note is pari passi with the other
debts of CCS, 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. The term note was
subordinate in right of payments to all policyholders of
CCS. Surplus funds are defined as funds CCS has remaining
after deduction of capital, insurance reserves and all other
liabilities, in accordance with accounting practices<PAGE>
prescribed or permitted by the Florida Insurance Department.<PAGE>
Effective October 1, 1996, CTI issued 1,723,290 shares
at the fair value of $3.00 per share of its common stock to
Kimmins Corp. (f/k/a Kimmins Environmental Services, Corp.)
in exchange for surrender of the Company's term note payable
in the amount of $5,169,870.
Item 2. Properties
------- ----------
Cumberland leases office space from a company owned by the
chairman of the Board, Mr. Francis M. Williams, at a monthly rate
of $4,347. The lease expired on February 28, 1997. A new lease
was executed March 1, 1997.
Item 3. Legal Proceedings
------- -----------------
Cumberland and its subsidiaries are involved in various
lawsuits arising in the ordinary course of its business
operations as an insurer. Management does not believe that any
of these lawsuits will have a material effect on the consolidated
financial position, future operations or cash flows of
Cumberland.
Item 4. Submission of Matters to a Vote of Security
Holders
------- --------------------------------------------------
None
Item 5. Market for the Company's Common Equity and Related
------- Stockholders Matters
--------------------------------------------------
--
The Company's Common Stock (symbol "CUMB") has been traded
in the over-the-counter market since October 1, 1992. Effective
December 16, 1996, Cumberland was approved and included in the
trading on the Nasdaq Small Cap Market. Bid and Asked prices
were set forth in Quotation Market Sheets published by the
National Quotation Bureau and Nasdaq. The bid and asked prices
for 1995 and 1996 were as follows:
1995 1996
------------------------------
Bid Ask Bid Ask
------- ---------------------
First Quarter $3/8 $1/2 $1/2 $9/16
Second Quarter 1/4 1/2 7/8 1.00
Third Quarter 1/4 1/2 3.00 3-1/4<PAGE>
Fourth Quarter 1/4 1/2 3.00 3-1/4<PAGE>
As of December 31, 1996, there were 1,062 stockholders of
record of the Common Stock. A number of such Holders are brokers
and other institutions holding shares in "street name" for more
than one beneficial owner.
Dividends
---------
The payment by the Company of dividends, if any, in the
future is within the discretion of its Board of Directors
and will depend upon the Company's earnings, capital
requirements (including working capital needs), and other
financial needs. Cumberland does not anticipate paying any
dividends on Cumberland Common Stock in the near future.
The future payment of dividends, if any, by CCS is
within the discretion of its Board of Directors and will
depend upon CCS's earnings, statutory limitations, capital
requirements (including working capital needs) and financial
condition, as well as other relevant factors. Applicable
state laws and regulations restrict the payment of dividends
by CCS to the extend of surplus profits less any dividends
that have been paid in the preceding twelve months or net
investment income for the year, whichever is less, unless
CCS obtains prior approval from the insurance commissioner.
CCS does not anticipate paying any dividends on CCS Common
Stock in the near future.<PAGE>
Item 6. Selected Financial Data
------- -----------------------
<TABLE>
<CAPTION>
Income Statement Data:
Year Ended December 31
-------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- ----------------
(In Thousands - except per share data)
<S> <C> <C> <C> <C> <C>
Operating data:
Net premium income . . . . . .$ 5,042 $ 4,412 $ 4,957 $ 5,068 $ 3,808
Net investment income . . . . . 331 337 284 397 404
Net realized gain (losses) . . - 22 (124) 124 118
Benefits and expenses . . . . . 5,418 4,825 6,604 7,016 6,952
Income (loss) before income
taxes . . . . . . . . . . . . 248 238 (1,209) (228) (583)
Net income (loss) . . . . . . . 183 231 (1,073) (228) (583)
Pro forma net income (loss) per
share (1) . . . . . . . . . . .$ .05 $ .06 $ (.27)$ (.06)$ (.14)
</TABLE>
(1) Pro forma net income (loss) per share (unaudited) for 1992
and 1993 has been calculated based on the 4,039,780 shares
of Cumberland Common Stock that were outstanding after the
Distribution. The 1994, 1995 and 1996 net income (loss) per
share amounts have been computed based on the actual
weighted average number of shares outstanding during the
respective years, adjusted for the dilutive effect of stock
options.<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data:
Year Ended December 31
-------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- ----------------
(In Thousands - except per share data)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Investments . . . . . . . . . .$ 7,637 $ 5,046 $ 5,852 $ 6,303 $ 6,110
Cash and cash equivalents . . . 1,161 3,117 1,701 1,236 669
Accounts receivable . . . . . . 1,361 948 2,540 550 925
Reinsurance recoverables (1) 1,363 1,876 1,749 1,697 988
Deferred policy acquisition
costs . . . . . . . . . . . . 697 340 581 435 635
Intangibles . . . . . . . . . . -- -- 134 2,163 1,957
Total assets . . . . . . . . . 12,608 11,956 12,834 12,709 11,769
Policy liabilities and
accruals:
Unearned premiums . . . . . . 1,895 1,037 1,631 1,182 1,862
Losses and LAE (1) . . . . . 3,497 3,355 3,138 2,352 1,992
Term notes/surplus debentures,
including accrued interest 4,291 4,403 4,343 4,798 0
Other long-term debt . . . . . -- -- -- -- 1,533
Total liabilities . . . . . . . 10,169 9,351 11,518 11,419 5,956
Total stockholders' equity . . 2,439 2,605 1,316 1,290 5,813
</TABLE>
(1) The 1992, 1993, 1994, 1995 and 1996 amounts have been
adjusted to reflect the Company's adoption of SFAS 113.
"Accounting and Reporting for Reinsurance of Short-Duration
and Long- Duration Contracts." See Note 1 of the Notes to
Consolidated Financial Statements.<PAGE>
Item 7. Management's Discussion and Analysis of Financial
------- Condition and Results of Operations
-------------------------------------------------
Results of Operations
---------------------
The following table sets forth, for the periods indicated,
(i) summary financial data (in thousands), and (ii) the
percentage change in the dollar amount for such items from period
to period.
<TABLE>
<CAPTION>
Percentage Increase
(Decrease)
Year Ended December Year Ended December
31 31
--------------------------------------------------
1994 1995 1996 1995 1996
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premium income . . $ 4,957 $ 5,068 $ 3,808 $ 2.2%$ (24.9)
Net investment income 284 397 404 39.8 1.8
Net realized gains
(losses) . . . . . . (124) 124 118 200.0 (4.8)
Other revenues . . . . 278 1,199 2,039 331.3 70.1
Benefits and expenses 6,604 7,016 6,952 6.2 (.9)
Loss before income taxes (1,209) (228) (583) 81.1 (155.7)
Net loss . . . . . . . (1,073) (228) (583) 78.8 (157.7)
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995
-----------------------------------------------------------------
-
During the year ended December 31, 1996, net premium income
decreased by 25 percent to $3,808,000 from $5,068,000 for the
year ended December 31, 1995.
Net reinsurance premiums earned through the Pooling
Agreements were $2,693,418 and $4,440,632 for 1996 and 1995,
respectively representing a decrease of $1,747,214, or an overall
39 percent decrease in assumed premiums.<PAGE>
Direct premiums earned were $1,114,901 and $627,683 for 1996
and 1995, respectively, representing an increase of $487,218 or
78 percent.<PAGE>
During 1996, direct premiums written by CCS increased while
assumed premiums decreased as a result of the marketing
activities of the Company. CCS's direction is to penetrate the
direct market while decreasing the volume of reinsurance premiums
assumed through Pooling Agreements. The following table reflects
the written premium activity for 1996 and 1995.
Written Premiums
--------------------------------------------
1995 1996 % Change
-------------- -------------- --------------
Direct . . . . . $ 881,683 $ 2,025,796 $ 130%
Assumed . . . . 3,899,884 2,890,050 (26%)
-------------- -------------- --------------
Total . . . . . $ 4,781,567 $ 4,915,846 $ 3%
============== ============== ==============
During the year ended December 31, 1996 and 1995, investment
income before capital gains was $403,919 and $397,681,
respectively. Realized gains, net of losses, for the year ended
December 31, 1996 and 1995 was $117,824 and $124,004,
respectively. The net result was investment income remained
consistent for 1996 as compared to 1995.
Other revenues for the year ended December 31, 1996
increased to $2,039,331 from $1,198,249 for the year ended
December 31, 1995, an increase of 70.1%. The increase is a
direct result of an increase of $612,350 in commission income
earned by subsidiary surety agencies, and an increase of $228,729
in consulting revenues derived from Qualex which was formed in
November 1994.
During the year ended December 31, 1996, benefits and claims
expenses increased to $1,670,640 from $1,245,546 for the year
ended December 31, 1995. The increase in benefit and claims
expenses of $425,095 is attributed to claims on reinsurance
assumed pooling agreements. During 1996, an increase of $300,000
was charged to the 1993/94 pooling agreement. Management
believes the increase in claims arising from business written in
the Pooling Agreement has leveled off and anticipates that losses
associated with the reinsurance contracts will decrease during
1997. Losses associated with direct premiums represent
approximately 11% of premiums earned or $127,232.
During the year ended December 31, 1996, the amortization of
deferred policy acquisitions costs decreased to $1,532,355 from
$2,380,140 for the year ended December 31, 1995. The decrease is
attributable to the decrease in earned premiums.<PAGE>
During the year ended December 31, 1996, operating expenses
increased to $3,255,805 from $2,882,255 in 1995. The increase is
due to additional expenses associated with the purchase of two
agencies during 1995, expenses incurred in research and
development of Cumberland's Bond Program, and additional
personnel employed to direct market its insurance products.
Net interest expense decreased to $493,337 in 1996 from
$508,217 in 1995 due to the conversion on the term note to equity
on October 1, 1996.
The Company s effective tax (benefit) rate for 1996 and 1995
was -0- percent for 1996 and 1995. The deviation from statutory
rates for 1996 and 1995 primarily relates to the Company s
establishment of a valuation allowance on a portion of the net
operating loss, the future realization of which is uncertain.
Year Ended December 31, 1995 Compared to Year Ended December 31,
1994
-----------------------------------------------------------------
During the year ended December 31, 1995, net premium income
increased by 2 percent to $5,068,000 from $4,957,000 for the
year ended December 31, 1994. Premium income for 1995, when
compared to 1994, remained relatively flat. Net reinsurance
premiums earned through the pooling agreements were $4,441,000
and $4,453,000 for 1995 and 1994, respectively. Direct premiums
earned were $628,000 for 1995 as compared to $503,000 for 1994,
an increase of $125,000 or 25%.
During the year ended December 31, 1995, net investment
income increased to $521,000 from $160,000 for the year ended
December 31, 1994. The increase in investment income is
attributed to net realized gains of $124,000 and an increase in
the interest rate earnings on the bond portfolio during 1995.
