-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RD0i5byPW+6fp3ZkzjXAslApuUUUvw0WqYhvoa2zkfryCNOdcyK6PK46Gagx4Cwe xSHBIgEoMLilD26/JF1CIw== 0000882087-98-000002.txt : 19980401 0000882087-98-000002.hdr.sgml : 19980401 ACCESSION NUMBER: 0000882087-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUMBERLAND TECHNOLOGIES INC CENTRAL INDEX KEY: 0000882087 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 593094503 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19727 FILM NUMBER: 98582398 BUSINESS ADDRESS: STREET 1: 4311 WEST WATERS AAVENUE SUITE 501 CITY: TAMPA STATE: FL ZIP: 33614 BUSINESS PHONE: 8175980546 MAIL ADDRESS: STREET 1: 4311 WEST WATERS AVENUE STREET 2: SUITE 501 CITY: TAMPA STATE: FL ZIP: 33614 FORMER COMPANY: FORMER CONFORMED NAME: CUMBERLAND HOLDINGS INC DATE OF NAME CHANGE: 19930328 10-K 1 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, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______to ________. Commission File No. 0-19727 CUMBERLAND TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Florida 59-3094503 (State or other jurisdiction (I.R.S. Employer of incorporation) Identification No.) 4311 West Waters Avenue, Suite 501, Tampa, Florida 33614 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (813) 885- 2112 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which ------------------- registered: Common Stock ------------------------------- The NASDAQ Stock Market Securities registered pursuant to Section 12(g) of the Act: Common Stock ------------------ (Title of Class) 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 ] $5,143,604 Aggregate market value of voting stock (Common Stock) held by nonaffiliates of the Registrant as of March 27, 1998 5,449,458 shares of Common Stock $.001 par value Number of shares of Common Stock outstanding as of March 27, 1998 Documents incorporated by reference: NONE 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 Cumberland Technologies, Inc. and subsidiaries (the Company or Cumberland ) 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 Cumberland s Bond 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 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. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise. PART I Item 1. Business ------- -------- 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"). CTI conducts its business through its subsidiaries, CCS, SSI, Surety Group, Inc. ( SG ), Surety Associates ( SA ), Official Notary Service of Texas, Inc. ("ONS") 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. Cumberland conducts its business through five of its subsidiaries and a number of independent agencies which focus on selling and delivering surety insurance products to consumers. Traditionally, the surety segment of the insurance industry has delivered its products through an antiquated manual process. The need to advance technologically created an opportunity for Cumberland to develop a software product to organize its business. During 1996, the Company introduced its bond software program "BondPro". A management team of software architects and developers and insurance executives at Cumberland committed itself to developing and distributing software that increases the speed with which the agents deliver their products through their agents and carriers to the consumer. It is Cumberland's goal to reduce operating costs of insurance agents through the use of the software Cumberland developed. Cumberland's business strategy focuses on niche industry consolidation through the implementation of the Company s proprietary information system. CCS is a property and casualty insurance company that was incorporated in Texas on May 4, 1988. In September 1994, CCS redomesticated from Texas to Florida. CCS is licensed to write insurance in twenty-four states (Arkansas, Delaware, Florida, Georgia, Idaho, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Washington, West Virginia and Wyoming), the District of Columbia and Guam and currently has applications for admission pending in the following six states: Alabama, Kansas, Mississippi, New York, Oklahoma, and Wisconsin. Most of these states have a lengthy application 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 it may take to approve an application. All applications are updated as new information becomes available, and Cumberland is waiting for inquiries or actions by these pending states. The 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 CCS will apply in these states. CCS is currently attempting to obtain additional state licenses to spread its risk geographically and increase its sales of direct line insurance. Management believes, however, that CCS can function profitably selling direct line insurance and reinsurance in the states in which it is currently licensed. CCS has in the past, and intends in the future, to primarily sell surety bonds to contractors and miscellaneous surety bonds to federal and local government agencies. Insurance Ratings ----------------- Insurers compete with other insurance companies on the basis of a number of factors, including the ratings assigned by A.M. Best. A.M. Best reviews an insurer s profitability, leverage and liquidity, as well as the insurer s book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its reserves and the experience and competence of its management. A.M. Best ratings are based upon factors relevant to the insured customer and are not directed to the protection of investors. SSI is a general lines agency that was incorporated in Florida on August 22, 1988. SSI secures surety risks for contractors as an agent and for other agents (as a broker) and secures insurance or reinsurance with twelve insurance companies, one of which is CCS. SG and SA are also general lines insurance agencies. The insurance companies pay SSI, SG and SA a commission ranging from 15 to 30 percent of premiums paid by the policyholders. Qualex is a consulting company which provides claims administration services to the surety and construction industries. The percentages of gross revenue generated by the Company's subsidiaries for the year ended December 31, 1997 were as follows: Subsidiary Revenue Percentage ------------------------ ------------------------ CCS 63 % SSI 14 SG 6 SA 7 Qualex 10 ------------------------ 100 % ======================== Cumberland s investment portfolio consists primarily of investment grade debt and equity securities. The market value of these securities vary depending upon general economic and market conditions and the interest rate environment. From time to time, Cumberland may be required for business or regulatory reasons to sell certain of its investments at a time when their market value is less than the cost of such of investments. Regulation ---------- The insurance subsidiary is subject to varying degree of supervision and regulation in the jurisdictions in which they conduct business under statutes which delegate regulatory, supervisory and administrative powers to state insurance regulators. The nature of the regulation varies from jurisdiction to jurisdiction but typically involves prior approval of the acquisition of control of an insurance company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, limitations on dividends, approval or filing of premium rates and policy forms for many lines of insurance, solvency standards, minimum amounts of capital and surplus that must be maintained, limitations on amounts or types and amount of investments, limitations on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policy or surety bond holders, reporting of financial condition and other matters. In addition, state insurance regulators perform periodic financial and market conduct examinations of insurance companies. All such regulation is intended generally to protect the policy or surety bond holders, rather than equity holders. No assurance can be given that future legislative or regulatory changes will not adversely affect CCS s business. Adverse Legislation ------------------- A significant portion of the CCS s business is and will continue to be derived from the writing of commercial surety bonds mandated by various states statutes and local ordinances to cover acts of public officials and private businesses, such as Realtors, automobile dealers and others who generally interact with members of the public . In recent years, several jurisdictions have repealed legislation mandating use of various types of these bonds, often replacing them with alternative protection mechanisms, who assert claims against such officials or businesses. In addition, contract surety bonds are required generally by federal, state and local governments for public works projects. If numerous governments were to repeal the requirements for obtaining bonds of the type written by CCS, their results of operations and financial condition would be materially and adversely affected and, consequently their financial condition could be materially and adversely affected. Controlling shareholders ------------------------ Francis Williams and Kimmins Corp. (collectively Majority Shareholder ) owns 78.3% of the outstanding ordinary shares of the Company and collectively control the affairs and policies of the Company. Circumstances may occur in which the interest Majority Shareholders of the Company, could be in conflict with the interest of the other holders of the common stock. In addition, the Majority Shareholders may have an interest in pursuing acquisitions, divestitures or other transactions that, in their judgement, could enhance their equity investment, even though such transactions might involve risks to the other holders of the common stock. The Company s Board of Directors has the authority to issue up to one million shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, thereby delaying, deferring or preventing a change of control of the Company. Insurance Products ------------------ Cumberland sells contract, notary, various miscellaneous bonds and registered investment advisors liability insurance. In addition, the Company provides reinsurance on surety bonds sold by other small specialty insurance companies. Cumberland also assumes underwriting risk from other surety insurance companies under various reinsurance arrangements. Contract surety bonds guarantee satisfactory performance and completion of a contractors' work and payment of the contractors' debts and obligations relating to the performance of the contract covered by the bond. A default in performance or payment on a bonded contract results in the surety being primarily liable for these obligations, to the extent of the penal amount of the bond. On insurance or surety products sold directly by Cumberland, the exposure to loss would be the entire amount of the loss less any portion for which Cumberland has secured reinsurance. On reinsurance, Cumberland's exposure to loss would be limited to 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 such reinsurer. Contract surety bonds which the Company sells directly and those for which it provides or assumes reinsurance are sold primarily to contractors involved in asbestos abatement, hazardous remediation and other small contractors in other lines of business. Typically, the contracts for which surety bonds are provided range from $100,000 to $250,000, and the amount of the surety bond is for the entire project. Miscellaneous bonds include license and permit, court, fidelity, notary and bonds for public officials. The bonds are primarily required by state statute and are used to satisfy certain obligations and to guarantee compliance with certain laws. The bond amounts are typically less than $25,000 and the average amount is $5,000. The Company's emphasis is to write bonds which historically have a low loss ratio in order to minimize loss exposure. Registered Investment Advisors (RIA) Liability Insurance is a claims - made professional liability insurance product which insures the insured's risk management program. Each account is limited to $500,000 maximum coverage and loss exposure is not realized until five (5) years after purchase. The Company generates revenues from direct premiums on surety bonds it writes and reinsurance premiums on surety bonds for which it provides reinsurance. Typically, premiums range from 1 percent to 3 percent of the bond amount, with the exact premium being determined based on established underwriting procedures. Nature of Customers - Underwriting Procedures --------------------------------------------- Cumberland has established an underwriting philosophy that centers on guidelines which seek to minimize the liability of issuing surety bonds by focusing on three principal areas: the financial strength, experience, and operating capacity of the contractor. Underwriting guidelines for financial strength provide that a contractor must have a minimum net worth of $100,000, minimum working capital of $50,000, minimum working capital to total contract backlog of 10 percent, minimum net worth to total contract backlog of 20 percent, net income for the past two years, and a debt to equity ratio less than 5:1. In addition, underwriters analyze the contractor's access to lines of credit, as well as secondary personal assets which could be utilized to provide additional financial support. Underwriting guidelines related to experience provide that all key managers of a contractor must have a minimum of five years of experience in the following areas: project management, project administration, accounting, and company management. Underwriters also investigate the past performance of the firm by contacting prior owners, subcontractors, and suppliers that have been connected with past projects to investigate a firm's ability to perform its work and to meet its financial obligations on a daily basis. When analyzing a contractor's capacity, underwriters look for consistent growth patterns which take into consideration the ratio of working capital to total contract amount and net worth to total contract amount. Underwriters require the outstanding backlog to be less than 150 percent of the largest previous backlog undertaken by the firm. Underwriters also consider the insurance carried by the firm for asbestos abatement and environmental experience and the financial integrity of the insurance carrier. The underwriting guidelines require the carrier to have an A rating by A.M. Best (an insurance rating service) and to provide coverage on an occurrence basis. If the firm seeking surety bonding fails to meet the above requirements, the surety requires collateral to offset the additional risk. This option is utilized if the firm meets 80 percent to 99 percent of the requirements. If a firm fails to meet 80 percent of the requirements, it is denied surety bonding. Cumberland also requires corporate indemnification, as well as personal indemnification when the ownership of the firm is closely held in order to mitigate the liability of issuing surety bonding. Management has entered into negotiations and is actively pursing additional customers to add to and diversify current operations. Marketing of Insurance Products ------------------------------- Software -------- Cumberland began its Bond Pro software development initiative in 1995. The product is designed to service the national agency base that sells primarily miscellaneous and contract surety bonds. Miscellaneous Bonds ------------------- These bonds are primarily sold through agents issued in small dollar amounts and written to governmental bodies as part of a licensing requirement. There are numerous types of miscellaneous bonds sold in the United States. Licensing laws often require firms to provide surety in support of the promise to lawfully conduct business. The scope of the bond varies according to the law, the locality, the nature of the guarantee, and the parties who have a right of action under the bond. The premium per bond ranges from $50 to $500 and the number of bonds an agent might write can exceed one thousand per month. Each state requires numerous bond forms and the agent and issuing company must contend with the problems associated with legal requirements, approval and insurance regulation which varies from state to state. Also, the billing, collection and accounts receivable associated with large numbers of small invoices must be managed. Contract Bonds -------------- Contract 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. Cumberland's typical bond is less than $1.5 million with aggregate ongoing work of $3 million. The bonds are provided to general contractors, subcontractors, and specialty contractors and are marketed through insurance agencies specializing in this type of coverage. Cumberland's management has identified agencies which specialize in bonds with the above parameters and solicit their business by personal contact via agency visits. The agency visits also allow for a demonstration of the Bond Pro Software Program which helps to solidify a business relationship due to advantages of automating the issuance of bid, performance, and payment bonds. The efficiencies gained in using the Bond Pro system for