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, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _____________.
Commission File No. 0-19727
CUMBERLAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3094503
--------------------------- -------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
4311 West Waters Avenue, Suite 501
Tampa, Florida 33614
------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(813) 885-2112
--------------------------
(Registrant's telephone number, including area code)
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)
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]
$2,556,232
----------
Aggregate market value of voting stock (Common Stock) held by
nonaffiliates of the Registrant as of March 15, 2000
5,497,244 shares of Common Stock $.001 par value
------------------------------------------------
Number of shares of Common Stock outstanding as of March 27, 2000
Documents incorporated by reference: NONE
<PAGE>
PART I
Item 1. Business
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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 ("SA") and Qualex
Consulting Group, Inc. ("Qualex") in the delivery of specialty surety and
insurance services. Surety services include underwriting surety bonds on a
direct and assumed basis, surety consulting and the development of surety
software. Insurance services include the underwriting of speciality and other
liability insurance products. In addition, the Company conducts its business
through a number of independent agencies which focus on selling and delivering
surety insurance products to consumers. Traditionally, this segment of the
surety industry has delivered its products through an antiquated manual process.
Because of this need to advance technologically, the Company developed a
software product called Bond-Pro(R). This patented surety issuance system
increases the speed that surety agents deliver their products to the customer
and financially report those transactions to the carrier, while reducing
operating costs. The Company's business strategy is to continue the underwriting
focus of each of its operating subsidiaries and to achieve growth through the
expanded licensing of Bond-Pro(R).
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.
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 risk of 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.
<PAGE>
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(R) 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, 1999 are as follows:
Subsidiary Revenue Percentage
---------- ------------------
CCS 83%
SSI 5
Qualex 5
SA 3
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 401, 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.
<PAGE>
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 $50,000 and are usually written on a
volume basis.
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 policyholder 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(R)." 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 its unique service affording
it the ability to capture a larger 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. CTI offers its Bond-Pro(R)
program to small and medium size agencies in order to produce premium for CCS.
The efficiencies gained in using the Bond-Pro(R) 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, publicly 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 and claims settlement
performance and capabilities. The reinsurance coverage terms are tailored to the
specific risk characteristics of the underlining products of the company.
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 $145,000 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.
<PAGE>
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.
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 1999, 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
consolidated financial statements and there are no explicit provisions in the
consolidated 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.
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.
<PAGE>
An Investment Committee of CCS's Board of Directors establishes
investment policy and oversees the management of the portfolios.
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.
The Company, while competitive in pricing and commission, believes that
the availability of its proprietary Bond-Pro(R) 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.
<PAGE>
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.
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 calculated its RBC requirements
as of December 31, 1999 and met the standards under the NAIC guidelines.
Controlling Shareholders
Francis Williams, and "KC" (collectively "Majority Shareholder") owns
79.7% of the outstanding ordinary shares of the Company and collectively control
the policies and affairs of the Company. Circumstances may arise in which the
interest 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
Shareholder 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, 1999, the Company had 39 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(R) program in independent insurance agencies, the impact of
insurance laws and regulation, the availability of financing, reliance on key
management personnel, ability to manage growth, the Company's expectations
regarding the adequacy of current financing arrangements, product demand and
market growth, and other statements regarding future plans and strategies,
anticipated events, trends or similar expressions concerning matters that are
not historical facts are forward looking statements. These statements are based
on certain assumptions and analyses 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.
Item 2. Properties
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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 $7,278, pursuant to a lease that was executed
March 1, 1997 and is effective through December 31, 2000. Effective March 1,
2000, the monthly rate will be $9,878 as a result of increased operating costs
and improvements.
Management considers the rented and leased office facilities of its
subsidiaries adequate for the current and anticipated future level of
operations.
Item 3. Legal Proceedings
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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.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
None
<PAGE>
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.
Name Position Presently Held Entity Period of Service
- ---- ----------------------- ------ -----------------
Joseph M. Williams: President CTI: 06/1992 to date
Edward J. Edenfield 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 1999 and 1998 were as
follows:
Bid Information
-------------------------------------------------------
1999 1998
-------------------------------------------------------
High Low High Low
-------------------------------------------------------
First Quarter $ 2 5/8 $ 1 3/4 $ 2 1/2 $ 2 1/2
Second Quarter 2 3/8 1 7/8 2 3/4 2 3/8
Third Quarter 2 1/8 1 7/8 3 1/8 3 1/8
Fourth Quarter 2 3/8 1 1/2 2 1 5/8
As of March 10, 2000, there were 856 stockholders of record of the
Common Stock. A number of such holders are brokers and other institutions
holding shares in "street name" for more than one beneficial owner.
Dividends
The payment by the Company of dividends, if any, in the future is
within the discretion of its Board of Directors and will depend upon the
Company's earnings, capital requirements (including working capital needs), and
other financial needs. Cumberland does not anticipate paying any dividends on
Cumberland Common Stock in the near future.
The future payment of dividends, if any, by CCS is within the
discretion of its Board of Directors and will depend upon CCS's earnings,
statutory limitations, capital requirements (including working capital needs)
and financial condition, as well as other relevant factors. Applicable state
laws and regulations restrict the payment of dividends by CCS to the 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
- ------- -----------------------
The following selected financial data are taken from the Company's
consolidated financial statements. The data should be read in conjunction with
the accompanying consolidated financial statements and the related notes,
Management's Discussion and Analysis and other financial information included in
this Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations Data:
Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------
(In Thousands - except per share data)
<S> <C> <C> <C> <C> <C>
Operating data:
Net premium income ......................... $ 9,618 $ 7,534 $ 5,684 $ 3,808 $ 5,068
Commission income .......................... 474 710 860 1,386 774
Other income .............................. 901 827 616 653 425
Net investment income ..................... 333 377 408 404 397
Net realized investment gain (losses) ..... 129 (437) 202 118 124
Benefits and expense ...................... 10,270 9,332 7,599 6,952 7,016
Income (loss) before income taxes ......... 1,185 (321) 171 (583) (228)
Net income (loss) ......................... 1,148 (321) 171 (583) (228)
Net income (loss) per share (1) ............... $ .21 $ (.06)$ .03 $ (.14) $ (.06)
</TABLE>
(1) The net loss per share for 1995 has been calculated based on the 4,039,780
shares of Cumberland Common Stock that were outstanding after the Distribution.
The 1999, 1998, 1997 and 1996 net income (loss) per share amounts have been
computed based on the actual weighted average number of shares outstanding
during the respective years.
<TABLE>
<CAPTION>
Balance Sheet Data:
December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Investments ............................... $ 8,394 $ 3,987 $ 6,469 $ 6,110 $ 6,303
Cash and cash equivalents ................. 2,000 4,202 1,804 669 1,236
Accrued investment income ................. 66 55 - - -
Accounts receivable ....................... 3,301 3,105 1,966 925 550
Reinsurance recoverables .................. 2,898 2,306 2,017 1,590 1,697
Deferred policy acquisition costs ......... 1,601 1,247 813 635 435
Intangibles ............................... 1,267 1,456 1,681 1,957 2,163
Other investments ......................... 559 553 244 - -
Deferred tax asset ........................ 305 - - - -
Other assets .............................. 315 354 327 486 325
Total assets .............................. 20,706 17,265 15,321 12,372 12,709
Policy liabilities and accruals:
Unearned premiums ......................... 4,844 3,750 2,629 1,862 1,182
Losses and LAE ............................ 4,577 3,220 2,550 1,992 2,352
Ceded reinsurance and accounts
payable ............................... 2,277 2,615 2,714 1,172 1,523
Income tax payable ....................... 35 - - - -
Term notes/surplus debentures, including
accrued interest ............................. 1,000 1,000 0 0 4,798
Other long-term debt ......................... 1,281 1,331 1,419 1,533 1,564
Total liabilities ............................ 14,014 11,916 9,312 6,559 11,419
Total stockholders' equity ................... 6,692 5,349 6,009 5,813 1,290
</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 31,
Year Ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net premium income ................... $ 9,618 $ 7,534 $ 5,684 27.7% 32.5%
Net investment income ................ 333 377 408 (11.7)% (7.6)%
Net realized investment gains
(losses) .......................... 129 (437) 202 129.5% (316.3)%
Other revenues ....................... 1,375 1,537 1,476 (10.5)% 4.2%
Losses and loss adjustment
expenses .......................... 2,395 2,648 1,792 (9.6)% 47.8%
Amortization of deferred
acquisition costs ................. 2,895 2,252 1,779 28.6% 26.6%
General expenses and taxes ........... 4,980 4,432 4,028 12.4% 10.0%
Income (loss) before income
taxes ............................. 1,185 (321) 171 469.2% (287.7)%
Income tax expenses .................. 37 - - - -
Net income (loss) .................... 1,148 (321) 171 457.6% (287.7)%
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Written direct and assumed premiums reached a record $13,237,460 during
1999. Overall written premiums, net of ceded premium increased by $1,922,427 or
22%. Earned premium growth increased by $2,084,108 or 28% to $9,617,792 for 1999
compared to $7,533,684 for 1998. The increase in earned premiums resulted from
CCS's continued growth in the direct surety bond market.