The Company realized net losses on sales of investments in common
stocks in 1994 of $123,000.
Other revenue for the year ended December 31, 1995 increased
to $1,199,000 from $278,000 for the year ended December 31, 1994,
an increase of 331%. The majority of the increase relates to
$489,000 of commission income derived from SG and SA which were
acquired in 1995, and $425,000 of consulting revenues derived
from Qualex which was formed in November 1994.
During the year ended December 31, 1995, benefits and claims
expenses decreased to $1,246,000 from $2,646,000 for the year
ended December 31, 1994. The ratio of benefits and claims
expenses to net premium income for 1995 (25%) decreased from 1994
(53%) primarily due to a decrease in incurred losses relating to
a single principal on business written through the 1991/92
pooling agreement. This loss was atypical in nature and expensed
during 1994.<PAGE>
During the year ended December 31, 1995, the amortization of
deferred policy acquisition costs increased to $2,380,000 from
$2,038,000 for the year ended December 31, 1994. The ratio of
amortization of deferred policy acquisition costs to net premium
income for 1995 (47%) approximated that for 1994 (41%).
During the year ended December 31, 1995, operating expenses
increased to $2,882,000 from $1,515,000 in 1994. This increase
was due primarily to purchasing the two agencies and expanding
the Company's book of business.
Net interest expense increased to $508,200 in 1995 from
$406,000 in 1994 primarily due to interest expense associated
with the purchase of SG and SA.
The Company s effective tax (benefit) rate for 1995 was -0-
percent as compared to (11.2) percent for 1994. The deviation
from statutory rates for 1994 and 1995 primarily relates to the
Company s establishment of a valuation allowance on a portion of
the net operating loss, the future realization of which is
uncertain.
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
Department of Insurance, the Company is permitted to write
premiums up to an amount equal to three times its statutory
surplus, or approximately $15,104,000 and $15,405,000 at
December 31, 1996 and 1995, respectively. Therefore, based upon
statutory guidelines, the Company could increase earned premiums
by approximately $11,296,000 in 1997 in addition to the amount
earned in 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 December 31, 1996, the Company s $11,629,224 of total
assets calculated based on generally accepted accounting
principles were distributed primarily as follows: 59 percent in
cash and investments (including accrued investment income), 17
percent in receivables and reinsurance recoverables, 22 percent
in intangibles and deferred policy acquisition costs and 2
percent in other assets.<PAGE>
The Company maintains a liquid operating position and
follows investment guidelines that are intended to provide an
acceptable return on investment while maintaining sufficient
liquidity to meet its obligations.
Net cash used in operating activities was $315,000, $375,000
and $355,000 for the years ended December 31, 1994, 1995 and
1996, respectively. In 1994, the cash used in operating
activities of $315,000 was due primarily to an increase in trade
accounts receivable and the net loss for the year offset by an
increase in ceded reinsurance payable. In 1995 and 1996 the cash
used in operating activities was primarily attributable to
payments of claims and reinsurance, which offset in part by a
decrease in accounts receivable.
Net cash (used in) provided by (used in) investing
activities was $(1,024,000), $(383,000), and $358,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Investing activities consist of purchases and sales of
investments and advances to and from KC.
KC and Cumberland entered into a term note agreement
evidencing the balance of the surplus debenture which was due KC
from CCS. The surplus debenture, as well as all accrued interest,
has been assigned to Cumberland. Refer to Note 8 of the Notes to
Consolidated Financial Statements.
Losses and Loss Adjustment Expenses
-----------------------------------
The consolidated financial statements include the estimated
liability for unpaid losses and loss adjustment expenses (LAE) of
CCS. The liabilities for losses and LAE are determined using
case-basis evaluations and statistical projections and represent
estimates of the ultimate net cost of all unpaid losses and LAE
incurred through the end the period. These estimates are subject
to the effect of trends in future claim severity and frequency.
These estimates are continually reviewed and, as experience
develops and new information becomes known, the liability is
adjusted as necessary; such adjustments, if any, are included in
current operations.
Reconciliation of Liability for Losses and Loss Adjustment
Expenses
-----------------------------------------------------------------
The following table provides a reconciliation of the
beginning and ending liability balances, net of reinsurance
recoverable, for 1994, 1995 and 1996 to the gross amounts
reported in Cumberland s balance sheets:<PAGE>
December 31
1994 1995 1996
-----------------------------------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at beginning
of year . . . . . . . . . . $1,708,761 $ 1,625,703 $1,052,547
-----------------------------------
Provision for losses and LAE
for claims occurring in the
current year, net of
reinsurance . . . . . . . . 2,425,455 1,486,546 1,370,640
Increase (decrease) in
estimated losses and LAE for
claims occurring in prior
years, net of reinsurance 220,600 (241,000) 300,000
-----------------------------------
Incurred losses during the
current year, net of
reinsurance . . . . . . . . 2,646,055 1,245,546 1,670,640
Losses and LAE payments for
claims, net of
reinsurance, occurring
during:
The current year . . . . . 810,903 161,279 422,544
Prior years . . . . . . . 1,918,210 1,657,423 1,705,721
-----------------------------------
2,729,113 1,818,702 2,128,265
-----------------------------------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at end of year . . 1,625,703 1,052,547 594,922
Reinsurance recoverables on
unpaid losses at end of year
(1) . . . . . . . . . . . . 1,512,219 1,299,257 1,396,874
-----------------------------------
Liability for losses and LAE,
gross of reinsurance
recoverables on unpaid
losses, at end of year . . $ 3,137,922 $ 2,351,804 $1,991,796
===================================
(1) Exclusive of ceded unearned premiums accounts.<PAGE>
Cumberland experienced a $241,000 excess in reserves for
losses and loss adjustment expenses in 1995, and experienced a
deficiency of $220,600 and $300,000 in 1994 and 1996,
respectively for losses incurred in prior years. The excess in
1995 principally resulted from settling case basis reserves
established in prior years for amounts that were less than
expected. The deficiency in 1994 principally resulted from a
single principal on business written through the 1991/92 pooling
agreement. This loss was atypical in nature and the Company does
not expect this situation to be indicative of a trend. The
deficiency in 1996 is a result of additional claims expense on a
1993/94 pooling agreement.
The anticipated effect of inflation is implicitly considered
when estimating liabilities for losses and LAE. While anticipated
price increases due to inflation are considered in estimating the
ultimate claim costs, the increase in average severities of
claims is caused by a number of factors. Future average
severities are projected based on historical trends adjusted for
anticipated changes in underwriting standards, policy provisions,
and general economic trends. These anticipated trends are
monitored based on actual development and are modified if
necessary.
The differences between the December 31, 1996 liability for
losses and LAE reported in the accompanying consolidated
financial statements in accordance with generally accepted
accounting principles ("GAAP") and that reported in the annual
statement filed with the state insurance departments in
accordance with statutory accounting practices ("SAP") are as
follows:
Liability for losses and LAE on a SAP basis
(which is net of reinsurance recoverables on
unpaid losses and LAE . . . . . . . . . . . $ 907,833
Reinsurance recoverables on unpaid losses and
LAE . . . . . . . . . . . . . . . . . . . . 1,396,874
Salvage and subrogation . . . . . . . . . . . (312,911)
---------------
Liability for losses and LAE, as reported in
the accompanying GAAP basis financial
statements . . . . . . . . . . . . . . . . . $ 1,991,796
===============<PAGE>
Analysis of Loss and Loss Adjustment Expense Development
--------------------------------------------------------
The following table represents the development of the
liability for unpaid liabilities, net of reinsurance, for 1989
through 1996 (in thousands).
<TABLE>
<CAPTION>
1989 1990 1991 1992
------------- -------------------------- -------------
<S> <C> <C> <C> <C>
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,003 $ 2,171 $ 1,663 $ 2,426
Liability re-estimated
as of:
One year later . . . 2,113 3,003 1,273 2,239
Two years later . . 1,908 2,549 1,200 2,546
Three years later . 1,806 2,349 1,316 2,263
Four years later . . 1,636 2,471 1,443 2,418
Five years later . . 1,678 2,368 1,234 -
Six years later . . 1,639 2,466 - -
Seven years later . 1,635 - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (632) $ (295)$ 429 $ 8
============= ========================== =============
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996
------------- -------------------------- -------------
<S> <C> <C> <C> <C>
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,709 $ 1,625 $ 1,053 $ 595 <PAGE>
Liability re-estimated
as of:
One year later . . . 2,033 2,228 2,186 -
Two years later . . 1,481 2,601 - -
Three years later . 2,947 - - -
Four years later . . - - - -
Five years later . . - - - -
Six years later . . - - - -
Seven years later . - - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (1,238) $ (976)$ (1,133) $ -
============= ========================== =============
/TABLE
<PAGE>
<TABLE>
<CAPTION>
1989 1990 1991 1992
------------- -------------------------- -------------
<S> <C> <C> <C> <C>
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 1,351 $ 1,931 $ 806 $ 1,151
============= ========================== =============
Two years later . . $ 1,524 $ 2,188 $ 884 $ 1,834
============= ========================== =============
Three years later . $ 1,614 $ 2,267 $ 1,095 $ 2,088
============= ========================== =============
Four years later . . $ 1,614 $ 2,295 $ 1,254 $ 1,957
============= ========================== =============
Five years later . . $ 1,623 $ 2,295 $ 1,260 $ -
============= ========================== =============
Six years later . . $ 1,623 $ 2,331 $ - $ -
============= ========================== =============
Seven years later . $ 1,630 $ - $ - $ -
============= ========================== =============
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996
------------- -------------------------- -------------
S> <C> <C> <C> <C
<PAGE>
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 765 1,643 1,334 -
============= ========================== =============
Two years later . . 1,058 2,316 - -
============= ========================== =============
Three years later . 2,868 - - -
============= ========================== =============
Four years later . . - - - -
============= ========================== =============
Five years later . . - - - -
============= ========================== =============
Six years later . . - - - -
============= ========================== =============
Seven years later . - - - -
============= ========================== =============
</TABLE>
Effect of Inflation
-------------------
Inflation has not had, and is not expected to have, a
material impact upon the Company s operations for the last three
years.<PAGE>
Item 8. Financial Statements and Supplementary Data
------- -------------------------------------------
The financial statements of the Company required by this
Item are listed in Item 14(a)(1) and (2) and are submitted as a
separate section of this report.
Item 9. Changes in and Disagreements with Accountants on
------- Accounting and Financial Disclosure
------------------------------------------------
None
Item 10. Directors and Executive Officers of the Registrant
-------- --------------------------------------------------
The current directors and executive officers of Cumberland
are as follows:
Name Age Position
-----------------------------------------------------------------
Francis M. Williams 55 Chairman of the Board
of Directors
Joseph M. Williams 40 President, Treasurer
and Director
George A. Chandler 67 Director
Edward J. Edenfield, IV 38 President, CCS
All Directors of Cumberland hold office until the next
annual meeting of stockholders and the election and qualification
of their successors. Officers of Cumberland are elected annually
by the Board of Directors and hold office at the discretion of
the Board.
