-----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, CS3FcgNnYwBzga8bN2mSxiceR65zNO+hsGvmKyTuF0J3KE5gmP8Ycvcl21aLso65 kxLbHTqLz8RA9ih1jJeeWQ== 0000882087-99-000008.txt : 19990403 0000882087-99-000008.hdr.sgml : 19990403 ACCESSION NUMBER: 0000882087-99-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUMBERLAND TECHNOLOGIES INC CENTRAL INDEX KEY: 0000882087 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] 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: 99583795 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, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______. Commission File No. 0-19727 CUMBERLAND TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter Florida 59-3094503 -------------------------------- ------------------------- -- (State or other jurisdiction of (I.R.S Employer incorporation) Identification No.) 4311 West Waters Avenue, Suite 501 33614 Tampa, Florida ------------------------------- ------------------------- - (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (813) 885- 2112 Securities registered pursuant to Section 12(b) of the Act: Title of each Class Name of each exchange on which registered: Common Stock The NASDAQ Stock Market -------------------- ---------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock ------------------------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark if disclosure of delinquent files pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [X] $2,845,112 ----------------------------------------------------------------- Aggregate market value of voting stock (Common Stock) held by nonaffiliates of the Registrant as of March 19, 1999 5,447,966 shares of Common Stock $.001 par value ----------------------------------------------------------------- Number of shares of Common Stock outstanding as of March 27, 1998 Documents incorporated by reference: NONE PART I Item 1. Business ------- -------- General ------- Cumberland Technologies, Inc. ( CTI or Cumberland ), (f/k/a Cumberland Holdings, Inc.) a Florida corporation, was formed on November 18, 1991, to be a holding company and a wholly-owned subsidiary of Kimmins Corp. ( KC ). Effective October 1, 1992, KC contributed all of the outstanding common stock of two of its wholly-owned subsidiaries, Cumberland Casualty & Surety Company ( CCS ) and Surety Specialists, Inc. ( SSI ) to CTI. KC then distributed to its stockholders CTI's common stock on the basis of one share of common stock of CTI for each five shares of KC common stock and Class B common stock owned (the Distribution ). Cumberland Technologies, Inc.,( the Company ) is a holding company engaged through its subsidiaries, Cumberland Casualty & Surety Company ( CCS ), Surety Specialists, Inc. ( SSI ), The Surety Group, Inc. ( SG ), Associates Acquisition Corp. d/b/a Surety Associates, Inc. ( SA ) and Qualex Consulting Group, Inc. ( Qualex ) in the delivery of speciality surety and insurance services. Surety services include underwriting surety bonds on a direct and assumed basis, surety consulting and the development of surety software. Insurance services include the underwriting of speciality and other liability insurance products. In addition, the Company conducts its business through a number of independent agencies which focus on selling and delivering surety insurance products to consumers. Traditionally, this segment of the surety industry has delivered its products through an antiquated manual process. Because of this need to advance technologically, the Company developed a software product called Bond-Pro . This patented surety issuance system increases the speed that surety agents deliver their products to the customer and financially report those transactions to the carrier, while reducing operating costs. The Company s business strategy is to continue the underwriting focus of each of its operating subsidiaries and to achieve growth through the expanded licensing of Bond-Pro . CCS is a property and casualty insurance company that was incorporated in Texas on May 4, 1988 and redomesticated in Florida, on September 2, 1994. CCS is licensed in twenty-six states, the District of Columbia, and Guam. It holds a certificate of authority from the United States Department of the Treasury, which qualifies CCS as an acceptable surety on Federal bonds. CCS is rated B+ (Very Good) by A.M. Best. CCS currently has applications for admission pending in various states. Most of these states have a lengthy applications process in which the admission filing must be updated with certain financial and nonfinancial information until the insurance department decides to approve an application. The insurance department is not restricted as to the amount of time if may take to approve an application. All applications are updated as new information becomes available and CCS is waiting for inquiries or actions by these pending states. Those states in which CCS has not yet applied for licensing generally require additional years of operating history or additional capital and surplus. Once CCS has met these requirements, it is anticipated that the applications for admission will be submitted accordingly. CCS is currently attempting to obtain additional state licenses in order to spread its loss geographically and to increase its sales of direct surety and insurance products. Management believes that CCS can function profitability selling direct surety and insurance products in the states in which it is currently licensed. SSI, a Florida corporation, formed in August 1988, SG, a Georgia corporation, and SA, a South Carolina corporation purchased by Cumberland in February and July 1995, respectively, are specialized surety agencies which operate as independent agencies. Each secures surety risks for small to medium size contractors as an agent and for other agents as a broker. SG and SA are also general lines insurance agencies. When acting as an agent, SSI, SG and SA receive a commission from the various insurance companies it represents, one of which is CCS. Agency commissions are based upon a percentage of premiums paid by the consumer. The commissions paid by CCS to SSI, SG and SA range from 15 to 40 percent. In addition, SSI generates additional revenues through a joint partnering agreement with St. Paul, Fire and Marine Group, f/k/a United States Fidelity and Guaranty Company ( St. Paul ) to pursue small to medium size contract and commercial surety business on a country wide basis (the St. Paul Agreement ). The St. Paul Agreement allows SSI to solicit surety business in states in which CCS is not licensed, thereby significantly increasing the Company s geographic spread of risk. It also facilitates St. Paul agents access to the Company s Bond-Pro issuance system. CCS participates in the St. Paul Agreement underwriting risk through a retrocessional treaty. Qualex, a Florida corporation, formed in November 1994, provides claim and contracting consulting services to the surety and construction industries. CCS purchases claim consulting services from Qualex on a contract basis. The percentages of gross revenue generated by the Company s subsidiaries for the year ended December 31, 1998 are as follows: Subsidiary Revenue Percentage -------------------- -------------------- CCS 74% SSI 9% Qualex 8% SA 5% SG 4% -------------------- 100% ==================== The term the Company unless the context otherwise requires, refers to Cumberland Technologies, Inc. and its subsidiaries. The principal executive offices of the Company are located at 4311 West Waters Avenue, Suite 501, Tampa, Florida 33614. The Company s telephone number is (813) 885-2112, its facsimile number is (813) 885-6734 and its web site is www.cumberlandtech.com. Surety Products --------------- CCS underwrites a wide variety of surety bonds for small to medium size surety accounts. CCS also assumes underwriting risk from other surety companies under various reinsurance arrangements. Contract surety bonds center primarily on performance and payment bonds issued for the construction industry. The bonds guarantee that a contractor will fulfill their obligations, with respect to performing the scope of work defined in the contract and fulfilling their financial obligations. CCS s typical bond is less than $500,000 with aggregate ongoing work of $1 million. These bonds are marketed through independent insurance agencies specializing in this type of coverage to general contractors, sub-contractors and specialty contractors. Commercial surety bonds, which includes all non-contract surety bonds, numerous types of license and permit, miscellaneous and judicial bonds. The scope of each bond varies according to the law, locality, the nature of the guarantee, and the parties who have a right of action under the bond. The typical bond penalty ranges from $5,000 to $25,000 and are usually written on a volume basis. Insurance Products ------------------ The Company s other liability insurance products include, Registered Investment Advisors professional liability insurance and Notary Public Errors and Omission liability insurance. Both coverages are occurrence liability coverages, that insure against specific liability risks. Under the Registered Investment Advisors professional liability coverage, each endorsed account is limited to a maximum liability coverage of $500,000. The Notary Public Errors and Omissions liability coverage is written with liability limits of $5,000 to $30,000 per policy. On surety or insurance products sold directly by CCS, exposure to loss would be the penal amount of the bond, less any portion for which CCS has secured reinsurance. On reinsurance, CCS s exposure to loss would be limited by the amount of reinsurance provided. Reinsurance does not relieve an insurer of its liability to the policy holder for the full amount of the policy, however, the reinsurer is obligated to the insurer for the portion assumed by the reinsurer. Technology Product ------------------ On October 1, 1996, CTI launched the development of a surety bond issuance system Bond-Pro . The Company received its federal copyright registration #TX4-542-729 effective March 29, 1997. The Company sees the implementation of the system as an integral part of our unique service affording us the ability to capture a share of the marketplace. This program encompasses the required functions an agency needs to run a full scale bond desk when implemented inside the agency structure. The software is designed to reduce the labor required to provide improved service. The efficiencies gained in using the Bond-Pro system enhances CCS s ability to increase premium and to develop relationships which may not otherwise be possible due to competition for this class of business. While a small percentage of the industry offers issue and reporting systems for bonds, no other provider offers a fully integrated, multi-carrier production and processing system including management reporting. Underwriting ------------ For the contract and commercial surety lines of business, the Company s underwriting philosophy provides for an individual analysis of the risk associated with each application, except for specific categories of miscellaneous bonds. In underwriting contract bonds, its approach focuses on the financial strength, experience and operating capacity of the contractor. In underwriting commercial surety, this approach focuses on the credit history and financial resources of the applicant. The Company maintains control of the contract and commercial surety underwriting process through the use of authority limits for each underwriter and committee underwriting of larger risks. The Company may require collateral on contract bonds and occasionally, on other types of bonds based upon an assessment of the risk characteristics. The risk assessment includes evaluation of the financial strength of the contractor, the credit history of the contractor, work in progress and successful work experience. Collateral can consist of irrevocable letters of credit, certificates of deposit, cash, savings accounts, publically traded securities and trustees or mortgages on real property. Both corporate and personal indemnification may be required in order to mitigate liability risk. The Company also targets various products in the commercial surety market which are characterized by relatively low risk exposure in small penal amounts. The underwriting criteria, including the extent of bonding authority granted to independent agents, will vary depending on the class of business and the type of bond. For example, relatively little underwriting information is typically required of certain low exposure risk such as notary bonds. Other liability insurance applications are individually evaluated and the decision to write a particular risk is made by the Company s underwriting department. The underwriting department determines whether to write a particular risk after evaluating a number of factors based upon detailed objective underwriting standards relating to each class of business. Reinsurance ----------- The Company s insurance subsidiary, in the ordinary course of business, cedes insurance to other insurance companies, to limit its exposure to loss, provide greater diversification of risk, and minimize aggregate exposures. Because the ceding of insurance does not discharge the primary liability of the original insurer, CCS places reinsurance with qualified carriers after conducting a detailed review of the nature of the obligation and a thorough assessment of the reinsurers credit qualifications, claims settlement performance and capabilities. The reinsurance coverage terms are tailored to the specific risk characteristics of the underlining products of the company. For contract and commercial surety business, CCS entered into an excess of loss reinsurance agreement with Transatlantic Reinsurance Company (Transatlantic Treaty), which is rated A+ (Superior) by A.M. Best. Excess of loss reinsurance is a form of reinsurance, which indemnifies the ceding insurer up to an agreed amount against all or a portion of the amount of loss in excess of a specified retention. Under the Transatlantic Treaty, CCS retains risk no greater than 5% of $2,700,000 or $135,000 per principal. Under the Transatlantic Treaty, the reinsurer automatically assumes the risk of losses and all contract surety bonds written and classified as surety in CCS s statutory annual statement and all miscellaneous surety bonds with penal sums over $100,000 written and classified as surety in CCS s statutory annual statement. For its liability line of registered investment advisor insurance, the Company has reduced its exposure on any one risk, through the purchase of a quota share agreement with Dorinco Reinsurance (Dorinco Treaty) which is rated A (Excellent) by A.M. Best. Under the Dorinco Treaty, CCS cedes 50% of its liability on all registered investment advisor policies. On a limited basis, CCS also assumes and cedes reinsurance through facultative and treaty agreements from other sureties. The loss of one of these customers or resources would not have a material impact on the operations of the company. From October 1991 through May 1, 1997, CCS participated in a pooling agreement with various sureties, which specialized in writing contract surety. Effective to April 1, 1993, CCS assumed 25% of the business underwritten by the pooling agreement; 12.5% effective April 1, 1995 and 10% effective April 1, 1996. Effective April 1997, CCS elected not to participate in future business under the pooling agreement. Reserves -------- Reserves for losses and loss adjustment expenses are established based upon reported claims and historical industry loss development. The amount of loss reserves for reported claims is based on a case by case evaluation of the claim. Historical industry data is reviewed and consideration is given to the anticipated impact of various factors such as legal developments, economic conditions, and the effects of inflation. Amounts are adjusted periodically to reflect these factors. Reserve for losses and loss adjustment expenses are actuarial estimates of losses, including the related settlement costs. Management believes that the reserves for losses and loss adjustment expenses are adequate to cover the losses and loss adjustment expenses, including the cost of incurred but not reported losses. During 1998, there were no material changes in the mix of business or types of risk assumed. However, the Company was effective in spreading the geographic mix of the business. Current fluctuations in inflation have not had a material effect on the financial statements and there are no explicit provisions in the financial statements for the effects of inflation that may cause future changes in claim severity. Other than certain classification differences, there are no material differences between statutory reserves and Generally Accepted Accounting Principle ( GAAP ) reserves. CCS does not discount its loss reserves for financial reporting purposes. Environmental Claims -------------------- The Company bonds several accounts that have incidental environmental exposure, with respect to which the Company provides limited contract