UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[Mark One]
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 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 Corporate Issuers
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of September 30, 2001 was 5,597,244 shares.
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
------ ---------------------
Page
----
Item 1. Condensed (unaudited) consolidated balance sheets
at September 30, 2001 and December 31, 2000 ..............1-2
Condensed (unaudited) consolidated statements of
operations for the nine months ended September 30, 2001
and September 30, 2000 .....................................3
Condensed (unaudited) consolidated statements of
operations for the three months ended September 30, 2001
and September 30, 2000 .....................................4
Condensed consolidated statements of stockholders' equity
for the nine months ended September 30, 2001 (unaudited)
and for the year ended December 31, 2000....................5
Condensed (unaudited) consolidated statements of cash flows
for the nine months ended September 30, 2001 and
September 30, 2000..........................................6
Notes to condensed (unaudited) consolidated financial
statements ..............................................7-15
Item 2. Management's discussion and analysis of financial condition
and results of operations...............................16-18
Item 3. Quantitative and qualitative disclosures about
market risk ...............................................19
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal proceedings ...........................................20
Item 2. Changes in securities .......................................20
Item 3. Defaults upon senior securities..............................20
Item 4. Submission of matters to a vote of security holders..........20
Item 5. Other information............................................20
Item 6. Exhibits and reports of form 8-k.............................20
Signatures...................................................21
UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
------- --------------------
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
------
--------------------------
September 30, December 31,
2001 2000
--------------------------
Investments:
-----------
Securities available-for-sale at fair value:
Debt securities ............................... $10,059,349 $ 7,553,010
Equity securities ............................. -- 2,716
Debt securities held-to-maturity at amortized
cost (fair value, 2001 - $375,431
2000 - $1,227,130) ............................ 359,411 1,223,593
Mortgage loans on real estate, at unpaid
principal ..................................... 41,086 742,068
Short-term investments .......................... 433,993 433,993
----------- -----------
Total investments ............................. 10,893,839 9,955,380
Cash and cash equivalents .......................... 1,505,076 693,778
Accrued investment income .......................... 163,533 185,011
Reinsurance recoverable ............................ 4,542,999 4,910,443
Accounts receivable:
-------------------
Nonaffiliate less allowance for doubtful
accounts of $13,750 ........................... 4,439,194 3,821,206
Affiliate ....................................... 476,835 436,997
Income tax recoverable ............................. 142,160 167,588
Deferred income tax asset .......................... 175,234 175,234
Deferred policy acquisition costs .................. 2,077,720 1,955,018
Intangibles, net ................................... 1,006,858 1,115,316
Other investment ................................... 609,586 582,532
Other assets ....................................... 459,971 311,082
----------- -----------
$26,493,005 $24,309,585
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
----------------------------
September 30, December 31,
2001 2000
----------------------------
Policy liabilities and accruals:
-------------------------------
Loss and loss adjustment expenses ............. $ 3,758,295 $ 5,185,626
Unearned premiums ............................. 6,151,499 5,775,524
Ceded reinsurance payable ........................ 1,583,987 721,513
Derivative liability ............................. 1,773,914 --
Accounts payable and other liabilities ........... 2,982,689 2,637,748
Debt:
----
Nonaffiliate .................................. 945,884 1,102,683
Affiliate ..................................... 1,000,000 1,000,000
------------ ------------
Total liabilities ............................. 18,196,268 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 ........ 461,935 104,485
Retained earnings ............................. 822,289 774,993
------------ ------------
8,560,456 8,150,210
Less treasury stock, at cost, 318,612 shares . (263,719) (263,719)
------------ ------------
Total stockholders' equity .................... 8,296,737 7,886,491
------------ ------------
$ 26,493,005 $ 24,309,585
============ ============
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------