issuing, tracking, and reporting bonds enhances Cumberland's ability to increase premium and to develop relationships which may not otherwise be possible due to competition for this class of business. Prior to Cumberland's software development initiative, the insurance industry supplied their products through agents on a manual basis, and made very little use of the current technological advancements in communication methods. Billings and receivables in many instances may have been automated, but no integrated system existed which effectively combined company approval, forms inventory, bond issuance, invoicing, accounts receivable, collection, renewals and management information reporting, and which conformed to the variety of state insurance regulations and addressed the issue that a single agent might deal with ten to fifteen companies. Starting in 1995, Cumberland's management elected to initially focus on this neglected area. Since the launching of the development of this product the Company's software team has written, applied for copyright, field tested and began distributing the "Cumberland Bond Issuance Program" to selected agents around the United States on October 1, 1996. The Company received its federal copyright registration #TX4-542-729, effective March 29, 1997. This program encompasses all the required functions an agency needs to run a full scale bond desk when implemented inside the agency structure. The software developed, is designed to reduce the labor required to provide the service. The program is structured to allow CTI to sell components of the program to a broad section of the surety industry. As of December 31, 1997, CTI has twenty agencies using its software and intends to complete installations of approximately four agencies per month during 1998. General ------- Cumberland utilizes the services of its subsidiaries as well as general agents for marketing, underwriting and administration of its direct lines of business. Reinsurance is provided on a treaty and facultative basis. Treaty reinsurance involves providing reinsurance based on a written agreement between the two sureties. The agreement describes which business is covered and the amount covered for each bond. Facultative reinsurance is provided on an individual bond basis. Each bond is underwritten to determine the acceptability of the risk and the amount of reinsurance provided is determined by the underwriter's evaluation of the risk. Cumberland utilizes the independent agency system through its bond program to market its contract and miscellaneous bonds, outsourcing to market its notary bonds, and a general agency to market its registered investment advisor's insurance. Direct Insurance ---------------- During 1996, Cumberland Casualty & Surety Company changed the focus of how it acquires surety premium. The Company committed to enter the miscellaneous, license and permit, probate, court and performance and payment bond markets on a direct basis. The Company's emphasis is to market directly to agents for all classes of surety business, thus providing the Company with greater control over marketing and underwriting functions, management believes that their emphasis will create a high quality and profitable book of business. During 1996, 1995 and 1994 Cumberland had a Managing General Agent Agreement with Midwest Indemnity Corp. ("Midwest") or (the "Managing General Agent"). Midwest is a fifty-plus year old insurance agency which is primarily an underwriter of surety bonds. Based in Illinois, Midwest markets bonds nationally through a network of independent agents which market to contractors in their geographic areas. Midwest was granted underwriting and binding authority on bonds up to $500,000 and premium collection authority, for which it received a 35 percent commission to cover overhead costs and the cost of commissions to subagents. The profit from this agreement, after deductions for commissions, reinsurance and losses was then split evenly between Cumberland and the Managing General Agent. Effective January 1, 1997, Cumberland terminated its agreement with Midwest Indemnity Corp. Cumberland primarily writes direct surety bonds for KC and its affiliates. Revenues attributable to direct surety transactions with KC and its affiliates were $1,738, $2,873 and $4,535 for the years ended December 31, 1997, 1996 and 1995, respectively. Reinsurance ----------- Effective July 1, 1996, Cumberland Casualty & Surety Company entered into a surety excess of loss reinsurance agreement with Transatlantic Reinsurance Company which provides the Company with the ability to write single bonds up to $1,500,000 with a principal aggregate level of $3,000,000. Transatlantic Reinsurance Company (Transatlantic Re) is a carrier that specializes in reinsurance treaties related to the surety business. Established in 1952, Transatlantic Re is Best Rated A+ (Superior), with statutory surplus of $952,707,000 at December 31, 1996. The reinsurance treaty provides the Company with the ability to actively pursue small to medium sized contractors with revenues up to $5,000,000. It also allows the Company to market and underwrite miscellaneous surety bonds up to $1,500,000. The agreement is a principal excess of loss agreement and Cumberland retains five percent (5%) of $900,000 net loss, each principal excess of $100,000 net loss. The Company retains ten percent (10%) of the next $1,000,000 layer. This reinsurance treaty effectively allows Cumberland Casualty & Surety Company to market its products in all twenty-six (26) states in which it is presently licensed, which management believes leads to a better geographic spread of risk and premium dollars. For the period October 1991 to September 1993, Cumberland entered into a pooling agreement with Indiana Lumbermens Mutual Insurance Company ( ILMIC ), Connecticut Indemnity Company ("CIC") and American Surety Company ("American Surety"). CIC is a member of the Orion Capital Companies which are specialty writers of property and casualty coverages with an emphasis on workers' compensation, professional liability for architects and engineers, nonstandard automobile and surety business. CIC was formed in 1917 and had statutory surplus of $99,939,000 at December 31, 1996. CIC is Best Rated A (Excellent), based on the consolidated performance of the Orion Capital Companies by A.M. Best, an insurance rating agency. The Orion Capital Companies had statutory surplus of $672,168,000 at December 31, 1996 and, based on its consolidated performance, is Best Rated A (Excellent). American Surety is a small nondomestic surety which is not rated. The Company entered into a pooling agreement (beginning October 1993). Under the provisions of the new agreement, CIC and ILMIC were replaced by Gulf Insurance Company ("Gulf"). Under this agreement, Cumberland assumes 10% (effective April 1, 1996); 12.5% (effective April 1, 1995) and 25% (prior to April 1, 1995) of certain surety policies underwritten by Gulf. Gulf is a member of the Gulf Insurance Group which was formed in 1940 and is jointly owned by Primerica Corporation and Travelers Corporation. Gulf is rated A+ (Superior) and had policyholders' surplus of $287,534,000 at December 31, 1996. Gulf is a niche market underwriter which targets small to medium size accounts and offers directors and officers, errors and omissions, fidelity and surety, and other specialty liability products. Cumberland assumes reinsurance on a facultative and treaty basis from several small sureties. The loss of one of these customers would not have a material impact on the operations of Cumberland. Investments ----------- Investment activities are conducted by an investment committee which manages assets pursuant to investment objectives and guidelines established by senior management of Cumberland. These objectives require that the portfolio consist of debt and equity securities of the type and quality mix which will enable Cumberland to compete effectively in the property and casualty insurance market, provide appropriate interest margins and assure Cumberland's continued solvency and profitability. In addition, investments in tax-free obligations are made to the extent of any tax advantages available. Investment in any security not stated in the investment committee's guidelines is limited to five percent of statutory surplus. Reserves for Losses and Loss Adjustment Expenses ------------------------------------------------ Reserves for losses and loss adjustment expenses are established based upon reported claims and Cumberland's historical record of loss ratios and trends. The amount of loss reserves for reported claims is based on a case by case evaluation of the claim. Additionally, historical data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments and economic conditions, including the effects of inflation. Amounts are adjusted periodically to reflect these factors. In addition, Cumberland may incur additional liability if its reinsurers do not meet their obligations. Reinsurance does not discharge an insurance carrier from its primary liability to a policy holder for the face amount of the coverage. 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. In accordance with statutory requirements, CCS's reserves are certified annually at year end by an independent actuary. During 1997, there was no material change in the mix of business, including the location of business, geographic mix, and types of risks assumed. Current fluctuations in inflation have not had a material effect on the financial statements and there are no explicit provisions in the financial statements for the effects of inflation that may cause future changes in claim severity. Other than certain classification differences, there are no material differences between statutory reserves and Generally Accepted Accounting Principle ("GAAP") reserves. The Company does not discount its loss reserves for financial reporting purposes. Claims Adjustment ----------------- In addition to management's active participation in claims administration, Cumberland has historically relied upon outside claims adjusters and attorneys to help minimize the cost of claims administration. Due to management's active participation, Cumberland believes it has the expertise to manage its claims administration. Regulation ---------- Cumberland is subject to regulation by various supervising agencies which exercise broad administrative powers with respect to licensing to transact business, overseeing trade practices, licensing agents, approving policy and bond forms, establishing reserve requirements, prescribing dividend limitations, approving rates, prescribing the form and content of required financial statements, regulating the types and amount of investments permitted and other matters, all as set forth in regulations. State laws regulating insurance holding companies, such as Cumberland, may significantly limit the ability of CCS to pay dividends to Cumberland, therefore affecting Cumberland's ability to pay or KC's ability to require Cumberland to pay loans or advances from KC. Under insurance guaranty fund laws, insurers doing business in states having such laws can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The amount of any future assessments on Cumberland under these laws cannot be reasonably estimated at this time. All of the states in which Cumberland is licensed regulate insurers and their affiliates under insurance holding company legislation. Under such laws, transactions with related parties may be subject to prior notice or approval depending on the size of the transaction in relation to the Company's financial position. There can be no assurance that such transactions will be approved in the future. Although the federal government generally does not directly regulate the insurance industry, federal initiatives often have an impact on the industry in a variety of ways. Current and proposed federal measures which may significantly affect the insurance industry include employee benefit regulation, securities regulation concerning insurance products, tax law changes affecting the taxation of insurance companies, changes in the tax treatment of insurance products, and proposed legislation to more fully subject insurance companies to antitrust laws. Changes in federal, state, and local regulations could have a material adverse effect on Cumberland's future operations. Cumberland believes it is substantially in compliance with all material statutory regulations concerning its primary business operations. Competition ----------- The insurance industry is highly competitive due to the number and size of insurers and agencies. However, because Cumberland markets its products in the specialty contract surety and landfill market, Cumberland believes that its competition is limited to a few regional surety companies which have also targeted this market. The larger sureties and insurance companies have chosen historically not to enter this market. Cumberland has aligned itself with other small sureties as a reinsurer. Therefore, Cumberland is able to write larger bonds than some competitors of the same financial size because of the availability of reinsurance from these sureties. The surety market is highly competitive. Companies generally compete for surety business on the basis of price, service, financial strength, ratings, reputation and capabilities of the independent agents and brokers who solicit the business, and reputation of the insurance company. The small contract and commercial bond markets in which CCS competes have seen additional competition as both large and small insurance companies are competing and expanding in this area. CCS does not have a direct sales force but instead relies on a nationwide network of independent insurance agencies. In order to compete effectively in the market, CCS will need to continue to maintain productive relationships with the independent insurance agencies that offer its products. Certain existing and potential competitors of CCS are larger, and have greater financial resources and more extensive insurance product lines. The business of CCS could be adversely affected by such competition. Cumberland believes that the principal competitive factors in the industry are reputation, managerial experience, price, and breadth of services offered. Employees --------- As of December 31, 1997, Cumberland employs thirty-one employees, of which two are employed in an executive capacity, eight are employed in professional capacities, and twenty-nine are employed in a variety of administrative and clerical positions. Cumberland believes that it can continue to operate effectively with the current number of employees. None of the Company's employees are union members and none are subject to collective bargaining agreements. The Company believes that its relationship with its employees is satisfactory. Item 2. Properties ------- ---------- Cumberland leases office space from a company owned by the Chairman of the Board, Mr. Francis M. Williams, at a monthly rate of $7,254 pursuant to a lease that was executed March 1, 1997 and is effective through December 31, 2001. Item 3. Legal Proceedings ------- ----------------- Cumberland 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 Cumberland. Item 4. Submission of Matters to a Vote of Security Holders ------- -------------------------------------------------- None 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 the National Quotation Bureau and Nasdaq. The high and low bid prices for 1997 and 1996 were as follows: Bid Information ----------------------------- 1997 1996 -------------- --------------- High Low High Low ------- -------------- ------- First Quarter 2 1/2 1 5/8 9/16 1/2 Second Quarter 4 2 1 7/8 Third Quarter 3 5/8 2 19/32 3 1/4 3 Fourth Quarter 3 1/2 2 1/4 3 1/4 3 As of March 2, 1998, there were 971 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 extend 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 ------- -----------------------
Statement of Operations Data: Year Ended December 31 ------------------------------------------- 1997 1996 1995 1994 1993 -------- ---------------- -------- -------- (In Thousands - except per share data) Operating data: Net premium income . . . . . .$ 5,684 $ 3,808 $ 5,068 $ 4,957 $ 4,412 Commission income . . . . . . . 860 1,386 774 - - Other income . . . . . . . . . 616 653 425 - - Net investment income . . . . . 408 404 397 284 337 Net realized gain (losses) . . 202 118 124 (124) 22 Benefits and expenses . . . . . 7,599 6,952 7,016 6,604 4,825 Income (loss) before income taxes . . . . . . . . . . . . 171 (583) (228) (1,209) 238 Net income (loss) . . . . . . . 171 (583) (228) (1,073) 231 Pro forma net income (loss) per share (1) . . . . . . . . . . .$ .03 $ (.14)$ (.06)$ (.27)$ .06
(1) Pro forma net income (loss) per share (unaudited) for 1994 and 1993 has been calculated based on the 4,039,780 shares of Cumberland Common Stock that were outstanding after the Distribution. The 1997, 1996 and 1995 net income (loss) per share amounts have been computed based on the actual weighted average number of shares outstanding during the respective years.