bonding programs. In the commercial surety market, the Company provides bonds to corporations that are in the business of mining various minerals, establishing mitigation banks, or operating environmental facilities, and that are obligated to post financial assurance bonds that guarantee that property can be managed according to regulatory guidelines. While no environmental responsibility is overtly provided by commercial or contract bonds, some risk of environmental exposure may exist if the surety were to assume certain rights of ownership of the property in the completion of a defaulted project or through salvage recovery. To date, the Company has not received any environmental claim notices, nor is management aware of any potential environmental claims. Investments ----------- Insurance company investment practices must comply with insurance laws and regulations. Generally, insurance laws and regulations prescribe the nature and quality of, and set limits on, various types of investments, which may be made by CCS. CCS s investment portfolios, generally are managed to maximize any tax advantages to the extent available while minimizing credit risk with investments concentrated in high quality, fixed income securities. CCS s portfolios are managed to provide diversification by limiting exposures to any one issue or issuer and to provide liquidity by investing in the public securities markets. Portfolios are structured to support CCS s operations and in consideration of the expected duration of liabilities and short-term cash needs. An Investment Committee of CCS s Board of Directors establishes investment policy and oversees the management of the portfolio. Marketing --------- The Company principally markets its products in twenty-six states, the District of Columbia and Guam in which it is licensed and indirectly in all other states through its joint partnering agreement with St. Paul. Its products are marketed primarily through SSI, SG, SA and independent agents and producers, including multi-line agents and brokers that specialize as surety specialists, many of whom are members of the National Association of Surety Bond Producers. On occasion, CCS will write business directly with the customer, but does not actively seek such business. The Company uses specialized general agencies to market its other liability insurance products. Competition ----------- The insurance industry is a highly competitive industry. There are numerous firms, particularly in the specialty surety markets, which compete for a limited volume of business. Competition is based upon price, service, products offered, and financial strength of the insurance company. There are a number of companies in the industry, which offer products similar to the Company s. The Company competes in the small to medium size contract and commercial surety bond markets. Primary competitors include large multi-line companies, as well as small regional companies that specialize in the surety market. While the surety industry has experienced slow premium growth, competition has increased as a result of 10 years of profitable underwriting experience. This competition has typically manifested itself through reduced premium rates, and greater tolerance for relaxation of underwriting standards. Management believes such competition will continue. The Company, while competitive in pricing and commission, believes that the availability of its proprietary Bond-Pro surety issuance system, specialty underwriting, managerial experience and service are its primary competitive factors in the industry. To this end, the Company believes that its technology and specialization in underwriting niche surety markets will enable it to continue to compete effectively, even when challenged by the larger standard market companies. Regulation ---------- The Company s subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they transact business under statutes, which delegate regulatory, supervisory, and administrative powers to State insurance regulators. In general, an insurer s state of domicile, has principal responsibility for such regulation. It is designed generally to protect policy holders rather than investors and relates to matters such as the standards of solvency which must be maintained; the licensing of insurers and their agents; examination of the affairs of insurance companies, including periodic financial and market conduct examinations; the filing of annual and other reports, prepared on a statutory basis, on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. Licensed or admitted insurers generally must file with the insurance regulators of such states, or have filed on its behalf, the premium rates and bond and policy forms used within each state. In some states, approval of such rates and forms must be received from the insurance regulators in advance of their use. CCS is domiciled in Florida and licensed in 26 states, the District of Columbia and Guam. SSI, SG and SA are licensed in Florida, Georgia and South Carolina respectfully. CCS is also regulated by the United States Department of the Treasury as an acceptable surety for Federal bonds. Holding company laws impose standards on certain transactions between registered insurers and their affiliates, which include, among other things, that the terms of the transactions be fair and reasonable and that the books, accounts and records of each party be maintained so as to clearly and accurately disclose the precise nature and details of the transactions. Holding company laws also generally require that any person or entity desiring to acquire more than a specified percentage (commonly 10%) of the Company s outstanding voting securities, is required first to obtain approval of the applicable state s insurance regulators. The National Association of Insurance Commissioners ( NAIC ) has adopted a risk-based capital ( RBC ) model law for property and casualty companies. The RBC model law is intended to provide standards for calculating a variable regulatory capital requirement related to a company s current operations and its risk exposures (asset risk, underwriting risk, credit risk and off balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for regulators that establishes uniform capital levels and specific authority levels for regulatory interventions when an insurer falls below minimum capital levels. The model laws specifies four distinct action level at which a regulator can intervene with increasing degrees of authority over a domestic insurer as its financial conditions deteriorates. These RBC levels are based on the percentage of an insurers surplus to its calculated RBC. The company s RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is to be used in premium rate making or approval. The Company has calculated its RBC requirements as of December 31, 1998 and found that it exceeded the highest level of capital requirements. Controlling Shareholders ------------------------ Francis Williams, and the KC (collectively Majority Shareholder ) owns 78% of the outstanding ordinary shares of the company and collectively control the policies and affairs of the Company. Circumstances may incur in which the interests of the Majority Shareholder of the Company could be in conflict with the interest of the other holders of the common stock. In addition, the Majority Shareholders may have an interest in pursuing acquisitions, divestitures or other transaction that in their judgement, could enhance their equity investment, even though such transactions might involve risk to the other holders of the common stock. Employees --------- On December 31, 1998, the Company had 37 employees. All are employed on a full-time basis. None of the Company s employees are union members or subject to collective bargaining agreements. The Company believes that it enjoys a favorable relationship with its employees. Forward-looking Statements -------------------------- All statements, other than statements of historical facts, included or incorporated by reference in this Form 10-K which address activities, events or developments which the Company expects or anticipates will or may occur in the future, including statements regarding the Company s competitive position, changes in business strategy or plans, the availability and price of reinsurance, the Company s ability to pass on price increases, plans to install the Bond-Pro program in independent insurance agencies, the impact of insurance laws and regulation, the availability of financing, reliance on key management personnel, ability to manage growth, the Company s expectations regarding the adequacy of current financing arrangements, product demand and market growth, and other statements regarding future plans and strategies, anticipated events or trends similar expressions concerning matters that are not historical facts are forward looking statements. These statements are based on certain assumptions and analyzes made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as factors it believes are appropriate in the circumstances. However, whether actual results and developments will conform with the Company s expectations and predictions is subject to a number of risks and uncertainties which could cause actual results to differ significantly and materially from past results and from the Company s expectations, including the risk factors discussed in this Form 10-K, Item 1 and other factors, many of which are beyond the control of the Company, consequently, all of the forward-looking statements made in this Form 10-K are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized that they will have the expected consequences to or effects on the Company or its business or operations. The Company assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise. Item 2. Properties ------- ---------- The Company s operating subsidiaries rent or lease office space in the cities in which they are located. CCS and Qualex lease office space in Tampa, Florida from a company owned by Francis Williams, the Chairman of the Board of the Company, at a monthly rate of $7,254, pursuant to a lease that was executed March 1, 1997 and is effective through December 31, 2000. Management considers the rented and leased office facilities of its subsidiaries adequate for the current and anticipated future level of operations. Item 3. Legal Proceedings ------- ----------------- The Company and its subsidiaries are involved in various lawsuits arising in the ordinary course of its business operations as an insurer. Management does not believe that any of these lawsuits will have a material effect on the consolidated financial position, future operations or cash flows of the Company. Item 4. Submission of Matters to a Vote of Security Holders ------- -------------------------------------------------- -- None Executive Officers of the Registrant ------------------------------------ All of the following persons are regarded as executive officers because of their responsibilities and duties as elected officers of the Company's subsidiaries. Other than Francis M. Williams and Joseph M. Williams (See Item 10), there are no family relationships between any of Company s executive officers and directors, and there are no arrangements or understandings between any of these officers and any other person pursuant to which the officer was selected as an officer. Position Presently Name Held Period of Service ------------------- ------------------- ------------------- Edward J. Edenfield President CTI-05/1996 to date IV President CCS-05/1996 to date President SSI-06/1997 to date President SG- 01/1998 to date President SA- 01/1998 to date Carol S. Black Secretary CTI-06/1995 to date Secretary/Treasurer CCS-06/1995 to date Secretary SSI-08/1995 to date Secretary/Treasurer Qualex-08/1995 to date Secretary SG-08/1995 to date Secretary SA-08/1995 to date Edward A. Mackowiak President Qualex-11/1994 to date Sam H. Newberry Vice President SG-01/1998 to date PART II Item 5. Market for the Company's Common Equity and Related ------ Stockholders Matters -------------------------------------------------- The Company's Common Stock (symbol CUMB ) has been traded in the over-the-counter market since October 1, 1992. Effective December 16, 1996, Cumberland was approved and included in the trading on the Nasdaq SmallCap Market. High and Low bid prices were set forth in Quotation Market Sheets published by Nasdaq. The high and low bid prices for 1998 and 1997 were as follows: Bid Information ----------------------------- 1998 1997 -------------- --------------- High Low High Low ------- -------------- ------- First Quarter 2 1/2 2 1/2 2 1/2 1 5/8 Second Quarter 2 3/4 2 5/16 4 2 Third Quarter 3 1/8 3 1/8 3 5/8 2 19/32 Fourth Quarter 2 1 5/8 3 1/2 2 1/4 As of March 12, 1998, there were 903 stockholders of record of the Common Stock. A number of such holders are brokers and other institutions holding shares in street name for more than one beneficial owner. Dividends --------- The payment by the Company of dividends, if any, in the future is within the discretion of its Board of Directors and will depend upon the Company's earnings, capital requirements (including working capital needs), and other financial needs. Cumberland does not anticipate paying any dividends on Cumberland Common Stock in the near future. The future payment of dividends, if any, by CCS is within the discretion of its Board of Directors and will depend upon CCS's earnings, statutory limitations, capital requirements (including working capital needs) and financial condition, as well as other relevant factors. Applicable state laws and regulations restrict the payment of dividends by CCS to the extent of surplus profits less any dividends that have been paid in the preceding twelve months or net investment income for the year, whichever is less, unless CCS obtains prior approval from the insurance commissioner. CCS does not anticipate paying any dividends on CCS Common Stock in the near future. Item 6. Selected Financial Data ------- -----------------------
Statement of Operations Data: Year Ended December 31 ------------------------------------------- 1998 1997 1996 1995 1994 -------- ---------------- -------- -------- (In Thousands - except per share data) Operating data: Net premium income $ 7,534 $ 5,684 $ 3,808 $ 5,068 $ 4,957 Commission income . . . . . . . 710 860 1,386 774 - Other income . . . . . . . . . 827 616 653 425 - Net investment income . . . . . 377 408 404 397 284 Net realized investment gain (losses) . . . . . . . . . (437) 202 118 124 (124) Benefits and expenses . . . . . 9,332 7,599 6,952 7,016 6,604 Income (loss) before income taxes . . . . . . . . . . . . (321) 171 (583) (228) (1,209) Net income (loss) . . . . . . . (321) 171 (583) (228) (1,073) Pro forma net income (loss) per share (1) . . . . . . . . . . .$ (.06)$ .03 $ (.14)$ (.06)$ (.27)
(1) Pro forma net income (loss) per share (unaudited) for 1995 and 1994 has been calculated based on the 4,039,780 shares of Cumberland Common Stock that were outstanding after the Distribution. The 1998, 1997 and 1996 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 ------------------------------------------- 1998 1997 1996 1995 1994 -------- ---------------- -------- -------- (In Thousands) Balance sheet data: Investments . . . . . . . . . .$ 3,987 $ 6,469 $ 6,110 $ 6,303 $ 5,852 Cash and cash equivalents . . . 4,202 1,804 669 1,236 1,701 Accounts receivable . . . . . . 2,782 2,210 925 550 2,540 Reinsurance recoverables . . . 2,306 2,017 1,590 1,697 1,749 Deferred policy acquisition costs . . . . . . . . . . . . 1,246 813 635 435 581 Intangibles . . . . . . . . . . 1,456 1,681 1,957 2,163 134 Total assets . . . . . . . . . 16,345 15,321 12,372 12,709 12,834 Policy liabilities and accruals: Unearned premiums . . . . . . 3,750 2,629 1,862 1,182 1,631 Losses and LAE . . . . . . . 3,220 2,550 1,992 2,352 3,138 Ceded reinsurance and accounts payable . . . . . . . . . . 1,695 2,714 1,172 - - Term notes/surplus debentures, including accrued interest 1,000 0 0 4,798 4,343 Other long-term debt . . . . . 1,331 1,419 1,533 - - Total liabilities . . . . . . . 10,996 9,312 6,559 11,419 11,518 Total stockholders' equity . . 5,349 6,009 5,814 1,290 1,316 /TABLE 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 -------------------------------------------------- 1998 1997 1996 1998 1997 -------------------------------------------------- Net premium income . . $ 7,534 $ 5,684 $ 3,808 32.5% 49.3 % Net investment income 377 408 404 (7.6%) 1.0 % Net realized investment gains (losses) . . . (437) 202 118 (316.3%) 71.2 % Other revenues . . . . 1,537 1,476 2,039 4.2% (27.6)% Losses and loss adjustment expenses 2,648 1,792 1,671 47.8% 7.2 % Amortization of deferred acquisition costs . . 2,252 1,779 1,532 15.4% 16.1% General expenses and taxes . . . . . . . . 4,432 4,028 3,749 10.0% 7.4% Income (loss) before income taxes . . . . (321) 171 (583) - 70.8 % Net Income (loss) . . . (321) 171 (583) - 70.8 %
