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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[Mark One]
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002.
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 incorporation) (I.R.S. Employer
Identification No.)
4311 West Waters Avenue, Suite 501
Tampa, Florida 33614
- ---------------------------------------------- ------------------------
(Address of principal executive office) (Zip code)
(813) 885-2112
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(Former name, former address and formal fiscal year,
if changed since last report)
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [x] No [ ]
Applicable Only to Insurers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by a check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
Applicable Only to Corporate Issuers
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of September 30, 2002 was 5,596,744 shares.
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
- ------ ---------------------
Page
----
Item 1. Condensed Consolidated Balance Sheets at
September 30, 2002(unaudited) and December 31, 2001.......1-2
Condensed Consolidated Statements of Operations
(unaudited)for the nine months ended
September 30, 2002 and 2001.................................3
Condensed Consolidated Statements of Operations
(unaudited)for the three months ended
September 30, 2002 and 2001.................................4
Condensed Consolidated Statements of Stockholders'
Equity for the nine months ended September 30, 2002
(unaudited)and for the year ended December 31, 2001.........5
Condensed Consolidated Statements of Cash Flows
(unaudited)for the nine months ended
September 30, 2002 and 2001.................................6
Notes to Condensed Consolidated Financial Statements
(unaudited)..............................................7-18
Forward-looking Statement Disclosure........................19
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................20-25
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................26
Item 4. Controls and Procedures.....................................26
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal proceedings...........................................27
Item 2. Changes in securities.......................................27
Item 3. Defaults upon senior securities.............................27
Item 4. Submission of matters to a vote of security holders.........27
Item 5. Other information...........................................27
Item 6. Exhibits and Reports of Form 8-k............................27
Signatures...............................................28-30
UNITED STATES SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
- ------ --------------------
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
----------------------------
September 30, December 31,
2002 2001
----------------------------
(unaudited)
Investments:
- -----------
Securities available-for-sale at fair value:
Debt securities ............................... $ 8,962,071 $ 9,339,353
Debt securities held-to-maturity at amortized
cost (fair value, 2002 - $365,043
2001 - $374,436) .............................. 359,700 359,475
Mortgage loans on real estate, at unpaid
principal ..................................... 717,129 681,790
Short-term investments .......................... 433,993 433,993
----------- -----------
Total investments ............................. 10,472,893 10,814,611
Cash and cash equivalents .......................... 1,784,478 2,654,131
Accrued investment income .......................... 133,261 154,527
Reinsurance recoverable ............................ 5,060,973 3,124,052
Accounts receivable:
Nonaffiliate less allowance for doubtful
accounts of $91,839 and $13,750 at
September 30, 2002 and December 31, 2001,
respectively .................................. 2,470,735 4,615,327
Affiliate ....................................... 101,851 72,201
Income tax recoverable ............................. 1,056,625 --
Deferred income tax asset .......................... 680,651 499,145
Deferred policy acquisition costs .................. 1,965,043 1,903,547
Intangibles, net ................................... 310,255 380,951
Goodwill ........................................... 134,000 152,780
Other investment ................................... 640,872 640,872
Other assets ....................................... 355,029 371,893
----------- -----------
$25,166,666 $25,384,037
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
----------------------------
September 30, December 31,
2002 2001
----------------------------
(unaudited)
Policy liabilities and accruals:
- -------------------------------
Loss and loss adjustment expenses ............ $ 3,716,559 $ 4,113,232
Derivative instruments ....................... 4,329,300 1,978,891
Unearned premiums ............................ 5,535,838 5,582,640
Ceded reinsurance payable ....................... 101,709 1,035,123
Accounts payable and other liabilities .......... 4,857,039 3,388,269
Income tax payable .............................. -- 113,284
Debt:
- ----
Nonaffiliate ................................. 475,334 651,940
Affiliate .................................... 604,055 604,055
------------ ------------
Total liabilities ............................ 19,619,834 17,467,434
------------ ------------
Stockholders' equity:
- --------------------
Preferred stock, $.001 par value; 10,000,000
shares authorized, no shares issued ...... -- --
Common stock, $.001 par value; 10,000,000
shares authorized; 5,915,356 shares issued 5,916 5,916
Capital in excess of par value ............... 7,270,316 7,270,316
Accumulated other comprehensive income ....... 279,588 70,729
Retained earnings (deficit) .................. (1,745,269) 833,361
------------ ------------
5,810,551 8,180,322
------------ ------------
Less treasury stock, at cost, 318,612 shares (263,719) (263,719)
------------ ------------
Total stockholders' equity ................... 5,546,832 7,916,603
------------ ------------
$ 25,166,666 $25,384,037
============ ============
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
---------------------------------
Nine Months Ended September 30,
2002 2001
---------------------------------
Revenue:
- -------
Direct premiums earned ......................... $ 10,734,758 $ 10,621,463
Assumed premiums earned ........................ 2,828,414 2,674,256
Less ceded premiums ............................ (2,458,760) (3,432,921)
------------ ------------
Net premium income ............................. 11,104,412 9,862,798
Net investment income .......................... 373,411 462,343
Net realized investment gains (losses) ......... 14,851 (10,012)
Other income ................................... 1,611,878 1,371,117
------------ ------------
Total revenue .................................. 13,104,552 11,686,246
------------ ------------
Benefits and Expenses:
- ---------------------
Losses and loss adjustment expenses ............ 6,253,934 2,022,001
Derivative expense ............................. 2,505,923 1,463,908
Amortization of deferred policy acquisition
costs ...................................... 3,294,236 3,130,794
Operating expenses ............................. 4,781,024 4,912,356
Interest expense ............................... 27,369 126,144
------------ ------------
Total expenses ................................. 16,862,486 11,655,203
------------ ------------
