UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 2001.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to .
Commission File No. 0-19727
CUMBERLAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3094503
--------------------------------------------- -----------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
4311 West Waters Avenue, Suite 501
Tampa, Florida 33614
--------------------------------------------- -----------------------
(Address of principal executive office) (Zip code)
(813) 885-2112
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
--------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [x] No [ ]
Applicable Only to Insurers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by a check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [x] No [ ]
Applicable Only to Corporate Issuers
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of March 31, 2001 was 5,597,244 shares.
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
------ ---------------------
Page
----
Item 1. Condensed consolidated balance sheets at
March 31, 2001(unaudited) and December 31, 2000 .......1-2
Condensed unaudited consolidated statements
of operations for the three months ended
March 31, 2001 and March 31, 2000 .......................3
Condensed consolidated statements of
stockholders' equity for the three months ended
March 31, 2001 (unaudited) and for the year
ended December 31, 2000 .................................4
Condensed unaudited consolidated statements of
cash flows for the three months ended March 31, 2001
and March 31, 2000 ......................................5
Notes to condensed unaudited consolidated financial
statements ...........................................6-12
Item 2. Management's Discussion and Analysis of financial
condition and results of operations .................13-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.............................................15
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal proceedings.........................................16
Item 2. Changes in securities.....................................16
Item 3. Defaults upon senior securities...........................16
Item 4. Submission of matters to a vote of security holders.......16
Item 5. Other information.........................................16
Item 6. Exhibits and Reports of Form 8-k..........................16
Signatures................................................17
UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
------ --------------------
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
-------------------------
March 31, December 31,
2001 2000
-------------------------
(unaudited)
Investments:
-----------
Securities available-for-sale at fair value:
Debt securities ............................... $ 7,945,741 $ 7,553,010
Equity securities ............................. 4,197 2,716
Debt securities held-to-maturity at amortized
cost (fair value, 2001 - $1,232,013
2000 - $1,227,130) ............................ 1,224,214 1,223,593
Mortgage loans on real estate, at unpaid
principal ..................................... 741,747 742,068
Short-term investments .......................... 433,993 433,993
----------- -----------
Total investments ............................. 10,349,892 9,955,380
Cash and cash equivalents .......................... 1,195,347 693,778
Accrued investment income .......................... 120,628 185,011
Reinsurance recoverable ............................ 4,208,726 4,910,443
Accounts receivable:
-------------------
Nonaffiliate less allowance for doubtful
accounts of $13,750............................ 4,250,930 3,821,206
Affiliate ....................................... 437,636 436,997
Income tax recoverable ............................. 186,588 167,588
Deferred income tax asset .......................... 175,234 175,234
Deferred policy acquisition costs .................. 2,073,219 1,955,018
Intangibles, net ................................... 1,079,163 1,115,316
Other investment ................................... 595,496 582,532
Other assets ....................................... 360,248 311,082
----------- -----------
$25,033,107 $24,309,585
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------
March 31, December 31,
2001 2000
-----------------------------
(unaudited)
Policy liabilities and accruals:
-------------------------------
Loss and loss adjustment expenses ............ $ 4,694,374 $ 5,185,626
Unearned premiums ............................ 6,047,266 5,775,524
Ceded reinsurance payable ....................... 638,631 721,513
Derivative instruments .......................... 944,034 --
Accounts payable and other liabilities .......... 2,726,488 2,637,748
Debt:
----
