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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
For the fiscal year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______to ________.
Commission File No. 0-19727
CUMBERLAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3094503
(State or other jurisdiction (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 -------------------------------
The NASDAQ Stock Market
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
------------------
(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 ]
$5,143,604
Aggregate market value of voting stock (Common Stock) held by
nonaffiliates of the Registrant as of March 27, 1998
5,449,458 shares of Common Stock $.001 par value
Number of shares of Common Stock outstanding as of March 27, 1998
Documents incorporated by reference: NONE
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 Cumberland
Technologies, Inc. and subsidiaries (the Company or
Cumberland ) 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 Cumberland s Bond program in
independent insurance agencies, the impact of insurance laws and
regulation, the availability of financing, reliance on key
management personnel, ability to manage growth, the Company s
expectations regarding the adequacy of current financing
arrangements, product demand and market growth, and other
statements regarding future plans and strategies, anticipated
events or trends similar expressions concerning matters that are
not historical facts are forward looking statements. These
statements are based on certain assumptions and 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 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. The Company assumes no obligation to update publicly
any such forward-looking statements, whether as a result of new
information, future events or otherwise.
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. ( SG ), Surety
Associates ( SA ), Official Notary Service of Texas, Inc. ("ONS")
and Qualex Consulting Group, Inc. ("Qualex") (collectively
together with Cumberland, 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 direct surety and, to a lesser extent, reinsurance. SSI,
a Florida corporation formed in August 1988, is a general lines
agency which operates as an independent agent. SG, a Georgia
corporation, and Associates Acquisition Corp. d/b/a Surety
Associates, a South Carolina corporation, purchased by Cumberland
in February and July 1995, respectively, are general lines
insurance agencies which operate as independent agencies.
Qualex, a Florida corporation formed in November 1995, provides
claim and contracting consulting services.
Cumberland conducts its business through five 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
delivered its products through an antiquated manual process. The
need to advance technologically created an opportunity for
Cumberland to develop a software product to organize its
business. During 1996, the Company introduced its bond software
program "BondPro". A management team of software architects and
developers and insurance executives at Cumberland committed
itself to developing and distributing software that increases the
speed with which the agents 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 the Company s proprietary information system.
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-four states (Arkansas, Delaware, Florida,
Georgia, Idaho, Indiana, Kentucky, Louisiana, Maryland,
Massachusetts, Missouri, Montana, Nebraska, Nevada, North Dakota,
Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee,
Texas, Washington, West Virginia and Wyoming), the District of
Columbia and Guam and currently has applications for admission
pending in the following six states: Alabama, Kansas,
Mississippi, New York, Oklahoma, and Wisconsin. Most of these
states have a lengthy application 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 Cumberland is waiting for inquiries or actions by these
pending 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. 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.
Insurance Ratings
-----------------
Insurers compete with other insurance companies on the basis
of a number of factors, including the ratings assigned by A.M.
Best.
A.M. Best reviews an insurer s profitability, leverage and
liquidity, as well as the insurer s book of business, the
adequacy and soundness of its reinsurance, the quality and
estimated market value of its assets, the adequacy of its
reserves and the experience and competence of its management.
A.M. Best ratings are based upon factors relevant to the insured
customer and are not directed to the protection of investors.
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 claims
administration services to the surety and construction
industries.
The percentages of gross revenue generated by the Company's
subsidiaries for the year ended December 31, 1997 were as
follows:
Subsidiary Revenue Percentage
------------------------ ------------------------
CCS 63 %
SSI 14
SG 6
SA 7
Qualex 10
------------------------
100 %
========================
Cumberland s investment portfolio consists primarily of
investment grade debt and equity securities. The market value of
these securities vary depending upon general economic and market
conditions and the interest rate environment. From time to time,
Cumberland may be required for business or regulatory reasons to
sell certain of its investments at a time when their market value
is less than the cost of such of investments.