(Loss) income before income tax benefit expense (3,757,934) 31,043
Income tax benefit ............................ (1,179,304) (16,253)
------------ ------------
Net (loss) income ............................. $ (2,578,630) $ 47,296
============ ============
Weighted average shares outstanding - basic .... 5,597,244 5,586,445
============ ============
Net (loss) income per share - basic .......... $ (0.46) 0.01
============ ============
Weighted average shares outstanding - diluted .. 5,597,244 5,666,744
============ ============
Net (loss) income per share - diluted ......... $ (0.46) 0.01
============ ============
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------
Three Months Ended September 30,
2002 2001
--------------------------------
Revenue:
- -------
Direct premiums earned ........................... $ 3,723,222 $ 3,662,600
Assumed premiums earned .......................... 959,831 1,142,481
Less ceded premiums .............................. (583,365) (1,201,917)
----------- -----------
Net premium income ............................... 4,099,688 3,603,164
Net investment income ............................ 126,927 162,748
Net realized investment gains .................... 27,708 6,428
Other income ..................................... 540,419 441,332
----------- -----------
Total revenue .................................... 4,794,742 4,213,672
----------- -----------
Benefits and Expenses:
- ---------------------
Losses and loss adjustment expenses .............. 2,284,615 1,059,308
Derivative expense ............................... 1,464,451 594,860
Amortization of deferred policy acquisition
Costs ........................................ 978,582 1,235,126
Operating expenses ............................... 1,455,660 1,618,611
Interest expense ................................. 8,306 38,164
----------- -----------
Total expenses ................................... 6,191,614 4,546,069
----------- -----------
Loss before income tax benefit ................... (1,396,872) (332,397)
Income tax benefit ............................... (297,307) (131,079)
----------- -----------
Net loss ......................................... $(1,099,565) $ (201,318)
=========== ===========
Weighted average shares outstanding - basic ...... 5,597,244 5,597,244
=========== ===========
Net loss per share - basic ....................... $ (0.20) $ (0.04)
=========== ===========
Weighted average shares outstanding - diluted .... 5,597,244 5,666,744
=========== ===========
Net loss per share - diluted ..................... $ (0.20) $ (0.04)
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 (UNAUDITED)
AND FOR THE YEAR ENDED DECEMBER 31, 2001
Capital in Accumulated
Common Shares Excess of Other Retained Total
------------- Par Comprehensive Earnings Treasury Stockholders'
Stock Amount Value Income (Deficit) Stock Equity
----------- ---------- ---------- ------------ --------- ----------- -------------
Balance at January 1, 2001 ... 5,871,356 $ 5,872 $ 7,264,860 $ 104,485 $ 774,993 $ (263,719) $ 7,886,491
Exercise of 44,000 shares
under 1991 stock
option plan............ 44,000 44 5,456 5,500
Net unrealized depreciation
of available-for-sale
securities, net of
income tax............. (33,756) (33,756)
Net income ................ 58,368 58,368
-----------
Comprehensive income ...... 24,612
----------- ----------- ------------ ----------- ----------- ----------- ----------
Balance at December 31, 2001.. 5,915,356 5,916 7,270,316 70,729 833,361 (263,719) 7,916,603
Net unrealized appreciation
of available-for-sale
securities, net of
income tax............. 208,859 208,859
Net loss .................. (2,578,630) (2,578,630)
-----------
Comprehensive loss......... (2,369,771)
----------- ------------ ------------ ----------- ----------- ----------- -----------
Balance at September 30, 2002 5,915,356 $ 5,916 $ 7,270,316 $ 279,588 $(1,745,269) $ (263,719) ($5,546,832)
=========== ============ ============ =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------
Nine Months Ended September 30,
2002 2001
-------------------------------
Operating activities:
- --------------------
Net (loss) income ................................. $(2,578,630) $ 47,296
Adjustments to reconcile net (loss) income to cash
(used in) provided by operating activities:
(Amortization) accretion of investment
discounts and premiums ................ 23,414 (21,342)
Policy acquisition costs amortized ......... 3,294,236 3,130,794
Policy acquisition costs deferred .......... (3,355,732) (3,253,496)
Amortization ............................... 89,476 108,458
Net realized (gain) loss on disposal of
investments ............................ (14,851) 10,012
(Increase) decrease in:
Accrued investment income .............. 21,266 21,478
Reinsurance recoverable ................ (1,936,921) 367,444
Accounts receivable .................... 2,144,592 (617,988)
Income tax recoverable ................. (1,056,625) 25,428
Deferred income tax asset .............. (271,623) --
Other assets ........................... 16,864 (148,889)
Increase (decrease) in:
Policy liabilities and accruals ........ (443,475) (351,356)
Derivative liability ................... 2,350,409 1,773,914
Ceded reinsurance payable .............. (933,414) 862,474
Accounts payable and other liabilities . 1,468,770 344,941
Income tax payable ..................... (113,284) --
----------- -----------
Net cash (used in) provided by operating activities (1,295,528) 2,299,168
----------- -----------
Investing activities:
- --------------------
Securities available-for-sale:
Purchases - fixed maturities ............... (3,172,826) (2,940,621)
Proceeds from fixed maturities ............. 3,840,296 804,960
Securities held-to-maturity:
Proceeds from fixed maturities ............. -- 865,000
Purchase - mortgage loan ................... (35,339) 982
Other investment .................................. -- (27,054)
----------- -----------
Net cash provided by (used in) investing activities 632,131 (1,296,733)
----------- -----------
Financing activities:
- --------------------
Payments on debt, affiliate and
non-affiliate .................................. (176,606) (156,799)
Stock options exercised ........................... -- 5,500
Net change in advances from affiliates ............ (29,650) (39,838)
----------- -----------
Net cash used in financing activities ............. (206,256) (191,137)
----------- -----------
Increase (decrease) in cash and cash equivalents .. (869,653) 811,298
Cash and cash equivalents, beginning of period .... 2,654,131 693,778
----------- -----------
Cash and cash equivalents, end of period .......... $ 1,784,478 $1,505,076
=========== ===========
Supplemental cash flows disclosure:
- ----------------------------------
Cash paid for interest ............................ $ 2,451 $ 30,724
----------- -----------
Cash paid for income taxes ........................ $ 214,300 $ (166,681)
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
1. Ownership and Organization
--------------------------
Cumberland Technologies, Inc. ("CTI" or "the Company") 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 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"). Effective January 30,
1997, Cumberland Holdings, Inc. changed its name to Cumberland
Technologies, Inc. CTI conducts its business through five wholly-owned
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. Qualex Consulting
Group, Inc. ("Qualex"), a Florida corporation formed in November 1994,
provides claim and contracting consulting services.
2. Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
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.
Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with accounting principles generally accepted
in the United States of America for interim financial information and with
the instructions to Form 10-Q. Accordingly, they do not include all of the
information and notes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2002
are not necessarily indicative of the results that may be expected for any
future quarters or the year ending December 31, 2002. For further
information, refer to consolidated financial statements and notes thereto
for the year ended December 31, 2001, included in the Company's Form 10-K
as filed with the United States Securities and Exchange Commission on April
1, 2002.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Investments
-----------
The Company accounts for marketable securities in accordance with Statement
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
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. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts from the
date of purchase to maturity. Such amortization and accretion, which is
calculated under the interest method, is included in investment income.
Marketable equity securities and debt securities not classified as
"held-to-maturity" or "trading" 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 income taxes, reported
as a separate component of stockholders' equity and of other comprehensive
income (loss). Realized gains and losses and declines in value judged to be
other-than-temporary are included in income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities are included in investment income.
Short-term investments primarily include certificates of deposit having
maturities of more than three months when purchased. These investments are
reported at cost, which approximates fair value.
Cash Equivalents
----------------
The Company considers all highly liquid investments having a maturity of
three months or less when purchased to be cash equivalents.
Deferred Policy Acquisition Costs
---------------------------------
To the extent recoverable from future policy revenues, the costs of
acquiring new surety business, principally commissions, are deferred and
amortized in a manner which charges each year's operations in direct
proportion to the premium revenue recognized.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Intangibles
-----------
As of January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which addresses the financial accounting and
reporting standards for the acquisition of intangible assets outside of a
business combination and for goodwill and other intangible assets
subsequent to their acquisition. This accounting standard requires that
goodwill be separately disclosed from other intangible assets in the
statement of financial position, and no longer be amortized but tested for
impairment on a periodic basis. The provisions of this accounting standard
also require the completion of a transitional impairment test within six
months of adoption, with any impairments identified treated as a cumulative
effect of a change in accounting principle.
In accordance with SFAS No. 142, the Company discontinued the amortization
of goodwill effective January 1, 2002. A reconciliation of previously
reported net income and earnings per share to the amounts adjusted for the
exclusion of goodwill amortization net of the related income tax effect
follows:
Three Months Ended September 30,
--------------------------------
2002 2001
--------------------------------
Reported net loss ..................... $(1,099,565) $ (201,318)
Add: Goodwill amortization,
net of income tax................... -- 13,953
----------- -----------
Adjusted net loss ..................... $(1,099,565) $ (187,365)
----------- -----------
Basic earnings per common share:
Reported net loss ................... $ (0.20) $ (0.04)
Goodwill amortization,
net of income tax ................. -- --
----------- ------------
Adjusted net loss ..................... $ (0.20) $ (0.04)
=========== ===========
Diluted earnings per common share:
Reported net loss ........................ $ (0.20) $ (0.04)
Goodwill amortization,
net of income tax ...................... -- --
----------- -----------
Adjusted net loss .......................... $ (0.20) $ (0.04)
=========== ===========
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Intangibles (continued)
----------------------
Nine Months Ended September 30,
-------------------------------
2002 2001
-------------------------------
Reported net (loss) earnings ............... $ (2,578,630) $ 47,296
Add: Goodwill amortization,
net of income tax ...................... -- 41,860
------------- ----------
Adjusted net (loss) earnings ............... $ (2,578,630) $ 89,156
------------- ----------
Basic earnings per common share:
Reported net (loss) earnings ............. $ (0.46) $ 0.01
Goodwill amortization,
net of income tax ...................... -- 0.01
------------- ----------
Adjusted net (loss) earnings ............... $ (0.46) $ 0.02
============= ==========
Diluted earnings per common share:
Reported net (loss) earnings ............. $ (0.46) $ 0.01
Goodwill amortization,
net of income tax ...................... -- 0.01
------------- ----------
Adjusted net (loss) earnings ............... $ (0.46) $ 0.02
============= ==========
The Company completed the transitional impairment tests and the results
indicated that the fair value of goodwill was not materially different than
the carrying value.
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"). Prior to the implementation of SFAS No. 142,
Goodwill was amortized on a straight-line basis over 15 years. All other
intangible assets are amortized on a straight-line basis over the related
estimated lives and contract periods, which range from 3 to 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 values of Goodwill and other intangible assets are reviewed
periodically for impairment. If this review indicates that the intangible
assets will not be recoverable, as determined based on the fair value of
the entity acquired over the remaining amortization period, the Company's
carrying value of the Goodwill and other intangible assets will be reduced
to approximate fair value.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Loss and Loss Adjustment Expenses
---------------------------------
The liability for loss and loss adjustment expenses including incurred but
not reported losses is based on the estimated ultimate cost of settling the
claim using traditional paid and incurred loss development methods. 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 liabilities 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 loss
and loss adjustment expenses are accrued when the related liability for
unpaid losses is accrued. Loss adjustment expenses include costs associated
directly with specific claims paid or in the process of settlement, such as
legal and adjusters' fees. Loss adjustment expenses also include other
costs that cannot be associated with specific claims but are related to
losses 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 does not consider investment income in determining if a premium
deficiency relating to short duration contracts exists.
