Year Ended December 31, 1997 Compared to Year Ended December 31, -----------------------------------------------------------------
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
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.
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.
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.
Year Ended December 31, 1996 Compared to Year Ended December 31, ----------------------------------------------------------------
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.
assumed through Pooling Agreements. The following table reflects the written premium net of reinsurance, activity for 1996 and 1995.
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.
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.
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.
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.
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
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.
Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at end of year . . 1,392,931 594,922 1,052,547
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 =========== =========== ==========
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
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).
Year ended December 31 ---------------------------------- 1997 1996 1995 ----------- ----------- ---------- Investing activities: Securities available-for- sale : Purchases - fixed maturities (1,493,023) (300,012) (2,561,848) Sales - fixed maturities 954,039 620,000 1,436,223 Purchases - equities . (4,536,969) (3,249,846) (1,224,251) Sales - equities . . . 4,269,885 3,628,259 1,445,237 Securities held-to-maturity: Purchases . . . . . . . . (299,492) (680,116) - Maturities . . . . . . . 985,000 310,000 701,655 Proceeds from sales and maturities of investments - 25,529 116,117 Purchases of businesses, net of cash acquired - - (572,677) Software development costs - (99,938) - ----------- ----------- ----------- Net cash (used in) provided by investing activities (120,560) 253,876 (659,944) Financing activities: Purchases of treasury stock (9,448) (99,856) (27,666) Payments on short-term borrowings and long-term debt . . . . . . . . . . (114,745) (469,483) (86,130) Net advances to (from) affiliates . . . . . . . (546,696) (234,433) 277,452 Net proceeds from short-term borrowings . . . . . . . - - 406,607 ----------- ----------- ----------- Net cash (used in) provided by financing activities (670,889) (803,772) 570,263 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents . . . 1,134,454 (566,854) (464,971) ----------- ----------- ----------- Cash and cash equivalents, beginning of year . . . 669,076 1,235,930 1,700,901 ----------- ----------- ----------- Cash and cash equivalents, end of year . . . . . . $1,803,530 $ 669,076 $1,235,930 =========== =========== ===========
Cumberland Technologies, Inc. ( CTI ) f/k/a Cumberland Holdings, Inc., a Florida corporation, was formed on November 18, 1991, to be a Holding company and a wholly-owned subsidiary of Kimmins Corp. ( KC ). Effective October 1, 1992, KC contributed all of the outstanding common stock of two of its other wholly- owned subsidiaries, Cumberland Casualty & Surety Company ( CCS ) and Surety Specialists, Inc. ( SSI ) to CHI. KC then distributed to its stockholders CHI s common stock on the basis of one share of common stock of CHI for each five shares of KC common stock and Class B common stock owned (the Distribution). Effective January 30, 1997, Cumberland Holdings, Inc. changed its name to Cumberland Technologies, Inc. ("CTI"). CTI conducts its business through five subsidiaries. CCS, a Florida corporation formed in May 1988, provides underwriting for specialty surety and performance and payment bonds for contractors. The surety services provided include direct surety and to a lesser extent, reinsurance. SSI, a Florida corporation formed in August 1988, is a general lines agency which operates as an independent agent. Surety Group ( SG ), a Georgia corporation, and Associates Acquisition Corp. d/b/a Surety Associates ( SA ), a South Carolina corporation, purchased in February and July 1995, respectively, are general lines agencies which operate as independent agencies. Official Notary Service of Texas, Inc. ( ONS ), a Texas corporation formed in February 1994, is an inactive corporation. Qualex Consulting Group, Inc. ( Qualex ), a Florida corporation formed in November 1994, provides claim and contracting consulting services. Florida Credit & Collection Services, Inc. a Florida corporation formed in December 1996 was dissolved in June 1997. CTI and its subsidiaries are referred to herein as the Company.
The consolidated financial statements include the accounts of CTI and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Debt securities that the Company has both the positive intent and ability to hold to maturity are classified as held- to-maturity securities and are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, as well as interest earnings on these securities, is included in investment income.
Marketable equity securities and debt securities not classified as held-to-maturity are classified as available- for-sale. Available-for-sale securities are reported at estimated fair value, with the unrealized gains and losses, net of any related taxes, reported as a separate component of stockholders equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities available-for-sale are included in investment income.
The Company considers all highly liquid investments having a maturity of three months or less when purchased to be cash
Intangible assets are stated at cost and principally represent purchased customer accounts, noncompete agreements, purchased contract agreements, and the excess of costs over the fair value of identifiable net assets acquired ( Goodwill ). Purchased customer accounts, noncompete agreements, and purchased contract agreements are being amortized on a straight-line basis over the related estimated lives and contract periods, which range from 3 to 15 years. Goodwill is being amortized on a straight-line basis over 15 years. Purchased customer accounts are records and files obtained from acquired businesses that contain information on insurance policies and the related insured parties that is essential to policy renewals.