During 1999, premiums written by CCS increased as a result of the
continued marketing direction of the Company, which is to penetrate the direct
market while decreasing the volume of reinsurance premiums assumed through
Pooling Agreements. CCS's reinsurance assumed premium is a result of quota share
agreements whereby CCS assumes a portion of the premiums written by agencies
contracted to produce business using Cumberland's Bond-Pro(R) issuance program.
The increase in ceded premiums is correlated to the direct premium written and
the association to excess of loss treaties on these premiums. The following
table reflects the written premium activity, net of reinsurance ceded, for 1999
and 1998.
Written Premiums
--------------------------------------------------------------------
1999 1998 % Change
---------------------- ---------------------- ----------------------
Direct ..$ 10,816,114 $ 9,451,746 14.4%
Assumed . 2,421,346 1,478,109 63.8%
Ceded ... (2,740,148) (2,354,970) (16.4)%
---------------------- ----------------------- ----------------------
Total ...$ 10,497,312 $ 8,574,885 22.4%
====================== ======================= ======================
<PAGE>
During the year ended December 31, 1999 and 1998, net investment income
earned was $333,462 and $377,218, respectively. Realized net losses and gains
for the years ended December 31, 1999 and 1998 were $129,101 and $(437,565),
respectively. CCS wrote down its 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 in 1998,
which was 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. For the
year ended December 31, 1999, other revenues decreased by $162,145 (11%) which
is attributable to the transfer of direct writings by subsidiary agencies for
other carriers in 1998 to CCS in 1999.
Losses and loss adjustment expenses decreased to $2,394,532 from
$2,648,074 for the year ended December 31, 1999 and 1998, respectively. The
decrease of $253,542 or 9.6% is attributed to a decrease on claims incurred on
assumed pooling business. Direct incurred losses increased $423,081 (183.9%)
while losses under the assumed pooling agreements decreased $981,978 (94.5%).
Assumed claims on the expired pooling agreements were impacted during 1998 by
losses incurred of $1,039,232. The following tables reflects the 1999 activity
as it pertains to earned premiums and incurred claims:
Premiums Earned Claims Incurred Ratio
---------------------- ---------------------- ----------------------
Direct, net $ 7,538,112 $ 1,684,078 22.3%
Assumed, net 2,079,680 653,201 31.4%
Assumed
(pooling net) - 57,253 -
---------------------- ---------------------- ----------------------
Total $ 9,617,792 $ 2,394,532 24.9%
====================== ====================== ======================
During the year ended December 31, 1999 the net amortization of
deferred policy acquisitions costs increased to $2,895,834 from $2,252,195 for
the year ended December 31, 1998. The increase is attributed to the increase in
earned premiums.
During the year ended December 31, 1999, operating expenses and taxes,
licenses and fees (excluding income taxes) increased to $4,766,101 from
$4,313,278 in 1998. The increase of $452,823 or 10% is a result of increased
salary expense including bonuses, payroll taxes and employee benefits of
$112,550; travel expenses of $102,665; increased taxes, licenses and fees of
$141,370 and general office expenses of $96,238. The increase in salary, travel
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 on non-affiliated debt is interest paid to the Surety
Group and Surety Associates on notes due to agencies the Company purchased in
1995.
The Company incurred income tax expenses during 1999 of $36,686. Due to
tax loss carryforwards, the Company did not incur income tax expense on a
consolidated basis for the years ending December 31, 1998 and 1997,
respectively.
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Written direct and assumed premiums reached a then record $10,929,855
during 1998. Overall written premiums, net of ceded premium increased by
$2,340,624 or 37.5%. Earned premium growth increased by 32.5% to $7,533,684 for
1998 as compared to $5,683,945 for 1997. The increase in earned premiums
resulted from CCS's continued growth in the direct surety bond market.
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 CCS's Bond-Pro(R) 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, net 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 its 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 was
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 $61,049 (4%)
is related to revenues earned through the Company's claim consulting group.
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 (48%) is attributed to an increase of $327,956 (31%) in
direct claims incurred and $528,001 (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 $1,039,232. 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 Earned Claims 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%
====================== ====================== =====================
<PAGE>
During the year ended December 31, 1998 the 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 $409,802 or 10% is a result of increased
salary expense including bonuses, payroll taxes and employee benefits of
$180,161, general office expenses of $22,797 and increased taxes, licenses and
fees of $206,844. 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 ended December 31, 1998 and 1997,
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 $15,320,000 at December 31, 1999. Statutory guidelines impose an
additional limitation on increasing net written premiums to no more than 33% of
prior year's net written premiums. Under these guidelines, the Company could
increase net written premiums by approximately $3,500,000.
At December 31, 1999, the Company's $20,706,550 of total assets
calculated based on generally accepted accounting principles were distributed
primarily as follows: 50.5 percent in cash and investments (including accrued
investment income), 29.9 percent in receivables and reinsurance recoverables,
13.9 percent in intangibles and deferred policy acquisition costs, 1.5 percent
in deferred income tax asset and 4.2 percent in other assets.
The Company follows investment guidelines that are intended to provide
an acceptable return on investment while maintaining sufficient liquidity to
meet its obligations.
Net cash provided by (used in) operating activities was $1,965,077,
$(193,734) and $1,925,903 for the years ended December 31, 1999, 1998 and 1997,
respectively. In 1999, the cash provided by operating activities was primarily
attributable to increases in net income and accrued policy liabilities on claims
and reinsurance. In 1998, the decrease in cash provided by operating activities
is primarily attributed to an increase in receivables of $1,422,588 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.
Net cash (used in) provided by investing activities was $(4,133,973),
$1,410,318 and $(364,768) for the years ended December 31, 1999, 1998 and 1997,
respectively. Investing activities consist of purchases and sales of
investments.
<PAGE>
Net cash (used in) provided by financing activities was $(33,308),
$1,182,237 and $(426,681) for the years ended December 31, 1999, 1998 and 1997,
respectively. Financing activities consist of purchases of treasury stock,
long-term and short-term borrowings and repayment on borrowings during 1999,
1998 and 1997.
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.
<PAGE>
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 1999, 1998 and
1997 to the gross amounts reported in Cumberland's balance sheets:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C>
Liability for losses and LAE, net of reinsurance
recoverable on unpaid losses, at beginning
of year ...................................... $ 1,680,580 $ 1,392,931 $ 594,922
---------------------------------------------------------------
Provision for losses and LAE for claims occurring
in the current year, net of reinsurance ...... 2,810,532 2,331,074 1,743,117
Increase (decrease) in estimated losses and LAE for
claims occurring in prior years, net of
reinsurance .................................. (416,000) 317,000 49,000
---------------------------------------------------------------
Incurred losses during the current year, net of
reinsurance .................................. 2,394,532 2,648,074 1,792,117
Losses and LAE payments for claims, net of
reinsurance, occurring during:
Current year ................................. 135,635 557,997 553,629
Prior years .................................. 1,130,750 1,802,428 440,479
---------------------------------------------------------------
1,266,385 2,360,425 994,108
Liability for losses and LAE, net of reinsurance
recoverable on unpaid losses, at end of year . 2,808,727 1,680,580 1,392,931
Reinsurance recoverables on unpaid losses at end of
year ......................................... 1,767,812 1,539,877 1,157,369
---------------------------------------------------------------
Liability for losses and LAE, gross of reinsurance
recoverables on unpaid losses, at end of year .. $ 4,576,539 $ 3,220,457 $ 2,550,300
===============================================================
</TABLE>
Cumberland experienced a $416,000 redundancy and deficiencies of
$317,000 and $49,000 for losses and loss adjustment expenses in 1999, 1998 and
1997, respectively. The redundancy principally resulted from subrogation
received on pooling agreement case base reserves and claims in prior years. 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 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, 1999 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:
<PAGE>
Liability for losses and LAE on a SAP basis (which is net of
reinsurance recoverables on unpaid losses and LAE) ..... $ 2,808,727
Reinsurance recoverables on unpaid losses and LAE ...... 1,767,812
--------------------
Liability for losses and LAE, as reported in the
accompanying GAAP basis consolidated
financial statements ................................. $ 4,576,539
====================
Analysis of Loss and Loss Adjustment Expense Development
The following table represents the development of the liability for
unpaid losses and LAE, net of reinsurance, for 1992 through 1999 (in thousands).
