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
For the fiscal year ended December 31, 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.
(Exact name of registrant as specified in its charter
Florida 59-3094503
-------------------------------- -------------------------
--
(State or other jurisdiction of (I.R.S Employer
incorporation) Identification No.)
4311 West Waters Avenue, Suite 501 33614
Tampa, Florida
------------------------------- -------------------------
-
(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 The NASDAQ Stock Market
-------------------- ----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
------------------------------------------------
(Title of Class)<PAGE>
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
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. [X]
$2,845,112
-----------------------------------------------------------------
Aggregate market value of voting stock (Common Stock) held by
nonaffiliates of the Registrant as of March 19, 1999
5,447,966 shares of Common Stock $.001 par value
-----------------------------------------------------------------
Number of shares of Common Stock outstanding as of March 27, 1998
Documents incorporated by reference: NONE<PAGE>
PART I
Item 1. Business
------- --------
General
-------
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, Inc. ( 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 . 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 .
CCS is a property and casualty insurance company that was
incorporated in Texas on May 4, 1988 and redomesticated in
Florida, on September 2, 1994. CCS is licensed in twenty-six
states, the District of Columbia, and Guam. It holds a
certificate of authority from the United States Department of the
Treasury, which qualifies CCS as an acceptable surety on Federal
bonds. CCS is rated B+ (Very Good) by A.M. Best.<PAGE>
CCS currently has applications for admission pending in
various states. Most of these states have a lengthy applications
process in which the admission 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
if may take to approve an application. All applications are
updated as new information becomes available and CCS is waiting
for inquiries or actions by these pending states. Those 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 the applications for admission will be submitted
accordingly. CCS is currently attempting to obtain additional
state licenses in order to spread its loss geographically and to
increase its sales of direct surety and insurance products.
Management believes that CCS can function profitability selling
direct surety and insurance products in the states in which it is
currently licensed.
SSI, a Florida corporation, formed in August 1988, SG, a
Georgia corporation, and SA, a South Carolina corporation
purchased by Cumberland in February and July 1995, respectively,
are specialized surety agencies which operate as independent
agencies. Each secures surety risks for small to medium size
contractors as an agent and for other agents as a broker. SG and
SA are also general lines insurance agencies. When acting as an
agent, SSI, SG and SA receive a commission from the various
insurance companies it represents, one of which is CCS. Agency
commissions are based upon a percentage of premiums paid by the
consumer. The commissions paid by CCS to SSI, SG and SA range
from 15 to 40 percent.
In addition, SSI generates additional revenues through a
joint partnering agreement with St. Paul, Fire and Marine Group,
f/k/a United States Fidelity and Guaranty Company ( St. Paul ) to
pursue small to medium size contract and commercial surety
business on a country wide basis (the St. Paul Agreement ). The
St. Paul Agreement allows SSI to solicit surety business in
states in which CCS is not licensed, thereby significantly
increasing the Company s geographic spread of risk. It also
facilitates St. Paul agents access to the Company s Bond-Pro
issuance system. CCS participates in the St. Paul Agreement
underwriting risk through a retrocessional treaty.
Qualex, a Florida corporation, formed in November 1994,
provides claim and contracting consulting services to the surety
and construction industries. CCS purchases claim consulting
services from Qualex on a contract basis.
The percentages of gross revenue generated by the Company s
subsidiaries for the year ended December 31, 1998 are as follows:<PAGE>
Subsidiary Revenue Percentage
-------------------- --------------------
CCS 74%
SSI 9%
Qualex 8%
SA 5%
SG 4%
--------------------
100%
====================
The term the Company unless the context otherwise
requires, refers to Cumberland Technologies, Inc. and its
subsidiaries. The principal executive offices of the Company are
located at 4311 West Waters Avenue, Suite 501, Tampa, Florida
33614. The Company s telephone number is (813) 885-2112, its
facsimile number is (813) 885-6734 and its web site is
www.cumberlandtech.com.
Surety Products
---------------
CCS underwrites a wide variety of surety bonds for small to
medium size surety accounts. CCS also assumes underwriting risk
from other surety companies under various reinsurance
arrangements. Contract surety 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. CCS s typical bond is less than $500,000 with
aggregate ongoing work of $1 million. These bonds are marketed
through independent insurance agencies specializing in this type
of coverage to general contractors, sub-contractors and specialty
contractors.
Commercial surety bonds, which includes all non-contract
surety bonds, numerous types of license and permit, miscellaneous
and judicial bonds. The scope of each bond varies according to
the law, locality, the nature of the guarantee, and the parties
who have a right of action under the bond. The typical bond
penalty ranges from $5,000 to $25,000 and are usually written on
a volume basis.<PAGE>
Insurance Products
------------------
The Company s other liability insurance products include,
Registered Investment Advisors professional liability insurance
and Notary Public Errors and Omission liability insurance. Both
coverages are occurrence liability coverages, that insure against
specific liability risks. Under the Registered Investment
Advisors professional liability coverage, each endorsed account
is limited to a maximum liability coverage of $500,000. The
Notary Public Errors and Omissions liability coverage is written
with liability limits of $5,000 to $30,000 per policy.
On surety or insurance products sold directly by CCS,
exposure to loss would be the penal amount of the bond, less any
portion for which CCS has secured reinsurance. On reinsurance,
CCS s exposure to loss would be limited by the amount of
reinsurance provided. Reinsurance does not relieve an insurer of
its liability to the policy holder for the full amount of the
policy, however, the reinsurer is obligated to the insurer for
the portion assumed by the reinsurer.
Technology Product
------------------
On October 1, 1996, CTI launched the development of a surety
bond issuance system Bond-Pro . The Company received its
federal copyright registration #TX4-542-729 effective March 29,
1997. The Company sees the implementation of the system as an
integral part of our unique service affording us the ability to
capture a share of the marketplace. This program encompasses the
required functions an agency needs to run a full scale bond desk
when implemented inside the agency structure. The software is
designed to reduce the labor required to provide improved
service. The efficiencies gained in using the Bond-Pro system
enhances CCS s ability to increase premium and to develop
relationships which may not otherwise be possible due to
competition for this class of business. While a small percentage
of the industry offers issue and reporting systems for bonds, no
other provider offers a fully integrated, multi-carrier
production and processing system including management reporting.
Underwriting
------------
For the contract and commercial surety lines of business,
the Company s underwriting philosophy provides for an individual
analysis of the risk associated with each application, except for
specific categories of miscellaneous bonds. In underwriting
contract bonds, its approach focuses on the financial strength,
experience and operating capacity of the contractor. In
underwriting commercial surety, this approach focuses on the
credit history and financial resources of the applicant.<PAGE>
The Company maintains control of the contract and commercial
surety underwriting process through the use of authority limits
for each underwriter and committee underwriting of larger risks.
The Company may require collateral on contract bonds and
occasionally, on other types of bonds based upon an assessment of
the risk characteristics. The risk assessment includes
evaluation of the financial strength of the contractor, the
credit history of the contractor, work in progress and successful
work experience. Collateral can consist of irrevocable letters
of credit, certificates of deposit, cash, savings accounts,
publically traded securities and trustees or mortgages on real
property. Both corporate and personal indemnification may be
required in order to mitigate liability risk. The Company also
targets various products in the commercial surety market which
are characterized by relatively low risk exposure in small penal
amounts. The underwriting criteria, including the extent of
bonding authority granted to independent agents, will vary
depending on the class of business and the type of bond. For
example, relatively little underwriting information is typically
required of certain low exposure risk such as notary bonds.
Other liability insurance applications are individually
evaluated and the decision to write a particular risk is made by
the Company s underwriting department. The underwriting
department determines whether to write a particular risk after
evaluating a number of factors based upon detailed objective
underwriting standards relating to each class of business.
Reinsurance
-----------
The Company s insurance subsidiary, in the ordinary course
of business, cedes insurance to other insurance companies, to
limit its exposure to loss, provide greater diversification of
risk, and minimize aggregate exposures. Because the ceding of
insurance does not discharge the primary liability of the
original insurer, CCS places reinsurance with qualified carriers
after conducting a detailed review of the nature of the
obligation and a thorough assessment of the reinsurers credit
qualifications, claims settlement performance and capabilities.
The reinsurance coverage terms are tailored to the specific risk
characteristics of the underlining products of the company.<PAGE>
For contract and commercial surety business, CCS entered
into an excess of loss reinsurance agreement with Transatlantic
Reinsurance Company (Transatlantic Treaty), which is rated A+
(Superior) by A.M. Best. Excess of loss reinsurance is a form of
reinsurance, which indemnifies the ceding insurer up to an agreed
amount against all or a portion of the amount of loss in excess
of a specified retention. Under the Transatlantic Treaty, CCS
retains risk no greater than 5% of $2,700,000 or $135,000 per
principal. Under the Transatlantic Treaty, the reinsurer
automatically assumes the risk of losses and all contract surety
bonds written and classified as surety in CCS s statutory annual
statement and all miscellaneous surety bonds with penal sums over
$100,000 written and classified as surety in CCS s statutory
annual statement.
For its liability line of registered investment advisor
insurance, the Company has reduced its exposure on any one risk,
through the purchase of a quota share agreement with Dorinco
Reinsurance (Dorinco Treaty) which is rated A (Excellent) by A.M.
Best. Under the Dorinco Treaty, CCS cedes 50% of its liability
on all registered investment advisor policies.
On a limited basis, CCS also assumes and cedes reinsurance
through facultative and treaty agreements from other sureties.
The loss of one of these customers or resources would not have a
material impact on the operations of the company. From October
1991 through May 1, 1997, CCS participated in a pooling agreement
with various sureties, which specialized in writing contract
surety. Effective to April 1, 1993, CCS assumed 25% of the
business underwritten by the pooling agreement; 12.5% effective
April 1, 1995 and 10% effective April 1, 1996. Effective April
1997, CCS elected not to participate in future business under the
pooling agreement.
Reserves
--------
Reserves for losses and loss adjustment expenses are
established based upon reported claims and historical industry
loss development. The amount of loss reserves for reported
claims is based on a case by case evaluation of the claim.
Historical industry data is reviewed and consideration is given
to the anticipated impact of various factors such as legal
developments, economic conditions, and the effects of inflation.
Amounts are adjusted periodically to reflect these factors.<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.
During 1998, there were no material changes in the mix of
business or types of risk assumed. However, the Company was
effective in spreading the geographic mix of the business.
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. CCS does not
discount its loss reserves for financial reporting purposes.
Environmental Claims
--------------------
The Company bonds several accounts that have incidental
environmental exposure, with respect to which the Company
provides limited contract bonding programs. In the commercial
surety market, the Company provides bonds to corporations that
are in the business of mining various minerals, establishing
mitigation banks, or operating environmental facilities, and that
are obligated to post financial assurance bonds that guarantee
that property can be managed according to regulatory guidelines.