The carrying value of goodwill and other intangible assets will be reviewed if circumstances suggest that they may be impaired. If this review indicates that the intangible assets will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company s carrying value of the goodwill will be reduced by the estimated shortfall of cash flows.
The liability for unpaid claims including incurred but not reported losses is based on the estimated ultimate cost of settling the claim (including the effects of inflation and other societal and economic factors), using past experience adjusted for current trends and any other factors that would modify past experience. These estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known. Such adjustments are included in current operations. A liability for all costs expected to be incurred in connection with the settlement of unpaid claims (claim adjustment expense) is accrued when the related liability for unpaid claims is accrued. Claim adjustment expenses include costs associated directly with specific claims paid or in the process of settlement, such as legal and adjusters fees. Claim adjustment expenses also include other costs that cannot be associated with specific claims but are related to claims paid or in the process of settlement, such as internal costs of the claims function.
The Company does not discount its reserves for losses and loss adjustment expenses. The Company writes primarily surety contracts which are of short duration.
The Company assumes and cedes reinsurance and participates in various pools. The accompanying financial statements reflect premiums, benefits and settlement expenses, and deferred policy acquisition costs, net of reinsurance ceded (see Note 11).
Amounts recoverable from reinsurers for unpaid losses are estimated in a manner consistent with the claim liability associated with the reinsured policies.
Direct insurance and assumed reinsurance premiums earned are recognized on a pro-rated basis over the period of risk. Commission income is recognized at the effective date of the bonds issued. Other income consisting primarily of consulting fees are recognized when the negotiated services are provided.
Earnings (loss) per share is calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128 Earnings per Share and is based on the weighted average number of shares outstanding, adjusted for the dilutive effect of stock options. Since the effect of including the entire 189,086 outstanding stock options in the denominator of the calculation for the year ended December 31, 1997 had no effect on the result of the calculation, and the effect of stock options for the years ended December 31, 1996, and 1995 would be antidilutive, earnings per share is the same on both a basic and diluted basis for 1997, 1996 and 1995. The weighted average number of outstanding shares were 5,449,518, 4,026,655 and 3,824,494 at December 31, 1997, 1996 and 1995, respectively.
The majority of the Company s business relates to surety and performance bonds for contractors. Accordingly, the occurrence of adverse economic conditions in the contracting business could have a material adverse effect on the Company s business although no such conditions have been encountered in the past. The Company only requires collateral from surety bond customers if the customer meets between 80 percent to 99 percent of the Company s underwriting criteria. Customers that fail to meet at least 80 percent of the requirements are denied surety bonding.
In June 1997, the financial Accounting Standards Board issued Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, adoption in 1998 will have no impact on the Company s net income or shareholders equity. Statement 130 requires unrealized gains or losses on the Company s available-for-sale securities, which currently are reported in shareholders equity to be included in other comprehensive income and the disclosure of total comprehensive income.
Certain amounts in the 1996 financial statements have been reclassified to conform to the 1997 financial statement presentation. These Reclassifications had no effect on net loss or stockholders equity previously reported.
CTI and its subsidiaries have entered into transactions with KC and companies affiliated through common ownership. CCS writes surety bonds for KC and its affiliates. Revenues attributable to surety bonds 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. Other income from affiliates consist primarily of consulting services provided to KC.
1997, the Company was released by the bank as a guarantor on the note.
Cumberland leases office space from a company owned by the Chairman of the Board of Directors at a monthly rate of $7,254. The lease is effective through December 31,2000.
3. Investments ----------- The Company s investments in available-for-sale securities and held-to-maturity securities are summarized as follows:
Liabilities: Long-term debt . . . . . . $ 1,418,520 $ 1,418,520
Cash and cash equivalents, short-term investments, accounts receivable and long-term debt: The carrying amount reported in the balance sheet approximates its fair value.
Amortization expense amounted to $275,169 in 1997, $306,175 in 1996 and $227,185 in 1995.
The following table provides a reconciliation of the beginning and ending liability balances, net of reinsurance recoverables, for the years ended December 31, 1997, 1996 and 1995, to the gross amounts reported in the Company s consolidated balance sheets:
December 31 ---------------------------------- 1997 1996 1995 ---------------------- ---------- Liability for losses and LAE, net of reinsurance recoverable on unpaid losses, at beginning of $ 594,922 $1,052,547 $1,625,703 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 recoverables 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 ---------------------- ----------
Cumberland experienced a $49,000 and $662,000 deficiency for losses and loss adjustment 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 amounts less than expected.
The 1996 weighted average interest rate for short-term borrowings was 8.5%.
