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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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______ to ______.
Commission File No. 0-19727
CUMBERLAND TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter
Florida 59-3094503
-------------------------------- -------------------------
--
(State or other jurisdiction of (I.R.S Employer
incorporation) Identification No.)
4311 West Waters Avenue, Suite 501 33614
Tampa, Florida
------------------------------- -------------------------
-
(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]
$2,845,112
-----------------------------------------------------------------
Aggregate market value of voting stock (Common Stock) held by
nonaffiliates of the Registrant as of March 19, 1999
5,447,966 shares of Common Stock $.001 par value
-----------------------------------------------------------------
Number of shares of Common Stock outstanding as of March 27, 1998
Documents incorporated by reference: NONE
PART I
Item 1. Business
------- --------
General
-------
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 ). Cumberland Technologies, Inc.,( the
Company ) is a holding company engaged through its subsidiaries,
Cumberland Casualty & Surety Company ( CCS ), Surety Specialists,
Inc. ( SSI ), The Surety Group, Inc. ( SG ), Associates
Acquisition Corp. d/b/a Surety Associates, Inc. ( SA ) and Qualex
Consulting Group, Inc. ( Qualex ) in the delivery of speciality
surety and insurance services. Surety services include
underwriting surety bonds on a direct and assumed basis, surety
consulting and the development of surety software. Insurance
services include the underwriting of speciality and other
liability insurance products. In addition, the Company conducts
its business through a number of independent agencies which focus
on selling and delivering surety insurance products to consumers.
Traditionally, this segment of the surety industry has delivered
its products through an antiquated manual process. Because of
this need to advance technologically, the Company developed a
software product called Bond-Pro . This patented surety issuance
system increases the speed that surety agents deliver their
products to the customer and financially report those
transactions to the carrier, while reducing operating costs. The
Company s business strategy is to continue the underwriting focus
of each of its operating subsidiaries and to achieve growth
through the expanded licensing of Bond-Pro .
CCS is a property and casualty insurance company that was
incorporated in Texas on May 4, 1988 and redomesticated in
Florida, on September 2, 1994. CCS is licensed in twenty-six
states, the District of Columbia, and Guam. It holds a
certificate of authority from the United States Department of the
Treasury, which qualifies CCS as an acceptable surety on Federal
bonds. CCS is rated B+ (Very Good) by A.M. Best.
CCS currently has applications for admission pending in
various states. Most of these states have a lengthy applications
process in which the admission filing must be updated with
certain financial and nonfinancial information until the
insurance department decides to approve an application. The
insurance department is not restricted as to the amount of time
if may take to approve an application. All applications are
updated as new information becomes available and CCS is waiting
for inquiries or actions by these pending states. Those states
in which CCS has not yet applied for licensing generally require
additional years of operating history or additional capital and
surplus. Once CCS has met these requirements, it is anticipated
that the applications for admission will be submitted
accordingly. CCS is currently attempting to obtain additional
state licenses in order to spread its loss geographically and to
increase its sales of direct surety and insurance products.
Management believes that CCS can function profitability selling
direct surety and insurance products in the states in which it is
currently licensed.
SSI, a Florida corporation, formed in August 1988, SG, a
Georgia corporation, and SA, a South Carolina corporation
purchased by Cumberland in February and July 1995, respectively,
are specialized surety agencies which operate as independent
agencies. Each secures surety risks for small to medium size
contractors as an agent and for other agents as a broker. SG and
SA are also general lines insurance agencies. When acting as an
agent, SSI, SG and SA receive a commission from the various
insurance companies it represents, one of which is CCS. Agency
commissions are based upon a percentage of premiums paid by the
consumer. The commissions paid by CCS to SSI, SG and SA range
from 15 to 40 percent.
In addition, SSI generates additional revenues through a
joint partnering agreement with St. Paul, Fire and Marine Group,
f/k/a United States Fidelity and Guaranty Company ( St. Paul ) to
pursue small to medium size contract and commercial surety
business on a country wide basis (the St. Paul Agreement ). The
St. Paul Agreement allows SSI to solicit surety business in
states in which CCS is not licensed, thereby significantly
increasing the Company s geographic spread of risk. It also
facilitates St. Paul agents access to the Company s Bond-Pro
issuance system. CCS participates in the St. Paul Agreement
underwriting risk through a retrocessional treaty.
Qualex, a Florida corporation, formed in November 1994,
provides claim and contracting consulting services to the surety
and construction industries. CCS purchases claim consulting
services from Qualex on a contract basis.
The percentages of gross revenue generated by the Company s
subsidiaries for the year ended December 31, 1998 are as follows:
Subsidiary Revenue Percentage
-------------------- --------------------
CCS 74%
SSI 9%
Qualex 8%
SA 5%
SG 4%
--------------------
100%
====================
The term the Company unless the context otherwise
requires, refers to Cumberland Technologies, Inc. and its
subsidiaries. The principal executive offices of the Company are
located at 4311 West Waters Avenue, Suite 501, Tampa, Florida
33614. The Company s telephone number is (813) 885-2112, its
facsimile number is (813) 885-6734 and its web site is
www.cumberlandtech.com.
Surety Products
---------------
CCS underwrites a wide variety of surety bonds for small to
medium size surety accounts. CCS also assumes underwriting risk
from other surety companies under various reinsurance
arrangements. Contract surety bonds center primarily on
performance and payment bonds issued for the construction
industry. The bonds guarantee that a contractor will fulfill
their obligations, with respect to performing the scope of work
defined in the contract and fulfilling their financial
obligations. CCS s typical bond is less than $500,000 with
aggregate ongoing work of $1 million. These bonds are marketed
through independent insurance agencies specializing in this type
of coverage to general contractors, sub-contractors and specialty
contractors.
