UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
---------------
FORM 10-Q/A
[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 consolidated statements of operations
for the three months ended March 31, 2001 and
March 31, 2000 (unaudited) ...............................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 consolidated statements of cash flows
for the three months ended March 31, 2001 and
March 31, 2000 (unaudited) ...............................5
Notes to condensed consolidated financial statements
(unaudited) ...........................................6-13
Item 2. Management's Discussion and Analysis of financial
condition and results of operations ..................14-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk .............................................16
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal proceedings .........................................17
Item 2. Changes in securities .....................................17
Item 3. Defaults upon senior securities ...........................17
Item 4. Submission of matters to a vote of security holders .......17
Item 5. Other information .........................................17
Item 6. Exhibits and Reports of Form 8-k ..........................17
Signatures ................................................18
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 liability ............................. 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 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
----------------------------
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 (UNAUDITED)
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
appreciation of
available-for-sale
securities, net of
income tax ..................
(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 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
----------------------------
Three Months Ended March 31,
2001 2000
----------------------------
Operating activities:
--------------------
Net income ......................................... $ 222,017 $ 438,674
Adjustments to reconcile net income to cash
provided by operating activities:
Accretion 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 on sales of
investments ............................. -- (213,258)
(Increase) decrease in:
Accrued investment income ............... 64,383 (32,920)
Reinsurance recoverable ................. 701,717 102,111
Accounts receivables .................... (429,724) (795,122)
Income tax recoverable .................. (19,000) --
Other assets ............................ (49,166) (58,534)
Increase (decrease) in:
Policy liabilities and accruals ......... (219,510) 588,553
Derivative liability .................... 944,034 --
Ceded reinsurance payable ............... (82,882) 115,716
Accounts payable and other liabilities .. 88,740 --
Income tax payable ...................... -- 70,000
----------- -----------
Net cash provided by operating activities .......... 1,129,582 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
Proceeds from 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 from affiliates ............. (639) (28,502)
----------- -----------
Net cash (used in) financing activities ............ (133,937) (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 CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and notes required
by accounting principles generally accepted in the United States of America
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
months ended March 31, 2001 are not necessarily indicative of the results
that may be expected for any future quarters or the year ending December
31, 2001. For further information, refer to consolidated financial
statements and notes thereto as of and for the years ended December 31,
2000 and 1999, included in the Company's Form 10-K for the year ended
December 31, 2000 as filed with the United States Securities and Exchange
Commission on April 17, 2001.
Reclassifications
-----------------
Certain amounts in the 2000 financial statements have been reclassified to
conform to the 2001 financial statement presentations.
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Investments
-----------
The Components of unrealized appreciation of investments recorded in
stockholders' equity are 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
income taxes ................... $ 8,906 $ 104,485
========= =========
5. Income Taxes
------------
The Company's provision for income taxes for the quarters ended March 31,
2001 and 2000 has been calculated using an effective rate of approximately
33%.
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 March
31, 2001 and December 31, 2000, no payments could be made under the terms
of the debenture.
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
$1,851,490 and $1,851,000 as of March 31, 2001 and December 31, 2000,
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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. Intangibles (continued)
-----------------------
New Accounting Pronouncements
-----------------------------
On June 29, 2001, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations" was approved by the Financial Accounting
Standards Board (FASB). SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. Goodwill and certain intangible assets will remain on the balance
sheet and not be amortized. On an annual basis, and when there is reason to
suspect that their values have been diminished or impaired, these assets
must be tested for impairment, and write-downs may be necessary. The
Company is required to implement SFAS No. 141 on July 1, 2001 and it has
not determined the impact, if any, that this statement will have on its
consolidated financial position or results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this statement. The Company is required to implement
SFAS No. 142 on January 1, 2002 and it has not determined the impact, if
any, that this statement will have on its consolidated financial position
or results of operations.
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 liability for loss
and loss adjustment expenses is 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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. Unearned Premiums
-----------------
Unearned premiums are deferred and amortized on a pro-rated basis.
11. Reinsurance
-----------
The Company assumes and cedes reinsurance and participates in various
pools. The financial statements reflect premiums, benefits and settlement
expenses, and deferred policy acquisition costs, net of reinsurance ceded.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the future policy benefit and claim liability associated with the
reinsured policies.
Accounts recoverable from reinsurers for unpaid losses are presented as an
asset in the accompanying consolidated financial statements.
12. Accounting for Derivative Instruments
-------------------------------------
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
policy provides coverage to the Registered Investment Advisor who writes
insured's investing in mutual funds and other investment instruments. The
loss on any policy is determined by a reduction below cost in the account
of the insured over a five-year period. The identified derivative was
accounted for as an insurance contract within the policy liabilities for
loss and loss adjustment expenses account in the consolidated balance sheet
for periods prior to January 1, 2001.
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 condensed consolidated balance sheet at January
1, 2001. The increase in the derivative liability account in the amount of
$344,034 is included in losses and loss adjustment expenses in the
condensed consolidated statement of operations for the three months period
ended March 31, 2001.
Estimates and assumption 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 affect the amounts
reported and disclosed herein.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
--------------------
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 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 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 CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
Explanatory Note
----------------
This amendment to Form 10-Q has been filed to reflect that the Company has
received the independent valuation report of the value of the derivative
instruments described in Note 12 to the financial statements. The valuation
report indicated a fair value that is consistent with the Company's previously
reported financial results, and the Company's results of operations did not
require any adjustment.
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 operating activities was $1,129,582 and $47,474 for
the three months ended March 31, 2001 and 2000, respectively. Net cash provided
by operating activities is primarily attributed to a decrease in reinsurance
recoverable and an increase in derivative liability, which are offset by an
increase in accounts receivable and a decrease in policy liabilities and
accruals.
Net cash (used in) 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, 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 or 24%; assumed premiums
increased $48,150 or 7% and ceded premiums increased $334,862 or 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 of 2000. Other income increased by $203,024
during the first three months of 2001 when compared to the same period of 2000.
The increase is attributable to the Company's consulting subsidiary earnings.
During the three months ended March 31, 2001, loss and loss adjustment
expenses were $882,392 as compared to $750,096, for the same period of 2000.
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 increase in net premium income.
During the three months ended March 31, 2001, amortization of deferred
policy acquisition costs was $1,096,621 as compared to $886,483 for the same
period 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 increases in salary expenses and legal fees associated with the
Company's 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
calculated using effective rates of approximately 33%.
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 consist of state government obligations and have
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. These risks are 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 approximately $2 million at an average
interest rate of 8.5%. The terms of the note agreements 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. Changes 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: July 30, 2001 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principle Executive Officer)
Date: July 30, 2001 By: /s/ Carol S. Black
--------------------------------------------
Carol S. Black
Secretary and Chief Financial Officer
(Principle Accounting and Financial Officer)