Balance Sheet Data: Year Ended December 31 ------------------------------------------- 1997 1996 1995 1994 1993 -------- ---------------- -------- -------- (In Thousands - except per share data) Balance sheet data: Investments . . . . . . . . . .$ 6,469 $ 6,110 $ 6,303 $ 5,852 $ 5,046 Cash and cash equivalents . . . 1,804 669 1,236 1,701 3,117 Accounts receivable . . . . . . 2,210 925 550 2,540 948 Reinsurance recoverables . . . 2,017 1,590 1,697 1,749 1,876 Deferred policy acquisition costs . . . . . . . . . . . . 813 635 435 581 340 Intangibles . . . . . . . . . . 1,681 1,957 2,163 134 - Total assets . . . . . . . . . 15,321 12,372 12,709 12,834 11,956 Policy liabilities and accruals: Unearned premiums . . . . . . 2,629 1,862 1,182 1,631 1,037 Losses and LAE . . . . . . . 2,550 1,992 2,352 3,138 3,355 Ceded reinsurance and accounts payable . . . . . . . . . . 2,714 1,172 - - - Term notes/surplus debentures, including accrued interest 0 0 4,798 4,343 4,403 Other long-term debt . . . . . 1,419 1,533 - - - Total liabilities . . . . . . . 9,312 6,559 11,419 11,518 9,351 Total stockholders' equity . . 6,009 5,814 1,290 1,316 2,605 /TABLE 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.
Percentage Increase (Decrease) Year Ended December Year Ended December 31 31 -------------------------------------------------- 1997 1996 1995 1997 1996 -------------------------------------------------- Net premium income . . $ 5,684 $ 3,808 $ 5,068 $ 49.3 % (24.9)% Net investment income 408 404 397 1.0 % 1.8 % Net realized gains (losses) . . . . . . . 202 118 124 71.2 % (4.8)% Other revenues . . . . 1,476 2,039 1,198 (27.6)% 70.1 % Benefits and expenses 7,599 6,952 7,016 9.3 % (.9)% Income (loss) before income taxes . . . . 170 (583) (228) 70.8 % (155.7)% Net Income (loss) . . . 170 (583) (228) 70.8 % (157.7)%
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 ----------------------------------------------------------------- During the year ended December 31, 1997, net earned premium income increased by 49 percent to $5,684,000 from $3,808,000. Direct premiums earned from nonaffiliates were $5,836,655 and $1,149,377 for 1997 and 1996, respectively, representing an increase of $4,687,278 or 408 percent. Net reinsurance premiums earned through the Pooling Agreements were $1,166,025 and $2,693,418 for 1997 and 1996, respectively, representing a decrease of $1,527,393, or 57 percent. During 1997, direct premiums written by CCS increased while assumed premiums decreased as a result of the marketing direction of the Company, which is to penetrate the direct market while decreasing the volume of reinsurance premiums assumed through Pooling Agreements. The following table reflects the written premium activity, net of reinsurance ceded, for 1997 and 1996. Written Premiums -------------------------------------------- 1997 1996 % Change -------------- -------------- -------------- Direct (net) $ 5,202,001$ 1,854,270 181% Assumed (net) 1,032,260 2,513,775 (59% ) -------------- -------------- Total . . . . $ 6,234,261$ 4,368,045 43% ============== ============== During the year ended December 31, 1997 and 1996, investment income before capital gains was $408,050 and $403,919, respectively. Realized gains, net of realized losses, for the year ended December 31, 1997 and 1996 were $201,863 and $117,824, respectively. Investment income remained consistent for 1997 as compared to 1996. Other revenues for the year ended December 31, 1997 decreased to $1,475,990 from $2,039,331 or 28 percent. Other revenues consist primarily of commissions earned by subsidiary agencies. The decrease of approximately $563,000 is attributable to the transfer of direct writings by subsidiary agencies for other carriers in 1996 to CCS in 1997. During the year ended December 31, 1997, benefits and claims expenses increased to $1,792,117 from $1,670,640 for the year ended December 31, 1996. The increase in benefit and claims expenses of $121,477 is attributed to the effects of reserve increases on direct business of $928,009 which is offset by a decrease in claim reserves on assumed business of $806,532. Loss ratios on direct and assumed premiums earned during 1997 are 40% and 63.6%, respectively. During the year ended December 31, 1997, the net amortization of deferred policy acquisitions costs increased to $1,778,808 from $1,532,355 for the year ended December 31, 1996. The increase is attributable to the increase in earned premiums. During the year ended December 31, 1997, operating expenses increased to $3,903,476 from $3,255,805 in 1996. The increase is due to expenses incurred in the continuing research and development of Cumberland's Bond Program and additional personnel employed to direct market its insurance products. Management believes that future programming updates to BondPro and other related expenses will remain consistent with 1997 operating expenses. Net interest expense decreased to $124,928 in 1997 from $493,337 in 1996 due to the conversion on the term note to equity on October 1, 1996. Interest expense on notes due to agencies purchased in 1995 were $124,928 and $121,271 for the years ended December 31, 1997 and 1996, respectively. The Company incurred interest expense during 1996 of $372,006 on the term note prior to the 1996 conversion. The Company s effective tax (benefit) rate was -0- percent for 1997 and 1996. The net operating loss carryforward at December 31, 1997 is $841,568. The deviation from statutory rates for 1997 and 1996 primarily relates to the Company s establishment of a valuation allowance on a portion of the net operating loss, the future realization of which is uncertain. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 ---------------------------------------------------------------- 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.
Percentage Increase (Decrease) Year Ended December Year Ended December 31 31 -------------------------------------------------- 1996 1995 1994 1996 1995 -------------------------------------------------- Net premium income . . $ 3,808 $ 5,068 $ 4,957 $ (24.9) 2.2 % Net investment income 404 397 284 1.8 39.8 Net realized gains (losses) . . . . . . . 118 124 (124) (4.8) 200.0 Other revenues . . . . 2,039 1,198 278 70.1 331.3 Benefits and expenses 6,952 7,016 6,604 (.9) 6.2 Loss before income taxes . . . . . . . . (583) (228) (1,209) (155.7) 81.1 Net loss . . . . . . . (583) (228) (1,073) (157.7) 78.8
During the year ended December 31, 1996, net earned premium income decreased by 25 percent to $3,808,000 from $5,068,000 or $1,260,000. The decrease is primarily attributed to the premiums assumed through reinsurance pooling agreements. Net reinsurance premiums earned through the Pooling Agreements were $2,693,418 and $4,440,632 for 1996 and 1995, respectively, representing a decrease of $1,747,214, or an overall 39 percent decrease in assumed premiums. Net direct premiums earned were $1,114,901 and $627,683 for 1996 and 1995, respectively, representing an increase of $487,218 or 78 percent. During 1996, direct premiums written by CCS increased while assumed premiums decreased as a result of the marketing direction of the Company. CCS's direction is to penetrate the direct market while decreasing the volume of reinsurance premiums assumed through Pooling Agreements. The following table reflects the written premium net of reinsurance, activity for 1996 and 1995. Written Premiums -------------------------------------------- 1996 1995 % Change -------------- -------------- -------------- Direct, net . $ 1,854,270 $ 881,683 110% Assumed, net 2,513,775 3,899,884 (36%) -------------- -------------- Total . . . . $ 4,368,045 $ 4,781,567 9% ============== ============== During the year ended December 31, 1996 and 1995, investment income before realized capital gains was $403,919 and $397,680, respectively. Realized gains, net of realized losses, for the year ended December 31, 1996 and 1995 was $117,824 and $124,004, respectively. Overall investment income remained consistent for 1996 as compared to 1995. Other revenues for the year ended December 31, 1996 increased to $2,039,331 from $1,198,249 for the year ended December 31, 1995, an increase of 70.1%. The increase is a direct result of an increase of $612,350 in commission income earned by subsidiary surety agencies, and an increase of $228,729 in consulting revenues derived from Qualex Consulting, Inc. a claims consulting company which was formed in November 1994. During the year ended December 31, 1996, benefits and claims expenses increased to $1,670,640 from $1,245,546 for the year ended December 31, 1995. The increase in benefit and claims expenses of $425,094 is attributed to claims on reinsurance assumed pooling agreements. During 1996, an increase of $300,000 was charged to the 1993/94 pooling agreement. Management believes the increase in claims arising from business written in the Pooling Agreement has leveled off and anticipates that losses associated with the reinsurance contracts will decrease during 1997. Losses associated with direct premiums represent approximately 11% of premiums earned or $127,232. During the year ended December 31, 1996, the amortization of deferred policy acquisitions costs decreased to $1,532,355 from $2,380,140 for the year ended December 31, 1995. The decrease is attributable to the decrease in earned premiums. During the year ended December 31, 1996, operating expenses increased to $3,255,805 from $2,882,255 in 1995. The increase is due to additional expenses associated with the purchase of two agencies during 1995, expenses incurred in research and development of Cumberland's Bond Program, and additional personnel employed to direct market its insurance products. Net interest expense decreased to $493,337 in 1996 from $508,217 in 1995 due to the conversion on the term note to equity on October 1, 1996. The Company s effective tax (benefit) rate was -0- percent for 1996 and 1995. The deviation from statutory rates for 1996 and 1995 primarily relates to the Company s establishment of a valuation allowance on a portion of the net operating loss, the future realization of which is uncertain. 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 premiums up to an amount equal to three times its statutory surplus, or approximately $15,134,000 and $15,104,000 at December 31, 1997 and 1996, respectively. Therefore, based upon statutory guidelines, the Company could increase earned premiums by approximately $9,500,000 in 1998 in addition to the amount earned in 1997. The primary sources of liquidity for the Company are funds generated from commissions, surety premiums, investment income, and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses, and commissions. At December 31, 1997, the Company s $15,321,383 of total assets calculated based on generally accepted accounting principles were distributed primarily as follows: 55 percent in cash and investments (including accrued investment income), 27 percent in receivables and reinsurance recoverables, 16 percent in intangibles and deferred policy acquisition costs and 2 percent in other assets. The Company maintains a liquid operating position and follows investment guidelines that are intended to provide an acceptable return on investment while maintaining sufficient liquidity to meet its obligations. Net cash (used in) provided by operating activities was $1,925,903, $(169,587) and $(375,690) for the years ended December 31, 1997, 1996 and 1995, respectively. In 1997, the cash provided by operating activities was primarily attributable to the increase in ceded reinsurance payable and pooling liabilities and accruals. In 1996, the cash used in operating activities was primarily attributable to payments of claims and reinsurance, which was offset in part by a decrease in accounts receivable. Net cash (used in) provided by investing activities was $(120,560), $253,876, and $(659,944) for the years ended December 31, 1997, 1996 and 1995, respectively. Investing activities consist of purchases and sales of investments and advances to and from KC. Net cash (used in) provided by financing activities was $(670,889) $(803,772) and $570,263 for the years ended December 31, 1997, 1996 and 1995, respectively. Financing activities consist of purchases of treasury stock, short-term borrowings and repayment during 1997, 1996 and 1995 on notes payable that are a result of the 1995 purchase of two agencies. Year 2000 Issue (unaudited) --------------------------- The Company has developed an in-house surety administrative system BondPro . BondPro is an agency surety bond administration system that issues bonds, tracks underwriting, and accounting and reporting from its database. BondPro is a window based program and is year 2000 compliant. The Company is aware of the issues that many computer systems will face as the millennium (year 2000) approaches. The Company, however, believes that its own internal software and hardware is year 2000 compliant. The Company believes that any year 2000 problems encountered by procurement agencies, and other customers and vendors are not likely to have a material adverse effect on the Company s operations. The Company anticipates no other year 2000 problems which are reasonably likely to have a material adverse effect on the Company s operations. There can be no assurance, however, that such problems will not arise. Losses and Loss Adjustment Expenses ----------------------------------- The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (LAE) of CCS. The liabilities for losses and LAE are determined using case-basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through the end of the period. These estimates are subject to the effect of trends in future claim severity and frequency. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary; such adjustments, if any, are included in current operations. Reconciliation of Liability for Losses and Loss Adjustment Expenses ----------------------------------------------------------------- The following table provides a reconciliation of the beginning and ending liability balances, net of reinsurance recoverable, for 1997, 1996 and 1995 to the gross amounts reported in Cumberland s balance sheets: December 31 1997 1996 1995 ----------- ----------- ---------- Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at beginning $ 594,922 $ 1,052,547 $1,625,703 of year . . . . . . . . . . ----------- ----------- ---------- Provision for losses and LAE for claims occurring in the current year, net of reinsurance . . . . . . . . 1,743,117 1,008,640 1,486,546 Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance 49,000 662,000 (241,000) ----------- ----------- ---------- Incurred losses during the current year, net of reinsurance . . . . . . . . 1,792,117 1,670,640 1,245,546 Losses and LAE payments for claims, net of reinsurance, occurring during: The current year . . . . 553,629 422,544 161,279 Prior years . . . . . . 440,479 1,705,721 1,657,423 ----------- ----------- ---------- 994,108 2,128,265 1,818,702 ----------- ----------- ---------- Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at end of year . . 1,392,931 594,922 1,052,547 Reinsurance recoverables on unpaid losses at end of year 1,157,369 1,396,874 1,299,257 ----------- ----------- ---------- Liability for losses and LAE, gross of reinsurance recoverables on unpaid losses, at end of year . . $ 2,550,300 $ 1,991,796 $2,351,804 =========== =========== ========== Cumberland experienced a $49,000 and $662,000 a deficiency for losses and loss adjustment expenses in 1997 and 1996, respectively, and experienced a redundancy of $241,000 in 1995, for losses incurred in prior years. The deficiency in 1997 principally resulted from settling case basis reserves established in prior years for amounts that were more than expected. The deficiency in 1996 is a result of additional claims expense on a 1993/94 pooling agreement. The redundancy in 1995 principally resulted from settling case basis reserves established in prior years for amount less 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, 1997 liability for losses and LAE reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles ( GAAP ) and that reported in the annual statement filed with the state insurance departments in accordance with statutory accounting practices ( SAP ) are as follows: Liability for losses and LAE on a SAP basis (which is net of reinsurance recoverables on unpaid losses and LAE) $ 1,392,931 Reinsurance recoverables on unpaid losses and LAE . . . . . . . . . . . . . . . . . . 1,157,369 -------------- Liability for losses and LAE, as reported in the accompanying GAAP basis financial statements . . . . . . . . . . . . . . $ 2,550,300 ============== Analysis of Loss and Loss Adjustment Expense Development -------------------------------------------------------- The following table represents the development of the liability for unpaid liabilities, net of reinsurance, for 1990 through 1997 (in thousands).
