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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, 2003.
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
determined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
Applicable Only to Corporate Issuers
The number of shares of the Registrant's common stock, $.001 par value,
outstanding as of September 30, 2003 was 5,597,244 shares.
CUMBERLAND TECHNOLOGIES, INC.
FORM 10-Q
INDEX
-----
PART I FINANCIAL INFORMATION
- ------ ---------------------
Page
----
Item 1. Condensed Consolidated Balance Sheets at September 30, 2003
(unaudited) and December 31, 2002............................1-2
Condensed Consolidated Statements of Operations (unaudited)
for the nine months ended September 30, 2003 and 2002.........3
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended September 30, 2003 and 2002........4
Condensed Consolidated Statements of Stockholders' Equity for
the nine months ended September 30, 2003 (unaudited)
and for the year ended December 31, 2002......................5
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 2003
and 2002......................................................6
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................7-16
Forward-looking Statement Disclosure...........................17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................18-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk..................................................24
Item 4. Controls and Procedures.....................................24-25
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal proceedings..............................................26
Item 2. Changes in securities..........................................26
Item 3. Defaults upon senior securities................................26
Item 4. Submission of matters to a vote of security holders............26
Item 5. Other information..............................................26
Item 6. Exhibits and Reports of Form 8-k...............................26
Signatures..................................................27-31
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,
2003 2002
--------------------------
(unaudited)
Investments:
- -----------
Debt securities available-for-sale at fair value $ 5,242,096 $ 7,758,657
Debt securities held-to-maturity at amortized
cost (fair value, September 30, 2003 -
$100,000 and December 31, 2002 -
$367,681), respectively........................ 100,000 359,898
Mortgage loans on real estate, at unpaid
principal ..................................... 676,322 716,413
Short-term investments .......................... 433,993 433,993
----------- -----------
Total investments ............................. 6,452,411 9,268,961
Cash and cash equivalents .......................... 189,700 593,259
Accrued investment income .......................... 87,642 123,894
Reinsurance recoverable ............................ 13,310,057 12,089,177
Accounts receivable:
Nonaffiliate less allowance for doubtful
accounts of $77,122 and $116,323
at September 30, 2003 and December 31,
2002, respectively ............................ 1,498,775 2,518,187
Income tax recoverable ............................. 98,981 1,073,686
Deferred income tax asset .......................... 410,800 401,738
Deferred policy acquisition costs .................. 1,613,609 1,665,694
Intangibles, net ................................... 223,126 288,473
Goodwill ........................................... 152,780 152,780
Other investment ................................... 700,124 700,124
Other assets ....................................... 185,990 302,515
----------- -----------
$24,923,995 $29,178,488
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
-----------------------------
September 30, December 31,
2003 2002
-----------------------------
(unaudited)
Policy liabilities and accruals:
- -------------------------------
Loss and loss adjustment expense reserves .... $ 6,615,059 $ 8,895,470
Derivative instruments ....................... 4,130,558 4,346,285
Unearned premiums ............................ 4,312,521 4,587,175
Ceded reinsurance payable ....................... -- 26,883
Drafts outstanding .............................. 575,282 --
Accounts payable and other liabilities .......... 1,981,676 3,775,924
Long-term debt:
Nonaffiliate ................................. 401,417 455,417
Affiliate .................................... 604,055 604,055
------------ ------------
Total liabilities ............................ 18,620,568 22,691,209
------------ ------------
Stockholders' equity:
- --------------------
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 ....... 171,303 210,574
Accumulated deficit .......................... (880,389) (735,808)
Less treasury stock, at cost, 318,112 shares . (263,719) (263,719)
------------ ------------
Total stockholders' equity ................... 6,303,427 6,487,279
------------ ------------
Total liabilities and stockholders' equity $ 24,923,995 $29,178,488
============ ============
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