Nonaffiliate ................................. 963,885 1,102,683
Affiliate .................................... 1,000,000 1,000,000
------------ ------------
Total liabilities ............................ 17,014,678 16,423,094
------------ ------------
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; 5,915,356 and 5,871,356
shares issued, respectively .............. 5,916 5,872
Capital in excess of par value ............... 7,270,316 7,264,860
Accumulated other comprehensive income........ 8,906 104,485
Retained earnings............................. 997,010 774,993
------------ ------------
8,282,148 8,150,210
Less treasury stock, at cost, 318,112 shares (263,719) (263,719)
------------ ------------
Total stockholders' equity ................... 8,018,429 7,886,491
------------ ------------
$ 25,033,107 $24,309,585
============ ============
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------
Three Months Ended March 31,
2001 2000
-----------------------------
Revenue:
-------
Direct premiums earned ......................... $ 3,385,153 $ 2,724,631
Reinsurance premiums assumed ................... 751,015 702,865
Less reinsurance ceded ......................... (1,051,471) (716,609)
----------- -----------
Net premium income ............................. 3,084,697 2,710,887
Net investment income .......................... 155,934 139,570
Net realized investment gains................... -- 213,258
Other income ................................... 599,438 396,414
----------- -----------
Total revenue .................................. 3,840,069 3,460,129
Benefits and Expenses:
---------------------
Losses and loss adjustment expenses ............ 882,392 750,096
Amortization of deferred policy acquisition
costs ...................................... 1,096,621 886,483
Operating expenses ............................. 1,466,300 1,109,983
Interest expense ............................... 62,319 52,802
----------- -----------
Total expenses ................................. 3,507,632 2,799,364
Income before income tax expense ............... 332,437 660,765
Income tax expense ............................. 110,420 222,091
----------- -----------
Net income...................................... $ 222,017 $ 438,674
=========== ===========
Weighted average number of shares
outstanding ................................ 5,564,488 5,447,966
=========== ===========
Net income per share - basic ................... $ 0.04 $ 0.08
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Capital in Other Retained
Common Shares Excess of Comprehensive Earnings Total
-------------------- Par Income (Accumulated Treasury Stockholders'
Stock Amount Value (Loss) Deficit) Stock Equity
----- ------ --------- --------- -------- ----- ------
Balance at January 1, 2000 .. 5,815,356 $ 5,816 $ 7,257,916 $ (40,897) $(266,756) $ (263,719) $ 6,692,360
Exercise of 56,000 shares
under 1991 stock
option plan........... 56,000 56 6,944 7,000
Net increase in unrealized
depreciation of
available-for-sale
securities, net of
income tax ........... 145,382 145,382
Net income ............... 1,041,749 1,041,749
-----------
Comprehensive income ..... 1,187,131
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 5,871,356 5,872 7,264,860 104,485 774,993 (263,719) 7,886,491
Exercise of 44,000 shares
under 1991 stock
option plan........... 44,000 44 5,456 5,500
Net (decrease) in
unrealized depreciation
available-for-sale
securities ........... (95,579) (95,579)
Net income ............... 222,017 222,017
-----------
Comprehensive income ..... 126,438
----------- ----------- ------------ ----------- ----------- ----------- -----------
Balance at March 31, 2001 ... 5,915,356 $ 5,916 $ 7,270,316 $ 8,906 $997,010 $ (263,719) $ 8,018,429
=========== =========== ============ =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------
Three Months Ended March 31,
2001 2000
----------------------------
Operating activities:
--------------------
Net income.......................................... $ 222,017 $ 438,674
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
(Accretion) amortization of investment
discounts and premiums .................. (8,979) (125)
Policy acquisition costs amortized .......... 1,096,621 886,483
Policy acquisition costs deferred ........... (1,214,822) (1,094,986)
Amortization ................................ 36,153 40,882
Net realized (gains) losses on sales of
investments ............................. -- (213,258)
(Increase) decrease in:
Accrued investment income ............... 64,383 (32,920)
Reinsurance recoverable ................. 701,717 102,111
Accounts receivables .................... (430,363) (795,122)
Income tax recoverable .................. (19,000) --
Other assets ............................ (49,166) (58,534)