1990 1991 1992 1993 ------------- -------------------------- ------------- Liability for losses and loss adjustment expenses, net of reinsurance . . . . . $ 2,171 $ 1,663 $ 2,426 $ 1,709 Liability re-estimated as of: One year later . . . 3,003 1,273 1,239 3,815 Two years later . . 2,549 1,200 2,546 2,579 Three years later . 2,349 1,316 2,263 2,750 Four years later . . 2,471 1,443 2,418 2,851 Five years later . . 2,368 1,234 2,408 - Six years later . . 2,466 1,199 - - Seven years later . 2,370 - - - ------------- -------------------------- ------------- Cumulative (deficiency) redundancy . . . . . $ (199) $ 464 $ 18 $ (1,142) ============= ========================== =============
1994 1995 1996 1997 ------------- -------------------------- ------------- Liability for losses and loss adjustment expenses, net of reinsurance . . . . . $ 1,625 $ 1,053 $ 595 $ 1,393 Liability re-estimated as of: One year later . . . 1,384 1,716 644 - Two years later . . 1,420 1,815 - - Three years later . 1,631 - - - Four years later . . - - - - Five years later . . - - - - Six years later . . - - - - Seven years later . - - - - ------------- -------------------------- ------------- Cumulative (deficiency) redundancy . . . . . $ (6) $ (762)$ (49) $ - ============= ========================== ============= /TABLE
1990 1991 1992 1993 ------------- -------------------------- ------------- Cumulative amount of liability, net of reinsurance recoverables, paid through: One year later . . . $ 1,931 $ 806 $ 1,151 $ 765 ============= ========================== ============= Two years later . . $ 2,188 $ 884 $ 1,834 $ 1,058 ============= ========================== ============= Three years later . $ 2,267 $ 1,095 $ 2,088 $ 2,868 ============= ========================== ============= Four years later . . $ 2,295 $ 1,254 $ 1,957 $ 3,717 ============= ========================== ============= Five years later . . $ 2,295 $ 1,260 $ 3,533 $ - ============= ========================== ============= Six years later . . $ 2,331 $ 1,199 $ - $ - ============= ========================== ============= Seven years later . $ 2,364 $ - $ - $ - ============= ========================== =============
1994 1995 1996 1997 ------------- -------------------------- ------------- S> Cumulative amount of liability, net of reinsurance recoverables, paid through: One year later . . . $ 1,643 1,334 563 - ============= ========================== ============= Two years later . . 2,316 2,186 - - ============= ========================== ============= Three years later . 2,164 - - - ============= ========================== ============= Four years later . . - - - - ============= ========================== ============= Five years later . . - - - - ============= ========================== ============= Six years later . . - - - - ============= ========================== ============= Seven years later . - - - - ============= ========================== ============= /TABLE Effect of Inflation ------------------- Inflation has not had, and is not expected to have, a material impact upon the Company s operations for the last three years. Item 8. Financial Statements and Supplementary Data ------- ------------------------------------------- The financial statements of the Company required by this Item are listed in Item 14(a)(1) and (2) and are submitted as a separate section of this report. Item 9. Changes in and Disagreements with Accountants on ------- Accounting and Financial Disclosure ------------------------------------------------ None Item 10. Directors and Executive Officers of the Registrant -------- -------------------------------------------------- The current directors and executive officers of Cumberland are as follows: Name Age Position ----------------------------------------------------------------- Francis M. Williams 56 Chairman of the Board of Directors Joseph M. Williams 41 President and Treasurer George A. Chandler 68 Director Andrew J. Cohen 44 Director Edward J. Edenfield, IV 40 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. 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 has been a Director of Cumberland since its inception. In addition, Mr. Chandler has been a Director of KC since January 1990. Since November 1989, Mr. Chandler has been an independent business consultant. Mr. Chandler was Chairman of the Board from July 1986 to November 1989, and President and Chief Executive officer from October 1985 to November, 1989 of Aqu-Chem, Inc., a manufacturer of packaged boilers and water treatment equipment. From May 1983 to October 1985, he was President, Chief Executive Officer, and Director of American Ship Building Co., which is engaged in the construction, conversion and repair of cargo vessels. Mr. Chandler is also a Director of The Allen Group, Inc. and DeVlieg Bullard, Inc. Andrew J. Cohen was elected as a Director to Cumberland s Board effective February 24, 1997. Since June of 1972, Mr. Cohen has been co-President of ABC Fabric of Tampa, Inc. which is now the fourth largest private retail fabric company in the United States. Mr. Cohen brings both national marketing and corporate management experience to Cumberland. Beneficial Ownership Reporting Compliance ----------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the Company s officers and directors, and persons who own more than 10 percent of a registered class of the Company s equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ( SEC ). Officers, directors, and greater than 10 percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on the Company s review of the copies of such forms received by it, or written representations from certain reporting persons that no Form 5 was required for those persons, the Company believes that, during the year ended December 31, 1997 all filing requirements applicable to its officers, directors, and greater than 10 percent beneficial owners were complied with. Item 11. Executive Compensation and Other Information -------- -------------------------------------------- Summary Compensation Table -------------------------- The following table provides certain summary information concerning compensation paid or accrued by the Company and its subsidiaries to and on behalf of the Company s President for each of the three years ended December 31, 1997:
Long-Term Annual Compensation Compensation ---------------------------- ------------------- Name of Individual Other All and Principal Annual Stock other Position Year Salary Bonus Compensation Options Compensation Joseph M. Williams President and Treasurer . . 1997 $ 95,000 $30,000 $ - $ - $ - 1996 $ 95,000 $37,000 $ - $ - $ - 1995 $ 95,000 $30,000 $ - $ - $ - /TABLE Aggregate Option Exercises in 1997 and December 31, 1997 Option Values ----------------------------------------------------------------- - The following table shows information concerning options held by the officers shown in the Summary Compensation Table at the end of 1997. No options were exercised by such persons in 1997. Number of Securities Underlying Value of Unexercised Unexercised Options in-the-Money at Fiscal Year End Options at Fiscal (#) Year End ($)(1) Exercisable/ Exercisable/ Name Unexercisable Unexercisable --------------------- ------------------- ----------------------- Joseph M. Williams 124,000/0 $363,375/$0 (1) Represents the dollar value of the difference between the value at December 31, 1997 and the option exercise price of unexercised options at December 31, 1997. 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, 1997, 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 March 27, 1998 by (i) persons known by Cumberland to own more than 5 percent of Cumberland s outstanding Common Stock, (ii) each director and officer of Cumberland, and (iii) all directors and executive officers of Cumberland as a group: Amount and Nature Name and Address of Beneficial Percent of Issued and of Beneficial Owner Ownership of Common Outstanding Common (1) (2) Stock Stock --------------------- ------------------- ----------------------- Francis M. 3,602,002 (3) 66.1% Williams . . . . . Joseph M. Williams 358,783 (4) 6.6% George A. Chandler 2,669 (5) * Andrew J. Cohen . 42,590 (6) .8% Edward J. Edenfield IV . . . 8,000 (7) * All directors and executive officers as a group (five persons) . . . . . 4,014,044 73.7% (1) The address of all officers and Directors of Cumberland listed above are in care of Cumberland at 4311 W. Waters Ave., Suite 501, Tampa, FL 33614. (2) Cumberland believes that the persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them, unless otherwise noted. (3) Includes 2,318,617 shares owned by Mr. Francis Williams; 1,059,306 shares allocated to Mr. Williams based on his 61.5% ownership in Kimmins Corp., 29,345 shares owned by Mr. Williams wife; 22,748 shares held by Mr. Williams as trustee for his wife and children; 18,296 shares held by Mr. Williams as custodian under the New York Uniform Gifts to Minors Act for his Children; and 153,690 held by various Real Estate Partnerships of which Mr. Williams is 100 percent Owner. Mr. Williams owns 61.5% of the outstanding common stock of Kimmins Corp. and is its Chairman and Chief Executive Officer. (4) Includes 8,800 shares owned by Mr. Joseph M. Williams; options to acquire 124,000 shares of Cumberland Common Stock; 219 shares held by the KC 401(K) Plan and ESOP of which Mr. Williams is fully vested. Also includes 205,764 shares held by KC s 401(K) Plan, Profit Participation Plan and ESOP, options to acquire 20,000 shares of Cumberland Common Stock held by the ESOP, of which Mr. Williams is a trustee; Mr. Williams disclaims beneficial ownership of these shares. (5) Includes 1,869 shares owned by Mr. George A. Chandler and options to acquire 800 shares of Cumberland Common Stock. (6) Includes 72,540 shares owned by C&C Properties a partnership in which Mr. Cohen has a 50% ownership, 6,320 shares held in trust for Mr. Cohen s minor children. (7) Includes options to acquire 8,000 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, 1997, no payments could be made under the terms of the debenture. CTI entered into a term note agreement with KC for the outstanding amount of the surplus debenture, including interest arrearage ($4,291,049) at September 30, 1992 as part of the Distribution. The term note was pari passi with the other debts of CCS, had a 10 percent interest rate and was due on October 1, 2002. Effective October 1, 1996, CTI issued 1,723,290 shares at $3.00 per share of its common stock to Kimmins Corp. (f/k/a Kimmins Environmental Services, Corp.) in exchange for surrender of the Company's term note payable in the amount of $5,169,870. CCS writes surety bonds for KC and its affiliates. Revenues attributable to transactions with KC and its affiliates were $1,738, $2,873 and $4,535 for the years ended December 31, 1997, 1996 and 1995, respectively. Qualex performs consulting services for KC and affiliates. Revenue attributable to transaction with affiliates were $310,396, 338,478 and $43,183 for years ended December 31, 1997, 1996 and 1995, respectively. In 1992, the Company assigned a debenture due to KC from CCS to CTI. CTI entered into a term note agreement with KC for the outstanding amount of the debenture, including interest arrearage ($4,291,049) at September 30, 1992 as part of the spin-off transaction. The term note was pari passi with the other debts of the Company, 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 Service, Corp.) in exchange for surrender of the Company's term note payable in the amount of $5,169,870. Item 14. Exhibits, Financial Statements, Schedules, and Reports on -------- Form 8-K ------------------------------------------------------- -- (a) The following documents are filed as part of this Annual Report on Form 10-K 1. Financial Statements - Report of Independent Certified Public Accountants - Consolidated balance sheets at December 31, 1997 and 1996 - Consolidated statements of operations for each of the three years in the period ended December 31, 1997 - Consolidated statements of stockholders equity for each of the three years in the period ended December 31, 1997 - Consolidated statements of cash flows for each of the three years in the period ended December 31, 1997 - Notes to consolidated financial statements 2. Financial statement schedules I - Summary of Investments - Other than Investments in Related Parties II - Condensed Financial Information of Registrant III - Supplementary Insurance Information IV - Reinsurance V - Valuation and Qualifying Accounts All other Schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the Schedules, or because the information required is included in the financial statements and notes thereto. 