Derivative Instruments
----------------------
The Company adopted SFAS No. 133 effective January 1, 2001 which
establishes accounting and reporting standards for derivative instruments.
The Company identified one product that meets the definition of a
derivative instrument as defined in SFAS No. 133. The policy is issued to
registered investment advisors ("Advisors"), and insures losses suffered by
the Advisors as a result of market declines on covered investment
principal, provided that the Advisors have followed the investment
guidelines required by the policy. The identified derivative was formerly
accounted for as an insurance contract within the policy liabilities for
loss and loss adjustment expenses. At December 31, 2001 and September 30,
2002, the fair value of the derivative instrument has been determined by
using a financial model that incorporates market data and other
assumptions. Due to the volatility in the marketplace, the Company
suspended marketing of this product effective September 2001.
Unearned Premiums
-----------------
Unearned premiums are deferred and amortized on a pro-rata basis.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Reinsurance
-----------
The Company assumes and cedes reinsurance and participates in various
pools. The accompanying condensed consolidated financial statements reflect
premiums, benefits and settlement expenses, and deferred policy acquisition
costs, net of reinsurance ceded. Amounts recoverable from reinsurers for
unpaid losses are estimated in a manner consistent with the claim liability
associated with the reinsured policies.
Revenue Recognition
-------------------
Premiums earned on direct insurance and assumed reinsurance are recognized
on a pro-rata basis over the period of risk. Commission income, which is
earned on ceded premiums and premiums written for other third party
insurance carriers, is recognized at the effective date of the bonds
issued. Other income, consisting primarily of consulting fees, is
recognized when the negotiated services are provided.
Stock-Based Compensation
------------------------
The Company has adopted only the pro forma disclosure provisions of
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). SFAS No. 123 encourages, but does not require companies to record at
fair value compensation cost for stock-based employee compensation plans.
The Company accounts for equity-based compensation arrangements in
accordance with the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations. Intrinsic value is the amount by which the
market price of the underlying stock exceeds the exercise price of the
stock option or award on the measurement date, generally the date of grant.
Income Taxes
------------
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred income tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company files a consolidated tax return that includes all of its
subsidiaries.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
Earnings Per Share
------------------
The Company computes and discloses earnings (loss) per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share. The Company excluded 54,700 outstanding stock options
for the three months and nine months ended September 30, 2002 in the
computation of earnings per share, as the effect of these options would
have been anti-dilutive. The inclusion of 45,300 outstanding stock options
in the computation of earnings per share at September 30, 2001 resulted in
diluted earnings per share that was the same as basic earnings per share.
Business Concentration
----------------------
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. 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.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
amounts reported in the consolidated 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.
New Accounting Standards
------------------------
In July 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" was approved by the Financial Accounting Standards
Board (FASB). SFAS No.141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 provides accounting and
reporting standards related to obligations associated with the retirement
of tangible long-lived assets. SFAS 143 is effective on January 1, 2003,
however, earlier application is encouraged. The Company has not evaluated
the effect, if any, that the adoption of SFAS 143 will have on the
Company's consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
2. Summary of Significant Accounting Policies (continued)
-----------------------------------------------------
New Accounting Standards (continued)
-----------------------------------
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 provides
accounting and reporting standards for the impairment or disposal of
long-lived assets. SFAS 144 supersedes SFAS 121 but retains SFAS 121's
fundamental provisions for (a) recognition/measurement of impairment of
long-lived assets to be held and used and (b) measurement of long-lived
assets to be disposed of by sale. SFAS 144 also supersedes the
accounting/reporting provisions of Accounting Principles Board Opinion No.
30 ("APB 30") for segments of a business to be disposed of but retains APB
30's requirement to report discontinued operations separately from
continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale.
SFAS 144 is effective January 1, 2002. The Company adopted SFAS 144
effective January 1, 2002, and the adoption of this statement had no impact
on the financial condition, results of operations, or cash flows of the
Company.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 addresses the accounting for gains and losses
from the extinguishment of debt, economic effects and accounting practices
of sale-leaseback transactions and makes technical corrections to existing
pronouncements. The Company adopted SFAS No. 145 on April 1, 2002, and the
adoption did not have a material effect on the Company's financial
position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, "Liability Recognition for Certain Employees Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." Charges relating to the exit of an activity or disposal of
long-lived assets will be recorded when they are incurred and measurable.
Prior to SFAS No. 146 these charges were accrued at the time of commitment
to exit or dispose and activity. The Company has not yet determined the
impact of the adoption of this statement.
Reclassifications
-----------------
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the 2002 consolidated financial statement
presentation.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
3. Related Party Transactions
--------------------------
In 1988, CCS issued a surplus debenture to KC in exchange for $3,000,000
which bears interest at 10 percent per annum. Interest and principal
payments are 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. On June 30,
1999, CTI forgave $576,266 of its $2,625,000 surplus debenture due from
CCS. As a result, CCS increased paid-in capital to $1,000,000. As of
September 30, 2002 and December 31, 2001, no payments could be made under
the terms of the debenture.
On March 8, 2002, Cumberland purchased a residential mortgage from Francis
M. Williams. Mr. Williams is Chairman of the Board of the Company. The
principal balance on the loan was $36,906. Interest accrued through the
date of acquisition was $129 at an annual interest rate of 7.5%. No prior
liens exist related to taxes, assessments or other similar charges.