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 1998 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for losses and loss
adjustment expenses, net
of reinsurance ............ $ 2,426 $ 1,709 $ 1,625 $ 1,053 $ 595 $ 1,393 $ 1,680 $ 2,809
Liability re-estimated as of:
One year later ............ 2,239 3,815 1,384 1,716 644 1,710 1,264 -
Two years later ........... 2,546 2,579 1,420 1,815 1,013 1,711 - -
Three years later ......... 2,263 2,750 1,631 2,049 1,121 - - -
Four years later .......... 2,418 2,851 1,726 2,036 - - - -
Five years later .......... 2,408 3,176 1,625 - - - - -
Six years later ........... 2,970 3,139 - - - - - -
Seven years later ......... 2,310 - - - - - - -
----------------------------------------------------------------------------------------
Cumulative (deficiency)
redundancy ................ $ 116 $ (1,430) $ - $ (983) $ (526) $ (318) $ 416 $ 2,809
========= ========= ======== ========= ========= ========= ========= ========
1992 1993 1994 1995 1996 1997 1998 1999
----------------------------------------------------------------------------------------
Cumulative amount of
liability, net of
reinsurance recoverables,
paid through:
One year later .......... $ 1,151 $ 765 $ 1,643 $ 1,334 $ 563 $ 1,802 $ 2,155 $ -
========= ======== ======== ======== ======== ======== ========= =========
Two years later ......... $ 1,834 $ 1,058 $ 2,316 $ 2,186 $ 1,631 $ 2,856 $ - $ -
========= ======== ======== ======== ======== ======== ========= =========
Three years later ....... $ 2,088 $ 2,868 $ 2,164 $ 2,997 $ 2,466 $ - $ - $ -
========= ======== ======== ======== ======== ======== ========= =========
Four years later ........ $ 1,957 $ 3,717 $ 2,875 $ 3,506 $ - $ - $ - $ -
========= ======== ======== ======== ======== ======== ========= =========
Five years later ........ $ 3,533 $ 4,442 $ 3,230 $ - $ - $ - $ - $ -
========= ======== ======== ======== ======== ======== ========= =========
Six years later ......... $ 3,840 $ 4,804 $ - $ - $ - $ - $ - $ -
========= ======== ======== ======== ======== ======== ========= =========
Seven years later ....... $ 2,278 $ - $ - $ - $ - $ - $ - $ -
========= ======== ======== ======== ======== ======== ========= =========
</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 tables present principal maturity cash flows and relates
weighted average interest rates by expected maturity as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 Expected Maturity Date
-------------------------------------------------------------------------------
Fair
There- Value
2000 2001 2002 2003 2004 after Total 12/31/99
-------------------------------------------------------------------------------
(U.S. Equivalent in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Debt securities available for sale $ 3,099 - - 121 - 478 $ 3,698 $ 3,698
Average interest rate ........ 5.8% - - 5.8% - 6.1% - -
Debt securities held to maturity $ 1,500 865 - 255 95 - $ 2,715 $ 2,715
Average interest rate ........ 5.9% 6.3% - 5.5% 5.5% - - -
Mortgage loans .................. 896 1 1 2 2 38 940 940
Average interest rate ........ 8.9% 7.5% 7.5% 7.5% 7.5% 7.5% - -
Short-term investments .......... 430 - - - - - 430 430
Average interest rate ........ 4.7% - - - - - - -
Liabilities
Long-term, debt including current
portion ...................... $ 183 1,184 183 70 84 577 $ 2,281 $ 2,281
Average interest rate ........ 9.42% 9.35% 9.74% 9.04% 8.02% - - -
</TABLE>
<TABLE>
<CAPTION>
1998 Expected Maturity Date
-------------------------------------------------------------------------------
Fair
There- Value
1999 2000 2001 2002 2003 after Total 12/31/98
-------------------------------------------------------------------------------
(U.S. Equivalent in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Debt securities available for sale $ 750 600 25 - 125 582 $ 2,082 $ 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.
Additionally, the risk that the Company's results of operations may
suffer from rapid changes in interest rates is substantially mitigated as a
result of all of the Company's interest-earning assets and interest-bearing
liabilities being written at fixed rates.
Item 8. Consolidated financial statements and Supplementary Data
- ------ --------------------------------------------------------
The consolidated 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
--------------------
On January 3, 2000, the Company filed a Form 8-K to register its change
in certifying accountant.
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 58 Chairman of the Board of Directors
Joseph M. Williams 43 President and Treasurer
Andrew J. Cohen 46 Director
R. Donald Finn 56 Director
Edward J. Edenfield IV 42 President, CCS
All Directors of Cumberland hold office until the next annual meeting
of stockholders and the election and qualification of their successors. Officers
of Cumberland are elected annually by the Board of Directors and hold office at
the discretion of the Board.
Set forth below is information regarding the directors and executive
officers of Cumberland:
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.
<PAGE>
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.
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 was a Director of Cumberland since its inception through
September 9, 1999. 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. Mr. Chandler
resigned from the Board effective September 9, 1999.
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 experiences to Cumberland.
R. Donald Finn was elected as a Director to Cumberland's Board
effective September 9, 1999. For more than the last five years, Mr. Finn has
been a partner in the law firm of Gibson, McAskill & Crosby, located in Buffalo,
New York, where Mr. Finn has practiced law for more than the last 25 years.
<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, 1999 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
- -------- --------------------------------------------
<TABLE>
Summary Compensation Table
<CAPTION>
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 and CCS's President for each of the three
years in the period ended December 31, 1999:
Long-Term Compensation
------------------------------------------------------------------------------------
Stock All Other
Annual Compensation Options Compensation
------------------------------------------------------------------------------------
Name of Individual and
Principal Position 1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joseph M. Williams
President and Treasurer, CTI
Salary ................. $ 95,000 $ 95,000 $ 95,000 $ - $ - $ -
Bonus .................. $ 60,000 $ 30,000 $ 30,000 $ - $ - $ -
Edward J. Edenfield IV
President and CEO, CCS
Salary .................. $ 115,000 $ 116,731 $ 105,000 $ - $ - $ -
Bonus ................... $ 35,000 $ 25,000 $ 14,500 $ - $ - $ -
</TABLE>
Aggregate Option Exercises in 1999 and December 31, 1999 Option Values
The following table shows information concerning options held by the
officers shown in the Summary Compensation Table at the end of 1999. Mr. Joseph
M. Williams exercised 24,000 options in 1999.
Value of Unexercised
Number of Securities Underlying In-the-Money
Unexercised Options at Fiscal Options at Fiscal
Year End Year End ($)(1)
Name (#) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------
Joseph M. Williams 100,000/0 $175,000/0
Edward J. Edenfield IV 16,000/0 $28,000/0
(1) Represents the dollar value of the difference between the value at December
31, 1999 and the option exercise price of unexercised options at December
31, 1999.
<PAGE>
Compensation Committee Interlocks and Insider Participation
There is no compensation committee of the Company's Board of Directors
or other committee of the Board performing equivalent functions. The person who
performs the equivalent function is Francis M. Williams, Chairman of the Board.
