UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[Mark One]
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 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
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(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification No.)
4311 West Waters Avenue, Suite 501
Tampa, Florida 33614
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(Address of principal executive offices) (Zip Code)
(813) 885-2112
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
Indicate by a check mark if disclosure of delinquent files pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [x]
$992,266
-----------------------------------
Aggregate market value of voting stock (Common Stock) held by nonaffiliates of
the Registrant as of March 7, 2002
5,597,244 shares of Common Stock $.001 par value
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Number of shares of Common Stock outstanding as of March 7, 2002
Documents incorporated by reference: NONE
PART I
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Item 1. Business
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General
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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 wholly-owned subsidiaries, Cumberland Casualty & Surety Company ("CCS") and
Surety Specialists, Inc. ("SSI") to CTI. KC then distributed to its stockholders
CTI's common stock on the basis of one share of common stock of CTI for each
five shares of KC common stock and Class B common stock owned (the
"Distribution"). Cumberland Technologies, Inc., ("the Company") is a holding
company engaged through its subsidiaries, Cumberland Casualty & Surety Company
("CCS"), Surety Specialists, Inc. ("SSI"), The Surety Group, Inc. ("SG"),
Associates Acquisition Corp. d/b/a Surety Associates ("SA") and Qualex
Consulting Group, Inc. ("Qualex") in the delivery of specialty surety and
insurance services. Surety services include underwriting surety bonds on a
direct and assumed basis, surety consulting and the development of surety
software. Insurance services include the underwriting of speciality and other
liability insurance products. In addition, the Company conducts its business
through a number of independent agencies which focus on selling and delivering
surety insurance products to consumers. Because the need to advance
technologically in the delivery of insurance products, the Company developed a
software product called Bond-Pro(R). This patented surety issuance system
increases the speed that surety agents deliver their products to the customer
and financially report those transactions to the carrier, while reducing
operating costs. The Company's business strategy is to continue the underwriting
focus of each of its operating subsidiaries and to achieve growth through the
expanded licensing of Bond-Pro(R).
CCS is a property and casualty insurance company that was incorporated in
Texas on May 4, 1988 and redomesticated in Florida, on September 2, 1994. CCS is
licensed in twenty-seven states, the District of Columbia, and Guam. It holds a
certificate of authority from the United States Department of the Treasury,
which qualifies CCS as an acceptable surety on Federal bonds. CCS is rated "B+"
(Very Good) by A.M. Best.
CCS currently has applications for admission pending in various states.
Most of these states have a lengthy applications process in which the admission
filing must be updated with certain financial and nonfinancial information until
the insurance department decides to approve an application. The insurance
department is not restricted as to the amount of time it may take to approve an
application. All applications are updated as new information becomes available
and CCS is waiting for inquiries or actions by these pending states. Those
states in which CCS has not yet applied for licensing generally require
additional years of operating history or additional capital and surplus. Once
CCS has met these requirements, it is anticipated that the applications for
admission will be submitted accordingly. CCS is currently attempting to obtain
additional state licenses in order to spread its risk of loss geographically and
to increase its sales of direct surety and insurance products. Management
believes that CCS can function profitability selling direct surety and insurance
products in the states in which it is currently licensed.
SSI, a Florida corporation, formed in August 1988, SG, a Georgia
corporation, and SA, a South Carolina corporation purchased by the Company in
February and July 1995, respectively, are specialized surety agencies which
operate as independent agencies. Each secures surety risks for small to medium
size contractors as an agent and for other agents as a broker. SG and SA are
also general lines insurance agencies. When acting as an agent, SSI, SG and SA
receive a commission from the various insurance companies it represents, one of
which is CCS. Agency commissions are based upon a percentage of premiums paid by
the consumer. The commissions paid by CCS to SSI, SG and SA range from 35 to 40
percent.
In addition, SSI generates additional revenues through joint partnering
agreements to pursue small to medium size contract and commercial surety
business on a countrywide basis. The agreements allow SSI to solicit surety
business in states in which CCS is not licensed thereby significantly increasing
the Company's ability to geographically spread risk. CCS participates in both
agreements underwriting risk through a retrocession treaty.
Qualex, a Florida corporation, formed in November 1994, provides claim and
contracting consulting services to the surety and construction industries. CCS
purchases claim consulting services from Qualex on a contract basis.
The percentages of gross revenue generated by the Company's subsidiaries
for the year ended December 31, 2001 are as follows:
Subsidiary Revenue Percentage
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CCS................................. 89%
Qualex.............................. 8%
SA.................................. 1%
SG.................................. 2%
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100%
The term "the Company" unless the context otherwise requires, refers to
Cumberland Technologies, Inc. and its subsidiaries. The principal executive
offices of the Company are located at 4311 West Waters Avenue, Suite 401, Tampa,
Florida 33614. The Company's telephone number is (813) 885-2112, its facsimile
number is (813) 885-6734 and its web site is www.cumberlandtech.com.
Surety Products
---------------
CCS underwrites a wide variety of surety bonds for small to medium size
surety accounts. CCS also assumes underwriting risk from other surety companies
under various reinsurance arrangements. Contract surety bonds center primarily
on performance and payment bonds issued for the construction industry. The bonds
guarantee that a contractor will fulfill their obligations, with respect to
performing the scope of work defined in the contract and fulfilling their
financial obligations. CCS's typical bond is less than $500,000 with aggregate
ongoing work of $1 million. These bonds are marketed through independent
insurance agencies specializing in this type of coverage to general contractors,
sub-contractors and specialty contractors.
Commercial surety bonds, which includes all non-contract surety bonds,
numerous types of license and permit, miscellaneous and judicial bonds. The
scope of each bond varies according to the law, locality, the nature of the
guarantee, and the parties who have a right of action under the bond. The
typical bond penalty ranges from $5,000 to $50,000 and is usually written on a
volume basis.
Insurance Products
------------------
The Company's other liability insurance products include Registered
Investment Advisors professional liability insurance and Notary Public Errors
and Omission liability insurance. Both coverages are occurrence liability
coverages, that insure against specific liability risks. Under the Registered
Investment Advisors professional liability coverage, each endorsed account is
limited to a maximum liability coverage of $500,000. Due to the volatility in
the marketplace, the Company has suspended marketing of this product effective
September 2001. The Notary Public Errors and Omissions liability coverage is
written with liability limits of $7,500 to $30,000 per policy.
On surety or insurance products sold directly by CCS, exposure to loss
would be the penal amount of the bond, less any portion for which CCS has
secured reinsurance. On reinsurance, CCS's exposure to loss would be limited by
the amount of reinsurance provided. Reinsurance does not relieve an insurer of
its liability to the policyholder for the full amount of the policy, however,
the reinsurer is obligated to the insurer for the portion assumed by the
reinsurer.
Technology Product
------------------
On October 1, 1996, CTI launched the development of a surety bond issuance
system "Bond-Pro(R)." The Company received its federal copyright registration
#TX4-542-729 effective March 29, 1997. The Company sees the implementation of
the system as an integral part of its unique service affording it the ability to
capture a larger share of the marketplace. This program encompasses the required
functions an agency needs to run a full scale bond desk when implemented inside
the agency structure. The software is designed to reduce the labor required to
provide improved service. CCS offers its Bond-Pro(R) program to small and medium
size agencies in order to produce premiums. The efficiencies gained in using the
Bond-Pro(R) system enhances CCS's ability to increase premiums and to develop
relationships which may not otherwise be possible due to competition for this
class of business. While a small percentage of the industry offers issue and
reporting systems for bonds, no other provider offers a fully integrated,
multi-carrier production and processing system including management reporting.
Underwriting
------------
For the contract and commercial surety lines of business, the Company's
underwriting philosophy provides for an individual analysis of the risk
associated with each application, except for specific categories of
miscellaneous bonds. In underwriting contract bonds, its approach focuses on the
financial strength, experience and operating capacity of the contractor. In
underwriting commercial surety, this approach focuses on the credit history and
financial resources of the applicant.
The Company maintains control of the contract and commercial surety
underwriting process through the use of authority limits for each underwriter
and committee underwriting of larger risks. The Company may require collateral
on contract bonds and occasionally, on other types of bonds based upon an
assessment of the risk characteristics. The risk assessment includes evaluation
of the financial strength of the contractor, the credit history of the
contractor, work in progress and successful work experience. Collateral can
consist of irrevocable letters of credit, certificates of deposit, cash, savings
accounts and publicly traded securities. Both corporate and personal
indemnification may be required in order to mitigate liability risk. The Company
also targets various products in the commercial surety market which are
characterized by relatively low risk exposure in small penal amounts. The
underwriting criteria, including the extent of bonding authority granted to
independent agents, will vary depending on the class of business and the type of
bond. For example, relatively little underwriting information is typically
required of certain low exposure risk such as notary bonds.