-------------------------------
Nine Months Ended September 30,
2003 2002
-------------------------------
Revenue:
- -------
Direct premiums earned......................... $ 7,610,770 $ 10,734,758
Reinsurance premiums earned.................... 436,904 2,828,414
Less reinsurance ceded......................... (1,963,616) (2,458,760)
----------- ---------------
Net premium income............................. 6,084,058 11,104,412
Net investment income.......................... 209,039 373,411
Net realized investment gains ................. 70,835 14,851
Other income................................... 1,535,702 1,611,878
------------ ---------------
Total revenue.................................. 7,899,634 13,104,552
------------ ---------------
Benefits and Expenses:
- ---------------------
Losses and loss adjustment expenses............ 1,774,383 6,253,934
Derivative expense............................. 428,218 2,505,923
Amortization of deferred policy acquisition
costs...................................... 1,781,801 3,294,236
Operating expenses............................. 4,109,396 4,781,024
Interest expense............................... 24,917 27,369
---------- ---------------
Total expenses................................. 8,118,715 16,862,486
---------- ---------------
Loss before income tax benefit................. (219,081) (3,757,934)
Income tax benefit............................. (74,500) (1,179,304)
---------- ---------------
Net loss....................................... $ (144,581) $ (2,578,630)
========== ===============
Weighted average shares outstanding - basic.... 5,597,244 5,597,244
========== ===============
Net loss per share - basic..................... $ (0.03) $ (0.46)
========== ===============
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
--------------------------------
Three Months Ended September 30,
2003 2002
--------------------------------
Revenue:
- -------
Direct premiums earned ......................... $ 2,490,831 $ 3,723,222
Reinsurance premiums earned .................... 25,560 959,831
Less reinsurance ceded ......................... (609,448) (583,365)
----------- -----------
Net premium income ............................. 1,906,943 4,099,688
Net investment income .......................... 53,504 126,927
Net realized investment gains .................. 29,576 27,708
Other income ................................... 453,796 540,419
----------- -----------
Total revenue .................................. 2,443,819 4,794,742
----------- -----------
Benefits and Expenses:
- ---------------------
Losses and loss adjustment expenses ............ 316,989 2,284,615
Derivative expense ............................. (6,054) 1,464,451
Amortization of deferred policy acquisition
costs ...................................... 771,679 978,582
Operating expenses ............................. 1,369,746 1,455,660
Interest expense ............................... 7,928 8,306
----------- -----------
Total expenses ................................. 2,460,288 6,191,614
----------- -----------
Loss before income tax benefit ................. (16,469) (1,396,872)
Income tax expense (benefit) ................... 1,682 (297,307)
----------- -----------
Net loss ....................................... $ (18,151) $(1,099,565)
=========== ===========
Weighted average shares outstanding - basic .... 5,597,244 5,597,244
=========== ===========
Net loss per share - basic ..................... $ 0.00 $ (0.20)
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED) AND
FOR THE YEAR ENDED DECEMBER 31, 2002
------------------------------------
Retained
Common Shares Capital in Other Earnings Total
--------------------- Excess of Comprehensive (Accumulated Treasury Stockholders'
Stock Amount Par Value Income Deficit) Stock Equity
--------- --------- ----------- ---------- ----------- ----------- ---------------
Balance at January 1, 2002 ........ 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 ................. 139,845 139,845
Net loss ....................... (1,569,169) (1,569,169)
Comprehensive loss ............. (1,429,324)
----------- -------- ----------- ---------- ----------- ----------- -----------
Balance at December 31, 2002 ...... 5,915,356 5,916 7,270,316 210,574 (735,808) (263,719) 6,487,279
Net unrealized depreciation
of available-for-sale
securities, net of
income tax.................. (39,271) (39,271)
Net loss ....................... (144,581) (144,581)
-----------
Comprehensive loss ............. (183,852)
----------- -------- ----------- ---------- ----------- ----------- -----------
Balance at
September 30,2003 5,915,356...... $ 5,915,356 5,916 $ 7,270,316 $ 171,303 $ (880,389) $ (263,719) $6,303,427
=========== ======== =========== ========== =========== =========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
-------------------------------
Nine Months Ended September 30,
2003 2002
-------------------------------
Operating activities:
- --------------------
Net loss ............................................ $ (144,581) $(2,578,630)
Adjustments to reconcile net loss to cash used in
