UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2000.
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 office) (Zip code)
(813) 885-2112
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
--------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Applicable Only to Insurers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by a check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [x] No [ ]
Applicable Only to Corporate Issuers
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of September 30, 2000 was 5,553,244 shares.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
------ ---------------------
Page
----
Item 1. Condensed consolidated balance sheets at
September 30, 2000 (unaudited) and December 31, 1999....1-2
Condensed unaudited consolidated statements of operations
for the nine months ended September 30, 2000 and
September 30, 1999 .......................................3
Condensed unaudited consolidated statements of operations
for the three months ended September 30, 2000 and
September 30, 1999 .......................................4
Condensed consolidated statements of stockholders' equity for
the nine months ended September 30, 2000 (unaudited) and
for the year ended December 31, 1999 .....................5
Condensed unaudited consolidated statements of cash flows
for the nine months ended September 30, 2000 and
September 30, 1999 .......................................6
Notes to condensed unaudited consolidated financial
statements ............................................7-13
Item 2. Management's Discussion and Analysis of financial
condition and results of operations ..................14-16
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal proceedings .........................................17
Item 2. Changes in securities .....................................17
Item 3. Defaults upon senior securities ...........................17
Item 4. Submission of matters to a vote of security holders .......17
Item 5. Other information .........................................17
Item 6. Exhibits and Reports of Form 8-K ..........................17
Signatures ................................................18
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
------
Investments:
Securities available-for-sale at fair value:
Fixed maturities ............................ $ 7,308,674 $ 3,698,506
Equity securities ........................... 42,338 602,194
Fixed maturity securities held-to-maturity at
amortized cost .............................. 1,222,981 2,722,489
Residential mortgage loan on real estate, at
unpaid principal ............................ 939,393 940,304
Short-term investments ......................... 433,993 430,239
----------- -----------
Total investments ........................... 9,947,379 8,393,732
Cash and cash equivalents .......................... 1,977,845 2,000,147
Accrued investment income .......................... 115,162 66,088
Reinsurance recoverable ............................ 3,260,637 2,898,422
Accounts receivable:
Trade .......................................... 4,045,444 2,896,358
Affiliate ...................................... 438,219 404,481
Deferred tax asset ................................. 304,983 304,983
Deferred policy acquisition costs .................. 2,024,923 1,601,427
Intangibles, net ................................... 1,151,469 1,266,635
Other investment ................................... 580,675 559,418
Other assets ....................................... 296,486 314,859
----------- -----------
$24,143,222 $20,706,550
=========== ===========
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------ -------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Policy liabilities and accruals:
Loss and loss adjustment expenses ............. $ 5,063,153 $ 4,576,539
Unearned premiums ............................. 5,903,905 4,843,606
Ceded reinsurance payable ........................ 908,611 367,906
Accounts payable and other liabilities ........... 2,365,710 1,909,578
Income tax payable ............................... 228,523 35,132
Long-term debt:
Nonaffiliate .................................. 1,116,523 1,281,429
Affiliate ..................................... 1,000,000 1,000,000
------------ -------------
Total liabilities ............................. 16,586,425 14,014,190
Stockholders' equity:
Common stock, $.001 par value; 10,000,000
shares authorized; 5,553,244 and 5,497,244
shares issued and outstanding, respectively . 5,872 5,816
Capital in excess of par value ................ 7,264,860 7,257,916
Accumulated other comprehensive (loss) ........ (185,193) (40,897)
Retained earnings (deficit) ................... 734,977 (266,756)
------------- -------------
7,820,516 6,956,079
Less treasury stock, at cost, 318,612 shares . (263,719) (263,719)
------------- -------------
Total stockholders' equity .................... 7,556,797 6,692,360
------------- -------------
$ 24,143,222 $ 20,706,550
============= =============
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended September 30,
-------------------------------
2000 1999
------------ -------------
REVENUES:
---------
Direct premiums earned .................... $ 9,122,315 $ 7,359,043
Reinsurance premiums assumed .............. 1,836,007 1,545,840