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 ----------------------------------------------------------------- -- Written direct and assumed premiums reached a record $10,930,000 during 1998. Overall written premiums, net of ceded premium increased by $2,340,624 or 37.5%. Earned premium growth increased by 32.5% to $7,534,000 for 1998 as compared to $5,684,000 for 1997. The increase in earned premiums resulted from CCS s continued growth in the direct surety bond market. During 1998, premiums written by CCS increased as a result of the marketing direction of the Company, which is to penetrate the direct market while decreasing the volume of reinsurance premiums assumed through Pooling Agreements. CCS s reinsurance assumed premium is a result of quota share agreements whereby CCS assumes a portion of the premiums written by agencies contracted to produce business using Cumberland s Bond-Pro issuance program. The increase in ceded premiums is correlated to the direct premium written and the association to excess of loss treaties on these premiums. The following table reflects the written premium activity, net of reinsurance ceded, for 1998 and 1997. Written Premiums -------------------------------------------- 1998 1997 % Change -------------- -------------- -------------- Direct . . . $ 9,451,746 $ 6,797,136 39.1% Assumed . . . 1,478,109 1,189,689 24.2% Ceded . . . . (2,354,970) (1,752,564) (34.4%) -------------- -------------- Total . . . . $ 8,574,885 $ 6,234,261 37.5% ============== ============== During the year ended December 31, 1998 and 1997, investment income was $377,218 and $408,050, respectively. Realized net losses and gains for the years ended December 31, 1998 and 1997 were ($437,565) and $201,863, respectively. CCS wrote down their investment in certain equity securities during the 4th quarter of 1998 as management determined the decline in value to be other than temporary. As a result, CCS recorded a loss of $580,360 which is offset by net capital gains of $142,795. Other revenue consists primarily of commissions earned by subsidiary agencies and fee revenue earned by a subsidiary claims consulting group. The increase in other revenue for the year ended December 31, 1998 of approximately $61,000 or 4% is related to revenues earned through the Company s claim consulting group. For the year ended December 31, 1997, revenues decreased to $1,475,990 from $2,039,331 or 28 percent. The decrease of approximately $563,000 is attributable to the transfer of direct writings by subsidiary agencies for other carriers in 1996 to CCS in 1997. Losses and loss adjustment expenses increased to $2,648,074 from $1,792,117 for the year ended December 31, 1998 and 1997, respectively. The increase of $855,957 or 48% is attributed to an increase of $327,956 or 31% in direct claims incurred and $528,001 or 71% in assumed claims incurred. Assumed claims on the expired pooling agreements were negatively impacted by increased severe losses. Cumberland share of the 1998 incurred losses under the pooling agreements was $1,007,502. Management anticipates a decline in 1999 for claims attributed to the pooling agreements. The following tables reflects the 1998 activity as it pertains to earned premiums and incurred claims: Premiums Claims Earned Incurred Ratio -------------- -------------- -------------- Direct net . $ 6,437,429 $ 1,378,722 21.4% Assumed, net 1,066,907 230,120 21.6% Assumed (pooling), net (29,348) (1,039,232) - -------------- -------------- Total . . . . $ 7,533,684 $ 2,648,074 35.1% ============== ============== During the year ended December 31, 1998 the net amortization of deferred policy acquisitions costs increased to $2,252,195 from $1,778,808 for the year ended December 31, 1997. The increase is attributed to the increase in earned premiums. During the year ended December 31, 1998, operating expenses and taxes, licenses and fees (excluding income taxes) increased to $4,313,278 from $3,903,476 in 1997. The increase of approximately $410,000 or 10% is a result of increased salary expense including bonuses, payroll taxes and employee benefits of $180,000 and increased taxes, licenses and fees of $207,000. The increase in salary and related expenses is the cost of additional personnel consistent with the Company growth while the increase in taxes, licenses and fees expenses is attributed to increased premiums written. Interest expense is interest paid to the Surety Group and Surety Associates on notes due to agencies the Company purchased in 1995. Due to tax loss carryforwards, the Company did not incur income tax expense on a consolidated basis for the years ending December 31, 1998, 1997 and 1996, respectively. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 ----------------------------------------------------------------- -- The following table sets forth, for the periods indicated, (i) summary financial data (in thousands), and (ii) the percentage change in the dollar amount for such items from period to period.
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 . . . . 171 (583) (228) 70.8 % (155.7)% Net Income (loss) . . . 171 (583) (228) 70.8 % (157.7)%
During the year ended December 31, 1997, net earned premium income increased by 49 percent to $5,684,000 from $3,808,000. Direct premiums earned from nonaffiliates were $5,836,655 and $1,114,377 for 1997 and 1996, respectively, representing an increase of $4,722,278 or 424 percent. Net reinsurance premiums earned through the Pooling Agreements were $1,166,025 and $2,693,418 for 1997 and 1996, respectively, representing a decrease of $1,527,393, or 57 percent. During 1997, direct premiums written by CCS increased while assumed premiums decreased as a result of the marketing direction of the Company, which is to penetrate the direct market while decreasing the volume of reinsurance premiums assumed through Pooling Agreements. The following table reflects the written premium activity, net of reinsurance ceded, for 1997 and 1996. Written Premiums -------------------------------------------- 1997 1996 % Change -------------- -------------- -------------- Direct . . . . $ 6,797,136$ 2,025,796 236% Assumed . . . 1,189,689 2,890,050 (59%) Ceded . . . . (1,752,564) (547,801) (320%) -------------- -------------- Total . . . . $ 6,234,261$ 4,368,046 43% ============== ============== During the year ended December 31, 1997 and 1996, investment income before capital gains was $408,050 and $403,919, respectively. Realized gains, net of realized losses, for the year ended December 31, 1997 and 1996 were $201,863 and $117,824, respectively. Investment income remained consistent for 1997 as compared to 1996. Other revenues for the year ended December 31, 1997 decreased to $1,475,990 from $2,039,331 or 28 percent. Other revenues consist primarily of commissions earned by subsidiary agencies. The decrease of approximately $563,000 is attributable to the transfer of direct writings by subsidiary agencies for other carriers in 1996 to CCS in 1997. During the year ended December 31, 1997, losses and loss adjustment expenses increased to $1,792,117 from $1,670,640 for the year ended December 31, 1996. The increase in benefit and claims expenses of $121,477 is attributed to the effects of reserve increases on direct business of $928,009 which is offset by a decrease in claim reserves on assumed business of $806,532. Loss ratios on direct and assumed premiums earned during 1997 are 40% and 63.6%, respectively. During the year ended December 31, 1997, the net amortization of deferred policy acquisitions costs increased to $1,778,808 from $1,532,355 for the year ended December 31, 1996. The increase is attributable to the increase in earned premiums. During the year ended December 31, 1997, operating expenses increased to $3,903,476 from $3,255,805 in 1996. The increase is due to expenses incurred in the continuing research and development of Cumberland's Bond Program and additional personnel employed to direct market its insurance products. Net interest expense decreased to $124,928 in 1997 from $493,337 in 1996 due to the conversion on the term note to equity on October 1, 1996. Interest expense on notes due to the former owner's in connection with agencies purchased in 1995 were $124,928 and $121,271 for the years ending December 31, 1997 and 1996, respectively. The Company incurred interest expense during 1996 of $372,006 on the term note prior to the 1996 conversion. Due to tax loss carryforwards, the Company did not incur income tax expense on a consolidated basis for the years ending December 31, 1997 and 1996, respectively. Liquidity and Capital Resources ------------------------------- The capacity of a surety company to underwrite insurance and reinsurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. Based on standards established by the National Association of Insurance Commissioners (NAIC) and promulgated by the Florida Department of Insurance, the Company is permitted to write net premiums up to an amount equal to three times its statutory surplus, or approximately $14,500,000 at December 31, 1998. Therefore, based upon statutory guidelines, the Company could increase earned premiums by approximately $7,000,000 in 1999 in addition to the amount earned in 1998. The primary sources of liquidity for the Company are funds generated from commissions, surety premiums, investment income, and proceeds from sales and maturities of portfolio investments. The principal expenditures are payment of losses and loss adjustment expenses, insurance operating expenses, and commissions. At December 31, 1998, the Company s $16,545,051 of total assets calculated based on generally accepted accounting principles were distributed primarily as follows: 50 percent in cash and investments (including accrued investment income), 30 percent in receivables and reinsurance recoverables, 18 percent in intangibles and deferred policy acquisition costs and 2 percent in other assets. The Company maintains a liquid operating position and follows investment guidelines that are intended to provide an acceptable return on investment while maintaining sufficient liquidity to meet its obligations. Net cash (used in) provided by operating activities was $(193,734), $1,925,903 and $(16,958) for the years ended December 31, 1998, 1997 and 1996, respectively. In 1998, the decrease in cash provided by operating activities is primarily attributed to an increase in receivables of $1,047,974 and income taxes recoverable of $120,000. In 1997, the cash provided by operating activities was primarily attributable to the increase in ceded reinsurance payable and pooling liabilities and accruals. In 1996, the cash used in operating activities was primarily attributable to payments of claims and reinsurance, which was offset in part by a decrease in accounts receivable. Net cash (used in) provided by investing activities was $1,718,716, $(120,560) and $253,876 for the years ended December 31, 1998, 1997 and 1996, respectively. Investing activities consist of purchases and sales of investments and advances to and from KC. Net cash (used in) provided by financing activities was $873,839, $(670,889) and $(803,772) for the years ended December 31, 1998, 1997 and 1996, respectively. Financing activities consist of purchases of treasury stock, long-term and short-term borrowings and repayment on borrowings during 1998, 1997 and 1996. Year 2000 Issue --------------- The Company has employed consultants in its efforts to address its Year 2000 issues in conjunction with the Company s own information technology staff. Excluding the costs for the Company s own information technology personnel, the total cost of compliance is expected to be approximately $100,000 (of which $41,000 including equipment upgrades will be a capital expenditure) with $14,000 having been expended through December 31, 1998. All costs (except capital) have been and will be expensed as incurred and will be funded from the normal operating cash flows. The Company has developed an in-house surety administrative system BondPro . BondPro is an agency surety bond administration system that issues bonds, tracks underwriting, and accounting and reporting from its database. Bond-Pro is a Windows based program and is year 2000 compliant. The Company is aware of the issues that many computer systems will face as the millennium (year 2000) approaches. The Company, however, believes that its own internal software and hardware is year 2000 compliant. The Company believes that any year 2000 problems encountered by procurement agencies, and other customers and vendors are not likely to have a material adverse effect on the Company s operations. Excluding any possible catastrophic events such as the loss of utilities or banking, financial or communications services, the potential risks known to the Company at this time are primarily limited to delays, disruptions or losses resulting from information bottlenecks and the lack of computer processing power. In order to mitigate the risk to the greatest extent possible, the Company will be prepared to track mission-critical information manually. Such information includes tracking premium income, and receivables and recording payments received from agencies. The Company believes its current workforce and the employment pool available in the area is sufficiently skilled to accommodate such a demand. The Company will continue to evaluate its contingency planning activities as more information becomes available. At this time, the total cost of the risks is not anticipated to have a material adverse effect on the business, financial condition or results of operations of the Company. Losses and Loss Adjustment Expenses ----------------------------------- The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (LAE) of CCS. The liabilities for losses and LAE are determined using case-basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through the end of the period. These estimates are subject to the effect of trends in future claim severity and frequency. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary; such adjustments, if any, are included in current operations. Reconciliation of Liability for Losses and Loss Adjustment Expenses ----------------------------------------------------------------- The following table provides a reconciliation of the beginning and ending liability balances, net of reinsurance recoverable, for 1998, 1997 and 1996 to the gross amounts reported in Cumberland s balance sheets: December 31 1998 1997 1996 ----------- ----------- ---------- Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at beginning $ 1,392,931 $ 594,922 $ 1,052,547 of year . . . . . . . . . . ----------- ----------- ---------- Provision for losses and LAE for claims occurring in the current year, net of reinsurance . . . . . . . . 2,331,074 1,743,117 1,008,640 Increase (decrease) in estimated losses and LAE for claims occurring in prior years, net of reinsurance 317,000 49,000 662,000 ----------- ----------- ---------- Incurred losses during the current year, net of reinsurance . . . . . . . . 2,648,074 1,792,117 1,670,640 Losses and LAE payments for claims, net of reinsurance, occurring during: The current year . . . . 557,997 553,629 422,544 Prior years . . . . . . 1,802,428 440,479 1,705,721 ----------- ----------- ---------- 2,360,425 994,108 2,128,265 ----------- ----------- ---------- Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at end of year . . 1,680,580 1,392,931 594,922 Reinsurance recoverables on unpaid losses at end of year . . . . . . . . . . . 1,539,877 1,157,369 1,396,874 ----------- ----------- ---------- Liability for losses and LAE, gross of reinsurance recoverables on unpaid $ 3,220,457 $ 2,550,300 $ 1,991,796 losses, at end of year . . =========== =========== ========== Cumberland experienced deficiencies of $317,000, $49,000 and $662,000 for losses and loss adjustment expenses in 1998, 1997 and 1996, respectively. The deficiency in 1998 and 1997 principally resulted from settling case basis reserves established in prior years for amounts that were more than expected. The deficiency in 1996 is a result of additional claims expense on a 1993/94 pooling agreement. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions, and general economic trends. These anticipated trends are monitored based on actual development and are modified if necessary. The differences between the December 31, 1998 liability for losses and LAE reported in the accompanying consolidated financial statements in accordance with generally accepted accounting principles ( GAAP ) and that reported in the annual statement filed with the state insurance departments in accordance with statutory accounting practices ( SAP ) are as follows: Liability for losses and LAE on a SAP basis (which is net of reinsurance recoverables on unpaid losses and LAE) $ 1,680,580 Reinsurance recoverables on unpaid losses and LAE . . . . . . . . . . . . . . . . . . 1,539,877 -------------- Liability for losses and LAE, as reported in the accompanying GAAP basis financial statements . . . . . . . . . . . . . . $ 3,220,457 ============== Analysis of Loss and Loss Adjustment Expense Development -------------------------------------------------------- The following table represents the development of the liability for unpaid liabilities, net of reinsurance, for 1991 through 1998 (in thousands).