operating activities:
Accretion of investment discounts and premiums 17,729 23,414
Policy acquisition costs amortized ........... 1,781,801 3,294,236
Policy acquisition costs deferred ............ (1,729,716) (3,355,732)
Amortization ................................. 65,347 89,476
Net realized (gain) loss on disposal of
investments .............................. (70,835) (14,851)
(Increase) decrease in:
Accrued investment income ................ 36,252 21,266
Reinsurance recoverable .................. (1,220,880) (1,936,921)
Accounts receivable ...................... 1,019,412 2,144,592
Income tax recoverable ................... 974,705 (1,056,625)
Deferred income tax asset ................ 14,631 (271,623)
Other assets ............................. 116,525 16,864
(Decrease) increase in:
Policy liabilities and accruals .......... (2,555,065) (443,475)
Derivative liability ..................... (215,727) 2,350,409
Ceded reinsurance payable ................ (26,883) (933,414)
Accounts payable and other liabilities ... (1,794,248) 1,468,770
Drafts outstanding ....................... 575,282 --
Income tax payable ....................... -- (113,284)
----------- -----------
Net cash used in operating activities ............... (3,156,251) (1,295,528)
----------- -----------
Investing activities:
- --------------------
Securities available-for-sale:
Purchases - fixed maturities ................. (1,324,158) (3,172,826)
Proceeds from fixed maturities ............... 3,830,759 3,840,296
Securities held-to-maturity:
Proceeds from sales - debt securities ........ 260,000 --
Proceeds (purchases) of mortgage loans .............. 40,091 (35,339)
---------- -----------
Net cash provided by investing activities ........... 2,806,692 632,131
---------- -----------
Financing activities:
- --------------------
Payments on long-term debt .......................... (54,000) (176,606)
Net change in advances to affiliates ................ -- (29,650)
---------- -----------
Net cash used in financing activities ............... (54,000) (206,256)
---------- -----------
Decrease in cash and cash equivalents ............... (403,559) (869,653)
Cash and cash equivalents, beginning of period ...... 593,259 2,654,131
----------- -----------
Cash and cash equivalents, end of period ............ $ 189,700 $1,784,478
=========== ===========
Supplemental cash flows disclosure:
- ----------------------------------
Cash paid for interest .............................. $ -- $ 2,451
----------- -----------
Cash paid for income taxes .......................... $ -- $ 214,300
=========== ===========
See notes to condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (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 nine months ended September 30, 2003 are not
necessarily indicative of the results that may be expected for any future
quarters or the year ending December 31, 2003. For further information,
refer to consolidated financial statements and notes thereto for the year
ended December 31, 2002, included in the Company's Form 10-K as filed with
the United States Securities and Exchange Commission on May 5, 2003.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (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 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 nine months when purchased. These investments are
reported at cost, which approximates fair value.
Investments in which the Company has a 20% - 50% ownership interest are
accounted for using the equity method.
Cash Equivalents
----------------
The Company considers all highly liquid investments having a maturity of
twelve 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.
Intangibles
-----------
Intangible assets are stated at cost and principally represent purchased
customer accounts and the excess of costs over the fair value of
identifiable net assets acquired ("Goodwill").
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Intangibles (continued)
----------------------
Purchased customer accounts, noncompete agreements, and purchased contract
agreements are being amortized on a straight-line basis over the related
estimated lives and contract periods, which range from 3 to 15 years.
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.
In accordance with SFAS 142, "Goodwill and Other Intangible Assets", the
Company discontinued the amortization of goodwill effective January 1,
2002. At September 30, 2003 and December 31, 2002, goodwill, net of
accumulated amortization, was $152,780.
In accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", which became effective for the Company as of January 1,
2002, the Company periodically reviews the carrying value of long-lived
assets to determine if impairment has occurred. Impairment losses, if any,
are recorded in the period identified. Significant judgment is required to
determine whether or not impairment has occurred. The determination is made
by evaluating expected future undiscounted cash flows or the anticipated
recoverability of costs incurred and, if necessary, determining the amount
of the loss, if any, by evaluating the fair value of the assets.