Increase (decrease) in:
Policy liabilities and accruals ......... 724,524 588,553
Ceded reinsurance payable ............... (82,882) 115,716
Accounts payable and other liabilities .. 88,740
Income tax payable ...................... -- 70,000
----------- -----------
Net cash provided by (used in) operating activities 1,128,943 47,474
Investing activities:
--------------------
Securities available-for-sale:
Purchases - fixed maturities ................ (481,433) (3,795,509)
Proceed from sales - fixed maturities ....... -- 1,999,256
Purchases - equities ........................ -- 354,952
Securities held-to-maturity:
Purchases- fixed maturities ................. -- 1,500,000
Payments on mortgage loan .......................... 321 298
Other investment ................................... (12,964) (4,781)
---------- ----------
Net cash (used in) provided by investing activities (494,076) 54,216
Financing activities:
--------------------
Payments on debt, affiliate and
non-affiliate ................................... (138,798) (12,994)
Stock options exercised ............................ 5,500 --
Net change in advances to (from) affiliates ........ -- (28,502)
----------- -----------
Net cash (used in ) provided by financing activities (133,298) (41,496)
----------- -----------
Increase in cash and cash equivalents .............. 501,569 60,194
Cash and cash equivalents, beginning of period ..... 693,778 2,000,147
----------- -----------
Cash and cash equivalents, end of period ........... $ 1,195,347 $ 2,060,341
=========== ===========
Supplemental cash flows disclosure:
----------------------------------
Cash paid for interest ............................. $ 24,498 $ 52,802
----------- -----------
Cash paid for income taxes ......................... $ -- $ 144,650
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
1. Ownership and Organization
--------------------------
Cumberland Technologies, Inc. ("CTI" or the "Company") f/k/a Cumberland
Holdings, Inc., a Florida corporation, was formed on November 18, 1991,
to be a Holding company and a wholly-owned subsidiary of Kimmins Corp.
("KC"). Effective October 1, 1992, KC contributed all of the
outstanding common stock of two of its other wholly-owned subsidiaries,
Cumberland Casualty & Surety Company ("CCS") and Surety Specialists,
Inc. ("SSI") to CTI. KC then distributed to its stockholders CTI's
common stock on the basis of one share of common stock of CTI for each
five shares of KC common stock and Class B common stock owned (the
Distribution). Effective January 30, 1997, Cumberland Holdings, Inc.
changed its name to Cumberland Technologies, Inc. CTI conducts its
business through five subsidiaries. CCS, a Florida corporation formed
in May 1988, provides underwriting for specialty surety and performance
and payment bonds for contractors. The surety services provided include
direct surety and to a lesser extent, assumed reinsurance. SSI, a
Florida corporation formed in August 1988, is a general lines agency
which operates as an independent agent. The Surety Group ("SG"), a
Georgia corporation, and Associates Acquisition Corp. d/b/a Surety
Associates ("SA"), a South Carolina corporation, purchased in February
and July 1995, respectively, are general lines agencies which operate
as independent agencies. Official Notary Service of Texas, Inc.
("ONS"), a Texas corporation formed in February 1994, is an inactive
corporation. Qualex Consulting Group, Inc. ("Qualex"), a Florida
corporation formed in November 1994, provides claim and contracting
consulting services. CTI and its subsidiaries are referred to herein as
the "Company."
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of CTI and
its wholly owned subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation.
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the
United States of America which, as to the subsidiary insurance company,
differ from statutory accounting practices prescribed or permitted by
regulatory authorities. The significant accounting policies followed by
CTI and subsidiaries that materially affect the consolidated financial
statements are summarized in this note.
Reclassifications
-----------------
Certain amounts in the 2000 financial statements have been reclassified
to conform to the 2001 financial statement presentations.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more
information becomes known which would affect the amounts reported and
disclosed herein.
3. Earnings Per Share
------------------
Earnings per share for the three months ended March 31, 2001 and 2000
is based on the weighted average number of shares outstanding, adjusted
for the dilutive effect of stock options, and is the same on both a
basic and fully diluted basis.