Commercial surety bonds, which includes all non-contract
surety bonds, numerous types of license and permit, miscellaneous
and judicial bonds. The scope of each bond varies according to
the law, locality, the nature of the guarantee, and the parties
who have a right of action under the bond. The typical bond
penalty ranges from $5,000 to $25,000 and are usually written on
a volume basis.
Insurance Products
------------------
The Company s other liability insurance products include,
Registered Investment Advisors professional liability insurance
and Notary Public Errors and Omission liability insurance. Both
coverages are occurrence liability coverages, that insure against
specific liability risks. Under the Registered Investment
Advisors professional liability coverage, each endorsed account
is limited to a maximum liability coverage of $500,000. The
Notary Public Errors and Omissions liability coverage is written
with liability limits of $5,000 to $30,000 per policy.
On surety or insurance products sold directly by CCS,
exposure to loss would be the penal amount of the bond, less any
portion for which CCS has secured reinsurance. On reinsurance,
CCS s exposure to loss would be limited by the amount of
reinsurance provided. Reinsurance does not relieve an insurer of
its liability to the policy holder for the full amount of the
policy, however, the reinsurer is obligated to the insurer for
the portion assumed by the reinsurer.
Technology Product
------------------
On October 1, 1996, CTI launched the development of a surety
bond issuance system Bond-Pro . The Company received its
federal copyright registration #TX4-542-729 effective March 29,
1997. The Company sees the implementation of the system as an
integral part of our unique service affording us the ability to
capture a share of the marketplace. This program encompasses the
required functions an agency needs to run a full scale bond desk
when implemented inside the agency structure. The software is
designed to reduce the labor required to provide improved
service. The efficiencies gained in using the Bond-Pro system
enhances CCS s ability to increase premium and to develop
relationships which may not otherwise be possible due to
competition for this class of business. While a small percentage
of the industry offers issue and reporting systems for bonds, no
other provider offers a fully integrated, multi-carrier
production and processing system including management reporting.
Underwriting
------------
For the contract and commercial surety lines of business,
the Company s underwriting philosophy provides for an individual
analysis of the risk associated with each application, except for
specific categories of miscellaneous bonds. In underwriting
contract bonds, its approach focuses on the financial strength,
experience and operating capacity of the contractor. In
underwriting commercial surety, this approach focuses on the
credit history and financial resources of the applicant.
The Company maintains control of the contract and commercial
surety underwriting process through the use of authority limits
for each underwriter and committee underwriting of larger risks.
The Company may require collateral on contract bonds and
occasionally, on other types of bonds based upon an assessment of
the risk characteristics. The risk assessment includes
evaluation of the financial strength of the contractor, the
credit history of the contractor, work in progress and successful
work experience. Collateral can consist of irrevocable letters
of credit, certificates of deposit, cash, savings accounts,
publically traded securities and trustees or mortgages on real
property. Both corporate and personal indemnification may be
required in order to mitigate liability risk. The Company also
targets various products in the commercial surety market which
are characterized by relatively low risk exposure in small penal
amounts. The underwriting criteria, including the extent of
bonding authority granted to independent agents, will vary
depending on the class of business and the type of bond. For
example, relatively little underwriting information is typically
required of certain low exposure risk such as notary bonds.
Other liability insurance applications are individually
evaluated and the decision to write a particular risk is made by
the Company s underwriting department. The underwriting
department determines whether to write a particular risk after
evaluating a number of factors based upon detailed objective
underwriting standards relating to each class of business.
Reinsurance
-----------
The Company s insurance subsidiary, in the ordinary course
of business, cedes insurance to other insurance companies, to
limit its exposure to loss, provide greater diversification of
risk, and minimize aggregate exposures. Because the ceding of
insurance does not discharge the primary liability of the
original insurer, CCS places reinsurance with qualified carriers
after conducting a detailed review of the nature of the
obligation and a thorough assessment of the reinsurers credit
qualifications, claims settlement performance and capabilities.
The reinsurance coverage terms are tailored to the specific risk
characteristics of the underlining products of the company.
For contract and commercial surety business, CCS entered
into an excess of loss reinsurance agreement with Transatlantic
Reinsurance Company (Transatlantic Treaty), which is rated A+
(Superior) by A.M. Best. Excess of loss reinsurance is a form of
reinsurance, which indemnifies the ceding insurer up to an agreed
amount against all or a portion of the amount of loss in excess
of a specified retention. Under the Transatlantic Treaty, CCS
retains risk no greater than 5% of $2,700,000 or $135,000 per
principal. Under the Transatlantic Treaty, the reinsurer
automatically assumes the risk of losses and all contract surety
bonds written and classified as surety in CCS s statutory annual
statement and all miscellaneous surety bonds with penal sums over
$100,000 written and classified as surety in CCS s statutory
annual statement.
For its liability line of registered investment advisor
insurance, the Company has reduced its exposure on any one risk,
through the purchase of a quota share agreement with Dorinco
Reinsurance (Dorinco Treaty) which is rated A (Excellent) by A.M.
Best. Under the Dorinco Treaty, CCS cedes 50% of its liability
on all registered investment advisor policies.
On a limited basis, CCS also assumes and cedes reinsurance
through facultative and treaty agreements from other sureties.