Less reinsurance ceded .................... (2,395,335) (1,835,414)
------------ ------------
Net premium income ........................ 8,562,987 7,069,469
Net investment income ..................... 429,777 251,783
Net realized investment gains ............. 270,067 15,918
Other income .............................. 1,449,951 1,073,104
------------ ------------
Total revenues ......................... 10,712,782 8,410,274
BENEFITS AND EXPENSES:
Losses and loss adjustment expenses ....... 2,391,073 1,672,561
Amortization of deferred policy
acquisition costs ...................... 2,719,007 2,256,260
Operating expenses ........................ 3,919,119 3,321,865
Interest expense .......................... 176,850 160,936
------------ ------------
Total expenses ......................... 9,206,049 7,411,622
------------ ------------
Income before income tax provision ............. 1,506,733 998,652
Income tax provision ........................... 505,000 351,100
------------ ------------
Net income ..................................... $ 1,001,733 $ 647,552
============ ============
Weighted average number of shares - basic ...... 5,520,888 5,468,239
============ ============
Net income per share - basic ................... $ .18 $ .12
============ ============
Weighted average number of shares - diluted .... 5,602,688 --
============ ============
Net income per share - diluted ................. $ .18 $ --
============ ============
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30,
---------------------------------
2000 1999
---------------- -------------
REVENUES:
---------
Direct premiums earned .................... $ 3,304,403 $ 2,684,616
Reinsurance premiums assumed .............. 621,951 563,098
Less reinsurance ceded .................... (871,732) (607,502)
----------- -----------
Net premium income ........................ 3,054,622 2,640,212
Net investment income ..................... 157,843 75,766
Net realized investment gains ............. -- 5,973
Other income .............................. 545,921 367,467
----------- -----------
Total revenues ......................... 3,758,386 3,089,418
BENEFITS AND EXPENSES:
Losses and loss adjustment expenses ....... 984,854 614,482
Amortization of deferred policy
acquisition costs ...................... 1,029,749 669,423
Operating expenses ........................ 1,366,307 1,236,202
Interest expense .......................... 73,239 53,372
----------- -----------
Total expenses ......................... 3,454,149 2,573,479
----------- -----------
Income before income tax provision ............. 304,237 515,939
Income tax provision ........................... 102,909 231,100
----------- -----------
Net income ..................................... $ 201,328 $ 284,839
=========== ===========
Weighted average number of shares - basic ...... 5,553,244 5,468,239
=========== ===========
Net income per share - basic ................... $ .04 $ .05
=========== ===========
Weighted average number of shares - diluted .... 5,635,044 --
=========== ===========
Net income per share - diluted ................. $ .04 $ --
=========== ===========
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital in Other Retained Total
Common Shares Excess of Comprehensive Earnings Treasury Stockholders'
Stock Amount Par Value Income (Loss) (Deficit) Stock Equity
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 ............ 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 increase in unrealized
appreciation of
available-for-sale securities .... 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
Exercise of 56,000 shares
under 1991 stock option
plan ............................. 56,000 56 6,944 7,000
Net (decrease) in unrealized
depreciation of available-for-sale
securities ....................... (144,296) (144,296)
Net income ......................... 1,001,733 1,001,733
-----------
Comprehensive income ............... 864,437
--------- ------ ---------- ---------- ----------- ---------- -----------
Balance at September 30, 2000 ......... 5,871,356 $5,872 $7,264,860 $(185,193) $ 734,977 $(263,719) $7,556,797
========= ====== ========== ========== =========== ========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 1,001,733 $ 647,552
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization (accretion) of investment premiums
and discounts ....................................................... (12,367) 234
Policy acquisition costs amortized ...................................... 2,719,007 2,256,260
Policy acquisition costs deferred ....................................... (3,142,503) (2,580,810)
Depreciation and amortization ........................................... 115,166 147,913
Net realized gain on sales of investments .............................. (270,067) (15,918)
(Increase) decrease in:
Accrued investment income ............................................... (49,074) (247)
Reinsurance recoverable ................................................. (362,215) (1,397,409)
Accounts receivable ..................................................... (1,149,086) (1,075,852)
Income tax recoverable .................................................. -- 351,100
Other assets ............................................................ 18,373 (108,367)
Decrease (increase) in:
Policy liabilities and accruals ......................................... 2,003,045 1,318,641
Ceded reinsurance payable ............................................... 540,705 (502,977)
Income tax payable ...................................................... 193,391 653,299
----------- -----------
Net cash provided by (used in) operating activities .............................. 1,606,108 (306,581)
Cash flows from investing activities:
Securities available-for-sale:
Purchases - fixed maturities ............................................ (6,595,488) (358,700)
Sales - fixed maturities ................................................ 3,098,991 1,086,262
Proceeds from investment settlement ..................................... 228,875 --
Sales - equities ........................................................ 354,956 155,311
Securities held-to-maturity:
Maturities .............................................................. 1,500,000 --
Repayments on mortgage loan ...................................................... 911 --
Purchase - short-term assets ..................................................... (3,754) (6,246)
(Increase) decrease in other investment .......................................... (21,257) 846
----------- -----------
Net cash provided by (used in) investing activities .............................. (1,436,766) 877,473
Cash flows from financing activities:
Payments on long-term debt ....................................................... (164,906) (36,452)
Stock options exercised .......................................................... 7,000 --
Net advances from affiliates ..................................................... (33,738) (85,901)
----------- -----------
Net cash (used in) financing activities .......................................... (191,644) (122,353)
----------- -----------
Increase (decrease) in cash and cash equivalents ................................. (22,302) 448,538
Cash and cash equivalents, beginning of period ................................... 2,000,147 4,202,351
----------- -----------
Cash and cash equivalents, end of period ......................................... $ 1,977,845 $ 4,650,890
=========== ===========
Supplemental cash flows disclosure:
Cash paid for interest ........................................................... $ 78,317 $ 85,936
=========== ===========
Cash paid for income taxes ....................................................... $ 304,168 $ --
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. Ownership and Organization
-- --------------------------
Cumberland Technologies, Inc. ("CTI" or the "Company") 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.
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.
Reclassifications
Certain amounts in the 1999 financial statements have been reclassified
to conform to the 2000 financial statement presentation.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
-- ------------------------------------------------------
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.
3. Earnings Per Share
-- ------------------
Earnings per share for the nine months ended September 30, 2000 and
1999 is based on the weighted average number of shares outstanding,
adjusted for the dilutive effect of stock options. Earnings per share
at September 30, 2000 was the same on both a basic and fully diluted
basis.
4. Investments
-- -----------
Unrealized appreciation (depreciation): The components of unrealized
depreciation of investments recorded in stockholders' equity was as
follows:
Nine Months Ended Twelve Months Ended
September 30, 2000 December 31, 1999
------------------ --------------------
Fixed maturities .............. $ 28,994 $ (72,803)
Equities ...................... (214,187) 31,906
--------- ---------
Total unrealized
(depreciation) ............... $(185,193) $ (40,897)
========= =========
5. Income Taxes
-- ------------
The Company's provision for income taxes for the three months and nine
months ended September 30, 2000 has been calculated using an effective
rate of approximately 34%.
6. Term Note Due Affiliate
-- -----------------------
In 1988, CCS issued a surplus debenture to KC in exchange for
$3,000,000 which bears interest at 10 percent per annum. Interest and
principal payments are 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. 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>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Notes Payable
-- -------------
Affiliate
Effective November 10, 1998, CTI entered into a $1,000,000 convertible
term note agreement with TransCor Waste Services, Inc., a subsidiary of
KC. The note is due November 10, 2001 and bears interest at 10%. The
lender may convert the principal amount of the note or a portion
thereof into a common stock at $3.00 per share subsequent to a
six-month anniversary and prior to the maturity date.
Nonaffiliate
In connection with the acquisition of certain agencies during 1995, the
Company entered into two notes payable with the agencies' previous
owners. One note is due March 1, 2002 and bears interest at 8% through
February 28, 2001 and 10% thereafter. Principal payments of $150,000
are due annually beginning March 1, 2000. The other note payable is due
June 30, 2010 and bears interest at 9%. Principal and interest payments
of $11,104 are due monthly beginning April 1, 1997.
