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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 [Fee Required]
For the fiscal year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]
For the transition period from to
---------- ----------
.
Commission File No. 0-19727
CUMBERLAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3094503
(State or other jurisdiction (I.R.S.Employer
of incorporation) Identification
No.)
4311 West Waters Avenue, Suite 501, Tampa, Florida 33614
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 885-
2112
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which
registered:
------------------- ----------------------------------------
Common Stock NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
NONE
--------------------------------------------------
(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. [ ]
$6,011,478
------------------------------------------------
Aggregate market value of voting stock (Common Stock) held by
nonaffiliates as of December 31, 1996.
5,763,070 shares of Common Stock $.001 par value
-------------------------------------------------
Number of shares of Common Stock outstanding as of
December 31, 1996.
PART I
Item 1. Business
------- --------
Cumberland Technologies, Inc. ("CTI" or "Cumberland"),
(f/k/a Cumberland Holdings, Inc.) a Florida corporation, was
formed on November 18, 1991, to be a holding company and a
wholly-owned subsidiary of Kimmins Corp. ("KC"). Effective
October 1, 1992, KC contributed all of the outstanding common
stock of two of its wholly-owned subsidiaries, Cumberland
Casualty & Surety Company ("CCS") and Surety Specialists, Inc.
("SSI") to CTI. KC then distributed to its stockholders CTI's
common stock on the basis of one share of common stock of CTI for
each five shares of KC common stock and Class B common stock
owned (the "Distribution"). CTI conducts its business through
its subsidiaries, CCS, SSI, Surety Group, Inc., Surety
Associates, Official Notary Service of Texas, Inc. ("ONS") and
Qualex Consulting Group, Inc. ("Qualex"), collectively, the
"Company." CCS, a Florida corporation formed in May 1988,
provides performance and payment bonds for contractors and
miscellaneous surety bonds to federal and local government
agencies. The surety services provided include reinsurance and,
to a lesser extent, direct surety. SSI, a Florida corporation
formed in August 1988, is a general lines agency which operates
as an independent agent. Surety Group (SG), a Georgia
corporation, and Associates Acquisition Corp. d/b/a Surety
Associates (SA), a South Carolina corporation, purchased in
February and July 1995, respectively, are general lines insurance
agencies which operate as independent agencies. ONS, a Texas
corporation formed in February 1994, provides registration and
sundry services to notaries. Qualex, a Florida corporation
formed in November 1995, provides claim and contracting
consulting services. Florida Credit & Collection Services, Inc.,
a Florida corporation formed in December 1996, provides
collection services.
During 1996, the Company introduced its bond software
program "Bond Pro". Cumberland conducts its business through
four of its subsidiaries and a number of independent agencies
which focus on selling and delivering surety insurance products
to consumers. Traditionally, the surety segment of the insurance
industry has provided their services in substantially the same
manner since inception. The need to advance technologically
created an opportunity for Cumberland to develop a software
product to organize its business. A management team of software
writers and insurance executives at Cumberland committed itself
to developing and distributing software that increases the speed
with which insurance companies deliver their products through
their agents and carriers to the consumer. It is Cumberland's
goal to reduce operating costs of insurance agents through the
use of the software Cumberland developed. Cumberland's business
strategy focuses on niche industry consolidation through the
implementation of communication technologies.
CCS is a property and casualty insurance company that was
incorporated in Texas on May 4, 1988. In September 1994, CCS
redomesticated from Texas to Florida. CCS is licensed to write
insurance in twenty-two states (Delaware, Florida, Georgia,
Idaho, Indiana, Kentucky, Louisiana, Maryland, Massachusetts,
Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South
Carolina, South Dakota, Tennessee, Texas, Washington, West
Virginia and Wyoming) and the District of Columbia and Guam and
currently has applications for admission pending in the following
ten states: Alabama, Arkansas, Illinois, Iowa, Kansas,
Mississippi, New York, Oklahoma, Pennsylvania, and Wisconsin.
Most of these states have a lengthy application process in which
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 Cumberland is waiting for inquiries or actions by the states.
The 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 CCS will apply in these
states.
CCS is currently attempting to obtain additional state
licenses to spread its risk geographically and increase its sales
of direct line insurance. Management believes, however, that CCS
can function profitably selling direct line insurance and
reinsurance in the states in which it is currently licensed.
Although licensed for all property and casualty lines of
insurance in the majority of the states, CCS has in the past, and
intends in the future, to primarily sell surety bonds to
contractors and miscellaneous surety bonds to federal and local
government agencies. Cumberland has been rated B+ (Very Good) by
A.M. Best, an insurance rating agency.
SSI is a general lines agency that was incorporated in
Florida on August 22, 1988. SSI secures surety risks for
contractors as an agent and for other agents (as a broker) and
secures insurance or reinsurance with twelve insurance companies,
one of which is CCS, SG and SA are also general lines insurance
agencies. The insurance companies pay SSI, SG and SA a
commission ranging from 15 to 30 percent of premiums paid by the
policyholders.
Qualex is a consulting company which provides services to
the surety and construction industries.
The percentages of gross revenue generated by the Company's
subsidiaries for the year ended December 31, 1996 were as
follows:
Subsidiary Revenue Percentage
------------------------ ------------------------
CCS 63 %
SSI 14
SG 6
SA 7
Qualex 10
------------------------
100 %
========================
Insurance Products
------------------
Cumberland sells contract, landfill, notary, various
miscellaneous bonds and registered investment advisors liability
insurance. In addition, the Company provides reinsurance on
surety bonds sold by other small specialty insurance companies.
Cumberland also assumes underwriting risk from other surety
insurance companies.
Contract surety bonds guarantee satisfactory performance and
completion of a contractors' work and payment of the contractors'
debts and obligations relating to the performance of the contract
covered by the bond. A default in performance or payment on a
bonded contract results in the surety being primarily liable for
these obligations, to the extent of the penal amount of the bond.
On insurance or surety products sold directly by Cumberland,
the exposure to loss would be the entire amount of the loss less
any portion for which Cumberland has secured reinsurance. On
reinsurance, Cumberland's exposure to loss would be limited to
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 such reinsurer.
Contract surety bonds which the Company sells directly and
those for which it provides or assumes reinsurance are sold
primarily to contractors involved in asbestos abatement,
hazardous remediation and other small contractors in other lines
of business. Typically, the contracts for which surety bonds are
provided range from $100,000 to $250,000, and the amount of the
surety bond is for the entire project.
Miscellaneous bonds include license and permit, court,
fidelity, notary and bonds for public officials. The bonds are
primarily required by state statute and are used to satisfy
certain obligations and to guarantee compliance of certain laws.
The bond amounts are typically less than $25,000 and the average
amount is $5,000. The Company's emphasis is to write bonds which
historically have a low ratio in order to minimize loss exposure.
Registered Investment Advisors (RIA) Liability Insurance is
a claims - made professional liability insurance product which
insures specific written warranty's under the insured's risk
management program. Each account is limited to $500,000 maximum
coverage and loss exposure is not realized until five (5) years
after purchase.
The Company generates revenues from direct premiums on
surety bonds it writes and reinsurance premiums on surety bonds
for which it provides reinsurance. Typically, premiums range
from 1 percent to 3 percent of the bond amount, with the exact
premium being established based on established underwriting
procedures.
Nature of Customers - Underwriting Procedures
---------------------------------------------
Cumberland has established an underwriting philosophy that
centers on guidelines which seek to minimize the liability of
issuing surety bonds by focusing on three principal areas: the
financial strength, experience, and operating capacity of the
contractor.
Underwriting guidelines for financial strength provide that
a contractor must have a minimum net worth of $100,000, minimum
working capital of $50,000, minimum working capital to total
contract backlog of 10 percent, minimum net worth to total
contract backlog of 20 percent, net income for the past two
years, and a debt to equity ratio less than 5:1. In addition,
underwriters analyze the contractor's access to lines of credit,
as well as secondary personal assets which could be utilized to
provide additional financial support.
