UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to _______ 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 incorporation) (I.R.S. Employer
Identification No.)
4311 West Waters Avenue, Suite 501
Tampa, Florida 33614
(Address of principal executive office) (Zip code)
(813) 885-2112
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and formal fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Applicable Only to Insurers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by a check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
Applicable Only to Corporate Issuers
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of June 30, 1999 was 5,444,958 shares.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Condensed consolidated balance sheets at
June 30, 1999 and December 31, 1998 1-2
Condensed consolidated statements of operations for the
six months ended June 30, 1999 and June 30, 1998 3
Condensed consolidated statements of operations for the
three months ended June 30, 1999 and June 30, 1998 4
Condensed consolidated statements of cash flows
for the six months ended June 30, 1999 and 1998 5
Notes to condensed consolidated financial statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
PART II OTHER INFORMATION
Item 1. Legal proceedings 16
Item 2. Changes in securities 16
Item 3. Defaults upon senior securities 16
Item 4. Submission of matters to a
vote of security holders 16
Item 5. Other information 16
Item 6. Exhibits and Reports of Form 8-K 16
Signatures 17
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1998
1999 1998
------------------------------------
(Unaudited)
ASSETS
Investments:
Securities available-for-sale at fair value:
Fix maturities $ 1,311,690 $ 2,081,770
Equity securities 461,500 576,575
Fixed maturity securities
held-to-maturity, at
amortized cost 861,448 860,508
Residential mortgage loan on real
estate, at unpaid principal 43,868 44,427
Short-term investments 430,239 423,993
------------------------------------
Total investments 3,108,745 3,987,273
Cash and cash equivalents 4,473,674 4,202,351
Accrued investment income 53,941 55,348
Reinsurance recoverable 3,185,175 2,306,372
Accounts receivable:
Trade 2,294,193 1,809,726
Affiliate 918,939 927,910
Income tax recoverable - 120,000
Deferred policy acquisition costs 1,435,830 1,246,555
Intangibles, net 1,356,916 1,455,525
Other assets 239,303 233,991
====================================
$ 17,066,716 $ 16,345,051
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1998
1999 1998
------------------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------
Policy liabilities and accruals:
Loss and loss adjustment expenses $ 3,354,120 $ 3,220,457
Unearned premiums 4,372,116 3,749,945
Ceded reinsurance payable 194,729 1,114,267
Accounts payable and other liabilities 1,258,323 580,564
Amortized cost
Long-term debt:
Nonaffiliate 1,306,559 1,330,588
Affiliate 1,000,000 1,000,000
------------------------------------
Total liabilities 11,485,847 10,995,821
Stockholders' equity:
Preferred stock, $.001 par value;
10,000,000 shares authorized,
no shares issuedissued - -
Common stock, $.001 par value;
10,000,000 shares authorized, 5,763,070
shares issued at June 30, 1999 and
December 31,1998 respectively 5,763 5,763
Capital in excess of par value 7,212,941 7,212,941
Accumulated other comprehensive losses (322,002) (190,929)
Accumulated deficit (1,052,114) (1,414,826)
------------------------------------
5,844,588 5,612,949
Less treasury stock, at cost,
318,112 shares at June 30, 1999
and December 31, 1998 (263,719) (263,719)
------------------------------------
Total stockholders' equity 5,580,869 5,349,230
------------------------------------
$ 17,066,716 $ 16,345,051
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
------------------------------------
1999 1998
------------------------------------
(Unaudited) (Unaudited)
REVENUES:
Direct premiums earned $ 4,674,426 $ 3,922,511
Reinsurance premiums assumed 982,741 488,968
Less reinsurance ceded (1,227,912) (838,559)
------------------------------------
Net premium income 4,429,255 3,572,920
Net investment income 176,018 213,144
Net realized investment gains 9,946 170,318
Other income:
Affiliates - 126,862
Nonaffiliates 705,636 823,809
------------------------------------
5,320,855 4,907,053
Benefits and expenses:
Losses and loss adjustment expenses 1,058,079 880,956
Amortization of deferred policy
