UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
[Mark One]
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
--------- ---------.
Commission File No. 0-19727
CUMBERLAND TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-3094503
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(State or other jurisdiction (I.R.S. Employer
Identification
of corporation) No.)
4311 West Waters Avenue,
Suite 501, Tampa, Florida 33614
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(Address of principal (Zip Code)
executive office)
(813) 885-2112
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years<PAGE>
Indicate by a check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13, or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes [X] No [ ]
Applicable Only to Corporate Issuers
The number of shares of the Registrant's common stock, $.001 par
value, outstanding as of September 30, 1998 was 5,444,958 shares.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
-------------------------------
Item 1. Condensed consolidated balance sheets
------- at September 30, 1998 and
December 31, 1997 . . . . . . . . . . 1-2
Condensed consolidated statements
of operations for the nine months
ended September 30, 1998
and September 30, 1997. . . . . . . . . 3
Condensed consolidated statements
of operations for the three
months ended September 30, 1998
and September 30, 1997. . . . . . . . . 4
Condensed consolidated statements
of cash flows for the
nine months ended September 30, 1998
and 1997 . . . . . . . . . . . . . . . . 5
Notes to condensed consolidated
financial statements . . . . . . . . 6-11
Item 2. Management's Discussion and Analysis
------- of financial condition and
results of operations . . . . . . . 12-14
PART II OTHER INFORMATION
---------------------------
Item 1. Legal proceedings . . . . . . . . . . . . 15
Item 2. Changes in securities . . . . . . . . . . 15
Item 3. Defaults upon senior securities . . . . . 15
Item 4. Submission of matters to a vote
of security holders . . . . . . . . . 15
Item 5. Other information . . . . . . . . . . . . 15
Item 6. Exhibits and Reports of Form 8-K . . . . 15
Signatures . . . . . . . . . . . . . . . 16<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
------- --------------------
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------- --------------
(Unaudited)
ASSETS
------
Investments:
Securities available-for-
sale at fair value:
Fixed maturities . . . . . $ 2,162,507 $ 3,590,458
Equity securities . . . . 377,450 1,526,783
Fixed maturity securities
held-to-maturity, at
amortized cost . . . . . . 860,050 982,528
Residential mortgage loan
on real estate, at
unpaid principal . . . . . 44,699 45,314
Short-term investments . . 423,993 323,993
----------------------------
Total investments . . . . 3,868,699 6,469,076
Cash and cash equivalents . . . 3,073,318 1,803,530
Accrued investment income . . . 68,814 82,821
Reinsurance recoverable . . . . 1,701,813 2,016,756
Accounts receivable:
Trade less allowances for
doubtful accounts of
$113,120 at September 30,
1998 and December 31, 1997 2,608,804 1,307,216
Affiliate . . . . . . . . . 946,686 903,181
Deferred policy acquisition
costs . . . . . . . . . . . 1,249,726 812,745
Intangibles, net . . . . . . . 1,504,830 1,680,633
Other assets . . . . . . . . . 240,934 245,425
----------------------------
$ 15,263,624 $ 15,321,383
============================
See notes to condensed consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31,
1998 1997
-------------- --------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
EQUITY
--------------------------------
Policy liabilities and accruals:
Loss and loss adjustments
expenses . . . . . . . . . $ 2,518,586 $ 2,550,300
Unearned premiums . . . . . 3,774,788 2,629,282
Reinsurance payable . . . . . . 1,244,395 2,459,173
Accounts payable and other
liabilities . . . . . . . . 750,468 254,839
Income tax payable . . . . . . 120,000 -
Long-term debt:
Nonaffiliate . . . . . . . 1,342,205 1,418,520
----------------------------
Total liabilities . . . . 9,750,442 9,312,114
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,
5,763,070 shares issued at
September 30, 1998 and
December 31, 1997
respectively . . . . . . . 5,763 5,763
Capital in excess of par
value . . . . . . . . . . 7,212,941 7,212,941
Accumulated other
comprehensive income . . . (965,355) 134,201
Accumulated deficit . . . . (476,449) (1,093,418)
----------------------------
5,776,900 6,259,487
Less treasury stock, at cost,
318,112 shares and 313,612
at September 30, 1998 and
December 31, 1997,