Nine Months Ended September 30,
2001 2000
-------------------------------
Revenue:
-------
Direct premiums earned ......................... $ 10,621,463 $ 9,122,315
Reinsurance premiums assumed ................... 2,674,256 1,836,007
Less reinsurance ceded ......................... (3,432,921) (2,395,335)
------------ ------------
Net premium income ............................. 9,862,798 8,562,987
Net investment income .......................... 462,343 429,777
Net realized investment (losses) gains ......... (10,012) 270,067
Other income ................................... 1,371,117 1,449,951
------------ ------------
Total revenue .................................. 11,686,246 10,712,782
------------ ------------
Benefits and Expenses:
---------------------
Losses and loss adjustment expenses ............ 3,485,909 2,391,073
Amortization of deferred policy acquisition
costs ...................................... 3,130,794 2,719,007
Operating expenses ............................. 4,912,356 3,919,119
Interest expense ............................... 126,144 176,850
------------ ------------
Total expenses ................................. 11,655,203 9,206,049
------------ ------------
Income before income tax (benefit)/expense...... 31,043 1,506,733
Income tax (benefit)/expense ................... (16,253) 505,000
------------ ------------
Net income ..................................... $ 47,296 $ 1,001,733
============ ============
Weighted average number of shares
outstanding - basic ........................ 5,586,445 5,520,888
============ ============
Net income per share - basic ................... $ 0.01 $ 0.18
============ ============
Weighted average number of shares
outstanding - diluted ...................... 5,666,744 5,602,688
============ ============
Net income per share - diluted ................. $ 0.01 $ 0.18
============ ============
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------
Three Months Ended September 30,
2001 2000
--------------------------------
Revenue:
-------
Direct premiums earned ......................... $ 3,662,601 $ 3,304,403
Reinsurance premiums assumed ................... 1,142,481 621,951
Less reinsurance ceded ......................... (1,201,918) (871,732)
----------- -----------
Net premium income ............................. 3,603,164 3,054,622
Net investment income .......................... 162,748 157,843
Net realized investment gains .................. 6,428 --
Other income ................................... 441,332 545,921
----------- -----------
Total revenue .................................. 4,213,672 3,758,386
----------- -----------
Benefits and Expenses:
---------------------
Losses and loss adjustment expenses ............ 1,654,168 984,854
Amortization of deferred policy acquisition
costs ...................................... 1,235,126 1,029,749
Operating expenses ............................. 1,618,611 1,366,307
Interest expense ............................... 38,164 73,239
----------- -----------
Total expenses ................................. 4,546,069 3,454,149
----------- -----------
Income before income tax (benefit) expense ..... (332,397) 304,237
Income (loss) tax (benefit) expense ............ (131,079) 102,909
----------- -----------
Net income (loss) .............................. $ (201,318) $ 201,328
=========== ===========
Weighted average number of shares
outstanding - basic ........................ 5,597,244 5,553,244
=========== ===========
Net income (loss) per share - basic ............ $ (.04) $ 0.04
=========== ===========
Weighted average number of share
outstanding - diluted ...................... 5,666,744 5,635,044
=========== ===========
Net income (loss) per share - diluted .......... $ (.04) $ 0.04
=========== ===========
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 .......................... 56,000 56 6,944 7,000
plan
Net increase in unrealized
appreciation 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 increase in unrealized
appreciation of
available-for-sale
securities, net of
income tax ..................... 357,450 357,450
Net income ......................... 47,296 47,296
----------
Comprehensive income ............... 404,746
----------- ----------- ----------- ----------- ----------- ----------- ----------
Balance at September 30, 2001 ........ 5,915,356 $ 5,916 $7,270,316 $461,935 $822,289 $ (263,719) $8,296,737
=========== =========== =========== =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------
Nine Months Ended September 30,
2001 2000
-------------------------------
Operating activities:
--------------------
Net income ......................................... $ 47,296 $ 1,001,733
Adjustments to reconcile net income to cash
provided by operating activities:
Accretion of investment discounts ........... (21,342) (12,367)
Policy acquisition costs amortized .......... 3,567,924 2,719,007
Policy acquisition costs deferred ........... (3,690,626) (3,142,503)
Amortization ................................ 108,458 115,166