acquisition costs 1,586,837 1,153,668
Operating expenses 2,085,663 2,166,046
Interest expense 107,564 59,622
------------------------------------
4,838,143 4,260,292
------------------------------------
Income (loss) before income taxes 482,712 646,761
Income taxes (benefit) 120,000 -
------------------------------------
Net income (loss) $ 362,712 $ 646,761
====================================
Weighted average number of shares $ 5,444,958 $ 5,449,458
====================================
Net income (loss) per share $ .07 $ .12
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
------------------------------------
1999 1998
------------------------------------
(Unaudited) (Unaudited)
REVENUES:
Direct premiums earned $ 2,372,402 $ 2,119,901
Reinsurance premiums assumed 565,334 105,578
Less reinsurance ceded (667,730) (391,017)
------------------------------------
Net premium income 2,270,006 1,834,462
Net investment income 87,769 115,151
Net realized investment gains (3) 104,141
Other income:
Affiliates - 75,482
Nonaffiliates 378,263 487,740
------------------------------------
2,736,035 2,616,976
Benefits and expenses:
Losses and loss adjustment expenses 581,368 528,536
Amortization of deferred policy
acquisition costs 821,250 625,633
Operating expenses 1,112,690 1,106,824
Interest expense 53,647 29,715
------------------------------------
2,568,955 2,290,708
------------------------------------
Income (loss) before income taxes 167,080 326,268
Income taxes (benefit) 51,750 -
====================================
Net income (loss) $ 115,330 $ 326,368
====================================
Weighted average number of shares $ 5,444,958 $ 5,449,458
====================================
Net income (loss) per share $ .02 $ .06
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
------------------------------------
1999 1998
------------------------------------
(Unaudited) (Unaudited)
Operating activities:
Net income $ 362,712 $ 646,761
Adjustments to reconcile net income
(loss) to net
Cash (used in) provided by operating activities:
Amortization/accretion of investment
premiums and discounts 472 (289)
Policy acquisition cost amortized (1,586,837) (757,907)
Policy acquisition costs deferred 1,397,562 352,622
Depreciation and amortization 98,609 126,499
Net realized (gain)on sales of
investments (9,946) (170,318)
Income tax expense 120,000 -
Accrued interest on term notes, net - 59,622
(Increase) decrease in:
Accrued investment income 1,407 29,226
Reinsurance recoverable (878,803) 322,324
Trade receivables (484,467) (612,084)
Other assets (5,312) 16,655
Increase (decrease) in:
Policy liabilities and accruals 755,834 900,181
Ceded reinsurance payable (919,538) (1,831,824)
Accounts payable and other
liabilities 677,759 179,476
------------------------------------
Net cash (used in) provided by operating
activities (470,548) (739,056)
Investing activities:
Securities available-for-sale:
Purchases - fixed maturities (100,000) (842,319)
Sales - fix maturities 826,262 1,787,151
Purchases - equities - (1,846,235)
Sales - equities 36,354 2,152,210
Securities held-to-maturity:
Maturities - 127,140
Purchase - short-term investment (6,246) (100,000)
Proceeds from sales and maturities of
investments 559 348
Net advances to(from) affiliates 8,971 66,528
------------------------------------
Net cash provided by investing activities 765,900 1,344,823
Financing activities:
Payments on short-term borrowings and
long-term debt (24,029) (124,577)
------------------------------------
Net cash (used in) financing activities (24,029) (124,577)
------------------------------------
Increase (decrease)in cash and cash
equivalents 271,323 481,190
Cash and cash equivalents, beginning of
period 4,202,351 1,803,530
------------------------------------
Cash and cash equivalents, end of period $ 4,473,674 $ 2,284,720
====================================
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
1. Summary of Significant Accounting Policies
Organization - Cumberland Technologies, Inc. ("CTI" or "Cumberland"),
(f/k/a Cumberland Holdings, Inc.) a Florida corporation, was formed on
November 18, 1991, to be a holding company and a wholly owned subsidiary
of Kimmins Corp. ("KC"). Effective October 1, 1992, KC contributed all of
the outstanding common stock of two of its wholly owned subsidiaries,
Cumberland Casualty & Surety Company ("CCS") and Surety Specialists, Inc.