8. Intangibles
-- -----------
Intangible assets are stated at cost and principally represent
purchased customer accounts, noncompete agreements, purchased contract
agreements, and the excess of costs over the fair value of identifiable
net assets acquired ("Goodwill"). Goodwill is amortized on a
straight-line basis over 15 years and all other intangible assets are
amortized on a straight-line basis over the related estimated lives and
contract periods, which range from 3 to 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 are reviewed
periodically for impairment. 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
other intangible assets will be reduced by the estimated shortfall of
cash flows.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Loss and Loss Adjustment Expenses
-- ---------------------------------
The liability for unpaid claims including incurred but not reported
losses is based on the estimated ultimate cost of settling the claim
(including the effects of inflation and other societal and economic
factors), using past experience adjusted for current trends and any
other factors that would modify past experience. These estimates are
subject to the effects of trends in loss severity and frequency.
Although considerable variability is inherent in such estimates,
management believes that the reserves for loss and loss adjustment
expenses are adequate. The estimates are continually reviewed and
adjusted as necessary as experience develops or new information becomes
known. Such adjustments are included in current operations. A liability
for all costs expected to be incurred in connection with the settlement
of unpaid claims (loss adjustment expense) is accrued when the related
liability for unpaid loss 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 claims paid or in the process of
settlement, such as internal costs of the claims function.
The Company does not discount its reserves for losses and loss
adjustment expenses. The Company writes primarily surety contracts
which are of short duration.
The Company does not consider investment income in determining if a
premium deficiency relating to short duration contracts exists.
10. Unearned Premiums
--- -----------------
Unearned premiums are calculated using the monthly pro rata basis for
miscellaneous bonds and contract completion date or anticipated
contract completion date for contract bonds.
11. Reinsurance
--- -----------
The Company assumes and cedes reinsurance and participates in various
pools. The financial statements reflect premiums, benefits and
settlement expenses, and deferred policy acquisition costs, net of
reinsurance ceded. Amounts recoverable from reinsurers are estimated in
a manner consistent with the future policy benefit and claim liability
associated with the reinsured policies.
Accounts recoverable from reinsurers for unpaid losses are presented as
an asset in the accompanying consolidated financial statements.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Statutory Accounting Practices
--- ------------------------------
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. On a statutory accounting
basis, CCS's underwriting operations reported income net of taxes of
$259,424 and $675,975 for the nine months ended September 30, 2000 and
December 31, 1999, respectively. Statutory surplus (shareholders'
equity) of these operations was $5,128,641 and $5,106,241 as of
September 30, 2000 and December 31, 1999, respectively.
13. Comprehensive Income
--- --------------------
The Company adopted the provisions of the SFAS No. 130, "Reporting
Comprehensive Income," in 1999. Comprehensive income is defined as any
change in equity from transactions and other events originating from
nonowner sources. In the Company's case, those changes are principally
comprised of our reported net income and changes in the unrealized
appreciation and depreciation of the Company's available-for-sale
securities. SFAS No. 130 requires that the Company report all
components of comprehensive income. The following summaries present the
components of our comprehensive income, other than net income, for the
nine months ended September 30, 2000 and September 30, 1999,
respectively.
Consolidated Statements of
Comprehensive Income
-------------------------------
Nine Months Ended September 30,
-------------------------------
2000 1999
-------------- ------------
Net income .............................. $ 1,001,733 $ 647,552
Other comprehensive income:
Unrealized depreciation of available-
for-sale securities arising during
period ................................ (144,296) (186,710)
Less: reclassification adjustment for
gains included in net income ..... 7,000 --
----------- -----------
Comprehensive income .................... $ 864,437 $ 460,842
=========== ===========
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
14. Recently Issued Authoritative Guidance
--- --------------------------------------
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101, as amended, provides guidance related
to revenue recognition issues based on interpretations and practices
followed by the SEC. Management has determined that the adoption of SAB
101 did not have a material impact on its September 30, 2000, condensed
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued,
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities", which will be effective for the Company on April 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments embedded in other contracts, and for hedging activities.
SFAS 133 as amended by SFAS 137 and 138, requires, among other things,
that all derivatives be recognized in the consolidated balance sheets
as either assets or liabilities and measured at fair value. The
corresponding derivative gains and losses should be reported based upon
the hedge relationship, if such a relationship exits. Changes in the
fair value of derivatives that are not designated as hedges or that do
not meet the hedge accounting criteria in SFAS 133, are required to be
reported in income. The Company is in the process of quantifying the
impact of SFAS 133 on its consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation".