4. Investments
-----------
The components of unrealized appreciation of investments recorded in
stockholders' equity are as follows:
September 30, December 31,
2002 2001
------------- -------------
Fixed maturities, net of
income tax ..................... $ 344,481 $ 70,729
============= =============
5. Income Taxes
------------
The Company has recorded a deferred income tax asset of $680,651 and
$499,145 net of a valuation allowances of $200,000 and $-0- at September
30, 2002 and December 31, 2001, respectively. A valuation allowance has
been recognized for the deferred income tax asset as cumulative losses
create uncertainty about the realization of the benefits in future years.
The Company's provision for income taxes for the period ended September 30,
2002 and 2001 has been calculated using an effective rate of approximately
34%, respectively.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
6. Debt
----
Affiliate
---------
Effective November 10, 1998, CTI 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, 2002 and bears interest equal to one half of one
percent per annum in excess of the stated interest rate established by the
Bank of America. On December 26, 2001, the Company made a principal note
payment of $395,495 reducing the outstanding balance on the note to
$604,055. 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 maturity date.
Nonaffiliate
------------
In connection with the acquisition of certain agencies during 1995, the
Company entered into two notes payable with the agencies' previous owners.
One note was due March 1, 2002 bearing interest at 8% through February 28,
2001 and 10% thereafter. Principal payments of $125,000 are due annually
beginning March 1, 2000. On March 1, 2002, a final payment of $125,000 was
made on the note due March 1, 2002. The other note is due June 30, 2010 and
bears interest at 9%. Principal payments of $40,000 were due annually for
three years beginning January 5, 1996. Payments of $11,104 including
principal and interest were paid monthly from April 1, 1997 through June
30, 2001. On December 3, 2001, SA reached an agreement with the holder on
this note payable, whereby the terms of the note were modified, such that
the effective interest rate was 6%, and principal payments became payable
at $6,000 per month.
7. Reinsurance
-----------
The Company assumes and cedes reinsurance and participates in various
pools. The financial statements reflect premiums, benefits and settlement
expenses, and deferred policy acquisition costs, net of reinsurance ceded.
Amounts recoverable from reinsurers are estimated in a manner consistent
with the future policy benefit and claim liability associated with the
reinsured policies.
Accounts recoverable from reinsurers for unpaid losses are presented as an
asset in the accompanying consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
8. Accounting for Derivative Instruments
-------------------------------------
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
is effective for all fiscal years beginning after June 15, 2000. SFAS No.
133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. Under SFAS No. 133, certain
contracts that were not formerly considered derivatives may now meet the
definition of a derivative. The Company adopted SFAS No. 133 effective
January 1, 2001. The Company identified one product that meets the
definition of a derivative instrument as defined in SFAS No. 133. The
policy is issued to registered investment advisors ("Advisors"), and
insures losses suffered by the Advisors as a result of market declines on
covered investment principal, provided that the Advisors have followed the
investment guidelines required by the policy. The identified derivative was
formerly accounted for as an insurance contract within the policy
liabilities for loss and loss adjustment expenses account in the
consolidated balance sheet prior to January 1, 2001. There was no
cumulative effect of change in accounting principal due to the fact that
the policy liability recorded for this policy at December 31, 2000
approximated the fair value of the derivative instrument at January 1,
2001. The fair value, net of reinsurance, of the derivative instrument at
September 30, 2002 and December 31, 2001 is $4,329,300 and $1,978,891,
respectively. The Company is not involved in any hedging activities. At
September 30, 2002 the fair value of the derivative instrument has been
determined by using a financial model that incorporates market data and
other assumptions. Due to the volatility in the marketplace, the Company
suspended marketing of this product effective September 2001.
9. Statutory Accounting Practices
------------------------------
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. In 1998, the NAIC
adopted the Codification of Statutory Accounting Principles
("Codification") for insurance companies. Codification, which is intended
to standardize regulatory accounting and reporting for the insurance
industry, is effective January 1, 2001. The Company implemented
codification at January 1, 2001. On a statutory accounting basis, CCS
reported losses net of income taxes of ($1,589,521) for the nine months
ended September 30, 2002. Statutory surplus (shareholders' equity) of these
operations was $5,107,267 and $6,503,218 as of September 30, 2002 and
December 31, 2001, respectively.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (UNAUDITED)
10. Comprehensive Income
--------------------
Comprehensive (loss) income is defined as any change in equity from
transactions and other events originating from nonowner sources. In the
Company's case, those changes are principally comprised of reported net
income and changes in the unrealized appreciation and depreciation of the
Company's available-for-sale securities. SFAS No. 130 requires that the
Company report all components of comprehensive income. The following
summaries present the components of comprehensive income, other than net
income, for the nine months ended September 30, 2002 and September 30,
2001, respectively.
Consolidated Statements of
Comprehensive Income
-------------------------------
Nine Months Ended September 30,
2002 2001
-------------------------------
Net (loss) income........................... $ (2,578,630) $ 47,296
Other comprehensive income:
Unrealized appreciation of available-
for-sale securities arising during
period, net of income tax........... 176,324 326,096
Reclassification adjustment for (gains)
losses included in net income,
net of income tax................... 32,535 31,354
------------ -------------
Comprehensive (loss) income............. $ (2,369,771) $ 404,746
============ =============
11. Contingencies
-------------
CCS has been named in a class action lawsuit in the United States District
Court for the District of Colorado. The plaintiffs are clients of a
registered investment advisor (the "Advisor") and have alleged that the
Advisor, a registered broker-dealer, and certain other defendants
(excluding CCS) were negligent or otherwise responsible for losses suffered
by the plaintiffs resulting from embezzlement of the plaintiffs'
investments by a third party. As a separate count in the lawsuit, the
plaintiffs have also asserted claims against CCS based on a policy of
insurance issued by CCS to the Advisor. The policy does not provide
coverage for embezzlement, rather it insures losses caused by market
declines, providing that the Advisor has followed the investment guidelines
required by the policy. On July 31, 2002, the District Court granted CCS's
motion for summary judgment and dismissed the claims against CCS.