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, 1999, the Company paid nonofficer
Directors an annual fee of $5,000. Directors are reimbursed for all
out-of-pocket expenses incurred in attending Board of Directors and committee
meetings.
Board Compensation Committee Report on Executive Compensation
There is no formal compensation committee of the Board of Directors or
other committee of the Board performing equivalent functions. As noted above,
compensation is determined by Francis M. Williams, Chairman of the Board of the
Company under the direction of the Board of Directors. There is no formal
compensation policy for the Chief Executive Officer of the Company. Compensation
of the Chief Executive Officer, which primarily consists of salary, is based
generally on performance and the Company's resources. Compensation for Mr.
Joseph Williams has been fixed annually each year by the Chairman of the Board.
Mr. Joseph Williams' compensation is not subject to any employment contract.
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, 1999 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:
Amount and Nature of Beneficial Percent of Issued
Name and Address Ownership of and Outstanding
of Beneficial Owner (1) (2) Common Stock Common Stock
- --------------------------------------------------------------------------------
Francis M. Williams 3,721,515 (3) 67.7%
Joseph M. Williams 358,783 (4) 6.5%
R. Donald Finn 2,131 (5) *
Andrew J. Cohen 42,590 (6) .8%
Edward J. Edenfield IV 16,000 (7) .2%
Kimmins Corp. 1,723,290 31.3%
All directors and executive
Officers as a group (five persons) 4,802,762 85.8%
(1) The address of all officers and Directors of Cumberland listed above are in
care of Cumberland at 4311 W. Waters Ave., Suite 401, Tampa, Florida 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 2,436,529 shares owned by Mr. Francis Williams; 1,061,547 shares
allocated to Mr. Williams based on his 61.1% 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 153,050 held by various Real Estate Partnerships of which
Mr. Williams is 100 percent Owner. Mr. Williams owns 63.9% of the
outstanding common stock of Kimmins Corp. and is its Chairman and Chief
Executive Officer.
(4) Includes 32,800 shares owned by Mr. Joseph M. Williams; options to acquire
100,000 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 2,131 shares owned by Mr. R. Donald Finn.
(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 16,000 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, 1999, no
payments could be made under the terms of the debenture. 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 from $423,734.
CTI entered into a term note agreement with KC for the outstanding
amount of the surplus debenture, including interest in arrears of ($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.
<PAGE>
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 common
stock at $3.00 per share subsequent to a six month anniversary and prior to the
close of business on the maturity date.
CCS writes surety bonds for KC and its affiliates. Revenues
attributable to transactions with KC and its affiliates were $10,342, $14,907
and $1,738 for the years ended December 31, 1999, 1998 and 1997, respectively.
Qualex performs consulting services for KC and affiliates. Revenue attributable
to transaction with affiliates were $117,075, $282,193 and $310,396 for years
ended December 31, 1999, 1998 and 1997, respectively.
Item 14. Exhibits, Consolidated 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. Consolidated Financial Statements
- Report of Independent Auditors - Report of Independent
Certified Public Accountants - Consolidated balance sheets at
December 31, 1999 and 1998 - Consolidated statements of
operations for each of the three
years in the period ended December 31, 1999.
- Consolidated statements of stockholders' equity for each of
the three years in the period ended December 31, 1999.
- Consolidated statements of cash flows for each of the three
years in the period ended December 31, 1999.
- Notes to consolidated financial statements
2. Financial Statement Schedule
Schedule II - Condensed Financial Information of Registrant
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.
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
23.1 - Consent of Deloitte & Touche LLP
23.2 - Consent of Ernst & Young LLP
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
On November 12, 1999, the Company filed a Form 8-K to register changes
in Registrant's Certifying Accountant.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate
section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as a separate
section of this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized.
Date: April 14, 2000 CUMBERLAND TECHNOLOGIES, INC.
Date: April 14, 2000 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 14, 2000 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams, President
Date: April 14, 2000 By: /s/ Francis M. Williams
--------------------------------------------
Francis M. Williams, Chairman of the Board
Date: April 14, 2000 By: /s/ R. Donald Finn
--------------------------------------------
R. Donald Finn, Director
Date: April 14, 2000 By: /s/ Andrew J. Cohen
--------------------------------------------
Andrew J. Cohen, Director
Date: April 14, 2000 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 Consolidated Financial Statements
Consolidated Financial Statement Schedules and Exhibits
Year Ended December 31, 1999
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
----
Independent Auditors' Report .................................................30
Report of Independent Certified Public Accountants ...........................31
Consolidated Balance Sheets at December 31, 1999 and 1998 .................32-33
Consolidated Statements of Operations for Each of the
Three Years in the Period ended December 31, 1999 ...........................34
Consolidated Statements of Stockholders' Equity for
Each of the three years in the Period ended December 31, 1999 ...............35
Consolidated Statements of Cash Flows for Each of the
three years in the Period ended December 31, 1999 ...........................36
Notes to Consolidated Financial Statements ...................................37
The following financial statement schedule is filed as part of this report:
Schedule II - Condensed Financial Information of Registrant ..................55
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>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cumberland Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Cumberland
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 1999, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended. Our audit also included the financial
statement schedule listed in the Index. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
at December 31, 1999 and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Also, in our opinion the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Tampa, Florida
April 7, 2000
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Cumberland Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Cumberland
Technologies, Inc. as of December 31, 1998 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 the consolidated results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Tampa, Florida
March 19, 2000
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
-----------------------------
1999 1998
-----------------------------
Investments:
Securities available-for-sale at fair value:
Debt securities ........................... $ 3,698,506 $ 2,081,770
Equity securities ......................... 602,194 576,575
Debt securities held-to-maturity at amortized
cost (fair value, 1999 - $2,714,801;
1998 - $896,246) .......................... 2,722,489 860,508
Mortgage loans on real estate, at unpaid
principal ................................. 940,304 44,427
Short-term investments ....................... 430,239 423,993
------------ -----------
Total investments ......................... 8,393,732 3,987,273
Cash and cash equivalents ........................ 2,000,147 4,202,351
Accrued investment income ........................ 66,088 55,348
Reinsurance recoverable .......................... 2,898,422 2,306,372
Accounts receivable:
Less allowance for doubtful accounts of
$27,000 and $ - 0 - respectively ......... 2,896,358 2,729,774
Affiliate .................................... 404,481 375,304
Income tax recoverable ........................... -- 120,000
Deferred income tax asset ........................ 304,983 --
Deferred policy acquisition costs ................ 1,601,427 1,246,555
Intangibles, net ................................. 1,266,635 1,455,525
Other investment ................................. 559,418 552,606
Other assets ..................................... 314,859 233,991
----------- -----------
$20,706,550 $17,265,099
=========== ===========
See notes to consolidated financial
statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
---------------------------------
1999 1998
---------------------------------
Policy liabilities and accruals:
Loss and loss adjustment expenses .............. $ 4,576,539 $ 3,220,457
Unearned premiums .............................. 4,843,606 3,749,945
Ceded reinsurance payable ......................... 367,906 1,114,267
Accounts payable and other liabilities ............ 1,909,578 1,500,612
Income tax payable ................................ 35,132 --
Long-term debt:
Nonaffiliate ................................... 1,281,429 1,330,588
Affiliate ...................................... 1,000,000 1,000,000
------------ ------------
Total liabilities .............................. 14,014,190 11,915,869
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; 5,497,244 and 5,444,958
shares issued and outstanding, respectively 5,816 5,763
Capital in excess of par value ................. 7,257,916 7,212,941
Accumulated other comprehensive loss ........... (40,897) (190,929)
Accumulated deficit ............................ (266,756) (1,414,826)
------------ ------------
6,956,079 5,612,949
Less treasury stock, at cost, 318,112 shares at
December 31, 1999 and 1998 ................. (263,719) (263,719)
------------ ------------
Total stockholders' equity ..................... 6,692,360 5,349,230
------------ ------------
$ 20,706,550 $ 17,265,099
============ ============
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Direct premiums earned:
Affiliates ...................................... $ 10,342 $ 14,907 $ 1,738
Nonaffiliates ................................... 10,053,779 8,526,254 5,836,655
Reinsurance premiums assumed ........................ 2,079,680 1,268,032 1,381,264
Less reinsurance ceded .............................. (2,526,009) (2,275,509) (1,535,712)
------------ ----------- ----------
Net premium income .................................. 9,617,792 7,533,684 5,683,945
Net investment income ............................... 333,462 377,218 408,050
Net realized investment gains (losses) .............. 129,101 (437,565) 201,863
Commission income ................................... 473,912 710,058 859,862
Other income:
Affiliates ...................................... 117,075 289,207 310,396
Nonaffiliates ................................... 783,908 537,775 305,733
------------ ----------- ----------
Total revenue ....................................... 11,455,250 9,010,377 7,769,849
BENEFITS AND EXPENSES:
Losses and loss adjustment expenses ................. 2,394,532 2,648,074 1,792,117
Amortization of deferred policy acquisition
costs ........................................... 2,895,834 2,252,195 1,778,808
Operating expenses .................................. 4,766,101 4,313,278 3,903,476
Interest expense:
Affiliate ....................................... 100,000 -- --
Nonaffiliate .................................... 114,027 118,239 124,928
------------- ---------- ---------
Total expenses ...................................... 10,270,494 9,331,786 7,599,329
------------- ---------- -----------
Income (loss) before income tax expense ............. 1,184,756 (321,409) $ 170,520
Income tax expense .................................. 36,686 -- --
------------- ---------- -----------
Net income (loss) ................................... $ 1,148,070 $ (321,409) $ 170,520
============= ========== ===========
Weighted average number of shares ................... 5,475,613 5,447,966 5,449,518
============= ========== ===========
Net income (loss) per share ......................... $ 0.21 $ (.06) $ 0.03
============= ========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Accumulated Retained
Capital in Other Earnings Total
Common Shares Excess of Comprehensive (Accumulated Treasury Stockholders'
Stock Amount Par Value Income (Loss) Deficit) Stock Equity
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ......... 5,763,070 $ 5,763 $7,212,941 $ 99,676 $(1,263,937) $(240,771)($5,813,672)
Purchase of 3,139 shares
of treasury stock ............. (9,448) (9,448)
Net unrealized appreciation
of available-for-sale
securities, net of tax ....... 34,525 34,525
Net income ...................... 170,520 170,520
----------
Comprehensive income ............ 205,045
--------- ------ --------- ------- ---------- -------- ----------
Balance at December 31, 1997 ....... 5,763,070 5,763 7,212,941 134,201 (1,093,417) (250,219) 6,009,269
Purchase of 4,500 shares
of treasury stock ............. (13,500) (13,500)
Net unrealized depreciation
of available-for-sale
securities, net of tax ....... (325,130) (325,130)
Net loss ........................ (321,409) (321,409)
----------
Comprehensive loss .............. (646,539)
--------- ------ --------- -------- ---------- -------- ---------
Balance at December 31, 1998 ....... 5,763,070 5,763 7,212,941 (190,929) (1,414,826) (263,719) 5,349,230
Exercise of 52,286 shares
under 1991 stock option
plan .......................... 52,286 53 44,975 45,028
Net unrealized appreciation
of available-for-sale
securities, net of tax ....... 150,032 150,032
Net income ...................... 1,148,070 1,148,070
----------
Comprehensive income ............ 1,298,102
--------- ----------- ---------- --------- ----------- --------- ----------
Balance at December 31, 1999 ....... 5,815,356 $ 5,816 $7,257,916 $ (40,897) $ (266,756) $(263,719) $6,692,360
========= =========== ========== ========= =========== ========= ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ................................................ $ 1,148,070 $ (321,409) $ 170,520
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Amortization/accretion of investment
premiums and discounts .................................. (165) 392 (2,788)
Policy acquisition costs amortized .......................... 2,895,834 2,252,195 1,778,808
Policy acquisition costs deferred ........................... (3,250,706) (2,686,005) (1,956,364)
Depreciation and amortization ............................... 188,890 225,108 370,553
Net realized (gains) losses on sales of
investments ............................................. (129,101) 437,565 (201,863)
Provision for bad debts ..................................... 27,000 -- 113,120
(Increase) decrease in:
Accrued investment income .............................. (10,740) 27,473 6,831
Reinsurance recoverable ................................ (592,050) (289,616) (425,900)
Accounts receivables ................................... (193,584) (1,422,558) (852,285)
Income tax recoverable ................................. 120,000 (120,000) --
Deferred income tax asset .............................. (304,983) -- --
Other assets ........................................... (80,868) 11,434 57,079
Increase (decrease) in:
Policy liabilities and accruals ........................ 2,449,743 1,790,820 1,325,672
Ceded reinsurance payable .............................. (746,361) (1,344,906) 1,690,766
Accounts payable and other liabilities ................. 408,966 1,245,773 (148,246)
Income tax payable ..................................... 35,132 -- --
--------- ---------- -----------
Net cash provided by (used in) operating activities .............. 1,965,077 (193,734) 1,925,903
Investing activities:
Securities available-for-sale :
Purchases - fixed maturities ................................ (2,998,992) (968,313) (1,493,023)
Sales - fixed maturities .................................... 1,286,262 2,479,916 954,039
Purchases - equities ........................................ -- (2,819,999) (4,536,969)
Sales - equities ............................................ 347,707 2,999,085 4,269,885
Securities held-to-maturity:
Purchases- fixed maturities ................................. (1,860,015) (100,000) (299,492)
Maturities .................................................. -- 127,140 985,000
Purchases - mortgage loan ........................................ (895,877) -- --
Other investment ................................................. (6,812) (308,398) (244,208)
Proceeds from short-term investments ............................. (6,246) 887 --
---------- --------- -----------
Net cash (used in) provided by investing activities ............. (4,133,973) 1,410,318 (364,768)
Financing activities:
Purchases of treasury stock ...................................... -- (13,500) (9,448)
Payments on long-term debt ....................................... (49,159) (87,932) (114,745)
Stock options exercised .......................................... 45,028 -- --
Net change in advances to (from) affiliates ...................... (29,177) 283,669 (302,488)
Net proceeds from affiliated debt ................................ -- 1,000,000 --
---------- --------- -----------
Net cash (used in ) provided by financing activities ............. (33,308) 1,182,237 (426,681)
---------- --------- -----------
(Decrease) increase in cash and cash equivalents ................. (2,202,204) 2,398,821 1,134,454
Cash and cash equivalents, beginning of year ..................... 4,202,351 1,803,530 669,076
---------- ----------- -----------
Cash and cash equivalents, end of year ........................... $ 2,000,147 $ 4,202,351 $ 1,803,530
========== =========== ===========
Supplemental cash flows disclosure:
Cash paid for interest ........................................... $ 114,027 $ 118,239 $ 124,928
---------- ----------- -----------
Cash paid for income taxes ....................................... $ 148,950 $ 120,000 $ --
========== =========== ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
1. Ownership and 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
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). 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."
2. Summary of Significant Accounting Policies
- -- ------------------------------------------
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
consolidated 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, which is calculated under
the interest method, is included in investment income.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
2. Summary of Significant Accounting Policies (continued)
- -- ------------------------------------------------------
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 income taxes, reported as a separate component of
other comprehensive income (loss). The amortized cost of debt securities in this
category, which is calculated under the interest method, is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion is included in investment income. Realized gains and
losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in current 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.
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 to fair value.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
2. 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 liabilities 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.
Reinsurance
The Company assumes and cedes reinsurance and participates in various
pools. The accompanying consolidated 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, which is earned
on ceded premiums and premiums written for other third party insurance carriers,
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.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
2. Summary of Significant Accounting Policies (continued)
- -- ------------------------------------------------------
Income Taxes
Deferred income 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 income 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 income 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.
Earnings Per Share
The Company computes and discloses earnings (loss) per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The 134,500 and 189,086 outstanding stock options for the
years ended December 31, 1999 and 1997, respectively had no effect on the result
of the calculation of earnings per share. Additionally, the 187,086 outstanding
stock options at December 31, 1998 were antidilutive.