Other liability insurance applications are individually evaluated and the
decision to write a particular risk is made by the Company's underwriting
department. The underwriting department determines whether to write a particular
risk after evaluating a number of factors based upon detailed objective
underwriting standards relating to each class of business.
Reinsurance
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The Company's insurance subsidiary, in the ordinary course of business,
cedes insurance to other insurance companies, to limit its exposure to loss,
provide greater diversification of risk, and minimize aggregate exposures.
Because the ceding of insurance does not discharge the primary liability of the
original insurer, CCS places reinsurance with qualified carriers after
conducting a detailed review of the nature of the obligation and a thorough
assessment of the reinsurers credit qualifications and claims settlement
performance and capabilities. The reinsurance coverage terms are tailored to the
specific risk characteristics of the underlining products of the company.
For contract and commercial surety business, CCS entered into an excess of
loss reinsurance agreement with Transatlantic Reinsurance Company (Transatlantic
Treaty), which is rated A+ (Superior) by A.M. Best. Excess of loss reinsurance
is a form of reinsurance, which indemnifies the ceding insurer up to an agreed
amount against all or a portion of the amount of loss in excess of a specified
retention. The Company cedes to Transatlantic Reinsurance Company on an excess
of loss treaty 95% of the risk insured with a maximum exposure to the Company of
$235,000 per principal prior to June 30, 2001 and a maximum exposure of $300,000
per principal effective July 1, 2001. Under the Transatlantic Treaty, the
reinsurer automatically assumes the risk of losses on all contract surety bonds
written and classified as surety in CCS's statutory annual statement and all
miscellaneous surety bonds with penal sums over $100,000 written and classified
as surety in CCS's statutory annual statement.
For its liability line of registered investment advisor insurance, the
Company has reduced its exposure on any one risk, through the purchase of a
quota share agreement with Dorinco Reinsurance (Dorinco Treaty) which is rated A
(Excellent) by A.M. Best. Under the Dorinco Treaty, CCS cedes 50% of its
liability on all Registered Investment Advisor policies.
On a limited basis, CCS also assumes and cedes reinsurance through
facultative and treaty agreements from other sureties. Management believes the
loss of one of these customers or resources would not have a material impact on
the operations of the Company. From October 1991 through May 1, 1997, CCS
participated in a pooling agreement with various sureties, which specialized in
writing contract surety. Effective to April 1, 1993, CCS assumed 25% of the
business underwritten by the pooling agreement; 12.5% effective April 1, 1995
and 10% effective April 1, 1996. Effective April 1997, CCS elected not to
participate in future business under the pooling agreement.
Reserves
--------
Reserves for losses and loss adjustment expenses are established based upon
reported claims and historical industry loss development. The amount of loss
reserves for reported claims is based on a case by case evaluation of the claim.
Historical industry data is reviewed and consideration is given to the
anticipated impact of various factors such as legal developments, economic
conditions and the effects of inflation. Amounts are adjusted periodically to
reflect these factors.
Reserve for losses and loss adjustment expenses are actuarial estimates of
losses, including the related settlement costs. Management believes that the
reserves for losses and loss adjustment expenses are adequate to cover the
losses and loss adjustment expenses, including the cost of incurred but not
reported losses.
During 2001, there were no material changes in the mix of business or types
of risk assumed. However, the Company was effective in spreading the geographic
mix of the business.
Current fluctuations in inflation have not had a material effect on the
consolidated financial statements and there are no explicit provisions in the
consolidated financial statements for the effects of inflation that may cause
future changes in claim severity.
Other than certain classification differences, there are no material
differences between statutory reserves and Generally Accepted Accounting
Principle ("GAAP") reserves. CCS does not discount its loss reserves for
financial reporting purposes.
Environmental Claims
--------------------
The Company bonds several accounts that have incidental environmental
exposure, with respect to which the Company provides limited contract bonding
programs. In the commercial surety market, the Company provides bonds to
corporations that are in the business of mining various minerals, establishing
mitigation banks, or operating environmental facilities, and that are obligated
to post financial assurance bonds that guarantee that property can be managed
according to regulatory guidelines. While no environmental responsibility is
overtly provided by commercial or contract bonds, some risk of environmental
exposure may exist if the surety were to assume certain rights of ownership of
the property in the completion of a defaulted project or through salvage
recovery.
To date, the Company has not received any environmental claim notices, nor
is management aware of any potential environmental claims.
Investments
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Insurance company investment practices must comply with insurance laws and
regulations. Generally, insurance laws and regulations prescribe the nature and
quality of, and set limits on, various types of investments, which may be made
by CCS.
CCS's investment portfolios generally are managed to maximize any tax
advantages to the extent available while minimizing credit risk with investments
concentrated in high quality, fixed income securities. CCS's portfolios are
managed to provide diversification by limiting exposures to any one issue or
issuer and to provide liquidity by investing in the public securities markets.
Portfolios are structured to support CCS's operations and in consideration of
the expected duration of liabilities and short-term cash needs.
An Investment Committee of CCS's Board of Directors establishes investment
policy and oversees the management of the portfolios.
Marketing
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CCS principally markets its products in twenty-seven states, the District
of Columbia and Guam in which it is licensed and indirectly in all other states
through its joint partnering agreements with The St. Paul and Peerless Insurance
Company. Its products are marketed primarily through SSI, SG, SA and independent
agents and producers, including multi-line agents and brokers that specialize as
surety specialists, many of whom are members of the National Association of
Surety Bond Producers. CCS uses specialized general agencies to market its other
liability insurance products.
Competition
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The insurance industry is a highly competitive industry. There are numerous
firms, particularly in the specialty surety markets, which compete for a limited
volume of business. Competition is based upon price, service, products offered,
and financial strength of the insurance company. There are a number of companies
in the industry, which offer products similar to the Company's.
The Company competes in the small to medium size contract and commercial
surety bond markets. Primary competitors include large multi-line companies, as
well as small regional companies that specialize in the surety market. While the
surety industry has experienced slow premium growth, competition has increased
as a result of 10 years of profitable underwriting experience. This competition
has typically manifested itself through reduced premium rates, and greater
tolerance for relaxation of underwriting standards. Management believes such
competition will continue.
The Company, while competitive in pricing and commission, believes that the
availability of its proprietary Bond-Pro(R) surety issuance system, specialty
underwriting, managerial experience and service are its primary competitive
factors in the industry. To this end, the Company believes that its technology
and specialization in underwriting niche surety markets will enable it to
continue to compete effectively, even when challenged by the larger standard
market companies.
Regulation
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The Company's subsidiaries are subject to varying degrees of regulation and
supervision in the jurisdictions in which they transact business under statutes,
which delegate regulatory, supervisory, and administrative powers to State
insurance regulators. In general, an insurer's state of domicile has principal
responsibility for such regulation. It is designed generally to protect policy
holders rather than investors and relates to matters such as the standards of
solvency which must be maintained; the licensing of insurers and their agents;
examination of the affairs of insurance companies, including periodic financial
and market conduct examinations; the filing of annual and other reports,
prepared on a statutory basis, on the financial condition of insurers or for
other purposes; establishment and maintenance of reserves for unearned premiums
and losses; and requirements regarding numerous other matters. Licensed or
admitted insurers generally must file with the insurance regulators of such
states, or have filed on its behalf, the premium rates and bond and policy forms
used within each state. In some states, approval of such rates and forms must be
received from the insurance regulators in advance of their use.
CCS is domiciled in Florida and licensed in 27 states, the District of
Columbia and Guam. SSI, SG and SA are licensed in Florida, Georgia and South
Carolina respectfully. CCS is also regulated by the United States Department of
the Treasury as an acceptable surety for Federal bonds.
Holding company laws impose standards on certain transactions between
registered insurers and their affiliates, which include, among other things,
that the terms of the transactions be fair and reasonable and that the books,
accounts and records of each party be maintained so as to clearly and accurately
disclose the precise nature and details of the transactions. Holding company
laws also generally require that any person or entity desiring to acquire more
than a specified percentage (commonly 10%) of the Company's outstanding voting
securities, is required first to obtain approval of the applicable state's
insurance regulators.
The National Association of Insurance Commissioners ("NAIC") has adopted a
risk-based capital ("RBC") model law for property and casualty companies. The
RBC model law is intended to provide standards for calculating a variable
regulatory capital requirement related to a company's current operations and its
risk exposures (asset risk, underwriting risk, credit risk and off balance sheet
risk). These standards are intended to serve as a diagnostic solvency tool for
regulators that establishes uniform capital levels and specific authority levels
for regulatory interventions when an insurer falls below minimum capital levels.
The model laws specifies four distinct action levels at which a regulator can
intervene with increasing degrees of authority over a domestic insurer as its
financial conditions deteriorates. These RBC levels are based on the percentage
of an insurers surplus to its calculated RBC. The company's RBC is required to
be disclosed in its statutory annual statement. The RBC is not intended to be
used as a rating or ranking tool nor is to be used in premium rate making or
approval. The Company calculated its RBC requirements as of December 31, 2001
and met the standards under the NAIC guidelines.