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 is 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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Derivative Instruments
----------------------
The Company adopted SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" 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 for periods prior to January 1, 2001 and
on 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 of the derivative instrument
at September 30, 2003 and December 31, 2002 is $4,130,558 and $4,346,285,
respectively. At September 30, 2003 and December 31, 2002 the fair value of
the derivative instrument was 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 Company is not involved in any hedging activities.
Unearned Premiums
-----------------
Unearned premiums are deferred and amortized on a pro-rata basis.
Reinsurance
-----------
The Company assumes and cedes reinsurance and participates in various
pools. The accompanying 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.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
2. Summary of Significant Accounting Policies (continued)
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 has recorded a deferred income tax asset of $410,800 and
$401,738 at September 30, 2003 and December 31, 2002, respectively.
Realization of the asset is dependent on generating sufficient taxable
income in future years. Although realization is not assured, management
believes it is more likely than not that all of the deferred income tax
asset will be realized.
The Company files a consolidated tax return that includes all of its
subsidiaries.
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 39,500 and 54,700 outstanding stock options at
September 30, 2003 and 2002, respectively, had an immaterial effect on the
results of the calculations of earnings per share. The outstanding stock
options were not included in the loss per share calculations, as the effect
would be anti-dilutive to the Company's net loss for the nine-month periods
ended September 30, 2003 and 2002.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
2. Summary of Significant Accounting Policies (continued)
------------------------------------------------------
Business Concentration
----------------------
The majority of the Company's business relates to surety bonds, which
provide performance and payment bonds for individual and commercial
contractors, and market performance products, which provide specific
liability coverage for professional services rendered by registered
investment advisors. Accordingly, the occurrence of adverse economic
conditions could have a material adverse effect on the Company's business,
although for surety bonds, no such conditions have been encountered in the
Company's past experience. For surety bonding, the Company requires
collateral from surety bond customers if the customer fails to meet 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 August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it
occurred. The standard is effective for fiscal years beginning after
September 15, 2002. The adoption of SFAS 143 did not have a significant
impact on the Company's financial position or results of operations.
In September 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS No. 146
requires costs associated with exit or disposal activities to be recognized
when the costs are incurred, rather than at a date of commitment to an exit
or disposal. The adoption of SFAS 146 does not have a significant impact on
the Company's financial position or results of operations.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
2. Summary of Significant Accounting Policies (continued)
New Accounting Standards (continued)
------------------------------------
In April of 2003, the FASB issued SFAS No. 149 entitled "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No.
149"), SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133 entitled
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 did not have a significant impact on the
Company's financial position or results of operations.
Reclassifications
-----------------
Certain amounts in the 2002 condensed consolidated financial statements
have been reclassified to conform to the 2003 condensed consolidated
financial statement presentation.
3. Related Party Transactions
--------------------------
In 1988, CCS issued a surplus debenture to KC in exchange for $3,000,000
which bore interest at 10 percent per annum. Interest and principal
payments were 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
September 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. At January 1, 2003, CTI forgave the $2,048,734 balance of the
surplus note increasing CCS's paid in capital to $3,048,734.
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, 2003 December 31, 2002
--------------------------------------
Fixed maturities, net of
income tax ............... $171,303 $ 210,574
========= =========
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
5. Income Taxes
------------
The Company has recorded a deferred income tax asset of $410,800 and
$401,738 at September 30, 2003 and December 31, 2002, respectively.
The Company's provision for income taxes for the nine-month period ended
September 30, 2003 and 2002 have been calculated using an effective rate of
approximately 34% and 31%, respectively.
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, 2003 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
nine-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 September 30,
2010 and bears interest at 9%. Principal payments of $40,000 were due
annually for nine 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's Consolidated Balance Sheet includes reinsurance recoverables
of $13,310,057 at September 30, 2003. 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 for unpaid losses are presented as an asset in the accompanying
condensed consolidated financial statements.
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
7. Reinsurance (continued)
-----------------------
The components of the recoverables include amounts due on paid claims
subject to reinsurance treaties and amounts recoverable on unpaid losses.