respectively . . . . . . . (263,718) (250,218)
----------------------------
Total stockholders' equity 5,513,182 6,009,269
----------------------------
$ 15,263,624 $ 15,321,383
============================
See notes to condensed consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September
30,
-----------------------------
1998 1997
-------------- --------------
(Unaudited) (Unaudited)
REVENUES:
Direct premiums earned . . 6,102,701 3,981,294
Reinsurance premiums assumed 951,808 807,633
Less reinsurance ceded . . (1,644,486) (1,057,788)
----------------------------
Net premium income . . . . 5,410,023 3,731,139
Net investment income . . . 303,501 297,892
Net realized investment
gains . . . . . . . . . . 142,800 207,781
Other income . . . . . . . 653,425 895,051
----------------------------
6,509,749 5,131,863
Benefits and expenses:
Losses and loss adjustment
expenses . . . . . . . . . 1,582,625 1,355,867
Amortization of deferred
policy acquisition costs 943,914 947,767
Operating expenses . . . . 3,157,182 2,895,517
Interest expense . . . . . 89,059 93,883
----------------------------
5,772,780 5,293,034
----------------------------
Income (loss) before income
taxes . . . . . . . . . . . 736,969 (161,171)
Income taxes (benefit) . . . . 120,000 -
----------------------------
Net income (loss) . . . . . . . $ 616,969 $ (161,171)
============================
Weighted average number of 5,448,965 5,449,538
shares . . . . . . . . . . ============================
Net income (loss) per share . . $ .11 $ (.03)
============================
See notes to condensed consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September
30,
-----------------------------
1998 1997
-------------- --------------
(Unaudited) (Unaudited)
REVENUES:
Direct premiums earned . . 2,180,191 2,427,649
Reinsurance premiums assumed 462,839 617,064
Less reinsurance ceded . . (805,927) (840,184)
----------------------------
Net premium income . . . . 1,837,103 2,204,529
Net investment income . . . 90,357 100,028
Net realized investment
gains (losses) . . . . . (27,518) 128,304
Other income . . . . . . . 98,515 328,384
----------------------------
1,998,457 2,761,245
Benefits and expenses:
Losses and loss adjustment
expenses . . . . . . . . . 701,669 935,808
Amortization of deferred
policy acquisition costs 186,007 730,135
Operating expenses . . . . 991,136 904,086
Interest expense . . . . . 29,437 31,972
----------------------------
1,908,249 2,602,001
----------------------------
Income before income
taxes . . . . . . . . . . . 90,208 159,244
Income taxes (benefit) . . . . 120,000 -
----------------------------
Net income (loss) . . . . . . . $ (29,792)$ 159,244
============================
Weighted average number of
shares . . . . . . . . . . 5,448,965 5,449,458
============================
Net income (loss) per share . . $ (.01)$ (.03)
============================
See notes to condensed consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September
30,
-----------------------------
1998 1997
------------- --------------
(Unaudited) (Unaudited)
Operating activities:
Net income (loss) . . . . . . . $ 616,969 $ (161,171)
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities:
Amortization/accretion of
investment premiums and
discounts . . . . . . . . 177 (2,917)
Policy acquisition costs
amortized . . . . . . . . (943,914) (2,017,661)
Policy acquisition costs
deferred . . . . . . . . . 506,932 1,905,448
Depreciation and amortization 175,803 207,287
Net realized (gain) on sales
of investments . . . . . . (142,800) (207,781)
Accrued interest on term
notes, net . . . . . . . . 89,059 93,883
Income taxes payable . . . 120,000 -
(Increase) decrease in:
Accrued investment income 14,007 13,882
Reinsurance recoverable . 314,943 89,394
Trade receivables . . . . (1,301,588) (736,402)
Other assets . . . . . . . 4,491 178,100
Increase (decrease) in:
Policy liabilities and
accruals . . . . . . . 1,113,792 1,631,443
Ceded reinsurance payable (1,214,778) -
Accounts payable and
other liabilities . . . 495,628 52,179
----------------------------
Net cash (used in) provided by
operating activities . . . (151,279) 1,045,684
See notes to condensed consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended September
30,
-----------------------------
1998 1997
-------------- --------------
(Unaudited) (Unaudited)
Investing activities:
Securities available-for-sale :
Purchases - fixed maturities (968,312) (736,054)
Sales - fixed maturities . 2,287,151 599,311
Purchases - equities . . . (2,702,235) (3,511,369)
Sales - equities . . . . . 2,999,086 3,600,174