1991 1992 1993 1994 ------------- -------------------------- ------------- Liability for losses and loss adjustment expenses, net of reinsurance . . . . . $ 1,663 $ 2,426 $ 1,709 $ 1,625 Liability re-estimated as of: One year later . . . 1,273 2,239 3,815 1,384 Two years later . . 1,200 2,546 2,579 1,420 Three years later . 1,316 2,263 2,750 1,631 Four years later . . 1,443 2,418 2,851 1,726 Five years later . . 1,234 2,408 3,176 - Six years later . . 1,199 2,970 - - Seven years later . 1,199 - - - ------------- -------------------------- ------------- Cumulative (deficiency) redundancy . . . . . $ 464 $ (544) $ (1,467) $ (101) ============= ========================== =============
1995 1996 1997 1998 ------------- -------------------------- ------------- Liability for losses and loss adjustment expenses, net of reinsurance . . . . . $ 1,053 $ 595 $ 1,393 $ 1,680 Liability re-estimated as of: One year later . . . 1,716 644 1,710 - Two years later . . 1,815 1,013 - - Three years later . 2,049 - - - Four years later . . - - - - Five years later . . - - - - Six years later . . - - - - Seven years later . - - - - ------------- -------------------------- ------------- Cumulative (deficiency) redundancy . . . . . $ (966) $ (418)$ (317) $ - ============= ========================== ============= /TABLE
1991 1992 1993 1994 ------------- -------------------------- ------------- Cumulative amount of liability, net of reinsurance recoverables, paid through: One year later . . . $ 806 $ 1,151 $ 765 $ 1,643 ============= ========================== ============= Two years later . . $ 884 $ 1,834 $ 1,058 $ 2,316 ============= ========================== ============= Three years later . $ 1,095 $ 2,088 $ 2,868 $ 2,164 ============= ========================== ============= Four years later . . $ 1,254 $ 1,957 $ 3,717 $ 2,875 ============= ========================== ============= Five years later . . $ 1,260 $ 3,533 $ 4,442 $ - ============= ========================== ============= Six years later . . $ 1,199 $ 3,840 $ - $ - ============= ========================== ============= Seven years later . $ 1,199 $ - $ - $ - ============= ========================== =============
1995 1996 1997 1998 ------------- -------------------------- ------------- S> Cumulative amount of liability, net of reinsurance recoverables, paid through: One year later . . . $ 1,334 563 1,802 - ============= ========================== ============= Two years later . . 2,186 1,631 - - ============= ========================== ============= Three years later . 2,997 - - - ============= ========================== ============= Four years later . . - - - - ============= ========================== ============= Five years later . . - - - - ============= ========================== ============= Six years later . . - - - - ============= ========================== ============= Seven years later . - - - - ============= ========================== ============= /TABLE Effect of Inflation ------------------- Inflation has not had a material impact upon the Company s operations for the last three years. Item 7A. Quantitative and Qualitative Disclosures About Market -------- Risk ------------------------------------------------------- -- Interest Rate Sensitivity ------------------------- The following table presents maturity principal cash flows and relates weighted average interest rates by expected maturity as of December 31, 1998:
Expected Maturity Date ----------------------------------------------------------- Fair value There- 12/31 1999 2000 2001 2002 2003 after Total /98 ------- -------------- -------------- -------------- ------- (U.S. Equivalent in thousands) Assets ------- Securities available for sale . . . . . 752 600 26 - 126 546 2,050 2,082 Average interest rate . . . . . 6.1% 7.0% 5.6% - 5.8% - - - Liabilities ----------- Long-term, debt including current portion 49 183 1,184 184 70 661 2,331 2,331 Average interest rate . . . . . 9.4% 9.2% 9.3% 8.9% 9.5% - - - /TABLE The operations of the Company are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of the Company s interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, mature or reprice in specified periods. The principal objective of the Company s asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Company. Due to the limited nature and duration of claims, generally one to two years, the Company maintains a portfolio that closely parallel s the money market interest rate scenario. Item 8. Financial Statements and Supplementary Data ------- ----------------------------------------- The financial statements of the Company required by this Item are listed in Item 14(a)(1) and (2) and are submitted as a separate section of this report. Item 9. Changes in and Disagreements with Accountants on ------- Accounting and Financial Disclosure ------------------------------------------------------- -- None Item 10. Directors and Executive Officers of the Registrant -------- ------------------------------------------------------- - The current directors and executive officers of Cumberland are as follows: Name Age Position ----------------------------------------------------------------- Francis M. Williams 57 Chairman of the Board of Directors Joseph M. Williams 42 President and Treasurer George A. Chandler 69 Director Andrew J. Cohen 45 Director Edward J. Edenfield, IV 41 President, CCS All Directors of Cumberland hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers of Cumberland are elected annually by the Board of Directors and hold office at the discretion of the Board. 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, 1998:
Annual Compensation Long-Term Compensation ---------------------------- --------------------- Name of Other All Individual Annual Stock other and Principal Year Salary Bonus Compensation Options Compensation Position Joseph M. Williams President and Treasurer . . 1998 $95,000 $30,000 $ - $ - $ - 1997 $95,000 $30,000 $ - $ - $ - 1996 $95,000 $37,000 $ - $ - $ - /TABLE Aggregate Option Exercises in 1998 and December 31, 1998 Option Values ----------------------------------------------------------------- -- The following table shows information concerning options held by the officers shown in the Summary Compensation Table at the end of 1998. No options were exercised by such persons in 1998. Number of Securities Underlying Value of Unexercised Unexercised Options in-the-Money at Fiscal Year End Options at Fiscal (#) Year End ($)(1) Exercisable/ Exercisable/ Name Unexercisable Unexercisable --------------------- ------------------- ----------------------- Joseph M. Williams 124,000/0 $248,000/0 (1) Represents the dollar value of the difference between the value at December 31, 1998 and the option exercise price of unexercised options at December 31, 1998. Compensation Committee Interlocks and Insider Participation ----------------------------------------------------------- There is no compensation committee of the Company s Board of Directors or other committee of the Board performing equivalent functions. The person who performs the equivalent function is Francis M. Williams, Chairman of the Board. Francis Williams serves as an executive officer and director of Kimmins Corp. of which Joseph Williams is also an executive officer. Compensation of Directors ------------------------- During the year ended December 31, 1998, the Company paid nonofficer Directors an annual fee of $5,000. Directors are reimbursed for all out-of-pocket expenses incurred in attending Board of Directors and committee meetings. Board Compensation Committee Report on Executive Compensation ------------------------------------------------------------- There is no formal compensation committee of the Board of Directors or other committee of the Board performing equivalent functions. As noted above, compensation is determined by Francis M. Williams, Chairman of the Board of the Company under the direction of the Board of Directors. There is no formal compensation policy for the Chief Executive Officer of the Company. Compensation of the Chief Executive Officer, which primarily consists of salary, is based generally on performance and the Company s resources. Compensation for Mr. Joseph Williams has been fixed annually each year by the Chairman of the Board. Mr. Joseph Williams compensation is not subject to any employment contract. Item 12. Security Ownership of Certain Beneficial Owners and -------- Management ------------------------------------------------------- -- Commons Stock Ownership of Certain Beneficial Owners and Management ----------------------------------------------------------------- -- The following table sets forth the number of shares of Cumberland s Common Stock beneficially owned as of December 31, 1998 by (i) persons known by Cumberland to own more than 5 percent of Cumberland s outstanding Common Stock, (ii) each director and officer of Cumberland, and (iii) all directors and executive officers of Cumberland as a group: Amount and Nature Name and Address of Beneficial Percent of Issued and of Beneficial Owner Ownership of Common Outstanding Common (1) (2) Stock Stock --------------------- ------------------- ----------------------- Francis M. Williams . . . . 4,285,886(3) 78.7% Joseph M. Williams 358,783(4) 6.6% George A. Chandler 2,669(5) * Andrew J. Cohen . 42,590(6) .8% Edward J. Edenfield IV . . 12,000(7) .2% Kimmins Corp. . . 1,723,290 31.6% All directors and executive officers as a group (five persons) . . . . 4,701,928 86.3% (1) The address of all officers and Directors of Cumberland listed above are in care of Cumberland at 4311 W. Waters Ave., Suite 501, Tampa, FL 33614. (2) Cumberland believes that the persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them, unless otherwise noted. (3) Includes 2,338,517 shares owned by Mr. Francis Williams; 1,059,306 shares allocated to Mr. Williams based on his 61.5% ownership in Kimmins Corp., 29,345 shares owned by Mr. Williams wife; 22,748 shares held by Mr. Williams as trustee for his wife and children; 18,296 shares held by Mr. Williams as custodian under the New York Uniform Gifts to Minors Act for his Children; and 153,690 held by various Real Estate Partnerships of which Mr. Williams is 100 percent Owner. Mr. Williams owns 61.5% of the outstanding common stock of Kimmins Corp. and is its Chairman and Chief Executive Officer. (4) Includes 8,800 shares owned by Mr. Joseph M. Williams; options to acquire 124,000 shares of Cumberland Common Stock; 219 shares held by the KC 401(K) Plan and ESOP of which Mr. Williams is fully vested. Also includes 205,764 shares held by KC s 401(K) Plan, Profit Participation Plan and ESOP, options to acquire 20,000 shares of Cumberland Common Stock held by the ESOP, of which Mr. Williams is a trustee; Mr. Williams disclaims beneficial ownership of these shares. (5) Includes 1,869 shares owned by Mr. George A. Chandler and options to acquire 800 shares of Cumberland Common Stock. (6) Includes 72,540 shares owned by C&C Properties a partnership in which Mr. Cohen has a 50% ownership, 6,320 shares held in trust for Mr. Cohen s minor children. (7) Includes options to acquire 12,000 shares of Cumberland Common stock. Item 13. Certain Relationships and Related Transactions -------- ---------------------------------------------- Surplus Debentures/Term Note ---------------------------- In 1988, CCS issued a surplus debenture to KC in exchange for $3,000,000 which bears interest at 10 percent per annum. In 1992, the debenture due to KC from CCS was assigned to CTI. Interest and principal payments are subject to approval by the Florida Department of Insurance. On April 1, 1997, CTI forgave $375,000 of its $3,000,000 surplus debenture due to CCS. As a result, CCS increased paid-in-capital by $375,000. As of December 31, 1998, no payments could be made under the terms of the debenture. CTI entered into a term note agreement with KC for the outstanding amount of the surplus debenture, including interest arrearage ($4,291,049) at September 30, 1992 as part of the Distribution. The term note was pari passi with the other debts of CCS, had a 10 percent interest rate and was due on October 1, 2002. Effective October 1, 1996, CTI issued 1,723,290 shares at $3.00 per share of its common stock to Kimmins Corp. (f/k/a Kimmins Environmental Services, Corp.) in exchange for surrender of the Company's term note payable in the amount of $5,169,870. Effective November 10, 1998 Cumberland entered into a $1,000,000 convertible term note agreement with TransCor Waste Services, Inc., a subsidiary of KC. The note is due November 10, 2001 and bears interest at 10%. The lender may convert the principal amount of the note or a portion thereof into common stock at $3.00 per share subsequent to a six month anniversary and prior to the close of business on the maturity date. CCS writes surety bonds for KC and its affiliates. Revenues attributable to transactions with KC and its affiliates were $14,907, $1,738 and $2,873 for the years ended December 31, 1998, 1997 and 1996, respectively. Qualex performs consulting services for KC and affiliates. Revenue attributable to transaction with affiliates were $282,193, 310,396 and $338,478 for years ended December 31, 1998, 1997 and 1996, respectively. Item 14. Exhibits, Financial Statements, Schedules, and Reports on -------- Form 8-K ------------------------------------------------------- (a) The following documents are filed as part of this Annual Report on Form 10-K 1. Financial Statements - Report of Independent Certified Public Accountants - Consolidated balance sheets at December 31, 1998 and 1997 - Consolidated statements of operations for each of the three years in the period ended December 31, 1998 - Consolidated statements of stockholders equity for each of the three years in the period ended December 31, 1998 - Consolidated statements of cash flows for each of the three years in the period ended December 31, 1998 - Notes to consolidated financial statements 2. Financial statement schedules II - Condensed Financial Information of Registrant V - Valuation and Qualifying Accounts All other Schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the Schedules, or because the information required is included in the financial statements and notes thereto. 