Amounts recoverable from reinsurers on unpaid losses are estimated in a
manner consistent with the future policy benefit and claim liability
associated with the reinsured policies and are subject to inherent
uncertainties. Due to the inherent uncertainties in the process of
establishing these amounts, the actual ultimate amount could differ from
the currently recorded amount.
Reinsurance contracts do not relieve the ceding company of its obligations
to indemnify its own policyholders.
8. 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 ($294,298) for the nine months ended
September 30, 2003. Statutory surplus (shareholders' equity) of these
operations was $4,166,400 and $4,734,899 as of September 30, 2003 and
December 31, 2002, respectively.
9. Comprehensive Loss
------------------
Comprehensive loss is defined as any change in equity from transactions and
other events originating from nonowner sources. The Company's comprehensive
loss is comprised of reported net loss and changes in the unrealized
appreciation of available-for-sale securities. The following summarizes the
components of comprehensive loss:
CUMBERLAND TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
------------------------------
9. Comprehensive Loss (continued)
------------------------------
Consolidated Statements of
Comprehensive Loss
--------------------------------
Nine Months Ended September 30,
2003 2002
--------------------------------
Net loss ................................... $ (144,581) $(2,578,630)
Other comprehensive income:
Unrealized appreciation of available-
for-sale securities arising during
period, net of income tax ........... 16,792 176,324
Reclassification adjustment for (losses)
gains included in net income, net of
income tax .......................... (56,063) 32,535
----------- -----------
Comprehensive loss ......................... $ (183,852) $(2,369,771)
============ ============
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 Financial Services, the Company is permitted to write net premiums
up to an amount equal to three times its statutory surplus, or approximately
$14,200,000 at December 31, 2003. 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 $4,100,000 in the year 2003 subject to
risk-based capital limitations.
At September 30, 2003, $24,923,995 of the Company's total assets calculated
based on accounting principles generally accepted in the United States of
America were comprised as follows: 27 percent in cash and investments (including
accrued investment income), 59 percent in receivables and reinsurance
recoverables, 2 percent in income tax recoverable and deferred income tax asset,
8 percent in intangibles and deferred policy acquisition costs and 4 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 operating activities was $3,156,251 and $1,295,528 for the
nine months ended September 30, 2003 and 2002, respectively. Cash used in
operating activities is the result of a decrease in policy liabilities and
accounts payable and is offset by income tax recovered.
Net cash provided by investing activities was $2,806,692 and $632,131 for
the nine months ended September 30, 2003 and 2002, respectively. Investing
activities consist of purchases, sales, and maturities of investments.
Net cash used in financing activities was $54,000 and $206,256 for the nine
months ended September 30, 2003 and 2002, 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, collection of reinsurance
recoverable 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 or liabilities under the derivative
instrument. However, if policy claims are significantly higher than expected,
the Company may require additional capital.
As of September 30, 2003, 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 registration of its common
stock, and its reporting obligations, under the Securities Exchange Act of 1934.
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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
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 September 30, 2003 and December
31, 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.
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.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Critical Accounting Policies (continued)
----------------------------------------
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, 2003 AND 2002
-----------------------------------------------------------
Direct, assumed and ceded premiums for the nine months ended September 30,
2003 decreased $5,020,354 or 45% when compared to the same period in 2002. The
decrease is attributed to the Company's marketing decision to write small to
medium size bonds and the discontinuance of assuming premiums under a former
reinsurance program. Net premium income for the period ended September 30, 2003
and 2002, was $6,084,058 and $11,104,412, respectively.
Net investment income for the nine months ended September 30, 2003
decreased by $164,372 or 44% when compared to the same period in 2002. The
decrease is attributed to a decrease in bond holdings and an overall decrease in
interest rates earned on the bond and money market portfolio. Bond holdings were
liquidated in the previous twelve months to meet the demand of claim payments.
During the nine months ended September 30, 2003, loss and loss adjustment
expenses decreased by $4,479,551 or 72% when compared to the same period in
2002. The decrease is attributed to a decline in incurred losses and loss
adjustment expenses on direct and assumed business. Consequently, reserves were
utilized in reducing incurred expenses while cash was utilized in meeting claim
payments.