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 consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated 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)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
2. Summary of Significant Accounting Policies (continued)
- -- ------------------------------------------------------
New Accounting Standards
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 ("SFAS
131"). SFAS 131 superseded FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual consolidated 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 SFAS 131 the Company has not
reported financial information on separate segments. SFAS 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of SFAS 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 Activity ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The Financial Accounting Standards Board has
issued Statement No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133, which delays the
implementation date of SFAS 133 for one year, to fiscal years beginning after
June 15, 2000. Because of the Company's minimal use of derivatives, management
does not anticipate that the adoption of SFAS 133 will have a significant effect
on the Company's results of operations or financial position.
Reclassifications
Certain amounts in the 1998 and 1997 consolidated financial statements
have been reclassified to conform to the 1999 financial statement presentation.
3. 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 $10,342, $14,907 and $1,738 for the years ended December 31,
1999, 1998 and 1997, respectively. Qualex performs consulting services for KC
and affiliates. Other income from affiliates consist primarily of consulting
services provided to KC.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
3. Related Party Transactions (continued)
- -- --------------------------------------
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. During 1998, KC reimbursed SSI for certain
project premiums. As a result, a related note receivable was paid in full and a
commission of $83,952 was recognized by CCS.
Cumberland leases office space from a company owned by the Chairman of the
Board of Directors at a monthly rate of $7,278. The rate increases to $9,878
effective March 1, 2000 as a result of increased operating costs and
improvements.
4. Investments
- -- -----------
The Company's investments in available-for-sale securities and
held-to-maturity securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Gains Unrealized Estimated Fair
Cost Losses Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale securities at December 31, 1999:
Debt securities:
U.S. Government bonds ..................................... $3,274,876 $ -- $ 4,635 $3,270,241
State and municipal bonds ................................. 496,433 -- 68,168 428,265
---------- ---------- ---------- ----------
Total debt securities ....................................... 3,771,309 -- 72,803 3,698,506
---------- ---------- ---------- ----------
Equity securities ........................................... 570,288 31,906 -- 602,194
---------- ---------- ---------- ----------
Total .......................................................... $4,341,597 $ 31,906 $ 72,803 $4,300,700
========== ========== ========== ==========
Held-to-maturity securities at December 31, 1999:
Debt securities:
U.S. Government bonds ..................................... $2,722,489 $ 2,583 $ 10,271 $2,714,801
========== ========== ========== ==========
Available-for-sale securities at December 31, 1998:
Debt securities:
U.S. Government and government agency
bonds ...................................... ........... $1,553,407 $ 19,426 $ 563 $1,572,270
State and municipal bonds ................................. 496,380 13,120 -- 509,500
---------- ---------- ---------- ----------
Total debt 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:
Debt securities:
U.S. Government bonds ..................................... $ 860,508 $ 35,738 $ -- $ 896,246
========== ========== ========== ==========
</TABLE>
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
4. Investments (continued)
The amortized cost and fair value of the Company's investments in debt
securities, segregated by available-for-sale and held-to-maturity, at December
31, 1999 are summarized, by stated maturity, as follows:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------------------------------------------------------------
Maturity Amortized Cost Fair Value Amortized Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less ............................ $3,099,153 $3,098,991 $1,501,286 $1,500,000
Due after one year through five
years ........................................... 125,723 121,250 1,221,203 1,214,801
Due after ten years through
fifteen years ................................... 50,000 50,000 -- --
Due after twenty years ............................. 496,433 428,265 -- --
----------- ---------- ---------- ----------
$3,771,309 $3,698,506 $2,722,489 $2,714,801
=========== ========== ========== ==========
</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, 1999 and 1998, the Company had $2.9 million and $3.4
million, respectively, in restricted investments (debt securities and short-term
investments). Restricted investments primarily represent funds held as
collateral in connection with reinsurance trust agreements and funds held as
required under statutory regulations by state insurance departments.
Net investment income for the Company is comprised of the following:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Debt and equity securities ................................................ $ 143,416 $ 246,618 $ 344,459
Mortgage loans on real estate ............................................. 3,480 6,711 4,105
Short-term investments, including cash and
cash equivalents ...................................................... 199,208 135,926 70,857
--------- --------- ---------
346,104 389,255 419,421
Less investment expenses .................................................. (12,642) (12,037) (11,371)
--------- ------- ---------
Net investment income ..................................................... $ 333,462 $ 377,218 $ 408,050
========= ========= =========
Realized gains (losses) on available-for-sale securities:
Debt securities - gains ............................................... $ 10,592 $ 15,589 $ --
Equity securities - gains ............................................. 118,509 226,613 201,863
Equity securities - losses ............................................ -- (679,767) --
--------- --------- ---------
Net realized investment gains (losses) .................................... $ 129,101 $(437,565) $ 201,863
========= ========= =========
</TABLE>
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
5. Fair Value of Financial Instruments
The carrying amounts and fair values of the Company's financial
instruments at December 31, 1999 and 1998 are as follows:
December 31, 1999
----------------------------
Carrying Amount Fair Value
----------------------------
Assets:
Cash and cash equivalents, including short-
term investments ............................ $2,430,386 $2,430,386
Investments ..................................... 7,023,189 7,015,501
Mortgage loans on real estate ................... 940,304 940,304
Accounts receivable ............................. 3,300,839 3,300,839
Reinsurance recoverable ......................... 2,898,422 2,898,422
Liabilities:
Long-term debt .................................. 2,281,429 2,190,520
Ceded reinsurance payable ....................... 367,906 367,906
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 ............................. 3,105,078 3,105,078
Reinsurance recoverable ......................... 2,306,372 2,306,372
Liabilities:
Long-term debt .................................. 2,330,588 2,239,679
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, mortgage loans on
real estate, accounts receivable, long-term debt and ceded reinsurance payable:
The carrying amount reported in the balance sheet approximates its fair value.
Investments: Fair values for debt securities are based on quoted market
prices 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)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
6. Intangibles
Intangibles at December 31 are comprised of the following:
December 31,
---------------------------
1999 1998
---------------------------
Deferred state admission costs ............... $ 227,171 $ 227,171
Customer lists and acquisition costs ......... 1,084,041 1,084,041
Product development .......................... 262,194 262,194
Goodwill ..................................... 926,661 926,661
---------- ----------
2,500,067 2,500,067
Accumulated amortization ..................... 1,233,432 1,044,542
---------- ----------
Total ........................................ $1,266,635 $1,455,525
========== ==========
Amortization expense amounted to $188,890 in 1999, $225,108 in 1998 and
$275,169 in 1997.
7. Other Investment
The Company has a 30 percent investment in Global Solutions Insurance
Services, Inc. ("GSIS"), an agency located in California that issues cargo
insurance and customs bonds, which is accounted for under the equity method.