Controlling Shareholders
------------------------
Francis Williams, and KC (collectively "Majority Shareholder") owns 79.6%
of the outstanding ordinary shares of the Company and collectively control the
policies and affairs of the Company. Circumstances may arise in which the
interest of the Majority Shareholder of the Company could be in conflict with
the interest of the other holders of the common stock. In addition, the Majority
Shareholder may have an interest in pursuing acquisitions, divestitures or other
transaction that in their judgement, could enhance their equity investment, even
though such transactions might involve risk to the other holders of the common
stock.
Employees
---------
On December 31, 2001, the Company had 47 employees. All are employed on a
full-time basis. None of the Company's employees are union members or subject to
collective bargaining agreements.
Forward-looking Statements
--------------------------
All statements, other than statements of historical facts, included or
incorporated by reference in this Form 10-K which address activities, events or
developments which the Company expects or anticipates will or may occur in the
future, including statements regarding the Company's competitive position,
changes in business strategy or plans, the availability and price of
reinsurance, the Company's ability to pass on price increases, plans to install
the Bond-Pro(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, trends or similar expressions concerning matters that are
not historical facts are forward looking statements. These statements are based
on certain assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current conditions and
expected future developments as well as factors it believes are appropriate in
the circumstances. However, whether actual results and developments will conform
with the Company's expectations and predictions is subject to a number of risks
and uncertainties which could cause actual results to differ significantly and
materially from past results and from the Company's expectations, including the
risk factors discussed in this Form 10-K, Item 1 and 7A, and other factors, many
of which are beyond the control of the Company, consequently, all of the
forward-looking statements made in this Form 10-K are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized that they will have the expected consequences to or
effects on the Company or its business or operations.
Item 2. Properties
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The Company's operating subsidiaries rent or lease office space in the
cities in which they are located. CCS and Qualex lease office space in Tampa,
Florida from a company owned by Francis Williams, the Chairman of the Board of
the Company, at a monthly rate of $12,876, pursuant to a lease that was executed
June 1, 1999 and is effective through May 31, 2009.
Management considers the rented and leased office facilities of its
subsidiaries adequate for the current and anticipated future level of
operations.
Item 3. Legal Proceedings
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CCS has been named in a class action lawsuit. The plaintiffs are clients of
a registered investment advisor (the "Advisor") and have alleged that the
Advisor, a registered broker-dealer, and certain other defendants (excluding
CCS) were negligent or otherwise responsible for losses suffered by the
plaintiffs resulting from embezzlement of the plaintiffs' investments by a third
party. As a separate count in the lawsuit, the plaintiffs have also asserted
claims against CCS based on a policy of insurance issued by CCS to the Advisor.
The policy does not provide coverage for embezzlement, rather it insures losses
caused by market declines, providing that the Advisor has followed the
investment guidelines required by the policy. CCS denies the plaintiff's
allegations, however, it cannot predict the outcome or the impact this action
could have on CCS. CCS is vigorously defending this lawsuit and intends to move
for summary judgment.
The Company and its subsidiaries are involved in various lawsuits arising
in the ordinary course of its business operations as an insurer. Management does
not believe that any of these lawsuits will have a material effect on the
consolidated financial position, future operations or cash flows of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
------ ---------------------------------------------------
None
Executive Officers of the Registrant
------------------------------------
All of the following persons are regarded as executive officers because of
their responsibilities and duties as elected officers of the Company's
subsidiaries. Other than Francis M. Williams and Joseph M. Williams (See Item
10), there are no family relationships between any of Company's executive
officers and directors, and there are no arrangements or understandings between
any of these officers and any other person pursuant to which the officer was
selected as an officer.
- ---------------------------- -------------- -------- -----------------
Position
Name Presently Held Entity Period of Service
- ---------------------------- -------------- -------- -----------------
Joseph M.Williams.......... President CTI 06/1992 to date
Edward J. Edenfield, IV..... President CCS 05/1996 to date
President SSI 06/1997 to date
President SG 01/1998 to date
President SA 01/1998 to date
Carol S. Black.............. Secretary CTI 06/1995 to date
Secretary/Treasurer CCS 06/1995 to date
Secretary SSI 08/1995 to date
Secretary/Treasurer Qualex 08/1995 to date
Secretary SG 08/1995 to date
Secretary SA 08/1995 to date
Edward A. Mackowiak......... President Qualex 11/1994 to date
Sam H. Newberry............. Vice President SG 01/1998 to date
PART II
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Item 5. Market for the Company's Common Equity and Related Stockholders Matters
- ------ -----------------------------------------------------------------------
The Company's common stock (symbol "CUMB") has been traded in the
over-the-counter market since October 1, 1992. Effective December 16, 1996, the
Company was approved and included in the trading on the Nasdaq SmallCap Market.
High and Low bid prices were set forth in Quotation Market Sheets published by
Nasdaq. The high and low bid prices for 2001 and 2000 were as follows:
Bid Information
---------------
2001 2000
--------------------------------------------------
High Low High Low
--------------------------------------------------
First Quarter.............. $ 1 29/32 $ 1 3/8 $ 1 3/4 $ 1 1/2
Second Quarter ............ 1 1/10 1 1/10 1 7/8 1 23/32
Third Quarter ............. 49/50 9/10 1 13/16 1 3/4
Fourth Quarter ............ 19/20 19/20 2 1/2 2 1/2
As of March 15, 2002, there were 815 stockholders of record of the common
stock. A number of such holders are brokers and other institutions holding
shares in "street name" for more than one beneficial owner.
The Company recently received a letter from The Nasdaq Stock Market, Inc.
to the effect that its shares failed to meet the Nasdaq SmallCap Market's
minimum price requirement of $1.00 per share for 30 consecutive trading days.
The Company's share are subject to delisting unless prior to August 13, 2002,
the shares close at $1.00 or more for a minimum of 10 consecutive trading days.
Nasdaq could require a longer period of compliance to avoid delisting. If the
qualification requirements have not been met by the specified times, the shares
will likely be delisted, in which case the Company's shares may be eligible to
be traded on the Nasdaq Over-the Counter Bulletin Board, if a broker-dealer
makes a market in them and requests that they be included, and subject to other
conditions.
Dividends
---------
The payment by the Company of dividends, if any, in the future is within
the discretion of its Board of Directors and will depend upon the Company's
earnings, capital requirements (including working capital needs), and other
financial needs. The Company did not declare or pay dividends in 2001 and does
not anticipate paying any dividends on the Company's Common Stock in the near
future.
The future payment of dividends, if any, by CCS is within the discretion of
its Board of Directors and will depend upon CCS's earnings, statutory
limitations, capital requirements (including working capital needs) and
financial condition, as well as other relevant factors. Applicable state laws
and regulations restrict the payment of dividends by CCS to the extent of
surplus profits less any dividends that have been paid in the preceding twelve
months or net investment income for the year, whichever is less, unless CCS
obtains prior approval from the insurance commissioner. CCS does not anticipate
paying any dividends on CCS common stock in the near future.
Item 6. Selected Financial Data
- ------ -----------------------
The following selected financial data are taken from the Company's
consolidated financial statements. The data should be read in conjunction with
the accompanying consolidated financial statements and the related notes,
Management's Discussion and Analysis and other financial information included in
this Form 10-K.