Set forth below is information regarding the directors and
executive officers of Cumberland:<PAGE>
Francis M. Williams has been Chairman of the Board of
Cumberland since its inception and, until June 1992, was
President of Cumberland. In addition, Mr. Williams has been
Chairman of the Board and Director of CCS and SSI from
inception and President and Chairman of the Board of KC
since its inception in 1979. Prior to November 1988, Mr.
Williams was the Chairman of the Board and Chief Executive
Officer of Kimmins Corp. (a predecessor of KC) and its
predecessors and sole owner of K Management Corp. From June
1981 until January 1988, Mr. Williams was the Chairman of
the Board of Directors of College Venture Equity Corp., a
small business investment company; and since June 1981, he
has been Chairman of the Board, Director, and sole
stockholder of Kimmins Coffee Service, Inc. , an office
coffee service company. Mr. Williams has also been a
director the National Association of Demolition Contractors
and a member of the executive committee of the Tampa Bay
International Trade Council.
Joseph M. Williams has been the Secretary, Treasurer
and a Director of Cumberland since its inception and since
June 1992 has been President of Cumberland. In addition, Mr.
Williams has been the Secretary and Treasurer of Kimmins
Corp. since October 1988, the Vice President, Secretary, and
Treasurer of CCS since April 1989, and Vice President,
Secretary, and Treasurer of SSI since August, 1989. From
June 1985 through October 1988, Mr. Williams was the
secretary of Kimmins Corp. a predecessor of KC. Mr. Williams
has been employed by the Company and Kimmins Corp. in
various capacities since January 1984. From January 1982 to
December 1983, he was the managing partner of Williams and
Grana, a firm engaged in public accounting. From January
1978 to December 1981, Mr. Williams was employed as a senior
tax accountant with Price Waterhouse & Co. Joseph M.
Williams is the nephew of Francis M. Williams.<PAGE>
Edward J. Edenfield, IV is the President and Chief
Operating Officer of Cumberland Casualty & Surety Company.
Mr. Edenfield joined Cumberland Casualty & Surety Company in
May of 1996 as Chief Operating Officer, and was promoted to
President in September of 1996. He brings over sixteen (16)
years of management experience in the insurance industry,
specializing in contract and miscellaneous surety bonds.
Mr. Edenfield completed his bachelor's degree in Business
Administration with an emphasis in Economics from Lycoming
College. Prior to his involvement with Cumberland, Mr.
Edenfield had various management and senior management
positions in the insurance industry. Most recently he was
Assistant Vice President - Surety with Meadowbrook Insurance
Group in Southfield, Michigan. Mr. Edenfield began his
career in 1980 with Continental Insurance Company in their
New York home office. Mr. Edenfield is presently a Board
Member of The American Surety Association, and is involved
in the National Association of Independent Sureties, as well
as being a member of the National Association of Surety Bond
Producers. Mr. Edenfield is responsible for administration
and finance of the insurance operations at Cumberland.
George A. Chandler has been a Director of Cumberland
since its inception. In addition, Mr. Chandler has been a
Director of KC since January 1990. Since November 1989, Mr.
Chandler has been an independent business consultant. Mr.
Chandler was Chairman of the Board from July 1986 to
November 1989, and President and Chief Executive officer
from October 1985 to November, 1989 of Aqu-Chem, Inc., a
manufacturer of packaged boilers and water treatment
equipment. From May 1983 to October 1985, he was President,
Chief Executive Officer, and Director of American Ship
Building Co., which is engaged in the construction,
conversion and repair of cargo vessels. Mr. Chandler is also
a Director of The Allen Group, Inc. and DeVlieg Bullard,
Inc.
Compliance with Section 16(a) of the Securities Exchange Act
------------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934
requires the Company s officers and directors, and persons who
own more than 10 percent of a registered class of the Company s
equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent stockholders are
required by SEC regulation to furnish the Company with copies of
all Section 16(a) forms they file. Based solely on the Company s
review of the copies of such forms received by it, or written
representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that, during the
year ended December 31, 1996 all filing requirements applicable
to its officers, directors, and greater than 10 percent
beneficial owners were complied with.<PAGE>
Item 11. Executive Compensation and Other Information
-------- --------------------------------------------
Summary Compensation Table
The following table provides certain summary information
concerning compensation paid or accrued by the Company and its
subsidiaries to and on behalf of the Company s President for the
year ended December 31, 1996:
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------- -------------------
Name of Individual Other All
and Principal Annual Stock other
Position Year Salary Bonus Compensation Options Compensation
<S> <C> <C> <C> <C> <C> <C>
Joseph M. Williams
President and
Treasurer . . 1996 $ 95,000 $37,000 $ - $ - $ -
1995 $ 95,000 $30,000 $ - $ - $ -
1994 $ 95,000 $30,000 $ - $ - $ -
</TABLE>
Aggregate Option Exercises in 1996 and December 31, 1996 Option
Values
-----------------------------------------------------------------
The following table shows information concerning options
held by the officers shown in the Summary Compensation Table at
the end of 1996. No options were exercised by such persons in
1996.
Number of
Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options Options at Fiscal
at Fiscal Year End Year End ($)(1)
Name (#) Exercisable (E) Exercisable(E)
--------------------- ------------------- -----------------------
Joseph M. Williams 124,000 $ 359,500 (E)
(1) Represents the dollar value of the difference between the
value at December 31, 1996 and the option exercise price of
unexercised options at December 31, 1996.<PAGE>
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
There is no compensation committee of the Company s Board of
Directors or other committee of the Board performing equivalent
functions. The person who performs the equivalent function is
Francis M. Williams, Chairman of the Board.
Compensation of Directors
-------------------------
During the year ended December 31, 1996, the Company paid
nonofficer Directors an annual fee of $5,000. Directors are
reimbursed for all out-of-pocket expenses incurred in attending
Board of Directors and committee meetings.
Board Compensation Committee Report on Executive Compensation
-------------------------------------------------------------
There is no formal compensation committee of the Board of
Directors or other committee of the Board performing equivalent
functions. As noted above, compensation is determined by
Francis M. Williams, Chairman of the Board of the Company under
the direction of the Board of Directors. There is no formal
compensation policy for the Chief Executive Officer of the
Company. Compensation of the Chief Executive Officer, which
primarily consists of salary, is based generally on performance
and the Company s resources. Compensation for Mr. Joseph Williams
has been fixed annually each year by the Chairman of the Board.
Mr. Joseph Williams compensation is not subject to any
employment contract. In 1994, Mr. Joseph Williams compensation
was $125,000. In 1994, the Company recorded net premium income of
$4,957,000 and a net loss of $1,073,362. In 1995, Mr. Joseph
Williams compensation was $125,000. In 1995, the Company
recorded net premium income of $5,068,315 and a net loss of
$228,210. In 1996, Mr. Joseph Williams' compensation was
$132,000. In 1996, the Company recorded net premium income of
$3,808,319 and a net loss of $582,744.
Item 12. Security Ownership of Certain Beneficial Owners
and
-------- Management
--------------------------------------------------
Commons Stock Ownership of Certain Beneficial Owners and
Management
-----------------------------------------------------------------
The following table sets forth the number of shares of
Cumberland s Common Stock beneficially owned as of December 31,
1996 by (i) persons known by Cumberland to own more than 5
percent of Cumberland s outstanding Common Stock, (ii) each
director and officer of Cumberland, and (iii) all directors and
officers of Cumberland as a group:<PAGE>
Amount and Nature
Name and Address of Beneficial Percent of Issued and
of Beneficial Owner Ownership of Common Outstanding Common
(1) (2) Stock Stock
--------------------- ------------------- -----------------------
Francis M.
Williams . . . . . 3,542,592 (3) 65.1 %
Joseph M. Williams 349,783 (4) 6.4 %
George A. Chandler 2,669 (5) *
All directors and
officers as a
group (three
persons) . . . . 3,895,044 71.5 %
(1) The address of all officers and Directors of Cumberland
listed above are in care of Cumberland at 4311 W.
Waters Ave., Suite 501, Tampa, FL 33614.
(2) Cumberland believes that the persons named in the table
have sole voting and investment power with respect to
all shares of common stock beneficially owned by them,
unless otherwise noted.
(3) Includes 2,259,207 shares owned by Mr. Francis
Williams; 1,059,306 shares allocated to Mr. Williams
based on his ownership in Kimmins Corp., 29,345 shares
owned by Mr. Williams wife; 22,748 shares held by Mr.
Williams as trustee for his wife and children; 18,296
shares held by Mr. Williams as custodian under the New
York Uniform Gifts to Minors Act for his Children; and
153,690 held by various Real Estate Partnerships of
which Mr. Williams is 100 percent Owner.
(4) Includes 8,800 shares owned by Mr. Joseph M. Williams;
options to acquire 115,000 shares of Cumberland Common
Stock; 219 shares held by the KC 401(K) Plan and ESOP
of which Mr. Williams is fully vested; 205,764 shares
held by KC s 401(K) Plan, Profit Participation Plan and
ESOP, options to acquire 20,000 shares of Cumberland
Common Stock held by the ESOP, of which Mr. Williams is
a trustee, but of which Mr. Williams disclaims
beneficial ownership.
(5) Includes 1,869 shares owned by Mr. George A. Chandler
and options to acquire 800 shares of Cumberland Common
Stock.
* Less than one percent.<PAGE>
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
CCS writes surety bonds for KC and its affiliates. Revenues
attributable to transactions with KC and its affiliates were
$13,546, $4,535 and $2,873 for the years ended December 31, 1994,
1995 and 1996, respectively.
In May 1988, CCS issued KC a surplus debenture in exchange
for $3,000,000, bearing interest at 10 percent per annum.
Interest and principal payments are due quarterly only if and
when CCS s surplus, as defined below, exceeds $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 December 1988, CCS issued to KC a
surplus debenture for $5,000,000 bearing interest at 12 percent
per annum. CCS obtained permission from the Commissioner of
Insurance and repaid this debenture in 1991. This $5,000,000
payment was applied to the outstanding principal and therefore
did not reduce the outstanding interest.
In 1992, the Company assigned the debenture due to KC from
CCS to CTI. CTI 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 as part of the spin-
off transaction. The term note is pari passi with the other debts
of the Company, bears interest at 10 percent and is due on
October 1, 2002. For the first five years interest and principal
are due quarterly with minimum payments equal to one-half of net
earnings before interest and federal income taxes. This
debenture 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.
Effective October 1, 1996, CTI issued 1,723,290 shares at the
fair value of $3.00 per share of its common stock to Kimmins
Corp. (f/k/a Kimmins Environmental Service, Corp.) in exchange
for surrender of the Company's term note payable in the amount of
$5,169,870.