Regulation
----------
The insurance subsidiary is subject to varying degree of
supervision and regulation in the jurisdictions in which they
conduct business under statutes which delegate regulatory,
supervisory and administrative powers to state insurance
regulators. The nature of the regulation varies from
jurisdiction to jurisdiction but typically involves prior
approval of the acquisition of control of an insurance company
controlling an insurance company, regulation of certain
transactions entered into by an insurance company with any of its
affiliates, limitations on dividends, approval or filing of
premium rates and policy forms for many lines of insurance,
solvency standards, minimum amounts of capital and surplus that
must be maintained, limitations on amounts or types and amount of
investments, limitations on the size of risks which may be
insured by a single company, licensing of insurers and agents,
deposits of securities for the benefit of policy or surety bond
holders, reporting of financial condition and other matters. In
addition, state insurance regulators perform periodic financial
and market conduct examinations of insurance companies. All such
regulation is intended generally to protect the policy or surety
bond holders, rather than equity holders. No assurance can be
given that future legislative or regulatory changes will not
adversely affect CCS s business.
Adverse Legislation
-------------------
A significant portion of the CCS s business is and will
continue to be derived from the writing of commercial surety
bonds mandated by various states statutes and local ordinances to
cover acts of public officials and private businesses, such as
Realtors, automobile dealers and others who generally interact
with members of the public . In recent years, several
jurisdictions have repealed legislation mandating use of various
types of these bonds, often replacing them with alternative
protection mechanisms, who assert claims against such officials
or businesses. In addition, contract surety bonds are required
generally by federal, state and local governments for public
works projects. If numerous governments were to repeal the
requirements for obtaining bonds of the type written by CCS,
their results of operations and financial condition would be
materially and adversely affected and, consequently their
financial condition could be materially and adversely affected.
Controlling shareholders
------------------------
Francis Williams and Kimmins Corp. (collectively Majority
Shareholder ) owns 78.3% of the outstanding ordinary shares of
the Company and collectively control the affairs and policies of
the Company. Circumstances may occur in which the interest
Majority Shareholders of the Company, could be in conflict with
the interest of the other holders of the common stock. In
addition, the Majority Shareholders may have an interest in
pursuing acquisitions, divestitures or other transactions that,
in their judgement, could enhance their equity investment, even
though such transactions might involve risks to the other holders
of the common stock.
The Company s Board of Directors has the authority to issue
up to one million shares of Preferred Stock and to determine the
price, rights, preferences and privileges of those shares without
any further vote or action by the stockholders. The rights of
the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. The issuance
of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying,
deferring or preventing a change of control of the Company.
Insurance Products
------------------
Cumberland sells contract, 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
under various reinsurance arrangements.
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 with 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 loss ratio in order to
minimize loss exposure.
Registered Investment Advisors (RIA) Liability Insurance is
a claims - made professional liability insurance product which
insures 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 determined 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 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 sells 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. Licensing
laws often require firms to provide surety in support of the
promise to lawfully conduct business. The scope of the bond
varies according to the law, the locality, the nature of the
guarantee, and the parties who have a right of action under
the bond.
The premium per bond ranges 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 contend with the problems
associated with legal requirements, approval and insurance
regulation 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.
Billings and receivables in many instances may 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, and which
conformed to the variety of state insurance regulations and
addressed 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 Company received its federal copyright registration
#TX4-542-729, effective March 29, 1997. This program
encompasses all the required functions an agency needs to
run a full scale bond desk when implemented inside the
agency structure. The software developed, is designed to
reduce the labor required to provide the service. The
program is structured to allow CTI to sell components of the
program to a broad section of the surety industry. As of
December 31, 1997, CTI has twenty agencies using its
software and intends to complete installations of
approximately four agencies per month during 1998.
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
through its bond program to market its contract and
miscellaneous bonds, outsourcing to market its notary bonds,
and a general agency to market its registered investment
advisor's insurance.
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 is to
market directly to agents for all classes of surety
business, thus providing the Company with greater control
over marketing and underwriting functions, management
believes that their emphasis will create a high quality and
profitable book of business.