While no environmental responsibility is overtly provided by
commercial or contract bonds, some risk of environmental exposure
may exist if the surety were to assume certain rights of
ownership of the property in the completion of a defaulted
project or through salvage recovery.
To date, the Company has not received any environmental
claim notices, nor is management aware of any potential
environmental claims.
Investments
-----------
Insurance company investment practices must comply with
insurance laws and regulations. Generally, insurance laws and
regulations prescribe the nature and quality of, and set limits
on, various types of investments, which may be made by CCS.<PAGE>
CCS s investment portfolios, generally are managed to
maximize any tax advantages to the extent available while
minimizing credit risk with investments concentrated in high
quality, fixed income securities. CCS s portfolios are managed to
provide diversification by limiting exposures to any one issue or
issuer and to provide liquidity by investing in the public
securities markets. Portfolios are structured to support CCS s
operations and in consideration of the expected duration of
liabilities and short-term cash needs.
An Investment Committee of CCS s Board of Directors
establishes investment policy and oversees the management of the
portfolio.
Marketing
---------
The Company principally markets its products in twenty-six
states, the District of Columbia and Guam in which it is licensed
and indirectly in all other states through its joint partnering
agreement with St. Paul. Its products are marketed primarily
through SSI, SG, SA and independent agents and producers,
including multi-line agents and brokers that specialize as surety
specialists, many of whom are members of the National Association
of Surety Bond Producers. On occasion, CCS will write business
directly with the customer, but does not actively seek such
business. The Company uses specialized general agencies to
market its other liability insurance products.
Competition
-----------
The insurance industry is a highly competitive industry.
There are numerous firms, particularly in the specialty surety
markets, which compete for a limited volume of business.
Competition is based upon price, service, products offered, and
financial strength of the insurance company. There are a number
of companies in the industry, which offer products similar to the
Company s.
The Company competes in the small to medium size contract
and commercial surety bond markets. Primary competitors include
large multi-line companies, as well as small regional companies
that specialize in the surety market. While the surety industry
has experienced slow premium growth, competition has increased as
a result of 10 years of profitable underwriting experience. This
competition has typically manifested itself through reduced
premium rates, and greater tolerance for relaxation of
underwriting standards. Management believes such competition
will continue.<PAGE>
The Company, while competitive in pricing and commission,
believes that the availability of its proprietary Bond-Pro
surety issuance system, specialty underwriting, managerial
experience and service are its primary competitive factors in the
industry. To this end, the Company believes that its technology
and specialization in underwriting niche surety markets will
enable it to continue to compete effectively, even when
challenged by the larger standard market companies.
Regulation
----------
The Company s subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they
transact business under statutes, which delegate regulatory,
supervisory, and administrative powers to State insurance
regulators. In general, an insurer s state of domicile, has
principal responsibility for such regulation. It is designed
generally to protect policy holders rather than investors and
relates to matters such as the standards of solvency which must
be maintained; the licensing of insurers and their agents;
examination of the affairs of insurance companies, including
periodic financial and market conduct examinations; the filing of
annual and other reports, prepared on a statutory basis, on the
financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums
and losses; and requirements regarding numerous other matters.
Licensed or admitted insurers generally must file with the
insurance regulators of such states, or have filed on its behalf,
the premium rates and bond and policy forms used within each
state. In some states, approval of such rates and forms must be
received from the insurance regulators in advance of their use.
CCS is domiciled in Florida and licensed in 26 states, the
District of Columbia and Guam. SSI, SG and SA are licensed in
Florida, Georgia and South Carolina respectfully. CCS is also
regulated by the United States Department of the Treasury as an
acceptable surety for Federal bonds.
Holding company laws impose standards on certain
transactions between registered insurers and their affiliates,
which include, among other things, that the terms of the
transactions be fair and reasonable and that the books, accounts
and records of each party be maintained so as to clearly and
accurately disclose the precise nature and details of the
transactions. Holding company laws also generally require that
any person or entity desiring to acquire more than a specified
percentage (commonly 10%) of the Company s outstanding voting
securities, is required first to obtain approval of the
applicable state s insurance regulators.<PAGE>
The National Association of Insurance Commissioners ( NAIC )
has adopted a risk-based capital ( RBC ) model law for property
and casualty companies. The RBC model law is intended to provide
standards for calculating a variable regulatory capital
requirement related to a company s current operations and its
risk exposures (asset risk, underwriting risk, credit risk and
off balance sheet risk). These standards are intended to serve
as a diagnostic solvency tool for regulators that establishes
uniform capital levels and specific authority levels for
regulatory interventions when an insurer falls below minimum
capital levels. The model laws specifies four distinct action
level at which a regulator can intervene with increasing degrees
of authority over a domestic insurer as its financial conditions
deteriorates. These RBC levels are based on the percentage of an
insurers surplus to its calculated RBC. The company s RBC is
required to be disclosed in its statutory annual statement. The
RBC is not intended to be used as a rating or ranking tool nor is
to be used in premium rate making or approval. The Company has
calculated its RBC requirements as of December 31, 1998 and found
that it exceeded the highest level of capital requirements.
Controlling Shareholders
------------------------
Francis Williams, and the KC (collectively Majority
Shareholder ) owns 78% of the outstanding ordinary shares of the
company and collectively control the policies and affairs of the
Company. Circumstances may incur in which the interests of the
Majority Shareholder of the Company could be in conflict with the
interest of the other holders of the common stock. In addition,
the Majority Shareholders may have an interest in pursuing
acquisitions, divestitures or other transaction that in their
judgement, could enhance their equity investment, even though
such transactions might involve risk to the other holders of the
common stock.
Employees
---------
On December 31, 1998, the Company had 37 employees. All are
employed on a full-time basis. None of the Company s employees
are union members or subject to collective bargaining agreements.
The Company believes that it enjoys a favorable relationship with
its employees.<PAGE>
Forward-looking Statements
--------------------------
All statements, other than statements of historical facts,
included or incorporated by reference in this Form 10-K 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 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 analyzes 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, including the risk factors discussed in
this Form 10-K, Item 1 and other factors, many of which are
beyond the control of the Company, consequently, all of the
forward-looking statements made in this Form 10-K are qualified
by these cautionary statements and there can be no assurance that
the actual results or developments anticipated by the Company
will be realized or, even if substantially realized that they
will have the expected consequences to or effects on the Company
or its business or operations. The Company assumes no obligation
to update publicly any such forward-looking statements, whether
as a result of new information, future events or otherwise.
Item 2. Properties
------- ----------
The Company s operating subsidiaries rent or lease office
space in the cities in which they are located. CCS and Qualex
lease office space in Tampa, Florida from a company owned by
Francis Williams, the Chairman of the Board of the Company, at a
monthly rate of $7,254, pursuant to a lease that was executed
March 1, 1997 and is effective through December 31, 2000.
Management considers the rented and leased office facilities
of its subsidiaries adequate for the current and anticipated
future level of operations.<PAGE>
Item 3. Legal Proceedings
------- -----------------
The Company 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 the
Company.<PAGE>
Item 4. Submission of Matters to a Vote of Security
Holders
------- --------------------------------------------------
--
None
Executive Officers of the Registrant
------------------------------------
All of the following persons are regarded as executive
officers because of their responsibilities and duties as elected
officers of the Company's subsidiaries. Other than Francis M.
Williams and Joseph M. Williams (See Item 10), there are no
family relationships between any of Company s executive officers
and directors, and there are no arrangements or understandings
between any of these officers and any other person pursuant to
which the officer was selected as an officer.
Position Presently
Name Held Period of Service
------------------- ------------------- -------------------
Edward J. Edenfield President CTI-05/1996 to date
IV President CCS-05/1996 to date
President SSI-06/1997 to date
President SG- 01/1998 to date
President SA- 01/1998 to date
Carol S. Black Secretary CTI-06/1995 to date
Secretary/Treasurer CCS-06/1995 to date
Secretary SSI-08/1995 to date
Secretary/Treasurer Qualex-08/1995 to
date
Secretary SG-08/1995 to date
Secretary SA-08/1995 to date
Edward A. Mackowiak President Qualex-11/1994 to
date
Sam H. Newberry Vice President SG-01/1998 to date<PAGE>
PART II
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 SmallCap Market. High and Low bid prices
were set forth in Quotation Market Sheets published by Nasdaq.
The high and low bid prices for 1998 and 1997 were as follows:
Bid Information
-----------------------------
1998 1997
-------------- ---------------
High Low High Low
------- -------------- -------
First Quarter 2 1/2 2 1/2 2 1/2 1 5/8
Second Quarter 2 3/4 2 5/16 4 2
Third Quarter 3 1/8 3 1/8 3 5/8 2 19/32
Fourth Quarter 2 1 5/8 3 1/2 2 1/4
As of March 12, 1998, there were 903 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.<PAGE>
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
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 CCS obtains prior approval from
the insurance commissioner. CCS does not anticipate paying any
dividends on CCS Common Stock in the near future.
