1996 net income (loss) per share amounts have been computed based on the actual weighted average number of shares outstanding during the respective years.
Year Ended December 31, 1998 Compared to Year Ended December 31, ----------------------------------------------------------------- -- Written direct and assumed premiums reached a record $10,930,000 during 1998. Overall written premiums, net of ceded
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.
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:
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.
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.
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.
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.
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.
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 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.
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
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 ----------- ----------- ----------
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 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:
Reinsurance recoverables on unpaid losses and LAE . . . . . . . . . . . . . . . . . . 1,539,877 --------------
Year ended December 31 ---------------------------------- 1998 1997 1996 ----------- ----------- ---------- Investing activities: Securities available-for- sale: Purchases - fixed maturities . . . . . . . (968,313) (1,493,023) (300,012) Sales - fixed maturities 2,479,916 954,039 620,000 Purchases - equities . . (2,819,999) (4,536,969) (3,249,846) Sales - equities . . . . 2,999,085 4,269,885 3,628,259 Securities held-to-maturity: Purchases . . . . . . . . (100,000) (299,492) (680,116) Maturities . . . . . . . 127,140 985,000 310,000 Proceeds from other investments . . . . . . . . 887 - 25,529 Software development costs . - - (99,938) ----------- ----------- ----------- Net cash provided by (used in) investing activities . 1,718,716 (120,560) 253,876 Financing activities: Purchases of treasury stock (13,500) (9,448) (99,856) Payments on short-term borrowings and long-term debt . . . . . . . . . . . (87,932) (114,745) (469,483) Net change in advances to (from) affiliates . . . . . (24,729) (546,696) (234,433) Net proceeds from short-term borrowings . . . . . . . . 1,000,000 - - ----------- ----------- ----------- Net cash provided by (used in) financing activities 873,839 (670,889) (803,772) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents . . 2,398,821 1,134,454 (566,854) Cash and cash equivalents, beginning of year . . . . 1,803,530 669,076 1,235,930 ----------- ----------- ----------- Cash and cash equivalents, end of year . . . . . . . $4,402,351 $1,803,530 $ 669,076 =========== =========== ===========
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 CTI. KC then distributed to its stockholders CHI 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). Effective January 30, 1997, Cumberland Holdings, Inc. changed its name to Cumberland Technologies, Inc. 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, assumed 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 accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, as to the subsidiary insurance company, differ from statutory accounting practices prescribed or permitted by regulatory authorities. The significant accounting policies followed by CTI and subsidiaries that materially affect the financial statements are summarized in this note.
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 other comprehensive income. 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 on the Statement of Operations. 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 equivalents.
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 and intangibles will be reduced by the estimated shortfall of cash flows.
The Company does not consider investment income in determining if a premium deficiency relating to short duration contracts exists.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which would affect the amounts reported and disclosed herein.
As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ( SFAS 130 ). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company net income or shareholders equity. SFAS 130 requires unrealized gains and losses on the Company s available for sale securities, which prior adoption were reported separately in shareholders equity to be included in other comprehensive income. All adjustments made between net income and comprehensive income for the Company are attributed to unrealized gains and losses. Prior year financial statements presented conform to the requirements of SFAS 130. See Note 16.
At December 31, 1996, the Company was a guarantor for $2.25 million of borrowings made under the terms of a loan agreement entered into on December 8, 1995 between KC and a bank. During 1997, the Company was released by the bank as a guarantor on the note.
The Company held no investments in any person or its affiliates (excluding obligations of the U.S. Government or its agencies) which exceeded 10 percent of stockholders equity at the end of the respective 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 agreements.
There was no income tax expense or benefit recognized in 1998, 1997 or 1996.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax reporting purposes. Significant components of the Company s deferred tax liabilities and assets are as follows:
December 31 December 31 1998 1997 ---------------------------- Affiliate: Note payable due November 10, 2001 . . . . . . . . . . . $ 1,000,000 $ - Nonaffiliate: Note payable due March 1, 2002 374,087 377,077 Note payable due June 30, 2010 956,501 1,041,443 ---------------------------- $ 2,330,588 $ 1,418,520 ============================
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 a common stock at $3.00 per share subsequent to a six month anniversary and prior to the maturity date.
Maturities of notes payable to nonaffiliates for the five years succeeding December 31, 1998 and thereafter are as follows:
In 1992, CTI entered into a term note agreement with KC for the outstanding amount of a debenture, including interest arrearage of $4,291,049. The term note was pari passi with the other debts of CCS, bearing interest at 10 percent of the unpaid principal and interest and was due on October 1, 2002. Interest and principal were due quarterly with minimum payments equal to one half of net earnings before interest and federal income
As a result of the Distribution, options were granted to certain individuals, which vest over five years from the date of the grant. Options to purchase 52,586 shares of the Company s common stock, at no cost to the holders, were granted during 1992 and remain outstanding at December 31, 1998. 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, 1998, all of the options were exercisable.
Effective May 22, 1996, the Company granted options to purchase 20,000 shares to the President of CCS at a price of $.75 per share. As of December 31, 1998, 12,000 of the options were exercisable. The Company granted options on July 26, 1996 to purchase 2,500 shares to an employee at a price of $1.00 per share. As of December 31, 1998, 1,500 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.
CTI is authorized to issue 1,000,000 shares of preferred 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, 1998.
Loss and loss adjustment expenses in 1998, 1997, and 1996 are summarized as follows:
Statutory surplus and net income (loss), as reported to the domiciliary state insurance department in accordance with its prescribed or permitted statutory accounting practices for CCS is summarized as follows:
On February 1, 1999 the Company filed a registration statement on Form S-8 to register 400,000 shares of stock available to participants of the 1991 Stock Option Plan.
Other assets . . . 68,363 54,408 Surplus debenture receivable from subsidiary . . . 5,026,354 4,763,854 ------------- -------------
Management fees from wholly- owned subsidiaries . . . $ 217,892 $ 88,378 $ 62,557 Interest income from subsidiary . . . . 262,500 271,875 300,000 ------------- ------------- -------------
Income (loss) before income taxes and equity in net income (loss) of subsidiaries . . . 65,150 65,352 (143,343)
2. Basis of Presentation - In the parent-company-only financial statements, the Company s investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since the date of acquisition. The Company s share of net income of its subsidiaries is included in consolidated income using the equity method. Parent-company-only financial statements should be read in conjunction with the Company s consolidated financial statements.
Deferred income tax valuation allowance . . . . $374,149 321,120 $ -0- $ -0- $ 695,269 ========== ========== ========== ========== ========== For the year ended December 31, 1997:
Average shares outstanding . 5,447,966 5,449,518 4,026,655 Net effect of dilutive stock options . . . . . . . . . . - - - ----------- ----------- ----------
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-71537) pertaining to the 1991 Stock Option Plan of Cumberland Technologies, Inc. of our report dated March 19, 1999, with respect to the consolidated financial statements and schedules of Cumberland Technologies, Inc. included in the annual report (Form 10-K) for the year ended December 31, 1998.