Year Ended December 31,
-------------- -------------- --------------- -------------- ----------
2001 2000 1999 1998 1997
-------------- -------------- --------------- -------------- ----------
(In Thousands - except per share data)
Statement of Operations Data:
- ----------------------------
Net premium income ................................ $ 13,641 $ 12,128 $ 9,618 $ 7,534 $ 5,684
Net investment income ............................. 605 576 333 377 408
Net realized capital gains (losses) ............... 306 38 129 (437) 202
Commission and other income ....................... 1,909 1,683 1,375 1,537 1,476
Total revenue ................................. 16,461 14,425 11,455 9,011 7,770
Benefits and expenses ............................. 16,034 12,416 10,056 9,214 7,474
Impairment of long-lived assets ................... 437 -- -- -- --
Interest expense .................................. 166 203 214 118 125
Income (loss) from continuing
operations before extraordinary item ........... (176) 1,806 1,185 (321) 171
Income tax (benefit) expense....................... (76) 764 37 -- --
Extraordinary gain on restructuring of
note, net of tax .............................. 158 -- -- -- --
Net income(loss)................................... 58 1,042 1,148 (321) 171
Income (loss) per common share - diluted............... $ 0.01 $ 0.19 $ 0.21 $ (0.06) $ 0.03
Year Ended December 31,
--------- --------- ------------ ------------ ---------
2001 2000 1999 1998 1997
--------- --------- ------------ ------------ ---------
(In thousands)
Assets Balance Sheet Data:
- -------------------------
Investments ....................................... $ 10,815 $ 9,955 $ 8,394 $ 3,987 $ 6,469
Cash and cash equivalents ......................... 2,654 694 2,000 4,202 1,804
Accrued investment income ......................... 154 185 66 55 --
Accounts receivable ............................... 4,687 4,258 3,301 3,105 1,966
Reinsurance recoverable ........................... 3,844 4,910 2,898 2,306 2,017
Deferred policy acquisition costs ................. 1,904 1,955 1,601 1,247 813
Intangibles ....................................... 534 1,115 1,267 1,456 1,681
Other investment .................................. 641 583 559 553 244
Deferred tax asset ................................ 499 175 305 -- --
Income tax recoverable ............................ - 168 -- -- --
Other assets ...................................... 372 311 315 354 327
Total assets ...................................... $ 26,104 $24,309 $20,706 $17,265 $ 15,321
Policy Liabilities and Accruals:
- -------------------------------
Unearned premiums ................................. $ 5,583 $ 5,775 $ 4,844 $ 3,750 $ 2,629
Losses and LAE .................................... 4,113 5,186 4,577 3,220 2,550
Derivative instruments ............................ 1,979 -- -- -- --
Ceded reinsurance and accounts payable ............ 5,143 3,359 2,277 2,615 2,714
Income tax payable ................................ 113 -- 35 -- --
Term note to affiliate ............................ 604 1,000 1,000 1,000 --
Non affiliate debt ................................ 652 1,103 1,281 1,331 1,419
Total liabilities ................................. 18,187 16,423 14,014 11,916 9,312
Total stockholders' equity ........................ $ 7,917 $ 7,886 $ 6,692 $ 5,349 $ 6,009
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ------- -------------------------
Critical Accounting Policies
- ----------------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates and assumptions are based
on historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
The Company believes the following accounting policies are the most
critical since these policies require significant judgment or involve complex
estimations that are important to the portrayal of the Company's financial
condition and operating results:
The Company records valuation allowances to reduce the deferred tax assets
to the amount that is more likely than not to be realized. While the Company
considers taxable income in assessing the need for a valuation allowance, in the
event the Company determines it would be able to realize its deferred tax assets
in the future in excess of the net recorded amount, an adjustment would be made
and income increased in the period of such determination. Likewise, in the event
the Company determines it would not be able to realize all or part of its
deferred tax assets in the future, an adjustment would be made and charged
against income in the period of such determination.
The Company reviews long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Upon determination that the carrying value of the asset is
impaired, the Company would record an impairment charge or loss. Future adverse
changes in market conditions or poor operating results of the underlying
investment could result in losses or an inability to recover the carrying value
of the investment that may not be reflected therein; and therefore, might
require the Company to record an impairment charge in the future.
Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No.133") 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 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. At December 31, 2001 the fair value
of the derivative instrument has been determined by using a financial model that
incorporates market data and other assumptions. Due to the volatility in the
marketplace, the Company has suspended marketing of this product effective
September 2001.
The liability for loss and loss adjustment expenses including incurred but
not reported losses is based on the estimated ultimate cost of settling the
claim using traditional paid and incurred loss development methods. These
estimates are subject to the effects of trends in loss severity and frequency.
Although considerable variability is inherent in such estimates, management
believes that the liabilities for loss and loss adjustment expenses are
adequate. The estimates are continually reviewed and adjusted as necessary as
experience develops or new information becomes known. Such adjustments are
included in current operations. A liability for all costs expected to be
incurred in connection with the settlement of unpaid loss and loss adjustment
expenses is accrued when the related liability for unpaid losses is accrued.
Loss adjustment expenses include costs associated directly with specific claims
paid or in the process of settlement, such as legal and adjusters' fees. Loss
adjustment expenses also include other costs that cannot be associated with
specific claims but are related to losses paid or in the process of settlement,
such as internal costs of the claims function. The Company does not discount its
reserves for losses and loss adjustment expenses. The Company writes primarily
surety contracts which are of short duration. The Company does not consider
investment income in determining if a premium deficiency relating to short
duration contracts exists.
Results of Operations
- ---------------------
The following table sets forth, for the periods indicated, (i) summary
financial data (in thousands), and (ii) the percentage change in the dollar
amount for such items from period to period.
Percentage Increase (Decrease)
Year Ended December 31,
Year Ended December 31,
---------------------------------------------------------------------------------------
2001 2000 1999 2001 2000
---------------------------------------------------------------------------------------
(In thousands)
Net premium income ............................ $ 13,641 $ 12,128 $ 9,618 12.5% 26.1%
Net investment income ......................... 604 576 333 4.9% 73.0%
Net realized investment gains ................. 306 38 129 705.3% (70.5)%
Other income .................................. 1,909 1,682 1,375 13.5% 22.3%
Losses and loss adjustment
expenses .................................. 4,045 3,360 2,395 20.4% 40.3%
Derivative expense ............................ 1,061 -- -- 100.0% --
Amortization of deferred
acquisition costs ......................... 4,363 3,767 2,895 15.8% 30.1%
Operating expenses and interest ............... 6,730 5,491 4,980 22.6% 10.3%
Impairment of long-lived assets ............... 437 -- -- 100.0% --
Income (loss) from continuing
operations ................................ (176) 1,806 1,185 (109.8)% 52.4%
Income tax (benefit) expense .................. (76) 764 37 (109.9)% 1,964.9%
Income (loss) before extraordinary
item ...................................... (100) 1,042 1,148 (109.6)% (9.2)%
Extraordinary gain on restructuring of note,
net of tax ................................ 158 -- -- 100.0% --
Net income..................................... $ 58 $ 1,042 $ 1,148 (94.4)% (9.2)%
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
--------------------------------------------------------------------
During the period ended December 31, 2001 and 2000, earned direct and
assumed premium was $18,253,687 and $15,236,814, respectively. Overall earned
premiums, net of ceded premiums increased 12.5% or $1,513,363. The increase in
earned premiums is a result of CCS's continued growth in the surety bond market.
The following table represents the written and earned premium for CCS and the
percentage of change for the years ended December 31, 2001 and 2000,
respectively.
Written Premiums (000's) Earned Premiums (000's)
---------------------------------------------------------------
2001 2000 % Change 2001 2000 %Change
---------------------------------------------------------------
Direct ........ $ 13,867 $ 13,775 .7% $14,465 $ 12,756 13.4%
Assumed ....... 4,194 2,393 75.3% 3,788 2,481 52.7%
Ceded ......... (4,654) (3,510) 32.6% (4,612) (3,109) 48.3%
-------- -------- ------- ------
Total ..... $ 13,407 $ 12,658 5.9% $13,641 $ 12,128 12.5%
======== ======== ======= =========
During the years ended December 31, 2001 and 2000, net investment income
earned was $604,463 and $576,406, respectively. The return on average invested
assets was 6.01% for the year 2001 as compared to 6.28% for the year 2000. The
slight decrease in the return is attributed to the decrease in overall interest
rates. Net realized gains for the years ended December 31, 2001 and 2000 were
$305,461 and $38,381, respectively. Net realized gains during 2001 are a result
of gains on bond disposals of $329,360 which is offset by losses of $23,899 on
stock disposals. Realized gains in year 2000 are attributed to stock disposals.
Other revenue consists primarily of commissions earned by subsidiary
agencies and fee revenue earned by a subsidiary claim-consulting group. For the
year ended December 31, 2001, other revenues increased by $227,283 or 13.5%,
which is primarily attributable to increased business by the Company's claim
consulting subsidiary.
Loss and loss adjustment expenses including derivative expense was
$5,106,377 and $3,360,358 for the years ended December 31, 2001 and 2000,
respectively. The increase of $1,746,019 or 52% is attributed to an increase in
derivative expense and assumed claims expense when compared to the same period
in the prior year. The increase on assumed claims is attributable to claims
associated with the joint partnering agreement with SSI where CCS assumes a
portion of the risk underwritten. The Company adopted SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities on January 1, 2001. CCS
identified one product that met the definition of a derivative instrument under
SFAS No. 133, and recorded an additional $1,060,799 in derivative expense during
2001. Derivative expenses represent additional charges recorded by CCS that are
necessary to account for the derivative instrument at fair value. The fair value
of the derivative instrument is calculated using a financial model, inclusive of
certain assumptions and market data.
The following table reflects the 2001 activity for CCS as it pertains to
earned premiums and incurred claims and derivative expense:
-------------------------------------
Loss LAE and
Earned Derivative
Premiums Expense Ratio
-------------------------------------
Direct surety premiums, net .......... $ 8,709,977 $ 2,874,915 33.0%
Assumed surety premiums, net ......... 3,788,443 1,170,663 30.9%
Other liability premiums, net ........ 1,142,896 1,060,799 92.8%
----------- -----------
Total ........................... $13,641,316 $ 5,106,377
=========== ===========
During the year ended December 31, 2001 the net amortization of deferred
policy acquisition costs were to $4,362,721 as compared to $3,767,107 for the
year ended December 31, 2000. The acquisition costs represent 23.9% and 24.7% of
the direct and assumed earned premiums for the years ended December 31, 2001 and
2000, respectively.