3. The following documents are filed as exhibits to this Annual Report on Form 10-K: 3(i) - Articles of Incorporation 3(ii)- Bylaws 10 - Lease agreement with Cumberland Properties, Inc. 11 - Statement Re: Computation of earnings per share 22 - Subsidiary list 23 - Consent of Independent Certified Public Accountants 27 - Financial Data Schedule * 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, 1999 CUMBERLAND TECHNOLOGIES, INC. ----------------------------- Date: March 31, 1999 By: /s/ Joseph M. Williams ----------------------------- Joseph M. Williams, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 31, 1999 By: /s/ Joseph M. Williams ----------------------------- Joseph M. Williams, President Date: March 31, 1999 By: /s/ Francis M. Williams ----------------------------- Francis M. Williams Chairman of the Board Date: March 31, 1999 By: /s/ George A. Chandler ----------------------------- George A. Chandler, Director Date: March 31, 1999 By: /s/ Andrew J. Cohen ----------------------------- Andrew J. Cohen, Director Date: March 31, 1999 By: /s/ Carol S. Black ----------------------------- Carol S. Black, Secretary (principal financial and accounting officer) Annual Report on Form 10-K Item 14(a), (c) and (d) List of Financial Statements, Financial Statement Schedules and Exhibits Year Ended December 31, 1998 Cumberland Technologies, Inc. Tampa, Florida CUMBERLAND TECHNOLOGIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS The following consolidated financial statements of Cumberland Technologies, Inc. are included herein: Page ---- Report of Independent Certified Public Accountants . . . . . 31 Consolidated Balance Sheets at December 31, 1998 and 1997 . . 32 Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 1998 . . . . 34 Consolidated Statements of Stockholders Equity for Each of the Three Years in the Period Ended December 31, 1998 . . . . . . . . . . . . 35 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998 . . 36 Notes to Consolidated Financial Statements . . . . . . . . . 38 The following consolidated financial statement schedules are filed as part of this report: Schedule II Condensed Financial Information of Registrant . 55 Schedule V Valuation and Qualifying Accounts . . . . . . . 59 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. Report of Independent Certified Public Accountants Board of Directors Cumberland Technologies, Inc. We have audited the accompanying consolidated balance sheets of Cumberland Technologies, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cumberland Technologies, Inc. at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. March 19, 1999 Tampa, Florida CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS December 31 ----------------------------- 1998 1997 ---------------------------- Investments - Notes 1 and 3: Securities available-for- sale at fair value: Fixed maturities (cost: 1998 - $2,049,787; 1997 - $3,551,313) . . . . . . . $ 2,081,770 $ 3,590,458 Equity securities (cost: 1998 - $799,487; 1997 - $1,431,727) . . . 576,575 1,526,783 Fixed maturity securities held-to-maturity, at amortized cost: (fair value, 1998 -$896,246; 1997 - $1,002,280) . . . . . . 860,508 982,528 Residential mortgage loan on real estate, at unpaid principal . . . . . . . . 44,427 45,314 Short-term investments . . 423,993 323,993 ---------------------------- Total investments . . . . 3,987,273 6,469,076 Cash and cash equivalents 4,202,351 1,803,530 Accrued investment income 55,348 82,821 Reinsurance recoverable . . 2,306,372 2,016,756 Accounts receivable: Trade less allowance for doubtful accounts of -0- and $113,120 at December 31, 1998 and 1997, respectively . . . . . . 1,809,726 1,307,216 Affiliate . . . . . . . . 927,910 903,181 Income tax recoverable . . 120,000 - Deferred policy acquisition 1,246,555 812,745 costs . . . . . . . . . . Intangibles, net . . . . . 1,455,525 1,680,633 Other assets . . . . . . . 233,991 245,425 ---------------------------- $ 16,345,051 $ 15,321,383 ============== ============== See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY December 31 ----------------------------- 1998 1997 ---------------------------- Policy liabilities and accruals: Loss and loss adjustment $ 3,220,457 $ 2,550,300 expenses . . . . . . . . . Unearned premiums . . . . . 3,749,945 2,629,282 Ceded reinsurance payable . . . 1,114,267 2,459,173 Accounts payable and other 580,564 254,839 liabilities . . . . . . . . . . Long-term debt: Nonaffiliate . . . . . . . 1,330,588 1,418,520 Affiliate . . . . . . . . . 1,000,000 - ---------------------------- Total liabilities . . . . . 10,995,821 9,312,114 Stockholders' equity: Preferred stock, $.001 par value; 10,000,000 shares authorized, no shares issued - - Common stock, $.001 par value; 10,000,000 shares authorized; 5,763,070 shares issued at December 31, 1998 and 1997, 5,763 5,763 Capital in excess of par value . . . . . . . . . . 7,212,941 7,212,941 Accumulated other comprehensive (loss) . . . (190,929) 134,201 Accumulated deficit . . . . (1,414,826) (1,093,417) ---------------------------- 5,612,949 6,259,488 Less treasury stock, at cost, 318,112 and 313,612 shares at December 31, 1998 and 1997, respectively . . . . (263,719) (250,219) ---------------------------- Total stockholders' equity 5,349,230 6,009,269 ---------------------------- $ 16,345,051 $ 15,321,383 ============================ See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31 ---------------------------------- 1998 1997 1996 ----------- ----------- ---------- REVENUE: Direct premiums earned: Affiliates . . . . . . . 14,907 1,738 2,873 Nonaffiliates . . . . . 8,526,254 5,836,655 1,149,377 Reinsurance premiums assumed . . . . . . . . 1,268,032 1,381,264 3,083,787 Less reinsurance ceded . (2,275,509) (1,535,712) (427,718) ----------- ----------- ---------- Net premium income . . . 7,533,684 5,683,945 3,808,319 Net investment income . . 377,218 408,050 403,919 Net realized investment gains (losses) . . . . . (437,565) 201,863 117,824 Commission income . . . . 710,058 859,862 1,385,964 Other income: Affiliates . . . . . . . 289,207 310,396 338,478 Nonaffiliates . . . . . 537,775 305,733 314,889 ----------- ----------- ---------- 9,010,377 7,769,849 6,369,393 Benefits and expenses: Losses and loss adjustment expenses . . . . . . . . 2,648,074 1,792,117 1,670,640 Amortization of deferred policy acquisition costs 2,252,195 1,778,808 1,532,355 Operating expenses . . . 4,313,278 3,903,476 3,255,805 Interest expense: Affiliates . . . . . . . - - 372,066 Nonaffiliates . . . . . 118,239 124,928 121,271 ----------- ----------- ---------- 9,331,786 7,599,329 6,952,137 ----------- ----------- ---------- Net income (loss) . . . . . . (321,409)$ 170,520 $ (582,744) =========== =========== ========== Weighted average number of shares . . . . . . . . . 5,447,966 5,449,518 4,026,655 =========== =========== ========== Net income (loss) per share $ (.06)$ 0.03 $ (.14) =========== =========== ========== See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Capital in Common Shares Excess of Stock Amount Par Value ----------------------------------- Balance at January 1, 1996 . 4,039,780 $ 4,040 $2,044,794 Purchase of 86,210 shares of treasury stock . . . Conversion of term note for 1,723,290 shares of common stock . . . . . . 1,723,290 1,723 5,168,147 Net increase in unrealized depreciation of available-for-sale securities . . . . . . . Net (loss) income . . . . Comprehensive loss . . . . ----------------------------------- Balance at December 31, 1996 5,763,070 5,763 7,212,941 Purchase of 3,139 shares of treasury stock . . . Net increase in unrealized depreciation of available-for-sale securities . . . . . . . Net (loss)income . . . . . Comprehensive income . . . ----------------------------------- Balance at December 31, 1997 5,763,070 5,763 7,212,941 Purchase of 4,500 shares of treasury stock . . . Net decrease in unrealized depreciation of available-for-sale securities . . . . . . . Net (loss) income . . . . Comprehensive loss . . . . ----------------------------------- Balance at December 31, 1998 5,763,070 5,763 7,212,941 =================================== See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 (continued)
Accumulated Retained Other Earnings Treasury Total Comprehensiv(accumulated Stock Stockholders e income deficit) ------------ ' Equity ------------------------------------------------ ------------------------------------------------ ------------------------ ------------ Balance at January 1, 63,045 $ (681,193) (140,915) 1,289,771 1996 . . . . . . . . Purchase of 86,210 shares of (99,856) (99,856) treasury stock . Conversion of term note for 5,169,870 1,723,290 shares of common stock Net increase in unrealized 36,631 36,631 depreciation available-for- sale securities Net (loss) income (582,744) (582,744) ------------ ------------ ------------ Comprehensive loss (546,113) ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ Balance at December 99,676 (1,263,937) (240,771) 5,813,672 31, 1996 . . . . . . Purchase of 3,139 shares of (9,448) (9,448) treasury stock . Net increase in unrealized depreciation of 34,525 34,525 available-for- sale securities Net (loss) income 170,520 170,520 ------------ ------------ ------------ Comprehensive 205,045 income . . . . . . ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ Balance at December 134,201 (1,093,417) (250,219) 6,009,269 31, 1997 . . . . . . Purchase of 4,500 shares of (13,500) (13,500) treasury stock . Net increase in unrealized depreciation of (325,130) (325,130) available-for- sale securities Net (loss) income (321,409) (321,409) ------------ ------------ ------------ Comprehensive loss (646,539) ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ Balance at December (190,929) (1,414,826) (263,719) 5,349,230 31, 1998 . . . . . . ================================================ = = = =
See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31 ---------------------------------- 1998 1997 1996 ----------- ----------- ---------- Operating activities: Net (loss) income . . . . . . $ (321,409) $ 170,520 $ (582,744) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Amortization/accretion of investment premiums and discounts . . . . . . . 391 (2,788) (6,052) Policy acquisition costs amortized . . . . . . . 2,252,194 1,778,808 1,532,355 Policy acquisition costs deferred . . . . . . . . (2,686,004) (1,956,364) (1,732,272) Depreciation and amortization . . . . . . 225,108 370,553 378,447 Net realized loss(gain) on sales of investments 437,566 (201,863) (117,824) Provision for bad debts - 113,120 - Accrued interest on term notes, net . . . . . . . - - 404,337 (Increase) decrease in: Accrued investment income . . . . . . 27,473 6,831 (2,421) Reinsurance recoverable (289,616) (425,900) 709,464 Trade receivables . . . (502,510) (852,285) (139,675) Income tax recoverable (120,000) - - Other assets . . . . . . 11,434 57,079 (232,148) Increase (decrease) in: Policy liabilities and accruals . . . . . . 1,790,820 1,325,672 319,801 Ceded reinsurance payable . . . . . . . (1,344,906) 1,690,766 165,504 Accounts payable and other liabilities . . 325,725 (148,246) (713,730) ----------- ----------- ---------- Net cash (used in) provided by operating activities . . (193,734) 1,925,903 (16,958) See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Year ended December 31 ---------------------------------- 1998 1997 1996 ----------- ----------- ---------- Investing activities: Securities available-for- sale: Purchases - fixed maturities . . . . . . . (968,313) (1,493,023) (300,012) Sales - fixed maturities 2,479,916 954,039 620,000 Purchases - equities . . (2,819,999) (4,536,969) (3,249,846) Sales - equities . . . . 2,999,085 4,269,885 3,628,259 Securities held-to-maturity: Purchases . . . . . . . . (100,000) (299,492) (680,116) Maturities . . . . . . . 127,140 985,000 310,000 Proceeds from other investments . . . . . . . . 887 - 25,529 Software development costs . - - (99,938) ----------- ----------- ----------- Net cash provided by (used in) investing activities . 1,718,716 (120,560) 253,876 Financing activities: Purchases of treasury stock (13,500) (9,448) (99,856) Payments on short-term borrowings and long-term debt . . . . . . . . . . . (87,932) (114,745) (469,483) Net change in advances to (from) affiliates . . . . . (24,729) (546,696) (234,433) Net proceeds from short-term borrowings . . . . . . . . 1,000,000 - - ----------- ----------- ----------- Net cash provided by (used in) financing activities 873,839 (670,889) (803,772) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents . . 2,398,821 1,134,454 (566,854) Cash and cash equivalents, beginning of year . . . . 1,803,530 669,076 1,235,930 ----------- ----------- ----------- Cash and cash equivalents, end of year . . . . . . . $4,402,351 $1,803,530 $ 669,076 =========== =========== =========== See notes to consolidated financial statements. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. Summary of Significant Accounting Policies ------------------------------------------ Organization ------------ Cumberland Technologies, Inc. ( CTI ) f/k/a Cumberland Holdings, Inc., a Florida corporation, was formed on November 18, 1991, to be a Holding company and a wholly-owned subsidiary of Kimmins Corp. ( KC ). Effective October 1, 1992, KC contributed all of the outstanding common stock of two of its other wholly- owned subsidiaries, Cumberland Casualty & Surety Company ( CCS ) and Surety Specialists, Inc. ( SSI ) to CTI. KC then distributed to its stockholders CHI s common stock on the basis of one share of common stock of CTI for each five shares of KC common stock and Class B common stock owned (the Distribution). Effective January 30, 1997, Cumberland Holdings, Inc. changed its name to Cumberland Technologies, Inc. CTI conducts its business through five subsidiaries. CCS, a Florida corporation formed in May 1988, provides underwriting for specialty surety and performance and payment bonds for contractors. The surety services provided include direct surety and to a lesser extent, assumed reinsurance. SSI, a Florida corporation formed in August 1988, is a general lines agency which operates as an independent agent. Surety Group ( SG ), a Georgia corporation, and Associates Acquisition Corp. d/b/a Surety Associates ( SA ), a South Carolina corporation, purchased in February and July 1995, respectively, are general lines agencies which operate as independent agencies. Official Notary Service of Texas, Inc. ( ONS ), a Texas corporation formed in February 1994, is an inactive corporation. Qualex Consulting Group, Inc. ( Qualex ), a Florida corporation formed in November 1994, provides claim and contracting consulting services. Florida Credit & Collection Services, Inc. a Florida corporation formed in December 1996 was dissolved in June 1997. CTI and its subsidiaries are referred to herein as the Company. Principles of Consolidation --------------------------- The consolidated financial statements include the accounts of CTI and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies (continued) ------------------------------------------------------ Basis of Presentation --------------------- The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, as to the subsidiary insurance company, differ from statutory accounting practices prescribed or permitted by regulatory authorities. The significant accounting policies followed by CTI and subsidiaries that materially affect the financial statements are summarized in this note. Investments ----------- Debt securities that the Company has both the positive intent and ability to hold to maturity are classified as held- to-maturity securities and are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest earnings on these securities, is included in investment income. Marketable equity securities and debt securities not classified as held-to-maturity are classified as available- for-sale. Available-for-sale securities are reported at estimated fair value, with the unrealized gains and losses, net of any related taxes, reported as a separate component of other comprehensive income. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included on the Statement of Operations. The cost of securities sold is based on the specific identification method. Interest and dividends on securities available-for-sale are included in investment income. Short-term investments primarily include certificates of deposit having maturities of more than three months when purchased, which are reported at cost which approximates fair value. Cash Equivalents ---------------- The Company considers all highly liquid investments having a maturity of three months or less when purchased to be cash equivalents. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Deferred Policy Acquisition Costs --------------------------------- To the extent recoverable from future policy revenues, the costs of acquiring new surety business, principally commissions, are deferred and amortized in a manner which charges each year s operations in direct proportion to the premium revenue recognized. Intangibles ----------- Intangible assets are stated at cost and principally represent purchased customer accounts and the excess of costs over the fair value of identifiable net assets acquired ( Goodwill ). Purchased customer accounts, noncompete agreements, and purchased contract agreements are being amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. Goodwill is being amortized on a straight-line basis over 15 years. Purchased customer accounts are records and files obtained from acquired businesses that contain information on insurance policies and the related insured parties that is essential to policy renewals. The carrying value of goodwill and other intangible assets will be reviewed if circumstances suggest that they may be impaired. If this review indicates that the intangible assets will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company s carrying value of the goodwill and intangibles will be reduced by the estimated shortfall of cash flows. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Loss and Loss Adjustment Expenses --------------------------------- The liability for loss and loss adjustment expenses including incurred but not reported losses is based on the estimated ultimate cost of settling the claim using traditional paid and incurred loss development methods. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in current operations. A liability for all costs expected to be incurred in connection with the settlement of unpaid loss and loss adjustment expenses is accrued when the related liability for unpaid losses is accrued. Loss adjustment expenses include costs associated directly with specific claims paid or in the process of settlement, such as legal and adjusters fees. Loss adjustment expenses also include other costs that cannot be associated with specific claims but are related to losses paid or in the process of settlement, such as internal costs of the claims function. The Company does not discount its reserves for losses and loss adjustment expenses. The Company writes primarily surety contracts which are of short duration. The Company does not consider investment income in determining if a premium deficiency relating to short duration contracts exists. Unearned Premiums ----------------- Unearned premiums are calculated using the monthly pro rata basis. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Reinsurance ----------- The Company assumes and cedes reinsurance and participates in various pools. The accompanying financial statements reflect premiums, benefits and settlement expenses, and deferred policy acquisition costs, net of reinsurance ceded (see Note 12). Amounts recoverable from reinsurers for unpaid losses are estimated in a manner consistent with the claim liability associated with the reinsured policies. Revenue Recognition ------------------- Direct insurance and assumed reinsurance premiums earned are recognized on a pro-rata basis over the period of risk. Commission income is recognized at the effective date of the bonds issued. Other income consisting primarily of consulting fees are recognized when the negotiated services are provided. Commissions related to agency activity are generally recognized at the later of the effective date of the policy or the date billed. Income Taxes ------------ Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company files a consolidated tax return that includes all of its subsidiaries. See Note 7. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Earnings Per Share ------------------ Earnings (loss) per share is based on the weighted average number of shares outstanding, adjusted for the dilutive effect of stock options. Since the effect of including the entire 168,486 outstanding stock options in the denominator of the calculation for the year ended December 31, 1998 had no effect on the result of the calculation, and the effect of stock options for the years ended December 31, 1997, and 1996 would be antidilutive, earnings per share is the same on both a basic and diluted basis for 1998, 1997 and 1996. Business Concentration ---------------------- The majority of the Company s business relates to surety and performance bonds for contractors. Accordingly, the occurrence of adverse economic conditions in the contracting business could have a material adverse effect on the Company s business although no such conditions have been encountered in the past. The Company only requires collateral from surety bond customers if the customer meets between 80 percent to 99 percent of the Company s underwriting criteria. Customers that fail to meet at least 80 percent of the requirements are denied surety bonding. Use of Estimates ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which would affect the amounts reported and disclosed herein. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- New Accounting Standards ------------------------ As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ( SFAS 130 ). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company net income or shareholders equity. SFAS 130 requires unrealized gains and losses on the Company s available for sale securities, which prior adoption were reported separately in shareholders equity to be included in other comprehensive income. All adjustments made between net income and comprehensive income for the Company are attributed to unrealized gains and losses. Prior year financial statements presented conform to the requirements of SFAS 130. See Note 16. Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board s Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement 131). Statement 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. The Company's only material operating segment is the underwriting of surety insurance products. In accordance with Statement 131 the Company has not reported financial information on separate segments. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of Statement 131 did not affect results of operations or financial position. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Because of the Company s minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. Summary of Significant Accounting Policies(continued) ----------------------------------------------------- Reclassifications ----------------- Certain amounts in the 1997 financial statements have been reclassified to conform to the 1998 financial statement presentation. These reclassifications had no effect on net loss or stockholders equity previously reported. 2. Related Party Transactions -------------------------- CTI and its subsidiaries have entered into transactions with KC and companies affiliated through common ownership. CCS writes surety bonds for KC and its affiliates. Revenues attributable to surety bonds with KC and its affiliates were $14,907, $1,738 and $2,873 for the years ended December 31, 1998, 1997 and 1996, respectively. Qualex performs consulting services for KC and affiliates. Other income from affiliates consist primarily of consulting services provided to KC. Affiliate accounts receivable represents funds advanced and joint expenses that have not yet been reimbursed from KC and its affiliates. These receivables are paid periodically and no interest is charged on the outstanding balances which are payable on demand. Also included in affiliate accounts receivable at December 31, 1997 is a $135,000 note receivable from the Company s Chairman of the Board of Directors. During 1998, KC reimbursed SSI for certain project premiums that had been guaranteed by the Chairman. As a result, the note receivable was paid in full and a commission of $83,952 was recognized by CCS. At December 31, 1996, the Company was a guarantor for $2.25 million of borrowings made under the terms of a loan agreement entered into on December 8, 1995 between KC and a bank. During 1997, the Company was released by the bank as a guarantor on the note. Cumberland leases office space from a company owned by the Chairman of the Board of Directors at a monthly rate of $7,254. The lease is effective through December 31,2000. 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:
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair Value ----------- Gains Losses ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- ---------------------- Available-for-sale securities at December 31, 1998: Fixed maturity securities: U.S. Government bonds . . . $1,553,407 $ 19,426 $ 563 $1,572,270 State and municipal bonds . 496,380 13,120 - 509,500 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- Total fixed maturity securities $2,049,787 32,546 563 2,081,770 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- Equity securities . . . . . . 799,487 - 222,912 576,575 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- Total . . . . . . . . . . . . . $2,849,274 $ 32,546 $ 223,475 $ 2,658,345 =========== ====================== =========== = = = = Held-to-maturity securities at December 31, 1998: Fixed maturity securities: U.S. Government bonds . . . $ 860,508 $ 35,738 $ - $ 896,246 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- Total . . . . . . . . . . . . . $ 860,508 $ 35,738 $ - $ 896,246 =========== ====================== =========== = = = = Available-for-sale securities at December 31, 1997: Fixed maturity securities: U.S. Government and $3,054,983 $ 33,890 $ 1,865 $3,087,008 government agency bonds . State and municipal bonds 496,330 7,120 - 503,450 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- Total fixed maturity securities $3,551,313 $ 41,010 $ 1,865 $3,590,458 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- Equity securities . . . . 1,431,727 115,618 20,562 1,526,783 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ---------- ---------------------- ----------- Total . . . . . . . . . . . . . $4,983,040 $ 156,628 $ 22,427 $5,117,241 =========== ====================== =========== = = = = Held-to-maturity securities at December 31, 1997: Fixed maturity securities: U.S. Government bonds . . $ 982,528 $ 19,752 $ - $1,002,280 ----------- ---------------------- ----------- ----------- ---------------------- ----------- ----------- ---------------------- ----------- Total . . . . . . . . . . . . . $ 982,528 $ 19,752 $ - $1,002,280 =========== ====================== =========== = = = = /TABLE CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Investments (continued) ----------------------- The amortized cost and fair value of the Company s investments in fixed maturity securities, segregated by available-for-sale and held-to-maturity, at December 31, 1998 are summarized, by stated maturity, as follows:
Available-for-Sale Held to Maturity ------------------------ ------------------------ Amortized Amortized Maturity Cost Fair Value Cost Fair Value ----------------------- ------------ ------------------------ ------------ Due in one year or less $ 751,160 $ 757,080 $ - $ - Due after one year through five years 626,332 639,196 860,508 896,246 Due after five years through ten years . 125,915 125,994 - - Due after ten years through fifteen years 50,000 50,000 - - Due after twenty years 496,380 509,500 - - ------------ ------------------------ ------------ $ 2,049,787 $ 2,081,770 $ 860,508 $ 896,246 ============ ======================== ============
