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, 1999.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to _________.
Commission File 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 Identification No.)
of incorporation)
4311 West Waters Avenue, Suite 501
Tampa, Florida 33614
(Address of principal executive office) (Zip code)
(813) 885-2112
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and formal 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 Insurers Involved in Bankruptcy
Proceedings During the Preceding Five Years
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, 1999 was 5,468,239 shares.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Condensed consolidated balance sheets
at September 30,1999 and December 31, 1998 1-2
Condensed consolidated statements of operations
for the nine months ended September 30, 1999
and September 30, 1998 3
Condensed consolidated statements of operations
for the three months ended September 30, 1999
and September 30, 1998 4
Condensed consolidated statements of cash flows
for the nine months ended
September 30, 1999 and 1998 5
Notes to condensed consolidated financial statements 6-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 13-15
PART II OTHER INFORMATION
Item 1. Legal proceedings 16
Item 2. Changes in securities 16
Item 3. Defaults upon senior securities 16
Item 4. Submission of matters to a vote of security holders 16
Item 5. Other information 16
Item 6. Exhibits and Reports of Form 8-K 16
Signatures 17
<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
1999 1998
------------------------------------
(Unaudited)
ASSETS
Investments:
Securities available-for-sale at fair value:
Fix maturities $ 1,280,150 $ 2,081,770
Equity securities 322,875 576,575
Fixed maturity securities held-to-maturity
held at amortized costs 861,928 860,508
Residential mortgage loan on real
estate, at unpaid principal 43,581 44,427
Short-term investments 430,239 423,993
------------------------------------
Total investments 2,938,773 3,987,273
Cash and cash equivalents 4,650,889 4,202,351
Accrued investment income 55,595 55,348
Reinsurance recoverable 3,703,781 2,306,372
Accounts receivable:
Trade 2,885,578 1,809,726
Affiliate 1,013,811 927,910
Income tax recoverable - 120,000
Deferred policy acquisition costs 1,571,105 1,246,555
Intangibles, net 1,307,612 1,455,525
Other assets 342,358 233,991
====================================
$ 18,469,502 $ 16,345,051
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998
1999 1998
------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Policy liabilities and accruals:
Loss and loss adjustment expenses $ 3,574,234 $ 3,220,457
Unearned premiums 4,714,809 3,749,945
Ceded reinsurance payable 611,290 1,114,267
Accounts payable and other liabilities 1,233,863 580,564
Income tax payable 231,100 -
Long-term debt:
Nonaffiliate 1,294,135 1,330,588
Affiliate 1,000,000 1,000,000
------------------------------------
Total liabilities 12,659,431 10,995,821
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,
5,815,356 shares issued at
September 30, 1999; 5,763,070 shares
issued at December 31,1998 5,816 5,763
Capital in excess of par value 7,220,731 7,212,941
Accumulated other comprehensive losses (377,639) (190,929)
Accumulated deficit (775,118) (1,414,826)
------------------------------------
6,073,790 5,612,949
Less treasury stock, at cost, 318,112
shares at September 30, 1999 and
December 31, 1998 (263,719) (263,719)
------------------------------------
Total stockholders' equity 5,810,071 5,349,230
------------------------------------
$ 18,469,502 $ 16,345,051
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30,
------------------------------------
1999 1998
------------------------------------
(Unaudited) (Unaudited)
REVENUES:
Direct premiums earned $ 7,359,043 $ 6,102,701
Reinsurance premiums assumed 1,545,840 951,808
Less reinsurance ceded (1,835,414) (1,644,486)
------------------------------------
Net premium income 7,069,469 5,410,023
Net investment income 251,783 303,501
Net realized investment gains 15,918 142,800
Other income:
Affiliates - 126,862
Nonaffiliates 1,073,104 1,139,351
------------------------------------
8,410,274 7,122,537