3. The following documents are filed as exhibits to this Annual Report on Form 10-K: 3(i) - Articles of Incorporation 3(ii)- Bylaws 10 - Lease agreement with Cumberland Properties, Inc. 11 - Statement Re: Computation of earnings per share 22 - Subsidiary list 27 - Financial Data Schedule * Previously filed as part of Registrant s Registration Statement on Form 8, File No. 0-19727 and incorporated herein by reference thereto. (b) Reports on Form 8-K None (c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunder duly authorized. Date: March 31, 1998 CUMBERLAND TECHNOLOGIES, INC. ----------------------------- Date: March 31, 1998 By: /s/ Joseph M. Williams ----------------------------- Joseph M. Williams, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 31, 1998 By: /s/ Joseph M. Williams ----------------------------- Joseph M. Williams, President Date: March 31, 1998 By: /s/ Francis M. Williams ----------------------------- Francis M. Williams, Chairman of the Board Date: March 31, 1998 By: /s/ George A. Chandler ----------------------------- George A. Chandler, Director Date: March 31, 1998 By: /s/ Andrew J. Cohen ----------------------------- Andrew J. Cohen, Director Date: March 31, 1998 By: /s/ Carol S. Black ----------------------------- Carol S. Black, Secretary (principal financial and accounting officer) Annual Report on Form 10-K Item 14(a), (c) and (d) List of Financial Statements, Financial Statement Schedules and Exhibits Year Ended December 31, 1997 Cumberland Technologies, Inc. Tampa, Florida CUMBERLAND TECHNOLOGIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS The following consolidated financial statements of Cumberland Technologies, Inc. are included herein: Page Report of Independent Certified Public Accountants . . . . . 32 Consolidated Balance Sheets at December 31, 1997 and 1996 . . 33 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1997 . . . . 35 Consolidated Statements of Stockholders Equity for Each of the Three Years in the Period Ended December 31, 1997 . . . . . . . . . . . . 36 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1997 . . 37 Notes to Consolidated Financial Statements . . . . . . . . . 38 The following consolidated financial statement schedules are filed as part of this report: Schedule I Summary of Investments Other than Investments in Related Parties . . . . . . . . 56 Schedule II Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . 57 Schedule V Valuation and Qualifying Accounts . . . . . . 61 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. Report of Independent Certified Public Accountants Board of Directors Cumberland Technologies, Inc. We have audited the accompanying consolidated balance sheets of Cumberland Technologies, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cumberland Technologies, Inc. at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. March 24, 1998 Tampa, Florida CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS December 31 ----------------------------- 1997 1996 -------------- -------------- Investments - Notes 1 and 3: Securities available-for- sale at fair value: Fixed maturities (cost: 1997 - $3,551,313; 1996 - $3,013,312) . . . . . . . $ 3,590,458 $ 3,055,753 Equity securities (cost: 1997 - $1,431,727; 1996 - $962,780) . . . . 1,526,783 1,020,016 Fixed maturity securities held-to-maturity, at amortized cost: (fair value, 1997 -$1,002,280; 1996 - $1,699,435) . . . . 982,528 1,664,264 Residential mortgage loan on real estate, at unpaid principal . . . . . . . . 45,314 45,838 Short-term investments . . 323,993 323,993 ---------------------------- Total investments . . . . 6,469,076 6,109,864 Cash and cash equivalents 1,803,530 669,076 Accrued investment income 82,821 89,652 Reinsurance recoverable . . 2,016,756 1,590,856 Accounts receivable: Trade less allowance for doubtful accounts of $113,120 and -0- at December 31, 1997 and 1996, respectively . . . 1,307,216 568,051 Affiliate . . . . . . . . 903,181 356,485 Deferred policy acquisition costs . . . . . . . . . . 812,745 635,189 Intangibles, net . . . . . 1,680,633 1,956,724 Other assets . . . . . . . 245,425 396,442 ---------------------------- $ 15,321,383 $ 12,372,339 ============================ See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY December 31 ----------------------------- 1997 1996 ---------------------------- Policy liabilities and accruals: Loss and loss adjustments $ 2,550,300 $ 1,991,796 expenses . . . . . . . . . Unearned premiums . . . . . 2,629,282 1,862,114 Ceded reinsurance payable . . . 2,459,173 768,407 Accounts payable and other 254,839 403,085 liabilities . . . . . . . . . . Long-term debt: Nonaffiliate . . . . . . . 1,418,520 1,533,265 ---------------------------- Total liabilities . . . . 9,312,114 6,558,667 Stockholders' equity: Preferred stock, $.001 par value; 10,000,000 shares authorized, no shares issued . . . . . . . . . . - - Common stock, $.001 par value; 10,000,000 shares authorized; 5,763,070 shares issued at December 31, 1997 and 1996, . . . 5,763 5,763 Capital in excess of par value . . . . . . . . . . 7,212,941 7,212,941 Net unrealized appreciation of available-for-sale securities . . . . . . . . 134,201 99,676 Accumulated deficit . . . . (1,093,417) (1,263,937) ---------------------------- 6,259,488 6,054,443 Less treasury stock, at cost, 313,612 and 310,473 shares at December 31, 1997 and December 31, 1996, respectively . . . . . . . (250,219) (240,771) ---------------------------- Total stockholders' equity 6,009,269 5,813,672 ---------------------------- $ 15,321,383 $ 12,372,339 ============================ See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31 ---------------------------------- 1997 1996 1995 ----------- ----------- ---------- REVENUES: Direct premiums earned: Affiliates . . . . . . . 1,738 2,873 4,535 Nonaffiliates . . . . . 5,836,655 1,149,377 623,148 Reinsurance premiums assumed . . . . . . . . 1,381,264 3,083,787 4,944,125 Less reinsurance ceded . (1,535,712) (427,718) (503,493) ----------- ----------- ---------- Net premium income . . . 5,683,945 3,808,319 5,068,315 Net investment income . . 408,050 403,919 397,380 Net realized gains . . . 201,863 117,824 124,004 Commission income . . . . 859,862 1,385,964 773,611 Other income: Affiliates . . . . . . . 310,396 338,478 43,183 Nonaffiliates . . . . . 305,733 314,889 381,455 ----------- ----------- ---------- 7,769,849 6,369,393 6,787,948 Benefits and expenses: Losses and loss adjustment expenses . . . . . . . . 1,792,117 1,670,640 1,245,546 Amortization of deferred policy acquisition costs 1,778,808 1,532,355 2,380,140 Operating expenses . . . 3,903,476 3,255,805 2,882,255 Interest expense: Affiliates (net of interest income from affiliates of $-0-; -0- and 22,660 for 1997, 1996 and 1995, respectively) . . . . - 372,066 432,112 Nonaffiliates . . . . . 124,928 121,271 76,105 ----------- ----------- ---------- 7,599,329 6,952,137 7,016,158 ----------- ----------- ---------- Income (loss) before income taxes . . . . . . . . . . 170,520 (582,744) (228,210) Income taxes (benefit) . . . - - - ----------- ----------- ---------- Net income (loss) . . . . . . $ 170,520 $ (582,744)$ (228,210) =========== =========== ========== Weighted average number of shares . . . . . . . . . 5,449,518 4,026,655 3,824,494 =========== =========== ========== Net income (loss) per share $ 0.03 $ (.14)$ (.06) =========== =========== ========== See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 Capital in Excess of Shares Amount Par Value ----------------------------------- Balance at January 1, 1995 . 4,039,780 $ 4,040 $2,044,794 Purchases of 48,546 shares of treasury stock . . . Net increase in unrealized depreciation of available-for-sale securities . . . . . . . Net loss . . . . . . . . . ----------------------------------- Balance at December 31, 1995 4,039,780 4,040 2,044,794 Purchases of 86,210 shares of treasury stock . . . Conversion of term note for 1,723,290 shares of common stock . . . . . . 1,723,290 1,723 5,168,147 Net increase in unrealized appreciation of available-for-sale securities . . . . . . . Net loss . . . . . . . . . ----------------------------------- Balance at December 31, 1996 5,763,070 5,763 7,212,941 Purchases of 3,139 shares of treasury stock . . . Net increase in unrealized depreciation of available-for-sale securities . . . . . . . Net income . . . . . . . . ----------------------------------- Balance at December 31, 1997 5,763,070 5,763 7,212,941 =================================== See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (continued)
Unrealized Appreciation (Depreciation) Retained of Available- Earnings Total for-Sale (Accumulated Treasury Stock Stockholders' Securities Deficit) ---------------- Equity ---------------- ---------------- ----------- ---------------- ---------- ---------- ----------- Balance at January 1, 1995 . (166,457)$ (452,983) (113,249) 1,316,145 Purchases of 48,546 shares of (27,666) (27,666) treasury stock . . . . Net increase in unrealized depreciation available- for-sale securities . (229,502) (229,502) Net loss . . . . . . . . (228,210) (228,210) ---------------- ---------------- ---------------- ---------------- ----------- ----------- ----------- ----------- Balance at December 31, 1995 63,045 (681,193) (140,915) 1,289,771 Purchases of 86,210 shares of (99,856) (99,856) treasury stock . . . . Conversion of term note for 1,723,290 shares of common stock . . . . . 5,169,870 Net increase in unrealized appreciation of available-for-sale 36,631 36,631 securities . . . . . . Net loss . . . . . . . . (582,744) (582,744) ---------------- ---------------- ---------------- ---------------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 99,676 (1,263,937) (240,771) 5,813,672 Purchases of 3,139 shares of (9,448) (9,448) treasury stock . . . . Net increase in unrealized depreciation of available-for-sale 34,525 34,525 securities . . . . . . Net income . . . . . . . (170,520) (170,520) ---------------- ---------------- ---------------- ---------------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 134,201 (1,093,417) (250,219) 6,009,269 ========== ========== ========== ==========
See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 ---------------------------------- 1997 1996 1995 ----------- ----------- ---------- Operating activities: Net income loss . . . . . . $ 170,520 $ (582,744) $ (228,210) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Amortization/accretion of investment premiums and discounts . . . . . (2,788) (6,052) (10,137) Policy acquisition costs amortized . . . . . . 1,778,808 1,532,355 2,380,140 Policy acquisition costs deferred . . . . . . . (1,956,364) (1,732,272) (2,234,669) Depreciation and amortization . . . . . 370,553 378,447 278,008 Net realized (gain) on sales of investments (201,863) (117,824) (124,004) Provision for bad debts 113,120 - 67,209 Accrued interest on term notes, net . . . . . . - 404,337 454,772 (Increase) decrease in: Accrued investment income . . . . . . 6,831 (2,421) (40,629) Reinsurance recoverable (425,900) 709,464 51,126 Trade receivables . . (852,285) (139,675) 1,644,946 Other assets . . . . . 57,079 (232,148) (89,891) Increase (decrease) in: Policy liabilities and accruals . . . . . 1,325,672 319,801 (1,235,291) Ceded reinsurance payable . . . . . . 1,690,766 165,504 (1,930,993) Accounts payable and other liabilities (148,246) (713,730) 641,933 ----------- ----------- ---------- Net cash (used in) provided by operating activities 1,925,903 (16,958) (375,690) See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Year ended December 31 ---------------------------------- 1997 1996 1995 ----------- ----------- ---------- Investing activities: Securities available-for- sale : Purchases - fixed maturities (1,493,023) (300,012) (2,561,848) Sales - fixed maturities 954,039 620,000 1,436,223 Purchases - equities . (4,536,969) (3,249,846) (1,224,251) Sales - equities . . . 4,269,885 3,628,259 1,445,237 Securities held-to-maturity: Purchases . . . . . . . . (299,492) (680,116) - Maturities . . . . . . . 985,000 310,000 701,655 Proceeds from sales and maturities of investments - 25,529 116,117 Purchases of businesses, net of cash acquired - - (572,677) Software development costs - (99,938) - ----------- ----------- ----------- Net cash (used in) provided by investing activities (120,560) 253,876 (659,944) Financing activities: Purchases of treasury stock (9,448) (99,856) (27,666) Payments on short-term borrowings and long-term debt . . . . . . . . . . (114,745) (469,483) (86,130) Net advances to (from) affiliates . . . . . . . (546,696) (234,433) 277,452 Net proceeds from short-term borrowings . . . . . . . - - 406,607 ----------- ----------- ----------- Net cash (used in) provided by financing activities (670,889) (803,772) 570,263 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents . . . 1,134,454 (566,854) (464,971) ----------- ----------- ----------- Cash and cash equivalents, beginning of year . . . 669,076 1,235,930 1,700,901 ----------- ----------- ----------- Cash and cash equivalents, end of year . . . . . . $1,803,530 $ 669,076 $1,235,930 =========== =========== =========== See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. Summary of Significant Accounting Policies ------------------------------------------ Organization ------------ Cumberland Technologies, Inc. ( CTI ) f/k/a Cumberland Holdings, Inc., a Florida corporation, was formed on November 18, 1991, to be a Holding company and a wholly-owned subsidiary of Kimmins Corp. ( KC ). Effective October 1, 1992, KC contributed all of the outstanding common stock of two of its other wholly- owned subsidiaries, Cumberland Casualty & Surety Company ( CCS ) and Surety Specialists, Inc. ( SSI ) to CHI. KC then distributed to its stockholders CHI s common stock on the basis of one share of common stock of CHI 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"). 