The Company held no investments in any person or its affiliates (excluding obligations of the U.S. Government or its agencies) which exceeded 10 percent of stockholders equity at the end of the respective year. At December 31, 1998 and 1997, the Company had $3.4 million and $5.3 million, respectively, in restricted investments (fixed maturity securities and short-term investments). Restricted investments primarily represent funds held as collateral in connection with reinsurance trust agreements and funds held as 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 ---------------------------------- 1998 1997 1996 ----------- ---------- ---------- Fixed maturity and equity securities . . . . . . . . $ 246,618 $ 344,459 $ 388,700 Mortgage loans on real estate 6,711 4,105 4,613 Short-term investments, including cash and cash equivalents . . . . . . . . 135,926 70,857 50,684 ----------- ----------- ---------- 389,255 419,421 443,997 Less investment expenses . . (12,037) (1,1371) (40,078) ----------- ----------- ---------- Net investment income . . . . $ 377,218 $ 408,050 $ 403,919 Realized gain (loss) on available-for-sale securities: Fixed maturities - gains . 15,589 - - Equity securities - gains 226,613 201,863 117,824 Equity securities - losses (679,767) - - ----------- ----------- ---------- Net realized investment gains $ (437,565)$ 201,863 $ 117,824 (losses) . . . . . . . . . . CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Fair Value of Financial Instruments ----------------------------------- The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 are as follows: December 31, 1998 ---------------------------- Carrying Amount Fair Value ---------------------------- Assets: Cash and cash equivalents, including short-term investments . . . . . . . . $ 4,626,344 $ 4,626,344 Investments . . . . . . . . . 3,563,280 3,554,591 Accounts receivable . . . . . 2,737,636 2,737,636 Reinsurance receivable . . . 2,306,372 2,306,372 Liabilities: Long-term debt . . . . . . $ 2,330,588 $ 2,330,588 Policy loss reserves . . . 3,220,457 3,220,457 Ceded reinsurance payable 1,114,267 1,114,267 The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents, short-term investments, accounts receivable and long-term debt: The carrying amount reported in the balance sheet approximates its fair value. Investments: Fair values for fixed maturity securities are based on quoted market prices, where available, and are recognized in the balance sheet for available-for-sale securities. The fair values for equity securities are based on quoted market prices and are recognized in the balance sheet. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. Intangibles ----------- Intangibles at December 31 are comprised of the following: 1998 1997 -------------- -------------- Purchased customer accounts $ 1,084,041 $ 1,084,041 Noncompete agreements . . . . - 234,000 Goodwill . . . . . . . . . . 926,661 926,661 2,010,702 2,244,702 -------------- -------------- Less accumulated amortization 555,177 (564,069) -------------- -------------- $ 1,455,525 $ 1,680,633 ============== ============== Amortization expense amounted to $225,108 in 1998, $275,169 in 1997 and $306,175 in 1996. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Reserve for Losses and Loss Adjustment Expenses ----------------------------------------------- The following table provides a reconciliation of the beginning and ending liability balances, net of reinsurance recoverables, for the years ended December 31, 1998, 1997 and 1996, to the gross amounts reported in the Company s consolidated balance sheets: December 31 ---------------------------------- 1998 1997 1996 ---------------------- --------- Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at beginning of year . . . . . . . . . . . $ 1,392,931 $ 594,922 $1,052,547 Provision for losses and LAE for claims occurring in the current year, net of reinsurance . . . . . . . . 2,331,074 1,743,117 1,008,640 Increase in estimated losses and LAE for claims occurring in prior years, net of reinsurance . . . . 317,000 49,000 662,000 ---------------------- ---------- Incurred losses during the current year, net of reinsurance . . . . . . . . 2,648,074 1,792,117 1,670,640 Losses and LAE payments for claims, net of reinsurance, occurring during: 557,997 553,629 422,544 The current year . . . . 1,802,428 440,479 1,705,721 Prior years . . . . . . . ---------------------- ---------- 2,360,425 994,108 2,128,265 ---------------------- ---------- Liability for losses and LAE, net of reinsurance recoverables on unpaid losses, at end of year . . 1,680,580 1,392,931 $ 594,922 Reinsurance recoverables on unpaid losses at end of year . . . . . . . . . . . 1,539,877 1,157,369 1,396,874 ---------------------- ---------- Liability for losses and LAE, gross of reinsurance recoverables on unpaid losses, at end of year . . $ 3,220,457 $2,550,300 $1,991,796 ---------------------- ---------- CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Reserve for Losses and Loss Adjustment Expenses (continued) ----------------------------------------------------------- Cumberland experienced deficiencies of $317,000, $49,000 and $662,000 for losses and loss adjustment expenses in 1998, 1997 and 1996, respectively. The deficiency in 1998 and 1997 principally resulted from settling case basis reserves established in prior years for amounts that were more than expected. The deficiency in 1996 is a result of additional claims expense on a 1993/94 pooling agreements. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions, and general economic trends. These anticipated trends are monitored based on actual development and are modified if necessary. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Income Taxes ------------ There was no income tax expense or benefit recognized in 1998, 1997 or 1996. A reconciliation of the federal statutory income tax rate applied to pre-tax income (loss) and the effective income tax benefit rate is as follows: 1998 1997 1996 ----------- ----------- ---------- Federal statutory tax rate . . . . . . . . . . (34.0)% 34.0% (34.0)% State income taxes, net of federal income tax benefit . . . . . . . . (3.0) 3.9 (3.7)% Income exempt from taxation and dividend exclusions . . . . . . . (9.7) (7.2) (10.1) Differences between income statement and tax return . . . . . . . . . (7.0) 69.3 - Utilization of NOL carryforwards . . . . . 38.2 (110.1) 44.4 Nondeductible expenses . 15.5 10.1 3.4 ----------- ----------- ---------- Effective tax rate . . . - - - =========== =========== ========== CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Income Taxes (continued) ------------------------ Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes. Significant components of the Company s deferred tax liabilities and assets are as follows: December 31 ----------------------------- 1998 1997 -------------- -------------- Deferred tax liabilities: Deferred policy acquisition costs . . . . . . . . . . . $ 544,339 $ 305,836 Unrealized gains . . . . . . - 50,500 ---------------------------- Total deferred tax liabilities 544,339 356,336 ---------------------------- Deferred tax assets: Unrealized loss . . . . . . . 290,236 - Outside basis difference in investments . . . . . . . . 91,646 40,620 Amortization of intangibles 96,160 69,028 Unearned premiums . . . . . . 245,321 166,961 Losses and loss adjustment expenses . . . . . . . . . 54,885 19,050 Net operating loss carryforward . . . . . . . 85,789 232,012 Alternative minimum credit carryforward . . . . . . . 27,648 15,555 Surplus note . . . . . . . . 102,314 102,314 Other, net . . . . . . . . . 17,139 8,931 ---------------------------- 1,011,138 654,471 Less valuation allowance . . (466,799) (298,135) ---------------------------- Total deferred tax assets . . . 544,339 356,336 ---------------------------- Net deferred taxes . . . . . . $ - $ - ============================ CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. Income Taxes (continued) ------------------------ The Company has net operating loss carryforwards as of December 31, 1998 of approximately $227,980 which generally expire in 2010 and 2011. 8. Long-Term Debt -------------- Long-term debt consists of the following: December 31 December 31 1998 1997 ---------------------------- Affiliate: Note payable due November 10, 2001 . . . . . . . . . . . $ 1,000,000 $ - Nonaffiliate: Note payable due March 1, 2002 374,087 377,077 Note payable due June 30, 2010 956,501 1,041,443 ---------------------------- $ 2,330,588 $ 1,418,520 ============================ Notes Payable to Affiliate -------------------------- Effective November 10, 1998, Cumberland entered into a $1,000,000 convertible term note agreement with TransCor Waste Services, Inc., a subsidiary of KC. The note is due November 10, 2001 and bears interest at 10%. The lender may convert the principal amount of the note or a portion thereof into a common stock at $3.00 per share subsequent to a six month anniversary and prior to the maturity date. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Long-Term Debt (continued) -------------------------- Notes Payable to Nonaffiliates ------------------------------ In connection with the acquisition of certain agencies during 1995, the Company entered into two notes payable with the agencies previous owners. One note is due March 1, 2002 and bears interest at 8% through February 28, 2001 and 10% thereafter. Principal payments of $125,000 are due annually beginning March 1, 2000. The other is due June 30, 2010 and bears interest 9%. Principal payments of $40,000 were due annually for three years beginning January 5, 1996. Payments of $11,104 including principal and interest are payable monthly beginning April 1, 1997. Interest paid in 1998, 1997 and 1996 for term notes due nonaffiliates was $118,239, 124,298 and $121,271, respectively. Maturities of notes payable to nonaffiliates for the five years succeeding December 31, 1998 and thereafter are as follows: Year Ending December 31 -------------------- -------------------- 1999 $ 49,158 2000 183,471 2001 184,254 2002 181,002 2003 72,637 Thereafter 660,066 Term Note Due Affiliate ----------------------- In 1992, CTI entered into a term note agreement with KC for the outstanding amount of a debenture, including interest arrearage of $4,291,049. The term note was pari passi with the other debts of CCS, bearing interest at 10 percent of the unpaid principal and interest and was due on October 1, 2002. Interest and principal were due quarterly with minimum payments equal to one half of net earnings before interest and federal income taxes. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. Long-Term Debt (continued) -------------------------- Effective October 1, 1996, CTI issued 1,723,290 shares at the fair value of $3.00 per share of its common stock to Kimmins Corp. (f/k/a Kimmins Environmental Service, Corp.) in exchange for surrender of the term note payable in the amount of $5,169,870 (including accrued interest). 9. Employee Benefit Plan --------------------- On April 1, 1996, CTI adopted a defined contribution 401(k) plan covering substantially all employees. Under the plan, the Company makes contributions equal to one percent of the participant's compensation, not to exceed six percent of the participant's annual compensation. The Company's contributions to the plan totaled $11,701, $9,367 and $7,288 in 1998, 1997 and 1996, respectively. 10. Stock Option Plan ----------------- CTI has 400,000 shares of its common stock reserved for issuance for the exercise of options to be granted under CTI s 1991 stock option plan (the Plan ). Options granted under the Plan, in general, expire no later than ten years from the date of grant. As a result of the Distribution, options were granted to certain individuals, which vest over five years from the date of the grant. Options to purchase 52,586 shares of the Company s common stock, at no cost to the holders, were granted during 1992 and remain outstanding at December 31, 1998. All are currently exercisable. Effective October 1, 1992, the Company granted options to purchase 100,000 shares to its President at a price of $.125 per share. As of December 31, 1998, all of the options were exercisable. Effective May 22, 1996, the Company granted options to purchase 20,000 shares to the President of CCS at a price of $.75 per share. As of December 31, 1998, 12,000 of the options were exercisable. The Company granted options on July 26, 1996 to purchase 2,500 shares to an employee at a price of $1.00 per share. As of December 31, 1998, 1,500 of the options were exercisable. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Stock Option Plan (continued) ----------------------------- Effective, March 18, 1998, the Company granted options to purchase 12,000 shares to certain individuals at CCS at a price of $2.25 per share. As of December 31, 1998, 2,400 of the options were exercisable. The Company has elected to follow Accounting Principles Board of Opinion No 25 Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, required use of option valuation models that were not developed for use in valuing employee stock options since no material amount of options have been awarded since the effective date of Statement 123, the effect of applying Statement No. 123's fair value method to the Company's stock based awards results in net income and earnings per share that are not materially different from amounts reported based on APB 25. 11. Preferred Stock --------------- CTI is authorized to issue 1,000,000 shares of preferred stock, $.001 par value, with such rights and privileges as determined by the Board of Directors. The preferred stock shall be issued at such times and for such consideration as determined by the Board of Directors. No shares have been issued as of December 31, 1998. 12. Reinsurance ----------- CCS assumes reinsurance through a program whereby its subsidiary, SSI, has contracted through a joint partnering agreement with St. Paul Fire and Marine Group, f/k/a United States Fidelity and Guaranty Company ( St. Paul ) to pursue small to medium size contract and commercial surety business in states in which CCS is not licensed. CCS participates in the St. Paul agreement underwriting risk through a retrocessional treaty with St. Paul s reinsurer, Transatlantic Reinsurance Company. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Reinsurance (continued) ----------------------- Effective October 1, 1996, CCS entered into a quota share agreement with First Indemnity of America Insurance Company whereby all of the premiums written through a shared underwriting office are subject to this treaty. Cumberland assumes 50% of the premiums written by FIA and cedes 50% of the premiums written by CCS. CCS assumed reinsurance primarily from a pooling agreement which expired in April, 1997 for which CCS assumed 10 percent of the risk with a maximum exposure to CCS of $125,000 per bond. CCS is still receiving residual revenues from a pooling agreement for which CCS assumed 25 percent and 20 percent of the risk with a maximum exposure to CCS of $125,000 and $600,000 per bond, respectively. The Company cedes to Transatlantic Reinsurance Company on an excess of loss treaty 95% of the risk insured with a maximum exposure to the Company of $235,000 per principal. Transatlantic Reinsurance Company is rated A+ by A.M. Best. For its liability line of registered investment advisor insurance, the Company has reduced its exposure on any one risk, with a purchase of a quota share agreement with Dorinco Reinsurance (Dorinco Treaty) which is rated A (Excellent) by A.M. Best. Under the Dorinco Treaty, CCS cedes 50% of its liability on all registered investment advisor policies, which have an aggregate net liability limit of $500,000 per endorsement. The Company continues to have exposure to risk for reinsurance ceded in the event that the reinsurer is unable to meet its obligation under the reinsurance agreement in force. Reinsurance does not relieve an insurer of its liability to policyholders, however, the reinsurer is obligated to the insurer for the portion assumed by such reinsurer. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. Reinsurance (continued) -----------------------