The loss of one of these customers or resources would not have a
material impact on the operations of the company. From October
1991 through May 1, 1997, CCS participated in a pooling agreement
with various sureties, which specialized in writing contract
surety. Effective to April 1, 1993, CCS assumed 25% of the
business underwritten by the pooling agreement; 12.5% effective
April 1, 1995 and 10% effective April 1, 1996. Effective April
1997, CCS elected not to participate in future business under the
pooling agreement.
Reserves
--------
Reserves for losses and loss adjustment expenses are
established based upon reported claims and historical industry
loss development. The amount of loss reserves for reported
claims is based on a case by case evaluation of the claim.
Historical industry data is reviewed and consideration is given
to the anticipated impact of various factors such as legal
developments, economic conditions, and the effects of inflation.
Amounts are adjusted periodically to reflect these factors.
Reserve for losses and loss adjustment expenses are
actuarial estimates of losses, including the related settlement
costs. Management believes that the reserves for losses and loss
adjustment expenses are adequate to cover the losses and loss
adjustment expenses, including the cost of incurred but not
reported losses.
During 1998, there were no material changes in the mix of
business or types of risk assumed. However, the Company was
effective in spreading the geographic mix of the business.
Current fluctuations in inflation have not had a material
effect on the 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. CCS does not
discount its loss reserves for financial reporting purposes.
Environmental Claims
--------------------
The Company bonds several accounts that have incidental
environmental exposure, with respect to which the Company
provides limited contract bonding programs. In the commercial
surety market, the Company provides bonds to corporations that
are in the business of mining various minerals, establishing
mitigation banks, or operating environmental facilities, and that
are obligated to post financial assurance bonds that guarantee
that property can be managed according to regulatory guidelines.
While no environmental responsibility is overtly provided by
commercial or contract bonds, some risk of environmental exposure
may exist if the surety were to assume certain rights of
ownership of the property in the completion of a defaulted
project or through salvage recovery.
To date, the Company has not received any environmental
claim notices, nor is management aware of any potential
environmental claims.
Investments
-----------
Insurance company investment practices must comply with
insurance laws and regulations. Generally, insurance laws and
regulations prescribe the nature and quality of, and set limits
on, various types of investments, which may be made by CCS.
CCS s investment portfolios, generally are managed to
maximize any tax advantages to the extent available while
minimizing credit risk with investments concentrated in high
quality, fixed income securities. CCS s portfolios are managed to
provide diversification by limiting exposures to any one issue or
issuer and to provide liquidity by investing in the public
securities markets. Portfolios are structured to support CCS s
operations and in consideration of the expected duration of
liabilities and short-term cash needs.
An Investment Committee of CCS s Board of Directors
establishes investment policy and oversees the management of the
portfolio.
Marketing
---------
The Company principally markets its products in twenty-six
states, the District of Columbia and Guam in which it is licensed
and indirectly in all other states through its joint partnering
agreement with St. Paul. Its products are marketed primarily
through SSI, SG, SA and independent agents and producers,
including multi-line agents and brokers that specialize as surety
specialists, many of whom are members of the National Association
of Surety Bond Producers. On occasion, CCS will write business
directly with the customer, but does not actively seek such
business. The Company uses specialized general agencies to
market its other liability insurance products.
Competition
-----------
The insurance industry is a highly competitive industry.
There are numerous firms, particularly in the specialty surety
markets, which compete for a limited volume of business.
Competition is based upon price, service, products offered, and
financial strength of the insurance company. There are a number
of companies in the industry, which offer products similar to the
Company s.
The Company competes in the small to medium size contract
and commercial surety bond markets. Primary competitors include
large multi-line companies, as well as small regional companies
that specialize in the surety market. While the surety industry
has experienced slow premium growth, competition has increased as
a result of 10 years of profitable underwriting experience. This
competition has typically manifested itself through reduced
premium rates, and greater tolerance for relaxation of
underwriting standards. Management believes such competition
will continue.
The Company, while competitive in pricing and commission,
believes that the availability of its proprietary Bond-Pro
surety issuance system, specialty underwriting, managerial
experience and service are its primary competitive factors in the
industry. To this end, the Company believes that its technology
and specialization in underwriting niche surety markets will
enable it to continue to compete effectively, even when
challenged by the larger standard market companies.
Regulation
----------
The Company s subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they
transact business under statutes, which delegate regulatory,
supervisory, and administrative powers to State insurance
regulators. In general, an insurer s state of domicile, has
principal responsibility for such regulation. It is designed
generally to protect policy holders rather than investors and
relates to matters such as the standards of solvency which must
be maintained; the licensing of insurers and their agents;
examination of the affairs of insurance companies, including
periodic financial and market conduct examinations; the filing of
annual and other reports, prepared on a statutory basis, on the
financial condition of insurers or for other purposes;
establishment and maintenance of reserves for unearned premiums
and losses; and requirements regarding numerous other matters.
Licensed or admitted insurers generally must file with the
insurance regulators of such states, or have filed on its behalf,
the premium rates and bond and policy forms used within each
state. In some states, approval of such rates and forms must be
received from the insurance regulators in advance of their use.
CCS is domiciled in Florida and licensed in 26 states, the
District of Columbia and Guam. SSI, SG and SA are licensed in
Florida, Georgia and South Carolina respectfully. CCS is also
regulated by the United States Department of the Treasury as an
acceptable surety for Federal bonds.