During 1996, 1995 and 1994 Cumberland had a Managing
General Agent Agreement with Midwest Indemnity Corp.
("Midwest") or (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 was granted underwriting and binding
authority on bonds up to $500,000 and premium collection
authority, for which it received 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 was then split
evenly between Cumberland and the Managing General Agent.
Effective January 1, 1997, Cumberland terminated 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 $1,738, $2,873
and $4,535 for the years ended December 31, 1997, 1996 and
1995, 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 $952,707,000 at
December 31, 1996. The reinsurance treaty provides the
Company with 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. 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-six (26) states in which it is
presently licensed, which management believes leads to a
better geographic spread of risk and premium dollars.
For the period October 1991 to September 1993,
Cumberland entered into a pooling agreement with Indiana
Lumbermens Mutual Insurance Company ( ILMIC ), Connecticut
Indemnity Company ("CIC") and American Surety Company
("American Surety"). 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 $99,939,000
at December 31, 1996. 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
$672,168,000 at December 31, 1996 and, based on its
consolidated performance, is Best Rated A (Excellent).
American Surety is a small nondomestic surety which is not
rated.
The Company entered into a 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)
and 25% (prior to April 1, 1995) 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 $287,534,000 at December 31, 1996. Gulf is a niche
market underwriter which targets small to medium size
accounts and offers directors and officers, errors and
omissions, 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
-----------
Investment 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 guidelines 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 ratios 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.
During 1997, there was no material change in the mix of
business, including the location of business, geographic
mix, and types of risks assumed.
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, 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 material 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.
The surety market is highly competitive. Companies
generally compete for surety business on the basis of price,
service, financial strength, ratings, reputation and
capabilities of the independent agents and brokers who
solicit the business, and reputation of the insurance
company. The small contract and commercial bond markets in
which CCS competes have seen additional competition as both
large and small insurance companies are competing and
expanding in this area. CCS does not have a direct sales
force but instead relies on a nationwide network of
independent insurance agencies. In order to compete
effectively in the market, CCS will need to continue to
maintain productive relationships with the independent
insurance agencies that offer its products. Certain
existing and potential competitors of CCS are larger, and
have greater financial resources and more extensive
insurance product lines. The business of CCS could be
adversely affected by such competition.
Cumberland believes that the principal competitive
factors in the industry are reputation, managerial
experience, price, and breadth of services offered.
Employees
---------
As of December 31, 1997, 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.
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 $7,254 pursuant to a lease that was executed March 1, 1997 and
is effective through December 31, 2001.
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
PART II
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 SmallCap Market. High and Low bid prices
were set forth in Quotation Market Sheets published by the
National Quotation Bureau and Nasdaq. The high and low bid
prices for 1997 and 1996 were as follows:
Bid Information
-----------------------------
1997 1996
-------------- ---------------
High Low High Low
------- -------------- -------
First Quarter 2 1/2 1 5/8 9/16 1/2
Second Quarter 4 2 1 7/8
Third Quarter 3 5/8 2 19/32 3 1/4 3
Fourth Quarter 3 1/2 2 1/4 3 1/4 3
As of March 2, 1998, there were 971 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
------- -----------------------
Statement of Operations Data:
Year Ended December 31
-------------------------------------------
1997 1996 1995 1994 1993
-------- ---------------- -------- --------
(In Thousands - except per share data)
Operating data:
Net premium income . . . . . .$ 5,684 $ 3,808 $ 5,068 $ 4,957 $ 4,412
Commission income . . . . . . . 860 1,386 774 - -
Other income . . . . . . . . . 616 653 425 - -
Net investment income . . . . . 408 404 397 284 337
Net realized gain (losses) . . 202 118 124 (124) 22
Benefits and expenses . . . . . 7,599 6,952 7,016 6,604 4,825
Income (loss) before income
taxes . . . . . . . . . . . . 171 (583) (228) (1,209) 238
Net income (loss) . . . . . . . 171 (583) (228) (1,073) 231
Pro forma net income (loss) per
share (1) . . . . . . . . . . .$ .03 $ (.14)$ (.06)$ (.27)$ .06
(1) Pro forma net income (loss) per share (unaudited) for
1994 and 1993 has been calculated based on the
4,039,780 shares of Cumberland Common Stock that were
outstanding after the Distribution. The 1997, 1996 and
1995 net income (loss) per share amounts have been
computed based on the actual weighted average number of
shares outstanding during the respective years.