("SSI") to CTI. KC then distributed to its stockholders CTI's common stock
on the basis of one share of common stock of CTI for each five shares of
KC common stock and Class B common stock owned (the "Distribution").
Cumberland Technologies, Inc., ("the Company") is a holding company
engaged through its subsidiaries, Cumberland Casualty & Surety Company
("CCS"), Surety Specialists, Inc. ("SSI"), The Surety Group, Inc. ("SG"),
Associates Acquisition Corp. d/b/a Surety Associates ("SA") and Qualex
Consulting Group, Inc. ("Qualex") in the delivery of speciality surety and
insurance services. Surety services include underwriting surety bonds on a
direct and assumed basis, surety consulting and the development of surety
software. Insurance services include the underwriting of speciality and
other liability insurance products. In addition, the Company conducts its
business through a number of independent agencies which focus on selling
and delivering surety insurance products to consumers. Traditionally, this
segment of the surety industry has delivered its products through an
antiquated manual process. Because of this need to advance
technologically, the Company developed a software product called
Bond-Pro(TM)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(TM).
Principles of Consolidation - The consolidated financial statements
include the accounts of CTI and its wholly owned subsidiaries. All
material intercompany transactions and balances have been eliminated in
consolidation.
Basis of Presentation - The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles which, as to the subsidiary insurance company, differ from
statutory accounting practices prescribed or permitted by regulatory
authorities. The significant accounting policies followed by CTI and
subsidiaries that materially affect the financial statements are
summarized in this note.
Reclassifications - Certain amounts in the 1998 financial statements have
been reclassified to conform to the 1999 financial statement
presentations.
Use of Estimate - We make estimates and assumptions that have an effect on
the amounts that we report in our financial statements. Our most
significant estimates are those relating to our reserves for losses and
loss adjustment expenses. We continually review our estimates and make
adjustments as necessary, but actual results could turn out significantly
different than what we envisioned when we made these estimates.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCL&L STATEMENTS (UNAUDITED)
2. Net Income Per Share
Net income per share for the six months ended June 30, 1999 is based on
the weighted average number of shares outstanding, adjusted for the
dilutive effect of stock options, and is the same on both a primary and
fully diluted basis.
3. Investments
Change in Unrealized Appreciation: The increase (decrease) in
unrealized appreciation of investments recorded in shareholders' equity
was as follows:
Six Twelve Months
Months Ended December
Ended June 30, 31, 1998
1999
------------------------------------------------
Fixed maturities $ (21,015) $ 31,983
Equities (300,987) (222,912)
================================================
Total change in
unrealized
appreciation $ (322,002) $ (190,929)
================================================
4. Income Taxes
The Company's provision for income taxes for the six months ending June
30, 1999 has an effective rate of 29% after utilization of the Company's
net operating loss carryforward of approximately $227,980. The Company
elected not to set up a provision for income taxes for the quarter ending
June 30, 1998 due to its net operating loss carryforward of approximately
$841,568.
5. Term Note Due Affiliate
In 1988, CCS issued a surplus debenture to KC in exchange for $3,000,000
which bears interest at 10 percent per annum. Interest and principal
payments are due quarterly only if and when CCS's surplus, as defined
below, exceeds S4,000,000 and are limited to an amount equal to one-half
of the statutory net income before dividends and federal and foreign
income taxes of CCS during that year. In 1992, the debenture due to KC
from CCS was assigned to CTI. As of December 3 1, 1998, no amounts could
be paid by CCS to CTI under the terms of the debenture.