Benefits and expenses:
Losses and loss adjustment expenses 1,672,561 1,582,625
Amortization of deferred policy
acquisition costs 1,798,983 1,074,435
Operating expenses 3,779,142 3,639,449
Interest expense 160,936 89,059
------------------------------------
7,411,622 6,385,568
------------------------------------
Income (loss) before income taxes 998,652 736,969
Income taxes (benefit) 351,100 120,000
------------------------------------
Net income (loss) $ 647,552 $ 616,969
====================================
Weighted average number of shares $ 5,468,239 $ 5,448,965
====================================
Net income (loss) per share $ .12 $ .11
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
------------------------------------
1999 1998
------------------------------------
(Unaudited) (Unaudited)
REVENUES:
Direct premiums earned $ 2,684,616 $ 2,180,191
Reinsurance premiums assumed 563,098 462,839
Less reinsurance ceded (607,502) (805,927)
------------------------------------
Net premium income 2,640,212 1,837,103
Net investment income 75,766 90,357
Net realized investment gains 5,973 (27,518)
Other income:
Nonaffiliates 367,467 315,543
------------------------------------
3,089,418 2,215,485
Benefits and expenses:
Losses and loss adjustment expenses 614,482 701,669
Amortization of deferred policy
acquisition costs 517,238 243,362
Operating expenses 1,388,387 1,150,809
Interest expense 53,372 29,437
------------------------------------
2,573,479 2,125,277
------------------------------------
Income (loss) before income taxes 515,939 90,208
Income taxes (benefit) 231,100 120,000
====================================
Net income (loss) $ 284,839 $ (29,792)
====================================
Weighted average number of shares $ 5,468,239 $ 5,448,965
====================================
Net income (loss) per share $ .05 $ (.01)
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30,
------------------------------------
1999 1998
------------------------------------
(Unaudited) (Unaudited)
Operating activities:
Net income $ 647,552 $ 616,969
Adjustments to reconcile net income
(loss) to net
Cash (used in) provided by operating activities:
Amortization/accretion of investment
premiums and discounts 234 177
Policy acquisition cost amortized (1,798,983) (943,914)
Policy acquisition costs deferred 1,474,433 506,932
Depreciation and amortization 147,913 175,803
Net realized (gain)on sales of
investments (15,918) (142,800)
Income tax expense 351,100 120,000
Accrued interest on term notes, net - 89,059
(Increase) decrease in:
Accrued investment income (247) 14,007
Reinsurance recoverable (1,397,409) 314,943
Trade receivables (1,075,852) (1,301,588)
Other assets (108,367) 4,491
Increase (decrease) in:
Policy liabilities and accruals 1,318,641 1,113,792
Ceded reinsurance payable (502,977) (1,214,778)
Accounts payable and other
liabilities 653,299 495,628
------------------------------------
Net cash (used in) provided by operating
activities (306,581) (151,279)
Investing activities:
Securities available-for-sale:
Purchases - fixed maturities (358,700) (968,312)
Sales - fix maturities 1,086,262 2,287,151
Purchases - equities - (2,702,235)
Sales - equities 155,311 2,999,086
Securities held-to-maturity:
Maturities - 127,140
Purchase - short-term investment (6,246) (100,000)
Proceeds from sales and maturities of
investments 846 615
Net advances to (from) affiliates (85,901) (43,505)
------------------------------------
Net cash provided by investing activities 791,572 1,599,940
Financing activities:
Purchase of treasury stock - (13,499)
Payments on short-term borrowings and
long-term debt (36,453) (165,374)
------------------------------------
Net cash (used in) financing activities (36,453) (178,873)
------------------------------------
Increase (decrease) in cash and cash
equivalents 448,538 1,269,788
Cash and cash equivalents, beginning of
period 4,202,351 1,803,530
====================================
Cash and cash equivalents, end of period $ 4,650,889 $ 3,073,318
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1999
1. Summary of Significant Accounting Policies
Organization - 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").