Summarized financial information of GSIS is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Revenues .................................................................................. . $ 227,652 $ 310,877 $ 254,975
Net loss .................................................................................... 677,516 452,055 366,079
<CAPTION>
As of December 31,
-----------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
Current assets .............................................................................. $ 574,964 $ 745,406
Non-current assets .......................................................................... 107,906 122,420
Current liabilities ......................................................................... 269,781 424,420
Non-current liabilities ..................................................................... 1,902,601 1,267,421
</TABLE>
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
8. 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, 1999, 1998 and 1997, to the gross amounts reported in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Liability for losses and LAE, net of reinsurance
recoverable on unpaid losses, at beginning of
year .............................................................. $ 1,680,580 $ 1,392,931 $ 594,922
Provision for losses and LAE for claims occurring
in the current year, net of reinsurance ........................... 2,810,532 2,331,074 1,743,117
Increase in estimated losses and LAE for claims
occurring in prior years, net of reinsurance ...................... (416,000) 317,000 49,000
--------- ----------- -----------
Incurred losses during the current year, net of
reinsurance ....................................................... 2,394,532 2,648,074 1,792,117
Losses and LAE payments for claims, net of
reinsurance, occurring during:
Current year ...................................................... 135,635 557,997 553,629
Prior years ....................................................... 1,130,750 1,802,428 440,479
--------- --------- -----------
1,266,385 2,360,425 994,108
--------- ---------- -----------
Liability for losses and LAE, net of reinsurance
recoverables on unpaid losses, at end of year ..................... 2,808,727 1,680,580 1,392,931
Reinsurance recoverables on unpaid losses at end of
year .............................................................. 1,767,812 1,539,877 1,157,369
--------- --------- -----------
Liability for losses and LAE, gross of reinsurance
recoverables on unpaid losses, at end of year ..................... $ 4,576,539 $ 3,220,457 $ 2,550,300
=========== =========== ===========
</TABLE>
Cumberland experienced a $416,000 redundancy and deficiencies of
$317,000 and $49,000 for losses and loss adjustment expenses in 1999, 1998 and
1997, respectively. The redundancy principally resulted from subrogation
received on pooling agreement case base reserves and claims in prior years. 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 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)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
9. Income Taxes
- -- ------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ................................... $ 283,252 $ -- $ --
State ..................................... 58,417 -- --
Total current ............................. 341,669 -- --
Deferred:
Federal ................................... (260,407) -- --
State ..................................... (44,576) -- --
Total deferred ............................ (304,983) -- --
--------- --------------- ----------------
Total provision ............................... $ 36,686 $ -- $ --
========= =============== ================
</TABLE>
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1999 1998 1997
----------------------------------------------------
<S> <C> <C> <C>
Statutory federal rate ......................................... 34.00% (34.00%) 34.0%
State income taxes, net ........................................ 0.78 (3.00) 3.9
Tax exempt income .............................................. 0.00 (9.70) (7.2)
Change in valuation allowance .................................. (35.30) 31.20 (40.8)
Nondeductible expenses ......................................... 0.46 15.50 10.1
Miscellaneous .................................................. 3.16 -- --
------ ------ ------
Effective tax rate ............................................. 3.10% -- --
====== ====== ======
</TABLE>
The following summarizes the effect of deferred income taxes items and
their impact of "temporary differences" between amounts of assets and
liabilities for financial reporting purposes and such amounts as measured by tax
laws. Temporary differences and carry-forwards which give rise to deferred
income tax assets and liabilities are as follows:
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
9. Income Taxes (continued)
- -- ------------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax liabilities:
- --------------------------------
Deferred acquisition costs ................................. $ (632,564) $ (544,339) $ (305,836)
States taxes ............................................... (15,156) -- --
Unrealized gain on investments ............................. (12,603) -- (50,500)
----------- ----------- -----------
Total deferred income tax
liabilities ............................................ (660,323) (544,339) (356,336)
Deferred income tax assets:
- ---------------------------
Basis difference in fixed assets ........................... 17,990 17,139 8,931
Unrealized loss in investments ............................. -- 290,236 --
Basis difference in investments ............................ 96,201 91,646 40,620
Reserve discounting ........................................ 33,112 54,885 19,050
Unearned premiums .......................................... 605,246 245,321 166,961
Amortization ............................................... 105,358 96,160 69,028
Net operating loss carryforward ............................ -- 85,789 232,012
Alternative minimum credit
carryforward ........................................... -- 27,648 15,555
Surplus notes .............................................. 107,399 102,314 102,314
----------- ----------- -----------
Total deferred income tax assets ........................... 965,306 1,011,138 654,471
Less valuation allowance ................................... -- (466,799) (298,135)
----------- ----------- -----------
Total deferred income tax assets ........................... 965,306 544,339 356,336
----------- ----------- -----------
Net deferred income tax asset .............................. $ 304,983 $ -- $ --
=========== =========== ===========
</TABLE>
10. Long-Term Debt
- --- --------------
Long-term debt as of December 31, consists of the following:
1999 1998
--------------------------
Affiliate:
Convertible note payable due November 10,
2001 ........................................ $1,000,000 $1,000,000
Nonaffiliate:
Note payable due March 1, 2002 ............... 374,086 374,087
Note payable due June 30, 2010 ............... 907,343 956,501
---------- ----------
$2,281,429 $2,330,588
========== ==========
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
10. Long-Term Debt (continued)
- --- --------------------------
Convertible Note 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.
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 1999, 1998 and 1997 for term notes due nonaffiliates
was $114,027, $118,239 and $124,298, respectively.
Maturities of notes payable for the five years succeeding December 31,
1999 and thereafter are as follows:
Year Ending December 31,
----------------------------------------- ---------------------------
2000 $ 183,448
2001 1,184,254
2002 183,296
2003 70,365
2004 83,696
Thereafter 576,370
11. 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 deferrals. The Company's
contributions to the plan totaled $22,730, $11,701 and $9,367 in 1999, 1998 and
1997, respectively.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
12. Stock Option Plan
- --- -----------------
During the fiscal year ended December 31, 1999, the Company registered
the 1991 Stock Option Plan. (the"Plan"). The Company applies APB Opinion No. 25
and related interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized for the Plan. Had compensation cost been
determined based on the fair market value at the grant dates for awards under
the Plan consistent with the method of FASB Statement No.123, the effect on the
Company's net income and earnings per share would have been immaterial.
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants for the years ended December 31,
1999 and 1998, respectively; dividend yield of 0% for all years, risk free
interest rates of 5.40%, and 6.05%, expected lives of 4 years and volatility of
99.98% for all years.
Options granted under this plan have a term of ten years and vest
ratably over a four year period immediately following the grant date. The
following table summarizes all stock option transaction for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------- ------------------------- --------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------- ---------------- --------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year ......... 187,086 $ .35 189,086 $ .21 189,086 $ .21
Grants ...................... -- -- 12,000 $ 2.25 -- --
Exercised ................... (52,286) $ .15 -- -- -- --
Forfeited ................... (300) $ .15 (14,000) $ .15 -- --
------- --------- ------------ --------- -------- ---------------
Outstanding at end of
year ..................... 134,500 $ .42 187,086 $ .35 189,086 $ .21
======== =========== ============ ========== ========= ===============
Exercisable at
end of year ............. 122,800 $ .30 168,486 $ .22 175,586 $ .17
======== =========== ======================== ========= ===============
Weighted-average
fair value of
options granted
during the year .......... -- $ -- -- $ 2.375 -- $ --
======= =========== ======================== ========= ===============
</TABLE>
The proceeds from the exercise of stock options include certain income
tax benefits, which are included in capital in excess of par value.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
12. Stock Option Plan (continued)
- --- ----------------- -----------
The following table summarizes information about stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ------------------- --------------------------------------
Number Weighted-Average Number
Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Range of Exercise December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price
Prices
- -------------------- ------------------ ------------------ ------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
$ .125 ............ 100,000 2 years $ .125 100,000 $ .125
$ .75 - 1.00 ...... 22,500 7 years $ .780 18,000 $ .780
$ 2.25 ............ 12,000 9 years $ 2.25 4,800 $ 2.25
------------------ ------------------ ------------------- ------------------ -------------------
134,500 9 years $ .42 122,800 $ .30
================== ================== =================== ================== ===================
</TABLE>
13. 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, 1999.
14. 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.
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.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
14. Reinsurance (continued)
- --- -----------------------
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.