Balance Sheet Data:
Year Ended December 31
-------------------------------------------
1997 1996 1995 1994 1993
-------- ---------------- -------- --------
(In Thousands - except per share data)
Balance sheet data:
Investments . . . . . . . . . .$ 6,469 $ 6,110 $ 6,303 $ 5,852 $ 5,046
Cash and cash equivalents . . . 1,804 669 1,236 1,701 3,117
Accounts receivable . . . . . . 2,210 925 550 2,540 948
Reinsurance recoverables . . . 2,017 1,590 1,697 1,749 1,876
Deferred policy acquisition
costs . . . . . . . . . . . . 813 635 435 581 340
Intangibles . . . . . . . . . . 1,681 1,957 2,163 134 -
Total assets . . . . . . . . . 15,321 12,372 12,709 12,834 11,956
Policy liabilities and
accruals:
Unearned premiums . . . . . . 2,629 1,862 1,182 1,631 1,037
Losses and LAE . . . . . . . 2,550 1,992 2,352 3,138 3,355
Ceded reinsurance and accounts
payable . . . . . . . . . . 2,714 1,172 - - -
Term notes/surplus debentures,
including accrued interest 0 0 4,798 4,343 4,403
Other long-term debt . . . . . 1,419 1,533 - - -
Total liabilities . . . . . . . 9,312 6,559 11,419 11,518 9,351
Total stockholders' equity . . 6,009 5,814 1,290 1,316 2,605
/TABLE
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
--------------------------------------------------
1997 1996 1995 1997 1996
--------------------------------------------------
Net premium income . . $ 5,684 $ 3,808 $ 5,068 $ 49.3 % (24.9)%
Net investment income 408 404 397 1.0 % 1.8 %
Net realized gains
(losses) . . . . . . . 202 118 124 71.2 % (4.8)%
Other revenues . . . . 1,476 2,039 1,198 (27.6)% 70.1 %
Benefits and expenses 7,599 6,952 7,016 9.3 % (.9)%
Income (loss) before
income taxes . . . . 170 (583) (228) 70.8 % (155.7)%
Net Income (loss) . . . 170 (583) (228) 70.8 % (157.7)%
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
-----------------------------------------------------------------
During the year ended December 31, 1997, net earned
premium income increased by 49 percent to $5,684,000 from
$3,808,000. Direct premiums earned from nonaffiliates were
$5,836,655 and $1,149,377 for 1997 and 1996, respectively,
representing an increase of $4,687,278 or 408 percent.
Net reinsurance premiums earned through the Pooling
Agreements were $1,166,025 and $2,693,418 for 1997 and 1996,
respectively, representing a decrease of $1,527,393, or 57
percent.
During 1997, direct premiums written by CCS increased
while assumed premiums decreased as a result of the marketing
direction of the Company, which 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, net of reinsurance ceded, for 1997 and
1996.
Written Premiums
--------------------------------------------
1997 1996 % Change
-------------- -------------- --------------
Direct (net) $ 5,202,001$ 1,854,270 181%
Assumed (net) 1,032,260 2,513,775 (59% )
-------------- --------------
Total . . . . $ 6,234,261$ 4,368,045 43%
============== ==============
During the year ended December 31, 1997 and 1996,
investment income before capital gains was $408,050 and $403,919,
respectively. Realized gains, net of realized losses, for the
year ended December 31, 1997 and 1996 were $201,863 and $117,824,
respectively. Investment income remained consistent for 1997 as
compared to 1996.