Securities held-to-maturity:
Purchases . . . . . . . . . . - (299,492)
Maturities . . . . . . . . . 127,140 985,000
Purchase - short-term
investment . . . . . . . . (100,000) -
Proceeds from sales and
maturities of investments . . 615 464
Net advances to (from)
affiliates . . . . . . . . . (43,505) (237,210)
----------------------------
Net cash (used in) provided by
investing activities . . . . 1,599,940 400,824
Financing activities:
Purchases of treasury stock . . (13,499) (9,447)
Payments on short-term
borrowings and long-term
debt . . . . . . . . . . . . (165,374) (185,921)
----------------------------
Net cash (used in) provided by
financing activities . . . . (178,873) (195,368)
----------------------------
Increase (decrease) in cash and
cash equivalents . . . . . . 1,269,788 1,251,140
Cash and cash equivalents,
beginning of period . . . . . 1,803,530 993,069
----------------------------
Cash and cash equivalents, end
of period . . . . . . . . . . $ 3,073,318 $ 2,244,209
============================
See notes to condensed consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
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 five of its
nine subsidiaries. CCS, a Florida corporation formed in May
1988, provides underwriting for specialty sureties and
performance and payment bonds for contractors. The surety
services provided include direct surety, and to a lesser
extent, reinsurance. 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, is an inactive corporation. Qualex Consulting
Group, Inc. (Qualex), a Florida corporation formed in
November 1994, provides claim and contracting consulting
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.
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.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Reclassifications - Certain amounts in the 1997 financial
statements have been reclassified to conform to the 1998
financial statement presentations.
Use of Estimates - We make estimates and assumptions that
have an effect on the amounts that we report in our
financial statements. Our most significant estimates are
those relating to our reserves for losses and loss
adjustment expenses. We continually review our estimates
and make adjustments as necessary, but actual results could
turn out significantly different than what we envisioned
when we made these estimates.
2. Net Income Per Share
--------------------
Net income per share for the three and nine months ended
September 30, 1998 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.
3. Investments
-----------
Change in Unrealized Appreciation: The increase (decrease)
in unrealized appreciation of investments recorded in
shareholders equity was as follows:
Nine Months Twelve Months
Ended Ended
September 30, December 31,
1998 1997
-------------- --------------
Fixed maturities . . $ 37,042 $ 39,146
Equities . . . . . . (1,002,397) 95,056
-------------- --------------
Total change in
unrealized
appreciation . . $ (965,355) $ 134,201
============== ==============<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Income Taxes
------------
The Company s provision for income taxes for the quarters
ended September 30, 1998 and 1997 differ from the statutory
rate of 34% due primarily to the Company s utilization of
net operating loss carryforward.
5. 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, 1997, no amounts could be paid by CCS to CTI
under the terms of the debenture.
On April 1, 1997, CTI, forgave $375,000 of its $3,000,000
surplus debenture due to CCS. As a result, CCS increased
paid in capital by $375,000.
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, 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 (including accrued interest).<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. Notes Payable to Nonaffiliates
------------------------------
In connection with the acquisition of certain agencies
during 1995 (see Note 9), the Company entered into two notes
payable with the agencies previous owners. One note is due
March 1, 2002 and bears interest at 8% through February 28,
2001 and 10% thereafter. Principal payments of $150,000 are
due annually beginning March 1, 2000. The other is due
September 30, 2010 and bears interest at 8% through
September 30, 1999 and 9% thereafter. Principal payments of
$40,000 were 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.
7. 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. Goodwill 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. 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.