On April 1, 1997, CTI forgave $375,000 of its $3,000,000 surplus debenture
due to CCS. As a result, CCS increased paid in capital by $375,000. On
June 30, 1999, CTI forgave $576,266 of its $2,625,000 surplus debenture
due to CCS. As a result, CCS increased paid-in capital to $1,000,000.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCL&L STATEMENTS (UNAUDITED)
5. Term Note Due Affiliate (continued)
In addition, in 1992, CTI entered into a term note agreement with KC for
the outstanding amount of the debenture, including interest arrearage
$4,291,049. The term note was pari passi with the other debts of CCS,
bearing interest at 10 percent of the unpaid principal and interest and
was due on October 1, 2002. Interest and principal were due quarterly with
minimum payments equal to one half of net earnings before interest and
federal income taxes.
Effective October 1, 1996, CTI issued 1,723,290 shares at the fair value
of $3.00 per share of its common stock to Kimmins Corp. (f/k/a Kimmins
Environmental Service, Corp.) in exchange for surrender of the Company's
term note payable in the amount of $5,169,870 (including accrued
interest).
6. Notes Payable
Affiliate
Effective November 10, 1998, Cumberland entered into a $1,000,000
convertible term note agreement with TransCor Waste Services, Inc., a
subsidiary of KC. The note is due November 10, 2001 and bears interest at
10%. The lender may convert the principal amount of the note or a portion
thereof into a common stock at $3.00 per share subsequent to a six-month
anniversary and prior to the maturity date.
Nonaffiliate
In connection with the acquisition of certain agencies during 1995, the
Company entered into two notes payable with the agencies' previous owners.
One note is due March 1, 2002 and bears interest at 8% through February
28, 2001 and 10% thereafter. Principal payments of $150,000 are due
annually beginning March 1, 2000. The other is due June 30, 2010 and
bears interest at 9%. Principal and interest payments at 9% of $11,104 are
due monthly beginning April 1, 1997.
7. Intangibles
Intangible assets are stated at cost and principally represent purchased
customer accounts, noncompete agreements, purchased contract agreements,
and the excess of costs over the fair value of identifiable net assets
acquired ("Goodwill"). Purchased customer accounts, noncompete agreements,
and purchased contract agreements are being amortized on a straight-line
basis over the related estimated lives and contract periods, which range
from 3 to 15 years. Goodwill is being amortized on a straight-line basis
over 15 years. Purchased customer accounts are records and files obtained
from acquired businesses that contain information on insurance policies
and the related insured parties that is essential to policy renewals.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCL&L STATEMENTS (UNAUDITED)
7. Intangibles (continued)
The carrying value of goodwill and other intangible assets will be
reviewed if circumstances suggest that they may be impaired. If this
review indicates that the intangible assets will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired
over the remaining amortization period, the Company's carrying value of
the goodwill will be reduced by the estimated shortfall of cash flows.
8. Loss and Loss Adjustment Expenses
The liability for unpaid claims including incurred but not reported losses
is based on the estimated ultimate cost of settling the claim (including
the effects of inflation and other societal and economic factors), using
past experience adjusted for current trends and any other factors that
would modify past experience. These estimates are subject to the effects
of trends in loss severity and frequency. Although considerable
variability is inherent in such estimates, management believes that the
reserves for loss and loss adjustment expenses are adequate. The estimates
are continually reviewed and adjusted as necessary as experience develops
or new information becomes known. Such adjustments are included in current
operations. A liability for all costs expected to be incurred in
connection with the settlement of unpaid claims (claim adjustment expense)
is accrued when the related liability for unpaid claims is accrued. Claim
adjustment expenses include costs associated directly with specific claims
paid or in the process of settlement, such as legal and adjusters' fees.
Claim adjustment expenses also include other costs that cannot be
associated with specific claims but are related to claims paid or in the
process of settlement, such as internal costs of the claims function.
The Company does not discount its reserves for losses and loss adjustment
expenses. The Company writes primarily surety contracts which are of short
duration.
The Company does not consider investment income in determining if a
premium deficiency relating to short duration contracts exists.
9. Unearned Premiums
Unearned premiums are calculated using the monthly pro rata basis for
miscellaneous bonds and completion date or anticipated contract completion
date for contract bonds.