Underwriting guidelines related to experience provide that
all key managers of a contractor must have a minimum of five
years of experience in the following areas: project management,
project administration, accounting, and company management.
Underwriters also investigate the past performance of the firm by
contacting prior owners, subcontractors, and suppliers that have
been connected with past projects to investigate a firm's ability
to perform its work and to meet its financial obligations on a
daily basis.
When analyzing a contractor's capacity, underwriters look
for consistent growth patterns which take into consideration the
ratio of working capital to total contract amount and net worth
to total contract amount. Underwriters require the outstanding
backlog to be less than 150 percent of the largest previous
backlog undertaken by the firm. Underwriters also consider the
insurance carried by the firm for asbestos abatement and
environmental experience and the financial integrity of the
insurance carrier. The underwriting guidelines require the
carrier to have an A rating by A.M. Best (an insurance rating
service) and to provide coverage on an occurrence basis.
If the firm seeking surety bonding fails to meet the above
requirements, the surety requires collateral to offset the
additional risk. This option is utilized if the firm meets 80
percent to 99 percent of the requirements. If a firm fails to
meet 80 percent of the requirements, it is denied surety bonding.
Cumberland also requires corporate indemnification, as well
as personal indemnification when the ownership of the firm is
closely held in order to mitigate the liability of issuing surety
bonding. Management believes that Cumberland can achieve
profitable operating results with its current operations of the
company. Management has entered into negotiations and is
actively pursing additional customers to add to and diversify
current operations.
Marketing of Insurance Products
-------------------------------
Software
--------
Cumberland began its Bond Pro software development
initiative in 1995. The product is designed to service the
national agency base that sell primarily miscellaneous and
contract surety bonds.
Miscellaneous Bonds
-------------------
These bonds are primarily sold through agents issued in
small dollar amounts and written to governmental bodies as
part of a licensing requirement. There are numerous types
of miscellaneous bonds sold in the United States. The
collective revenue generated from these bonds is over $1
million annually.
Each state and municipality within each state have bond
requirements. For example, if you wanted to secure a
license to sell hot dogs from a vending cart, most
municipalities required a bond be posted before the
governmental body would issue a license. The bonds usually
run between $1,000 and $20,000 and are valid for one year.
There is a very low loss ratio for these bonds as they do
not guarantee performance and each individual risk is
relatively small.
The premium per bond ranging from $50 to $500 and the
number of bonds an agent might write can exceed one thousand
per month. Each state requires numerous bond forms and the
agent and issuing company must wrestle with the problems
associated with legal requirements, approval and insurance
which varies from state to state. Also, the billing,
collection and accounts receivable associated with large
numbers of small invoices must be managed.
Contract Bonds
--------------
Contract 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. Cumberland's typical bond is less than $1.5
million with aggregate ongoing work of $3 million. The
bonds are provided to general contractors, subcontractors,
and specialty contractors and are marketed through insurance
agencies specializing in this type of coverage.
Cumberland's management has identified agencies which
specialize in bonds with the above parameters and solicit
their business by personal contact via agency visits. The
agency visits also allow for a demonstration of the Bond Pro
Software Program which helps to solidify a business
relationship due to advantages of automating the issuance of
bid, performance, and payment bonds. The efficiencies
gained in using the Bond Pro system for issuing, tracking,
and reporting bonds enhances Cumberland's ability to
increase premium and to develop relationships which may not
otherwise be possible due to competition for this class of
business.
Prior to Cumberland's software development initiative,
the insurance industry supplied their products through
agents on a manual basis, and made very little use of the
current technological advancements in communication methods.
Certainly billings and receivables in many instances, have
been automated but no integrated system existed which
effectively combined company approval, forms inventory, bond
issuance, invoicing, accounts receivable, collection,
renewals and management information reporting, as well as
conforming to the variety of state insurance regulations and
dealing with the issue that a single agent might deal with
ten to fifteen companies.
Starting in 1995, Cumberland's management elected to
initially focus on this neglected area. Since the launching
of the development of this product the company's software
team has written, applied for copyright, field tested and
began distributing the "Cumberland Bond Issuance Program" to
selected agents around the United States on October 1, 1996.
The full program encompasses all the required functions and
agency needs to run a full scale bond desk. The software
developed, when implemented inside the agency structure is
designed to reduce the labor required to provide the
service.
It is designed to assist the agency with the modules
they choose, and is structured to allow CTI to sell
components of the program to a board section of the surety
industry.
As of December 31, 1996 CTI has ten agencies using its
software and contracts for four installations.
It is CTI's intention in 1997 to create the first
simplified version of the software for sale through direct
mail to smaller agencies throughout the United States. This
product includes the basic forms and issuance sections of
the full program and will be marketed in a similar fashion
as America Online markets its service. CTI is producing a
software disk that will be mailed to the agents. All that
will be required for them to buy the service is to put the
mailed disk into their computer, review the demonstration
program and press a button to sign up for agency
authorization.
Also in development, is a marketing program which when
completed, will integrate with the full package and will
identify the customers in a given geographical area for the
product offered, and include various marketing programs for
the agents to use in securing the business. This program
will also be sold as a stand-alone product.
The Cumberland "Bond Pro" market penetration plan
directs four (4) sales field personnel to introduce the 400
largest surety agents to our program, install the program
and train the agents personnel in its use.
General
-------
Cumberland utilizes the services of its subsidiaries as
well as general agents for marketing, underwriting and
administration of its direct lines of business. Reinsurance
is provided on a treaty and facultative basis. Treaty
reinsurance involves providing reinsurance based on a
written agreement between the two sureties. The agreement
describes which business is covered and the amount covered
for each bond. Facultative reinsurance is provided on an
individual bond basis. Each bond is underwritten to
determine the acceptability of the risk and the amount of
reinsurance provided is determined by the underwriter's
evaluation of the risk.
Cumberland utilizes the independent agency system to
market its contract, landfill and miscellaneous bonds,
direct mail to market its notary bonds, and a general agency
to market it's registered investment advisor's insurance.
Utilizing its bond program, Cumberland markets its
insurance products through a direct sales force and a direct
mail system as well as the independent agency system.
Direct Insurance
----------------
During 1996, Cumberland Casualty & Surety Company
changed the focus of how it acquires surety premium. The
Company committed to enter the miscellaneous, license and
permit, probate, court and performance and payment bond
markets on a direct basis. The Company's emphasis will be
to market directly to agents for all classes of surety
business. This provides the Company with greater control
over marketing and underwriting functions which long-term,
will ensure a high quality and profitable book of business.
During 1994, 1995 and 1996 Cumberland had a Managing
General Agent Agreement with Midwest Indemnity Corp.
("Midwest"), (the "Managing General Agent"). Midwest is a
fifty-plus year old insurance agency which is primarily an
underwriter of surety bonds. Based in Illinois, Midwest
markets bonds nationally through a network of independent
agents which market to contractors in their geographic
areas. Midwest has been granted underwriting and binding
authority on bonds up to $500,000 and premium collection
authority, for which it receives a 35 percent commission to
cover overhead costs and the cost of commissions to
subagents. The profit from this agreement, after deductions
for commissions, reinsurance and losses is then split evenly
between Cumberland and the Managing General Agent. As of
December 31, 1996, the Company reported a profit split
recoverable from Midwest of approximately $.5 million.
Effective January 1, 1997 Cumberland dissolved its agreement
with Midwest Indemnity Corp.
Cumberland primarily writes direct surety bonds for KC
and its affiliates. Revenues attributable to direct surety
transactions with KC and its affiliates were $13,546, $4,535
and $2,873 for the years ended December 31, 1994, 1995 and
1996, respectively.