CUMBERLAND TECHNOLOGIES, INC.
Forward-looking Statement Disclosure
- ------------------------------------
All statements, other than statements of historical facts, included or
incorporated by reference in this Form 10-Q 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(R) 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 analysis 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. These risks
and uncertainties include, but are not limited to, changes in the market value
of the Company's investments, increases in the Company's liability under
derivative securities, losses on claims in excess of the Company's liability for
loss and loss adjustment expenses, competition in the insurance industry,
inability to recover from reinsurers for unpaid losses, unanticipated losses
from litigation, the effects of new or existing government regulations, and the
impact of new accounting pronouncements. All of the forward-looking statements
made in this Form 10-Q are qualified by these cautionary statements and there
can be no assurance that the actual results or development 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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 $15,300,000
at December 31, 2002. Statutory guidelines impose an additional limitation on
increasing net written premiums to no more than 33% of prior year's net written
premiums. Under these guidelines, the Company could increase net written
premiums by approximately $1,900,000 in the year 2002 subject to risk-based
capital limitations.
At September 30, 2002, $25,166,666 of the Company's total assets calculated
based on generally accepted accounting principles in the United States of
America were comprised as follows: 49 percent in cash and investments (including
accrued investment income), 30 percent in receivables and reinsurance
recoverables, 7 percent in income tax recoverable and deferred income tax asset,
9 percent in intangibles and deferred policy acquisition costs and 5 percent in
other assets.
The Company follows investment guidelines that are intended to provide an
acceptable return on investment while maintaining sufficient liquidity to meet
its obligations.
Net cash (used in) provided by operating activities was ($1,295,528) and
$2,299,168 for the nine months ended September 30, 2002 and 2001, respectively.
Net cash used in operating activities for the period ended September 30, 2002 is
primarily attributed to an increase in policy liabilities and is offset by
increases in deferred income tax asset and income taxes recoverable. Net cash
provided by operating activities for the nine months ended September 30, 2001 is
primarily attributed to a decrease in reinsurance recoverable and an increase in
derivative liability which are offset by an increase in accounts receivable and
a decrease in policy liabilities and accruals.
Net cash provided by (used in) investing activities was $632,131 and
($1,296,733) for the nine months ended September 30, 2002, and 2001,
respectively. Investing activities consist of purchases, sales, and maturities
of investments.
Net cash used in financing activities was $206,256 and $191,137 for the
nine months ended September 30, 2002 and 2001, respectively. Financing
activities consist primarily of payments on long-term debt.
It is anticipated that the liquidity requirements of the Company will be
met primarily by funds generated from operations. The principal sources of
operating cash flows are premiums, investment income, and sales and maturities
of investments. The Company believes that total invested assets, including cash
and short-term investments, are sufficient in the aggregate and have suitably
scheduled maturities to satisfy all policy claims and other operating
liabilities.
As of September 30, 2002, the Company believes that it has sufficient
capital resources to fund its present capital requirements.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
------------------------------------------
Management of the Company is considering a possible "going private"
transaction, which might involve a reverse stock split or a stock repurchase
program. Any such transaction would be reviewed and approved by the Board of
Directors of the Company prior to completion, and may require shareholder
approval. The actual amount of funds needed to implement a transaction is not
known, but management believes that it would not have a material impact on the
financial condition of the Company. However, any such transaction may have the
effect of enabling the Company to terminate the resignation of its common stock,
and its reporting obligations, under the Securities Exchange Act of 1934.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Critical Accounting Policies
----------------------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates and assumptions are based
on historical experience and various other factors that are believed to be
reasonable under the circumstances. Actual results could differ from these
estimates under different assumptions or conditions.
The Company believes the following accounting policies are the most
critical since these policies require significant judgment or involve complex
estimations that are important to the portrayal of the Company's financial
condition and operating results:
Asset Impairment
----------------
The Company reviews long-lived assets, including certain identifiable
intangibles, for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. Upon determination
that the carrying value of the asset is impaired, the Company would record an
impairment charge or loss. Future adverse changes in market conditions or poor
operating results of the underlying investment could result in losses or an
inability to recover the carrying value of the investment that may not be
reflected therein; and therefore, might require the Company to record an
impairment charge in the future.
Derivatives
-----------
Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No.133") is effective for
all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The Company
adopted SFAS No. 133 effective January 1, 2001. The Company identified one
product that meets the definition of a derivative instrument as defined in SFAS
No. 133. The identified derivative was formerly accounted for as an insurance
contract within the policy liabilities for loss and loss adjustment expenses
account in the consolidated balance sheet. At December 31, 2001 and September
30, 2002 the fair value of the derivative instrument has been determined by
using a financial model that incorporates market data and other assumptions. Due
to the volatility in the marketplace, the Company has suspended marketing of
this product effective September 2001.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Critical Accounting Policies (continued)
---------------------------------------
Reserves for Unpaid Losses and Adjustment Expenses
--------------------------------------------------
The liability for loss and loss adjustment expenses including incurred but
not reported losses is based on the estimated ultimate cost of settling the
claim using traditional paid and incurred loss development methods. 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 liabilities 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 loss and loss adjustment
expenses is accrued. Loss adjustment expenses include costs associated directly
with specific claims paid or in the process of settlement, such as legal and
adjusters' fees. Loss adjustment expenses also include other costs that cannot
be associated with specific claims but are related to losses paid or in the
process of settlement, such as internal costs of the claims function. The
Company does not discount its liability for losses and loss adjustment expenses.