10. Reinsurance
The Company assumes and cedes reinsurance and participates in various
pools. The accompanying financial statements reflect premiums, benefits
and settlement expenses, and deferred policy acquisition costs, net of
reinsurance ceded. Amounts recoverable from reinsurers are estimated in a
manner consistent with the future policy benefit and claim liability
associated with the reinsured policies.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. Reinsurance (continued)
Accounts recoverable from reinsurers for unpaid losses are presented as an
asset in the accompanying consolidated financial statements.
11. Statutory Accounting Practices
Our underwriting operations are required to file financial statements with
state regulatory authorities. The accounting principles used to prepare
these statutory financial statements follow prescribe accounting
principles, which differ from GAAP. On a statutory accounting basis, our
underwriting operations reported income net of taxes of $477,617 at June
30, 1999 and $74,157 at December 31, 1998. Statutory surplus
(shareholders' equity) of these operations was $4,814,340 and $4,843,478
as of June 30, 1999 and December 31, 1998, respectively.
12. Comprehensive Income
We adopted the provisions of the SFAS No. 130, "Reporting Comprehensive
Income," in 1998. Comprehensive income is defined as any change in our
equity from transactions and other events originating from nonowner
sources. In our case, those changes are composed of our reported net
income and changes in the unrealized appreciation of our investment
portfolio. SFAS No. 130 requires that we report all components of
comprehensive income. The following summaries present the components of
our comprehensive income, other than net income, for the last two years.
Consolidated Statements of Comprehensive Income
(Unaudited)
------------------------------------------------------------------------
Six Months Ended June 30,
------------------------------------
1999 1998
------------------------------------
Net income $ 362,712 $ 646,761
Change in unrealized (depreciation)
Appreciation (131,073) 151,155
====================================
Comprehensive income $ 231,639 $ 495,606
====================================
13. Year 2000
The Company has employed consultants to address its Year 2000 issues in
conjunction with the Company's own information technology staff. Excluding
the costs for the Company's own information technology personnel, the
total cost of compliance is expected to be approximately $100,000 (of
which $41,000 including equipment upgrades will be a capital expenditure).
All costs (except capital) have been and will be expensed as incurred and
will be funded from the normal operating cash flows.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13. Year 2000 (continued)
The Company has developed an in-house surety administrative system
"Bond-Pro(TM)." Bond-Pro(TM) is an agency surety bond administration
system that issues bonds, tracks underwriting, and accounting and
reporting from its database. Bond-Pro(TM) is a window-based program and is
year 2000 compliant. The Company is aware of the issues that many computer
systems will face as the millennium (Year 2000) approaches. The Company,
however, believes that its own internal software and hardware is year 2000
compliant. The Company believes that any year 2000 problems encountered by
procurement agencies, and other customers and vendors are not likely to
have a material adverse effect on the Company's operations. The Company
anticipates no other year 2000 problems which are reasonably likely to
have a material adverse effect on the Company's operations. There can be
no assurance, however, that such problems will not arise.
Excluding any possible catastrophic events such as the loss of utilities
or banking, financial or communications services, the potential risks
known to the Company at this time are primarily limited to delays,
disruptions or losses resulting from information bottlenecks and the lack
of computer processing power. In order to mitigate the risk to the
greatest extent possible, the Company will be prepared to track
mission-critical information manually. Such information includes tracking
premium income, and receivables and recording payments received from
agencies. The Company believes its current workforce and the employment
pool available in the area is sufficiently skilled to accommodate such a
demand. The Company will continue to evaluate its contingency planning
activities as more information becomes available. At this time, the total
cost of the risks is not anticipated to have a material adverse effect on
the business, financial condition or results of operations of the Company.
14. Subsequent Events
On February 1, 1999, the Company filed a Registration Statement on Form
S-8 to register 400,000 shares of stock available to participants of the
1991 Stock Option Plan.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Forward-looking Statement Disclosure
This report contains certain forward-looking statements within the meaning of
the Private Litigation Reform Act of 1995. Forward-looking statements are
statements other than historical information or statements of current condition.