During the year ended December 31, 2001, operating expenses and taxes,
licenses and fees (excluding income taxes) increased to $6,563,919 from
$5,288,520 in 2000. The increase of $1,275,399 or 24.1% is a result of increased
salary and related expenses, actuarial and consulting fees associated with the
derivative valuation, legal fees, travel and related expenses and other
miscellaneous expenses. The Company began direct marketing in the surety bond
market in 1997. Through 2001, the Company has produced approximately $67 million
in gross written premiums and $52 million in premiums net of reinsurance. The
increase in expenses is associated with the Company's continued expansion and
administration costs.
In accordance with Statement of Financial Accounting Standard 121 ("SFAS
121"), goodwill and other long-lived assets that were capitalized in conjunction
with the purchase of Associates Acquisition Corp., d/b/a Surety Associates, were
deemed impaired as of December 31, 2001, and an asset impairment charge of
$437,418 was recorded.
Interest expense on non-affiliated debt is interest paid to the former
owners of The Surety Group and Surety Associates on notes due to agencies the
Company purchased in 1995. Interest on affiliated debt represents interest on a
note payable to TransCor, a division of KC.
The Company incurred income tax (benefit) expense during 2001 and 2000 of
$(75,932) and $764,390, respectively. The Company's effective tax rate for the
2001 is 26.7% and 42% for 2000.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
---------------------------------------------------------------------
Written direct and assumed premiums reached a record $16,168,734 during
2000. Overall written premiums, net of ceded premiums, increased by $2,160,885
or 20.6% when compared to the same period in 1999. Earned premiums increased by
$2,510,161 or 26.1% to $12,127,953 for 2000 compared to $9,617,792 for 1999. The
increase in earned premiums resulted from CCS's continued growth in the direct
surety bond market.
During 2000, premiums written by CCS increased as a result of the continued
marketing direction of the Company, which is to penetrate the direct market
while decreasing the volume of reinsurance premiums assumed through pooling
agreements. CCS's reinsurance assumed premium is a result of quota share
agreements whereby CCS assumes a portion of the premiums written by agencies
contracted to produce business using The Company's Bond-Pro(R) issuance program.
The increase in ceded premiums is correlated to the direct premium written and
the association to excess of loss treaties on these premiums. The following
table reflects the written premium activity, net of reinsurance ceded, for 2000
and 1999.
Written Premiums
-----------------------------------------
2000 1999 % Change
-----------------------------------------
Direct ............................ $ 13,775,266 $ 10,816,114 27.4%
Assumed ........................... 2,393,468 2,421,346 (1.2)%
Ceded ............................. (3,510,537) (2,740,148) 28.1%
------------ ------------ ------
Total ......................... $ 12,658,197 $ 10,497,312 20.6%
============ ============ ======
During the year ended December 31, 2000 and 1999, net investment income
earned was $576,406 and $333,462, respectively. Net realized gains for the years
ended December 31, 2000 and 1999 were $38,381 and $129,101, respectively. The
increase in net investment income is attributed to a reallocation of investments
from money market funds to the bond portfolio. Net realized gains includes other
than temporary losses of $231,686 from certain investments.
Other income consists primarily of commissions earned by subsidiary
agencies and fee revenue earned by a subsidiary claims consulting group. For the
year ended December 31, 2000, other revenues increased by $307,249 or 22.3%,
which is attributable to increased business by the Company's claim consulting
subsidiary.
Losses and loss adjustment expenses increased to $3,360,258 from $2,394,532
for the year ended December 31, 2000 and 1999, respectively. The increase of
$965,726 or 40.3% is attributed to claims arising from increased direct
writings. Losses as a percentage of earned premiums were 27.7% and 24.9% for the
years ended December 31, 2000 and 1999, respectively. Direct incurred losses
increased $1,498,196 or 89.0% while losses under the assumed agreements
decreased $475,117 or 72.7% when comparing current year to prior year. The
following tables reflects the 2000 activity as it pertains to earned premiums
and incurred claims:
---------------------------------------------
Earned Loss and LAE
Premiums Expense Incurred Ratio
---------------------------------------------
Direct, net .............. $ 9,647,241 $ 3,182,274 33.0%
Assumed, net ............. 2,480,712 178,084 7.2%
----------- ----------- ----
Total .................... $12,127,953 $ 3,360,358 27.7%
=========== =========== ====
During the year ended December 31, 2000 the net amortization of deferred
policy acquisitions costs increased to $3,767,107 from $2,895,834 for the year
ended December 31, 1999. The increase is attributed to the increase in earned
premiums.
During the year ended December 31, 2000, operating expenses and taxes,
licenses and fees (excluding income taxes) increased to $5,288,520 from
$4,766,101 in 1999. The increase of $522,419 or 11% is a result of increased
salary expense including bonuses, payroll taxes and employee benefits of
$617,066 and a decrease in general office expenses of $94,647. The increase in
salary and consulting expenses is attributable to the cost of additional
personnel and results from the Company's growth.
Interest expense on non-affiliated debt is interest paid to the former
owners of The Surety Group and Surety Associates on notes due to agencies the
Company purchased in 1995.
The Company incurred income tax expenses during 2000 of $764,390 as
compared to $36,686 during 1999. The income tax expense for the year ended
December 31, 1999 includes the reversal of a valuation allowance of $466,799.
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 $19,509,655
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 $4,400,000.
At December 31, 2001, the Company's $26,104,019 of total assets were
distributed primarily as follows: 52.2 percent in cash and investments
(including accrued investment income), 32.7 percent in receivables and
reinsurance recoverables, 9.3 percent in intangibles and deferred policy
acquisition costs, 1.9 percent in deferred income tax asset and 3.9 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 $2,811,695, $214,494 and
$1,965,077 for the years ended December 31, 2001, 2000 and 1999, respectively.
In 2001 and 2000, the cash provided by operating activities was primarily
attributed to an increase in policy liabilities and accruals. In 1999, the cash
provided by operating activities was primarily attributable to increases in net
income and accrued policy liabilities on claims and reinsurance.
Net cash used in investing activities was $(630,772), $(1,316,601) and
$(4,133,973) for the years ended December 31, 2001, 2000 and 1999, respectively.
Investing activities consist primarily of purchases and sales of investments.
Net cash used in financing activities was $(220,570), $(204,262) and
$(33,308) for the years ended December 31, 2001, 2000 and 1999, respectively.
Financing activities consist primarily of repayments on borrowings and advances
to (from) affiliates during 2001, 2000 and 1999.
The following summarizes the Company's contractual cash obligations at
December 31, 2001 and the effect such obligations are expected to have on its
liquidity and cash flow in future periods.
Payments Due by Period (in thousands)
------------------------------------------------------------------
Less than 1 1-3 4-5 After5
Total Year Years Years Years
------------------------------------------------------------------
Contractual cash obligations:
- ----------------------------
Operating leases ........................................ $1,473 $ 224 $ 439 $ 393 $ 417
------ ------ ------ ------ ------
Total contractual cash obligations ...................... $1,473 $ 224 $ 439 $ 393 $ 417
====== ====== ====== ====== ======
At December 31, 2001 and 2000, the Company did not have any other
commercial commitments, such as guarantees or standby repurchase obligations, or
any relationships with unconsolidated entities or financial partnerships, such
as entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Losses and Loss Adjustment Expenses
- -----------------------------------
The consolidated financial statements include the estimated liability for
unpaid losses and loss adjustment expenses (LAE) of CCS. The liabilities for
losses and LAE's are determined using case-basis evaluations and statistical
projections and represent estimates of the ultimate net cost of all unpaid
losses and LAE's incurred through the end of the period. These estimates are
subject to the effect of trends in future claim severity and frequency. These
estimates are continually reviewed and, as experience develops and new
information becomes known, the liability is adjusted as necessary; such
adjustments, if any, are included in current operations.