1998 1997 1996 --------------------------- --------------------------- --------------------------- ----------------- ----------------- ----------------- Written Earned Written Earned Written Earned ------------ ------------ ------------ ------------ ------------ ------------ -------- -------- -------- -------- -------- -------- Direct premiums $ 9,451,746 $ 8,541,161 $ 6,797,136 5,838,393 2,025,796 1,152,250 Assumed 1,478,109 1,268,032 1,189,689 1,381,264 2,890,050 3,083,787 premiums Ceded premiums (2,354,970) (2,275,509) (1,752,564) (1,535,712) (547,800) (427,718) ------------ ------------ ------------ ------------ ------------ ------------ -------- -------- -------- -------- -------- -------- Net premiums . $ 8,574,885 $ 7,533,684 $ 6,234,261 $ 5,683,945 $ 4,368,046 $ 3,808,319 ======= ======= ======= ======= ======= =======
Loss and loss adjustment expenses in 1998, 1997, and 1996 are summarized as follows: 1998 1997 1996 ----------- ----------- ---------- Direct . . . . . . . . . $ 1,743,448 $ 1,048,450 $ 127,232 Assumed . . . . . . . . 1,343,334 741,351 1,587,890 Ceded . . . . . . . . . (438,708) 2316 (44,482) ----------- ----------- ---------- Net losses and loss adjustment expenses . $ 2,648,074 $ 1,792,117 $ 1,670,640 =========== =========== ========== The Company reported reinsurance recoverables on paid losses of $408,708 and $448,553 at 1998 and 1997, respectively. 13. Statutory Accounting Practices and Regulatory Requirements -------------------------------------------------------- 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: CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. Statutory Accounting Practices and Regulatory Requirements (continued) ------------------------------------------------------------ -- Year Ended December 31 1998 1997 1996 ----------- ----------- ---------- Statutory capital and surplus $ 4,843,478 $ 5,044,527 $5,034,662 Net income (loss) . . . . . . 74,157 $ 959,304 $ (293,204) CCS is domiciled in Florida and prepares its statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Florida Insurance Department. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ( NAIC ). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. Accordingly, that project, which was completed in 1998, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements. Under applicable state insurance statues, CCS must maintain minimum capital and surplus of $2,500,000 (as of December 31, 1998). In addition, under applicable state laws and regulations, CCS is restricted from paying dividends to the extent of surplus profits less any dividends that have been paid in the preceding twelve months or net investment income for the year, whichever is less, unless the Company obtains prior approval from the Florida Department of Insurance. As of December 31, 1998, no dividends from CCS are available for payment to the Company without the prior approval of the Department of Insurance. CUMBERLAND TECHNOLOGIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. Comprehensive Income -------------------- The Company adopted the provisions of the SFAS No. 130, Reporting Comprehensive Income, in 1998. Comprehensive income is defined as any change in equity from transactions and other events originating from nonowner sources. For the Company comprehensive income is composed of reported net income and changes in the unrealized appreciation of available for sale investment portfolio. SFAS No. 130 requires the Company to report all components of comprehensive income. The following summaries present the components of our comprehensive income, other than net income, for the last two years. Consolidated Statements of Comprehensive Income Twelve Months Ended December 31 1998 1997 ----------- ----------- Net income (loss) . . . . . . $ (321,409)$ 170,520 Other comprehensive income, net of tax: Unrealized (depreciation) appreciation of available for sale securities arising during period . . (830,088) 161,425 ----------- ----------- Less: reclassification adjustment for (losses) gains included in net $ (504,958) $ 126,000 income ---------------- ---------------- Comprehensive income . . $ (649,539)$ 205,045 ================ ================ 15. Subsequent Events ----------------- On February 1, 1999 the Company filed a registration statement on Form S-8 to register 400,000 shares of stock available to participants of the 1991 Stock Option Plan. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CUMBERLAND TECHNOLOGIES, INC. December 31 --------------------------- Condensed Balance 1998 1997 Sheets ------------- ------------- ---------------------- Assets: Trade receivables $ - $ 21,835 Accounts receivable from affiliates - - Investment in wholly- owned subsidiaries 1,701,379 2,385,867 Other assets . . . 68,363 54,408 Surplus debenture receivable from subsidiary . . . 5,026,354 4,763,854 ------------- ------------- $ 6,796,096 $ 7,225,964 ============= ============= Liabilities: Accounts payable to affiliates . . . 1,442,165 1,213,207 Accounts payable . 4,701 3,488 ------------- ------------- 1,446,866 1,216,695 Stockholders' equity: Common stock . . . 5,763 5,763 Other stockholders' 5,343,467 6,003,506 equity . . . . . ------------- ------------- 5,349,230 6,009,269 ------------- ------------- $ 6,796,096 $ 7,225,964 ============= ============= SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CUMBERLAND TECHNOLOGIES, INC. Year Ended December 31 ----------------------------------------- Condensed Statements of Operations 1998 1997 1996 ---------------------- ------------- ------------- ------------- Management fees from wholly- owned subsidiaries . . . $ 217,892 $ 88,378 $ 62,557 Interest income from subsidiary . . . . 262,500 271,875 300,000 ------------- ------------- ------------- 480,392 360,253 362,557 Costs and expenses: Selling and administrative expenses . . . . 415,242 294,901 133,834 Interest expense to affiliates . . . - - 372,066 ------------- ------------- ------------- 415,242 294,901 505,900 ------------- ------------- ------------- Income (loss) before income taxes and equity in net income (loss) of subsidiaries . . . 65,150 65,352 (143,343) Federal and state income tax benefits . . . . . - - - Equity in net income (loss) of subsidiaries . . . (386,559) 105,168 (439,401) ------------- ------------- ------------- Net income (loss) . . $ (321,409)$ 170,520 $ (582,744) ============= ============= ============= SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CUMBERLAND TECHNOLOGIES, INC. Supplemental Schedule of Noncash Investing and Financing Activities ----------------------------------------------------------------- The Company operates through its wholly-owned subsidiaries and all operating activities have been funded by its subsidiaries. Notes to Condensed Financial Statements --------------------------------------- 1. Organization and summary of significant accounting policies ----------------------------------------------------------- Organization - Cumberland Technologies, Inc. ( CTI or Cumberland ), a Florida corporation, was formed on November 18, 1991, to be a holding company and a wholly-owned subsidiary of Kimmins Corp. ( KC ). Effective October 1, 1992, KC contributed all of the outstanding common stock of two of its wholly-owned subsidiaries, Cumberland Casualty & Surety Company ( CCS ) and Surety Specialists, Inc. ( SSI ) to CTI. KC then distributed to its stockholders CTI's common stock on the basis of one share of common stock of CTI for each five shares of KC common stock and Class B common stock owned (the Distribution ). CTI conducts its business through its subsidiaries, CCS, SSI, Surety Group, Inc. ( SG ), Surety Associates ( SA ), and Qualex Consulting Group, Inc. ( Qualex ) (collectively together with Cumberland, the Company. ) CCS, a Florida corporation formed in May 1988, provides performance and payment bonds for contractors and miscellaneous surety bonds to federal and local government agencies. The surety services provided include direct surety and, to a lesser extent, reinsurance. SSI, a Florida corporation formed in August 1988, is a general lines agency which operates as an independent agent. SG, a Georgia corporation, and Associates Acquisition Corp. d/b/a Surety Associates, a South Carolina corporation, purchased by Cumberland in February and July 1995, respectively, are general lines insurance agencies which operate as independent agencies. Qualex, a Florida corporation formed in November 1995, provides claim and contracting consulting services. For the years ended December 31, 1998 and 1997, CTI charged its subsidiaries excluding CCS, a management fee. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) CUMBERLAND TECHNOLOGIES, INC. Notes to Condensed Financial Statements (continued) --------------------------------------------------- 2. Basis of Presentation - In the parent-company-only financial statements, the Company s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The Company s share of net income of its subsidiaries is included in consolidated income using the equity method. Parent-company-only financial statements should be read in conjunction with the Company s consolidated financial statements. Investment in subsidiaries at December 31, 1998 and 1997 include the net unrealized (depreciation) appreciation in available-for-sale securities held by CCS, of $(190,929) and $134,201 as of December 31, 1998 and 1997, respectively. These amounts have been included in the CTI other stockholders equity amounts. 3. Surplus Debenture Receivable from Subsidiary -------------------------------------------- In 1988, CCS issued a surplus debenture to KC in exchange for $3,000,000 which bears interest at 10 percent per annum. In 1992, the debenture due to KC from CCS was assigned to CTI. Interest and principal payments are subject to approval by the Florida Department of Insurance. On April 1, 1997, CTI forgave $375,000 of its $3,000,000 surplus debenture due to CCS. As a result, CCS increased paid-in-capital by $375,000. As of December 31, 1998, no payments could be made under the terms of the debenture. 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, 1996: Deducted from asset accounts: Allowance for doubtful accounts $ 67,209 $ -0- $ -0- $67,209 $ -0- ========== ========== ========== ========== ========== Deferred income tax valuation allowance . . . . $374,149 321,120 $ -0- $ -0- $ 695,269 ========== ========== ========== ========== ========== For the year ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful accounts . . . . $ -0- $113,120 $ -0- $ -0- $ 113,120 ========== ========== ========== ========== ========== Deferred income tax valuation allowance . . . . $695,269 $ -0- $ -0- $ 397,134 $ 298,135 ========== ========== ========== ========== ========== For the year ended December 31, 1998: Deducted from asset accounts: Allowance for doubtful accounts $ 113,120 -0- $ -0- $ 113,120 $ -0- ========== ========== ========== ========== ========== Deferred income tax valuation allowance . . . . $298,135 $ -0- $168,664 $ -0- $ 466,799 ========== ========== ========== ========== ========== /TABLE EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE CUMBERLAND TECHNOLOGIES, INC. Year Ended December 31 1998 1997 1996 ----------- ---------- --------- Average shares outstanding . 5,447,966 5,449,518 4,026,655 Net effect of dilutive stock options . . . . . . . . . . - - - ----------- ----------- ---------- Totals . . . . . . . . . . . 5,447,996 5,449,518 4,026,655 =========== =========== ========== Net income (loss) . . . . . . (321,409)$ 170,520 $ (582,744) =========== =========== ========== Earnings (loss) per share amount . . . . . . . . . . $ (.06)$ .03 $ (.14) =========== =========== ========== EXHIBIT 22 - SUBSIDIARIES OF THE REGISTRANT CUMBERLAND TECHNOLOGIES, INC. As of December 31, 1998, the subsidiaries of Cumberland Technologies, Inc. were as follows: - Surety Specialists, Inc. - Cumberland Casualty & Surety Company - Official Notary Service of Texas, Inc. - Qualex Consulting Group, Inc. - The Surety Group, Inc. - Associates Acquisition Corp. d/b/a Surety Associates, Inc. EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS CUMBERLAND TECHNOLOGIES, INC. We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-71537) pertaining to the 1991 Stock Option Plan of Cumberland Technologies, Inc. of our report dated March 19, 1999, with respect to the consolidated financial statements and schedules of Cumberland Technologies, Inc. included in the annual report (Form 10-K) for the year ended December 31, 1998. /s/: ERNST & YOUNG LLP March 31, 1999 Tampa, Florida EX-27 2
7 12-MOS DEC-31-1998 DEC-31-1998 2,081,770 860,508 0 576,575 44,427 0 3,987,273 4,202,351 2,306,372 1,246,555 16,345,051 3,220,457 3,749,945 1,114,267 0 2,330,588 0 0 5,763 0 16,345,051 7,533,684 377,218 (437,565) 1,537,040 2,648,074 2,252,195 4,313,278 (321,409) 0 (321,409) 0 0 0 (321,409) (0.06) 0 0 0 0 0 0 0 0
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