Item 6. Selected Financial Data
------- -----------------------
<TABLE>
<CAPTION>
Statement of Operations Data:
Year Ended December 31
-------------------------------------------
1998 1997 1996 1995 1994
-------- ---------------- -------- --------
(In Thousands - except per share data)
<S> <C> <C> <C> <C> <C>
Operating data:
Net premium income $ 7,534 $ 5,684 $ 3,808 $ 5,068 $ 4,957
Commission income . . . . . . . 710 860 1,386 774 -
Other income . . . . . . . . . 827 616 653 425 -
Net investment income . . . . . 377 408 404 397 284
Net realized investment gain
(losses) . . . . . . . . . (437) 202 118 124 (124)
Benefits and expenses . . . . . 9,332 7,599 6,952 7,016 6,604
Income (loss) before income
taxes . . . . . . . . . . . . (321) 171 (583) (228) (1,209)
Net income (loss) . . . . . . . (321) 171 (583) (228) (1,073)
Pro forma net income (loss) per
share (1) . . . . . . . . . . .$ (.06)$ .03 $ (.14)$ (.06)$ (.27)
</TABLE>
(1) Pro forma net income (loss) per share (unaudited) for
1995 and 1994 has been calculated based on the
4,039,780 shares of Cumberland Common Stock that were
outstanding after the Distribution. The 1998, 1997 and<PAGE>
1996 net income (loss) per share amounts have been
computed based on the actual weighted average number of
shares outstanding during the respective years.<PAGE>
<TABLE>
<CAPTION>
Balance Sheet Data:
Year Ended December 31
-------------------------------------------
1998 1997 1996 1995 1994
-------- ---------------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Investments . . . . . . . . . .$ 3,987 $ 6,469 $ 6,110 $ 6,303 $ 5,852
Cash and cash equivalents . . . 4,202 1,804 669 1,236 1,701
Accounts receivable . . . . . . 2,782 2,210 925 550 2,540
Reinsurance recoverables . . . 2,306 2,017 1,590 1,697 1,749
Deferred policy acquisition
costs . . . . . . . . . . . . 1,246 813 635 435 581
Intangibles . . . . . . . . . . 1,456 1,681 1,957 2,163 134
Total assets . . . . . . . . . 16,345 15,321 12,372 12,709 12,834
Policy liabilities and
accruals:
Unearned premiums . . . . . . 3,750 2,629 1,862 1,182 1,631
Losses and LAE . . . . . . . 3,220 2,550 1,992 2,352 3,138
Ceded reinsurance and accounts
payable . . . . . . . . . . 1,695 2,714 1,172 - -
Term notes/surplus debentures,
including accrued interest 1,000 0 0 4,798 4,343
Other long-term debt . . . . . 1,331 1,419 1,533 - -
Total liabilities . . . . . . . 10,996 9,312 6,559 11,419 11,518
Total stockholders' equity . . 5,349 6,009 5,814 1,290 1,316
/TABLE
<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
--------------------------------------------------
1998 1997 1996 1998 1997
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premium income . . $ 7,534 $ 5,684 $ 3,808 32.5% 49.3 %
Net investment income 377 408 404 (7.6%) 1.0 %
Net realized investment
gains (losses) . . . (437) 202 118 (316.3%) 71.2 %
Other revenues . . . . 1,537 1,476 2,039 4.2% (27.6)%
Losses and loss
adjustment expenses 2,648 1,792 1,671 47.8% 7.2 %
Amortization of deferred
acquisition costs . . 2,252 1,779 1,532 15.4% 16.1%
General expenses and
taxes . . . . . . . . 4,432 4,028 3,749 10.0% 7.4%
Income (loss) before
income taxes . . . . (321) 171 (583) - 70.8 %
Net Income (loss) . . . (321) 171 (583) - 70.8 %
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31,
1997
-----------------------------------------------------------------
--
Written direct and assumed premiums reached a record
$10,930,000 during 1998. Overall written premiums, net of ceded<PAGE>
premium increased by $2,340,624 or 37.5%. Earned premium growth
increased by 32.5% to $7,534,000 for 1998 as compared to
$5,684,000 for 1997. The increase in earned premiums resulted
from CCS s continued growth in the direct surety bond market.<PAGE>
During 1998, premiums written by CCS increased as a result
of the marketing direction of the Company, which is to penetrate
the direct market while decreasing the volume of reinsurance
premiums assumed through Pooling Agreements. CCS s reinsurance
assumed premium is 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 issuance
program. The increase in ceded premiums is correlated to the
direct premium written and the association to excess of loss
treaties on these premiums. The following table reflects the
written premium activity, net of reinsurance ceded, for 1998 and
1997.
Written Premiums
--------------------------------------------
1998 1997 % Change
-------------- -------------- --------------
Direct . . . $ 9,451,746 $ 6,797,136 39.1%
Assumed . . . 1,478,109 1,189,689 24.2%
Ceded . . . . (2,354,970) (1,752,564) (34.4%)
-------------- --------------
Total . . . . $ 8,574,885 $ 6,234,261 37.5%
============== ==============
During the year ended December 31, 1998 and 1997, investment
income was $377,218 and $408,050, respectively. Realized net
losses and gains for the years ended December 31, 1998 and 1997
were ($437,565) and $201,863, respectively. CCS wrote down their
investment in certain equity securities during the 4th quarter of
1998 as management determined the decline in value to be other
than temporary. As a result, CCS recorded a loss of $580,360
which is offset by net capital gains of $142,795.
Other revenue consists primarily of commissions earned by
subsidiary agencies and fee revenue earned by a subsidiary claims
consulting group. The increase in other revenue for the year
ended December 31, 1998 of approximately $61,000 or 4% is related
to revenues earned through the Company s claim consulting group.
For the year ended December 31, 1997, revenues decreased to
$1,475,990 from $2,039,331 or 28 percent. The decrease of
approximately $563,000 is attributable to the transfer of direct
writings by subsidiary agencies for other carriers in 1996 to
CCS in 1997.<PAGE>
Losses and loss adjustment expenses increased to $2,648,074
from $1,792,117 for the year ended December 31, 1998 and 1997,
respectively. The increase of $855,957 or 48% is attributed to
an increase of $327,956 or 31% in direct claims incurred and
$528,001 or 71% in assumed claims incurred. Assumed claims on
the expired pooling agreements were negatively impacted by
increased severe losses. Cumberland share of the 1998 incurred
losses under the pooling agreements was $1,007,502. Management
anticipates a decline in 1999 for claims attributed to the
pooling agreements. The following tables reflects the 1998
activity as it pertains to earned premiums and incurred claims:
Premiums Claims
Earned Incurred Ratio
-------------- -------------- --------------
Direct net . $ 6,437,429 $ 1,378,722 21.4%
Assumed, net 1,066,907 230,120 21.6%
Assumed
(pooling), net (29,348) (1,039,232) -
-------------- --------------
Total . . . . $ 7,533,684 $ 2,648,074 35.1%
============== ==============
During the year ended December 31, 1998 the net amortization
of deferred policy acquisitions costs increased to $2,252,195
from $1,778,808 for the year ended December 31, 1997. The
increase is attributed to the increase in earned premiums.
During the year ended December 31, 1998, operating expenses
and taxes, licenses and fees (excluding income taxes) increased
to $4,313,278 from $3,903,476 in 1997. The increase of
approximately $410,000 or 10% is a result of increased salary
expense including bonuses, payroll taxes and employee benefits of
$180,000 and increased taxes, licenses and fees of $207,000. The
increase in salary and related expenses is the cost of additional
personnel consistent with the Company growth while the increase
in taxes, licenses and fees expenses is attributed to increased
premiums written.
Interest expense is interest paid to the Surety Group and
Surety Associates on notes due to agencies the Company purchased
in 1995.
Due to tax loss carryforwards, the Company did not incur
income tax expense on a consolidated basis for the years ending
December 31, 1998, 1997 and 1996, respectively.<PAGE>
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
-----------------------------------------------------------------
--
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
--------------------------------------------------
1997 1996 1995 1997 1996
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premium income . . $ 5,684 $ 3,808 $ 5,068 $ 49.3 % (24.9)%
Net investment income 408 404 397 1.0 % 1.8 %
Net realized gains
(losses) . . . . . . . 202 118 124 71.2 % (4.8)%
Other revenues . . . . 1,476 2,039 1,198 (27.6)% 70.1 %
Benefits and expenses 7,599 6,952 7,016 9.3 % (.9)%
Income (loss) before
income taxes . . . . 171 (583) (228) 70.8 % (155.7)%
Net Income (loss) . . . 171 (583) (228) 70.8 % (157.7)%
</TABLE>
During the year ended December 31, 1997, net earned premium
income increased by 49 percent to $5,684,000 from $3,808,000.
Direct premiums earned from nonaffiliates were $5,836,655 and
$1,114,377 for 1997 and 1996, respectively, representing an
increase of $4,722,278 or 424 percent.
Net reinsurance premiums earned through the Pooling
Agreements were $1,166,025 and $2,693,418 for 1997 and 1996,
respectively, representing a decrease of $1,527,393, or 57
percent.
During 1997, direct premiums written by CCS increased while
assumed premiums decreased as a result of the marketing direction
of the Company, which is to penetrate the direct market while
decreasing the volume of reinsurance premiums assumed through
Pooling Agreements. The following table reflects the written<PAGE>
premium activity, net of reinsurance ceded, for 1997 and 1996.<PAGE>
Written Premiums
--------------------------------------------
1997 1996 % Change
-------------- -------------- --------------
Direct . . . . $ 6,797,136$ 2,025,796 236%
Assumed . . . 1,189,689 2,890,050 (59%)
Ceded . . . . (1,752,564) (547,801) (320%)
-------------- --------------
Total . . . . $ 6,234,261$ 4,368,046 43%
============== ==============
During the year ended December 31, 1997 and 1996, investment
income before capital gains was $408,050 and $403,919,
respectively. Realized gains, net of realized losses, for the
year ended December 31, 1997 and 1996 were $201,863 and $117,824,
respectively. Investment income remained consistent for 1997 as
compared to 1996.
Other revenues for the year ended December 31, 1997
decreased to $1,475,990 from $2,039,331 or 28 percent. Other
revenues consist primarily of commissions earned by subsidiary
agencies. The decrease of approximately $563,000 is attributable
to the transfer of direct writings by subsidiary agencies for
other carriers in 1996 to CCS in 1997.
During the year ended December 31, 1997, losses and loss
adjustment expenses increased to $1,792,117 from $1,670,640 for
the year ended December 31, 1996. The increase in benefit and
claims expenses of $121,477 is attributed to the effects of
reserve increases on direct business of $928,009 which is offset
by a decrease in claim reserves on assumed business of $806,532.
Loss ratios on direct and assumed premiums earned during 1997 are
40% and 63.6%, respectively.
During the year ended December 31, 1997, the net
amortization of deferred policy acquisitions costs increased to
$1,778,808 from $1,532,355 for the year ended December 31, 1996.
The increase is attributable to the increase in earned premiums.
During the year ended December 31, 1997, operating expenses
increased to $3,903,476 from $3,255,805 in 1996. The increase is
due to expenses incurred in the continuing research and
development of Cumberland's Bond Program and additional personnel
employed to direct market its insurance products.<PAGE>
Net interest expense decreased to $124,928 in 1997 from
$493,337 in 1996 due to the conversion on the term note to equity
on October 1, 1996. Interest expense on notes due to the former
owner's in connection with agencies purchased in 1995 were
$124,928 and $121,271 for the years ending December 31, 1997 and
1996, respectively. The Company incurred interest expense during
1996 of $372,006 on the term note prior to the 1996 conversion.
Due to tax loss carryforwards, the Company did not incur
income tax expense on a consolidated basis for the years ending
December 31, 1997 and 1996, respectively.
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 net
premiums up to an amount equal to three times its statutory
surplus, or approximately $14,500,000 at December 31, 1998.
Therefore, based upon statutory guidelines, the Company could
increase earned premiums by approximately $7,000,000 in 1999 in
addition to the amount earned in 1998.
The primary sources of liquidity for the Company are funds
generated from commissions, 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, 1998, the Company s $16,545,051 of total
assets calculated based on generally accepted accounting
principles were distributed primarily as follows: 50 percent in
cash and investments (including accrued investment income), 30
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.<PAGE>
Net cash (used in) provided by operating activities was
$(193,734), $1,925,903 and $(16,958) for the years ended
December 31, 1998, 1997 and 1996, respectively. In 1998, the
decrease in cash provided by operating activities is primarily
attributed to an increase in receivables of $1,047,974 and income
taxes recoverable of $120,000. In 1997, the cash provided by
operating activities was primarily attributable to the increase
in ceded reinsurance payable and pooling liabilities and
accruals. In 1996, the cash used in operating activities was
primarily attributable to payments of claims and reinsurance,
which was offset in part by a decrease in accounts receivable.