Other revenues for the year ended December 31, 1997
decreased to $1,475,990 from $2,039,331 or 28 percent. Other
revenues consist primarily of commissions earned by subsidiary
agencies. The decrease of approximately $563,000 is attributable
to the transfer of direct writings by subsidiary agencies for
other carriers in 1996 to CCS in 1997.
During the year ended December 31, 1997, benefits and
claims expenses increased to $1,792,117 from $1,670,640 for the
year ended December 31, 1996. The increase in benefit and claims
expenses of $121,477 is attributed to the effects of reserve
increases on direct business of $928,009 which is offset by a
decrease in claim reserves on assumed business of $806,532. Loss
ratios on direct and assumed premiums earned during 1997 are 40%
and 63.6%, respectively.
During the year ended December 31, 1997, the net
amortization of deferred policy acquisitions costs increased to
$1,778,808 from $1,532,355 for the year ended December 31, 1996.
The increase is attributable to the increase in earned premiums.
During the year ended December 31, 1997, operating
expenses increased to $3,903,476 from $3,255,805 in 1996. The
increase is due to expenses incurred in the continuing research
and development of Cumberland's Bond Program and additional
personnel employed to direct market its insurance products.
Management believes that future programming updates to BondPro
and other related expenses will remain consistent with 1997
operating expenses.
Net interest expense decreased to $124,928 in 1997 from
$493,337 in 1996 due to the conversion on the term note to equity
on October 1, 1996. Interest expense on notes due to agencies
purchased in 1995 were $124,928 and $121,271 for the years ended
December 31, 1997 and 1996, respectively. The Company incurred
interest expense during 1996 of $372,006 on the term note prior
to the 1996 conversion.
The Company s effective tax (benefit) rate was -0-
percent for 1997 and 1996. The net operating loss carryforward at
December 31, 1997 is $841,568. The deviation from statutory
rates for 1997 and 1996 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, 1996 Compared to Year Ended December 31,
1995
----------------------------------------------------------------
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
--------------------------------------------------
1996 1995 1994 1996 1995
--------------------------------------------------
Net premium income . . $ 3,808 $ 5,068 $ 4,957 $ (24.9) 2.2 %
Net investment income 404 397 284 1.8 39.8
Net realized gains
(losses) . . . . . . . 118 124 (124) (4.8) 200.0
Other revenues . . . . 2,039 1,198 278 70.1 331.3
Benefits and expenses 6,952 7,016 6,604 (.9) 6.2
Loss before income
taxes . . . . . . . . (583) (228) (1,209) (155.7) 81.1
Net loss . . . . . . . (583) (228) (1,073) (157.7) 78.8
During the year ended December 31, 1996, net earned
premium income decreased by 25 percent to $3,808,000 from
$5,068,000 or $1,260,000. The decrease is primarily attributed
to the premiums assumed through reinsurance pooling agreements.
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. Net 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
direction 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 net of reinsurance, activity for 1996 and
1995.
Written Premiums
--------------------------------------------
1996 1995 % Change
-------------- -------------- --------------
Direct, net . $ 1,854,270 $ 881,683 110%
Assumed, net 2,513,775 3,899,884 (36%)
-------------- --------------
Total . . . . $ 4,368,045 $ 4,781,567 9%
============== ==============
During the year ended December 31, 1996 and 1995,
investment income before realized capital gains was $403,919 and
$397,680, respectively. Realized gains, net of realized losses,
for the year ended December 31, 1996 and 1995 was $117,824 and
$124,004, respectively. Overall 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 Consulting, Inc. a
claims consulting company 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 $425,094 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 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.
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 $15,134,000 and $15,104,000 at
December 31, 1997 and 1996, respectively. Therefore, based upon
statutory guidelines, the Company could increase earned premiums
by approximately $9,500,000 in 1998 in addition to the amount
earned in 1997.