Holding company laws impose standards on certain
transactions between registered insurers and their affiliates,
which include, among other things, that the terms of the
transactions be fair and reasonable and that the books, accounts
and records of each party be maintained so as to clearly and
accurately disclose the precise nature and details of the
transactions. Holding company laws also generally require that
any person or entity desiring to acquire more than a specified
percentage (commonly 10%) of the Company s outstanding voting
securities, is required first to obtain approval of the
applicable state s insurance regulators.
The National Association of Insurance Commissioners ( NAIC )
has adopted a risk-based capital ( RBC ) model law for property
and casualty companies. The RBC model law is intended to provide
standards for calculating a variable regulatory capital
requirement related to a company s current operations and its
risk exposures (asset risk, underwriting risk, credit risk and
off balance sheet risk). These standards are intended to serve
as a diagnostic solvency tool for regulators that establishes
uniform capital levels and specific authority levels for
regulatory interventions when an insurer falls below minimum
capital levels. The model laws specifies four distinct action
level at which a regulator can intervene with increasing degrees
of authority over a domestic insurer as its financial conditions
deteriorates. These RBC levels are based on the percentage of an
insurers surplus to its calculated RBC. The company s RBC is
required to be disclosed in its statutory annual statement. The
RBC is not intended to be used as a rating or ranking tool nor is
to be used in premium rate making or approval. The Company has
calculated its RBC requirements as of December 31, 1998 and found
that it exceeded the highest level of capital requirements.
Controlling Shareholders
------------------------
Francis Williams, and the KC (collectively Majority
Shareholder ) owns 78% of the outstanding ordinary shares of the
company and collectively control the policies and affairs of the
Company. Circumstances may incur in which the interests of the
Majority Shareholder of the Company could be in conflict with the
interest of the other holders of the common stock. In addition,
the Majority Shareholders may have an interest in pursuing
acquisitions, divestitures or other transaction that in their
judgement, could enhance their equity investment, even though
such transactions might involve risk to the other holders of the
common stock.
Employees
---------
On December 31, 1998, the Company had 37 employees. All are
employed on a full-time basis. None of the Company s employees
are union members or subject to collective bargaining agreements.
The Company believes that it enjoys a favorable relationship with
its employees.
Forward-looking Statements
--------------------------
All statements, other than statements of historical facts,
included or incorporated by reference in this Form 10-K which
address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including
statements regarding the Company s competitive position, changes
in business strategy or plans, the availability and price of
reinsurance, the Company s ability to pass on price increases,
plans to install the Bond-Pro 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 analyzes 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.
Item 2. Properties
------- ----------
The Company s operating subsidiaries rent or lease office
space in the cities in which they are located. CCS and Qualex
lease office space in Tampa, Florida from a company owned by
Francis Williams, the Chairman of the Board of the Company, at a
monthly rate of $7,254, pursuant to a lease that was executed
March 1, 1997 and is effective through December 31, 2000.
Management considers the rented and leased office facilities
of its subsidiaries adequate for the current and anticipated
future level of operations.
Item 3. Legal Proceedings
------- -----------------
The Company and its subsidiaries are involved in various
lawsuits arising in the ordinary course of its business
operations as an insurer. Management does not believe that any
of these lawsuits will have a material effect on the consolidated
financial position, future operations or cash flows of the
Company.
Item 4. Submission of Matters to a Vote of Security
Holders
------- --------------------------------------------------
--
None
Executive Officers of the Registrant
------------------------------------
All of the following persons are regarded as executive
officers because of their responsibilities and duties as elected
officers of the Company's subsidiaries. Other than Francis M.
Williams and Joseph M. Williams (See Item 10), there are no
family relationships between any of Company s executive officers
and directors, and there are no arrangements or understandings
between any of these officers and any other person pursuant to
which the officer was selected as an officer.
Position Presently
Name Held Period of Service
------------------- ------------------- -------------------
Edward J. Edenfield President CTI-05/1996 to date
IV President CCS-05/1996 to date
President SSI-06/1997 to date
President SG- 01/1998 to date
President SA- 01/1998 to date
Carol S. Black Secretary CTI-06/1995 to date
Secretary/Treasurer CCS-06/1995 to date
Secretary SSI-08/1995 to date
Secretary/Treasurer Qualex-08/1995 to
date
Secretary SG-08/1995 to date
Secretary SA-08/1995 to date
Edward A. Mackowiak President Qualex-11/1994 to
date
Sam H. Newberry Vice President SG-01/1998 to date
PART II
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 Nasdaq.
The high and low bid prices for 1998 and 1997 were as follows:
Bid Information
-----------------------------
1998 1997
-------------- ---------------
High Low High Low
------- -------------- -------
First Quarter 2 1/2 2 1/2 2 1/2 1 5/8
Second Quarter 2 3/4 2 5/16 4 2
Third Quarter 3 1/8 3 1/8 3 5/8 2 19/32
Fourth Quarter 2 1 5/8 3 1/2 2 1/4
As of March 12, 1998, there were 903 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
extent of surplus profits less any dividends that have been paid
in the preceding twelve months or net investment income for the
year, whichever is less, unless CCS obtains prior approval from
the insurance commissioner. CCS does not anticipate paying any
dividends on CCS Common Stock in the near future.