Reconciliation of Liability for Losses and Loss Adjustment Expenses
- -------------------------------------------------------------------
The following table provides a reconciliation of the beginning and ending
liability balances, net of reinsurance recoverable, for 2001, 2000 and 1999 to
the gross amounts reported in the Company's balance sheets:
December 31,
---------------------------------------------
2001 2000 1999
---------------------------------------------
Liability for losses and LAE, net of reinsurance
recoverable on unpaid losses, at beginning
of year ....................................................................... $2,416,657 $ 2,808,727 $ 1,680,580
---------- ----------- -----------
Incurred losses and LAE's claims, net of reinsurance, occurring during:
Current year ................................................................... 4,982,148 4,363,435 2,810,532
Prior year ..................................................................... (936,570) (1,003,077) (416,000)
----------- ----------- ---------
Total incurred losses, net of reinsurance ......................................... 4,045,578 3,360,358 2,394,532
Losses and LAE payments for claims, net of
reinsurance, occurring during:
Current year ................................................................... 1,331,813 2,450,587 135,635
Prior years .................................................................... 1,017,190 383,749 1,130,750
----------- ----------- ---------
Total payments .................................................................... 2,349,003 2,834,336 1,266,385
Liability for losses and LAE, net of reinsurance
recoverable on unpaid losses, at end of year ................................... 4,113,232 3,334,749 2,808,727
Liability for derivative instrument at end of
the year ....................................................................... -- (918,092) --
Subrogation recoverables........................................................... -- 1,850,877 1,767,812
----------- ----------- ---------
Liability for losses and LAE, gross of reinsurance
recoverables on unpaid losses, at end of year .................................. $ 4,113,232 $ 4,267,534 $ 4,576,539
=========== =========== ===========
The Company experienced $936,570, $1,003,077 and $416,000 in redundancies
for losses and loss adjustment expenses in 2001, 2000 and 1999 respectively. The
redundancies principally result from subrogation received on pooling agreement
case base reserves and claims in prior years. 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 ("Navy"). At the time the
bonds were issued by CCS as surety, KC entered into an indemnification
agreement, whereby KC indemnified CCS 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 was subsequently litigated and CCS
was unsuccessful in its litigation activities with the Navy. As a result, KC
reimbursed CCS $1,500,000 of the total subrogation recoverable of $1,851,000 in
November 2001 on the contract. CCS wrote off the remaining $351,000 reinsurance
recoverable as a charge to loss and loss adjustment expense and incurred an
additional $240,000 in legal fees during 2001.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated price increases due
to inflation are considered in estimating the ultimate claim costs, the increase
in average severities of claims is caused by a number of factors. Future average
severities are projected based on historical trends adjusted for anticipated
changes in underwriting standards, policy provisions, and general economic
trends. These anticipated trends are monitored based on actual development and
are modified if necessary.
The differences between the December 31, 2001 liability for losses and LAE
reported in the accompanying consolidated financial statements in accordance
with generally accepted accounting principles ("GAAP") and that reported in the
annual statement filed with the state insurance departments in accordance with
statutory accounting practices ("SAP") are as follows:
Liability for losses and LAE on a SAP basis
(which is net of reinsurance recoverables on
unpaid losses and LAE) ............................ $ 5,091,080
Subrogation recoverable ............................. 1,001,043
Derivative instrument ............................... (1,978,891)
---------------
Liability for losses and LAE, as reported
in the accompanying GAAP basis consolidated
financial statements .............................. $ 4,113,232
===============
Analysis of Loss and Loss Adjustment Expense Development
- --------------------------------------------------------
The following table represents the development of the statutory liability
for unpaid losses and LAE, net of reinsurance, for 1994 through 2001 (in
thousands).
1994 1995 1996 1997 1998 1999 2000 2001
--------- --------- --------- --------- --------- --------- ----------- -------
Liability for losses and loss
adjustment expenses, net
of reinsurance ........................ $ 1,625 $ 1,053 $ 595 $ 1,393 $ 1,680 $ 2,809 $ 3,335 $ 5,091
Liability re-estimated as of:
One year later ........................ 1,384 1,716 644 1,710 1,264 1,806 3,142 --
Two years later ....................... 1,420 1,815 1,013 1,711 655 1,188 -- --
Three years later ..................... 1,631 2,049 1,121 1,237 996 -- -- --
Four years later ...................... 1,726 2,036 818 1,686 -- -- -- --
Five years later ...................... 1,625 1,721 1,159 -- -- -- -- --
Six years later ....................... 1,328 2,083 -- -- -- -- -- --
Seven years later ..................... 1,640 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ---------- ----------- -------
Cumulative (deficiency)
redundancy ............................ $ (15) $(1,030) $ (564) $ (293) $ 684 $ 1,621 $ 193 $ 5,091
======= ======= ======= ======= ======= ========== =========== =======
1994 1995 1996 1997 1998 1999 2000 2001
------- ------- ------- ------- ------- ---------- ----------- -------
Cumulative amount of
liability, net of
reinsurance recoverables,
paid through:
One year later .................... $ 1,643 $ 1,334 $ 563 $ 1,802 $ 2,155 $ 2,196 $ 2,249 $ --
======= ======= ======= ======= ======= ========== =========== =======
Two years later ................... $ 2,316 $ 2,186 $ 1,631 $ 2,856 $ 1,878 $ 90 $ -- $ --
======= ======= ======= ======= ======= ========== =========== =======
Three years later ................. $ 2,164 $ 2,997 $ 2,466 $ 2,575 $ 488 $ -- $ -- $ --
======= ======= ======= ======= ======= ========== =========== =======
Four years later .................. $ 2,875 $ 3,506 $ 2,336 $ 1,345 $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= ========== =========== =======
Five years later .................. $ 3,230 $ 3,360 $ 929 $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= ========== =========== =======
Six years later ................... $ 3,062 $ 1,903 $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= ========== =========== =======
Seven years later ................. $ 1,572 $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= ========== =========== =======
Effect of Inflation
- -------------------
Inflation has not had a material impact upon the Company's operations for
the last three years.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Interest Rate Sensitivity
-------------------------
The following tables present principal maturity cash flows and related
weighted average interest rates by expected maturity as of December 31, 2001 and
2000:
2001 Expected Maturity Date
---------------------------
Fair
There- Value
2002 2003 2004 2005 2006 after Total 12/31/01
--------------------------------------------------------------------------------------------
(In thousands)
Assets
- ------
Debt securities available for sale ... $ 502 $ 3,424 $ 1,140 $ 1,757 $ 1,071 $ 1,445 $ 9,339 $ 9,339
Average interest rate ............ 6.4% 5.3% 5.8% 6.7% 5.8% 7.2% 6.2% 6.2%
Debt securities held to maturity ..... -- 260 100 -- -- -- 360 374
Average interest rate ............ -- 5.5% 5.5 -- -- -- 5.5% 5.5%
Mortgage loans ....................... 2 2 2 2 2 32 41 41
Average interest rate ............ 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Short-term investments ............... 434 -- -- -- -- -- 434 434
Average interest rate ............ 5.3% -- -- -- -- -- 5.3% 5.5%
Liabilities
- -----------
Debt including current
portion .......................... $ 729 $ 72 $ 72 $ 72 $ 72 $ 239 $ 1,256 $ 1,256
Average interest rate ............ 8.1% 6.3% 6.3% 6.3% 6.3% 6.3% 6.6% 6.6%
2000 Expected Maturity Date
---------------------------
Fair
There- Value
2001 2002 2003 2004 2005 after Total 12/31/00
-----------------------------------------------------------------------------------------
(In thousands)
Assets
- ------
Debt securities available for sale ..... $ 498 $ 504 $ 2,410 $ 2,051 $ 1,152 $ 938 $ 7,553 $ 7,553
Average interest rate .............. 5.5% 6.4% 5.9% 6.2% 7.3% 7.3% 6.4% 6.4%
Debt securities held to maturity ....... 865 -- 259 100 -- -- 1,224 1,224
Average interest rate .............. 6.3% -- 5.5 5.5% -- -- 5.8% 5.8%
Mortgage loans ......................... 701 1 2 2 2 34 742 742
Average interest rate .............. .5% 7.5% 7.5% 7.5% 7.5% 7.5% 6.3% 6.3%
Short-term investments ................. 434 -- -- -- -- -- 434 434
Average interest rate .............. 5.5% -- -- -- -- -- 5.5% 5.5%
Liabilities
- -----------
Debt including current
portion ............................ $ 1,184 $ 189 $ 70 $ 77 $ 84 $ 499 $ 2,103 $ 2,103
Average interest rate .............. 9.0% 7.7% 8.6% 8.5% 8.4% 8.0% 8.4% 8.4%
The operations of the Company are subject to risk resulting from interest
rate fluctuations to the extent that there is a difference between the amount of
the Company's interest-earning assets and the amount of interest-bearing
liabilities that are prepaid/withdrawn, mature or reprice in specified periods.
The principal objective of the Company's asset/liability management activities
is to provide maximum levels of net interest income while maintaining acceptable
levels of interest rate and liquidity risk and facilitating the funding needs of
the Company.
Due to the limited nature and duration of claims, generally one to two
years, the Company maintains a portfolio with a yield that approximates the
money market interest rate scenario.
Additionally, the Company's exposure to rapid changes in interest rates is
partially mitigated because most of the Company's interest-earning assets and
interest-bearing liabilities being written are at fixed rates.
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 adopted SFAS No. 133 effective January 1, 2001. 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. Under
the Registered Investment Advisors professional liability coverage, each
endorsed account is limited to a maximum liability coverage of $500,000. Due to
the volatility in the marketplace, the Company has suspended marketing of this
product effective September 2001.
In July 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
were 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. 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. The Company has not
evaluated the effect, if any, that the adoption of SFAS 142 will have on the
Company's consolidated financial statements.