Reinsurance
-----------
Effective July 1, 1996, Cumberland Casualty & Surety
Company entered into a surety excess of loss reinsurance
agreement with Transatlantic Reinsurance Company which
provides the Company with the ability to write single bonds
up to $1,500,000 with a principal aggregate level of
$3,000,000. Transatlantic Reinsurance Company
(Transatlantic Re) is a carrier that specializes in
reinsurance treaties related to the surety business.
Established in 1952, Transatlantic Re is Best Rated A+
(Superior), with statutory surplus of $787,403,000 at
December 31, 1995. The reinsurance treaty provides the
Company the ability to actively pursue small to medium sized
contractors with revenues up to $5,000,000. It also allows
the Company to market and underwrite miscellaneous surety
bonds up to $1,500,000. The agreement is a principal excess
of loss agreement and Cumberland retains five percent (5%)
of $900,000 net loss, each principal excess of $100,000 net
loss, each principal. The Company retains ten percent (10%)
of the next $1,000,000 layer. This reinsurance treaty
effectively allows Cumberland Casualty & Surety Company to
market its products in all twenty-two (22) states they are
presently licensed in, which will lead to a better
geographic spread of risk and premium dollars.
A portion of Cumberland's reinsurance premiums written
were generated through a quota share reinsurance treaty (the
"Treaty") with an unaffiliated insurer, Indiana Lumbermen's
Mutual Insurance Company ("ILMIC"). ILMIC is a specialty
carrier that issues insurance policies related to the lumber
business and surety bonds. Established in 1897, ILMIC is
Best Rated B++ (Very Good) with statutory policyholders'
surplus of $25,242,000 at December 31, 1995. The terms of
this treaty provide that Cumberland assume 40 percent of all
bonds up to $250,000 written by ILMIC and also assume 40
percent of the losses and loss adjustment expenses
associated with the policies. ILMIC retained 40 percent
commission to cover agents' commissions, premium taxes and
general overhead expenses. This treaty has been replaced by
a pooling agreement, and although Cumberland is still
receiving residual revenues from this treaty, it does not
anticipate receiving significant future revenues from this
agreement.
For the period October 1991 to September 1993,
Cumberland entered into a pooling agreement with ILMIC.
Connecticut Indemnity Company ("CIC") and American Surety
Company ("American Surety") which replaces the quota share
reinsurance agreement. CIC is a member of the Orion Capital
Companies which are specialty writers of property and
casualty coverages with an emphasis on workers'
compensation, professional liability for architects and
engineers, nonstandard automobile and surety business. CIC
was formed in 1917 and had statutory surplus of $90,381,000
at December 31, 1995. CIC is Best Rated A (Excellent),
based on the consolidated performance of the Orion Capital
Companies by A.M. Best, an insurance rating agency. The
Orion Capital Companies had statutory surplus of
$520,306,000 at December 31, 1995 and, based on its
consolidated performance, is Best Rated A (Excellent).
American Surety is a small nondomestic surety which is not
rated. This pooling arrangement increased Cumberland's
diversification geographically and reduced the amount of
dependence on ILMIC. Because of this agreement, management
does not believe that the loss of the quota share
reinsurance treaty with ILMIC had a material adverse effect
on the operation of Cumberland.
The Company entered into a new pooling agreement
(beginning October 1993). Under the provisions of the new
agreement, CIC and ILMIC were replaced by Gulf Insurance
Company ("Gulf"). Under this agreement, Cumberland assumes
10% (effective April 1, 1996); 12.5% (effective April 1,
1995; 25% prior to that date) of certain surety policies
underwritten by Gulf. Gulf is a member of the Gulf
Insurance Group which was formed in 1940 and is jointly
owned by Primerica Corporation and Travelers Corporation.
Gulf is rated A+ (Superior) and had policyholders' surplus
of $269,179,379 at December 31, 1995. Gulf is a niche
market underwriter which targets small to medium size
accounts and offers D&O, E&O, fidelity and surety and other
specialty liability products.
Cumberland assumes reinsurance on a facultative and
treaty basis from several small sureties. The loss of one
of these customers would not have a material impact on the
operations of Cumberland.
Investments
-----------
Investments activities are conducted by an investment
committee which manages assets pursuant to investment
objectives and guidelines established by senior management
of Cumberland. These objectives require that the portfolio
consist of debt and equity securities of the type and
quality mix which will enable Cumberland to compete
effectively in the property and casualty insurance market,
provide appropriate interest margins and assure Cumberland's
continued solvency and profitability. In addition,
investments in tax-free obligations are made to the extent
of any tax advantages available. Investment in any security
not stated in the investment committee's philosophy is
limited to five percent of statutory surplus.
Reserves for Losses and Loss Adjustment Expenses
------------------------------------------------
Reserves for losses and loss adjustment expenses are
established based upon reported claims and Cumberland's
historical record of loss percentages and trends. The
amount of loss reserves for reported claims is based on a
case by case evaluation of the claim. Additionally,
historical data is reviewed and consideration is given to
the anticipated impact of various factors such as legal
developments and economic conditions, including the effects
of inflation. Amounts are adjusted periodically to reflect
these factors. In addition, Cumberland may incur additional
liability if its reinsurers do not meet their obligations.
Reinsurance does not discharge an insurance carrier from its
primary liability to a policy holder for the face amount of
the coverage.
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. In accordance with
statutory requirements, CCS's reserves are certified
annually at year end by an independent actuary.
There has been no material change in the mix of
business, including the location of business, geographic
mix, and types of risks assumed. Incurred losses increased
in 1994 due to a single principal on business written
through the 1991/92 pooling agreement. This loss was
atypical in nature, and the Company does not expect this
trend to continue. An additional reserve increase was
recognized during 1996 due to the increase in claims on a
1993/1994 Pooling Agreement.
Current fluctuations in inflation have not had a
material effect on the financial statements and there are no
explicit provisions in the financial statements for the
effects of inflation that may cause future changes in claim
severity.
Other than certain classification differences, there
are no material differences between statutory reserves and
Generally Accepted Accounting Principle ("GAAP") reserves.
The Company does not discount its loss reserves for
financial reporting purposes.
Claims Adjustment
-----------------
In addition to management's active participation in
claims administration, Cumberland has historically relied
upon outside claims adjusters and attorneys to help minimize
the cost of claims administration. Due to management's
active participation and the increased direct premium,
Cumberland believes it has the expertise to manage its
claims administration.
Regulation
----------
Cumberland is subject to regulation by various
supervising agencies which exercise broad administrative
powers with respect to licensing to transact business,
overseeing trade practices, licensing agents, approving
policy and bond forms, establishing reserve requirements,
prescribing dividend limitations, approving rates,
prescribing the form and content of required financial
statements, regulating the types and amount of investments
permitted and other matters, all as set forth in
regulations.
State laws regulating insurance holding companies, such
as Cumberland, may significantly limit the ability of CCS to
pay dividends to Cumberland, therefore affecting
Cumberland's ability to pay or KC's ability to require
Cumberland to pay loans or advances from KC. Under
insurance guaranty fund laws, insurers doing business in
states having such laws can be assessed up to prescribed
limits for policyholder losses incurred by insolvent
companies. The amount of any future assessments on
Cumberland under these laws cannot be reasonably estimated
at this time.
All of the states in which Cumberland is licensed
regulate insurers and their affiliates under insurance
holding company legislation. Under such laws, transactions
with related parties may be subject to prior notice or
approval depending on the size of the transaction in
relation to the Company's financial position. There can be
no assurance that such transactions will be approved in the
future.
Although the federal government generally does not
directly regulate the insurance industry, federal
initiatives often have an impact on the industry in a
variety of ways. Current and proposed federal measures
which may significantly affect the insurance industry
include employee benefit regulation, securities regulation
concerning insurance products, tax law changes affecting the
taxation of insurance companies, changes in the tax
treatment of insurance products, and proposed legislation to
more fully subject insurance companies to antitrust laws.
Changes in federal, state, and local regulations could have
a materially adverse effect on Cumberland's future
operations.
Cumberland believes it is substantially in compliance
with all material statutory regulations concerning its
primary business operations.