Net realized losses (gains) on sales of
investments ............................. 10,012 (270,067)
(Increase) decrease in:
Accrued investment income ............... 21,478 (49,074)
Reinsurance recoverable ................. 367,444 (362,215)
Accounts receivable ..................... (617,988) (1,149,086)
Income tax recoverable .................. 25,428 --
Other assets ............................ (148,889) 18,373
Increase (decrease) in:
Policy liabilities and accruals ......... (351,356) 2,003,045
Derivative liability .................... 1,773,914 --
Ceded reinsurance payable ............... 862,474 540,705
Accounts payable and other liabilities .. 344,941 --
Income tax payable ...................... -- 193,391
----------- -----------
Net cash provided by operating activities .......... 2,299,168 1,606,108
Investing activities:
--------------------
Securities available-for-sale:
Purchases - fixed maturities ................ (2,940,621) (6,595,488)
Proceed from sales - fixed maturities ....... 804,960 3,098,991
Proceeds from investment settlement ......... -- 228,875
Purchases - equities ........................ -- 354,956
Securities held-to-maturity:
Purchases- fixed maturities ................. -- 1,500,000
Maturities .................................. 865,000 --
Proceeds from mortgage loan ........................ 982 911
Purchase - short-term assets ....................... --
(3,754)
Increase in other investment ....................... (27,054) (21,257)
----------- -----------
Net cash used in investing activities .............. (1,296,733) (1,436,766)
Financing activities:
--------------------
Payments on debt, affiliate and
non-affiliate ................................... (156,799) (164,906)
Stock options exercised ............................ 5,500 7,000
Net change in advances from affiliates ............. (39,838) (33,738)
----------- -----------
Net cash used in financing activities .............. (191,137) (191,644)
----------- -----------
Increase (decrease) in cash and cash equivalents ... 811,298 (22,302)
Cash and cash equivalents, beginning of period ..... 693,778 2,000,147
----------- -----------
Cash and cash equivalents, end of period ........... $ 1,505,076 $ 1,977,845
=========== ===========
Supplemental cash flows disclosure:
----------------------------------
Cash paid for interest ............................. $ 30,724 $ 78,317
----------- -----------
Cash (received) paid for income taxes .............. $ (166,681) $ 304,168
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity 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
and nine month periods ended September 30, 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 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. 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 and nine month periods September 30, 2001
and 2000 is based on the weighted average number of shares outstanding,
adjusted for the dilutive effect of stock options.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. Investments
-----------
The components of unrealized appreciation (depreciation) of investments
recorded in stockholders' equity are as follows:
September 30, December 31,
2001 2000
------------ -------------
Fixed maturities, net of
income tax ............................... $ 461,935 $ 126,607
Equities ................................... -- (22,122)
--------- ---------
Total unrealized appreciation,
net of income taxes ...................... $ 461,935 $ 104,485
========= =========
5. Income Taxes
------------
The Company's provision for income taxes for the nine-month periods ended
September 30, 2001 and 2000, respectively, was 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
September 30, 2001, 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 defaulted 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 as of September 30, 2001 and December 31, 2000. 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 nine-month anniversary and prior
to the maturity date. An amendment to the note extending the due date of
the note to November 10, 2002 was executed on October 23, 2001.
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 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.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 provides accounting and
reporting standards related to obligations associated with the retirement
of tangible long-lived assets. SFAS 143 is effective on January 1, 2003,
however, earlier application is encouraged. The Company has not evaluated
the effect, if any, that the adoption of SFAS 143 will have on the
Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 provides
accounting and reporting standards for the impairment or disposal of
long-lived assets. SFAS 144 supersedes SFAS 121 but retains SFAS 121's
fundamental provisions for (a) recognition/measurement of impairment of
long-lived assets to be held and used and (b) measurement of long-lived
assets to be disposed of by sale. SFAS 144 also supersedes the
accounting/reporting provisions of Accounting Principles Board Opinion No.