The primary sources of liquidity for the Company are
funds generated from commissions, 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, 1997, the Company s $15,321,383 of
total assets calculated based on generally accepted accounting
principles were distributed primarily as follows: 55 percent in
cash and investments (including accrued investment income), 27
percent in receivables and reinsurance recoverables, 16 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) provided by operating activities was
$1,925,903, $(169,587) and $(375,690) for the years ended
December 31, 1997, 1996 and 1995, respectively. In 1997, the
cash provided by operating activities was primarily attributable
to the increase in ceded reinsurance payable and pooling
liabilities and accruals. In 1996, the cash used in operating
activities was primarily attributable to payments of claims and
reinsurance, which was offset in part by a decrease in accounts
receivable.
Net cash (used in) provided by investing activities was
$(120,560), $253,876, and $(659,944) for the years ended December
31, 1997, 1996 and 1995, respectively. Investing activities
consist of purchases and sales of investments and advances to and
from KC.
Net cash (used in) provided by financing activities was
$(670,889) $(803,772) and $570,263 for the years ended December
31, 1997, 1996 and 1995, respectively. Financing activities
consist of purchases of treasury stock, short-term borrowings and
repayment during 1997, 1996 and 1995 on notes payable that are a
result of the 1995 purchase of two agencies.
Year 2000 Issue (unaudited)
---------------------------
The Company has developed an in-house surety
administrative system BondPro . BondPro is an agency surety
bond administration system that issues bonds, tracks
underwriting, and accounting and reporting from its database.
BondPro is a window based program and is year 2000 compliant.
The Company is aware of the issues that many computer systems
will face as the millennium (year 2000) approaches. The Company,
however, believes that its own internal software and hardware is
year 2000 compliant. The Company believes that any year 2000
problems encountered by procurement agencies, and other customers
and vendors are not likely to have a material adverse effect on
the Company s operations. The Company anticipates no other year
2000 problems which are reasonably likely to have a material
adverse effect on the Company s operations. There can be no
assurance, however, that such problems will not arise.
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 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 1997, 1996 and 1995 to the gross amounts
reported in Cumberland s balance sheets:
December 31
1997 1996 1995
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at beginning $ 594,922 $ 1,052,547 $1,625,703
of year . . . . . . . . . . ----------- ----------- ----------
Provision for losses and LAE
for claims occurring in the
current year, net of
reinsurance . . . . . . . . 1,743,117 1,008,640 1,486,546
Increase (decrease) in
estimated losses and LAE for
claims occurring in prior
years, net of reinsurance 49,000 662,000 (241,000)
----------- ----------- ----------
Incurred losses during the
current year, net of
reinsurance . . . . . . . . 1,792,117 1,670,640 1,245,546
Losses and LAE payments for
claims, net of
reinsurance, occurring
during:
The current year . . . . 553,629 422,544 161,279
Prior years . . . . . . 440,479 1,705,721 1,657,423
----------- ----------- ----------
994,108 2,128,265 1,818,702
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at end of year . . 1,392,931 594,922 1,052,547
Reinsurance recoverables on
unpaid losses at end of year 1,157,369 1,396,874 1,299,257
----------- ----------- ----------
Liability for losses and LAE,
gross of reinsurance
recoverables on unpaid
losses, at end of year . . $ 2,550,300 $ 1,991,796 $2,351,804
=========== =========== ==========
Cumberland experienced a $49,000 and $662,000 a
deficiency for losses and loss adjustment expenses in 1997 and
1996, respectively, and experienced a redundancy of $241,000 in
1995, for losses incurred in prior years. The deficiency in 1997
principally resulted from settling case basis reserves
established in prior years for amounts that were more than
expected. The deficiency in 1996 is a result of additional
claims expense on a 1993/94 pooling agreement. The redundancy in
1995 principally resulted from settling case basis reserves
established in prior years for amount less than expected.