SSI acts as an agent for surety bonds written for KC and its
affiliates. Commission revenues attributable to transactions with
KC and its affiliates were $59,759, $43,183 and $16,803 for the
years ended December 31, 1994, 1995 and 1996, respectively.<PAGE>
CCS and SSI filed a consolidated tax return with KC for 1988
through September 30, 1992. CTI filed a separate return for the
three months ending December 31, 1992. Under a tax-sharing
agreement with KC, CCS and SSI were charged that portion of the
consolidated liability which is in direct proportion to the ratio
of CCS s and SSI s pre-tax financial income or loss to the
consolidated totals, without consideration of the effect of
permanent and temporary differences which were allocated, in
total, to KC. CCS and SSI, accordingly, did not record deferred
taxes on their balance sheets and the annual charge representing
CCS s and SSI s tax liability was settled through an intercompany
charge.
Item 14. Exhibits, Financial Statements, Schedules, and
-------- Reports on Form 8-K
----------------------------------------------
(a) The following documents are filed as part of this Annual
Report on Form 10-K
1. Financial Statements
- Report of Independent Certified Public Accountants
- Consolidated balance sheets at December 31, 1995
and 1996
- Consolidated statements of operations for each of
the three years in the period ended December 31,
1996
- Consolidated statements of stockholders equity
for each of the three years in the period ended
December 31, 1996
- Consolidated statements of cash flows for each of
the three years in the period ended December 31,
1996
- Notes to consolidated financial statements
2. Financial statement schedules
I - Summary of Investments - Other than
Investments in Related Parties
II - Condensed Financial Information of Registrant
III - Supplementary Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts
All other Schedules are omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the Schedules, or because the
information required is included in the financial statements and
notes thereto.
3. The following documents are filed as exhibits to this
Annual Report on Form 10-K:
3(a)*- Articles of Incorporation and Bylaws<PAGE>
10* - Material contracts
11 - Statement Re: Computation of earnings per share
22 - Subsidiary list
* Previously filed as part of Registrant s Registration
Statement on Form 8, File No. 0-19727 and incorporated
herein by reference thereto.
(b) Reports on Form 8-K
Form 8-K was filed during the three months ended
December 31, 1996 due to the term note converted to
equity. The filing included Condensed Consolidated Pro
Forma Balance Sheet dated September 30, 1996.
(c) Exhibits
The response to this portion of Item 14 is submitted as
a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as
a separate section of this report.<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunder duly authorized.
Date: April 15, 1997 CUMBERLAND TECHNOLOGIES, INC.
-----------------------------
Date: April 15, 1997 By: /s/ Joseph M. Williams
-----------------------------
Joseph M. Williams, President
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.
Date: April 15, 1997 By: /s/ Joseph M. Williams
-----------------------------
Joseph M. Williams, President
Date: April 15, 1997 By: /s/ Francis M. Williams
-----------------------------
Francis M. Williams,
Chairman of the Board
Date: April 15, 1997 By: /s/ George A. Chandler
-----------------------------
George A. Chandler, Director
Date: April 15, 1997 By: /s/ Carol S. Black
-----------------------------
Carol S. Black, Secretary
(principal financial and
accounting officer)<PAGE>
Annual Report on Form 10-K
Item 14(a), (c) and (d)
List of Financial Statements, Financial Statement
Schedules and Exhibits
Year Ended December 31, 1996
Cumberland Technologies, Inc.
Tampa, Florida<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
The following consolidated financial statements of
Cumberland Technologies, Inc. are included herein:
Page
Report of Independent Certified Public Accountants . . . . . 30
Consolidated Balance Sheets at December 31, 1995 and 1996 . . 31
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended December 31, 1996 . . . . 33
Consolidated Statements of Stockholders Equity for
Each of the Three Years in the Period Ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Cash Flows for Each of
the Three Years in the Period Ended December 31, 1996 . . 35
Notes to Consolidated Financial Statements . . . . . . . . . 36
The following consolidated financial statement schedules are
filed as part of this report:
Schedule I Summary of Investments Other than
Investments in Related Parties . . . . . . . . 54
Schedule II Condensed Financial Information of Registrant 55
Schedule III Supplementary Insurance Information . . . . . 59
Schedule IV Reinsurance . . . . . . . . . . . . . . . . . 60
Schedule V Valuation and Qualifying Accounts . . . . . . 61
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
The following exhibits are filed as part of this report:
Exhibit 11 - Statement Re: Computation of Earnings Per
Share
Exhibit 22 - Subsidiary List
Exhibit 27 - Financial Data Schedule<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Cumberland Technologies, Inc.
We have audited the accompanying consolidated balance sheets of
Cumberland Technologies, Inc. as of December 31, 1995 and 1996,
and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. Our audits also included
the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
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 consolidated
financial position of Cumberland Technologies, Inc. at December
31, 1995 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set
forth therein.
ERNST & YOUNG LLP
April 10, 1997
Tampa, Florida<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-----------------------------
1995 1996
-------------- --------------
Investments - Notes 1 and 3:
Securities available-for-
sale at fair value:
Fixed maturities . . . . . $ 3,452,553 $ 3,055,753
Equity securities . . . . 1,160,500 1,020,016
Fixed maturity securities
held-to-maturity, at
amortized cost . . . . . . 1,294,758 1,664,264
Residential mortgage loan on
real estate, at unpaid
principal . . . . . . . . 46,367 45,838
Short-term investments . . 348,993 323,993
----------------------------
Total investments . . . . 6,303,171 6,109,864
Cash and cash equivalents 1,235,930 669,076
Accrued investment income 87,231 89,652
Reinsurance recoverable . . 1,697,417 987,953
Accounts receivable:
Trade, less allowance for
doubtful accounts of
$67,209 at December 31,
1995 and $-0- December
31, 1996 . . . . . . . . 428,376 906,530
Affiliate . . . . . . . . 122,052 18,006
Deferred policy acquisition
costs . . . . . . . . . . 435,272 635,189
Intangibles, net . . . . . 2,162,961 1,956,724
Other assets . . . . . . . 236,566 396,442
----------------------------
$ 12,708,976 $ 11,769,436
============================
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
-----------------------------
1995 1996
-------------- --------------
Policy liabilities and accruals:
Loss and loss adjustments
expenses . . . . . . . . . $ 2,351,804 $ 1,991,796
Unearned premiums . . . . . 1,182,305 1,862,114
Ceded reinsurance payable . . . 165,504
Accounts payable and other
liabilities . . . . . . . . 1,116,815 403,085
Short-term borrowings . . . . . 406,607 -
Long-term debt:
Affiliate, including accrued
interest . . . . . . . . . 4,797,804 -
Nonaffiliate . . . . . . . 1,563,870 1,533,265
----------------------------
Total liabilities . . . . 11,419,205 5,955,764
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, 4,039,780 and
5,763,070 shares issued at
December 31, 1995 and 1996,
respectively . . . . . . . 4,040 5,763
Capital in excess of par
value . . . . . . . . . . 2,044,794 7,212,941
Net unrealized appreciation
of available-for-sale
securities . . . . . . . . 63,045 99,676
Accumulated deficit . . . . (681,193) (1,263,937)
----------------------------
1,430,686 6,054,443
Less treasury stock, at cost,
224,263 and 310,473 shares
at December 31, 1995 and
December 31, 1996,
respectively . . . . . . . (140,915) (240,771)
----------------------------
Total stockholders' equity 1,289,771 5,813,672
----------------------------
$ 12,708,976 $ 11,769,436
============================
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
----------------------------------
1994 1995 1996
----------- ----------- ----------
REVENUES:
Reinsurance premiums
assumed . . . . . . . . $ 5,019,734 $ 4,944,125 $3,083,787
Direct premiums earned:
Affiliates . . . . . . . 13,546 4,535 2,873
Nonaffiliates . . . . . 489,698 623,148 1,149,377
Less reinsurance ceded . (566,264) (503,493) (427,718)
----------- ----------- ----------
Net premium income . . . 4,956,714 5,068,315 3,808,319
Net investment income . . 283,638 397,380 403,919
Net realized investment
(losses) gains . . . . (123,395) 124,004 117,824
Commission income . . . . 141,852 773,611 1,385,964
Other income:
Affiliates . . . . . . . 59,759 43,183 338,478
Nonaffiliates . . . . . 76,551 381,455 314,889
----------- ----------- ----------
5,395,119 6,787,948 6,369,393
Benefits and expenses:
Benefits and claims . . . 2,646,055 1,245,546 1,670,640
Amortization of deferred
policy acquisition costs 2,037,539 2,380,140 1,532,355
Operating expenses . . . 1,514,575 2,882,255 3,255,805
Interest expense:
Affiliates (net of
interest income from
affiliates of $54,609,
$22,660 and -0- for
1994, 1995 and 1996,
respectively) . . . . 405,502 432,112 372,066
Nonaffiliates . . . . . - 76,105 121,271
----------- ----------- ----------
6,603,671 7,016,158 6,952,137
----------- ----------- ----------
Loss before income
taxes . . . . . . . . . . (1,208,552) (228,210) (582,744)
Income taxes (benefit) . . . (135,190) - -
----------- ----------- ----------
Net loss . . . . . . . . . . $(1,073,362)$ (228,210)$ (582,744)
=========== =========== ==========
Weighted average number of
shares . . . . . . . . . 3,908,759 3,824,494 4,026,655
=========== =========== ==========
Net loss per share . . . . . $ (.27)$ (.06)$ (.14)
=========== =========== ==========
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Capital in
Excess of
Shares Amount Par Value
-----------------------------------
Balance at January 1, 1994 . 4,039,780 $ 4,040 $2,044,794
Purchases of 104,030 shares
of treasury stock . . .
Change in accounting
principle . . . . . . .
Net increase in unrealized
depreciation of
available-for-sale
securities . . . . . . .
Net loss . . . . . . . . . -----------------------------------
Balance at December 31, 1994 4,039,780 4,040 2,044,794
Purchases of 48,546 shares
of treasury stock . . .
Net increase in unrealized
appreciation of
available-for-sale
securities . . . . . . .
Net loss . . . . . . . . . -----------------------------------
Balance at December 31, 1995 4,039,780 4,040 2,044,794
Purchases of 86,210 shares
of treasury stock . . .
Conversion of term note for
1,723,290 shares of
common stock . . . . . . 1,723,290 1,723 5,168,147
Net increase in unrealized
appreciation of
available-for-sale
securities . . . . . . .
Net loss . . . . . . . . . -----------------------------------
Balance at December 31, 1996 5,763,070 5,763 7,212,941
===================================
See notes to consolidated financial statements.<PAGE>
Cumberland Technologies, Inc.
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1994, 1995 and 1996
Consolidated Statements of Operations
(continued)
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
of Actively Retained
Managed and Earnings Total
Available-for- (Accumulated Treasury Stock Stockholders'
Sale Securities Deficit) ---------------- Equity
---------------- ---------------- ----------- ----------------
---------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994 . (28,191) 620,379 (36,244) 2,604,778
Purchases of 104,030 of
treasury (77,005) (77,005)
stock . . . . . . . .
Change in accounting 46,755 46,755
principle . . . . . . . .