Cumberland Technologies, Inc., ("the Company") is a holding company
engaged through its subsidiaries, Cumberland Casualty & Surety Company
("CCS"), Surety Specialists, Inc. ("SSI"), The Surety Group, Inc. ("SG"),
Associates Acquisition Corp. d/b/a Surety Associates ("SA") and Qualex
Consulting Group, Inc. ("Qualex") in the delivery of speciality surety and
insurance services. Surety services include underwriting surety bonds on a
direct and assumed basis, surety consulting and the development of surety
software. Insurance services include the underwriting of speciality and
other liability insurance products. In addition, the Company conducts its
business through a number of independent agencies which focus on selling
and delivering surety insurance products to consumers. Traditionally, this
segment of the surety industry has delivered its products through an
antiquated manual process. Because of this need to advance
technologically, the Company developed a software product called
Bond-Pro(R). This patented surety issuance system increases the speed that
surety agents deliver their products to the customer and financially
report those transactions to the carrier, while reducing operating costs.
The Company's business strategy is to continue the underwriting focus of
each of its operating subsidiaries and to achieve growth through the
expanded licensing of Bond-Pro(R).
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.
Reclassifications - Certain amounts in the 1998 financial statements have
been reclassified to conform to the 1999 financial statement
presentations.
Use of Estimate - 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.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCL&L STATEMENTS (UNAUDITED)
2. Net Income Per Share
Net income per share for the nine months ended September 30, 1999 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 September Ended December
30, 1999 31, 1998
------------------------------------------------
Fixed maturities $ (51,012) $ 31,983
Equities (326,627) (222,912)
================================================
Total change in
unrealized
appreciation $ (377,639) $ (190,929)
================================================
4. Income Taxes
The Company's provision for income taxes for the nine months ending
September 30, 1999 and 1998 has an effective rate of 34% and 16%,
respectively. The rate for 1998 is a result of the Company's 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 S4,000,000 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 3 1, 1998, 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. On
June 30, 1999, CTI forgave $576,266 of its $2,625,000 surplus debenture
due to CCS. As a result, CCS increased paid-in capital to $1,000,000.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCL&L STATEMENTS (UNAUDITED)
5. Term Note Due Affiliate (continued)
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. 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).
6. Notes Payable
Affiliate
Effective November 10, 1998, Cumberland entered into a $1,000,000
convertible term note agreement with TransCor Waste Services, Inc., a
subsidiary of KC. The note is due November 10, 2001 and bears interest at
10%. The lender may convert the principal amount of the note or a portion
thereof into a common stock at $3.00 per share subsequent to a six-month
anniversary and prior to the maturity date.
Nonaffiliate
In connection with the acquisition of certain agencies during 1995, 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 9%. 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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCL&L STATEMENTS (UNAUDITED)
7. Intangibles (continued)
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.
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.
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.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. Reinsurance (continued)
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 $644,232 at
September 30, 1999 and $74,157 at December 31, 1998. Statutory surplus
(shareholders' equity) of these operations was $5,316,570 and $4,843,478
as of September 30, 1999 and December 31, 1998, 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.
Consolidated Statements of Comprehensive Income
(Unaudited)
------------------------------------------------------------------------
Nine Months Ended September 30,
------------------------------------
1999 1998
------------------------------------
Net income $ 647,552 $ 616,969
Change in unrealized (depreciation)
appreciation (186,710) (1,099,556)
====================================
Comprehensive income $ 460,842 $ (482,587)
====================================
13. Year 2000
The Company has employed consultants to address its Year 2000 issues in
conjunction with the Company's own information technology staff. Excluding
the costs for the Company's own information technology personnel, the
total cost of compliance is expected to be approximately $100,000 (of
which $41,000 including equipment upgrades will be a capital expenditure).
All costs (except capital) have been and will be expensed as incurred and
will be funded from the normal operating cash flows.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13. Year 2000 (continued)
The Company has developed an in-house surety administrative system
"Bond-Pro(R)." Bond-Pro(R) is an agency surety bond administration system
that issues bonds, tracks underwriting, and accounting and reporting from
its database. Bond-Pro(R) 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.