30 ("APB 30") for segments of a business to be disposed of but retains APB
30's requirement to report discontinued operations separately from
continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale.
SFAS 144 is effective on January 1, 2002, however, earlier application is
encouraged. The Company has not evaluated the effect, if any, that the
adoption of SFAS 144 will have on the Company's consolidated financial
statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
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 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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12. Accounting for Derivatives
--------------------------
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
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
$1,173,914 is included in losses and loss adjustment expenses in the
condensed consolidated statement of operations for the nine-month period
ended September 30, 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.
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 Commissioners 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 income taxes of $5,143 for the nine months ended
September 30, 2001 and $511,624 for the year ended December 31, 2000.
Statutory surplus (shareholders' equity) of these operations was $6,273,570
as of September 30, 2001.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 for the nine months ended
September 30, 2001 and September 30, 2000, respectively.
Consolidated Statements
of Comprehensive Income
-------------------------------
Nine Months Ended September 30,
2001 2000
-------------------------------
Net income ............................... $ 47,296 $ 1,001,733
Other comprehensive income:
Unrealized appreciation (depreciation)
of available-for-sale securities
arising during period ................ 326,096 (144,296)
Reclassification adjustment for
losses included in net income ........ 31,354 7,000
----------- -----------
Comprehensive income ..................... $ 404,746 $ 864,437
=========== ===========
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.
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, 2001. 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 September 30, 2001, $26,493,005 of the Company's total assets,
calculated based on accounting principles generally accepted in the United
States of America, were comprised as follows: 47 percent in cash and investments
(including accrued investment income), 36 percent in receivables and reinsurance
recoverables, 12 percent in intangibles and deferred policy acquisition costs
and 5 percent in other assets.
The Company follows investment guidelines that are intended to provide an
acceptable return on investments while maintaining sufficient liquidity to meet
its obligations.
Net cash provided by operating activities was $2,299,168 and $1,606,108 for
the nine months ended September 30, 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 investing activities was $1,296,733 and $1,436,766 for the
nine months ended September 30, 2001, and 2000, respectively. Investing
activities consist of purchases, sales, and maturities of investments.
As of September 30, 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
-----------------------------------------------------------
During the nine months ended September 30, 2001, net premium income totaled
$9,862,798 representing a net increase of 15 percent from that of the same
period in 2000 ($8,562,987). The increase is attributed to the underwriting of
small and medium size surety bonds and specialty insurance services. During the
nine months of 2001 as compared to the same period in 2000, direct premiums
earned increased $1,499,148 or 16%; assumed premiums increased $838,249 or 46%
and ceded premiums increased $1,037,586 or 43%. 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 nine months of 2001 remained consistent
when compared to the same period of 2000. The realized loss of $10,012 in 2001
is attributed to the write-off of an equity security and is offset by realized
gains on the disposal of fixed maturities. Other income decreased by $78,834
during the nine months of 2001 when compared to the same period of 2000. The
decrease is attributable to the subsidiary agency decline in commission income
of $145,701 and is offset by the Company's claims consulting subsidiary income
increase of $66,867.
During the nine months ended September 30, 2001, loss and loss adjustment
expenses were $3,485,909 as compared to $2,391,073, 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 in reserves is
attributable to two components. One is additional reserves of $477,157 required
under FASB 133, Accounting for Derivative Instruments and Hedging Activities
implemented on January 1, 2001. The additional reserves are calculated,
primarily, based on the market value of investments attached to the Registered
Investment Advisor's Policy and are subject to market fluctuations. The second
reserve component consists of an increase of $617,679 and is consistent with the
increase in net premium income at September 30, 2001 and 2000. The loss ratio to
net premiums earned, excluding the additional derivative reserves, was 30% and
28%, respectively.