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 January 1, 2002, however, earlier application is
encouraged. The Company adopted SFAS 144 effective January 1, 2002, and the
adoption of this statement had no impact on the financial condition, results of
operations, or cash flows of the Company.
Item 8. Consolidated financial statements and Supplementary Data
- ------ --------------------------------------------------------
The consolidated financial statements of the Company required by this Item
are listed in Item 14(a)(1) and (2) and are submitted as a separate section of
this report.
The following information presents unaudited quarterly operating results
for the Company for 2001 and 2000. The data has been prepared by the Company on
a basis consistent with the Consolidated Financial Statements included elsewhere
in this Form 10-K, and include all adjustments, consisting of normal recurring
accruals that the Company considers necessary for a fair presentation thereof.
12/31 9/30 6/30 3/31 12/31 9/30 6/30 3/31
(In thousands, except per share data) 01 01 01 01 00 00 00 00
- ------------------------------------- ------- ------- ------- --------- ------- -------- ------- -------
Revenue .......................................... $ 4,632 $ 4,213 $ 3,776 $ 3,840 $ 3,713 $ 3,758 $ 3,494 $ 3,460
Benefit related expenses ......................... 2,710 2,889 1,891 1,980 2,018 2,015 1,458 1,636
Operating and other expenses ..................... 2,129 1,656 1,854 1,528 1,396 1,439 1,494 1,163
------- ------- ------- ------- ------- ------- ------- -------
Total expenses ................................... 4,839 4,545 3,745 3,508 3,414 3,454 2,952 2,799
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income from continuing
operations ..................................... (207) (332) 31 332 299 304 542 661
Income tax (benefit) expense ..................... (59) (131) 4 110 259 103 180 222
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income before extraordinary
item ........................................... (148) (201) 27 222 40 201 362 439
Extraordinary item net of taxes .................. 158 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ................................ $ 10 $ (201) $ 27 $ 222 $ 40 $ 201 362 439
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of shares
outstanding - basic ............................ 5,589 5,597 5,597 5,564 5,529 5,553 5,511 5,448
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share - basic .............. $ 0.01 $ (0.04) $ 0.01 $ 0.04 $ 0.01 $ 0.04 $ 0.07 $ 0.08
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of shares
outstanding - diluted .......................... 5,612 5,667 5,667 5,564 5,642 5,635 5,593 5,448
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per share -
diluted ........................................ $ 0.01 $ (0.04) $ 0.01 $ 0.04 $ 0.01 $ 0.04 $ 0.06 $ 0.08
======= ======= ======= ======= ======= ======= ======= =======
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
- ------ -----------------------------------
On January 3, 2000, the Company filed a Form 8-K to register its change in
certifying accountant.
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
The current directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Francis M. Williams 60 Chairman of the Board of Directors
Joseph M. Williams 45 President and Treasurer
Andrew J. Cohen 48 Director
R. Donald Finn 58 Director
Edward J. Edenfield IV 44 President, CCS
All Directors of the Company hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Officers of
the Company are elected annually by the Board of Directors and hold office at
the discretion of the Board.
Set forth below is information regarding the directors and executive
officers of the Company:
Francis M. Williams has been Chairman of the Board of the Company since its
inception and, until June 1992, was President of the Company. In addition, Mr.
Williams has been Chairman of the Board and Director of CCS and SSI from
inception and President and Chairman of the Board of KC since its inception in
1979. Prior to November 1988, Mr. Williams was the Chairman of the Board and
Chief Executive Officer of Kimmins Corp. and its predecessors and sole owner of
K Management Corp. From June 1981 until January 1988, Mr. Williams was the
Chairman of the Board of Directors of College Venture Equity Corp., a small
business investment company; and since June 1981, he has been Chairman of the
Board, Director, and sole stockholder of Kimmins Coffee Service, Inc., an office
coffee service company. Mr. Williams has also been a director of the National
Association of Demolition Contractors and a member of the executive committee of
the Tampa Bay International Trade Council.
Joseph M. Williams has served as the Treasurer and President of the Company
since June 1992. He also served as Vice President and Secretary of the Company
from its inception on November 18, 1991 through June 1992. Mr. Williams served
as a member of the Board of Directors of the Company from November 18, 1991
through February 24, 1997. In addition, Mr. Williams has been the Secretary and
Treasurer of Kimmins Corp. since October 1988 and a member of the Board of
Directors of CCS since 1988. He held the position of President of CCS from 1991
through August of 1996. From 1989 through 1990 he held the position of Secretary
and Treasurer of CCS and from 1991 through 1994 served as Treasurer of CCS. Mr.
Williams has been employed by the Company and Kimmins Corp. in various
capacities since 1994. From January 1982 to December 1983, he was managing
partner of Williams and Grana, a firm engaged in public accounting. From January
1978 to December 1981, Mr. Williams was employed as a senior tax accountant with
Price Waterhouse & Company. Joseph M. Williams is the nephew of Francis M.
Williams.
Edward J. Edenfield, IV is the President and Chief Operating Officer of
CCS. Mr. Edenfield joined CCS in May of 1996 as Chief Operating Officer, and was
promoted to President in September of 1996. He brings over sixteen (16) years of
management experience in the insurance industry, specializing in contract and
miscellaneous surety bonds. Prior to his involvement with CCS, Mr. Edenfield had
various management and senior management positions in the insurance industry.
Mr. Edenfield began his career in 1980 with Continental Insurance Company in
their New York home office. Within the last five years prior to CCS, Mr.
Edenfield has held the position of Assistant Vice President in charge of surety
at Meadowbrook Insurance Group from August 1995 to May 1996; Vice President in
charge of underwriting at Universal Surety of America from October 1994 to
August 1995; Vice President in charge of underwriting at American Bonding
Company from January 1992 to September 1994, and Assistant Secretary in charge
of treaty and facultative reinsurance from March 1992 to December 1992. Mr.
Edenfield completed his bachelor's degree in Business Administration with an
emphasis in Economics from Lycoming College. Mr. Edenfield is presently a Board
Member of The American Surety Association, and is involved in the National
Association of Independent Sureties, as well as being a member of the National
Association of Surety Bond Producers. Mr. Edenfield is responsible for
administration and finance of the insurance operations at CCS.
Andrew J. Cohen was elected as a Director to the Company's Board effective
February 24, 1997. Currently Co-President and Chief Executive Officer of ABC
Capital Corp., an investment management firm based in Tampa, Florida and also
acts as Co-Chairman on their Board of Directors. In addition, Mr. Cohen is
President of Albany Associates, Inc., a Tampa based management consulting firm.
From June of 1972 through 1997, Mr. Cohen was co-President of ABC Fabric of
Tampa, Inc. which was the fourth largest private retail fabric company in the
United States. Mr. Cohen brings both national marketing and corporate management
experiences to the Company.
R. Donald Finn was elected as a Director to the Company's Board effective
September 9, 1999. For more than the last five years, Mr. Finn has been a
partner in the law firm of Gibson, McAskill & Crosby, located in Buffalo, New
York, where Mr. Finn has practiced law for more than the last 25 years.
Beneficial Ownership Reporting Compliance
- -----------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors, and greater than 10 percent stockholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on the Company's review of the copies of such forms
received by it, or written representations from certain reporting persons that
no Form 5 was required for those persons, the Company believes that, during the
year ended December 31, 2001 all filing requirements applicable to its officers,
directors, and greater than 10 percent beneficial owners were complied with.
Item 11. Executive Compensation and Other Information
- ------- --------------------------------------------
Summary Compensation Table
- --------------------------
The following table provides certain summary information concerning
compensation paid or accrued by the Company and its subsidiaries to and on
behalf of the Company's President and CCS's President for each of the three
years in the period ended December 31, 2001:
All
Other Other
Name and Principal Annual Compensation
Position Year Salary Bonus Compensation (1)
-------- ---- -------- -------- ------------ ------------
Joseph M. Williams ...................................... 2001 $125,000 $ 50,000 $ 10,800 $ 10,295
President and Treasurer ................................. 2000 $ 95,000 $ 64,000 $ 7,650 $ 8,641
CTI ..................................................... 1999 $ 95,000 $ 60,000 $ 6,600 $ 8,167
Edward J. Edenfield, IV ................................. 2001 $115,000 $ 25,000 $ 6,000 $ 4,905
President and CEO, CCS .................................. 2000 $115,000 $ 50,500 $ 6,000 $ 4,641
1999 $115,000 $ 35,000 $ 6,000 $ 4,181
(1) Represents the Company's contribution to the employee's account of the
Company's 401(k) Plan and premiums paid by the Company for term life
insurance and long-term disability. These plans, subject to the terms and
conditions of each plan, are available to all employees.