Gross and net written premiums in 1999, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------ ------------------------------ ----------------------------- -------------------------------
Written Earned Written Earned Written Earned
- ------------------------ ------------------------------ ----------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct
premiums ............. $ 10,816,114 $ 10,064,121 $ 9,451,746 $ 8,541,161 $ 6,797,136 $ 5,838,393
Assumed
premiums ............. 2,421,346 2,079,680 1,478,109 1,268,032 1,189,689 1,381,264
Ceded
premiums ............. (2,740,148) (2,526,009) (2,354,970) (2,275,509) (1,752,564) (1,535,712)
------------ ------------ ------------ ------------ ------------ ------------
Net
premiums ........... $ 10,497,312 $ 9,617,792 $ 8,574,885 $ 7,533,684 $ 6,234,261 $ 5,683,945
============ ============ ============ ============ ============ ============
</TABLE>
Loss and loss adjustment expenses in 1999, 1998, and 1997 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C>
Direct ................................................... $ 3,932,278 $ 1,743,448 $ 1,048,450
Assumed .................................................. 714,117 1,343,334 741,351
Ceded .................................................... (2,251,863) (438,708) 2,316
----------- ----------- -----------
Net losses and loss adjustment
expenses ............................................. $ 2,394,532 $ 2,648,074 $ 1,792,117
=========== =========== ===========
</TABLE>
The Company reported reinsurance recoverables on paid losses of
$408,708 and $448,553 at 1999 and 1998, respectively.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
15. Commitments and Contingencies
- --- -----------------------------
The Company leases certain office space and equipment under
noncancelable operating leases. Rent expense was $178,429, $163,409 and $87,048
for the years ended December 31, 1999, 1998 and 1997, respectively. Minimum
future rental commitments as of December 31, 1999 for all noncancelable
operating leases with an initial term of over one year are as follows:
Year Ending December 31,
---------------------------------------- ----------------------------
2000 $ 169,453
2001 146,645
2002 109,969
2003 107,893
2004 101,653
Thereafter 418,154
----------------------------
$ 1,053,767
============================
16. Statutory Accounting Practices and Regulatory Requirements
- --- ----------------------------------------------------------
Statutory surplus and net income as reported to the domiciliary state
insurance department in accordance with its prescribed or permitted statutory
accounting practices for CCS is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Statutory capital and surplus ............................................................ $5,106,241 $4,843,478 $5,044,527
Net income ............................................................................... 675,975 74,157 959,304
</TABLE>
CCS is domiciled in Florida and prepares its statutory-basis
consolidated 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. In 1998, the National
Association of Insurance Commissioner adopted the Codification of Statutory
Accounting Principles (Codification) for insurance companies. Codification,
which is intended to standardize regulatory accounting and reporting for the
insurance industry, is effective January 1, 2001. However, it is uncertain if
and when individual states will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997
16. Statutory Accounting Practices and Regulatory Requirements (continued)
- --- ----------------------------------------------------------------------
Under applicable state insurance statues, CCS must maintain minimum capital
and surplus of $2,500,000 (as of December 31, 1999). 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, 1999, no dividends from CCS are available for
payment to the Company without the prior approval of the Department of
Insurance. The more significant variances between statutory reporting and
generally accepted accounting principles are deferred policy acquisition costs,
deferred income taxes and nonadmitted assets. Insurance regulations dictate
expensing commissions and income taxes when paid. Nonadmitted assets represent
non-liquid assets and are excluded from the stautory statement of admitted
assets, liabilities and capital and surplus.
17. 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. The
Company's comprehensive income is comprised of reported net income and changes
in the unrealized appreciation of available-for-sale securities. The following
summarizes the components of comprehensive income:
<TABLE>
<CAPTION>
Consolidated Statements of Comprehensive Income
---------------------------------------------------------
Twelve Months Ended December 31,
---------------------------------------------------------
1999 1998 1997
------------ --------------- --------------
<S> <C> <C> <C>
Net income (loss) ............................................... $1,148,070 $ (321,409) $ 170,520
Other comprehensive income, net of tax:
Unrealized appreciation
(depreciation) of available-for-
sale securities arising during
period ................................................. 230,552 (830,088) 160,525
Less: reclassification adjustment
for gains (losses) included in
net income ........................................ $ 80,520 $ (504,958) $ 126,000
---------- ---------- ----------
Comprehensive income (loss)...................................... $1,298,102 $ (646,539) $ 205,045
========== ========== ==========
</TABLE>
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT
CUMBERLAND TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Condensed Balance Sheets 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Trade receivables ......................................................................... $ -- $ --
Accounts receivable from affiliates ....................................................... -- --
Investment in wholly-owned subsidiaries ................................................... 6,246,436 1,701,379
Other assets .............................................................................. 73,093 68,363
Other investments ......................................................................... 559,418 552,606
Surplus debenture receivable from subsidiary .............................................. 2,048,734 5,026,354
----------- -----------
$ 8,927,681 $ 7,348,702
=========== ===========
Liabilities:
Accounts payable to affiliates ............................................................ $ 2,223,760 $ 1,994,771
Accounts payable .......................................................................... 11,561 4,701
----------- -----------
2,235,321 1,999,472
Stockholders' equity:
Common stock .............................................................................. 5,816 5,763
Other stockholders' equity ................................................................ 6,686,544 5,343,467
----------- -----------
6,692,360 5,349,230
----------- -----------
$ 8,927,681 $ 7,348,702
=========== ===========
<CAPTION>
Condensed Statements of Operations Year Ended December 31,
- ---------------------------------- ---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Management fees from wholly-
owned subsidiaries ..................................................................... $ 233,226 $ 217,892 $ 88,378
Interest income from subsidiary ........................................................... -- 262,500 271,875
----------- ----------- -----------
233,226 480,392 360,253
Costs and expenses:
Selling and administrative expenses ....................................................... 469,534 415,242 294,901
Interest expense to affiliates ............................................................ 100,000 -- --
----------- ----------- -----------
569,534 415,242 294,901
----------- ----------- -----------
Income (loss) before income taxes
and equity in net income (loss)
of subsidiaries ........................................................................ (336,308) 65,150 65,352
Income taxes expense ...................................................................... (36,686) -- --
Equity in net income (loss) of
subsidiaries ........................................................................... 1,521,064 (386,559) 105,168
----------- ---------- -----------
Net income (loss) ......................................................................... $ 1,148,070 $ (321,409) $ 170,520
=========== =========== ===========
</TABLE>
<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, 1999, 1998 and 1997, CTI charged its
subsidiaries excluding CCS, a management fee.
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 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 includes the net unrealized depreciation in
available-for-sale securities held by CCS, of $40,897 and $190,929 as of
December 31, 1999 and 1998, respectively. These amounts have been included in
the CTI "other stockholders' equity" amounts.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (CONTINUED)
CUMBERLAND TECHNOLOGIES, INC.
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 from 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 from CCS. As a result, CCS
increased paid-in-capital to $1,000,000. As of December 31, 1999, no payments
could be made under the terms of the debenture.
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
CUMBERLAND TECHNOLOGIES, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C>
Average shares outstanding ................................... 5,475,613 5,447,966 5,449,518
Dilutive stock options ....................................... 134,500 - 189,086
---------- ---------- ----------
Totals ....................................................... 5,610,113 5,447,966 5,638,604
========== ========== ==========
Net income (loss) ............................................ 1,148,070 (321,409) $ 170,520
========== ========== ==========
Earnings (loss) per share amount ............................. $ .21 $ (.06) $ .03
========== ========== ==========
</TABLE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
CUMBERLAND TECHNOLOGIES, INC.
As of December 31, 1999, the subsidiaries of Cumberland Technologies, Inc.
were as follows:
o Surety Specialists, Inc.
o Cumberland Casualty & Surety Company
o Qualex Consulting Group, Inc.
o The Surety Group, Inc.
o Associates Acquisition Corp. d/b/a Surety Associates
EXHIBIT 23.1 - INDEPENDENT AUDITORS' CONSENT
CUMBERLAND TECHNOLOGIES, INC.
We consent to the incorporation by reference in Registration Statement No.
333-71537 of Cumberland Technologies, Inc. on Form S-8 of our report dated April
7, 2000, appearing in this Annual Report on Form 10-K of Cumberland
Technologies, Inc. for the year ended December 31, 1999.
/s/ DELOITTE & TOUCHE LLP
Tampa, Florida
April 14, 2000
EXHIBIT 23.2 - 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, 1999.
/s/ ERNST & YOUNG LLP
Tampa, Florida
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000882087
<NAME> CUMBERLAND TECHNOLOGIES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 3,698,506
<DEBT-CARRYING-VALUE> 2,722,489
<DEBT-MARKET-VALUE> 0
<EQUITIES> 602,194
<MORTGAGE> 940,304
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,393,732
<CASH> 2,000,147
<RECOVER-REINSURE> 2,898,422
<DEFERRED-ACQUISITION> 1,601,427
<TOTAL-ASSETS> 20,706,550
<POLICY-LOSSES> 4,576,539
<UNEARNED-PREMIUMS> 4,843,606
<POLICY-OTHER> 367,906
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 2,281,429
0
0
<COMMON> 5,816
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 20,706,550
9,617,792
<INVESTMENT-INCOME> 333,462
<INVESTMENT-GAINS> 129,101
<OTHER-INCOME> 1,374,895
<BENEFITS> 2,394,532
<UNDERWRITING-AMORTIZATION> 2,895,834
<UNDERWRITING-OTHER> 4,980,128
<INCOME-PRETAX> 1,184,756
<INCOME-TAX> 36,686
<INCOME-CONTINUING> 1,148,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,148,070
<EPS-BASIC> 0.21
<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>