4. Investments
-----------
Change in unrealized appreciation (depreciation): The increase
(decrease) in unrealized appreciation of investments recorded in
stockholders' equity was as follows:
Three Months Twelve Months
Ended Ended
March 31, 2001 December 31, 2000
----------------------------------
Fixed maturities, net of
income tax ......................... $ 29,547 $ 126,607
Equities ............................ (20,641) (22,122)
--------- ---------
Total change in unrealized
appreciation, net of taxes ......... $ 8,906 $ 104,485
========= =========
5. Income Taxes
------------
The Company's provision for income taxes for the quarter ended March
31, 2001 has been calculated using an effective rate of 34%.
6. Related Party Transactions
--------------------------
In 1988, CCS issued a surplus debenture to KC in exchange for
$3,000,000 which bears interest at 10 percent per annum. Interest and
principal payments are subject to approval by the Florida Department of
Insurance. On April 1, 1997, CTI forgave $375,000 of its $3,000,000
surplus debenture due to CCS. As a result, CCS increased paid in
capital by $375,000. On June 30, 1999, CTI forgave $576,266 of its
$2,625,000 surplus debenture due from CCS. As a result, CCS increased
paid-in capital to $1,000,000. As of December 31, 2000, no payments
could be made under the terms of the debenture.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Related Party Transactions (continued)
--------------------------------------
KC and SSI entered into an agreement with an independent contractor,
AEC, on August 16, 1989 on a construction contract with the United
States Navy (the Navy). Pursuant to this contract, the Company, as
surety, executed and delivered to the Navy certain performance and
payment bonds (the Bonds). At the time that the Bonds were issued, KC
entered into an indemnification agreement with the Company, whereby KC
indemnified the Company from any and all losses, costs, and expenses
incurred related to the Bonds. In 1991, the Navy default and
terminated AEC on the contract. The contract has been in litigation
since the termination in 1991 generating a subrogation receivable in
the amount of approximately $1,851,000 and $1,768,000 as of December
31, 2000, and 1999, respectively. In the event that the Company is
unsuccessful in its litigation activities with the Navy, management of
the Company believes that KC will reimburse the Company for the losses
and expenses incurred related to the Bonds.
7. Notes Payable
-------------
Affiliate
---------
Effective November 10, 1998, CTI entered into a $1,000,000 convertible
term note agreement with TransCor Waste Services, Inc., a subsidiary of
KC. The note is due November 10, 2001 and bears interest at 10%. The
lender may convert the principal amount of the note or a portion
thereof into a common stock at $3.00 per share subsequent to a
six-month anniversary and prior to the maturity date.
Nonaffiliate
------------
In connection with the acquisition of certain agencies during 1995, the
Company entered into two notes payable with the agencies previous
owners. One note is due March 1, 2002 and bears interest at 8% through
February 28, 2001 and 10% thereafter. Principal payments of $150,000
are due annually beginning March 1, 2000. The other is due June 30,
2010 and bears interest at 9%. Principal and interest payments of
$11,104 are due monthly beginning April 1, 1997.
8. Intangibles
-----------
Intangible assets are stated at cost and principally represent
purchased customer accounts, noncompete agreements, purchased contract
agreements, and the excess of costs over the fair value of identifiable
net assets acquired ("Goodwill"). Goodwill is amortized on a
straight-line basis over 15 years and all other intangible assets are
amortized on a straight-line basis over the related estimated lives and
contract periods, which range from 3 to 15 years. Purchased customer
accounts are records and files obtained from acquired businesses that
contain information on insurance policies and the related insured
parties that is essential to policy renewals.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Intangibles (continued)
-----------------------
The carrying value of Goodwill and other intangible assets are reviewed
periodically for impairment. If this review indicates that the
intangible assets will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the Goodwill and
other intangible assets will be reduced by the estimated shortfall of
cash flows.