Net increase in unrealized
depreciation available-
for-sale securities . (185,021) (185,021)
Net loss . . . . . . . . (1,073,362) (1,073,362)
---------------- ---------------- ---------------- ----------------
----------- ----------- ----------- -----------
Balance at December 31, 1994 (166,457) (452,983) (113,249) 1,316,145
Purchases of 48,546 shares
of (27,666) (27,666)
treasury stock . . . .
Net increase in unrealized
appreciation of
available-for-sale 229,502 229,502
securities . . . . . .
Net loss . . . . . . . . (228,210) (228,210)
---------------- ---------------- ---------------- ----------------
----------- ----------- ----------- -----------
Balance at December 31, 1995 63,045 (681,193) (140,915) 1,289,771
========== ========== ========== ==========<PAGE>
Purchases of 86,210 shares
of (99,856) (99,856)
treasury stock . . . .
Conversion of term note for
1,723,290 shares of
common stock . . . . . 5,169,170
Net increase in unrealized
appreciation of
available-for-sale 36,631 36,631
securities . . . . . .
Net loss . . . . . . . . (582,744) (582,744)
---------------- ---------------- ---------------- ----------------
----------- ----------- ----------- -----------
Balance at December 31, 1996 99,676 (1,263,937) (240,771) 5,813,672
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
-----------------------------------
1994 1995 1996
----------- ----------- -----------
Operating activities:
Net income loss $(1,073,362) $ (228,210) $ (582,744)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Amortization/accretion
of investment premiums
and discounts . . . . (2,850) (10,137) (6,052)
Policy acquisition costs
amortized . . . . . . 2,037,539 2,380,140 1,532,355
Policy acquisition costs
deferred . . . . . . . (2,278,348) (2,234,669) (1,732,272)
Depreciation and
amortization . . . . . 90,283 278,008 378,447
Net realized (gain) loss
on sales of investments 123,395 (124,004) (117,824)
Provision for bad debts 21,926 67,209 -
Accrued interests on
term notes, net . . . (59,515) 454,772 404,337
Deferred income taxes . (31,855) - -
(Increase) decrease in:
Accrued investment
income . . . . . . . 11,939 (40,629) (2,421)
Reinsurance recoverable 127,752 51,126 709,464
Trade receivables . . (1,461,300) 1,644,946 (478,154)
Other assets . . . . . (78,573) (89,366) (232,148)
Increase (decrease) in:
Policy liabilities and
accruals . . . . . . . 377,589 (1,235,291) 319,801
Ceded reinsurance
payable . . . . . . . 1,624,262 (1,930,993) 165,504
Accounts payable and
other liabilities . . 256,458 641,933 (713,730)
----------- ----------- -----------
Total adjustments . . . . . 758,702 (146,955) 227,307
----------- ----------- -----------
Net cash used in operating
activities . . . . . . . (314,660) (375,165) (355,437)
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(continued)
Year ended December 31
----------------------------------
1994 1995 1996
----------- ----------- -----------
Investing activities:
Securities available-for-
sale:
Purchases - fixed
maturities . . . . . . (2,539,297) (2,561,848) (300,012)
Sales - fixed maturities 3,145,241 1,436,223 620,000
Purchases - equities . (3,315,841) (1,224,251) (3,249,846)
Sales - equities . . . 1,961,669 1,445,237 3,628,259
Securities held-to-maturity:
Purchases . . . . . . . . (1,188,860) - (680,116)
Maturities . . . . . . . 499,918 701,655 310,000
Proceeds from sales and
maturities of investments 836,783 116,117 25,529
Purchases of investments . (464,061) (525) -
Purchases of businesses, net
of cash acquired . . . . - (572,677) -
Software development costs - - (99,938)
Net advances from KC . . . 40,475 277,452 104,046
----------- ----------- -----------
Net cash (used in) provided
by investing activities (1,023,973) (382,617) 357,922
Financing activities:
Purchases of treasury stock (77,005) (27,666) (99,856)
Payments on short-term
borrowings and long-term
debt . . . . . . . . . . - (86,130) (469,483)
Net proceeds from short-term
borrowings . . . . . . . - 406,607 -
----------- ----------- -----------
Net cash (used in) provided
by financing activities (77,005) 292,811 (569,339)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents . . 1,415,638 (464,971) (566,854)
Cash and cash equivalents,
beginning of year . . . . 3,116,539 1,700,901 1,235,930
----------- ----------- -----------
Cash and cash equivalents,
end of year . . . . . . . $1,700,901 $1,235,930 $ 669,076
=========== =========== ===========
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. 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). Effective January 30, 1997 Cumberland
Holdings, Inc. changed its name to Cumberland Technologies, Inc.
("CTI"). CTI conducts its business through seven subsidiaries.
CCS, a Florida corporation formed in May 1988, provides
reinsurance for specialty 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. 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 Group, Inc. (Qualex), a Florida
corporation formed in November 1994, provides claim and
contracting consulting services. Florida Credit & Collection
Services, Inc. a Florida corporation formed in December 1996
provides credit and collections services. CTI and its
subsidiaries are referred to herein as the "Company."
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts
of CTI and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in
consolidation.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Basis of Presentation
---------------------
The accompanying 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 CTI and subsidiaries that materially affect the
financial statements are summarized in this note.
Investments
-----------
Effective January 1, 1994, the Company adopted Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Under
this new accounting standard, debt securities that the Company
has both the positive intent and ability to hold to maturity are
classified as "held-to-maturity" securities and are reported at
amortized cost, adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization, as well as
interest earnings on these securities, is included in investment
income.
Marketable equity securities and debt securities not
classified as "held-to-maturity" are classified as "available-
for-sale." Available-for-sale securities are reported at
estimated fair value, with the unrealized gains and losses, net
of any related taxes, reported as a separate component of
stockholders equity. The amortized cost of debt securities in
this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and
accretion is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income.
The cost of securities sold is based on the specific
identification method. Interest and dividends on securities
available-for-sale are included in investment income.
Short-term investments primarily include certificates of
deposit having maturities of more than three months when
purchased, which are reported at cost which approximates fair
value.
The adoption of SFAS No. 115 resulted in an increase of
$46,755 in stockholders equity as of January 1, 1994.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Cash Equivalents
----------------
The Company considers all highly liquid investments having a
maturity of three months or less when purchased to be cash
equivalents.
Deferred Policy Acquisition Costs
---------------------------------
The costs of acquiring new surety business, principally
commissions, are deferred and amortized in a manner which charges
each year s operations in direct proportion to the premium
revenue recognized.
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.
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.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
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
reserves 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.
Unearned Premiums
-----------------
Unearned premiums are calculated using the monthly pro rata
basis.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
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 (see Note 11).
Amounts recoverable from reinsurers are estimated in a manner
consistent with the future policy benefit and claim liability
associated with the reinsured policies.
Accounts recoverable from reinsurers are presented as an
asset in the accompanying consolidated financial statements.
Revenue Recognition
-------------------
Direct insurance and reinsurance premiums earned and the
liability for unearned premiums are recognized on a pro-rated
basis over the period of risk. Surety and other bonds agency fees
are recognized when the negotiated services are provided. The
Company s insurance products policies are primarily short-
duration contracts.
Commissions related to agency activity are generally
recognized at the later of the effective date of the policy or
the date billed.
Income Taxes
------------
The Company s provision for income taxes is computed under
the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes." Under the method required by
Statement No. 109, 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. Under Statement No. 109, 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.
The Company files a consolidated tax return that includes
all of its subsidiaries.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Earnings Per Share
------------------
Net loss per share is based on the weighted average number
of shares outstanding, adjusted for the dilutive effect of stock
options, and is the same on both a primary and fully diluted
basis.
Business Concentration
----------------------
The majority of the Company s business relates to surety and
performance bonds for contractors. Accordingly, the occurrence of
adverse economic conditions in the contracting business could
have a material adverse effect on the Company s business although
no such conditions have been encountered in the past. The Company
only requires collateral from surety bond customers if the
customer meets between 80 percent to 99 percent of the Company s
underwriting criteria. Customers that fail to meet at least 80
percent of the requirements are denied surety bonding.
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 those estimates.
Reclassifications
-----------------
Certain amounts in 1994 financial statements have been
reclassified to conform to the 1995 and 1996 financial statement
presentations.
2. Related Party Transactions
--------------------------
CTI and its subsidiaries have entered into transactions with
KC and companies affiliated through common ownership by KC. CCS
writes surety bonds for KC and its affiliates.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Related Party Transactions (continued)
--------------------------------------
Affiliate accounts receivable represents funds advanced to
or from KC and its affiliates on a periodic basis with repayments
made on a periodic basis. Through March 31, 1995, the advances
bore interest at ten percent and were due on demand. Subsequent
to March 31, 1995, no interest was charged on the advances, which
remain payable on demand.
At December 31, 1996, the Company is a guarantor for $2.25
million of borrowings made under the terms of a loan agreement
entered into on December 8, 1995 between KC and a bank.
Cumberland leases office space from a company owned by the
Chairman of the Board at a monthly rate of $4,347.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments
The Company s investments in available-for-sale securities
and held-to-maturity securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------------------- -----------
<S> <C> <C> <C> <C>
Available-for-sale securities
at December 31, 1996:
Fixed maturity securities:
U.S. Government bonds . . $3,013,312 $ 48,201 $ 5,760 $3,055,753
Equity securities . . . . 962,780 67,936 10,700 1,020,016
----------- ---------------------- -----------
Total . . . . . . . . . . . . . $3,976,092 $ 116,137 $ 16,460 $4,075,769
=========== ====================== ===========
Held-to-maturity securities at
December 31, 1996:
Fixed maturity securities:
U.S. Government bonds . . $1,438,815 $ 15,066 $ 722 $1,453,159
State and municipal bonds 225,449 20,827 - 246,276
----------- ---------------------- -----------
Total . . . . . . . . . . . . . $1,664,264 $ 35,893 $ 722 $1,699,435
=========== ====================== ===========
Available-for-sale securities
at December 31, 1995:
Fixed maturity securities:
U.S. Government bonds . . $3,326,638 $ 125,915 $ - $3,452,553
Equity securities . . . . . 1,223,370 11,800 74,670 1,160,500
----------- ---------------------- -----------
Total . . . . . . . . . . . . . $4,550,008 $ 137,715 $ 74,670 $4,613,053
=========== ====================== ===========
/TABLE
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (continued)
-----------------------
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------------------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity securities at
December 31, 1995:
Fixed maturity securities:
U.S. Government bonds . . $1,064,221 $ 6,306 $ 2,907 $1,067,620
State and municipal bonds . . . 230,537 - - 230,537
----------- ---------------------- -----------
Total . . . . . . . . . . . . . $1,294,758 $ 6,306 $ 2,907 $1,298,157
=========== ====================== ===========
</TABLE>
The amortized cost and fair value of the Company s
investments in fixed maturity securities, segregated by
available-for-sale and held-to-maturity, at December 31, 1996 are
summarized, by stated maturity, as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held to Maturity
------------------------ ------------------------
Amortized
Maturity Cost Fair Value Cost Fair Value
----------------------- ------------ ------------------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 729,642 $ 734,809 $ 983,193 $ 1,005,454
Due after one year
through five years 2,283,670 2,320,944 681,071 693,980
------------ ------------------------ ------------
$ 3,013,312 $ 3,055,753 $ 1,664,264 $ 1,699,435
============ ======================== ==========
/TABLE
<PAGE>
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (continued)
-----------------------
Investments in any person or its affiliates (excluding
obligations of the U.S. Government or its agencies) which
exceeded 10 percent of stockholders equity at the end of the
respective year were as follows:
December 31
1995 1996
----------------- -----------------
Spartanburg County, SC
Municipal Bond . . . . . $ 230,536 $ -
Bank of Boston preferred
stock . . . . . . . . . 263,750 -
First Chicago Corp.