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, 1997 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) $ 1,392,931
Reinsurance recoverables on unpaid losses and
LAE . . . . . . . . . . . . . . . . . . 1,157,369
--------------
Liability for losses and LAE, as reported in
the accompanying GAAP basis financial
statements . . . . . . . . . . . . . . $ 2,550,300
==============
Analysis of Loss and Loss Adjustment Expense Development
--------------------------------------------------------
The following table represents the development of the
liability for unpaid liabilities, net of reinsurance, for 1990
through 1997 (in thousands).
1990 1991 1992 1993
------------- -------------------------- -------------
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 2,171 $ 1,663 $ 2,426 $ 1,709
Liability re-estimated
as of:
One year later . . . 3,003 1,273 1,239 3,815
Two years later . . 2,549 1,200 2,546 2,579
Three years later . 2,349 1,316 2,263 2,750
Four years later . . 2,471 1,443 2,418 2,851
Five years later . . 2,368 1,234 2,408 -
Six years later . . 2,466 1,199 - -
Seven years later . 2,370 - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (199) $ 464 $ 18 $ (1,142)
============= ========================== =============
1994 1995 1996 1997
------------- -------------------------- -------------
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,625 $ 1,053 $ 595 $ 1,393
Liability re-estimated
as of:
One year later . . . 1,384 1,716 644 -
Two years later . . 1,420 1,815 - -
Three years later . 1,631 - - -
Four years later . . - - - -
Five years later . . - - - -
Six years later . . - - - -
Seven years later . - - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (6) $ (762)$ (49) $ -
============= ========================== =============
/TABLE
1990 1991 1992 1993
------------- -------------------------- -------------
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 1,931 $ 806 $ 1,151 $ 765
============= ========================== =============
Two years later . . $ 2,188 $ 884 $ 1,834 $ 1,058
============= ========================== =============
Three years later . $ 2,267 $ 1,095 $ 2,088 $ 2,868
============= ========================== =============
Four years later . . $ 2,295 $ 1,254 $ 1,957 $ 3,717
============= ========================== =============
Five years later . . $ 2,295 $ 1,260 $ 3,533 $ -
============= ========================== =============
Six years later . . $ 2,331 $ 1,199 $ - $ -
============= ========================== =============
Seven years later . $ 2,364 $ - $ - $ -
============= ========================== =============
1994 1995 1996 1997
------------- -------------------------- -------------
S>
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 1,643 1,334 563 -
============= ========================== =============
Two years later . . 2,316 2,186 - -
============= ========================== =============
Three years later . 2,164 - - -
============= ========================== =============
Four years later . . - - - -
============= ========================== =============
Five years later . . - - - -
============= ========================== =============
Six years later . . - - - -
============= ========================== =============
Seven years later . - - - -
============= ========================== =============
/TABLE
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 56 Chairman of the Board
of Directors
Joseph M. Williams 41 President and Treasurer
George A. Chandler 68 Director
Andrew J. Cohen 44 Director
Edward J. Edenfield, IV 40 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. 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 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.
Prior to his involvement with Cumberland, 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 Cumberland
Casualty & Surety Company, 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 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.
Andrew J. Cohen was elected as a Director to
Cumberland s Board effective February 24, 1997. Since June
of 1972, Mr. Cohen has been co-President of ABC Fabric of
Tampa, Inc. which is now the fourth largest private retail
fabric company in the United States. Mr. Cohen brings both
national marketing and corporate management experience to
Cumberland.
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, 1997 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 each
of the three years ended December 31, 1997:
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 . . 1997 $ 95,000 $30,000 $ - $ - $ -
1996 $ 95,000 $37,000 $ - $ - $ -
1995 $ 95,000 $30,000 $ - $ - $ -
/TABLE
Aggregate Option Exercises in 1997 and December 31, 1997 Option
Values
-----------------------------------------------------------------
-
The following table shows information concerning options
held by the officers shown in the Summary Compensation Table at
the end of 1997. No options were exercised by such persons in
1997.