Item 6. Selected Financial Data
------- -----------------------
Statement of Operations Data:
Year Ended December 31
-------------------------------------------
1998 1997 1996 1995 1994
-------- ---------------- -------- --------
(In Thousands - except per share data)
Operating data:
Net premium income $ 7,534 $ 5,684 $ 3,808 $ 5,068 $ 4,957
Commission income . . . . . . . 710 860 1,386 774 -
Other income . . . . . . . . . 827 616 653 425 -
Net investment income . . . . . 377 408 404 397 284
Net realized investment gain
(losses) . . . . . . . . . (437) 202 118 124 (124)
Benefits and expenses . . . . . 9,332 7,599 6,952 7,016 6,604
Income (loss) before income
taxes . . . . . . . . . . . . (321) 171 (583) (228) (1,209)
Net income (loss) . . . . . . . (321) 171 (583) (228) (1,073)
Pro forma net income (loss) per
share (1) . . . . . . . . . . .$ (.06)$ .03 $ (.14)$ (.06)$ (.27)
(1) Pro forma net income (loss) per share (unaudited) for
1995 and 1994 has been calculated based on the
4,039,780 shares of Cumberland Common Stock that were
outstanding after the Distribution. The 1998, 1997 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.
Balance Sheet Data:
Year Ended December 31
-------------------------------------------
1998 1997 1996 1995 1994
-------- ---------------- -------- --------
(In Thousands)
Balance sheet data:
Investments . . . . . . . . . .$ 3,987 $ 6,469 $ 6,110 $ 6,303 $ 5,852
Cash and cash equivalents . . . 4,202 1,804 669 1,236 1,701
Accounts receivable . . . . . . 2,782 2,210 925 550 2,540
Reinsurance recoverables . . . 2,306 2,017 1,590 1,697 1,749
Deferred policy acquisition
costs . . . . . . . . . . . . 1,246 813 635 435 581
Intangibles . . . . . . . . . . 1,456 1,681 1,957 2,163 134
Total assets . . . . . . . . . 16,345 15,321 12,372 12,709 12,834
Policy liabilities and
accruals:
Unearned premiums . . . . . . 3,750 2,629 1,862 1,182 1,631
Losses and LAE . . . . . . . 3,220 2,550 1,992 2,352 3,138
Ceded reinsurance and accounts
payable . . . . . . . . . . 1,695 2,714 1,172 - -
Term notes/surplus debentures,
including accrued interest 1,000 0 0 4,798 4,343
Other long-term debt . . . . . 1,331 1,419 1,533 - -
Total liabilities . . . . . . . 10,996 9,312 6,559 11,419 11,518
Total stockholders' equity . . 5,349 6,009 5,814 1,290 1,316
/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
--------------------------------------------------
1998 1997 1996 1998 1997
--------------------------------------------------
Net premium income . . $ 7,534 $ 5,684 $ 3,808 32.5% 49.3 %
Net investment income 377 408 404 (7.6%) 1.0 %
Net realized investment
gains (losses) . . . (437) 202 118 (316.3%) 71.2 %
Other revenues . . . . 1,537 1,476 2,039 4.2% (27.6)%
Losses and loss
adjustment expenses 2,648 1,792 1,671 47.8% 7.2 %
Amortization of deferred
acquisition costs . . 2,252 1,779 1,532 15.4% 16.1%
General expenses and
taxes . . . . . . . . 4,432 4,028 3,749 10.0% 7.4%
Income (loss) before
income taxes . . . . (321) 171 (583) - 70.8 %
Net Income (loss) . . . (321) 171 (583) - 70.8 %
Year Ended December 31, 1998 Compared to Year Ended December 31,
1997
-----------------------------------------------------------------
--
Written direct and assumed premiums reached a record
$10,930,000 during 1998. Overall written premiums, net of ceded
premium increased by $2,340,624 or 37.5%. Earned premium growth
increased by 32.5% to $7,534,000 for 1998 as compared to
$5,684,000 for 1997. The increase in earned premiums resulted
from CCS s continued growth in the direct surety bond market.
During 1998, premiums written by CCS increased 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. CCS s reinsurance
assumed premium is a result of quota share agreements whereby CCS
assumes a portion of the premiums written by agencies contracted
to produce business using Cumberland s Bond-Pro issuance
program. The increase in ceded premiums is correlated to the
direct premium written and the association to excess of loss
treaties on these premiums. The following table reflects the
written premium activity, net of reinsurance ceded, for 1998 and
1997.
Written Premiums
--------------------------------------------
1998 1997 % Change
-------------- -------------- --------------
Direct . . . $ 9,451,746 $ 6,797,136 39.1%
Assumed . . . 1,478,109 1,189,689 24.2%
Ceded . . . . (2,354,970) (1,752,564) (34.4%)
-------------- --------------
Total . . . . $ 8,574,885 $ 6,234,261 37.5%
============== ==============
During the year ended December 31, 1998 and 1997, investment
income was $377,218 and $408,050, respectively. Realized net
losses and gains for the years ended December 31, 1998 and 1997
were ($437,565) and $201,863, respectively. CCS wrote down their
investment in certain equity securities during the 4th quarter of
1998 as management determined the decline in value to be other
than temporary. As a result, CCS recorded a loss of $580,360
which is offset by net capital gains of $142,795.
Other revenue consists primarily of commissions earned by
subsidiary agencies and fee revenue earned by a subsidiary claims
consulting group. The increase in other revenue for the year
ended December 31, 1998 of approximately $61,000 or 4% is related
to revenues earned through the Company s claim consulting group.
For the year ended December 31, 1997, revenues decreased to
$1,475,990 from $2,039,331 or 28 percent. 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.