Words such as experts, anticipates, intends, plans, believes, seeks or
estimates, or variations of such words, and similar expressions are also
intended to identify forward-looking statements. Examples of these
forward-looking statements include statements concerning the effects of
competition on premiums and revenues, expectations regarding Year 2000 issues
and the Company's efforts to address them.
All statements, other than statements of historical facts, included or
incorporated by reference in this Form 10-Q which address activities, events or
developments which the Company expects or anticipates will or may occur in the
future, including statements regarding the Company's competitive position,
changes in business strategy or plans, the availability and price of
reinsurance, the Company's ability to pass on price increases, plans to install
the Bond-Pro(TM) program in independent insurance agencies, the impact of
insurance laws and regulation, the availability of financing, reliance on-key
management personnel, ability to manage growth, the Company's expectations
regarding the adequacy of current financing arrangements, product demand and
market growth, and other statements regarding future plans and strategies,
anticipated events or trends similar expressions concerning matters that are not
historical facts are forward-looking statements. These statements are based on
certain assumptions and analysis made by the Company in light of its experience
and its perception of historical trends, current conditions and expected future
developments as well as factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties which could cause actual results to differ significantly and
materially from past results and from the Company's expectations. The Company
assumes no obligation to update publicly any such forward-looking statements,
whether as a result of new information, future events or otherwise.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCE
The capacity of a surety company to underwrite insurance and reinsurance
is based on maintaining liquidity and capital resources sufficient to pay claims
and expenses as they become due. Based on standards established by the National
Association of Insurance Commissioners (NAIC) and promulgated by the Florida
Department of Insurance, the Company is permitted to write premiums up to an
amount equal to three times its statutory surplus, or approximately $14,400,000
at June 30, 1999. Therefore, based upon statutory guidelines, the Company could
increase earned premiums by approximately $6,900,000 in 1999 in addition to the
amount earned in 1998. The primary sources of liquidity for the Company are
funds generated from surety premiums, investment income, and proceeds from sales
and maturities of portfolio investments. The principal expenditures are payment
of losses and loss adjustment expenses, insurance operating expenses, and
commissions.
At June 30, 1999, the Company's $17,066,716 of total assets calculated
based on generally accepted accounting principles were distributed primarily as
follows: 45 percent in cash and investments (including accrued investment
income), 38 percent in receivables and reinsurance recoverables, 16 percent in
intangibles and deferred policy acquisition costs and 1 percent in other assets.
The Company maintains a liquid operating position and follows investment
guidelines that are intended to provide an acceptable return on investment while
maintaining sufficient liquidity to meet its obligations.
Net cash used in operating activities was $470,548 and $739,056 for the
six months ended June 30, 1999 and 1998, respectively. Net cash used in
providing operating activities during 1999 is attributed to an increase in trade
and reinsurance receivables and policy and other liabilities which is offset by
a decrease in reinsurance payables. Net cash used in operating activities during
1998 is attributed to a net increase in reinsurance recoverables and trade
receivables, which is offset by a decrease in policy liabilities, ceded
reinsurance payable and policy acquisition costs, net of amounts deferred.
Net cash provided by investing activities was $765,900 and $1,344,823 for
the six months ended June 30, 1999, and 1998, respectively. Investing activities
consist of purchases and sales and maturities of investments.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
During the six months ended June 30, 1999, net premium income totaled
$4,429,255 representing a net increase of 24 percent from that of the same
period in 1998 ($3,572,920). The increase is attributed to the marketing
direction of the Company, which is to penetrate the direct market. During the
first six months of 1999 as compared to the same period during 1998, direct
premiums increased $751,913 (19%); assumed premiums increased $493,773 (101%)
and ceded premiums increased $389,352 (46%). CCS's reinsurance assumed premiums
increased as a result of quota share agreements whereby CCS assumes a portion of
the premiums written by agencies contracted to produce business using
Cumberland's Bond-Pro(TM) issuance program. The increase in ceded premiums is
related to the volume of direct and assumed premiums based on their relationship
under the Company's reinsurance treaties.