Net cash (used in) provided by investing activities was
$1,718,716, $(120,560) and $253,876 for the years ended December
31, 1998, 1997 and 1996, respectively. Investing activities
consist of purchases and sales of investments and advances to and
from KC.
Net cash (used in) provided by financing activities was
$873,839, $(670,889) and $(803,772) for the years ended December
31, 1998, 1997 and 1996, respectively. Financing activities
consist of purchases of treasury stock, long-term and short-term
borrowings and repayment on borrowings during 1998, 1997 and
1996.
Year 2000 Issue
---------------
The Company has employed consultants in its efforts 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) with $14,000 having been expended through December
31, 1998. All costs (except capital) have been and will be
expensed as incurred and will be funded from the normal operating
cash flows.
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. Bond-Pro is a
Windows 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. <PAGE>
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.
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 of 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 1998, 1997 and 1996 to the gross amounts
reported in Cumberland s balance sheets:<PAGE>
December 31
1998 1997 1996
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at beginning $ 1,392,931 $ 594,922 $ 1,052,547
of year . . . . . . . . . . ----------- ----------- ----------
Provision for losses and LAE
for claims occurring in the
current year, net of
reinsurance . . . . . . . . 2,331,074 1,743,117 1,008,640
Increase (decrease) in
estimated losses and LAE for
claims occurring in prior
years, net of reinsurance 317,000 49,000 662,000
----------- ----------- ----------
Incurred losses during the
current year, net of
reinsurance . . . . . . . . 2,648,074 1,792,117 1,670,640
Losses and LAE payments for
claims, net of reinsurance,
occurring during:
The current year . . . . 557,997 553,629 422,544
Prior years . . . . . . 1,802,428 440,479 1,705,721
----------- ----------- ----------
2,360,425 994,108 2,128,265
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at end of year . . 1,680,580 1,392,931 594,922
Reinsurance recoverables on
unpaid losses at end of
year . . . . . . . . . . . 1,539,877 1,157,369 1,396,874
----------- ----------- ----------
Liability for losses and LAE,
gross of reinsurance
recoverables on unpaid $ 3,220,457 $ 2,550,300 $ 1,991,796
losses, at end of year . . =========== =========== ==========<PAGE>
Cumberland experienced deficiencies of $317,000, $49,000 and
$662,000 for losses and loss adjustment expenses in 1998, 1997
and 1996, respectively. The deficiency in 1998 and 1997
principally resulted from settling case basis reserves
established in prior years for amounts that were more than
expected. 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, 1998 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) $ 1,680,580
Reinsurance recoverables on unpaid losses and
LAE . . . . . . . . . . . . . . . . . . 1,539,877
--------------
Liability for losses and LAE, as reported in
the accompanying GAAP basis financial
statements . . . . . . . . . . . . . . $ 3,220,457
==============<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 1991
through 1998 (in thousands).
<TABLE>
<CAPTION>
1991 1992 1993 1994
------------- -------------------------- -------------
<S> <C> <C> <C> <C>
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,663 $ 2,426 $ 1,709 $ 1,625
Liability re-estimated
as of:
One year later . . . 1,273 2,239 3,815 1,384
Two years later . . 1,200 2,546 2,579 1,420
Three years later . 1,316 2,263 2,750 1,631
Four years later . . 1,443 2,418 2,851 1,726
Five years later . . 1,234 2,408 3,176 -
Six years later . . 1,199 2,970 - -
Seven years later . 1,199 - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ 464 $ (544) $ (1,467) $ (101)
============= ========================== =============
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997 1998
------------- -------------------------- -------------
<S> <C> <C> <C> <C>
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,053 $ 595 $ 1,393 $ 1,680 <PAGE>
Liability re-estimated
as of:
One year later . . . 1,716 644 1,710 -
Two years later . . 1,815 1,013 - -
Three years later . 2,049 - - -
Four years later . . - - - -
Five years later . . - - - -
Six years later . . - - - -
Seven years later . - - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (966) $ (418)$ (317) $ -
============= ========================== =============
/TABLE
<PAGE>
<TABLE>
<CAPTION>
1991 1992 1993 1994
------------- -------------------------- -------------
<S> <C> <C> <C> <C>
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 806 $ 1,151 $ 765 $ 1,643
============= ========================== =============
Two years later . . $ 884 $ 1,834 $ 1,058 $ 2,316
============= ========================== =============
Three years later . $ 1,095 $ 2,088 $ 2,868 $ 2,164
============= ========================== =============
Four years later . . $ 1,254 $ 1,957 $ 3,717 $ 2,875
============= ========================== =============
Five years later . . $ 1,260 $ 3,533 $ 4,442 $ -
============= ========================== =============
Six years later . . $ 1,199 $ 3,840 $ - $ -
============= ========================== =============
Seven years later . $ 1,199 $ - $ - $ -
============= ========================== =============
</TABLE>
<TABLE>
<CAPTION>
1995 1996 1997 1998
------------- -------------------------- -------------
S> <C> <C> <C> <C
<PAGE>
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 1,334 563 1,802 -
============= ========================== =============
Two years later . . 2,186 1,631 - -
============= ========================== =============
Three years later . 2,997 - - -
============= ========================== =============
Four years later . . - - - -
============= ========================== =============
Five years later . . - - - -
============= ========================== =============
Six years later . . - - - -
============= ========================== =============
Seven years later . - - - -
============= ========================== =============
/TABLE
<PAGE>
Effect of Inflation
-------------------
Inflation has not had a material impact upon the Company s
operations for the last three years.
Item 7A. Quantitative and Qualitative Disclosures About Market
-------- Risk
-------------------------------------------------------
--
Interest Rate Sensitivity
-------------------------
The following table presents maturity principal cash flows
and relates weighted average interest rates by expected maturity
as of December 31, 1998:
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------
Fair
value
There- 12/31
1999 2000 2001 2002 2003 after Total /98
------- -------------- -------------- -------------- -------
(U.S. Equivalent in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
-------
Securities
available for
sale . . . . . 752 600 26 - 126 546 2,050 2,082
Average interest
rate . . . . . 6.1% 7.0% 5.6% - 5.8% - - -
Liabilities
-----------
Long-term, debt
including
current portion 49 183 1,184 184 70 661 2,331 2,331
Average interest
rate . . . . . 9.4% 9.2% 9.3% 8.9% 9.5% - - -
/TABLE
<PAGE>
The operations of the Company are subject to risk resulting
from interest rate fluctuations to the extent that there is a
difference between the amount of the Company s interest-earning
assets and the amount of interest-bearing liabilities that are
prepaid/withdrawn, mature or reprice in specified periods. The
principal objective of the Company s asset/liability management
activities is to provide maximum levels of net interest income
while maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Company.
Due to the limited nature and duration of claims, generally
one to two years, the Company maintains a portfolio that closely
parallel s the money market interest rate scenario.
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 57 Chairman of the Board
of Directors
Joseph M. Williams 42 President and Treasurer
George A. Chandler 69 Director
Andrew J. Cohen 45 Director
Edward J. Edenfield, IV 41 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.<PAGE>
Set forth below is information regarding the directors and
executive officers of Cumberland:
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. 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 of 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.
Prior to his involvement with Cumberland, Mr. Edenfield had
various management and senior management positions in the
insurance industry. Mr. Edenfield began his career in 1980
with Continental Insurance Company in their New York home
office. Within the last five years prior to Cumberland
Casualty & Surety Company, Mr. Edenfield has held the
position of Assistant Vice President in charge of surety at
Meadowbrook Insurance Group from August 1995 to May 1996;
Vice President in charge of underwriting at Universal Surety
of America from October 1994 to August 1995; Vice President
in charge of underwriting at American Bonding Company from
January 1992 to September 1994, and Assistant Secretary in
charge of treaty and facultative reinsurance from March 1992
to December 1992. Mr. Edenfield completed his bachelor's
degree in Business Administration with an emphasis in
Economics from Lycoming College. 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.
Andrew J. Cohen was elected as a Director to
Cumberland s Board effective February 24, 1997. Since June
of 1972, Mr. Cohen has been co-President of ABC Fabric of
Tampa, Inc. which is now the fourth largest private retail
fabric company in the United States. Mr. Cohen brings both
national marketing and corporate management experience to
Cumberland.<PAGE>
Beneficial Ownership Reporting Compliance
-----------------------------------------
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, 1997 all filing requirements applicable
to its officers, directors, and greater than 10 percent
beneficial owners were complied with.
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 each
of the three years ended December 31, 1998:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------- ---------------------
Name of Other All
Individual Annual Stock other
and Principal Year Salary Bonus Compensation Options Compensation
Position
<S> <C> <C> <C> <C> <C> <C>
Joseph M.
Williams
President and
Treasurer . . 1998 $95,000 $30,000 $ - $ - $ -
1997 $95,000 $30,000 $ - $ - $ -
1996 $95,000 $37,000 $ - $ - $ -
/TABLE
<PAGE>
Aggregate Option Exercises in 1998 and December 31, 1998 Option
Values
-----------------------------------------------------------------
--
The following table shows information concerning options
held by the officers shown in the Summary Compensation Table at
the end of 1998. No options were exercised by such persons in
1998.
Number of
Securities
Underlying Value of Unexercised
Unexercised Options in-the-Money
at Fiscal Year End Options at Fiscal
(#) Year End ($)(1)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
--------------------- ------------------- -----------------------
Joseph M. Williams 124,000/0 $248,000/0
(1) Represents the dollar value of the difference between
the value at December 31, 1998 and the option exercise
price of unexercised options at December 31, 1998.
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. Francis Williams
serves as an executive officer and director of Kimmins Corp. of
which Joseph Williams is also an executive officer.
Compensation of Directors
-------------------------
During the year ended December 31, 1998, 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.<PAGE>
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.
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,
1998 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
executive 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 . . . . 4,285,886(3) 78.7%
Joseph M. Williams 358,783(4) 6.6%
George A. Chandler 2,669(5) *
Andrew J. Cohen . 42,590(6) .8%
Edward J.
Edenfield IV . . 12,000(7) .2%
Kimmins Corp. . . 1,723,290 31.6%
All directors and
executive
officers as a
group (five
persons) . . . . 4,701,928 86.3%
(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 2,338,517 shares owned by Mr. Francis
Williams; 1,059,306 shares allocated to Mr. Williams
based on his 61.5% 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. Mr. Williams owns 61.5% of the outstanding
common stock of Kimmins Corp. and is its Chairman and
Chief Executive Officer.<PAGE>
(4) Includes 8,800 shares owned by Mr. Joseph M. Williams;
options to acquire 124,000 shares of Cumberland Common
Stock; 219 shares held by the KC 401(K) Plan and ESOP
of which Mr. Williams is fully vested. Also includes
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; Mr. Williams disclaims
beneficial ownership of these shares.