Losses and loss adjustment expenses increased to $2,648,074
from $1,792,117 for the year ended December 31, 1998 and 1997,
respectively. The increase of $855,957 or 48% is attributed to
an increase of $327,956 or 31% in direct claims incurred and
$528,001 or 71% in assumed claims incurred. Assumed claims on
the expired pooling agreements were negatively impacted by
increased severe losses. Cumberland share of the 1998 incurred
losses under the pooling agreements was $1,007,502. Management
anticipates a decline in 1999 for claims attributed to the
pooling agreements. The following tables reflects the 1998
activity as it pertains to earned premiums and incurred claims:
Premiums Claims
Earned Incurred Ratio
-------------- -------------- --------------
Direct net . $ 6,437,429 $ 1,378,722 21.4%
Assumed, net 1,066,907 230,120 21.6%
Assumed
(pooling), net (29,348) (1,039,232) -
-------------- --------------
Total . . . . $ 7,533,684 $ 2,648,074 35.1%
============== ==============
During the year ended December 31, 1998 the net amortization
of deferred policy acquisitions costs increased to $2,252,195
from $1,778,808 for the year ended December 31, 1997. The
increase is attributed to the increase in earned premiums.
During the year ended December 31, 1998, operating expenses
and taxes, licenses and fees (excluding income taxes) increased
to $4,313,278 from $3,903,476 in 1997. The increase of
approximately $410,000 or 10% is a result of increased salary
expense including bonuses, payroll taxes and employee benefits of
$180,000 and increased taxes, licenses and fees of $207,000. The
increase in salary and related expenses is the cost of additional
personnel consistent with the Company growth while the increase
in taxes, licenses and fees expenses is attributed to increased
premiums written.
Interest expense is interest paid to the Surety Group and
Surety Associates on notes due to agencies the Company purchased
in 1995.
Due to tax loss carryforwards, the Company did not incur
income tax expense on a consolidated basis for the years ending
December 31, 1998, 1997 and 1996, respectively.
Year Ended December 31, 1997 Compared to Year Ended December 31,
1996
-----------------------------------------------------------------
--
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 . . . . 171 (583) (228) 70.8 % (155.7)%
Net Income (loss) . . . 171 (583) (228) 70.8 % (157.7)%
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
$1,114,377 for 1997 and 1996, respectively, representing an
increase of $4,722,278 or 424 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 . . . . $ 6,797,136$ 2,025,796 236%
Assumed . . . 1,189,689 2,890,050 (59%)
Ceded . . . . (1,752,564) (547,801) (320%)
-------------- --------------
Total . . . . $ 6,234,261$ 4,368,046 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, losses and loss
adjustment 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.
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 the former
owner's in connection with agencies purchased in 1995 were
$124,928 and $121,271 for the years ending 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.
Due to tax loss carryforwards, the Company did not incur
income tax expense on a consolidated basis for the years ending
December 31, 1997 and 1996, respectively.
Liquidity and Capital Resources
-------------------------------
The capacity of a surety company to underwrite insurance and
reinsurance is based on maintaining liquidity and capital
resources sufficient to pay claims and expenses as they become
due. Based on standards established by the National Association
of Insurance Commissioners (NAIC) and promulgated by the Florida
Department of Insurance, the Company is permitted to write net
premiums up to an amount equal to three times its statutory
surplus, or approximately $14,500,000 at December 31, 1998.
Therefore, based upon statutory guidelines, the Company could
increase earned premiums by approximately $7,000,000 in 1999 in
addition to the amount earned in 1998.
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, 1998, the Company s $16,545,051 of total
assets calculated based on generally accepted accounting
principles were distributed primarily as follows: 50 percent in
cash and investments (including accrued investment income), 30
percent in receivables and reinsurance recoverables, 18 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
$(193,734), $1,925,903 and $(16,958) for the years ended
December 31, 1998, 1997 and 1996, respectively. In 1998, the
decrease in cash provided by operating activities is primarily
attributed to an increase in receivables of $1,047,974 and income
taxes recoverable of $120,000. 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
$1,718,716, $(120,560) and $253,876 for the years ended December
31, 1998, 1997 and 1996, 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
$873,839, $(670,889) and $(803,772) for the years ended December
31, 1998, 1997 and 1996, respectively. Financing activities
consist of purchases of treasury stock, long-term and short-term
borrowings and repayment on borrowings during 1998, 1997 and
1996.
Year 2000 Issue
---------------
The Company has employed consultants in its efforts to
address its Year 2000 issues in conjunction with the Company s
own information technology staff. Excluding the costs for the
Company s own information technology personnel, the total cost of
compliance is expected to be approximately $100,000 (of which
$41,000 including equipment upgrades will be a capital
expenditure) with $14,000 having been expended through December
31, 1998. All costs (except capital) have been and will be
expensed as incurred and will be funded from the normal operating
cash flows.
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. Bond-Pro is a
Windows 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.
Excluding any possible catastrophic events such as the loss
of utilities or banking, financial or communications services,
the potential risks known to the Company at this time are
primarily limited to delays, disruptions or losses resulting from
information bottlenecks and the lack of computer processing
power. In order to mitigate the risk to the greatest extent
possible, the Company will be prepared to track mission-critical
information manually. Such information includes tracking premium
income, and receivables and recording payments received from
agencies. The Company believes its current workforce and the
employment pool available in the area is sufficiently skilled to
accommodate such a demand. The Company will continue to evaluate
its contingency planning activities as more information becomes
available. At this time, the total cost of the risks is not
anticipated to have a material adverse effect on the business,
financial condition or results of operations of the Company.