Aggregate Option Exercises in 2001 and December 31, 2001 Option Values
- ----------------------------------------------------------------------
The following table shows information concerning options held by the
officers shown in the Summary Compensation Table at the end of 2001. Mr. Joseph
M. Williams exercised 56,000 and 44,000 options in 2001 and 2000, respectively.
Number of Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs at Options/SARs at Year
Value Year-End End ($)(2)
Shares Acquired Realized (#) Exercisable/ Exercisable/
Name on Exercise (#) ($)(1) Unexercisable Unexercisable
- ---- --------------- ---------- --------------- --------------------
Joseph M. Williams ........................... 56,000 $82,500 0/0 $ 0/0
Edward J. Edenfield, IV ...................... -- $ -- 24,000/0 $ 22,800/0
(1) Value realized is calculated using the Company's closing stock price on the
date of exercise, March 8, 2001, per share, less the exercise price for
such shares.
(2) Value is calculated using the Company's closing stock price on December 31,
2001, per share, less the exercise price for such shares.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
There is no compensation committee of the Company's Board of Directors or
other committee of the Board performing equivalent functions. The person who
performs the equivalent function is Francis M. Williams, Chairman of the Board.
Francis Williams serves as an executive officer and director of Kimmins Corp. of
which Joseph Williams is also an executive officer.
Compensation of Directors
- -------------------------
During the year ended December 31, 2001, the Company paid Francis M.
Williams an annual fee of $75,000 as Chairman of the Board. All non-officer
Directors received an annual fee of $5,000. Directors are reimbursed for all
out-of-pocket expenses incurred in attending Board of Directors and committee
meetings.
Board Compensation Committee Report on Executive Compensation
- -------------------------------------------------------------
There is no formal compensation committee of the Board of Directors or
other committee of the Board performing equivalent functions. As noted above,
compensation is determined by Francis M. Williams, Chairman of the Board of the
Company under the direction of the Board of Directors. There is no formal
compensation policy for the Chief Executive Officer of the Company. Compensation
of the Chief Executive Officer, which primarily consists of salary, is based
generally on performance and the Company's resources. Compensation for Mr.
Joseph Williams has been fixed annually each year by the Chairman of the Board.
Mr. Joseph Williams' compensation is not subject to any employment contract.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
Common Stock Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned as of December 31, 2001 by (i) persons known by the
Company to own more than 5 percent of the Company's outstanding Common Stock,
(ii) each director and officer of the Company, and (iii) all directors and
executive officers of the Company as a group:
Amount and Nature of Percent of Issued
Name and Address Beneficial Ownership of and Outstanding
of Beneficial Owner (1) (2) Common Stock Common Stock
- -------------------------- ----------------------- -----------------
Francis M. Williams 3,826,541 (3) 68.4%
Joseph M. Williams 360,493 (4) 6.4%
R. Donald Finn 7,131 (5) .1%
Andrew J. Cohen 47,590 (6) .9%
Edward J. Edenfield IV 24,000 (7) .4%
Kimmins Corp. 1,723,290 30.8%
All directors and executive
officers as a group (five persons) 4,894,565 87.5%
(1) The address of all officers and Directors of the Company listed above are
in care of the Company at 4311 West Waters Avenue, Suite 401, Tampa,
Florida 33614.
(2) The Company believes that the persons named in the table have sole voting
and investment power with respect to all shares of common stock
beneficially owned by them, unless otherwise noted.
(3) Includes 2,508,621 shares owned by Mr. Francis Williams; 1,094,480 shares
allocated to Mr. Williams based on his 63.5% ownership in Kimmins Corp.,
29,345 shares owned by Mr. Williams' wife; 22,748 shares held by Mr.
Williams as trustee for his wife and children; 18,296 shares held by Mr.
Williams as custodian under the New York Uniform Gifts to Minors Act for
his Children; and 153,050 held by various Real Estate Partnerships of which
Mr. Williams is 100 percent Owner. Mr. Williams owns 63.5% of the
outstanding common stock of Kimmins Corp. and is its Chairman and Chief
Executive Officer.
(4) Includes 133,500 shares owned by Mr. Joseph M. Williams; 1,010 shares held
by Mr. Williams as trustee for his children; 219 shares held by the KC
401(K) Plan and ESOP of which Mr. Williams is fully vested. Also includes
205,764 shares held by KC's 401(K) Plan, Profit Participation Plan and
ESOP, options to acquire 20,000 shares of the Company's Common Stock held
by the ESOP, of which Mr. Williams is a trustee; Mr. Williams disclaims
beneficial ownership of these shares.
(5) Includes 2,131 shares owned by Mr. R. Donald Finn and options to acquire
5,000 shares of the Company's common stock.
(6) Includes 72,540 shares owned by C&C Properties a partnership in which Mr.
Cohen has a 50% ownership, 6,320 shares held in trust for Mr. Cohen's minor
children and options to acquire 5,000 shares of the Company's common stock.
(7) Includes options to acquire 24,000 shares of the Company's Common stock.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Surplus Debentures/Term Note
----------------------------
In 1988, CCS issued a surplus debenture to KC in exchange for $3,000,000
which bears interest at 10 percent per annum. In 1992, the debenture due to KC
from CCS was assigned to CTI. Interest and principal payments are subject to
approval by the Florida Department of Insurance. On April 1, 1997, CTI forgave
$375,000 of its $3,000,000 surplus debenture due to CCS. As a result, CCS
increased paid-in-capital by $375,000. As of December 31, 1999, no payments
could be made under the terms of the debenture. On June 30, 1999, CTI forgave
$576,266 of its $2,625,000 surplus debenture due to CCS. As a result, CCS
increased paid-in-capital to $1,000,000 from $423,734. As of December 31, 2001,
no payments could be made under the terms of the debenture.
Effective November 10, 1988, the Company entered into a $1,000,000
convertible term note agreement with TransCor Waste Services, Inc., a subsidiary
of KC. The note, originally due November 10, 2001, has been extended to November
10, 2002. The annual rate of interest is equal to one half of one percent per
annum in excess of the stated interest rate established by the Bank of America.
The average interest rate for 2001 was 8.6%. On December 26, 2001, the Company
made a principal note payment of $395,945 reducing the note to $604,055. The
lender may convert the principal amount of the note or a portion thereof into
common stock at $3.00 per share subsequent to a six-month anniversary and prior
to the close of business on the maturity date.
CCS writes surety bonds for KC and its affiliates. Revenues attributable to
transactions with KC and its affiliates were $88, $4,413 and $10,342 for the
years ended December 31, 2001, 2000 and 1999, respectively. Qualex performs
consulting services for KC and affiliates. Revenue attributable to transaction
with affiliates were $121,089, $171,292 and $117,075 for years ended December
31, 2001, 2000 and 1999, respectively.
Item 14. Exhibits, Consolidated financial statements,
Schedules, and Reports on Form 8-K
- ------- ----------------------------------
(a) The following documents are filed as part of this Annual Report on Form
10-K
1. Consolidated Financial Statements
- Independent Auditors' Report
- Consolidated Balance Sheets at December 31, 2001 and 2000
- Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2001.
- Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 2001.
- Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2001.
- Notes to Consolidated Financial Statements
2. Financial Statement Schedule
Schedule II - Condensed Financial Information of Registrant
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and, therefore, have been
omitted.
3. The following documents are filed as exhibits to this Annual Report on
Form 10-K:
3(a) - Articles of Incorporation*
3(b) - Bylaws*
10(a) - Lease agreement with Cumberland Properties, Inc.*
10(c) - 1991 Stock Option Plan*
11 - Statement Re: Computation of Earnings Per Share
22 - Subsidiary list
23 - Consent of Deloitte & Touche LLP
* Note - Incorporated by reference to the same exhibit number filed with
the Registrant's Registration Statement on Form 10 (File No. 0-19727.)
(b) Reports on Form 8-K - None
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14 is
submitted as a separate section of this report.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunder duly authorized.
CUMBERLAND TECHNOLOGIES, INC.
--------------------------------------------
Date: April 1, 2002 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: April 1, 2002 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams, President
Date: April 1, 2002 By: /s/ Francis M. Williams
--------------------------------------------
Francis M. Williams, Chairman of the Board
Date: April 1, 2002 By: /s/ R. Donald Finn
--------------------------------------------
R. Donald Finn, Director
Date: April 1, 2002 By: /s/ Andrew J. Cohen
--------------------------------------------
Andrew J. Cohen, Director
Date: April 1, 2002 By: /s/ Carol S. Black
--------------------------------------------
Carol S. Black, Secretary
(Principal Financial and Accounting Officer)
Annual Report on Form 10-K
Item 14(a), (c) and (d)
List of Consolidated Financial Statements
Consolidated Financial Statement Schedules and Exhibits
Year Ended December 31, 2001
Cumberland Technologies, Inc.
Tampa, Florida
CUMBERLAND TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
The following consolidated financial statements of Cumberland Technologies,
Inc. are included herein:
Page
----
Independent Auditors' Report..................................................34
Consolidated Balance Sheets at December 31, 2001 and 2000 .........