Competition
-----------
The insurance industry is highly competitive due to the
number and size of insurers and agencies. However, because
Cumberland markets its products in the specialty contract
surety and landfill market, Cumberland believes that its
competition is limited to a few regional surety companies
which have also targeted this market. The larger sureties
and insurance companies have chosen historically not to
enter this market.
Cumberland has aligned itself with other small sureties
as a reinsurer. Therefore, Cumberland is able to write
larger bonds than some competitors of the same financial
size because of the availability of reinsurance from these
sureties.
Cumberland operates in a highly competitive market for
miscellaneous bonds, and competes with its competition on
price and service.
Cumberland believes that the principal competitive
factors in the industry are reputation, managerial
experience, price, and breadth of services offered.
Cumberland believes that the experience of senior
management, together with their reputation and the use of
their bond program as a marketing tool, provides it with a
competitive advantage in the industry in which its products
are marketed.
Employees
---------
Cumberland employs thirty-one employees, of which two
are employed in an executive capacity, eight are employed in
professional capacities, and twenty-nine are employed in a
variety of administrative and clerical positions.
Cumberland believes that it can continue to operate
effectively with the current number of employees.
None of the Company's employees are union members and
none are subject to collective bargaining agreements. The
Company believes that its relationship with its employees is
satisfactory.
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. Interest and principal payments are due
quarterly only if and when CCS's surplus, as defined below,
exceeds $4,000,000 and are limited to an amount equal to
one-half of the statutory net income before dividends and
federal and foreign and income taxes of CCS during that
year. As of December 31, 1996, no payments could be made
under the terms of the debenture.
In 1992, the debenture due to KC from CCS was assigned
to CTI. CTI entered into a term note agreement with KC for
the outstanding amount of the debenture, including interest
arrearage ($4,291,049) at September 30, 1992 as part of the
Distribution. The term note is pari passi with the other
debts of CCS, bears interest at 10 percent and is due on
October 1, 2002. Interest and principal are due quarterly
with minimum payments equal to one half of net earnings
before interest and federal income taxes. The term note was
subordinate in right of payments to all policyholders of
CCS. Surplus funds are defined as funds CCS has remaining
after deduction of capital, insurance reserves and all other
liabilities, in accordance with accounting practices
prescribed or permitted by the Florida Insurance Department.
Effective October 1, 1996, CTI issued 1,723,290 shares
at the fair value of $3.00 per share of its common stock to
Kimmins Corp. (f/k/a Kimmins Environmental Services, Corp.)
in exchange for surrender of the Company's term note payable
in the amount of $5,169,870.
Item 2. Properties
------- ----------
Cumberland leases office space from a company owned by the
chairman of the Board, Mr. Francis M. Williams, at a monthly rate
of $4,347. The lease expired on February 28, 1997. A new lease
was executed March 1, 1997.
Item 3. Legal Proceedings
------- -----------------
Cumberland 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
Cumberland.
Item 4. Submission of Matters to a Vote of Security
Holders
------- --------------------------------------------------
None
Item 5. Market for the Company's Common Equity and Related
------- Stockholders Matters
--------------------------------------------------
--
The Company's Common Stock (symbol "CUMB") has been traded
in the over-the-counter market since October 1, 1992. Effective
December 16, 1996, Cumberland was approved and included in the
trading on the Nasdaq Small Cap Market. Bid and Asked prices
were set forth in Quotation Market Sheets published by the
National Quotation Bureau and Nasdaq. The bid and asked prices
for 1995 and 1996 were as follows:
1995 1996
------------------------------
Bid Ask Bid Ask
------- ---------------------
First Quarter $3/8 $1/2 $1/2 $9/16
Second Quarter 1/4 1/2 7/8 1.00
Third Quarter 1/4 1/2 3.00 3-1/4
Fourth Quarter 1/4 1/2 3.00 3-1/4
As of December 31, 1996, there were 1,062 stockholders of
record of the Common Stock. A number of such Holders are brokers
and other institutions holding shares in "street name" for more
than one beneficial owner.
Dividends
---------
The payment by the Company of dividends, if any, in the
future is within the discretion of its Board of Directors
and will depend upon the Company's earnings, capital
requirements (including working capital needs), and other
financial needs. Cumberland does not anticipate paying any
dividends on Cumberland Common Stock in the near future.
The future payment of dividends, if any, by CCS is
within the discretion of its Board of Directors and will
depend upon CCS's earnings, statutory limitations, capital
requirements (including working capital needs) and financial
condition, as well as other relevant factors. Applicable
state laws and regulations restrict the payment of dividends
by CCS to the extend of surplus profits less any dividends
that have been paid in the preceding twelve months or net
investment income for the year, whichever is less, unless
CCS obtains prior approval from the insurance commissioner.
CCS does not anticipate paying any dividends on CCS Common
Stock in the near future.
Item 6. Selected Financial Data
------- -----------------------
Income Statement Data:
Year Ended December 31
-------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- ----------------
(In Thousands - except per share data)
Operating data:
Net premium income . . . . . .$ 5,042 $ 4,412 $ 4,957 $ 5,068 $ 3,808
Net investment income . . . . . 331 337 284 397 404
Net realized gain (losses) . . - 22 (124) 124 118
Benefits and expenses . . . . . 5,418 4,825 6,604 7,016 6,952
Income (loss) before income
taxes . . . . . . . . . . . . 248 238 (1,209) (228) (583)
Net income (loss) . . . . . . . 183 231 (1,073) (228) (583)
Pro forma net income (loss) per
share (1) . . . . . . . . . . .$ .05 $ .06 $ (.27)$ (.06)$ (.14)
(1) Pro forma net income (loss) per share (unaudited) for 1992
and 1993 has been calculated based on the 4,039,780 shares
of Cumberland Common Stock that were outstanding after the
Distribution. The 1994, 1995 and 1996 net income (loss) per
share amounts have been computed based on the actual
weighted average number of shares outstanding during the
respective years, adjusted for the dilutive effect of stock
options.
Balance Sheet Data:
Year Ended December 31
-------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- ----------------
(In Thousands - except per share data)
Balance sheet data:
Investments . . . . . . . . . .$ 7,637 $ 5,046 $ 5,852 $ 6,303 $ 6,110
Cash and cash equivalents . . . 1,161 3,117 1,701 1,236 669
Accounts receivable . . . . . . 1,361 948 2,540 550 925
Reinsurance recoverables (1) 1,363 1,876 1,749 1,697 988
Deferred policy acquisition
costs . . . . . . . . . . . . 697 340 581 435 635
Intangibles . . . . . . . . . . -- -- 134 2,163 1,957
Total assets . . . . . . . . . 12,608 11,956 12,834 12,709 11,769
Policy liabilities and
accruals:
Unearned premiums . . . . . . 1,895 1,037 1,631 1,182 1,862
Losses and LAE (1) . . . . . 3,497 3,355 3,138 2,352 1,992
Term notes/surplus debentures,
including accrued interest 4,291 4,403 4,343 4,798 0
Other long-term debt . . . . . -- -- -- -- 1,533
Total liabilities . . . . . . . 10,169 9,351 11,518 11,419 5,956
Total stockholders' equity . . 2,439 2,605 1,316 1,290 5,813
(1) The 1992, 1993, 1994, 1995 and 1996 amounts have been
adjusted to reflect the Company's adoption of SFAS 113.
"Accounting and Reporting for Reinsurance of Short-Duration
and Long- Duration Contracts." See Note 1 of the Notes to
Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial
------- Condition and Results of Operations
-------------------------------------------------
Results of Operations
---------------------
The following table sets forth, for the periods indicated,
(i) summary financial data (in thousands), and (ii) the
percentage change in the dollar amount for such items from period
to period.