9. Unearned Premiums
-----------------
Unearned premiums are calculated using the monthly pro rata
basis for miscellaneous bonds and completion date or
anticipated contract completion date for contract bonds.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. Reinsurance
-----------
The Company assumes and cedes reinsurance and participates
in various pools. The accompanying financial statements
reflect premiums, benefits and settlement expenses, and
deferred policy acquisition costs, net of reinsurance ceded.
Amounts recoverable from reinsurers are estimated in a
manner consistent with the future policy benefit and claim
liability associated with the reinsured policies.
Accounts recoverable from reinsurers for unpaid losses are
presented as an asset in the accompanying consolidated
financial statements.
11. Statutory Accounting Practices
------------------------------
Our underwriting operations are required to file financial
statements with state regulatory authorities. The
accounting principles used to prepare these statutory
financial statements follow prescribe accounting principles,
which differ from GAAP. On a statutory accounting basis,
our underwriting operations reported income net of taxes of
$507,134 at September 30, 1998 and $959,304 at December 31,
1997. Statutory surplus (shareholder s equity) of these
operations was $5,099,523 and $5,044,527 as of September 30,
1998 and December 31, 1997, respectively.
12. Comprehensive Income
--------------------
We adopted the provisions of the SFAS No. 130, "Reporting
Comprehensive Income," in 1998. Comprehensive income is
defined as any change in our equity from transactions and
other events originating from nonowner sources. In our
case, those changes are composed of our reported net income
and changes in the unrealized appreciation of our investment
portfolio. SFAS No. 130 requires that we report all
components of comprehensive income. The following summaries
present the components of our comprehensive income, other
than net income, for the last two years.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Consolidated Statements of Comprehensive Income
(Unaudited)
------------------------------------------------------
Nine Months Ended
September 30
------------------------
1998 1997
----------- -----------
Net income . . . . . . . . $ 616,969 $ -
Other comprehensive income,
net of tax. Unrealized
(depreciation) appreciation
of available for sale
securities arising during
period . . . . . . . . . $
(1,099,556) $ -
Less: reclassification
adjustment for gains
included in net income . $ 169,563 $ -
----------- -----------
Comprehensive income . . . $ (652,150) $ -
=========== ===========<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13. 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.
14. Year 2000
---------
The Company has developed an in-house surety administrative
system "BondPro". BondPro is an agency surety bond
administration system that issues bonds, tracks
underwriting, and accounting and reporting from its
database. BondPro is a window based program and is year
2000 compliant. The Company is aware of the issues that
many computer systems will face as the millennium (year
2000) approaches. The Company, however, believes that its
own internal software and hardware is year 2000 compliant.
The Company believes that any year 2000 problems encountered
by procurement agencies, and other customers and vendors are
not likely to have a material adverse effect on the
Company s operations. The Company anticipates no other year
2000 problems which are reasonably likely to have a material
adverse effect on the Company s operations. There can be no
assurance, however, that such problems will not arise.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The capacity of a surety company to underwrite insurance and
reinsurance is based on maintaining liquidity and capital
resources sufficient to pay claims and expenses as they become
due. Based on standards established by the National Association
of Insurance Commissioners (NAIC) and promulgated by the Florida
Department of Insurance, the Company is permitted to write
premiums up to an amount equal to three times its statutory
surplus, or approximately $15,100,000 at September 30, 1998.
Therefore, based upon statutory guidelines, the Company could
increase earned premiums by an additional $7,000,000 in 1998 in
addition to the amount earned in 1997. The primary sources of
liquidity for the Company are funds generated from surety pre-
miums, investment income, and proceeds from sales and maturities
of portfolio investments. The principal expenditures are payment
of losses and loss adjustment expenses, insurance operating
expenses, and commissions.
At September 30, 1998, the Company s $15,263,624 of total
assets calculated based on generally accepted accounting
principles were distributed primarily as follows: 46 percent in
cash and investments (including accrued investment income), 34
percent in receivables and reinsurance recoverables, 18 percent
in intangibles and deferred policy acquisition costs and 2
percent in other assets.