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 1998, 1997 and 1996 to the gross amounts
reported in Cumberland s balance sheets:
December 31
1998 1997 1996
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at beginning $ 1,392,931 $ 594,922 $ 1,052,547
of year . . . . . . . . . . ----------- ----------- ----------
Provision for losses and LAE
for claims occurring in the
current year, net of
reinsurance . . . . . . . . 2,331,074 1,743,117 1,008,640
Increase (decrease) in
estimated losses and LAE for
claims occurring in prior
years, net of reinsurance 317,000 49,000 662,000
----------- ----------- ----------
Incurred losses during the
current year, net of
reinsurance . . . . . . . . 2,648,074 1,792,117 1,670,640
Losses and LAE payments for
claims, net of reinsurance,
occurring during:
The current year . . . . 557,997 553,629 422,544
Prior years . . . . . . 1,802,428 440,479 1,705,721
----------- ----------- ----------
2,360,425 994,108 2,128,265
----------- ----------- ----------
Liability for losses and LAE,
net of reinsurance
recoverable on unpaid
losses, at end of year . . 1,680,580 1,392,931 594,922
Reinsurance recoverables on
unpaid losses at end of
year . . . . . . . . . . . 1,539,877 1,157,369 1,396,874
----------- ----------- ----------
Liability for losses and LAE,
gross of reinsurance
recoverables on unpaid $ 3,220,457 $ 2,550,300 $ 1,991,796
losses, at end of year . . =========== =========== ==========
Cumberland experienced deficiencies of $317,000, $49,000 and
$662,000 for losses and loss adjustment expenses in 1998, 1997
and 1996, respectively. The deficiency in 1998 and 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 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, 1998 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) $ 1,680,580
Reinsurance recoverables on unpaid losses and
LAE . . . . . . . . . . . . . . . . . . 1,539,877
--------------
Liability for losses and LAE, as reported in
the accompanying GAAP basis financial
statements . . . . . . . . . . . . . . $ 3,220,457
==============
Analysis of Loss and Loss Adjustment Expense Development
--------------------------------------------------------
The following table represents the development of the
liability for unpaid liabilities, net of reinsurance, for 1991
through 1998 (in thousands).
1991 1992 1993 1994
------------- -------------------------- -------------
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,663 $ 2,426 $ 1,709 $ 1,625
Liability re-estimated
as of:
One year later . . . 1,273 2,239 3,815 1,384
Two years later . . 1,200 2,546 2,579 1,420
Three years later . 1,316 2,263 2,750 1,631
Four years later . . 1,443 2,418 2,851 1,726
Five years later . . 1,234 2,408 3,176 -
Six years later . . 1,199 2,970 - -
Seven years later . 1,199 - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ 464 $ (544) $ (1,467) $ (101)
============= ========================== =============
1995 1996 1997 1998
------------- -------------------------- -------------
Liability for losses
and loss adjustment
expenses, net of
reinsurance . . . . . $ 1,053 $ 595 $ 1,393 $ 1,680
Liability re-estimated
as of:
One year later . . . 1,716 644 1,710 -
Two years later . . 1,815 1,013 - -
Three years later . 2,049 - - -
Four years later . . - - - -
Five years later . . - - - -
Six years later . . - - - -
Seven years later . - - - -
------------- -------------------------- -------------
Cumulative (deficiency)
redundancy . . . . . $ (966) $ (418)$ (317) $ -
============= ========================== =============
/TABLE
1991 1992 1993 1994
------------- -------------------------- -------------
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 806 $ 1,151 $ 765 $ 1,643
============= ========================== =============
Two years later . . $ 884 $ 1,834 $ 1,058 $ 2,316
============= ========================== =============
Three years later . $ 1,095 $ 2,088 $ 2,868 $ 2,164
============= ========================== =============
Four years later . . $ 1,254 $ 1,957 $ 3,717 $ 2,875
============= ========================== =============
Five years later . . $ 1,260 $ 3,533 $ 4,442 $ -
============= ========================== =============
Six years later . . $ 1,199 $ 3,840 $ - $ -
============= ========================== =============
Seven years later . $ 1,199 $ - $ - $ -
============= ========================== =============
1995 1996 1997 1998
------------- -------------------------- -------------
S>
Cumulative amount of
liability, net of
reinsurance
recoverables, paid
through:
One year later . . . $ 1,334 563 1,802 -
============= ========================== =============
Two years later . . 2,186 1,631 - -
============= ========================== =============
Three years later . 2,997 - - -
============= ========================== =============
Four years later . . - - - -
============= ========================== =============
Five years later . . - - - -
============= ========================== =============
Six years later . . - - - -
============= ========================== =============
Seven years later . - - - -
============= ========================== =============
/TABLE
Effect of Inflation
-------------------
Inflation has not had a material impact upon the Company s
operations for the last three years.
Item 7A. Quantitative and Qualitative Disclosures About Market
-------- Risk
-------------------------------------------------------
--
Interest Rate Sensitivity
-------------------------
The following table presents maturity principal cash flows
and relates weighted average interest rates by expected maturity
as of December 31, 1998:
Expected Maturity Date
-----------------------------------------------------------
Fair
value
There- 12/31
1999 2000 2001 2002 2003 after Total /98
------- -------------- -------------- -------------- -------
(U.S. Equivalent in thousands)
Assets
-------
Securities
available for
sale . . . . . 752 600 26 - 126 546 2,050 2,082
Average interest
rate . . . . . 6.1% 7.0% 5.6% - 5.8% - - -
Liabilities
-----------
Long-term, debt
including
current portion 49 183 1,184 184 70 661 2,331 2,331
Average interest
rate . . . . . 9.4% 9.2% 9.3% 8.9% 9.5% - - -
/TABLE
The operations of the Company are subject to risk resulting
from interest rate fluctuations to the extent that there is a
difference between the amount of the Company s interest-earning
assets and the amount of interest-bearing liabilities that are
prepaid/withdrawn, mature or reprice in specified periods. The
principal objective of the Company s asset/liability management
activities is to provide maximum levels of net interest income
while maintaining acceptable levels of interest rate and
liquidity risk and facilitating the funding needs of the Company.