preferred stock . . . . 190,000 -
At December 31, 1995 and 1996, the Company had $5.2 million
and $5.0 million, respectively, in restricted investments and
cash and cash equivalents. Restricted investments primarily
represent funds held as collateral in connection with reinsurance
trust agreements. <PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (continued)
-----------------------
Net investment income for the Company is comprised of the
following:
Year ended December 31
----------------------------------
1994 1995 1996
----------- ----------- ----------
Fixed maturity and equity
securities . . . . . . . . $ 251,973 $ 387,859 $ 388,700
Mortgage loans on real estate 18,262 4,658 4,613
Short-term investments,
including cash and cash
equivalents . . . . . . . . 52,433 74,601 50,684
----------- ----------- ----------
322,668 467,118 443,997
Less investment expenses . . (39,030) (69,738) (40,078)
----------- ----------- ----------
Net investment income . . . . 283,638 397,380 403,919
=========== =========== ==========
Realized gain (loss) on
available-for-sale
securities:
Fixed maturities . . . . . (34,752) (10,984) -
Equity securities . . . . . (88,643) 134,988 117,824
----------- ----------- ----------
Net realized investment gains
(losses) . . . . . . . . . $ (123,395)$ 124,004 $ 117,824
=========== =========== ==========
4. Fair Value of Financial Instruments
-----------------------------------
The carrying amounts and fair values of the Company's
financial instruments at December 31, 1996 are as follows:<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Fair Value of Financial Instruments (continued)
-----------------------------------------------
December 31, 1996
-----------------------------
Carrying
Amount Fair Value
-------------- --------------
Assets:
Cash and cash equivalents,
including short-term
investments . . . . . . . $ 993,069 $ 993,069
Investments . . . . . . . . . 5,785,871 5,821,042
Accounts receivable . . . . . 924,536 924,536
Reinsurance recoverables . . 987,953 987,953
Liabilities:
Long-term debt . . . . . . $ 1,533,265 $ 1,533,265
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial
instruments:
Cash and cash equivalents, short-term investments,
accounts receivable, reinsurance recoverables and long-term
debt: The carrying amount reported in the balance sheet
approximates its fair value.
Investments: Fair values for fixed maturity securities
are based on quoted market prices, where available, and are
recognized in the balance sheet for available-for-sale
securities. The fair values for equity securities are based
on quoted market prices and are recognized in the balance
sheet.
5. Intangibles
-----------
Intangibles at December 31 are comprised of the following:
1995 1996
-------------- --------------
Purchased customer accounts $ 1,084,041 $ 1,084,041
Noncompete agreements . . . . 234,000 234,000
Goodwill . . . . . . . . . . 926,661 926,661
Deferred state admission costs
and other . . . . . . . . . 389,427 489,365
-------------- --------------
2,634,129 2,734,067
Less accumulated amortization (471,168) (777,343)
-------------- --------------<PAGE>
$ 2,162,961 $ 1,956,724
============== ==============<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Intangibles (continued)
-----------------------
Amortization expense amounted to $61,370 in 1994, $227,185
in 1995 and $306,175 in 1996.
6. Reserve for Losses and Loss Adjustment Expenses
-----------------------------------------------
The following table provides a reconciliation of the
beginning and ending liability balances, net of reinsurance
recoverables, for the years ended December 31, 1994, 1995 and
1996, to the gross amounts reported in the Company s consolidated
balance sheets:
December 31
----------------------------------
1994 1995 1996
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at beginning of
year . . . . . . . . . . . $ 1,708,761 $1,625,703 $1,052,547
Provision for losses and LAE
for claims occurring in the
current year, net of
reinsurance . . . . . . . . 2,425,455 1,486,546 1,370,640
Increase (decrease) in
estimated losses and LAE
for claims occurring in
prior years, net of
reinsurance . . . . . . . . 220,600 (241,000) 300,000
---------------------- ----------
Incurred losses during the
current year, net of
reinsurance . . . . . . . . 2,646,055 1,245,546 1,670,640
Losses and LAE payments for
claims, net of reinsurance,
occurring during:
The current year . . . . 810,903 161,279 422,544
Prior years . . . . . . . 1,918,210 1,657,423 1,705,721
---------------------- ----------
2,729,113 1,818,702 2,128,265
---------------------- ----------<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Reserve for Losses and Loss Adjustment Expenses (continued)
-----------------------------------------------------------
December 31
----------------------------------
1994 1995 1996
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverables on unpaid
losses, at end of year . . $ 1,625,703 $1,052,547 594,922
Reinsurance recoverables on
unpaid losses at end of
year . . . . . . . . . . . 1,512,219 1,299,257 1,396,874
---------------------- ----------
Liability for losses and LAE,
gross of reinsurance
recoverables on unpaid
losses, at end of year . . $ 3,137,922 $2,351,804 $1,991,796
====================== ==========
The Company experienced a redundancy of $241,000 in reserves
for losses and loss adjustment expenses in 1995 and experienced a
deficiency of $220,600 and $300,000 in 1994 and 1996
respectively. The redundancy in 1995 principally resulted from
settling case basis reserves established in prior years for
amounts that were less than expected. The deficiency in 1994
principally resulted from a single principal on business written
through a 1991/92 pooling agreement. The deficiency in 1996
principally resulted from a 1993/94 Pooling Agreement.
The anticipated effect of inflation is implicitly considered
when estimating liabilities for losses and LAE. While anticipated
price increases due to inflation are considered in estimating the
ultimate claim costs, the increase in average severities of
claims is caused by a number of factors. Future average
severities are projected based on historical trends adjusted for
anticipated changes in underwriting standards, policy provisions,
and general economic trends. These anticipated trends are
monitored based on actual development and are modified if
necessary.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Reserve for Losses and Loss Adjustment Expenses (continued)
-----------------------------------------------------------
The Company has entered into a managing general agent
agreement with an unaffiliated insurance agency. Under the terms
of the agreement, the Company and agency share in the profits and
losses resulting from business placed by the managing general
agent. As of December 31, 1995 and 1996, the Company reported a
profit split recoverable of $542,856 and $527,471, respectively.
The profit split amounts have been included as a component of the
reserve for losses and loss adjustment expenses for 1995 in the
accompanying consolidated balance sheets. During 1996, the
profit split recoverable was utilized to offset accounts payable
due under the agreement. The managing general agent agreement
was not renewed effective January 1, 1997.
7. Short-Term Borrowings
---------------------
During 1995, the Company entered into 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
($518,000 at December 31, 1995). As of December 31, 1995, the
Company had $406,607 outstanding under the agreement. As of
December 31, 1995, the Company had preferred and common stocks
with an estimated fair value of $1,160,500 on account with the
investment firm. The loan bears interest at .75% to 2.50% above
the investment firm's base rate (8.75% at December 31, 1995).
For the year ended December 31, 1995 and 1996, the Company
incurred interest expense of $28,612 and $27,389 respectively,
under the terms of the agreement. During 1996, the Company paid
off this margin loan.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1995 weighted average interest rate for short-term
borrowings was 8.5%.
8. Long-Term Debt
--------------
Long-term debt consists of the following:
December 31
1995 1996
-------------- --------------
Term note due affiliate
(including accrued interest of
$1,797,804 at
December 31, 1995) . . . . . $ 4,797,804 $ -
Note payable due March 1, 2002
at 8% through February 28,
2001 and 10% thereafter . . . 413,870 423,265
Note payable due June 30, 2010
at 8% through July 31, 1999
and 9% thereafter . . . . . . 1,150,000 1,110,000
----------------------------
$ 6,361,674 $1,533,265
============================
Term Note Due Affiliate
-----------------------
In 1988, CCS issued a surplus debenture to KC in exchange
for $3,000,000 which bears interest at 10 percent per annum.
Interest and principal payments are due quarterly only if and
when CCS s surplus, as defined below, exceeds $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 CTI. As of December 31, 1996, no amounts could
be paid by CCS to CTI under the terms of the debenture.
In addition, in 1992, CTI 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
as part of the Distribution. The term note was pari passi with
the other debts of CCS, bearing interest at 10 percent of the
unpaid principal and interest and was due on October 1, 2002.
Interest and principal were due quarterly with minimum payments
equal to one half of net earnings before interest and federal
income taxes. Effective October 1, 1996, the term note was
converted to equity at a rate of $3.00 per share.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-Term Debt (continued)
--------------------------
The term note was subordinate in right of payment to all
policyholders of CCS. Surplus funds are defined as funds CCS has
remaining after deduction of capital, insurance reserves and all
other liabilities, in accordance with accounting practices
prescribed or permitted by the Florida Insurance Department.
Effective October 1, 1996, CTI issued 1,723,290 shares at
the fair value of $3.00 per share of its common stock to Kimmins
Corp. (f/k/a Kimmins Environmental Service, Corp.) in exchange
for surrender of the Company's term note payable in the amount of
$5,169,870.
Notes Payable to Nonaffiliates
------------------------------
In connection with the acquisition of certain agencies
during 1995 (see Note 16), 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 June 30, 2010
and bears interest at 8% through March 31, 1999 and 9%
thereafter. Principal payments of $40,000 are due annually for
three years beginning January 5, 1996. Principal and interest
payments at 9% of $11,104 are due monthly beginning April 1,
1997.
Maturities of notes payable to nonaffiliates for the five
years succeeding December 31, 1996 are as follows:
Year Ending December 31
--------------------------------
1997 $ 139,936
1998 173,248
1999 133,248
2000 283,248
2001 283,248<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Income Taxes
------------
Significant components of the provision (benefit) for income
taxes for the years ended December 31, 1994, 1995 and 1996, are
as follows:
1994 1995 1996
----------- ----------- ----------
Current . . . . . . . . $ (103,335)$ - -
Deferred . . . . . . . . (31,855) - -
----------- ----------- ----------
$ (135,190)$ - -
=========== =========== ==========
A reconciliation of the federal statutory income tax rate
applied to pre-tax loss and the effective income tax benefit rate
is as follows:
1994 1995 1996
----------- ----------- ----------
Federal statutory tax rate (34.0)% (34.0) % (34.0)%
State income taxes, net of
federal income tax
benefit . . . . . . . . (3.7) (4.4) (3.7)%
Income exempt from
taxation and dividend
exclusions . . . . . . . (6.6) (8.5) (10.1)
Differences between
earnings statement and
tax return . . . . . . . - 10.7 -
Valuation allowance . . . 24.3 34.6 44.4
Other, net . . . . . . . 8.8 1.6 3.4
----------- ----------- ----------
Effective tax rate . . . (11.2) % - -
=========== =========== ==========
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the
corresponding amounts used for income tax reporting purposes.