9. Loss and Loss Adjustment Expenses
---------------------------------
The liability for unpaid claims including incurred but not reported
losses is based on the estimated ultimate cost of settling the claim
(including the effects of inflation and other societal and economic
factors), using past experience adjusted for current trends and any
other factors that would modify past experience. These estimates are
subject to the effects of trends in loss severity and frequency.
Although considerable variability is inherent in such estimates,
management believes that the reserves for loss and loss adjustment
expenses are adequate. The estimates are continually reviewed and
adjusted as necessary as experience develops or new information becomes
known. Such adjustments are included in current operations. A liability
for all costs expected to be incurred in connection with the settlement
of unpaid claims (loss adjustment expense) is accrued when the related
liability for unpaid loss is accrued. Loss adjustment expenses include
costs associated directly with specific claims paid or in the process
of settlement, such as legal and adjusters' fees. Loss adjustment
expenses also include other costs that cannot be associated with
specific claims but are related to claims paid or in the process of
settlement, such as internal costs of the claims function.
The Company does not discount its reserves for losses and loss
adjustment expenses. The Company writes primarily surety contracts
which are of short duration.
The Company does not consider investment income in determining if a
premium deficiency relating to short duration contracts exists.
10. Unearned Premiums
-----------------
Unearned premiums are calculated using the monthly pro rata basis for
miscellaneous bonds and contract completion date or anticipated
contract completion date for contract bonds.
11. Reinsurance
-----------
The Company assumes and cedes reinsurance and participates in various
pools. The financial statements reflect premiums, benefits and
settlement expenses, and deferred policy acquisition costs, net of
reinsurance ceded. Amounts recoverable from reinsurers are estimated in
a manner consistent with the future policy benefit and claim liability
associated with the reinsured policies.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Reinsurance (continued)
-----------------------
Accounts recoverable from reinsurers for unpaid losses are presented as
an asset in the accompanying consolidated financial statements.
12. New Accounting Standards
------------------------
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities is effective for all fiscal years beginning after June 15,
2000. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, certain contracts that were not formerly considered
derivatives now meet the definition of a derivative. The Company
identified one product that meets the definition of a derivative
instrument as defined in SFAS No. 133. The identified derivative was
formerly accounted for as an insurance contract within the policy
liabilities for loss and loss adjustment expenses account in the
consolidated balance sheet. Effective January 1, 2001 the Company
adopted SFAS No. 133. The transition adjustment of $600,000 was
reclassified from the policy liabilities for loss and loss adjustment
expenses account to a liability for derivative instruments account on
the consolidated balance sheet at March 31, 2001. The increase in the
derivative instruments account in the amount of $344,034 is included in
losses and loss adjustment expenses on the March 31, 2001 income
statement. Estimates and assumptions were used in determining the
valuation of derivative instruments. Such estimates and assumptions
could change in the future as more information becomes known which
would effect the amounts reported and disclosed herein.
In assessing the value of the derivative instruments, the Company
estimated the cash flows from the derivative based on the data
obtained from its insurance agency regarding the composition of the
insured portfolios and discount factors obtained from its actuaries
which take into account lapse rates and the probability of claims
under the policy. The Company applied these factors to market values
of the insured portfolio's as of December 31, 2000, as adjusted for
additions to the portfolio during the first quarter of 2001. The
Company is in the process of obtaining an independent appraisal of the
derivative instruments as of March 31, 2001. The appraisal may
indicate that the value of the derivative instruments is greater than
the amount recorded in the March 31 financial statements, and require
the Company to record an additional loss to reflect that value.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
13. Statutory Accounting Practices
------------------------------
CCS is domiciled in Florida and prepares its statutory-basis
consolidated financial statements in accordance with accounting
practices prescribed or permitted by the Florida Insurance Department.