(5) Includes 1,869 shares owned by Mr. George A. Chandler
and options to acquire 800 shares of Cumberland Common
Stock.
(6) Includes 72,540 shares owned by C&C Properties a
partnership in which Mr. Cohen has a 50% ownership,
6,320 shares held in trust for Mr. Cohen s minor
children.
(7) Includes options to acquire 12,000 shares of Cumberland
Common stock.
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
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. In
1992, the debenture due to KC from CCS was assigned to CTI.
Interest and principal payments are subject to approval by the
Florida Department of Insurance. 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. As of
December 31, 1998, no payments could be made under the terms of
the debenture.
CTI entered into a term note agreement with KC for the
outstanding amount of the surplus 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, had a 10 percent interest rate and was due on October 1,
2002.
Effective October 1, 1996, CTI issued 1,723,290 shares at
$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.
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<PAGE>
principal amount of the note or a portion thereof into common
stock at $3.00 per share subsequent to a six month anniversary
and prior to the close of business on the maturity date.<PAGE>
CCS writes surety bonds for KC and its affiliates. Revenues
attributable to transactions with KC and its affiliates were
$14,907, $1,738 and $2,873 for the years ended December 31, 1998,
1997 and 1996, respectively. Qualex performs consulting services
for KC and affiliates. Revenue attributable to transaction with
affiliates were $282,193, 310,396 and $338,478 for years ended
December 31, 1998, 1997 and 1996, respectively.<PAGE>
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, 1998
and 1997
- Consolidated statements of operations for each of
the three years in the period ended December 31,
1998
- Consolidated statements of stockholders equity
for each of the three years in the period ended
December 31, 1998
- Consolidated statements of cash flows for each of
the three years in the period ended December 31,
1998
- Notes to consolidated financial statements
2. Financial statement schedules
II - Condensed Financial Information of Registrant
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(i) - Articles of Incorporation
3(ii)- Bylaws
10 - Lease agreement with Cumberland Properties,
Inc.
11 - Statement Re: Computation of earnings per share
22 - Subsidiary list
23 - Consent of Independent Certified Public
Accountants
27 - Financial Data Schedule<PAGE>
* 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
None
(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: March 31, 1999 CUMBERLAND TECHNOLOGIES, INC.
-----------------------------
Date: March 31, 1999 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: March 31, 1999 By: /s/ Joseph M. Williams
-----------------------------
Joseph M. Williams, President
Date: March 31, 1999 By: /s/ Francis M. Williams
-----------------------------
Francis M. Williams
Chairman of the Board
Date: March 31, 1999 By: /s/ George A. Chandler
-----------------------------
George A. Chandler, Director
Date: March 31, 1999 By: /s/ Andrew J. Cohen
-----------------------------
Andrew J. Cohen, Director
Date: March 31, 1999 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, 1998
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 . . . . . 31
Consolidated Balance Sheets at December 31, 1998 and 1997 . . 32
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended December 31, 1998 . . . . 34
Consolidated Statements of Stockholders Equity for
Each of the Three Years in
the Period Ended December 31, 1998 . . . . . . . . . . . . 35
Consolidated Statements of Cash Flows for Each of
the Three Years in the Period Ended December 31, 1998 . . 36
Notes to Consolidated Financial Statements . . . . . . . . . 38
The following consolidated financial statement schedules are
filed as part of this report:
Schedule II Condensed Financial Information of Registrant . 55
Schedule V Valuation and Qualifying Accounts . . . . . . . 59
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.<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, 1998 and 1997,
and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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.
March 19, 1999
Tampa, Florida<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-----------------------------
1998 1997
----------------------------
Investments - Notes 1 and 3:
Securities available-for-
sale at fair value:
Fixed maturities (cost:
1998 - $2,049,787; 1997 -
$3,551,313) . . . . . . . $ 2,081,770 $ 3,590,458
Equity securities
(cost: 1998 - $799,487;
1997 - $1,431,727) . . . 576,575 1,526,783
Fixed maturity securities
held-to-maturity, at
amortized cost: (fair
value, 1998 -$896,246; 1997
- $1,002,280) . . . . . . 860,508 982,528
Residential mortgage loan on
real estate, at unpaid
principal . . . . . . . . 44,427 45,314
Short-term investments . . 423,993 323,993
----------------------------
Total investments . . . . 3,987,273 6,469,076
Cash and cash equivalents 4,202,351 1,803,530
Accrued investment income 55,348 82,821
Reinsurance recoverable . . 2,306,372 2,016,756
Accounts receivable:
Trade less allowance for
doubtful accounts of -0-
and $113,120 at December
31, 1998 and 1997,
respectively . . . . . . 1,809,726 1,307,216
Affiliate . . . . . . . . 927,910 903,181
Income tax recoverable . . 120,000 -
Deferred policy acquisition 1,246,555 812,745
costs . . . . . . . . . .
Intangibles, net . . . . . 1,455,525 1,680,633
Other assets . . . . . . . 233,991 245,425
----------------------------
$ 16,345,051 $ 15,321,383
============== ==============
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
-----------------------------
1998 1997
----------------------------
Policy liabilities and accruals:
Loss and loss adjustment $ 3,220,457 $ 2,550,300
expenses . . . . . . . . .
Unearned premiums . . . . . 3,749,945 2,629,282
Ceded reinsurance payable . . . 1,114,267 2,459,173
Accounts payable and other 580,564 254,839
liabilities . . . . . . . . . .
Long-term debt:
Nonaffiliate . . . . . . . 1,330,588 1,418,520
Affiliate . . . . . . . . . 1,000,000 -
----------------------------
Total liabilities . . . . . 10,995,821 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
December 31, 1998 and 1997, 5,763 5,763
Capital in excess of par
value . . . . . . . . . . 7,212,941 7,212,941
Accumulated other
comprehensive (loss) . . . (190,929) 134,201
Accumulated deficit . . . . (1,414,826) (1,093,417)
----------------------------
5,612,949 6,259,488
Less treasury stock, at cost,
318,112 and 313,612 shares
at December 31, 1998 and
1997, respectively . . . . (263,719) (250,219)
----------------------------
Total stockholders' equity 5,349,230 6,009,269
----------------------------
$ 16,345,051 $ 15,321,383
============================
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31
----------------------------------
1998 1997 1996
----------- ----------- ----------
REVENUE:
Direct premiums earned:
Affiliates . . . . . . . 14,907 1,738 2,873
Nonaffiliates . . . . . 8,526,254 5,836,655 1,149,377
Reinsurance premiums
assumed . . . . . . . . 1,268,032 1,381,264 3,083,787
Less reinsurance ceded . (2,275,509) (1,535,712) (427,718)
----------- ----------- ----------
Net premium income . . . 7,533,684 5,683,945 3,808,319
Net investment income . . 377,218 408,050 403,919
Net realized investment
gains (losses) . . . . . (437,565) 201,863 117,824
Commission income . . . . 710,058 859,862 1,385,964
Other income:
Affiliates . . . . . . . 289,207 310,396 338,478
Nonaffiliates . . . . . 537,775 305,733 314,889
----------- ----------- ----------
9,010,377 7,769,849 6,369,393
Benefits and expenses:
Losses and loss adjustment
expenses . . . . . . . . 2,648,074 1,792,117 1,670,640
Amortization of deferred
policy acquisition costs 2,252,195 1,778,808 1,532,355
Operating expenses . . . 4,313,278 3,903,476 3,255,805
Interest expense:
Affiliates . . . . . . . - - 372,066
Nonaffiliates . . . . . 118,239 124,928 121,271
----------- ----------- ----------
9,331,786 7,599,329 6,952,137
----------- ----------- ----------
Net income (loss) . . . . . . (321,409)$ 170,520 $ (582,744)
=========== =========== ==========
Weighted average number of
shares . . . . . . . . . 5,447,966 5,449,518 4,026,655
=========== =========== ==========
Net income (loss) per share $ (.06)$ 0.03 $ (.14)
=========== =========== ==========
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Capital in
Common Shares Excess of
Stock Amount Par Value
-----------------------------------
Balance at January 1, 1996 . 4,039,780 $ 4,040 $2,044,794
Purchase 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
depreciation of
available-for-sale
securities . . . . . . .
Net (loss) income . . . .
Comprehensive loss . . . .
-----------------------------------
Balance at December 31, 1996 5,763,070 5,763 7,212,941
Purchase of 3,139 shares
of treasury stock . . .
Net increase in unrealized
depreciation of
available-for-sale
securities . . . . . . .
Net (loss)income . . . . .
Comprehensive income . . .
-----------------------------------
Balance at December 31, 1997 5,763,070 5,763 7,212,941
Purchase of 4,500 shares
of treasury stock . . .
Net decrease in unrealized
depreciation of
available-for-sale
securities . . . . . . .
Net (loss) income . . . .
Comprehensive loss . . . .
-----------------------------------
Balance at December 31, 1998 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, 1996, 1997 AND 1998 (continued)
<TABLE>
<CAPTION>
Accumulated Retained
Other Earnings Treasury Total
Comprehensiv(accumulated Stock Stockholders
e income deficit) ------------ ' Equity
------------------------------------------------
------------------------------------------------
------------------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 63,045 $ (681,193) (140,915) 1,289,771
1996 . . . . . . . .
Purchase of 86,210
shares of (99,856) (99,856)
treasury stock .
Conversion of term
note for 5,169,870
1,723,290 shares
of common stock
Net increase in
unrealized 36,631 36,631
depreciation
available-for-
sale securities
Net (loss) income (582,744) (582,744)
------------
------------
------------
Comprehensive loss (546,113)
------------------------------------------------
------------------------------------------------
------------------------------------------------
Balance at December 99,676 (1,263,937) (240,771) 5,813,672
31, 1996 . . . . . .
Purchase of 3,139
shares of (9,448) (9,448)
treasury stock . <PAGE>
Net increase in
unrealized
depreciation of 34,525 34,525
available-for-
sale securities
Net (loss) income 170,520 170,520
------------
------------
------------
Comprehensive 205,045
income . . . . . . ------------------------------------------------
------------------------------------------------
------------------------------------------------
Balance at December 134,201 (1,093,417) (250,219) 6,009,269
31, 1997 . . . . . .
Purchase of 4,500
shares of (13,500) (13,500)
treasury stock .