During the nine months ended September 30, 2001, amortization of deferred
policy acquisition costs was $3,130,794 as compared to $2,719,007 for the same
period in 2000. The increase in amortization of deferred policy acquisition
costs is attributed to the increase in direct and assumed premiums earned. The
expense represents 24% of direct and assumed premiums at September 30, 2001 and
September 30, 2000.
Operating expenses increased by $993,237 or 25% for the nine months ended
September 30, 2001 when compared to the same period in 2000. The increase is
primarily 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 nine months ended September 30, 2001 and September 30,
2000 were calculated using effective rates of approximately 34%.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
------------------------------------------------------------
During the three months ended September 30, 2001, net premium income
totaled $3,603,164 representing a net increase of 18 percent from that of the
same period in 2000 ($3,054,622). During the three months ending September 30,
2001 as compared to the same period during 2000, direct premiums earned
increased $358,198 or 11%; assumed premiums increased $520,530 or 84% and ceded
premiums increased $330,186 or 38%. Ceded premiums increase as the volume of
direct and assumed premiums increase based on their relationship under the
Company's reinsurance treaties.
Net investment income for the three months ending September 30, 2001
remained consistent when compared to the same period of 2000. Other income
decreased by $104,588 or 20% during the three months ended September 30, 2001
when compared to the same period of 2000. The decrease is attributed to
subsidiary agency commission of $76,590 and the Company's claims consulting
group of $27,998.
During the three months ended September 30, 2001, loss and loss adjustment
expenses were $1,654,168 as compared to $984,854, 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 $669,314 or 68% is
attributed to increasing certain factors in calculating reserves.
During the three months ended September 30, 2001, amortization of deferred
policy acquisition costs was $1,235,126 as compared to $1,029,749 for the same
period in 2000. The amortization of deferred policy acquisition costs increase
is based on factoring in the associated costs and is attributed to the increase
in premiums written and earned. The expense remained consistent at 26% of the
direct and assumed premiums earned for the periods ending September 30, 2001 and
2000.
Operating expenses increased by $252,304 or 19% for the three months ended
September 30, 2001 when compared to the same period in 2000. The increase is
attributed to increases in salary expenses, legal fees and other office
expenditures associated with the Company's growth.
Interest expense is attributed to the interest on notes payable to
affiliates.
Income taxes in the three months ended September 30, 2001 and 2000 was
calculated using an effective rate of 34%. Net income tax expense reflects a
negative tax effect due to prior year tax refunds.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
------- ABOUT MARKET RISK
-----------------
Investments
-----------
The Company had approximately $10.8 million of investments as of September
30, 2001. These investments largely consist of state government obligations and
have either variable rates of interest or stated interest rates ranging from
4.5% 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 general
policy of investing in securities with high credit ratings and investing through
major financial institutions with high credit ratings.
Notes Payable
-------------
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 not be available to the Company at a lower rate of interest.
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 may now meet the definition of a
derivative. The Company adopted SFAS No. 133 effective January 1, 2001. The
Company has one insurance product that meets the definition of a derivative
instrument as defined in SFAS No. 133. The identified derivative is speculative
in nature and was formerly accounted for as an insurance contract within the
policy liabilities for loss and loss adjustment expenses account in the
consolidated balance sheet. As of September 30, 2001, the amount recorded as a
liability for the value of this derivative was $1,773,914.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings
-----------------
The Company is engaged in various legal and regulatory
proceedings arising in the normal course of business which
management believes will not have a material adverse effect on
its financial position or results of operations.
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: November 14, 2001 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principle Executive Officer)
Date: November 14, 2001 By: /s/ Carol S. Black
--------------------------------------------
Carol S. Black
Secretary and Chief Financial Officer
(Principle Accounting and Financial Officer)