The Company writes primarily surety contracts which are of short duration. The
Company does not consider investment income in determining if a premium
deficiency relating to short duration contracts exists.
Reinsurance
-----------
The Company assumes and cedes insurance with other insurers and reinsurers
to limit maximum loss, provide greater diversification of risk and minimize
exposure on larger risks. Premiums and loss and loss adjustment expenses that
are ceded under reinsurance arrangements reduce the respective revenues and
expenses. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policy and are
reported as reinsurance recoverable.
Income Taxes
------------
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are established for the future tax
effects of temporary differences between the tax and financial reporting bases
of assets and liabilities using currently enacted tax rates. Such temporary
differences primarily relate to certain insurance liabilities, deferred policy
acquisition costs and intangible assets. The effect on deferred income taxes of
a change in tax rates is recognized in income in the period of enactment. A
valuation allowance to reduce deferred income tax assets is established when
deemed appropriate.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
-----------------------------------------------------------
Direct, assumed and ceded premiums earned for the period ended September
30, 2002 exceeded premiums earned for the same period in 2001 by $1,241,615 or
13%. Net premium income earned for the nine months ended September 30, 2002 and
2001, was $11,104,413 and $9,862,798, respectively.
Net investment income for the nine months ended September 30, 2002
decreased by $88,932 when compared to the same period in 2001. The decrease is
attributed to an overall decrease in interest rates earned on the bond and money
market portfolio. Other income for the nine months ended September 30, 2002 when
compared to the same period of 2001 increased by $240,761. The increase is
primarily attributed to the Company's claims consulting subsidiary.
During the nine months ended September 30, 2002, loss and loss adjustment
expenses increased by $4,231,933 when compared to the same period in 2001. The
increase is attributed to additional incurred losses and loss adjustment
expenses on direct business and assumed business in the amount of $3,544,329 and
$687,603, respectively. The volume of direct and assumed losses is attributed to
the increase of claims submitted and paid for the nine months ended September
30, 2002 resulting in the subsequent increase in the liability for loss and loss
adjustment expenses. The ratio of losses and loss adjustment expenses incurred
as a percentage of earned premiums is 56% for the period ending September 30,
2002 as compared to 21% for the same period in 2001.
During the nine months ended September 30, 2002, derivative expense
increased by $1,042,015 when compared to the same period in 2001. The change is
attributed to an increase in the market value of the derivative liability
requiring an increase in the liability for derivative valuation. The Company
anticipates that there may be additional future increases in the derivative
liability, which could cause an adverse effect on the Company's financial
results in the periods affected.
During the nine months ended September 30, 2002, amortization of deferred
policy acquisition costs was $3,294,236 as compared to $3,130,794 for the same
period in 2001. The amortization of deferred policy acquisition costs represents
24% and 23% of written premiums for the nine months ended September 30, 2002 and
2001, respectively.
Operating expenses for the nine months ended September 30, 2002 when
compared to the same period in 2001 decreased $131,332 or 3%. The Company's
largest operating expense is salary and related expenses representing 54% and
50% of the total operating expense for the nine months ended September 30, 2002
and 2001, respectively. The Company goal for 2002 is maintaining consistency
with prior year operating expenses without disruption of its marketing goals.
Interest expense represents payment to two subsidiary agencies previous
owners. The decrease in interest expense for the nine months ended September 30,
2002 is due to a decrease in the principal amount of the long-term debt.
Income taxes in the nine months ending September 30, 2002 and 2001 were
calculated using effective rate of 34%, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
------------------------------------------------------------
Direct, assumed and ceded premiums for the third quarter of 2002 increased
$496,524 or 14% when compared to the same period in 2001. Net premium income for
the period ended September 30, 2002 and 2001, was $4,099,688 and $3,603,164,
respectively.
Net investment income for the three months ended September 30, 2002
decreased by $35,821 when compared to the same period in 2001. The decrease is
attributed to an overall decrease in interest rates earned on the bond and money
market portfolio. Other income increased by $99,087 or 22% when compared to the
same period of 2001 and is primarily attributed to the Company's claims
consulting subsidiary.
During the three months ended September 30, 2002, loss and loss adjustment
expenses increased by $1,225,307 when compared to the same period in 2001. The
increase is attributed to incurred losses and loss adjustment expenses on direct
and assumed business. Incurred claims as a percentage of earned premiums were
30% and 29% for the period ending September 30, 2002 and 2001, respectively.
During the three months ended September 30, 2002, derivative expense
increased by $869,591 when compared to the same period in 2001. The change is
attributed to an increase in the market value of the derivative liability
requiring an increase in the liability for derivative valuation. The Company
anticipates that there may be additional future increases in the derivative
liability, which could cause an adverse effect on the Company's financial
results in the periods affected.
During the three months ended September 30, 2002, amortization of deferred
policy acquisition costs was $978,583 as compared to $1,235,126 for the same
period in 2001. The amortization of deferred policy acquisition costs is 24% and
26% of written premiums for the three months ended September 30, 2002 and 2001,
respectively.
Operating expenses for the three months ended September 30, 2002 when
compared to the same period in 2001 decreased by $162,951 or 10%. The Company
goal for 2002 is maintaining consistency with prior year operating expenses
while maintaining its marketing goals.
Interest expense represents payment to two subsidiary agencies' previous
owners. The decrease in interest expense for the three months ended September
30, 2002 is due to a decrease in the principal amount of the long-term debt.