Percentage Increase
(Decrease)
Year Ended December Year Ended December
31 31
--------------------------------------------------
1994 1995 1996 1995 1996
--------------------------------------------------
Net premium income . . $ 4,957 $ 5,068 $ 3,808 $ 2.2%$ (24.9)
Net investment income 284 397 404 39.8 1.8
Net realized gains
(losses) . . . . . . (124) 124 118 200.0 (4.8)
Other revenues . . . . 278 1,199 2,039 331.3 70.1
Benefits and expenses 6,604 7,016 6,952 6.2 (.9)
Loss before income taxes (1,209) (228) (583) 81.1 (155.7)
Net loss . . . . . . . (1,073) (228) (583) 78.8 (157.7)
Year Ended December 31, 1996 Compared to Year Ended December 31,
1995
-----------------------------------------------------------------
-
During the year ended December 31, 1996, net premium income
decreased by 25 percent to $3,808,000 from $5,068,000 for the
year ended December 31, 1995.
Net reinsurance premiums earned through the Pooling
Agreements were $2,693,418 and $4,440,632 for 1996 and 1995,
respectively representing a decrease of $1,747,214, or an overall
39 percent decrease in assumed premiums.
Direct premiums earned were $1,114,901 and $627,683 for 1996
and 1995, respectively, representing an increase of $487,218 or
78 percent.
During 1996, direct premiums written by CCS increased while
assumed premiums decreased as a result of the marketing
activities of the Company. CCS's direction is to penetrate the
direct market while decreasing the volume of reinsurance premiums
assumed through Pooling Agreements. The following table reflects
the written premium activity for 1996 and 1995.
Written Premiums
--------------------------------------------
1995 1996 % Change
-------------- -------------- --------------
Direct . . . . . $ 881,683 $ 2,025,796 $ 130%
Assumed . . . . 3,899,884 2,890,050 (26%)
-------------- -------------- --------------
Total . . . . . $ 4,781,567 $ 4,915,846 $ 3%
============== ============== ==============
During the year ended December 31, 1996 and 1995, investment
income before capital gains was $403,919 and $397,681,
respectively. Realized gains, net of losses, for the year ended
December 31, 1996 and 1995 was $117,824 and $124,004,
respectively. The net result was investment income remained
consistent for 1996 as compared to 1995.
Other revenues for the year ended December 31, 1996
increased to $2,039,331 from $1,198,249 for the year ended
December 31, 1995, an increase of 70.1%. The increase is a
direct result of an increase of $612,350 in commission income
earned by subsidiary surety agencies, and an increase of $228,729
in consulting revenues derived from Qualex which was formed in
November 1994.
During the year ended December 31, 1996, benefits and claims
expenses increased to $1,670,640 from $1,245,546 for the year
ended December 31, 1995. The increase in benefit and claims
expenses of $425,095 is attributed to claims on reinsurance
assumed pooling agreements. During 1996, an increase of $300,000
was charged to the 1993/94 pooling agreement. Management
believes the increase in claims arising from business written in
the Pooling Agreement has leveled off and anticipates that losses
associated with the reinsurance contracts will decrease during
1997. Losses associated with direct premiums represent
approximately 11% of premiums earned or $127,232.
During the year ended December 31, 1996, the amortization of
deferred policy acquisitions costs decreased to $1,532,355 from
$2,380,140 for the year ended December 31, 1995. The decrease is
attributable to the decrease in earned premiums.
During the year ended December 31, 1996, operating expenses
increased to $3,255,805 from $2,882,255 in 1995. The increase is
due to additional expenses associated with the purchase of two
agencies during 1995, expenses incurred in research and
development of Cumberland's Bond Program, and additional
personnel employed to direct market its insurance products.
Net interest expense decreased to $493,337 in 1996 from
$508,217 in 1995 due to the conversion on the term note to equity
on October 1, 1996.
The Company s effective tax (benefit) rate for 1996 and 1995
was -0- percent for 1996 and 1995. The deviation from statutory
rates for 1996 and 1995 primarily relates to the Company s
establishment of a valuation allowance on a portion of the net
operating loss, the future realization of which is uncertain.
Year Ended December 31, 1995 Compared to Year Ended December 31,
1994
-----------------------------------------------------------------
During the year ended December 31, 1995, net premium income
increased by 2 percent to $5,068,000 from $4,957,000 for the
year ended December 31, 1994. Premium income for 1995, when
compared to 1994, remained relatively flat. Net reinsurance
premiums earned through the pooling agreements were $4,441,000
and $4,453,000 for 1995 and 1994, respectively. Direct premiums
earned were $628,000 for 1995 as compared to $503,000 for 1994,
an increase of $125,000 or 25%.
During the year ended December 31, 1995, net investment
income increased to $521,000 from $160,000 for the year ended
December 31, 1994. The increase in investment income is
attributed to net realized gains of $124,000 and an increase in
the interest rate earnings on the bond portfolio during 1995.
The Company realized net losses on sales of investments in common
stocks in 1994 of $123,000.
Other revenue for the year ended December 31, 1995 increased
to $1,199,000 from $278,000 for the year ended December 31, 1994,
an increase of 331%. The majority of the increase relates to
$489,000 of commission income derived from SG and SA which were
acquired in 1995, and $425,000 of consulting revenues derived
from Qualex which was formed in November 1994.
During the year ended December 31, 1995, benefits and claims
expenses decreased to $1,246,000 from $2,646,000 for the year
ended December 31, 1994. The ratio of benefits and claims
expenses to net premium income for 1995 (25%) decreased from 1994
(53%) primarily due to a decrease in incurred losses relating to
a single principal on business written through the 1991/92
pooling agreement. This loss was atypical in nature and expensed
during 1994.
During the year ended December 31, 1995, the amortization of
deferred policy acquisition costs increased to $2,380,000 from
$2,038,000 for the year ended December 31, 1994. The ratio of
amortization of deferred policy acquisition costs to net premium
income for 1995 (47%) approximated that for 1994 (41%).
During the year ended December 31, 1995, operating expenses
increased to $2,882,000 from $1,515,000 in 1994. This increase
was due primarily to purchasing the two agencies and expanding
the Company's book of business.
Net interest expense increased to $508,200 in 1995 from
$406,000 in 1994 primarily due to interest expense associated
with the purchase of SG and SA.
The Company s effective tax (benefit) rate for 1995 was -0-
percent as compared to (11.2) percent for 1994. The deviation
from statutory rates for 1994 and 1995 primarily relates to the
Company s establishment of a valuation allowance on a portion of
the net operating loss, the future realization of which is
uncertain.
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
premiums up to an amount equal to three times its statutory
surplus, or approximately $15,104,000 and $15,405,000 at
December 31, 1996 and 1995, respectively. Therefore, based upon
statutory guidelines, the Company could increase earned premiums
by approximately $11,296,000 in 1997 in addition to the amount
earned in 1996. The primary sources of liquidity for the Company
are funds generated from surety premiums, investment income, and
proceeds from sales and maturities of portfolio investments. The
principal expenditures are payment of losses and loss adjustment
expenses, insurance operating expenses, and commissions.
At December 31, 1996, the Company s $11,629,224 of total
assets calculated based on generally accepted accounting
principles were distributed primarily as follows: 59 percent in
cash and investments (including accrued investment income), 17
percent in receivables and reinsurance recoverables, 22 percent
in intangibles and deferred policy acquisition costs and 2
percent in other assets.
The Company maintains a liquid operating position and
follows investment guidelines that are intended to provide an
acceptable return on investment while maintaining sufficient
liquidity to meet its obligations.
Net cash used in operating activities was $315,000, $375,000
and $355,000 for the years ended December 31, 1994, 1995 and
1996, respectively. In 1994, the cash used in operating
activities of $315,000 was due primarily to an increase in trade
accounts receivable and the net loss for the year offset by an
increase in ceded reinsurance payable. In 1995 and 1996 the cash
used in operating activities was primarily attributable to
payments of claims and reinsurance, which offset in part by a
decrease in accounts receivable.