Net increase in
unrealized
depreciation of (325,130) (325,130)
available-for-
sale securities
Net (loss) income (321,409) (321,409)
------------
------------
------------
Comprehensive loss (646,539)
------------------------------------------------
------------------------------------------------
------------------------------------------------
Balance at December (190,929) (1,414,826) (263,719) 5,349,230
31, 1998 . . . . . . ================================================
= = = =
</TABLE>
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
----------------------------------
1998 1997 1996
----------- ----------- ----------
Operating activities:
Net (loss) income . . . . . . $ (321,409) $ 170,520 $ (582,744)
Adjustments to reconcile net
(loss) income to net cash
(used in) provided by
operating activities:
Amortization/accretion of
investment premiums and
discounts . . . . . . . 391 (2,788) (6,052)
Policy acquisition costs
amortized . . . . . . . 2,252,194 1,778,808 1,532,355
Policy acquisition costs
deferred . . . . . . . . (2,686,004) (1,956,364) (1,732,272)
Depreciation and
amortization . . . . . . 225,108 370,553 378,447
Net realized loss(gain)
on sales of investments 437,566 (201,863) (117,824)
Provision for bad debts - 113,120 -
Accrued interest on term
notes, net . . . . . . . - - 404,337
(Increase) decrease in:
Accrued investment
income . . . . . . 27,473 6,831 (2,421)
Reinsurance recoverable (289,616) (425,900) 709,464
Trade receivables . . . (502,510) (852,285) (139,675)
Income tax recoverable (120,000) - -
Other assets . . . . . . 11,434 57,079 (232,148)
Increase (decrease) in:
Policy liabilities and
accruals . . . . . . 1,790,820 1,325,672 319,801
Ceded reinsurance
payable . . . . . . . (1,344,906) 1,690,766 165,504
Accounts payable and
other liabilities . . 325,725 (148,246) (713,730)
----------- ----------- ----------
Net cash (used in) provided
by operating activities . . (193,734) 1,925,903 (16,958)
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended December 31
----------------------------------
1998 1997 1996
----------- ----------- ----------
Investing activities:
Securities available-for-
sale:
Purchases - fixed
maturities . . . . . . . (968,313) (1,493,023) (300,012)
Sales - fixed maturities 2,479,916 954,039 620,000
Purchases - equities . . (2,819,999) (4,536,969) (3,249,846)
Sales - equities . . . . 2,999,085 4,269,885 3,628,259
Securities held-to-maturity:
Purchases . . . . . . . . (100,000) (299,492) (680,116)
Maturities . . . . . . . 127,140 985,000 310,000
Proceeds from other
investments . . . . . . . . 887 - 25,529
Software development costs . - - (99,938)
----------- ----------- -----------
Net cash provided by (used
in) investing activities . 1,718,716 (120,560) 253,876
Financing activities:
Purchases of treasury stock (13,500) (9,448) (99,856)
Payments on short-term
borrowings and long-term
debt . . . . . . . . . . . (87,932) (114,745) (469,483)
Net change in advances to
(from) affiliates . . . . . (24,729) (546,696) (234,433)
Net proceeds from short-term
borrowings . . . . . . . . 1,000,000 - -
----------- ----------- -----------
Net cash provided by (used
in) financing activities 873,839 (670,889) (803,772)
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents . . 2,398,821 1,134,454 (566,854)
Cash and cash equivalents,
beginning of year . . . . 1,803,530 669,076 1,235,930
----------- ----------- -----------
Cash and cash equivalents,
end of year . . . . . . . $4,402,351 $1,803,530 $ 669,076
=========== =========== ===========
See notes to consolidated financial statements.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Summary of Significant Accounting Policies
------------------------------------------
Organization
------------
Cumberland Technologies, Inc. ( CTI ) 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 other wholly-
owned subsidiaries, Cumberland Casualty & Surety Company ( CCS )
and Surety Specialists, Inc. ( SSI ) to CTI. KC then distributed
to its stockholders CHI 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). Effective
January 30, 1997, Cumberland Holdings, Inc. changed its name to
Cumberland Technologies, Inc. CTI conducts its business through
five subsidiaries. CCS, a Florida corporation formed in May 1988,
provides underwriting for specialty surety and performance and
payment bonds for contractors. The surety services provided
include direct surety and to a lesser extent, assumed
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. Florida Credit & Collection
Services, Inc. a Florida corporation formed in December 1996 was
dissolved in June 1997. 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
-----------
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 other
comprehensive income. 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 on the Statement of
Operations. 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.
Cash Equivalents
----------------
The Company considers all highly liquid investments having a
maturity of three months or less when purchased to be cash
equivalents.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies(continued)
-----------------------------------------------------
Deferred Policy Acquisition Costs
---------------------------------
To the extent recoverable from future policy revenues, 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 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 and
intangibles 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 loss and loss adjustment expenses
including incurred but not reported losses is based on the
estimated ultimate cost of settling the claim using traditional
paid and incurred loss development methods. 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 loss and
loss adjustment expenses is accrued when the related liability
for unpaid losses is accrued. Loss adjustment expenses include
costs associated directly with specific claims paid or in the
process of settlement, such as legal and adjusters fees. Loss
adjustment expenses also include other costs that cannot be
associated with specific claims but are related to losses 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 12).
Amounts recoverable from reinsurers for unpaid losses are
estimated in a manner consistent with the claim liability
associated with the reinsured policies.
Revenue Recognition
-------------------
Direct insurance and assumed reinsurance premiums earned are
recognized on a pro-rata basis over the period of risk.
Commission income is recognized at the effective date of the
bonds issued. Other income consisting primarily of consulting
fees are recognized when the negotiated services are provided.
Commissions related to agency activity are generally
recognized at the later of the effective date of the policy or
the date billed.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
The Company files a consolidated tax return that includes
all of its subsidiaries. See Note 7.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies(continued)
-----------------------------------------------------
Earnings Per Share
------------------
Earnings (loss) per share is based on the weighted average
number of shares outstanding, adjusted for the dilutive effect of
stock options. Since the effect of including the entire 168,486
outstanding stock options in the denominator of the calculation
for the year ended December 31, 1998 had no effect on the result
of the calculation, and the effect of stock options for the years
ended December 31, 1997, and 1996 would be antidilutive, earnings
per share is the same on both a basic and diluted basis for 1998,
1997 and 1996.
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. Such
estimates and assumptions could change in the future as more
information becomes known which would affect the amounts reported
and disclosed herein.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Summary of Significant Accounting Policies(continued)
-----------------------------------------------------
New Accounting Standards
------------------------
As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income ( SFAS 130 ). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the
Company net income or shareholders equity. SFAS 130 requires
unrealized gains and losses on the Company s available for sale
securities, which prior adoption were reported separately in
shareholders equity to be included in other comprehensive
income. All adjustments made between net income and
comprehensive income for the Company are attributed to unrealized
gains and losses. Prior year financial statements presented
conform to the requirements of SFAS 130. See Note 16.
Effective January 1, 1998, the Company adopted the Financial
Accounting Standards Board s Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information (Statement 131). Statement 131
superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. Statement 131 establishes
standards for the way that public business enterprises report
information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial
reports. The Company's only material operating segment is the
underwriting of surety insurance products. In accordance with
Statement 131 the Company has not reported financial information
on separate segments. Statement 131 also establishes standards
for related disclosures about products and services, geographic
areas, and major customers. The adoption of Statement 131 did
not affect results of operations or financial position.
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. Because of the Company s minimal
use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on
earnings or the financial position of the Company.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
presentation. These reclassifications had no effect on net loss
or stockholders equity previously reported.
2. Related Party Transactions
--------------------------
CTI and its subsidiaries have entered into transactions with
KC and companies affiliated through common ownership. CCS writes
surety bonds for KC and its affiliates. Revenues attributable to
surety bonds with KC and its affiliates were $14,907, $1,738 and
$2,873 for the years ended December 31, 1998, 1997 and 1996,
respectively. Qualex performs consulting services for KC and
affiliates. Other income from affiliates consist primarily of
consulting services provided to KC.
Affiliate accounts receivable represents funds advanced and
joint expenses that have not yet been reimbursed from KC and its
affiliates. These receivables are paid periodically and no
interest is charged on the outstanding balances which are payable
on demand. Also included in affiliate accounts receivable at
December 31, 1997 is a $135,000 note receivable from the
Company s Chairman of the Board of Directors. During 1998, KC
reimbursed SSI for certain project premiums that had been
guaranteed by the Chairman. As a result, the note receivable was
paid in full and a commission of $83,952 was recognized by CCS.
At December 31, 1996, the Company was 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. During
1997, the Company was released by the bank as a guarantor on the
note.
Cumberland leases office space from a company owned by the
Chairman of the Board of Directors at a monthly rate of $7,254.
The lease is effective through December 31,2000.<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>
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair Value
----------- Gains Losses -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
----------------------
<S> <C> <C> <C> <C>
Available-for-sale securities at
December 31, 1998:
Fixed maturity securities:
U.S. Government bonds . . . $1,553,407 $ 19,426 $ 563 $1,572,270
State and municipal bonds . 496,380 13,120 - 509,500
----------- ---------------------- -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
Total fixed maturity securities $2,049,787 32,546 563 2,081,770
----------- ---------------------- -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
Equity securities . . . . . . 799,487 - 222,912 576,575
----------- ---------------------- -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
Total . . . . . . . . . . . . . $2,849,274 $ 32,546 $ 223,475 $ 2,658,345
=========== ====================== ===========
= = = =
Held-to-maturity securities at
December 31, 1998:
Fixed maturity securities:
U.S. Government bonds . . . $ 860,508 $ 35,738 $ - $ 896,246
----------- ---------------------- -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
Total . . . . . . . . . . . . . $ 860,508 $ 35,738 $ - $ 896,246
=========== ====================== ===========
= = = =<PAGE>
Available-for-sale securities at
December 31, 1997:
Fixed maturity securities:
U.S. Government and $3,054,983 $ 33,890 $ 1,865 $3,087,008
government agency bonds .
State and municipal bonds 496,330 7,120 - 503,450
----------- ---------------------- -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
Total fixed maturity securities $3,551,313 $ 41,010 $ 1,865 $3,590,458
----------- ---------------------- -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
Equity securities . . . . 1,431,727 115,618 20,562 1,526,783
----------- ---------------------- -----------
----------- ---------------------- -----------
---------- ---------------------- -----------
Total . . . . . . . . . . . . . $4,983,040 $ 156,628 $ 22,427 $5,117,241
=========== ====================== ===========
= = = =
Held-to-maturity securities at
December 31, 1997:
Fixed maturity securities:
U.S. Government bonds . . $ 982,528 $ 19,752 $ - $1,002,280
----------- ---------------------- -----------
----------- ---------------------- -----------
----------- ---------------------- -----------
Total . . . . . . . . . . . . . $ 982,528 $ 19,752 $ - $1,002,280
=========== ====================== ===========
= = = =
/TABLE
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Investments (continued)
-----------------------
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, 1998 are
summarized, by stated maturity, as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held to Maturity
------------------------ ------------------------
Amortized Amortized
Maturity Cost Fair Value Cost Fair Value
----------------------- ------------ ------------------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 751,160 $ 757,080 $ - $ -
Due after one year
through five years 626,332 639,196 860,508 896,246
Due after five years
through ten years . 125,915 125,994 - -
Due after ten years
through fifteen years 50,000 50,000 - -
Due after twenty years 496,380 509,500 - -
------------ ------------------------ ------------
$ 2,049,787 $ 2,081,770 $ 860,508 $ 896,246
============ ======================== ============
</TABLE>
The Company held no 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.