Due to the limited nature and duration of claims, generally
one to two years, the Company maintains a portfolio that closely
parallel s the money market interest rate scenario.
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 57 Chairman of the Board
of Directors
Joseph M. Williams 42 President and Treasurer
George A. Chandler 69 Director
Andrew J. Cohen 45 Director
Edward J. Edenfield, IV 41 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, 1998:
Annual Compensation Long-Term Compensation
---------------------------- ---------------------
Name of Other All
Individual Annual Stock other
and Principal Year Salary Bonus Compensation Options Compensation
Position
Joseph M.
Williams
President and
Treasurer . . 1998 $95,000 $30,000 $ - $ - $ -
1997 $95,000 $30,000 $ - $ - $ -
1996 $95,000 $37,000 $ - $ - $ -
/TABLE
Aggregate Option Exercises in 1998 and December 31, 1998 Option
Values
-----------------------------------------------------------------
--
The following table shows information concerning options
held by the officers shown in the Summary Compensation Table at
the end of 1998. No options were exercised by such persons in
1998.
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 $248,000/0
(1) Represents the dollar value of the difference between
the value at December 31, 1998 and the option exercise
price of unexercised options at December 31, 1998.
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, 1998, 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 December 31,
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.
Williams . . . . 4,285,886(3) 78.7%
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 . . 12,000(7) .2%
Kimmins Corp. . . 1,723,290 31.6%
All directors and
executive
officers as a
group (five
persons) . . . . 4,701,928 86.3%
(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 2,338,517 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 12,000 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, 1998, 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.
Effective November 10, 1998 Cumberland entered into a
$1,000,000 convertible term note agreement with TransCor Waste
Services, Inc., a subsidiary of KC. The note is due November 10,
2001 and bears interest at 10%. The lender may convert the
principal amount of the note or a portion thereof into common
stock at $3.00 per share subsequent to a six month anniversary
and prior to the close of business on the maturity date.
CCS writes surety bonds for KC and its affiliates. Revenues
attributable to transactions with KC and its affiliates were
$14,907, $1,738 and $2,873 for the years ended December 31, 1998,
1997 and 1996, respectively. Qualex performs consulting services
for KC and affiliates. Revenue attributable to transaction with
affiliates were $282,193, 310,396 and $338,478 for years ended
December 31, 1998, 1997 and 1996, respectively.
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, 1998
and 1997
- Consolidated statements of operations for each of
the three years in the period ended December 31,
1998
- Consolidated statements of stockholders equity
for each of the three years in the period ended
December 31, 1998
- Consolidated statements of cash flows for each of
the three years in the period ended December 31,
1998
- Notes to consolidated financial statements
2. Financial statement schedules
II - Condensed Financial Information of Registrant
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
23 - Consent of Independent Certified Public
Accountants
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, 1999 CUMBERLAND TECHNOLOGIES, INC.
-----------------------------
Date: March 31, 1999 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, 1999 By: /s/ Joseph M. Williams
-----------------------------
Joseph M. Williams, President
Date: March 31, 1999 By: /s/ Francis M. Williams
-----------------------------
Francis M. Williams
Chairman of the Board
Date: March 31, 1999 By: /s/ George A. Chandler
-----------------------------
George A. Chandler, Director
Date: March 31, 1999 By: /s/ Andrew J. Cohen
-----------------------------
Andrew J. Cohen, Director
Date: March 31, 1999 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, 1998
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 . . . . . 31
Consolidated Balance Sheets at December 31, 1998 and 1997 . . 32
Consolidated Statements of Operations for Each of the
Three Years in the Period Ended December 31, 1998 . . . . 34
Consolidated Statements of Stockholders Equity for
Each of the Three Years in
the Period Ended December 31, 1998 . . . . . . . . . . . . 35
Consolidated Statements of Cash Flows for Each of
the Three Years in the Period Ended December 31, 1998 . . 36
Notes to Consolidated Financial Statements . . . . . . . . . 38
The following consolidated financial statement schedules are
filed as part of this report:
Schedule II Condensed Financial Information of Registrant . 55
Schedule V Valuation and Qualifying Accounts . . . . . . . 59
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.
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, 1998 and 1997,
and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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.
March 19, 1999
Tampa, Florida
CUMBERLAND TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-----------------------------
1998 1997
----------------------------
Investments - Notes 1 and 3:
Securities available-for-
sale at fair value:
Fixed maturities (cost:
1998 - $2,049,787; 1997 -
$3,551,313) . . . . . . . $ 2,081,770 $ 3,590,458
Equity securities
(cost: 1998 - $799,487;
1997 - $1,431,727) . . . 576,575 1,526,783
Fixed maturity securities
held-to-maturity, at
amortized cost: (fair
value, 1998 -$896,246; 1997
- $1,002,280) . . . . . . 860,508 982,528
Residential mortgage loan on
real estate, at unpaid
principal . . . . . . . . 44,427 45,314
Short-term investments . . 423,993 323,993