Net cash (used in) provided by (used in) investing
activities was $(1,024,000), $(383,000), and $358,000 for the
years ended December 31, 1994, 1995 and 1996, respectively.
Investing activities consist of purchases and sales of
investments and advances to and from KC.
KC and Cumberland entered into a term note agreement
evidencing the balance of the surplus debenture which was due KC
from CCS. The surplus debenture, as well as all accrued interest,
has been assigned to Cumberland. Refer to Note 8 of the Notes to
Consolidated Financial Statements.
Losses and Loss Adjustment Expenses
-----------------------------------
The consolidated financial statements include the estimated
liability for unpaid losses and loss adjustment expenses (LAE) of
CCS. The liabilities for losses and LAE are determined using
case-basis evaluations and statistical projections and represent
estimates of the ultimate net cost of all unpaid losses and LAE
incurred through the end 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 1994, 1995 and 1996 to the gross amounts
reported in Cumberland s balance sheets:
December 31
1994 1995 1996
-----------------------------------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at beginning
of year . . . . . . . . . . $1,708,761 $ 1,625,703 $1,052,547
-----------------------------------
Provision for losses and LAE
for claims occurring in the
current year, net of
reinsurance . . . . . . . . 2,425,455 1,486,546 1,370,640
Increase (decrease) in
estimated losses and LAE for
claims occurring in prior
years, net of reinsurance 220,600 (241,000) 300,000
-----------------------------------
Incurred losses during the
current year, net of
reinsurance . . . . . . . . 2,646,055 1,245,546 1,670,640
Losses and LAE payments for
claims, net of
reinsurance, occurring
during:
The current year . . . . . 810,903 161,279 422,544
Prior years . . . . . . . 1,918,210 1,657,423 1,705,721
-----------------------------------
2,729,113 1,818,702 2,128,265
-----------------------------------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at end of year . . 1,625,703 1,052,547 594,922
Reinsurance recoverables on
unpaid losses at end of year
(1) . . . . . . . . . . . . 1,512,219 1,299,257 1,396,874
-----------------------------------
Liability for losses and LAE,
gross of reinsurance
recoverables on unpaid
losses, at end of year . . $ 3,137,922 $ 2,351,804 $1,991,796
===================================
(1) Exclusive of ceded unearned premiums accounts.
Cumberland experienced a $241,000 excess in reserves for
losses and loss adjustment expenses in 1995, and experienced a
deficiency of $220,600 and $300,000 in 1994 and 1996,
respectively for losses incurred in prior years. The excess in
1995 principally resulted from settling case basis reserves
established in prior years for amounts that were less than
expected. The deficiency in 1994 principally resulted from a
single principal on business written through the 1991/92 pooling
agreement. This loss was atypical in nature and the Company does
not expect this situation to be indicative of a trend. The
deficiency in 1996 is a result of additional claims expense on a
1993/94 pooling agreement.
The anticipated effect of inflation is implicitly considered
when estimating liabilities for losses and LAE. While anticipated
price increases due to inflation are considered in estimating the
ultimate claim costs, the increase in average severities of
claims is caused by a number of factors. Future average
severities are projected based on historical trends adjusted for
anticipated changes in underwriting standards, policy provisions,
and general economic trends. These anticipated trends are
monitored based on actual development and are modified if
necessary.
The differences between the December 31, 1996 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 . . . . . . . . . . . $ 907,833
Reinsurance recoverables on unpaid losses and
LAE . . . . . . . . . . . . . . . . . . . . 1,396,874
Salvage and subrogation . . . . . . . . . . . (312,911)
---------------
Liability for losses and LAE, as reported in
the accompanying GAAP basis financial
statements . . . . . . . . . . . . . . . . . $ 1,991,796
===============
Analysis of Loss and Loss Adjustment Expense Development
--------------------------------------------------------
The following table represents the development of the
liability for unpaid liabilities, net of reinsurance, for 1989
through 1996 (in thousands).
1989 1990 1991 1992
------------- -------------------------- -------------
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,003 $ 2,171 $ 1,663 $ 2,426
Liability re-estimated
as of:
One year later . . . 2,113 3,003 1,273 2,239
Two years later . . 1,908 2,549 1,200 2,546
Three years later . 1,806 2,349 1,316 2,263
Four years later . . 1,636 2,471 1,443 2,418
Five years later . . 1,678 2,368 1,234 -
Six years later . . 1,639 2,466 - -
Seven years later . 1,635 - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (632) $ (295)$ 429 $ 8
============= ========================== =============
1993 1994 1995 1996
------------- -------------------------- -------------
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,709 $ 1,625 $ 1,053 $ 595
Liability re-estimated
as of:
One year later . . . 2,033 2,228 2,186 -
Two years later . . 1,481 2,601 - -
Three years later . 2,947 - - -
Four years later . . - - - -
Five years later . . - - - -
Six years later . . - - - -
Seven years later . - - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (1,238) $ (976)$ (1,133) $ -
============= ========================== =============
/TABLE
1989 1990 1991 1992
------------- -------------------------- -------------
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 1,351 $ 1,931 $ 806 $ 1,151
============= ========================== =============
Two years later . . $ 1,524 $ 2,188 $ 884 $ 1,834
============= ========================== =============
Three years later . $ 1,614 $ 2,267 $ 1,095 $ 2,088
============= ========================== =============
Four years later . . $ 1,614 $ 2,295 $ 1,254 $ 1,957
============= ========================== =============
Five years later . . $ 1,623 $ 2,295 $ 1,260 $ -
============= ========================== =============
Six years later . . $ 1,623 $ 2,331 $ - $ -
============= ========================== =============
Seven years later . $ 1,630 $ - $ - $ -
============= ========================== =============
1993 1994 1995 1996
------------- -------------------------- -------------
S>
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 765 1,643 1,334 -
============= ========================== =============
Two years later . . 1,058 2,316 - -
============= ========================== =============
Three years later . 2,868 - - -
============= ========================== =============
Four years later . . - - - -
============= ========================== =============
Five years later . . - - - -
============= ========================== =============
Six years later . . - - - -
============= ========================== =============
Seven years later . - - - -
============= ========================== =============
Effect of Inflation
-------------------
Inflation has not had, and is not expected to have, a
material impact upon the Company s operations for the last three
years.
Item 8. Financial Statements and Supplementary Data
------- -------------------------------------------
The financial statements of the Company required by this
Item are listed in Item 14(a)(1) and (2) and are submitted as a
separate section of this report.
Item 9. Changes in and Disagreements with Accountants on
------- Accounting and Financial Disclosure
------------------------------------------------
None
Item 10. Directors and Executive Officers of the Registrant
-------- --------------------------------------------------
The current directors and executive officers of Cumberland
are as follows:
Name Age Position
-----------------------------------------------------------------
Francis M. Williams 55 Chairman of the Board
of Directors
Joseph M. Williams 40 President, Treasurer
and Director
George A. Chandler 67 Director
Edward J. Edenfield, IV 38 President, CCS
All Directors of Cumberland hold office until the next
annual meeting of stockholders and the election and qualification
of their successors. Officers of Cumberland are elected annually
by the Board of Directors and hold office at the discretion of
the Board.
Set forth below is information regarding the directors and
executive officers of Cumberland:
Francis M. Williams has been Chairman of the Board of
Cumberland since its inception and, until June 1992, was
President of Cumberland. In addition, Mr. Williams has been
Chairman of the Board and Director of CCS and SSI from
inception and President and Chairman of the Board of KC
since its inception in 1979. Prior to November 1988, Mr.
Williams was the Chairman of the Board and Chief Executive
Officer of Kimmins Corp. (a predecessor of KC) 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 the National Association of Demolition Contractors
and a member of the executive committee of the Tampa Bay
International Trade Council.
Joseph M. Williams has been the Secretary, Treasurer
and a Director of Cumberland since its inception and since
June 1992 has been President of Cumberland. In addition, Mr.