Number of
Securities
Underlying Value of Unexercised
Unexercised Options in-the-Money
at Fiscal Year End Options at Fiscal
(#) Year End ($)(1)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
--------------------- ------------------- -----------------------
Joseph M. Williams 124,000/0 $363,375/$0
(1) Represents the dollar value of the difference between
the value at December 31, 1997 and the option exercise
price of unexercised options at December 31, 1997.
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, 1997, 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.
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 March 27, 1998
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 executive
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. 3,602,002 (3) 66.1%
Williams . . . . .
Joseph M. Williams 358,783 (4) 6.6%
George A. Chandler 2,669 (5) *
Andrew J. Cohen . 42,590 (6) .8%
Edward J.
Edenfield IV . . . 8,000 (7) *
All directors and
executive officers
as a group (five
persons) . . . . . 4,014,044 73.7%
(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 2,318,617 shares owned by Mr. Francis
Williams; 1,059,306 shares allocated to Mr. Williams
based on his 61.5% 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 153,690 held by various Real Estate
Partnerships of which Mr. Williams is 100 percent
Owner. Mr. Williams owns 61.5% of the outstanding
common stock of Kimmins Corp. and is its Chairman and
Chief Executive Officer.
(4) Includes 8,800 shares owned by Mr. Joseph M. Williams;
options to acquire 124,000 shares of Cumberland Common
Stock; 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 Cumberland Common Stock held by the ESOP, of
which Mr. Williams is a trustee; Mr. Williams disclaims
beneficial ownership of these shares.
(5) Includes 1,869 shares owned by Mr. George A. Chandler
and options to acquire 800 shares of Cumberland 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.
(7) Includes options to acquire 8,000 shares of Cumberland
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, 1997, no payments could be made under the terms of
the debenture.
CTI entered into a term note agreement with KC for the
outstanding amount of the surplus debenture, including interest
arrearage ($4,291,049) at September 30, 1992 as part of the
Distribution. The term note was pari passi with the other debts
of CCS, had a 10 percent interest rate and was due on October 1,
2002.
Effective October 1, 1996, CTI issued 1,723,290 shares at
$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.
CCS writes surety bonds for KC and its affiliates. Revenues
attributable to transactions with KC and its affiliates were
$1,738, $2,873 and $4,535 for the years ended December 31, 1997,
1996 and 1995, respectively. Qualex performs consulting services
for KC and affiliates. Revenue attributable to transaction with
affiliates were $310,396, 338,478 and $43,183 for years ended
December 31, 1997, 1996 and 1995, respectively.
In 1992, the Company assigned a 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 was pari passi with the other debts of
the Company, had a 10 percent interest rate and was due on
October 1, 2002. Effective October 1, 1996, CTI issued 1,723,290
shares at $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.
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, 1997
and 1996
- Consolidated statements of operations for each of
the three years in the period ended December 31,
1997
- Consolidated statements of stockholders equity
for each of the three years in the period ended
December 31, 1997
- Consolidated statements of cash flows for each of
the three years in the period ended December 31,
1997
- 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(i) - Articles of Incorporation
3(ii)- Bylaws
10 - Lease agreement with Cumberland Properties,
Inc.
11 - Statement Re: Computation of earnings per share
22 - Subsidiary list
27 - Financial Data Schedule
* 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
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.
Date: March 31, 1998 CUMBERLAND TECHNOLOGIES, INC.
-----------------------------
Date: March 31, 1998 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: March 31, 1998 By: /s/ Joseph M. Williams
-----------------------------
Joseph M. Williams, President
Date: March 31, 1998 By: /s/ Francis M. Williams
-----------------------------
Francis M. Williams,
Chairman of the Board
Date: March 31, 1998 By: /s/ George A. Chandler
-----------------------------
George A. Chandler, Director
Date: March 31, 1998 By: /s/ Andrew J. Cohen
-----------------------------
Andrew J. Cohen, Director
Date: March 31, 1998 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