Excluding any possible catastrophic events such as the loss of utilities
or banking, financial or communications services, the potential risks
known to the Company at this time are primarily limited to delays,
disruptions or losses resulting from information bottlenecks and the lack
of computer processing power. In order to mitigate the risk to the
greatest extent possible, the Company will be prepared to track
mission-critical information manually. Such information includes tracking
premium income, and receivables and recording payments received from
agencies. The Company believes its current workforce and the employment
pool available in the area is sufficiently skilled to accommodate such a
demand. The Company will continue to evaluate its contingency planning
activities as more information becomes available. At this time, the total
cost of the risks is not anticipated to have a material adverse effect on
the business, financial condition or results of operations of the Company.
14. Subsequent Events
On February 1, 1999, the Company filed a Registration Statement on Form
S-8 to register 400,000 shares of stock available to participants of the
1991 Stock Option Plan.
On November 12, 1999, the Company filed a Form 8-K to register changes in
Registrant's Certifying Accountant.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Forward-looking Statement Disclosure
This report contains certain forward-looking statements within the meaning of
the Private Litigation Reform Act of 1995. Forward-looking statements are
statements other than historical information or statements of current condition.
Words such as experts, anticipates, intends, plans, believes, seeks or
estimates, or variations of such words, and similar expressions are also
intended to identify forward-looking statements. Examples of these
forward-looking statements include statements concerning the effects of
competition on premiums and revenues, expectations regarding Year 2000 issues
and the Company's efforts to address them.
All statements, other than statements of historical facts, included or
incorporated by reference in this Form 10-Q which address activities, events or
developments which the Company expects or anticipates will or may occur in the
future, including statements regarding the Company's competitive position,
changes in business strategy or plans, the availability and price of
reinsurance, the Company's ability to pass on price increases, plans to install
the Bond-Pro(R) program in independent insurance agencies, the impact of
insurance laws and regulation, the availability of financing, reliance on-key
management personnel, ability to manage growth, the Company's expectations
regarding the adequacy of current financing arrangements, product demand and
market growth, and other statements regarding future plans and strategies,
anticipated events or trends similar expressions concerning matters that are not
historical facts are forward-looking statements. These statements are based on
certain assumptions and analysis made by the Company in light of its experience
and its perception of historical trends, current conditions and expected future
developments as well as factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties which could cause actual results to differ significantly and
materially from past results and from the Company's expectations. The Company
assumes no obligation to update publicly any such forward-looking statements,
whether as a result of new information, future events or otherwise.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCE
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 $15,900,000
at September 30, 1999. Therefore, based upon statutory guidelines, the Company
could increase earned premiums by approximately $7,500,000 in 1999 in addition
to the amount earned in 1998. The primary sources of liquidity for the Company
are funds generated from surety premiums, investment income, and proceeds from
sales and maturities of portfolio investments. The principal expenditures are
payment of losses and loss adjustment expenses, insurance operating expenses,
and commissions.
At September 30, 1999, the Company's $18,469,502 of total assets
calculated based on generally accepted accounting principles were distributed
primarily as follows: 41 percent in cash and investments (including accrued
investment income), 41 percent in receivables and reinsurance recoverables, 16
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 operating activities was $306,581 and $151,279 for the
nine months ended September 30, 1999 and 1998, respectively. Net cash used in
providing operating activities during 1999 is primarily attributed to net policy
acquisition costs. Net cash used in operating activities during 1998 is not
attributable to specific items and represents the net effects of all operating
activities.
Net cash provided by investing activities was $791,572 and $1,599,940 for
the nine months ended September 30, 1999, and 1998, 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 OPERATION
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
During the nine months ended September 30, 1999, net premium income
totaled $7,069,468 representing a net increase of 31 percent from that of the
same period in 1998 ($5,410,023). The increase is attributed to the marketing
direction of the Company, which is to penetrate the direct market. During the
first nine months of 1999 as compared to the same period during 1998, direct
premiums earned increased $1,256,342 (21%); assumed premiums increased $594,032
(62%) and ceded premiums increased $190,928 (12%). CCS's reinsurance assumed
premiums increased as a result of quota share agreements whereby CCS assumes a
portion of the premiums written by agencies contracted to produce business using
Cumberland's Bond-Pro(R) issuance program. The increase in ceded premiums is
related to the volume of direct and assumed premiums based on their relationship
under the Company's reinsurance treaties.