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) provided by operating activities was
($151,279) and $1,045,684 for the nine months ended September 30,
1998 and 1997, respectively. The decrease in net cash used in
operating activities during 1998 is attributed to a decrease in
ceded reinsurance payables, reinsurance recoverables and an
increase trade receivables, which is offset by an increase in
policy and other liabilities and policy acquisition costs
deferred. In 1997 the cash used in operating activities was
primarily attributable to a net increase in policy and other
liabilities which was offset by policy acquisition costs net of
amortization and a net increase in trade and reinsurance
receivables.
Net cash (used in) provided by investing activities was
$1,599,940 and $400,284 for the nine months ended September 30,
1998, and 1997, respectively. Investing activities consist of
purchases and sales and maturities of investments.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
----------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
-----------------------------------------------------------
During the nine months ended September 30, 1998, net premium
income totaled $5,410,023 representing an increase of 45 percent
from that of the same period in 1997 ($3,731,139). Premiums
continue to increase and is attributed to the marketing direction
of the Company, which is to penetrate the direct market while
decreasing the volume of reinsurance premiums assumed through
Pooling Agreements. During the first nine months of 1998 as
compared to the same period during 1997, direct premiums
increased $2,121,407 (53%); assumed premiums increased $144,175
(18%) and ceded premiums increased $586,698 or (55%). The
increase in the assumption premiums are a result of alliances the
Company has entered into through their direct written premiums
program. The increase in ceded premiums has a direct correlation
to the direct premium written and the association to Excess of
Loss treaties on these premiums.
Net investment income for the period ending September 30,
1998 as compared to the same period during 1997 reflect no
significant changes. Net realized gains during 1998 decreased
$64,981 when compared to the same period of 1997. Realized gains
and losses result from the disposal of common stock.
During the period ending September 30, 1998, other income
remained consistent when compared to the same period ending
September 30, 1997.
During the nine months ended September 30, 1998 and 1997,
benefits and claims expenses increased to $1,582,625 from
$1,355,867, an increase of 17 percent. Incurred claims expenses
represent the net reserve increase after deduction of paid claims
and fluctuates based on premiums written and earned as well as
claims incurred and paid. The increase of $226,758 is consistent
with the flow of premiums, representing approximately 30 and 36
percent of net premiums earned in measuring the claim expense for
the period ending September 30, 1998 and 1997, respectively.
During the period ending September 30, 1998 and 1997,
respectively, the amortization of deferred policy acquisition
cost is attributed to the increase in premiums written and
earned. Cost are deferred proportionately over the estimated
life of the bond and fluctuate according to the volume of
premiums written on contract and miscellaneous surety bonds.
Deferred policy acquisition costs averaged approximately 13 and
16 percent of direct and assumed premiums earned for the period
ending September 30, 1998 and 1997, respectively.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
----------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(CONTINUED)
------------------------------------------------------------
Operating expenses increased $311,808 or 11% when compared
to the same period in 1997. The increases are attributed to the
Company s growth in the direct market of new premiums
underwritten. The increase is summarized to the following
expense line items: salaries $135,000 or 9.5%; legal fees $29,000
or 195%; rent $31,000 or 30% and taxes, license and fees $116,000
or 129%.
Net interest expense in 1998 remained consistent when
compared to the same period during 1997. Interest expense
represents amounts incurred on the notes payable to affiliates
(See Note 4).
The Company recorded income tax expense of $120,000 for the
period ended September 30, 1998 having utilized their tax loss
carryforward of $445,967. The income tax expense is calculated
on a consolidated basis and adjusted for certain items applicable
to an insurance company. As a result of these adjustments and
application of the 1997 NOL, the Company s effective tax rate is
calculated at 16.3%.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
------------------------------------------------------------
During the three months ended September 30, 1998, net
premium income totaled $1,837,103 representing a decrease of 17
percent from that of the same period in 1997 ($2,204,529). The
decrease is due primarily to the decrease in the amount of direct
and assumed premiums earned. The fluctuation represents the flow
in the volume of premiums increasing between direct and assumed
premiums. Direct premiums written increased $724,700 and assumed
premiums written decreased $375,700 in comparing the change for
the same period in 1998 to 1997.
During the three months ended September 30, 1998, net
investment income remained level while net capital gains on
disposal of common stock decreased $155,800 or 121% from that
earned during the same period in 1997. The decrease is
attributed to realized losses of $27,500 incurred during the 3
months ending September 30, 1998. During the same period in
1997, the Company had $128,300 in realized gains.