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, reinsurance. SSI, a Florida corporation formed in August 1988, is a general lines agency which operates as an independent agent. Surety Group ( SG ), a Georgia corporation, and Associates Acquisition Corp. d/b/a Surety Associates ( SA ), a South Carolina corporation, purchased in February and July 1995, respectively, are general lines agencies which operate as independent agencies. Official Notary Service of Texas, Inc. ( ONS ), a Texas corporation formed in February 1994, is an inactive corporation. Qualex Consulting Group, Inc. ( Qualex ), a Florida corporation formed in November 1994, provides claim and contracting consulting services. Florida Credit & Collection Services, Inc. a Florida corporation formed in December 1996 was dissolved in June 1997. CTI and its subsidiaries are referred to herein as the Company. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of CTI and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies (continued) ------------------------------------------------------ Basis of Presentation --------------------- The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, as to the subsidiary insurance company, differ from statutory accounting practices prescribed or permitted by regulatory authorities. The significant accounting policies followed by CTI and subsidiaries that materially affect the financial statements are summarized in this note. Investments ----------- Debt securities that the Company has both the positive intent and ability to hold to maturity are classified as held- to-maturity securities and are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest earnings on these securities, is included in investment income. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available- for-sale. Available-for-sale securities are reported at estimated fair value, with the unrealized gains and losses, net of any related taxes, reported as a separate component of stockholders equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. 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. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies (continued) ------------------------------------------------------ Deferred Policy Acquisition Costs --------------------------------- To the extent recoverable from future policy revenues, the costs of acquiring new surety business, principally commissions, are deferred and amortized in a manner which charges each year s operations in direct proportion to the premium revenue recognized. Intangibles ----------- Intangible assets are stated at cost and principally represent purchased customer accounts, noncompete agreements, purchased contract agreements, and the excess of costs over the fair value of identifiable net assets acquired ( Goodwill ). Purchased customer accounts, noncompete agreements, and purchased contract agreements are being amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. Goodwill is being amortized on a straight-line basis over 15 years. Purchased customer accounts are records and files obtained from acquired businesses that contain information on insurance policies and the related insured parties that is essential to policy renewals. The carrying value of goodwill and other intangible assets will be reviewed if circumstances suggest that they may be impaired. If this review indicates that the intangible assets will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company s carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Loss and Loss Adjustment Expenses --------------------------------- The liability for unpaid claims including incurred but not reported losses is based on the estimated ultimate cost of settling the claim (including the effects of inflation and other societal and economic factors), using past experience adjusted for current trends and any other factors that would modify past experience. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in current operations. A liability for all costs expected to be incurred in connection with the settlement of unpaid claims (claim adjustment expense) is accrued when the related liability for unpaid claims is accrued. Claim adjustment expenses include costs associated directly with specific claims paid or in the process of settlement, such as legal and adjusters fees. Claim adjustment expenses also include other costs that cannot be associated with specific claims but are related to claims paid or in the process of settlement, such as internal costs of the claims function. The Company does not discount its reserves for losses and loss adjustment expenses. The Company writes primarily surety contracts which are of short duration. The Company does not consider investment income in determining if a premium deficiency relating to short duration contracts exists. 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 financial statements reflect premiums, benefits and settlement expenses, and deferred policy acquisition costs, net of reinsurance ceded (see Note 11). Amounts recoverable from reinsurers for unpaid losses are estimated in a manner consistent with the claim liability associated with the reinsured policies. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Amounts recoverable from reinsurers for unpaid losses are presented as an asset in the accompanying consolidated financial statements. Revenue Recognition ------------------- Direct insurance and assumed reinsurance premiums earned are recognized on a pro-rated basis over the period of risk. Commission income is recognized at the effective date of the bonds issued. Other income consisting primarily of consulting fees are recognized when the negotiated services are provided. Commissions related to agency activity are generally recognized at the later of the effective date of the policy or the date billed. Income Taxes ------------ The Company s provision for income taxes is computed under the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under the method required by Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company files a consolidated tax return that includes all of its subsidiaries. See Note 9. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Earnings Per Share ------------------ Earnings (loss) per share is calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128 Earnings per Share and is based on the weighted average number of shares outstanding, adjusted for the dilutive effect of stock options. Since the effect of including the entire 189,086 outstanding stock options in the denominator of the calculation for the year ended December 31, 1997 had no effect on the result of the calculation, and the effect of stock options for the years ended December 31, 1996, and 1995 would be antidilutive, earnings per share is the same on both a basic and diluted basis for 1997, 1996 and 1995. The weighted average number of outstanding shares were 5,449,518, 4,026,655 and 3,824,494 at December 31, 1997, 1996 and 1995, respectively. Business Concentration ---------------------- The majority of the Company s business relates to surety and performance bonds for contractors. Accordingly, the occurrence of adverse economic conditions in the contracting business could have a material adverse effect on the Company s business although no such conditions have been encountered in the past. The Company only requires collateral from surety bond customers if the customer meets between 80 percent to 99 percent of the Company s underwriting criteria. Customers that fail to meet at least 80 percent of the requirements are denied surety bonding. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- New Accounting Standards ------------------------ In June 1997, the financial Accounting Standards Board issued Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, adoption in 1998 will have no impact on the Company s net income or shareholders equity. Statement 130 requires unrealized gains or losses on the Company s available-for-sale securities, which currently are reported in shareholders equity to be included in other comprehensive income and the disclosure of total comprehensive income. Reclassifications ----------------- Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 financial statement presentation. These Reclassifications had no effect on net loss or stockholders equity previously reported. 2. Related Party Transactions -------------------------- CTI and its subsidiaries have entered into transactions with KC and companies affiliated through common ownership. CCS writes surety bonds for KC and its affiliates. Revenues attributable to surety bonds with KC and its affiliates were $1,738, $2,873 and $4,535 for the years ended December 31, 1997, 1996 and 1995, respectively. Qualex performs consulting services for KC and affiliates. Other income from affiliates consist primarily of consulting services provided to KC. Affiliate accounts receivable represents funds advanced and joint expenses that have not yet been reimbursed from KC and its affiliates. These receivables are paid periodically and no interest is charged on the outstanding balances which are payable on demand. Also included in affiliate accounts receivable at December 31, 1997 and 1996 is a $135,000 note receivable from the Company s Chairman of the Board of Directors. No interest is charged on the note which is payable on demand. At December 31, 1996, the Company was a guarantor for $2.25 million of borrowings made under the terms of a loan agreement entered into on December 8, 1995 between KC and a bank. During 1997, the Company was released by the bank as a guarantor on the note. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. Related Party Transactions (continued) -------------------------------------- Cumberland leases office space from a company owned by the Chairman of the Board of Directors at a monthly rate of $7,254. The lease is effective through December 31,2000. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Investments ----------- The Company s investments in available-for-sale securities and held-to-maturity securities are summarized as follows:
Cost Gross Gross Estimated ----------- Unrealized Unrealized Fair Value ----------- Gains Losses ----------- ----------- ---------------------- ----------- ---------------------- ----------- ---------------------- Available-for-sale securities at December 31, 1997: Fixed maturity securities: U.S. Government and government agency bonds . $3,054,983 $ 33,890 $ 1,864 $3,087,009 State and municipal bonds 496,330 7,120 - 503,450 ----------- ---------------------- ----------- ----------- ---------------------- ----------- -- --- --- --- Total fixed maturity securities $3,551,313 $ 41,010 $ 1,864 $3,590,459 ----------- ---------------------- ----------- ----------- ---------------------- ----------- --- --- --- --- Equity securities . . . . 1,431,727 115,618 20,562 1,526,783 ----------- ---------------------- ----------- ----------- ---------------------- ----------- --- --- --- --- Total . . . . . . . . . . . . . $4,983,040 $ 156,628 $ 22,426 $5,117,242 =========== ====================== =========== = = = = Held-to-maturity securities at December 31, 1997: Fixed maturity securities: U.S. Government bonds . . $ 982,528 $ 19,752 $ - $1,002,280 ----------- ---------------------- ----------- ----------- ---------------------- ----------- --- --- --- --- Total . . . . . . . . . . . . . $ 982,528 $ 19,752 $ - $1,002,280 =========== ====================== =========== = = = = Available-for-sale securities at December 31, 1996: Fixed maturity securities: U.S. Government bonds . . $3,013,312 $ 48,201 $ 5,760 $3,055,753 Equity securities . . . . . 962,780 67,936 10,700 1,020,016 ----------- ---------------------- ----------- ----------- ---------------------- ----------- --- --- --- --- Total . . . . . . . . . . . . . $3,976,092 $ 116,137 $ 16,460 $4,075,769 =========== ====================== =========== = = = = Held-to-maturity securities at December 31, 1996: Fixed maturity securities: U.S. Government bonds . . $1,438,815 $ 15,066 $ 722 $1,453,159 State and municipal bonds 225,449 20,827 - 246,276 ----------- ---------------------- ----------- ----------- ---------------------- ----------- --- --- -- --- Total . . . . . . . . . . . . . $1,664,264 $ 35,893 $ 722 $1,699,435 =========== ====================== =========== = = = = /TABLE CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Investments (continued) The amortized cost and fair value of the Company s investments in fixed maturity securities, segregated by available-for-sale and held-to-maturity, at December 31, 1997 are summarized, by stated maturity, as follows:
Available-for-Sale Held to Maturity ------------------------ ------------------------ Amortized Amortized Maturity Cost Fair Value Cost Fair Value ----------------------- ------------ ------------------------ ------------ Due in one year or less $ 1,113,158 $ 1,119,245 $ - $ - Due after one year through five years 1,816,637 1,842,568 982,528 1,002,280 Due after five years through ten years . 125,188 125,195 - - Due after twenty years 496,330 503,450 - - ------------ ------------------------ ------------ $ 3,551,313 $ 3,590,458 $ 982,528 $ 1,002,280 ============ ======================== ============
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, 1997 and 1996, the Company had $5.3 million and $5.0 million, respectively, in restricted investments (fixed maturity securities and short-term investments). Restricted investments primarily represent funds held as collateral in connection with reinsurance trust agreements and funds held as required under statutory regulations by state insurance departments. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Investments (continued) Net investment income for the Company is comprised of the following: Year ended December 31 ---------------------------------- 1997 1996 1995 ----------- ----------- ---------- Fixed maturity and equity securities . . . . . . . . $ 344,459 $ 388,700 $ 387,859 Mortgage loans on real estate 4,105 4,613 4,658 Short-term investments, including cash and cash equivalents . . . . . . . . 70,857 50,684 74,601 ----------- ----------- ---------- 419,421 443,997 467,118 Less investment expenses . . (11,371) (40,078) (69,738) ----------- ----------- ---------- Net investment income . . . . $ 408,050 $ 403,919 $ 397,380 =========== =========== ========== Realized gain (loss) on available-for-sale securities: Fixed maturities . . . . . - - (10,984) Equity securities . . . . . 201,863 117,824 134,988 ----------- ----------- ---------- Net realized investment gains (losses) . . . . . . . . . . $ 201,863 $ 117,824 $ 124,004 =========== =========== ========== CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Fair Value of Financial Instruments ----------------------------------- The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 are as follows: December 31, 1997 ----------------------------- Carrying Amount Fair Value -------------- -------------- Assets: Cash and cash equivalents, including short-term $ 2,127,523 $ 2,127,523 investments . . . . . . . . Investments . . . . . . . . . 6,145,083 6,164,835 Accounts receivable . . . . . 2,210,397 2,210,397 Liabilities: Long-term debt . . . . . . $ 1,418,520 $ 1,418,520 The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents, short-term investments, accounts receivable and long-term debt: The carrying amount reported in the balance sheet approximates its fair value. Investments: Fair values for fixed maturity securities are based on quoted market prices, where available, and are recognized in the balance sheet for available-for-sale securities. The fair values for equity securities are based on quoted market prices and are recognized in the balance sheet. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Intangibles ----------- Intangibles at December 31 are comprised of the following: 1997 1996 -------------- ------------- Purchased customer accounts $ 1,084,041 $ 1,084,041 Noncompete agreements . . . . 234,000 234,000 Goodwill . . . . . . . . . . 926,661 926,661 Deferred state admission costs and other . . . . . . 489,365 489,365 -------------- -------------- 2,734,067 2,734,067 Less accumulated amortization (1,053,434) (777,343) -------------- -------------- $ 1,680,633 $ 1,956,724 ============== ============== Amortization expense amounted to $275,169 in 1997, $306,175 in 1996 and $227,185 in 1995. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Reserve for Losses and Loss Adjustment Expenses The following table provides a reconciliation of the beginning and ending liability balances, net of reinsurance recoverables, for the years ended December 31, 1997, 1996 and 1995, to the gross amounts reported in the Company s consolidated balance sheets: December 31 ---------------------------------- 1997 1996 1995 ---------------------- ---------- Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at beginning of $ 594,922 $1,052,547 $1,625,703 year . . . . . . . . . . . Provision for losses and LAE for claims occurring in the current year, net of reinsurance . . . . . . . . 1,743,117 1,008,640 1,486,546 Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance . . . . . . . . 49,000 662,000 (241,000) ---------------------- ---------- Incurred losses during the current year, net of reinsurance . . . . . . . . 1,792,117 1,670,640 1,245,546 Losses and LAE payments for claims, net of reinsurance, occurring during: The current year . . . . 553,629 422,544 161,279 Prior years . . . . . . . 440,479 1,705,721 1,657,423 ---------------------- ---------- 994,108 2,128,265 1,818,702 ---------------------- ---------- Liability for losses and LAE, net of reinsurance recoverables on unpaid losses, at end of year . . 1,392,931 $ 594,922 $1,052,547 Reinsurance recoverables on unpaid losses at end of year . . . . . . . . . . . 1,157,369 1,396,874 1,299,257 ---------------------- ---------- Liability for losses and LAE, gross of reinsurance recoverables on unpaid losses, at end of year . . $ 2,550,300 $1,991,796 $2,351,804 ====================== ========== CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Reserve for Losses and Loss Adjustment Expenses (continued) ----------------------------------------------------------- Cumberland experienced a $49,000 and $662,000 deficiency for losses and loss adjustment in 1997 and 1996, respectively, and experienced a redundancy of $241,000 in 1995, for losses incurred in prior years. The deficiency in 1997 principally resulted from settling case basis reserves established in prior years for amounts that were more than expected. The deficiency in 1996 is a result of additional claims expense on a 1993/94 pooling agreement. The redundancy in 1995 principally resulted from settling case basis reserves established in prior years for amounts less 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. 7. Short-Term Borrowings --------------------- During 1995, the Company entered into a margin loan agreement with an investment firm which enabled the Company to borrow funds up to a percentage of the Company s invested funds ($518,000 at December 31, 1995). As of December 31, 1995, the Company had $406,607 outstanding under the agreement. As of December 31, 1995, the Company had preferred and common stocks with an estimated fair value of $1,160,500 on account with the investment firm. The loan bears interest at .75% to 2.50% above the investment firm's base rate (8.75% at December 31, 1996). For the year ended December 31, 1995 and 1996, the Company incurred interest expense of $28,612 and $27,389 respectively, under the terms of the agreement. During 1996, the Company paid off this margin loan. The 1996 weighted average interest rate for short-term borrowings was 8.5%. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Long-Term Debt -------------- Long-term debt consists of the following: December 31 December 31 ---------------------------- 1997 1996 ---------------------------- Note payable due March 1, 2002 $377,077 $ 423,265 Note payable due June 30, 2010 1,041,443 1,110,000 ---------------------------- $1,418,520 $ 1,533,265 ============================ Notes Payable to Nonaffiliates ------------------------------ In connection with the acquisition of certain agencies during 1995 (see Note 16), the Company entered into two notes payable with the agencies previous owners. One note is due March 1, 2002 and bears interest at 8% through February 28, 2001 and 10% thereafter. Principal payments of $150,000 are due annually beginning March 1, 2000. The other is due June 30, 2010 and bears interest at 8% through March 31, 1999 and 9% thereafter. Principal payments of $40,000 are due annually for three years beginning January 5, 1996. Principal payments of $11,104 are payable monthly beginning April 1, 1997. Maturities of notes payable to nonaffiliates for the five years succeeding December 31, 1997 are as follows: Year Ending December 31 -------------------------------- 1998 $ 173,248 1999 133,248 2000 283,248 2001 283,248 2002 255,063 CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Long-Term Debt (continued) -------------------------- Term Note Due Affiliate ----------------------- In 1992, CTI entered into a term note agreement with KC for the outstanding amount of a debenture, including interest arrearage of $4,291,049. The term note was pari passi with the other debts of CCS, bearing interest at 10 percent of the unpaid principal and interest and was due on October 1, 2002. Interest and principal were due quarterly with minimum payments equal to one half of net earnings before interest and federal income taxes. Effective October 1, 1996, CTI issued 1,723,290 shares at the fair value of $3.00 per share of its common stock to Kimmins Corp. (f/k/a Kimmins Environmental Service, Corp.) in exchange for surrender of the term note payable in the amount of $5,169,870 (including accrued interest). 9. Income Taxes ------------ There was no income tax expense or benefit recognized in 1997, 1996 or 1995. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Income Taxes (continued) ------------------------ A reconciliation of the federal statutory income tax rate applied to pre-tax income (loss) and the effective income tax benefit rate is as follows: 1997 1996 1995 ----------- ----------- ---------- Federal statutory tax rate 34.0% (34.0)% (34.0)% State income taxes, net of federal income tax benefit . . . . . . . . 3.9 (3.7)% (4.4) Income exempt from taxation and dividend exclusions . . . . . . . (7.2) (10.1) (8.5) Differences between income statement and tax return 69.3 - 10.7 Utilization of NOL carryforwards . . . . . (110.1) 44.4 34.6 Nondeductible expenses . 10.1 3.4 1.6 ----------- ----------- ---------- Effective tax rate . . . - - - =========== =========== ========== Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes. Significant components of the Company s deferred tax liabilities and assets are as follows: CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. Income Taxes (continued) ------------------------ December 31 1997 1996 ---------------------------- Deferred tax liabilities: Deferred policy acquisition costs . . . . . . . . . . . $ 305,836 $ 239,022 Losses and loss adjustment expenses . . . . . . . . . - 31,269 -------------- -------------- Total deferred tax liabilities 305,836 270,291 ============================ Deferred tax assets: Outside basis difference in investments . . . . . . . . 40,620 - Amortization of intangibles 90,857 63,341 Unearned premiums . . . . . . 321,557 140,143 Losses and loss adjustment expenses . . . . . . . . . 19,050 - Net operating loss carryforward . . . . . . . 316,682 746,174 Alternative minimum credit carryforward . . . . . . . 15,555 15,555 Other, net . . . . . . . . . 8,931 347 ---------------------------- 813,252 965,560 Less valuation allowance . . (507,416) (695,269) ---------------------------- Net deferred tax assets . . . . $ 305,836 $ 270,291 ============================ The Company has net operating loss carryforwards as of December 31, 1997 of approximately $841,568 which generally expire in 2010 and 2011. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Statutory Accounting Practices and Regulatory Requirements ---------------------------------------------------------- Statutory surplus and net income (loss), as reported to the domiciliary state insurance department in accordance with its prescribed or permitted statutory accounting practices for CCS is summarized as follows: Year Ended December 31 1997 1996 1995 ----------- ----------- ---------- Statutory capital and surplus $ 5,044,527 $ 5,034,662 $ 5,134,923 Net income (loss) . . . . . . $ 959,304 $ (293,204)$ 897,955 CCS is domiciled in Florida and prepares its statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Florida Insurance Department. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ( NAIC ). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. Accordingly, that project, which is expected to be completed in 1998, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. Under applicable state insurance statues, CCS must maintain minimum capital and surplus of $2,100,000 (as of December 31, 1997). 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, 1997, no dividends from CCS are available for payment to the Company without the prior approval of the Department of Insurance. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Reinsurance ----------- CCS assumes reinsurance primarily from a pooling agreement for which CCS assumes 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 assumes 25 percent and 20 percent of the risk with a maximum exposure to CCS of $125,000 and $600,000 per bond, respectively. CCS also cedes reinsurance to other insurance companies. 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 such reinsurer. The Company cedes on an excess of loss treaty 95% of the risk insured with a maximum exposure to the Company of $195,000 per principal. 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.