Net investment income for the nine months ending September 30, 1999
decreased by $51,718 or 17%. The decrease results from the decline in interest
rates in 1999. The Company has maintained its cash balance in U.S. Treasury
money market funds to optimize its investment position. Net realized gains were
$15,918 and $142,800 for the periods ending September 30, 1999 and 1998,
respectively. Other income decreased by $193,110 or 15%. The decrease is
attributable to the Company's market focus of direct writings for CCS. As a
result, subsidiary company's earnings attributed to income earned in other
markets have decreased.
During the nine months ended September 30, 1999 and 1998, benefits and
claims expenses increased to $1,672,561 from $1,582,625. Incurred 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.
During the nine months ended September 30, 1999, the amortization of
deferred policy acquisition costs increase is attributed to the increase in
premiums written and earned. Amortization of deferred policy acquisition costs
represent commission incurred as they relate to premiums earned.
Operating expenses increased by $127,743 or 4% for the period ending
September 30, 1999 when compared to the same period in 1998. The increase is
primarily attributed to an increase in salary and travel expenses which are
directly related to Company growth.
The increase in interest expense in 1999 is attributed to the interest on
the note payable to affiliate of $1,000,000 executed in the fourth quarter of
1998.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
During the three months ended September 30, 1999, net premium income
totaled $2,640,212 representing an increase of 44 percent from that of the same
period in 1998 ($1,837,103). During the three months ending September 30,1999 as
compared to the same period during 1998, direct premiums increased $504,426
(23%); assumed premiums increased $100,258 (22%) and ceded premiums increased
$198,425 (25%). Assumed premium increased as a result of the quota share
agreements whereby CCS assumes a portion of the premiums written by agencies
contracted to produce business using Cumberland's Bond-Pro(R) issuance program.
Ceded premiums increase as the volume of direct premiums increase based on their
relationship under the Company's reinsurance treaties.
Net investment income for the three months ending September 30, 1999 as
compared to the same period during 1998 decreased $14,591. The decrease reflects
the decreasing interest rates on the bond and money market holdings of the
Company. Net realized gains during 1999 were $5,937 as compared to realized
capital losses of $27,518 for the same period during 1998. Other income
increased by $51,925 during the three months ending September 30, 1999 when
compared to 1998. The increase reflects subsidiary earnings from non-affiliated
entities.
During the three months ended September 30, 1999 and 1998, respectively,
benefits and claims expenses decreased to $87,187 or 12%. Incurred 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.
During the three months ended September 30, 1999, the amortization of
deferred policy acquisition costs increase represents commissions incurred as
they relate to premiums written. Commissions on written premiums are deferred
proportionally over the life of the contract which fluctuates based on the
contract size.
Operating expenses increased by $237,579 or 21% for the three months ended
September 30, 1999 when compared to the three months ended September 30, 1998.
The increase is attributed to premium taxes and salary expense.
The increase in interest expense in 1999 is attributed to the interest on
the note payable to affiliate of $1,000,000 executed in the fourth quarter of
1998.
<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 September 9, 1999.
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 5,261,788 4,329 230,877
George A. Chandler 5,261,788 4,329 230,877
Andrew J. Cohen 5,261,788 4,329 230,877
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 TECHLOGIES, INC.
Date: November 15, 1999 By: /s/ Joseph M. Williams
------------------------------- ----------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principle Executive Officer)
Date: November 15, 1999 By: /s/ Carol S. Black
------------------------------- ------------------------
Carol S. Black
Secretary and Chief Financial Officer
(Principle Accounting and Financial
Officer)
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