Williams has been the Secretary and Treasurer of Kimmins
Corp. since October 1988, the Vice President, Secretary, and
Treasurer of CCS since April 1989, and Vice President,
Secretary, and Treasurer of SSI since August, 1989. From
June 1985 through October 1988, Mr. Williams was the
secretary of Kimmins Corp. a predecessor of KC. Mr. Williams
has been employed by the Company and Kimmins Corp. in
various capacities since January 1984. From January 1982 to
December 1983, he was the managing partner of Williams and
Grana, a firm engaged in public accounting. From January
1978 to December 1981, Mr. Williams was employed as a senior
tax accountant with Price Waterhouse & Co. Joseph M.
Williams is the nephew of Francis M. Williams.
Edward J. Edenfield, IV is the President and Chief
Operating Officer of Cumberland Casualty & Surety Company.
Mr. Edenfield joined Cumberland Casualty & Surety Company in
May of 1996 as Chief Operating Officer, and was promoted to
President in September of 1996. He brings over sixteen (16)
years of management experience in the insurance industry,
specializing in contract and miscellaneous surety bonds.
Mr. Edenfield completed his bachelor's degree in Business
Administration with an emphasis in Economics from Lycoming
College. Prior to his involvement with Cumberland, Mr.
Edenfield had various management and senior management
positions in the insurance industry. Most recently he was
Assistant Vice President - Surety with Meadowbrook Insurance
Group in Southfield, Michigan. Mr. Edenfield began his
career in 1980 with Continental Insurance Company in their
New York home office. Mr. Edenfield is presently a Board
Member of The American Surety Association, and is involved
in the National Association of Independent Sureties, as well
as being a member of the National Association of Surety Bond
Producers. Mr. Edenfield is responsible for administration
and finance of the insurance operations at Cumberland.
George A. Chandler has been a Director of Cumberland
since its inception. In addition, Mr. Chandler has been a
Director of KC since January 1990. Since November 1989, Mr.
Chandler has been an independent business consultant. Mr.
Chandler was Chairman of the Board from July 1986 to
November 1989, and President and Chief Executive officer
from October 1985 to November, 1989 of Aqu-Chem, Inc., a
manufacturer of packaged boilers and water treatment
equipment. From May 1983 to October 1985, he was President,
Chief Executive Officer, and Director of American Ship
Building Co., which is engaged in the construction,
conversion and repair of cargo vessels. Mr. Chandler is also
a Director of The Allen Group, Inc. and DeVlieg Bullard,
Inc.
Compliance with Section 16(a) of the Securities Exchange Act
------------------------------------------------------------
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, 1996 all filing requirements applicable
to its officers, directors, and greater than 10 percent
beneficial owners were complied with.
Item 11. Executive Compensation and Other Information
-------- --------------------------------------------
Summary Compensation Table
The following table provides certain summary information
concerning compensation paid or accrued by the Company and its
subsidiaries to and on behalf of the Company s President for the
year ended December 31, 1996:
Long-Term
Annual Compensation Compensation
---------------------------- -------------------
Name of Individual Other All
and Principal Annual Stock other
Position Year Salary Bonus Compensation Options Compensation
Joseph M. Williams
President and
Treasurer . . 1996 $ 95,000 $37,000 $ - $ - $ -
1995 $ 95,000 $30,000 $ - $ - $ -
1994 $ 95,000 $30,000 $ - $ - $ -
Aggregate Option Exercises in 1996 and December 31, 1996 Option
Values
-----------------------------------------------------------------
The following table shows information concerning options
held by the officers shown in the Summary Compensation Table at
the end of 1996. No options were exercised by such persons in
1996.
Number of
Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options Options at Fiscal
at Fiscal Year End Year End ($)(1)
Name (#) Exercisable (E) Exercisable(E)
--------------------- ------------------- -----------------------
Joseph M. Williams 124,000 $ 359,500 (E)
(1) Represents the dollar value of the difference between the
value at December 31, 1996 and the option exercise price of
unexercised options at December 31, 1996.
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.
Compensation of Directors
-------------------------
During the year ended December 31, 1996, the Company paid
nonofficer Directors an annual fee of $5,000. Directors are
reimbursed for all out-of-pocket expenses incurred in attending
Board of Directors and committee meetings.
Board Compensation Committee Report on Executive Compensation
-------------------------------------------------------------
There is no formal compensation committee of the Board of
Directors or other committee of the Board performing equivalent
functions. As noted above, compensation is determined by
Francis M. Williams, Chairman of the Board of the Company under
the direction of the Board of Directors. There is no formal
compensation policy for the Chief Executive Officer of the
Company. Compensation of the Chief Executive Officer, which
primarily consists of salary, is based generally on performance
and the Company s resources. Compensation for Mr. Joseph Williams
has been fixed annually each year by the Chairman of the Board.
Mr. Joseph Williams compensation is not subject to any
employment contract. In 1994, Mr. Joseph Williams compensation
was $125,000. In 1994, the Company recorded net premium income of
$4,957,000 and a net loss of $1,073,362. In 1995, Mr. Joseph
Williams compensation was $125,000. In 1995, the Company
recorded net premium income of $5,068,315 and a net loss of
$228,210. In 1996, Mr. Joseph Williams' compensation was
$132,000. In 1996, the Company recorded net premium income of
$3,808,319 and a net loss of $582,744.
Item 12. Security Ownership of Certain Beneficial Owners
and
-------- Management
--------------------------------------------------
Commons Stock Ownership of Certain Beneficial Owners and
Management
-----------------------------------------------------------------
The following table sets forth the number of shares of
Cumberland s Common Stock beneficially owned as of December 31,
1996 by (i) persons known by Cumberland to own more than 5
percent of Cumberland s outstanding Common Stock, (ii) each
director and officer of Cumberland, and (iii) all directors and
officers of Cumberland as a group:
Amount and Nature
Name and Address of Beneficial Percent of Issued and
of Beneficial Owner Ownership of Common Outstanding Common
(1) (2) Stock Stock
--------------------- ------------------- -----------------------
Francis M.
Williams . . . . . 3,542,592 (3) 65.1 %
Joseph M. Williams 349,783 (4) 6.4 %
George A. Chandler 2,669 (5) *
All directors and
officers as a
group (three
persons) . . . . 3,895,044 71.5 %
(1) The address of all officers and Directors of Cumberland
listed above are in care of Cumberland at 4311 W.
Waters Ave., Suite 501, Tampa, FL 33614.
(2) Cumberland believes that the persons named in the table
have sole voting and investment power with respect to
all shares of common stock beneficially owned by them,
unless otherwise noted.
(3) Includes 2,259,207 shares owned by Mr. Francis
Williams; 1,059,306 shares allocated to Mr. Williams
based on his ownership in Kimmins Corp., 29,345 shares
owned by Mr. Williams wife; 22,748 shares held by Mr.
Williams as trustee for his wife and children; 18,296
shares held by Mr. Williams as custodian under the New
York Uniform Gifts to Minors Act for his Children; and
153,690 held by various Real Estate Partnerships of
which Mr. Williams is 100 percent Owner.
(4) Includes 8,800 shares owned by Mr. Joseph M. Williams;
options to acquire 115,000 shares of Cumberland Common
Stock; 219 shares held by the KC 401(K) Plan and ESOP
of which Mr. Williams is fully vested; 205,764 shares
held by KC s 401(K) Plan, Profit Participation Plan and
ESOP, options to acquire 20,000 shares of Cumberland
Common Stock held by the ESOP, of which Mr. Williams is
a trustee, but of which Mr. Williams disclaims
beneficial ownership.
(5) Includes 1,869 shares owned by Mr. George A. Chandler
and options to acquire 800 shares of Cumberland Common
Stock.
* Less than one percent.
Item 13. Certain Relationships and Related Transactions
-------- ----------------------------------------------
CCS writes surety bonds for KC and its affiliates. Revenues
attributable to transactions with KC and its affiliates were
$13,546, $4,535 and $2,873 for the years ended December 31, 1994,
1995 and 1996, respectively.