Significant components of the Company s deferred tax liabilities
and assets are as follows:<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Income Taxes (continued)
------------------------
December 31
1995 1996
-------------- --------------
Deferred tax liabilities:
Deferred policy acquisition
costs . . . . . . . . . . . $ 163,793 $ 239,022
State licensing costs . . . . 21,486 -
Losses and loss adjustment
expenses . . . . . . . . . - 31,269
----------------------------
Total deferred tax liabilities 185,279 270,291
Deferred tax assets:
Amortization of intangibles 23,734 63,341
Unearned premiums . . . . . . 88,980 140,143
Losses and loss adjustment
expenses . . . . . . . . . 43,186 -
Net operating loss
carryforward . . . . . . . 400,135 746,174
Alternative minimum credit
carryforward . . . . . . . - 15,555
Other, net . . . . . . . . . 3,393 347
----------------------------
559,428 965,560
Less valuation allowance . . (374,149) (695,269)
----------------------------
Net deferred tax assets . . . . 185,279 270,291
Net deferred tax liabilities . $ 0 0
============================
The Company has net operating loss carryforwards as of
December 31, 1996 of approximately $1,982,924 which generally
expire in 2010 and 2011.
10. Regulatory Requirements
-----------------------
Generally accepted accounting principles (GAAP) differ in
certain respects from the accounting practices prescribed or
permitted by insurance statutory authorities.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Regulatory Requirements (continued)
-----------------------------------
Under applicable state insurance statues, CCS must maintain
minimum capital and surplus of $1,950,000 (as of December 31,
1996). In addition, under applicable state laws and regulations,
CCS is restricted from paying dividends to the extent of surplus
profits less any dividends that have been paid in the preceding
twelve months or net investment income for the year, whichever is
less, unless the Company obtains prior approval from the Florida
Department of Insurance. As of December 31, 1996, substantially
all CCS retained earnings is restricted from paying dividends.
11. Reinsurance
-----------
CCS assumes reinsurance primarily from a pooling agreement
for which CCS assumes 10 percent of the risk with a maximum
exposure to CCS of $125,000 per bond. CCS is still receiving
residual revenues from a pooling agreement for which CCS assumes
25 percent and 20 percent of the risk with a maximum exposure to
CCS of $125,000 and $600,000 per bond, respectively.
CCS also cedes reinsurance to 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. The Company continues to have exposure to risk
for reinsurance ceded in the event that the reinsurer is unable
to meet its obligation under the reinsurance agreement in force.
During April 1994, CCS amended one of its reinsurance
agreements to be retroactive for policies effective October 1,
1993. The agreement was previously effective beginning January 1,
1994. Under this agreement, CCS assumes 10% (effective April 1,
1996), 12.5% (effective April 1, 1995); 25% prior to that date)
of certain surety policies underwritten by the insurance company.
For the years ended December 31, 1996 and 1995, CCS assumed
earned premiums of approximately $2,600,000 and $4,372,000,
respectively, under the terms of the agreement. The agreement
expires April 1, 1997, but is expected to be renewed.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance (continued)
-----------------------
Benefits and claims in 1994, 1995, and 1996 are summarized
as follows:
1994 1995 1996
----------- ----------- ----------
Direct . . . . . . . . . $ (116,928)$ 63,343 $ 127,232
Assumed . . . . . . . . 2,790,489 1,184,953 1,587,890
Ceded . . . . . . . . . (27,506) (2,750) (44,482)
----------- ----------- ----------
Net benefits and claims
expenses . . . . . . . $ 2,646,055 $ 1,245,546 $ 1,670,640
=========== =========== ==========
One of the Company's subsidiaries is a claimant in a
proceeding against the United States Navy before the Armed
Services Board of Appeals seeking reimbursement of approximately
$1 million related to the subsidiary's performance under a
performance and payment bond related to the construction of a
building for the United States Navy. Management believes, based
on advice from its counsel, that it will be successful in this
claim and, accordingly, has recorded a reinsurance recoverable.
The Company is currently awaiting a decision in this case.
The Company s reinsurance recoverable amounts as of
December 31, 1995 and 1996 reported in the accompanying
consolidated balance sheets also included estimated subrogation
recoverables from the U.S. Government of approximately $600,000
and $640,000, respectively.
12. Stock Option Plan
-----------------
The Company has elected to follow Accounting Principles
Board of Opinion No 25 "Accounting for Stock Issued to Employees"
(APB 25) and related interpretations in accounting for its
employee stock options because the alternative fair value
accounting provided for under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation,"
required use of option valuation models that were not developed
for use in valuing employee stock options. The effect of
applying Statement No. 123's fair value method to the Company's
stock based awards results in net income and earnings per share
that are not material from amounts reported based on APB 25.
Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is
recognized.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Stock Option Plan (continued)
-----------------------------
CTI has 400,000 shares of its common stock reserved for
issuance for the exercise of options to be granted under CTI s
1991 stock option plan (the "Plan"). Options granted under the
Plan, in general, expire no later than ten years from the date of
grant.
As a result of the Distribution, options were granted to
certain individuals, which vest over five years from the date of
the grant. At December 31, 1996, options to purchase 68,386
shares of the Company s common stock, at no cost to the holder,
have been granted, all are currently exercisable. Effective
October 1, 1992, the Company granted options to purchase 100,000
shares to its President at a price of $.125 per share. As of
December 31, 1996, all of the options were exercisable.
Effective May 22, 1996, the Company granted options to
purchase 20,000 shares to the President of "CCS" at a price of
$.75 per share. As of December 31, 1996, 4,000 of the options
were exercisable. The Company granted options on July 26, 1996
to purchase 2,500 shares to an employee at a price of $1.00 per
share. As of December 31, 1996, 500 of the options were
exercisable.
As a result of the retirement of a fully vested option
holder, the Company purchased 16,700 options on July 1, 1996 at
$1.50 per share which represented the fair value of the Company's
stock at date of purchase. No options were exercised in 1994,
1995 or 1996.
13. Employee Benefit Plan
---------------------
On April 1, 1996, CTI adopted a defined contribution 401(k)
plan covering substantially all employees. Under the plan, the
Company makes contributions equal to one percent of the
participant's contributions, not to exceed six percent of the
participant's annual compensation. The Company's contributions
to the plan totaled $7,288 in 1996.
14. Supplemental Disclosure of Cash Flow Information
------------------------------------------------
For the year ending December 31, 1994, interest payable for
term note due affiliate of $460,111 was settled through the
intercompany account with KC. Interest paid in 1995 and 1996 for
short-term borrowings was $28,612 and $27,389, respectively.
Interest paid in 1995 and 1996 for term notes due nonaffiliates
was $45,600 and $89,000, respectively. No income taxes were paid
for the years ended December 31, 1994 and 1996. The Company<PAGE>
received an income tax refund of $108,231 for the year ended
December 31, 1995.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Preferred Stock
---------------
CTI is authorized to issue 1,000,000 shares of preferred
stock, $.001 par value, with such rights and privileges as
determined by the Board of Directors. The preferred stock shall
be issued at such times and for such consideration as determined
by the Board of Directors. No shares have been issued as of
December 31, 1996.
16. 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 payable 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.
Effective July 1, 1995, the Company acquired 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.
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.
The effects of the acquired assets have been excluded from
the accompanying consolidated statements of cash flows.
The following unaudited pro forma summary presents the
consolidated results of operations as if the acquisitions had
occurred at the beginning of the periods presented, and do not
purport to be indicative of the results that actually would have
occurred if the acquisitions had been consummated as of those
dates or of results which may occur in the future.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Acquisitions (continued)
------------------------
Year Ended December 31
1994 1995
-------------- --------------
(Unaudited)
Revenues . . . . . . . . . $ 6,576,646 $ 6,960,343
Net loss . . . . . . . . . (1,322,490)$ (341,347)
Net loss per share . . . . $ (.34)$ (.09)
17. Statutory Accounting Practices
------------------------------
Shareholders equity and net income (loss), as reported to
the domiciliary state insurance department in accordance with its
prescribed or permitted statutory accounting practices for CCS is
summarized as follows:
December 31
1995 1996
----------- ----------
Stockholders' equity
(capital and surplus) . . . $ 5,134,923 $5,034,662
=========== ==========
Year Ended December 31
1994 1995 1996
----------- ----------- ----------
Net income (loss) . . . . . . $ (783,977)$ 897,955 $ (293,204)
=========== =========== ==========
CCS is domiciled in Florida and prepares its statutory-basis
financial statements in accordance with accounting practices
prescribed or permitted by the Florida Insurance Department.
"Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a
variety of publications of the National Association of Insurance
Commissioners ("NAIC"). "Permitted" statutory accounting
practices encompass all accounting practices that are not
prescribed; such practices may differ from state to state, may
differ from company to company within a state, and may change in
the future. The NAIC currently is in the process of codifying
statutory accounting practices, the result of which is expected
to constitute the only source of "prescribed" statutory
accounting practices. Accordingly, that project, which is
expected to be completed in 1998, will likely change, to some
extent, prescribed statutory accounting practices, and may result
in changes to the accounting practices that insurance enterprises
use to prepare their statutory financial statements.<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
CUMBERLAND TECHNOLOGIES, INC.
DECEMBER 31, 1996
Column A Column B Column C Column D
----------------------------- ----------- ----------- ----------
Amount at
Which
Shown in
the
Balance
Type of Investment Cost Value Sheet
----------------------------- ----------- ----------- ----------
Fixed maturity securities,
available-for-sale:
Bonds:
United States Government
and government agencies $ 3,013,312 $ 3,055,753 $3,055,753
----------- ----------- ----------
Total . . . . . . . . . . . . 3,013,312 $ 3,055,753 3,055,753
===========
Equity securities, available-
for-sale:
Common stocks:
Banks, trusts and
insurance companies . . 5,625 $ 5,625 5,625
Industrial and
miscellaneous . . . . 610,905 671,266 671,266
Public utilities . . . . 138,125 135,000 135,000
Investment in limited
partnerships . . . . . . 208,125 209,375 208,125
----------- ----------- ----------
Total . . . . . . . . . . . . 962,780 $ 1,021,266 1,020,016
===========<PAGE>
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
(CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
DECEMBER 31, 1996
Column A Column B Column C Column D
----------------------------- ----------- ----------- ----------
Amount at
Which
Shown in
the
Balance
Type of Investment Cost Value Sheet
----------------------------- ----------- ----------- ----------
Fixed maturity securities,
held to maturity:
Bonds:
United States Government 1,438,815 $ 1,453,159 1,438,815
State and municipalities 225,449 246,276 225,449
----------- ----------- ----------
Total . . . . . . . . . . . . 1,664,264 $ 1,699,435 1,664,264
===========
Residential mortgage loan on
real estate . . . . . . . . 45,838 45,838
Short-term investments . . . 323,993 323,993
=========== ==========
Total investments . . . . . . $ 6,010,187 $6,109,864
=========== ==========<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
CUMBERLAND TECHNOLOGIES, INC.