During the three months ended September 30, 1998, other
income decreased $109,900 or 53% compared to the same period
during 1997. The decrease is attributable to subsidiary
companies decreasing the amount of business activity outside of
the Holding Company Group.
During the three months ended September 30, 1998, benefits
and claims expenses decreased to $701,669 from $935,808 from that
of the same period in 1997. The decrease is due primarily to a
decrease in benefits and claims associated with the pooling
agreements.
During the three months ended September 30, 1998, the
amortization of deferred policy acquisition costs decreased
$441,000 or 70% when compared to the same period during 1997.
The decrease is attributed to the volume of premium activity and
is associated directly to the increase in deferred policy
acquisition asset for the period ending September 30, 1998 as
compared to the same period in 1997. The fluctuations occurring
are related to the volume of contract and miscellaneous bonds
written and the length of the surety contract.
During the three months ended September 30, 1998, operating
expenses increased $8,300 or 1% when compared to the three
months ended September 30, 1997. The increase is attributed to
operating expenses associated with the Company s growth.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(CONTINUED)
-----------------------------------------------------------
Net interest expense remained consistent when compared to
the same period during 1997.
Due to utilization of the tax loss carryforward, the Company
recorded income tax expense of $120,000 during the three month
period ending September 30, 1998. The tax expense is attributed
to the current year tax expense.<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings
-----------------
None
Item 2. Changed in securities
---------------------
None
Item 3. Defaults upon senior securities
-------------------------------
None
Item 4. Submission of matters to a vote of security holders
---------------------------------------------------
Cumberland Technologies, Inc. Annual Shareholders
Meeting was held on August 24, 1998.
The three Directors nominated by management were named
in proxies for the meeting which were solicited
pursuant to Regulation 14A of the Securities Exchange
Act of 1934. There was no solicitation in opposition
to management s nominees. The Directors were elected
by the following votes:
In Favor Withheld Not Voted
---------- ---------- ----------
Francis M.
Williams . . . 5,123,575 4,387 321,496
George A.
Chandler . . . 5,123,665 4,297 321,496
Andrew J. Cohen 5,123,665 4,297 321,496
Item 5. Other information
-----------------
None
Item 6. Exhibits and reports on Form 8-K
--------------------------------
(a) None
Exhibit 27 - Financial Data Schedule
(for SEC use only)
(b) No reports on Form 8-K were filed during the
quarter for which this report is filed.<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CUMBERLAND TECHNOLOGIES, INC.
------------------------------
Date: November 20, 1998 By: /s/Joseph M. Williams
------------------------------ ------------------------------
Joseph M. Williams
President and
Chief Executive Officer
(Principle Executive Officer)
Date: November 20, 1998 By: /s/ Carol S. Black
------------------------------ ------------------------------
Carol S. Black
Secretary and
Chief Financial Officer
(Principle Accounting and
Financial Officer)<PAGE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 2,162,507
<DEBT-CARRYING-VALUE> 860,050
<DEBT-MARKET-VALUE> 0
<EQUITIES> 377,450
<MORTGAGE> 44,699
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,868,699
<CASH> 3,073,318
<RECOVER-REINSURE> 1,701,813
<DEFERRED-ACQUISITION> 1,249,726
<TOTAL-ASSETS> 15,263,624
<POLICY-LOSSES> 2,518,586
<UNEARNED-PREMIUMS> 3,774,788
<POLICY-OTHER> 1,244,395
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,342,205
0
0
<COMMON> 5,763
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,263,624
5,410,023
<INVESTMENT-INCOME> 303,501
<INVESTMENT-GAINS> 142,800
<OTHER-INCOME> 653,425
<BENEFITS> 1,582,625
<UNDERWRITING-AMORTIZATION> 943,914
<UNDERWRITING-OTHER> 3,246,241
<INCOME-PRETAX> 736,969
<INCOME-TAX> 120,000
<INCOME-CONTINUING> 616,969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 616,969
<EPS-PRIMARY> 0.11
<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>