1997 1996 1995 ------------------------- ------------------------- ------------------------- --------------- --------------- --------------- Written Earned Written Earned Written Earned ----------- ----------- ----------- ----------- ----------- ----------- ------- ------- ------- ------- ------- ------- Direct premiums . . . $6,797,136 5,838,393 2,025,796 1,152,250 881,683 627,683 Assumed premiums . . 1,189,689 1,381,264 2,890,050 3,083,787 4,341,649 4,944,125 Ceded premiums . . . (1,752,564) (1,535,712) (547,800) (427,718) (441,765) (503,493) ----------- ----------- ----------- ----------- ----------- ----------- ------- ------- ------- ------- ------- ------- Net premiums . . . . $6,234,261 $5,683,945 $ 4,368,046 $ 3,808,319 $4,781,567 $5,068,315 ====== ====== ====== ====== ====== ======
During April 1994, CCS amended one of its reinsurance agreements to be retroactive for policies effective October 1, 1993. The agreement was previously effective beginning January 1, 1994. Under this agreement, CCS assumes 10% (effective April 1, 1996), 12.5% (effective April 1, 1995); 25% prior to that date) of certain surety policies underwritten by the insurance company. For the years ended December 31, 1996 and 1995, CCS assumed earned premiums of approximately $2,600,000 and $4,372,000, respectively, under the terms of the agreement. The agreement expired April 1, 1997. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Reinsurance (continued) ----------------------- Loss and loss adjustment expenses in 1997, 1996, and 1995 are summarized as follows: 1997 1996 1995 ----------- ----------- ---------- Direct . . . . . . . . . $ 1,048,450 $ 127,232 $ 63,343 Assumed . . . . . . . . 741,351 1,587,890 1,184,953 Ceded . . . . . . . . . 2,316 (44,482) (2,750) ----------- ----------- ---------- Net losses and loss adjustment expenses $ 1,792,117 $ 1,670,640 $1,245,546 =========== =========== ========== The Company reported reinsurance recoverables on paid losses of $448,553 and $312,911 at 1997 and 1996, respectively. One of the Company's subsidiaries is a claimant in a proceeding against the United States Navy before the Armed Services Board of Appeals seeking reimbursement of approximately $1 million related to the subsidiary's performance under a performance and payment bond related to the construction of a building for the United States Navy. Management believes, based on advice from its counsel, that it will be successful in this claim and, accordingly, has recorded a reinsurance recoverable. The Company is currently awaiting a decision in this case. 12. Stock Option Plan ----------------- CTI has 400,000 shares of its common stock reserved for issuance for the exercise of options to be granted under CTI s 1991 stock option plan (the Plan ). Options granted under the Plan, in general, expire no later than ten years from the date of grant. As a result of the Distribution, options were granted to certain individuals, which vest over five years from the date of the grant. At December 31, 1997, options to purchase 66,586 shares of the Company s common stock, at no cost to the holders, have been granted, all are currently exercisable. Effective October 1, 1992, the Company granted options to purchase 100,000 shares to its President at a price of $.125 per share. As of December 31, 1997, all of the options were exercisable. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Stock Option Plan (continued) ----------------------------- Effective May 22, 1996, the Company granted options to purchase 20,000 shares to the President of "CCS" at a price of $.75 per share. As of December 31, 1997, 8,000 of the options were exercisable. The Company granted options on July 26, 1996 to purchase 2,500 shares to an employee at a price of $1.00 per share. As of December 31, 1997, 1,000 of the options were exercisable. The Company has elected to follow Accounting Principles Board of Opinion No 25 "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," required use of option valuation models that were not developed for use in valuing employee stock options since no material amount of options have been awarded since the effective date of Statement 123, the effect of applying Statement No. 123's fair value method to the Company's stock based awards results in net income and earnings per share that are not materially different from amounts reported based on APB 25. 13. Employee Benefit Plan --------------------- On April 1, 1996, CTI adopted a defined contribution 401(k) plan covering substantially all employees. Under the plan, the Company makes contributions equal to one percent of the participant's compensation, not to exceed six percent of the participant's annual compensation. The Company's contributions to the plan totaled $9,367 and $7,288 in 1997 and 1996, respectively. 14. Supplemental Disclosure of Cash Flow Information ------------------------------------------------ Interest paid in 1997, 1996 and 1995 for short-term borrowings was $0, $27,389 and $28,612, respectively. Interest paid in 1997, 1996 and 1995 for term notes due nonaffiliates was $124,928, $121,271 and $76,105, respectively. No income taxes were paid for the years ended December 31, 1997, 1996 and 1995. 15. 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, 1997. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. Acquisitions ------------ Effective February 28, 1995, the Company acquired substantially all of the assets of The Surety Group, a Georgia insurance agency specializing in the sales of surety bond policies. The purchase price of $850,000 is comprised of $325,000 paid at closing, the assumption of $25,000 of capital lease obligations and a $500,000 note payable to the seller. The purchase agreement provides that the purchase price may be reduced, but not increased, based on the agency s operating results during the three-year period ending February 28, 1998. Effective July 1, 1995, the Company acquired all of the assets of Surety Associates, Inc., a South Carolina insurance agency specializing in the sales of surety bond and certain types of property and casualty insurance policies. The purchase price of $1,330,241 is comprised of $180,241 paid at closing, and a $1,150,000 note payable to the seller. Both acquisitions have been accounted for using the purchase method. The results of operations of the acquired entities have been included in the accompanying consolidated statements of operations since their respective purchase date. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions had occurred at the beginning of the periods presented, and do not purport to be indicative of the results that actually would have occurred if the acquisitions had been consummated as of those dates or of results which may occur in the future. Year Ended December 31 1995 ---------------- (Unaudited) Revenues . . . . . . . . . $ 6,960,343 Net loss . . . . . . . . . $ (341,347) Net loss per share . . . . $ (.09) CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. Year 2000 Issue (unaudited) --------------------------- The Company has developed an in-house surety administrative system BondPro . BondPro is an agency surety bond administration system that issues bonds, tracks underwriting, and accounting and reporting from its database. BondPro is a window based program and is year 2000 compliant. The Company is aware of the issues that many computer systems will face as the millennium (year 2000) approaches. The Company, however, believes that its own internal software and hardware is year 2000 compliant. The Company believes that any year 2000 problems encountered by procurement agencies, and other customers and vendors are not likely to have a material adverse effect on the Company s operations. The Company anticipates no other year 2000 problems which are reasonably likely to have a material adverse effect on the Company s operations. There can be no assurance, however, that such problems will not arise. SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES CUMBERLAND TECHNOLOGIES, INC. DECEMBER 31, 1997 Column A Column B Column C Column D ----------------------------- ----------- ----------- ---------- Amount at Which Shown in the Balance Type of Investment Cost Value Sheet ----------------------------- ----------- ----------- ---------- Fixed maturity securities, available-for-sale: Bonds: United States Government and government agencies $ 3,054,983 $ 3,087,009 $3,087,009 State and municipalities 496,330 503,450 503,450 ----------- ----------- ---------- Total . . . . . . . . . . . . 3,551,313 3,590,459 3,590,459 Equity securities, available- for-sale: Common stocks: Banks, trusts and insurance companies . 30,000 28,000 28,000 Industrial and miscellaneous . . . . 1,401,727 1,498,783 1,498,783 ----------- ----------- ---------- Total . . . . . . . . . . . . 1,431,727 1,526,783 1,526,783 Fixed maturity securities, held to maturity: Bonds: United States Government 982,528 1,002,280 982,528 ----------- ----------- ---------- Total . . . . . . . . . . . . 982,528 1,002,280 982,528 Residential mortgage loan on real estate . . . . . . . . 45,314 45,314 45,314 Short-term investments . . . 323,993 323,993 323,993 =========== =========== ========== Total investments . . . . . . $ 6,334,875 $ 6,488,829 $6,469,077 =========== =========== ========== SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CUMBERLAND TECHNOLOGIES, INC. December 31 --------------------------- Condensed Balance 1997 1996 Sheets ------------- ------------- ---------------------- Assets: Trade receivables $ 21,835 $ - Accounts receivable from affiliates - 57,545 Investment in wholly- owned subsidiaries 2,385,867 1,698,281 Other assets . . . 54,408 85,560 Surplus debenture receivable from subsidiary . . . 4,763,854 4,866,979 ------------- ------------- $ 7,225,964 $ 6,708,365 ============ ============= Liabilities: Accounts payable to affiliates . . . 1,213,207 863,430 Accounts payable . 3,488 31,263 ------------- ------------- 1,216,695 894,693 Stockholders' equity: Common stock . . . 5,763 5,763 Other stockholders' equity . . . . . 6,003,506 5,807,909 ------------- ------------- 6,009,269 5,813,672 ------------- ------------- $ 7,225,964 $ 6,708,365 ============= ============= SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CUMBERLAND TECHNOLOGIES, INC. Year Ended December 31 ----------------------------------------- Condensed Statements of Operations 1997 1996 1995 ---------------------- ------------- ------------- ------------- Management fees from wholly-owned subsidiaries . . . $ 88,378 $ 62,557 $ - Interest income from subsidiary . . . . 271,875 300,000 300,000 ------------- ------------- ------------- 360,253 362,557 300,000 Costs and expenses: Selling and administrative expenses . . . . 294,901 133,834 151,189 Interest expense to affiliates . . . - 372,066 454,772 ------------- ------------- ------------- 294,901 505,900 605,961 ------------- ------------- ------------- Income (loss) before income taxes and equity in net income (loss) of subsidiaries . . . 65,352 (143,343) (305,961) Federal and state income tax benefits - - - Equity in net income (loss) of subsidiaries . . . 105,168 439,401 77,751 ------------- ------------- ------------- Net income (loss) . . $ 170,520 $ (582,744)$ (228,210) ============= ============= ============= SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CUMBERLAND TECHNOLOGIES, INC. Year Ended December 31 --------------------------- Condensed Statements of Cash Flows 1997 1996 1995 ---------------------- ------------- ------------- ------------- Net cash provided by operating activities - - - ------------- ------------- ------------- Cash and cash equivalents, beginning of year - - - ------------- ------------- ------------- Cash and cash equivalents, end of year . . . . . . . - $ - $ - ============= ============= ============= 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. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CUMBERLAND TECHNOLOGIES, INC. Notes to Condensed Financial Statements --------------------------------------- 1. Organization and summary of significant accounting policies ---------------------------------------------------------- - Organization - Cumberland Technologies, Inc. ("CTI" or "Cumberland"), (f/k/a Cumberland Holdings, Inc.) a Florida corporation, was formed on November 18, 1991, to be a holding company and a wholly-owned subsidiary of Kimmins Corp. ("KC"). Effective October 1, 1992, KC contributed all of the outstanding common stock of two of its wholly-owned subsidiaries, Cumberland Casualty & Surety Company ("CCS") and Surety Specialists, Inc. ("SSI") to CTI. KC then distributed to its stockholders CTI's common stock on the basis of one share of common stock of CTI for each five shares of KC common stock and Class B common stock owned (the "Distribution"). CTI conducts its business through its subsidiaries, CCS, SSI, Surety Group, Inc. ( SG ), Surety Associates ( SA ), Official Notary Service of Texas, Inc. ("ONS") 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, 1997 and 1996, CTI charged its subsidiaries excluding CCS, a management fee. No fee was charged for the year ended December 31, 1995. 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 unconsolidated subsidiaries is included in consolidated income using the equity method. Parent-company-only financial statements should be read in conjunction with the Company s consolidated financial statements. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CUMBERLAND TECHNOLOGIES, INC. Investment in subsidiaries at December 31, 1997 and 1996 include the net unrealized appreciation in available-for-sale securities held by CCS, of $134,201 and $99,676 as of December 31, 1997 and 1996, respectively. These amounts have been included in the CTI other stockholders equity amounts. 3. Surplus Debenture Receivable from Subsidiary -------------------------------------------- In 1988, CCS issued a surplus debenture to KC in exchange for $3,000,000 which bears interest at 10 percent per annum. In 1992, the debenture due to KC from CCS was assigned to CTI. Interest and principal payments are subject to approval by the Florida Department of Insurance. On April 1, 1997, CTI forgave $375,000 of its $3,000,000 surplus debenture due to CCS. As a result, CCS increased paid-in-capital by $375,000. As of December 31, 1997, no payments could be made under the terms of the debenture. SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS CUMBERLAND TECHNOLOGIES, INC.
Additions --------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period ----------------------- ---------- ---------- ---------- -------------------- For the year ended December 31, 1995: Deducted from asset accounts: Allowance for doubtful accounts $ 0 $ 67,209 0 $ 0 $ 67,209 ========== ========== ========== ========== ========== Deferred income tax valuation allowance . . . . 356,835 79,952 0 62,638(2) 374,149 ========== ========== ========== ========== ========== For the year ended December 31, 1996: Deducted from asset accounts: Allowance for doubtful accounts 67,209 0 0 67,209 0 ========== ========== ========== ========== ========== Deferred income tax valuation allowance . . . . 374,149 321,120 0 0 695,269 ========== ========== ========== ========== ========== For the year ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful accounts 0 113,120 113,120 ========== ========== ========== ========== ========== Deferred income tax valuation allowance . . . . $ 695,269 $ $ $ 187,853 $ 507,416 ========== ========== ========== ========== ========== /TABLE EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE CUMBERLAND TECHNOLOGIES, INC. Year Ended December 31 1997 1996 1995 ----------- ----------- ---------- Average shares outstanding . 5,449,518 4,026,655 3,824,494 Net effect of dilutive stock options . . . . . . . . . . - - - ----------- ----------- ---------- Totals . . . . . . . . . . . 5,449,518 4,026,655 3,824,494 =========== =========== ========== Net gain (loss) . . . . . . . $ 170,520 $ (582,744)$ (228,210) =========== =========== ========== Earnings (loss) per share amount . . . . . . . . . . $ .03 $ (.14)$ (.06) =========== =========== ========== EXHIBIT 22 - SUBSIDIARIES OF THE REGISTRANT CUMBERLAND TECHNOLOGIES, INC. As of December 31, 1997, the subsidiaries of Cumberland Technologies, Inc. were as follows: - Surety Specialists, Inc. - Cumberland Casualty & Surety Company - Official Notary Service of Texas, Inc. - Qualex Consulting Group, Inc. - Surety Group, Inc. - Associates Acquisition Corp. d/b/a Surety Associates, Inc. EX-27 2
7 12-MOS DEC-31-1997 DEC-31-1997 3,590,458 982,528 0 1,526,783 45,314 0 6,469,076 1,803,530 2,016,756 812,745 15,321,383 2,550,300 2,629,282 2,459,173 0 1,418,520 0 0 5,763 0 15,321,383 5,683,945 408,050 201,863 1,475,991 1,792,117 1,778,808 3,903,476 170,520 0 0 0 0 0 170,520 .03 0 0 0 0 0 0 0 0
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