FIN 44 clarifies the application of APB Opinion No. 25 regarding (a)
the definition of employee for purposes of applying APB Opinion No.
25, (b) the criteria for determining whether a stock option plan
qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option
or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions cover specific events that occur after either
December 15, 1998, or January 12, 2000. Management believes that the
adoption of FIN 44 will not have a material effect on the financial
position or results of operations of the Company.
<PAGE>
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Forward-looking Statement Disclosure
------------------------------------
All statements, other than statements of historical facts, included or
incorporated by reference in this Form 10-Q which address activities, events or
developments which the Company expects or anticipates will or may occur in the
future, including statements regarding the Company's competitive position,
changes in business strategy or plans, the availability and price of
reinsurance, the Company's ability to pass on price increases, plans to install
the Bond-Pro(R) program in independent insurance agencies, the impact of
insurance laws and regulation, the availability of financing, reliance on-key
management personnel, ability to manage growth, the Company's expectations
regarding the adequacy of current financing arrangements, product demand and
market growth, and other statements regarding future plans and strategies,
anticipated events or trends similar expressions concerning matters that are not
historical facts are forward-looking statements. These statements are based on
certain assumptions and analysis made by the Company in light of its experience
and its perception of historical trends, current conditions and expected future
developments as well as factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties which could cause actual results to differ significantly and
materially from past results and from the Company's expectations. All of the
forward-looking statements made in this Form 10-Q are qualified by these
cautionary statements and there can be no assurance that the actual results or
development 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.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The capacity of a surety company to underwrite insurance and
reinsurance is based on maintaining liquidity and capital resources sufficient
to pay claims and expenses as they become due. Based on standards established by
the National Association of Insurance Commissioners (NAIC) and promulgated by
the Florida Department of Insurance, the Company is permitted to write net
premiums up to an amount equal to three times its statutory surplus, or
approximately $15,400,000 at December 31, 2000. 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 $3,400,000 in the year 2000.
At September 30, 2000, $24,143,222 of the Company's total assets
calculated based on generally accepted accounting principles were comprised as
follows: 50 percent in cash and investments (including accrued investment
income), 32 percent in receivables and reinsurance recoverables, 13 percent in
intangibles and deferred policy acquisition costs and 5 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 $1,606,108 and
($306,581) for the nine months ended September 30, 2000 and 1999, respectively.
Net cash provided by operating activities is attributed to the combined change
in receivables, policy acquisition costs and payables which is offset by net
income after taxes.
Net cash (used in) provided by investing activities was ($1,436,766)
and $877,473 for the nine months ended September 30, 2000, and 1999,
respectively. Investing activities consist of purchases, sales and maturities of
investments.
Net cash used in financing activities was $191,644 and $122,353 for the
nine months ended September 30, 2000 and 1999, respectively. Net cash used in
the nine months ended September 30, 2000 is primarily attributed to payments on
long-term debt, while net cash used through September 30, 1999 is primarily
attributed to cash advances to affiliates.
As of September 30, 2000 the Company had sufficient capital resources
to fund foreseeable future requirements.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
-----------------------------------------------------------
During the nine months ended September 30, 2000, net premium income
totaled $8,562,987 representing a net increase of 21 percent from that of the
same period in 1999 ($7,069,469). The increase is attributed to the marketing
direction of the Company, which is to penetrate the small to medium surety
direct markets. During the first nine months of 2000 as compared to the same
period in 1999, direct premiums earned increased $1,763,272 (24%); assumed
premiums increased $290,167 (19%) and ceded premiums increased $559,921 (31%).
Ceded premiums increase as the volume of direct and assumed premiums increased
based on their relationship under the Company's reinsurance treaties.
Net investment income for the third quarter of 2000 as compared to the
same period in 1999 increased by $177,994 or 71 percent. The increase in net
investment income is attributed to a reallocation of investments from money
market funds in 2000 to the bond portfolio. Net realized gains during 2000 were
$254,149 higher than realized gains for the same period of 1999. The net
realized gain at September 30, 2000 is a result of the disposal of 27,000 shares
of common stock that had been written down to a lower market value in a prior
period. Other income increased by $376,847 during the first nine months of 2000
when compared to 1999. The increase is attributable to subsidiary company's
earnings.