Income taxes in the three months ended September 30, 2002 and 2001 were
calculated using annual effective rate of 34%, respectively.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ ----------------------------------------------------------
The Company had approximately $10.5 million of investments as of September
30, 2002. These investments largely consist of government obligations and have
either variable rates of interest or stated interest rates ranging from 3.5% to
8.5%. The Company's investments are exposed to certain market risks inherent
with such assets. The risk of defaults is mitigated by the Company's policy of
investing in securities with high credit ratings and investing through major
financial institutions with high credit ratings. The Company has notes payable
of approximately $1.1 million at an average interest rate of 8.6%.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133,
as amended, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Under SFAS No. 133, certain contracts
that were not formerly considered derivatives may now meet the definition of a
derivative. The Company adopted SFAS No. 133 effective January 1, 2001. The
Company identified one product that meets the definition of a derivative
instrument as defined in SFAS No. 133. The policy is issued to registered
investment advisors ("Advisors"), and insures losses suffered by the Advisors as
a result of market declines on covered investment principal, provided that the
Advisors have followed the investment guidelines required by the policy. The
identified derivative was formerly accounted for as an insurance contract within
the policy liabilities for loss and loss adjustment expenses account in the
consolidated balance sheet prior to January 1, 2001. There was no cumulative
effect of change in accounting principal due to the fact that the policy
liability recorded for this policy at December 31, 2000 approximated the fair
value of the derivative instrument at January 1, 2001. The fair value, net of
reinsurance, of the derivative instrument at September 30, 2002 and December 31,
2001 is $4,329,300 and $1,978,891, respectively. The Company is not involved in
any hedging activities. At September 30, 2002 the fair value of the derivative
instrument has been determined by using a financial model that incorporates
market data and other assumptions. Due to the volatility in the marketplace, the
Company suspended marketing of this product effective September 2001. The value
of the derivative liability increases in proportion to the volatility in the
marketplace.
Item 4. CONTROLS AND PROCEDURES
- ------ -----------------------
With the participation of management, the Company's chief executive officer
and chief financial officer evaluated the Company's disclosure controls and
procedures within 90 days of the filing date of this quarterly report. Based
upon this evaluation, the chief executive officer and chief financial officer
concluded that the Company's disclosure controls and procedures are effective in
ensuring that material information required to be disclosed is included in the
reports that it files with the Securities and Exchange Commission.
There were no significant changes in the Company's internal controls or, to
the knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the evaluation date.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings
- ------ -----------------
CCS was named as a defendant in a class action lawsuit in the United
States District Court for the District of Colorado. The plaintiffs are
clients of a registered investment advisor (the "Advisor") and have
alleged that the Advisor, a registered broker-dealer, and certain
other defendants (excluding CCS) were negligent or otherwise
responsible for losses suffered by the plaintiffs resulting from
embezzlement of the plaintiffs' investments by a third party. As a
separate count in the lawsuit, the plaintiffs have also asserted
claims against CCS based on a policy of insurance issued by CCS to the
Advisor. The policy does not provide coverage for embezzlement, rather
it insures losses caused by market declines, providing that the
Advisor has followed the investment guidelines required by the policy.
On July 31, 2002, the District Court granted CCS' motion for summary
judgment and dismissed the claims against CCS.
Item 2. Changes in securities
- ------ ---------------------
None
Item 3. Defaults upon senior securities
- ------ -------------------------------
None
Item 4. Submission of matters to a vote of security holders
- ------ ---------------------------------------------------
None
Item 5. Other Information
- ------ -----------------
None
Item 6. Exhibits and reports on Form 8-K
- ------ --------------------------------
(a) The following documents are filed as exhibits to this Quarterly
Report on Form 10-Q:
3(a) Articles of Incorporation*
3(b) Bylaws*
(b) On September 12, 2002 the Company filed a Form 8-K to announce
that it will be delisted from the NASDAQ SmallCap Market.
On October 3, 2002 the Company filed a Form 8-K to announce
that it will be listed on the Nasdaq OTC Bulletin Board.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUMBERLAND TECHNOLOGIES, INC.
Date: November 19, 2002 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 19, 2002 By: /s/ Carol S. Black
--------------------------------------------
Carol S. Black
Secretary and Chief Financial Officer
(Principal Accounting and Financial Officer)
CUMBERLAND TECHNOLOGIES, INC.
CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
-----------------------------------------------
I Joseph M. Williams, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cumberland
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosures controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002 By: /s/ Joseph M. Williams
----------------------------------
Joseph M. Williams
President and Treasurer
CUMBERLAND TECHNOLOGIES, INC.
CERTIFICATION FOR QUARTERLY REPORT ON FORM 10-Q
-----------------------------------------------
I Carol S. Black, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cumberland
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosures controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002 By: /s/ Carol S. Black
-------------------------------------
Carol S. Black
Secretary and Chief Financial Officer
CERTIFICATION OF PERIODIC FINANCIAL REPORT
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------
In connection with the Quarterly Report of Cumberland Technologies, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), Joseph
M. Williams, President and Treasurer, hereby certifies pursuant to 18 U.S.C. (S)
1350, as adopted pursuant to (S) 906 of the Sabanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 19, 2002 By: /s/ Joseph M. Williams
------------------------------------
Joseph M. Williams
President and Treasurer
CERTIFICATION OF PERIODIC FINANCIAL REPORT
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------
In connection with the Quarterly Report of Cumberland Technologies, Inc. (the
"Company") on Form 10-Q for the period ending September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), Carol
S. Black, Secretary and Chief Financial Officer, hereby certifies pursuant to 18
U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sabanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: November 19, 2002 By: /s/ Carol S. Black
-------------------------------------
Carol S. Black
Secretary and Chief Financial Officer