"Prescribed" statutory accounting practices include state laws,
regulations, and general administrative rules, as well as a variety of
publications of the National Association of Insurance Commissioners
("NAIC"). "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within
a state, and may change in the future. In 1998, the National
Association of Insurance Commissioner adopted the Codification of
Statutory Accounting Principles (Codification) for insurance
companies. Codification, which is intended to standardize regulatory
accounting and reporting for the insurance industry, is effective
January 1, 2001. The Company implemented codification at January 1,
2001. On a statutory accounting basis, CCS's underwriting operations
reported income net of taxes of ($191,483) for the three months ended
March 31, 2001 and $511,624 for the year ended December 31, 2000.
Statutory surplus (shareholders' equity) of these operations was
$5,586,139 and $5,441,336 as of March 31, 2001 and December 31, 2000,
respectively.
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. In the Company's case, those changes are principally
comprised of our reported net income and changes in the unrealized
appreciation and depreciation of the Company's available-for-sale
securities. SFAS No. 130 requires that the Company report all
components of comprehensive income. The following summaries present the
components of our comprehensive income, other than net income, for the
three months ended March 31, 2001 and March 31, 2000, respectively.
Consolidated Statements
of Comprehensive Income
------------------------
Three Months Ended
March 31,
2001 2000
------------------------
Net income .................................... $222,017 $438,674
Other comprehensive income:
Unrealized (depreciation) appreciation of
available-for-sale securities arising
during period ............................. (95,579) 38,007
Less: reclassification adjustment for
gains included in net income .......... -- 213,308
-------- --------
Comprehensive income .......................... $126,438 $263,373
======== ========
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Forward-looking Statement Disclosure
------------------------------------
All statements, other than statements of historical facts, included or
incorporated by reference in this Form 10-Q which address activities, events or
developments which the Company expects or anticipates will or may occur in the
future, including statements regarding the Company's competitive position,
changes in business strategy or plans, the availability and price of
reinsurance, the Company's ability to pass on price increases, plans to install
the Bond-Pro(R) program in independent insurance agencies, the impact of
insurance laws and regulation, the availability of financing, reliance on-key
management personnel, ability to manage growth, the Company's expectations
regarding the adequacy of current financing arrangements, product demand and
market growth, and other statements regarding future plans and strategies,
anticipated events or trends similar expressions concerning matters that are not
historical facts are forward-looking statements. These statements are based on
certain assumptions and analysis made by the Company in light of its experience
and its perception of historical trends, current conditions and expected future
developments as well as factors it believes are appropriate in the
circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties which could cause actual results to differ significantly and
materially from past results and from the Company's expectations. All of the
forward-looking statements made in this Form 10-Q are qualified by these
cautionary statements and there can be no assurance that the actual results or
development anticipated by the Company will be realized or, even if
substantially realized that they will have the expected consequences to or
effects on the Company or its business or operations.
The Company's independent accountants have not performed an interim review of
the financial statements included in this Report. The Company intends to request
that the accountants complete such a review once an independent appraisal report
is obtained on the derivative instruments. There can be no assurance that the
review will not cause the Company to adjust its financial statements as of March
31, 2001, for changes in the value of the derivative, or for other items.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The capacity of a surety company to underwrite insurance and reinsurance is
based on maintaining liquidity and capital resources sufficient to pay claims
and expenses as they become due. Based on standards established by the National
Association of Insurance Commissioners (NAIC) and promulgated by the Florida
Department of Insurance, the Company is permitted to write net premiums up to an
amount equal to three times its statutory surplus, or approximately $16,300,000
at December 31, 2000. Statutory guidelines impose an additional limitation on
increasing net written premiums to no more than 33% of prior year's net written
premiums. Under these guidelines, the Company could increase net written
premiums by approximately $4,200,000 in the year 2001 subject to risk-based
capital limitations.
At March 31, 2001, $25,033,107 of the Company's total assets calculated
based on generally accepted accounting principles were comprised as follows: 47
percent in cash and investments (including accrued investment income), 36
percent in receivables and reinsurance recoverables, 13 percent in intangibles
and deferred policy acquisition costs and 4 percent in other assets.