During the nine months ended September 30, 2000 and 1999, loss and loss
adjustment expenses increased to $2,391,073 from $1,672,561, respectively.
Incurred losses represent the net reserve increase after deduction of paid
claims and fluctuates based on premiums written and earned as well as claims
incurred and paid. The increase of $718,512 is attributable to higher claims
cost and reserve strengthening during the year 2000.
During the nine months ended September 30, 2000 and 1999, amortization
of deferred policy acquisition costs increased to $2,719,007 from $2,256,260,
respectively. The amortization of deferred policy acquisition costs increase is
attributed to the increased commission expense associated with miscellaneous
premiums written and general commission expenses attributed to agency
subsidiaries.
Operating expenses increased by $597,254 or 18% for the nine months
ended September 30, 2000 when compared to the same period in 1999. The increase
is attributed to salary, consulting fees and other expenses associated with
growth.
Interest expense is attributed to the interest on notes payable to
affiliates.
The increase in income taxes for the year 2000, as compared to the same
period in 1999, is attributed to the increase in earnings.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
------------------------------------------------------------
During the three months ended September 30, 2000, net premium income
totaled $3,054,621 representing an increase of 16 percent from that of the same
period in 1999 ($2,640,212). During the three months ending September 30, 2000
as compared to the same period during 1999, direct premiums increased $619,787
(23%); assumed premiums decreased $58,853 (10%) and ceded premiums increased
$264,230 (43%). Ceded premiums increase as the volume of direct premiums
increase based on their relationship under the Company's reinsurance treaties.
Net investment income for the three months ending September 30, 2000 as
compared to the same period during 1999 increased $82,077 (108%). The increase
is attributed to the increased volume of investments in the bond market. Other
income increased for the three months ended September 30, 2000 by $178,454 when
compared to the same period in 1999 and is directly attributed to subsidiary
earnings.
During the three months ended September 30, 2000 and 1999, loss and
loss adjustment expenses increased to $984,854 from $614,482, respectively.
Incurred losses represent the net reserve increase after deduction of paid
claims and fluctuates based on premiums written and earned as well as claims
incurred and paid. The increase in the third quarter is attributed to reserve
strengthening.
During the three months ended September 30, 2000, the amortization of
deferred policy acquisition costs increase is consistent with the increase in
premiums written and earned.
Operating expenses increased by $130,105 or 11% for the three months
ended September 30, 2000 when compared to the three months ended September 30,
1999. The increase is attributed to company growth and expansion and is
primarily related to salary and travel expenses.
The increase in income tax expenses is attributed to increased gain
from operations.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings
------- -----------------
None
Item 2. Changed in securities
------- ---------------------
None
Item 3. Defaults upon senior securities
------- -------------------------------
None
Item 4. Submission of matters to a vote of security holders
------- ---------------------------------------------------
Cumberland Technologies, Inc. Annual Shareholders' Meeting was held on
October 5, 2000. The three directors nominated by management were
named in proxies for the meeting which were solicited pursuant to
Regulation 14A of the Securities Exchange Act of 1934. There was no
solicitation in opposition to management's nominees. The directors
were elected by the following votes:
In Favor Withheld Not Voted
-------- -------- ---------
Francis M. Williams 5,662,378 1,460 207,518
Andrew J. Cohen ................ 5,662,378 1,460 207,518
R. Donald Finn ................. 5,662,113 1,725 207,518
Item 5. Other Information
------- -----------------
None
Item 6. Exhibits and reports on Form 8-K
------- --------------------------------
(a) None
Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUMBERLAND TECHNOLOGIES, INC.
-------------------------------------
Date: November 17, 2000 By: /s/ Joseph M. Williams
-------------------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principle Executive Officer)
Date: November 17, 2000 By: /s/ Carol S. Black
-------------------------------------
Carol S. Black
Secretary and Chief Financial Officer
(Principle Accounting and
Financial Officer)