At December 31, 1998 and 1997, the Company had $3.4 million
and $5.3 million, respectively, in restricted investments (fixed
maturity securities and short-term investments). Restricted
investments primarily represent funds held as collateral in
connection with reinsurance trust agreements and funds held as<PAGE>
required under statutory regulations by state insurance
departments.<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
----------------------------------
1998 1997 1996
----------- ---------- ----------
Fixed maturity and equity
securities . . . . . . . . $ 246,618 $ 344,459 $ 388,700
Mortgage loans on real estate 6,711 4,105 4,613
Short-term investments,
including cash and cash
equivalents . . . . . . . . 135,926 70,857 50,684
----------- ----------- ----------
389,255 419,421 443,997
Less investment expenses . . (12,037) (1,1371) (40,078)
----------- ----------- ----------
Net investment income . . . . $ 377,218 $ 408,050 $ 403,919
Realized gain (loss) on
available-for-sale
securities:
Fixed maturities - gains . 15,589 - -
Equity securities - gains 226,613 201,863 117,824
Equity securities - losses (679,767) - -
----------- ----------- ----------
Net realized investment gains $ (437,565)$ 201,863 $ 117,824
(losses) . . . . . . . . . . <PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Fair Value of Financial Instruments
-----------------------------------
The carrying amounts and fair values of the Company's
financial instruments at December 31, 1998 are as follows:
December 31, 1998
----------------------------
Carrying
Amount Fair Value
----------------------------
Assets:
Cash and cash equivalents,
including short-term
investments . . . . . . . . $ 4,626,344 $ 4,626,344
Investments . . . . . . . . . 3,563,280 3,554,591
Accounts receivable . . . . . 2,737,636 2,737,636
Reinsurance receivable . . . 2,306,372 2,306,372
Liabilities:
Long-term debt . . . . . . $ 2,330,588 $ 2,330,588
Policy loss reserves . . . 3,220,457 3,220,457
Ceded reinsurance payable 1,114,267 1,114,267
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 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.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Intangibles
-----------
Intangibles at December 31 are comprised of the following:
1998 1997
-------------- --------------
Purchased customer accounts $ 1,084,041 $ 1,084,041
Noncompete agreements . . . . - 234,000
Goodwill . . . . . . . . . . 926,661 926,661
2,010,702 2,244,702
-------------- --------------
Less accumulated amortization 555,177 (564,069)
-------------- --------------
$ 1,455,525 $ 1,680,633
============== ==============
Amortization expense amounted to $225,108 in 1998, $275,169
in 1997 and $306,175 in 1996.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998, 1997 and
1996, to the gross amounts reported in the Company s consolidated
balance sheets:
December 31
----------------------------------
1998 1997 1996
---------------------- ---------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at beginning of
year . . . . . . . . . . . $ 1,392,931 $ 594,922 $1,052,547
Provision for losses and LAE
for claims occurring in the
current year, net of
reinsurance . . . . . . . . 2,331,074 1,743,117 1,008,640
Increase in estimated losses
and LAE for claims
occurring in prior years,
net of reinsurance . . . . 317,000 49,000 662,000
---------------------- ----------
Incurred losses during the
current year, net of
reinsurance . . . . . . . . 2,648,074 1,792,117 1,670,640
Losses and LAE payments for
claims, net of reinsurance,
occurring during: 557,997 553,629 422,544
The current year . . . . 1,802,428 440,479 1,705,721
Prior years . . . . . . . ---------------------- ----------
2,360,425 994,108 2,128,265
---------------------- ----------
Liability for losses and LAE,
net of reinsurance
recoverables on unpaid
losses, at end of year . . 1,680,580 1,392,931 $ 594,922
Reinsurance recoverables on
unpaid losses at end of
year . . . . . . . . . . . 1,539,877 1,157,369 1,396,874
---------------------- ----------
Liability for losses and LAE,
gross of reinsurance
recoverables on unpaid
losses, at end of year . . $ 3,220,457 $2,550,300 $1,991,796
---------------------- ----------<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Reserve for Losses and Loss Adjustment Expenses (continued)
-----------------------------------------------------------
Cumberland experienced deficiencies of $317,000, $49,000 and
$662,000 for losses and loss adjustment expenses in 1998, 1997
and 1996, respectively. The deficiency in 1998 and 1997
principally resulted from settling case basis reserves
established in prior years for amounts that were more than
expected. The deficiency in 1996 is a result of additional
claims expense on a 1993/94 pooling agreements.
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)
7. Income Taxes
------------
There was no income tax expense or benefit recognized in
1998, 1997 or 1996.
A reconciliation of the federal statutory income tax rate
applied to pre-tax income (loss) and the effective income tax
benefit rate is as follows:
1998 1997 1996
----------- ----------- ----------
Federal statutory tax
rate . . . . . . . . . . (34.0)% 34.0% (34.0)%
State income taxes, net
of federal income tax
benefit . . . . . . . . (3.0) 3.9 (3.7)%
Income exempt from
taxation and dividend
exclusions . . . . . . . (9.7) (7.2) (10.1)
Differences between
income statement and tax
return . . . . . . . . . (7.0) 69.3 -
Utilization of NOL
carryforwards . . . . . 38.2 (110.1) 44.4
Nondeductible expenses . 15.5 10.1 3.4
----------- ----------- ----------
Effective tax rate . . . - - -
=========== =========== ==========<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes (continued)
------------------------
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:
December 31
-----------------------------
1998 1997
-------------- --------------
Deferred tax liabilities:
Deferred policy acquisition
costs . . . . . . . . . . . $ 544,339 $ 305,836
Unrealized gains . . . . . . - 50,500
----------------------------
Total deferred tax liabilities 544,339 356,336
----------------------------
Deferred tax assets:
Unrealized loss . . . . . . . 290,236 -
Outside basis difference in
investments . . . . . . . . 91,646 40,620
Amortization of intangibles 96,160 69,028
Unearned premiums . . . . . . 245,321 166,961
Losses and loss adjustment
expenses . . . . . . . . . 54,885 19,050
Net operating loss
carryforward . . . . . . . 85,789 232,012
Alternative minimum credit
carryforward . . . . . . . 27,648 15,555
Surplus note . . . . . . . . 102,314 102,314
Other, net . . . . . . . . . 17,139 8,931
----------------------------
1,011,138 654,471
Less valuation allowance . . (466,799) (298,135)
----------------------------
Total deferred tax assets . . . 544,339 356,336
----------------------------
Net deferred taxes . . . . . . $ - $ -
============================<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes (continued)
------------------------
The Company has net operating loss carryforwards as of
December 31, 1998 of approximately $227,980 which generally
expire in 2010 and 2011.
8. Long-Term Debt
--------------
Long-term debt consists of the following:
December 31 December 31
1998 1997
----------------------------
Affiliate:
Note payable due November 10,
2001 . . . . . . . . . . . $ 1,000,000 $ -
Nonaffiliate:
Note payable due March 1, 2002 374,087 377,077
Note payable due June 30, 2010 956,501 1,041,443
----------------------------
$ 2,330,588 $ 1,418,520
============================
Notes Payable to 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.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-Term Debt (continued)
--------------------------
Notes Payable to Nonaffiliates
------------------------------
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 $125,000 are due annually
beginning March 1, 2000. The other is due June 30, 2010 and bears
interest 9%. Principal payments of $40,000 were due annually for
three years beginning January 5, 1996. Payments of $11,104
including principal and interest are payable monthly beginning
April 1, 1997.
Interest paid in 1998, 1997 and 1996 for term notes due
nonaffiliates was $118,239, 124,298 and $121,271, respectively.
Maturities of notes payable to nonaffiliates for the five
years succeeding December 31, 1998 and thereafter are as follows:
Year Ending December
31
-------------------- --------------------
1999 $ 49,158
2000 183,471
2001 184,254
2002 181,002
2003 72,637
Thereafter 660,066
Term Note Due Affiliate
-----------------------
In 1992, CTI entered into a term note agreement with KC for
the outstanding amount of a debenture, including interest
arrearage of $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<PAGE>
taxes.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Long-Term Debt (continued)
--------------------------
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 term note payable in the amount of
$5,169,870 (including accrued interest).
9. 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 compensation, not to exceed six percent of the
participant's annual compensation. The Company's contributions
to the plan totaled $11,701, $9,367 and $7,288 in 1998, 1997 and
1996, respectively.
10. Stock Option Plan
-----------------
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. Options to purchase 52,586 shares of the Company s
common stock, at no cost to the holders, were granted during 1992
and remain outstanding at December 31, 1998. 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, 1998, 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, 1998, 12,000 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, 1998, 1,500 of the options were
exercisable.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Stock Option Plan (continued)
-----------------------------
Effective, March 18, 1998, the Company granted options to
purchase 12,000 shares to certain individuals at CCS at a price
of $2.25 per share. As of December 31, 1998, 2,400 of the
options were exercisable.
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 since no material
amount of options have been awarded since the effective date of
Statement 123, 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 materially different
from amounts reported based on APB 25.
11. 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, 1998.
12. Reinsurance
-----------
CCS assumes reinsurance through a program whereby its
subsidiary, SSI, has contracted through a joint partnering
agreement with St. Paul Fire and Marine Group, f/k/a United
States Fidelity and Guaranty Company ( St. Paul ) to pursue small
to medium size contract and commercial surety business in states
in which CCS is not licensed. CCS participates in the St. Paul
agreement underwriting risk through a retrocessional treaty with
St. Paul s reinsurer, Transatlantic Reinsurance Company.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Reinsurance (continued)
-----------------------
Effective October 1, 1996, CCS entered into a quota share
agreement with First Indemnity of America Insurance Company
whereby all of the premiums written through a shared underwriting
office are subject to this treaty. Cumberland assumes 50% of the
premiums written by FIA and cedes 50% of the premiums written by
CCS.
CCS assumed reinsurance primarily from a pooling agreement
which expired in April, 1997 for which CCS assumed 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 assumed 25 percent and 20 percent of the risk with a
maximum exposure to CCS of $125,000 and $600,000 per bond,
respectively.