The Company follows investment guidelines that are intended to provide an
acceptable return on investment while maintaining sufficient liquidity to meet
its obligations.
Net cash provided by (used in) operating activities was $1,128,943 and
$47,474 for the three months ended March 31, 2001 and 2000, respectively. Net
cash provided by operating activities is attributed to a decrease in policy
liabilities and accruals which is offset by an increase in reinsurance payables
and recoverables, accounts receivable and depreciation.
Net cash provided by investing activities was ($494,076) and $54,216 for
the three months ended March 31, 2001, and 2000, respectively. Investing
activities consist of purchases and sales and maturities of investments.
As of March 31, 2001 the Company had sufficient capital resources to fund
foreseeable future requirements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND 2000
--------------------------------------------------------
During the three months ended March 31, 2001, net premium income totaled
$3,084,697 representing a net increase of 14 percent from that of the same
period in 2000 ($2,710,887). The increase is attributed to the marketing
direction of the Company, which is to penetrate the direct market while
decreasing the volume of reinsurance premiums assumed through Pooling
Agreements. During the first three months of 2001 as compared to the same period
in 2000, direct premiums earned increased $660,522 (24%); assumed premiums
increased $48,150 (7%) and ceded premiums increased $334,862 (47%). Ceded
premiums increase as the volume of direct and assumed premiums increased based
on their relationship under the Company's reinsurance treaties.
Net investment income for the first quarter of 2001 remained consistent
when compared to the same period in the first quarter of 2000. Other income
increased by $203,024 during the first three months of 2001 when compared to
2000. The increase is attributable to subsidiary company's earnings.
During the three months ended March 31, 2001 and 2000, loss and loss
adjustment expenses increased to $882,392 from $750,096, respectively. Incurred
loss and loss adjustment expenses represent the net reserve increase after
deduction of paid claims and fluctuates based on premiums written and earned as
well as claims incurred and paid. The increase of $132,296 is consistent with
the flow of premiums when comparing the first quarter of 2001 to the same period
of 2000.
During the three months ended March 31, 2001 and 2000, amortization of
deferred policy acquisition costs increased to $1,096,621 in 2001 from $886,483
in 2000. The amortization of deferred policy acquisition costs increase is
attributed to the increase in premiums written and earned.
Operating expenses increased by $356,317 or 32% for the three months ended
March 31, 2001 when compared to the same period in 2000. The increase is
attributed to salary expenses $232,300; legal fees $73,000; travel expenses
$26,100; rent $11,700; taxes, license and fees $6,900 and other miscellaneous
expenses of $6,300. The increases are attributed to growth.
Interest expense is attributed to the interest on notes payable to
affiliates.
Income taxes in the three months ending March 31, 2001 and 2000 were
included based on the effective rate of 34%.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
------ ABOUT MARKET RISK
-----------------
The Company had approximately $10.3 million of investments as of March 31,
2001. These investments largely consisted of state government obligations and
had either variable rates of interest or stated interest rates ranging from
4.75% to 8.5%. The Company's investments are exposed to certain market risks
inherent with such assets. This risk is mitigated by the Company's policy of
investing in securities with high credit ratings and investing through major
financial institutions with high credit ratings.
The Company has notes payable of $2 million at an average interest rate of
8.5%. The terms of the note agreement are such that pre-payment of such debt may
not be advantageous to the Company in the event that funds may be available to
the Company at a lower rate of interest.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings
-----------------
None
Item 2. Changed in securities
---------------------
None
Item 3. Defaults upon senior securities
-------------------------------
None
Item 4. Submission of matters to a vote of security holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and reports on Form 8-K
--------------------------------
(a) None
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUMBERLAND TECHNOLOGIES, INC.
-----------------------------
Date: May 22, 2001 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principle Executive Officer)
Date: May 22, 2001 By: /s/ Carol S. Black
--------------------------------------------
Carol S. Black
Secretary and Chief Financial Officer
(Principle Accounting and Financial Officer)