In May 1988, CCS issued KC a surplus debenture in exchange
for $3,000,000, bearing interest at 10 percent per annum.
Interest and principal payments are due quarterly only if and
when CCS s surplus, as defined below, exceeds $4,000,000 and are
limited to an amount equal to one-half of the statutory net
income before dividends and federal and foreign income taxes of
CCS during that year. In December 1988, CCS issued to KC a
surplus debenture for $5,000,000 bearing interest at 12 percent
per annum. CCS obtained permission from the Commissioner of
Insurance and repaid this debenture in 1991. This $5,000,000
payment was applied to the outstanding principal and therefore
did not reduce the outstanding interest.
In 1992, the Company assigned the debenture due to KC from
CCS to CTI. CTI entered into a term note agreement with KC for
the outstanding amount of the debenture, including interest
arrearage ($4,291,049) at September 30, 1992 as part of the spin-
off transaction. The term note is pari passi with the other debts
of the Company, bears interest at 10 percent and is due on
October 1, 2002. For the first five years interest and principal
are due quarterly with minimum payments equal to one-half of net
earnings before interest and federal income taxes. This
debenture was subordinate in right of payment to all
policyholders of CCS. Surplus funds are defined as funds of CCS
remaining after deduction of capital, insurance reserves and all
other liabilities, in accordance with accounting practices
prescribed or permitted by the Florida Insurance Department.
Effective October 1, 1996, CTI issued 1,723,290 shares at the
fair value of $3.00 per share of its common stock to Kimmins
Corp. (f/k/a Kimmins Environmental Service, Corp.) in exchange
for surrender of the Company's term note payable in the amount of
$5,169,870.
SSI acts as an agent for surety bonds written for KC and its
affiliates. Commission revenues attributable to transactions with
KC and its affiliates were $59,759, $43,183 and $16,803 for the
years ended December 31, 1994, 1995 and 1996, respectively.
CCS and SSI filed a consolidated tax return with KC for 1988
through September 30, 1992. CTI filed a separate return for the
three months ending December 31, 1992. Under a tax-sharing
agreement with KC, CCS and SSI were charged that portion of the
consolidated liability which is in direct proportion to the ratio
of CCS s and SSI s pre-tax financial income or loss to the
consolidated totals, without consideration of the effect of
permanent and temporary differences which were allocated, in
total, to KC. CCS and SSI, accordingly, did not record deferred
taxes on their balance sheets and the annual charge representing
CCS s and SSI s tax liability was settled through an intercompany
charge.
Item 14. Exhibits, Financial Statements, Schedules, and
-------- Reports on Form 8-K
----------------------------------------------
(a) The following documents are filed as part of this Annual
Report on Form 10-K
1. Financial Statements
- Report of Independent Certified Public Accountants
- Consolidated balance sheets at December 31, 1995
and 1996
- Consolidated statements of operations for each of
the three years in the period ended December 31,
1996
- Consolidated statements of stockholders equity
for each of the three years in the period ended
December 31, 1996
- Consolidated statements of cash flows for each of
the three years in the period ended December 31,
1996
- Notes to consolidated financial statements
2. Financial statement schedules
I - Summary of Investments - Other than
Investments in Related Parties
II - Condensed Financial Information of Registrant
III - Supplementary Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts
All other Schedules are omitted since the required
information is not present or is not present in amounts
sufficient to require submission of the Schedules, or because the
information required is included in the financial statements and
notes thereto.
3. The following documents are filed as exhibits to this
Annual Report on Form 10-K:
3(a)*- Articles of Incorporation and Bylaws
10* - Material contracts
11 - Statement Re: Computation of earnings per share
22 - Subsidiary list
* Previously filed as part of Registrant s Registration
Statement on Form 8, File No. 0-19727 and incorporated
herein by reference thereto.
(b) Reports on Form 8-K
Form 8-K was filed during the three months ended
December 31, 1996 due to the term note converted to
equity. The filing included Condensed Consolidated Pro
Forma Balance Sheet dated September 30, 1996.
(c) Exhibits
The response to this portion of Item 14 is submitted as
a separate section of this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is submitted as
a separate section of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunder duly authorized.
Date: April 15, 1997 CUMBERLAND TECHNOLOGIES, INC.
-----------------------------
Date: April 15, 1997 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 15, 1997 By: /s/ Joseph M. Williams
-----------------------------
Joseph M. Williams, President
Date: April 15, 1997 By: /s/ Francis M. Williams
-----------------------------
Francis M. Williams,
Chairman of the Board
Date: April 15, 1997 By: /s/ George A. Chandler
-----------------------------
George A. Chandler, Director
Date: April 15, 1997 By: /s/ Carol S. Black
-----------------------------
Carol S. Black, Secretary
(principal financial and
accounting officer)
Annual Report on Form 10-K
Item 14(a), (c) and (d)
List of Financial Statements, Financial Statement
Schedules and Exhibits
Year Ended December 31, 1996
Cumberland Technologies, Inc.
Tampa, Florida
CUMBERLAND TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
The following consolidated financial statements of
Cumberland Technologies, Inc. are included herein:
Page
Report of Independent Certified Public Accountants . . . . . 30
Consolidated Balance Sheets at December 31, 1995 and 1996 . . 31
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended December 31, 1996 . . . . 33
Consolidated Statements of Stockholders Equity for
Each of the Three Years in the Period Ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Cash Flows for Each of
the Three Years in the Period Ended December 31, 1996 . . 35
Notes to Consolidated Financial Statements . . . . . . . . . 36
The following consolidated financial statement schedules are
filed as part of this report:
Schedule I Summary of Investments Other than
Investments in Related Parties . . . . . . . . 54
Schedule II Condensed Financial Information of Registrant 55
Schedule III Supplementary Insurance Information . . . . . 59
Schedule IV Reinsurance . . . . . . . . . . . . . . . . . 60
Schedule V Valuation and Qualifying Accounts . . . . . . 61
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.
The following exhibits are filed as part of this report:
Exhibit 11 - Statement Re: Computation of Earnings Per
Share
Exhibit 22 - Subsidiary List
Exhibit 27 - Financial Data Schedule
Report of Independent Certified Public Accountants
Board of Directors
Cumberland Technologies, Inc.
We have audited the accompanying consolidated balance sheets of
Cumberland Technologies, Inc. as of December 31, 1995 and 1996,
and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. Our audits also included
the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Cumberland Technologies, Inc. at December
31, 1995 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the
related financial statement schedules, when considered in
relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set
forth therein.
ERNST & YOUNG LLP
April 10, 1997
Tampa, Florida
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-----------------------------
1995 1996
-------------- --------------
Investments - Notes 1 and 3:
Securities available-for-
sale at fair value:
Fixed maturities . . . . . $ 3,452,553 $ 3,055,753
Equity securities . . . . 1,160,500 1,020,016
Fixed maturity securities
held-to-maturity, at
amortized cost . . . . . . 1,294,758 1,664,264
Residential mortgage loan on
real estate, at unpaid
principal . . . . . . . . 46,367 45,838
Short-term investments . . 348,993 323,993
----------------------------
Total investments . . . . 6,303,171 6,109,864
Cash and cash equivalents 1,235,930 669,076
Accrued investment income 87,231 89,652
Reinsurance recoverable . . 1,697,417 987,953
Accounts receivable:
Trade, less allowance for
doubtful accounts of
$67,209 at December 31,
1995 and $-0- December
31, 1996 . . . . . . . . 428,376 906,530
Affiliate . . . . . . . . 122,052 18,006
Deferred policy acquisition
costs . . . . . . . . . . 435,272 635,189
Intangibles, net . . . . . 2,162,961 1,956,724
Other assets . . . . . . . 236,566 396,442
----------------------------
$ 12,708,976 $ 11,769,436
============================
See notes to consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
-----------------------------
1995 1996
-------------- --------------