The Company cedes to Transatlantic Reinsurance Company on an
excess of loss treaty 95% of the risk insured with a maximum
exposure to the Company of $235,000 per principal. Transatlantic
Reinsurance Company is rated A+ by A.M. Best. For its liability
line of registered investment advisor insurance, the Company has
reduced its exposure on any one risk, with a purchase of a quota
share agreement with Dorinco Reinsurance (Dorinco Treaty) which
is rated A (Excellent) by A.M. Best. Under the Dorinco Treaty,
CCS cedes 50% of its liability on all registered investment
advisor policies, which have an aggregate net liability limit of
$500,000 per endorsement. 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. Reinsurance does not relieve an insurer of its liability
to policyholders, however, the reinsurer is obligated to the
insurer for the portion assumed by such reinsurer.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Reinsurance (continued)
-----------------------
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ---------------------------
----------------- ----------------- -----------------
Written Earned Written Earned Written Earned
------------ ------------ ------------ ------------ ------------ ------------
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct premiums $ 9,451,746 $ 8,541,161 $ 6,797,136 5,838,393 2,025,796 1,152,250
Assumed 1,478,109 1,268,032 1,189,689 1,381,264 2,890,050 3,083,787
premiums
Ceded premiums (2,354,970) (2,275,509) (1,752,564) (1,535,712) (547,800) (427,718)
------------ ------------ ------------ ------------ ------------ ------------
-------- -------- -------- -------- -------- --------
Net premiums . $ 8,574,885 $ 7,533,684 $ 6,234,261 $ 5,683,945 $ 4,368,046 $ 3,808,319
======= ======= ======= ======= ======= =======
</TABLE>
Loss and loss adjustment expenses in 1998, 1997, and 1996
are summarized as follows:
1998 1997 1996
----------- ----------- ----------
Direct . . . . . . . . . $ 1,743,448 $ 1,048,450 $ 127,232
Assumed . . . . . . . . 1,343,334 741,351 1,587,890
Ceded . . . . . . . . . (438,708) 2316 (44,482)
----------- ----------- ----------
Net losses and loss
adjustment expenses . $ 2,648,074 $ 1,792,117 $ 1,670,640
=========== =========== ==========
The Company reported reinsurance recoverables on paid losses
of $408,708 and $448,553 at 1998 and 1997, respectively.
13. Statutory Accounting Practices and Regulatory Requirements
--------------------------------------------------------
<PAGE>
Statutory surplus 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:<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Statutory Accounting Practices and Regulatory Requirements
(continued)
------------------------------------------------------------
--
Year Ended December 31
1998 1997 1996
----------- ----------- ----------
Statutory capital and surplus $ 4,843,478 $ 5,044,527 $5,034,662
Net income (loss) . . . . . . 74,157 $ 959,304 $ (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 was
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.
Under applicable state insurance statues, CCS must maintain
minimum capital and surplus of $2,500,000 (as of December 31,
1998). 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, 1998, no dividends
from CCS are available for payment to the Company without the
prior approval of the Department of Insurance.<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Comprehensive Income
--------------------
The Company adopted the provisions of the SFAS No. 130,
Reporting Comprehensive Income, in 1998. Comprehensive income
is defined as any change in equity from transactions and other
events originating from nonowner sources. For the Company
comprehensive income is composed of reported net income and
changes in the unrealized appreciation of available for sale
investment portfolio. SFAS No. 130 requires the Company to
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
Twelve Months Ended December 31
1998 1997
----------- -----------
Net income (loss) . . . . . . $ (321,409)$ 170,520
Other comprehensive income,
net of tax:
Unrealized (depreciation)
appreciation of available
for sale securities
arising during period . . (830,088) 161,425
----------- -----------
Less: reclassification
adjustment for (losses)
gains included in net $ (504,958) $ 126,000
income ---------------- ----------------
Comprehensive income . . $ (649,539)$ 205,045
================ ================
15. 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.<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
CUMBERLAND TECHNOLOGIES, INC.
December 31
---------------------------
Condensed Balance 1998 1997
Sheets ------------- -------------
----------------------
Assets:
Trade receivables $ - $ 21,835
Accounts receivable
from affiliates - -
Investment in wholly-
owned subsidiaries 1,701,379 2,385,867
Other assets . . . 68,363 54,408
Surplus debenture
receivable from
subsidiary . . . 5,026,354 4,763,854
------------- -------------
$ 6,796,096 $ 7,225,964
============= =============
Liabilities:
Accounts payable to
affiliates . . . 1,442,165 1,213,207
Accounts payable . 4,701 3,488
------------- -------------
1,446,866 1,216,695
Stockholders' equity:
Common stock . . . 5,763 5,763
Other stockholders' 5,343,467 6,003,506
equity . . . . . ------------- -------------
5,349,230 6,009,269
------------- -------------
$ 6,796,096 $ 7,225,964
============= =============<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
Year Ended December 31
-----------------------------------------
Condensed Statements
of Operations 1998 1997 1996
---------------------- ------------- ------------- -------------
Management fees from
wholly- owned
subsidiaries . . . $ 217,892 $ 88,378 $ 62,557
Interest income from
subsidiary . . . . 262,500 271,875 300,000
------------- ------------- -------------
480,392 360,253 362,557
Costs and expenses:
Selling and
administrative
expenses . . . . 415,242 294,901 133,834
Interest expense to
affiliates . . . - - 372,066
------------- ------------- -------------
415,242 294,901 505,900
------------- ------------- -------------
Income (loss) before
income taxes and
equity in net income
(loss) of
subsidiaries . . . 65,150 65,352 (143,343)
Federal and state
income tax
benefits . . . . . - - -
Equity in net income
(loss) of
subsidiaries . . . (386,559) 105,168 (439,401)
------------- ------------- -------------
Net income (loss) . . $ (321,409)$ 170,520 $ (582,744)
============= ============= =============<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
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.
Notes to Condensed Financial Statements
---------------------------------------
1. Organization and summary of significant accounting policies
-----------------------------------------------------------
Organization - Cumberland Technologies, Inc. ( CTI or
Cumberland ), 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. ( SG ), Surety Associates ( SA ), and Qualex Consulting
Group, Inc. ( Qualex ) (collectively together with Cumberland,
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 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. SG, a Georgia corporation, and
Associates Acquisition Corp. d/b/a Surety Associates, a South
Carolina corporation, purchased by Cumberland in February and
July 1995, respectively, are general lines insurance agencies
which operate as independent agencies. Qualex, a Florida
corporation formed in November 1995, provides claim and
contracting consulting services.
For the years ended December 31, 1998 and 1997, CTI charged
its subsidiaries excluding CCS, a management fee.<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
Notes to Condensed Financial Statements (continued)
---------------------------------------------------
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
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.
Investment in subsidiaries at December 31, 1998 and 1997
include the net unrealized (depreciation) appreciation in
available-for-sale securities held by CCS, of $(190,929) and
$134,201 as of December 31, 1998 and 1997, respectively. These
amounts have been included in the CTI other stockholders
equity amounts.
3. Surplus Debenture Receivable from Subsidiary
--------------------------------------------
In 1988, CCS issued a surplus debenture to KC in exchange
for $3,000,000 which bears interest at 10 percent per annum. In
1992, the debenture due to KC from CCS was assigned to CTI.
Interest and principal payments are subject to approval by the
Florida Department of Insurance. 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. As of
December 31, 1998, no payments could be made under the terms of
the debenture.<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, 1996:
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 67,209 $ -0- $ -0- $67,209 $ -0-
========== ========== ========== ========== ==========
Deferred income tax
valuation
allowance . . . . $374,149 321,120 $ -0- $ -0- $ 695,269
========== ========== ========== ========== ==========
For the year ended
December 31, 1997:
Deducted from asset
accounts:
Allowance for
doubtful
accounts . . . . $ -0- $113,120 $ -0- $ -0- $ 113,120
========== ========== ========== ========== ==========
Deferred income tax
valuation
allowance . . . . $695,269 $ -0- $ -0- $ 397,134 $ 298,135
========== ========== ========== ========== ==========
For the year ended
December 31, 1998:
Deducted from asset
accounts:
Allowance for
doubtful accounts $ 113,120 -0- $ -0- $ 113,120 $ -0-
========== ========== ========== ========== ==========<PAGE>
Deferred income tax
valuation
allowance . . . . $298,135 $ -0- $168,664 $ -0- $ 466,799
========== ========== ========== ========== ==========
/TABLE
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
CUMBERLAND TECHNOLOGIES, INC.
Year Ended December 31
1998 1997 1996
----------- ---------- ---------
Average shares outstanding . 5,447,966 5,449,518 4,026,655
Net effect of dilutive stock
options . . . . . . . . . . - - -
----------- ----------- ----------
Totals . . . . . . . . . . . 5,447,996 5,449,518 4,026,655
=========== =========== ==========
Net income (loss) . . . . . . (321,409)$ 170,520 $ (582,744)
=========== =========== ==========
Earnings (loss) per share
amount . . . . . . . . . . $ (.06)$ .03 $ (.14)
=========== =========== ==========<PAGE>
EXHIBIT 22 - SUBSIDIARIES OF THE REGISTRANT
CUMBERLAND TECHNOLOGIES, INC.
As of December 31, 1998, 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.
- The Surety Group, Inc.
- Associates Acquisition Corp. d/b/a Surety Associates, Inc.
<PAGE>
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
CUMBERLAND TECHNOLOGIES, INC.
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-71537) pertaining to the 1991 Stock
Option Plan of Cumberland Technologies, Inc. of our report dated
March 19, 1999, with respect to the consolidated financial
statements and schedules of Cumberland Technologies, Inc.
included in the annual report (Form 10-K) for the year ended
December 31, 1998.
/s/: ERNST & YOUNG LLP
March 31, 1999
Tampa, Florida<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 2,081,770
<DEBT-CARRYING-VALUE> 860,508
<DEBT-MARKET-VALUE> 0
<EQUITIES> 576,575
<MORTGAGE> 44,427
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,987,273
<CASH> 4,202,351
<RECOVER-REINSURE> 2,306,372
<DEFERRED-ACQUISITION> 1,246,555
<TOTAL-ASSETS> 16,345,051
<POLICY-LOSSES> 3,220,457
<UNEARNED-PREMIUMS> 3,749,945
<POLICY-OTHER> 1,114,267
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 2,330,588
0
0
<COMMON> 5,763
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 16,345,051
7,533,684
<INVESTMENT-INCOME> 377,218
<INVESTMENT-GAINS> (437,565)
<OTHER-INCOME> 1,537,040
<BENEFITS> 2,648,074
<UNDERWRITING-AMORTIZATION> 2,252,195
<UNDERWRITING-OTHER> 4,313,278
<INCOME-PRETAX> (321,409)
<INCOME-TAX> 0
<INCOME-CONTINUING> (321,409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (321,409)
<EPS-PRIMARY> (0.06)
<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>