December 31
---------------------------
Condensed Balance
Sheets 1995 1996
---------------------- ------------- -------------
Assets:
Accounts receivable
from affiliates $ 77,220 $ 57,545
Investment in wholly-
owned subsidiaries
(equity) . . . . 2,101,051 1,698,281
Other assets . . . 126,240 85,560
Surplus debenture
receivable from
subsidiary . . . 4,566,979 4,866,979
------------- -------------
$ 6,871,490 $ 6,708,365
============= =============
Liabilities:
Accountants payable 749,915 863,430
Other liabilities 34,000 31,263
Term note payable to
affiliate . . . . 4,797,804 0
5,581,719 894,693
Stockholders' equity:
Common stock . . . 4,040 5,763
Other stockholders'
equity . . . . . 1,285,731 5,807,909
------------- -------------
1,289,771 5,813,672
------------- -------------
$ 6,871,490 $ 6,708,365
============= =============<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
Year Ended December 31
---------------------------
Condensed Statements
of Operations 1994 1995 1996
---------------------- ------------- ------------- -------------
Management fees from
wholly-owned
subsidiaries . . . $ 155,417 $ - $ 62,557
Interest income from
subsidiary . . . . 310,500 300,000 300,000
------------- ------------- -------------
465,917 300,000 362,557
Costs and expenses:
Selling and
administrative
expenses . . . . 305,211 151,189 133,834
Interest expense to
affiliates . . . 481,736 454,772 372,066
------------- ------------- -------------
786,947 605,961 505,900
============= ============= =============
Loss before income
taxes and equity in
net income (loss) of
subsidiaries . . . (321,030) (305,961) (143,343)
Federal and state
income tax benefits 8,710 - -
Equity in net income
(loss) of
subsidiaries . . . (761,042) 77,751 (439,401)
------------- ------------- -------------
Net income (loss) . . $ (1,073,362)$ (228,210)$ (582,744)
============= ============= =============<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
Year Ended December 31
---------------------------
Year Ended December 31
---------------------------
Condensed Statements
of Cash Flows 1994 1995 1996
---------------------- ------------- ------------- -------------
Net cash provided by
operating activities - - -
------------- ------------- -------------
Cash and cash
equivalents,
beginning of year - - -
------------- ------------- -------------
Cash and cash
equivalents, end of
year . . . . . . . - $ - $ -
============= ============= =============
Supplemental Schedule of Noncash Investing and Financing
Activities
-----------------------------------------------------------------
The Company operates through its wholly-owned subsidiaries
and all operating activities have been funded by its
subsidiaries.
The Company was capitalized through the contribution of
the outstanding common stock of CCS and SSI to the Company by KC.
During 1992, the Company acquired the liabilities to KC
from CCS in the form of amounts due KC under the CCS surplus
debenture in exchange for the term note. Effective October 1,
1996, the term note was converted to equity.<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
---------------------------------------
1. Organization 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. CHI conducts its business through its
subsidiaries. Effective January 31, 1997, CHI changed its name to
Cumberland Technologies, Inc. ("CTI") to more efficiently state
the nature and direction of its surety bond software program
written and developed to assist its insurance operations and
subsidiaries in marketing its direct surety bond. CCS, a Florida
corporation formed in May 1988, provides reinsurance for
specialty sureties and performance and payment bonds for con-
tractors. 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. Surety Group (SG) and Associates
Acquisition Corp. d/b/a Surety Associates (SA), are general lines
agencies purchased in February and July 1995, respectively.
During 1994, CTI formed two additional subsidiaries, Official
Notary Service of Texas, Inc., a Texas corporation formed in
February 1994, provides registration and sundry services to
notaries, and Qualex Consulting Group, Inc., a Florida
corporation formed in November 1994, provides claim and
contracting consulting services.
For the years ended December 31, 1994 and 1996, CTI
charged its subsidiaries a management fee. No fee was charged for
the year ended December 31, 1995.
2. Basis of Presentation - In the parent-company-only
financial statements, the Company s investment in subsidiaries is
stated at cost plus equity in undistributed earnings of
subsidiaries since the date of acquisition. The Company s share
of net income of its unconsolidated subsidiaries is included in
consolidated income using the equity method. Parent-company-only
financial statements should be read in conjunction with the
Company s consolidated financial statements.<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements (continued)
---------------------------------------------------
The investment in subsidiaries amounts as of December 31,
1995 and 1996 are net of the net unrealized
depreciation/appreciation in available-for-sale securities held
by CCS. Such amounts total $63,045 and $99,676 as of December 31,
1995 and 1996, respectively. These amounts have also been
included in the CTI "other stockholders equity" amounts.<PAGE>
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
CUMBERLAND TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Future Policy
Benefits,
Deferred Losses, Other Policy
Policy Claims and Unearned Claims and Premium
Acquisition Loss Expenses Premiums Benefits Revenue
Costs -------------------------- Payable -------------
------------- -------- -------- ------------- --------
-------- --------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1994
Property and Casualty Insurance
Company . . . . . . . . . . . $ 580,743 $ 3,137,922 $ 1,631,478 $ 0 $ 4,956,714
======= ======= ======= ======= =======
Year ended
December 31, 1995
Property and Casualty Insurance
Company . . . . . . . . . . . $ 435,272 $ 2,351,804 $ 1,182,305 $ 0 $ 5,068,315
======= ============== ======= =======
Year ended
December 31, 1996
Property and Casualty Insurance
Company . . . . . . . . . . . $ 635,189 $ 1,991,796 $ 1,862,114 $ 0 $ 3,808,319
======= ======= ======= ======= =======
</TABLE>
(1) Includes reinsurance premiums assumed.<PAGE>
Schedule III - SUPPLEMENTARY INSURANCE INFORMATION
CUMBERLAND HOLDINGS, INC.
(CONTINUED)
<TABLE>
<CAPTION>
Benefits, Amortization
Claims, of Deferred Premiums
Net Losses and Policy Other Written
Investment Settlement Acquisition Operating (1)
Income Expenses Costs Expenses -------------
------------- -------------------------- ------------- --------
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1994
Property and Casualty Insurance
Company . . . . . . . . . . . $ 160,243 $ 2,646,055 $ 2,037,539 $ 1,514,575 $ 5,580,978
======= ======= ======= ======= =======
Year ended
December 31, 1995
Property and Casualty Insurance
Company . . . . . . . . . . . $ 521,384 $ 1,245,546 $ 2,380,140 $ 2,882,255 $ 4,781,567
======= ======= ======= ======= =======
Year ended
December 31, 1996
Property and Casualty Insurance
Company . . . . . . . . . . . $ 521,743 $ 1,670,640 $ 1,532,355 $ 3,255,805 $ 4,368,046
======= ======= ======= ======= =======
</TABLE>
(1) Includes reinsurance premiums assumed.<PAGE>
SCHEDULE IV - REINSURANCE
CUMBERLAND TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed to
Amount Companies Companies Amount Net
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1994
Property and
Casualty Insurance
Premiums . . . . . $ 503,244 $ 566,264 $5,019,734 $4,956,714 $ 101.27%
=======================================================
Year ended
December 31, 1995
Property and
Casualty Insurance
Premiums . . . . . $ 627,683 $ 503,493 $4,944,125 $5,068,315 $ 97.55%
=======================================================
Year ended
December 31, 1996
Property and
Casualty Insurance
Premiums . . . . . $ 1,152,250$ 427,718 $3,083,787 $3,808,319 $ 80.98%
=======================================================
/TABLE
<PAGE>
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
CUMBERLAND TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Additions
---------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------------------- ---------- ---------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1994:
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 0 $ 0 $ 0 $ 0
========== ========== ========== ========== ==========
Deferred income tax
valuation allowance$ 0 $ 294,197 $62,638(1)$ 0 $ 356,835
========== ========== ========== ========== ==========
For the year ended
December 31, 1995:
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 0 $ 67,209 $ 0 $ 0 $ 67,209
========== ========== ========== ========== ==========
Deferred income tax
valuation allowance$ 356,835 $ 79,952 $ 0 $ 62,638(2)$ 374,149
========== ========== ========== ========== ==========
For the year ended
December 31, 1996:
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 67,209 $ 0 $ 0 $ 67,209 $ 0
========== ========== ========== ========== ==========
Deferred income tax
valuation allowance$ 374,149 $ 321,111 $ 0 $ 0 $ 695,260
========== ========== ========== ========== ==========
</TABLE>
(1) Establishment of valuation allowance against deferred assets<PAGE>
associated with unrealized losses on available-for-sale
securities.
(2) Represents the elimination of the valuation allowance
associated with unrealized losses on available-for-sale
securities.<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
CUMBERLAND TECHNOLOGIES, INC.
Year Ended December 31
1994 1995 1996
----------- ----------- ----------
Average shares outstanding . 3,908,759 3,824,494 4,026,655
Net effect of dilutive stock
options . . . . . . . . . . - - -
Totals . . . . . . . . . . . $ 3,908,759$ 3,824,494 $4,026,655
=========== =========== ==========
Net income (loss) . . . . . . $(1,073,362)$ (228,210)$ (582,744)
=========== =========== ==========
Earnings (loss) per share $ (.27)$ (.06)$ (.14)
amount . . . . . . . . . . =========== =========== ==========<PAGE>
EXHIBIT 22 - SUBSIDIARIES OF THE REGISTRANT
CUMBERLAND TECHNOLOGIES, INC.
As of December 31, 1996, the subsidiaries of Cumberland
Technologies, Inc. were as follows:
- Surety Specialists, Inc.
- Cumberland Casualty & Surety Company
- Official Notary Service of Texas, Inc.
- Qualex Consulting Group, Inc.
- Surety Group, Inc.
- Associates Acquisition Corp. d/b/a Surety Associates, Inc.
- Florida Credit & Collection Services, Inc.<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 3,055,753
<DEBT-CARRYING-VALUE> 1,664,264
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,020,016
<MORTGAGE> 45,838
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,109,864
<CASH> 669,076
<RECOVER-REINSURE> 987,953
<DEFERRED-ACQUISITION> 635,189
<TOTAL-ASSETS> 11,769,436
<POLICY-LOSSES> 1,991,796
<UNEARNED-PREMIUMS> 1,862,114
<POLICY-OTHER> 165,504
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,533,265
0
0
<COMMON> 5,763
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,769,436
3,808,319
<INVESTMENT-INCOME> 403,919
<INVESTMENT-GAINS> 117,824
<OTHER-INCOME> 2,039,331
<BENEFITS> 1,670,640
<UNDERWRITING-AMORTIZATION> 1,532,355
<UNDERWRITING-OTHER> 3,255,805
<INCOME-PRETAX> (582,744)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (582,744)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