Maturities of notes payable to nonaffiliates for the five years succeeding December 31, 1997 are as follows:
The Company has net operating loss carryforwards as of December 31, 1997 of approximately $841,568 which generally expire in 2010 and 2011.
CCS is domiciled in Florida and prepares its statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Florida Insurance Department. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners ( NAIC ). Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The NAIC currently is in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. Accordingly, that project, which is expected to be completed in 1998, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes to the accounting practices that insurance enterprises use to prepare their statutory financial statements.
of certain surety policies underwritten by the insurance company. For the years ended December 31, 1996 and 1995, CCS assumed earned premiums of approximately $2,600,000 and $4,372,000, respectively, under the terms of the agreement. The agreement expired April 1, 1997.
1997 1996 1995 ----------- ----------- ---------- Direct . . . . . . . . . $ 1,048,450 $ 127,232 $ 63,343 Assumed . . . . . . . . 741,351 1,587,890 1,184,953 Ceded . . . . . . . . . 2,316 (44,482) (2,750) ----------- ----------- ---------- Net losses and loss adjustment expenses $ 1,792,117 $ 1,670,640 $1,245,546 =========== =========== ==========
The Company reported reinsurance recoverables on paid losses of $448,553 and $312,911 at 1997 and 1996, respectively.
As a result of the Distribution, options were granted to certain individuals, which vest over five years from the date of the grant. At December 31, 1997, options to purchase 66,586 shares of the Company s common stock, at no cost to the holders, have been granted, all are currently exercisable. Effective October 1, 1992, the Company granted options to purchase 100,000 shares to its President at a price of $.125 per share. As of December 31, 1997, all of the options were exercisable.
The Company has elected to follow Accounting Principles Board of Opinion No 25 "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," required use of option valuation models that were not developed for use in valuing employee stock options since no material amount of options have been awarded since the effective date of Statement 123, the effect of applying Statement No. 123's fair value method to the Company's stock based awards results in net income and earnings per share that are not materially different from amounts reported based on APB 25.
Interest paid in 1997, 1996 and 1995 for short-term borrowings was $0, $27,389 and $28,612, respectively. Interest paid in 1997, 1996 and 1995 for term notes due nonaffiliates was $124,928, $121,271 and $76,105, respectively. No income taxes were paid for the years ended December 31, 1997, 1996 and 1995.
stock, $.001 par value, with such rights and privileges as determined by the Board of Directors. The preferred stock shall be issued at such times and for such consideration as determined by the Board of Directors. No shares have been issued as of December 31, 1997.
Effective July 1, 1995, the Company acquired all of the assets of Surety Associates, Inc., a South Carolina insurance agency specializing in the sales of surety bond and certain types of property and casualty insurance policies. The purchase price of $1,330,241 is comprised of $180,241 paid at closing, and a $1,150,000 note payable to the seller.
Both acquisitions have been accounted for using the purchase method. The results of operations of the acquired entities have been included in the accompanying consolidated statements of operations since their respective purchase date.
The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions had occurred at the beginning of the periods presented, and do not purport to be indicative of the results that actually would have occurred if the acquisitions had been consummated as of those dates or of results which may occur in the future.
United States Government and government agencies $ 3,054,983 $ 3,087,009 $3,087,009 State and municipalities 496,330 503,450 503,450 ----------- ----------- ----------
Total . . . . . . . . . . . . 1,431,727 1,526,783 1,526,783 Fixed maturity securities, held to maturity:
Short-term investments . . . 323,993 323,993 323,993 =========== =========== ==========
Other assets . . . 54,408 85,560 Surplus debenture receivable from subsidiary . . . 4,763,854 4,866,979 ------------- -------------
Common stock . . . 5,763 5,763 Other stockholders' equity . . . . . 6,003,506 5,807,909 ------------- -------------
Condensed Statements of Operations 1997 1996 1995 ---------------------- ------------- ------------- -------------
Cash and cash equivalents, end of year . . . . . . . - $ - $ - ============= ============= =============
Investment in subsidiaries at December 31, 1997 and 1996 include the net unrealized appreciation in available-for-sale securities held by CCS, of $134,201 and $99,676 as of December 31, 1997 and 1996, respectively. These amounts have been included in the CTI other stockholders equity amounts.
Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period ----------------------- ---------- ---------- ---------- --------------------
Allowance for doubtful accounts $ 0 $ 67,209 0 $ 0 $ 67,209 ========== ========== ========== ========== ==========
Deferred income tax valuation allowance . . . . 356,835 79,952 0 62,638(2) 374,149 ========== ========== ========== ========== ========== For the year ended December 31, 1996:
Average shares outstanding . 5,449,518 4,026,655 3,824,494 Net effect of dilutive stock options . . . . . . . . . . - - - ----------- ----------- ----------