Net investment income for the six months ending June 30, 1999 decreased by
$37,126 or 17%. The decrease results from the decline in interest rates in 1999
and 1998. The Company has maintained its cash balance in U.S. Treasury money
market funds to optimize its investment position. Net realized gains were $9,946
and $170,318 for the periods ending June 30, 1999 and 1998, respectively. Other
income decreased by $245,035 or 26%. The decrease is attributable to the
Company's market focus of direct writings for CCS. As a result, subsidiary
company's earnings attributed to income earned in other markets have decreased.
During the six months ended June 30, 1999 and 1998, benefits and claims
expenses increased to $1,058,079 from $880,956. Incurred expenses represent the
net reserve increase after deduction of paid claims and fluctuates based on
premiums written and earned as well as claims incurred and paid. The increase of
$177,123 is consistent with the flow of premiums when comparing the period
ending June 30, 1999 to the same period of 1998.
During the six months ended June 30, 1999, the amortization of deferred
policy acquisition costs increase is attributed to the increase in premiums
written and earned. Amortization of deferred policy acquisition costs represent
commission incurred as they relate to premiums earned.
Operating expenses decreased by $80,384 or 4% for the period ending June
30, 1999 when compared to the same period in 1998. The decrease is attributed to
a decrease in salary and payroll expenses, consulting fees and other general
expenses and is partially offset by an increase in legal fees and travel
expenses.
The increase in interest expense in 1999 is attributed to the interest on
the note payable to affiliate of $1,000,000 executed in the fourth quarter of
1998.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
During the three months ended June 30, 1999, net premium income totaled
$2,270,006 representing an increase of 24 percent from that of the same period
in 1998 ($1,834,462). During the three months ending June 30,1999 as compared to
the same period during 1998, direct premiums increased $252,501 (12%); assumed
premiums increased $459,756 (435%) and ceded premiums increased $276,713 (71%).
Assumed premium increased as a result of the quota share agreements whereby CCS
assumes a portion of the premiums written by agencies contracted to produce
business using Cumberland's Bond-Pro(TM) issuance program. Ceded premiums
increase as the volume of direct premiums increase based on their relationship
under the Company's reinsurance treaties.
Net investment income for the three months ending June 30, 1999 as
compared to the same period during 1998 decreased $27,382. Net decrease reflects
the decreasing interest rates on the bond and money market holdings of the
Company. Net realized gains during 1998 were $104,144 higher than realized gains
for the same period of 1999. Other income decreased by $184,958 during the three
months ending June 30, 1999 when compared to 1998. The decrease is attributable
to the Company's market focus of direct premium writings for CCS. As a result,
subsidiary company's earnings attributed to income earned in other markets have
decreased.
During the three months ended June 30, 1999 and 1998, benefits and claims
expenses increased to $581,368 from $528,536. Incurred expenses represent the
net reserve increase after deduction of paid claims and fluctuates based on
premiums written and earned as well as claims incurred and paid. The increase of
$52,833 is consistent with the flow of premiums when comparing the three months
ending June 30,1999 to the same period of 1998.
During the three months ended June 30, 1999, the amortization of deferred
policy acquisition costs increase is consistent with the increase in premiums
written and earned.
Operating expenses decreased by $5,866 or 1% for the three months ended
June 30, 1999 when compared to the three months ended June 30, 1998.
The increase in interest expense in 1999 is attributed to the interest on
the note payable to affiliate of $1,000,000 executed in the fourth quarter of
1998.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changed in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other Information
None
Item 6. Exhibits and reports on Form 8-K
(a) None
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUMBERLAND TECHLOGIES, INC.
Date: August 13, 1999 By: /s/ Joseph M. Williams
------------------------------- ----------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principle Executive Officer)
Date: August 13, 1999 By: /s/ Carol S. Black
------------------------------- ------------------------
Carol S. Black
Secretary and Chief Financial Officer
(Principle Accounting and Financial
Officer)
<PAGE>
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