During the nine months ended September 30, 2003, derivative expense
decreased $2,077.705 or 83% when compared to the same period in 2002. The
fluctuation of market values, cancellations and maturities resulted in a
reduction of the valuation and expense.
During the nine months ended September 30, 2003, amortization of deferred
policy acquisition costs was $1,781,801 as compared to $3,294,236 for the same
period in 2002. The decrease is primarily attributed to the decrease in premiums
written and earned. The amortization of deferred policy acquisition costs is 25%
and 29% of written premiums representing commissions paid on direct, assumed and
ceded premiums for the nine months ended September 30, 2003 and 2002,
respectively.
Operating expenses for the nine months ended September 30, 2003 when
compared to the same period in 2002 decreased by $671,628 or 14%. The decrease
is attributed to downsizing operations.
The decrease in interest expense for the nine months ended September 30,
2003 is due to a decrease in the interest rate on the long-term debt.
Income taxes in the nine months ended September 30, 2003 and 2002 were
calculated using an effective rate of 34% and 31.4%, 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, 2003 AND 2002
------------------------------------------------------------
Direct, assumed and ceded premiums for the third quarter of 2003 decreased
$2,192,745 or 53% when compared to the same period in 2002. The decrease is
attributed to the Company's decision to write small to medium size bonds and the
discontinuance of assuming premiums under a former reinsurance program. Net
premium income for the period ended September 30, 2003 and 2002, was $1,906,943
and $4,099,688, respectively.
Net investment income for the three months ended September 30, 2003
decreased by $73,423 when compared to the same period in 2002. The decrease is
attributed to a decrease in bond holdings and an overall decrease in interest
rates earned on the bond and money market portfolio and liquidation of bond and
cash holdings to meet the demand of claim payments.
During the three months ended September 30, 2003, loss and loss adjustment
expenses decreased by $1,967,626 or 86% when compared to the same period in
2002. The decrease is attributed to a decline in incurred losses and loss
adjustment expenses on direct and assumed business.
During the three months ended September 30, 2003, derivative expense
decreased by $1,470,505 when compared to the same period in 2002. The change is
attributed to changes in the market values, maturities and cancellations.
During the three months ended September 30, 2003, amortization of deferred
policy acquisition costs was $771,679 as compared to $978,582 for the same
period in 2002. The decrease is directly related to the decrease in written and
earned premiums.
Operating expenses for the three months ended September 30, 2003 when
compared to the same period in 2002 decreased by $85,914 or 6%. The decrease is
attributed to downsizing operations.
Income taxes in the three months ended September 30, 2003 and 2002 have an
effective rate of 10.2% and 21.3%, respectively. Annual income tax expense was
calculated utilizing an effective rate of 34% and 31.4% for the nine months
ended September 30, 2003. For the six month period ended June 30, 2003, the tax
benefit was calculated using an effective rate of 37.6%. The change to an
effective rate of 34% for the nine month period ended September 30, 2003 has
resulted in the recognition of an income tax expense of $1,682 for the three
month period ended September 30, 2003.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Company had approximately $6.5 million of investments as of September
30, 2003. 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 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 of the
derivative instrument at September 30, 2003 and December 31, 2002 is $4,130,558
and $4,346,285, respectively. The Company is not involved in any hedging
activities. At September 30, 2003 and December 31, 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
- ------- -----------------------
The Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), does not expect that its disclosure controls
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdown can occur because of simple error or mistake. The design of any system
of controls also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Item 4. CONTROLS AND PROCEDURES (CONTINUED)
- ------- -----------------------------------
Based upon the Company's disclosure controls evaluation, the CEO and CFO
have concluded that, subject to the limitations noted above, the Company's
disclosure controls as of September 30, 2003 are effective to give reasonable
assurance that the information required to be disclosed by the Company in its
periodic reports is accumulated and communicated to management, including the
CEO and CFO, as appropriate to allow timely decisions regarding disclosure and
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
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
-----------------
None
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*
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer under
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
* Incorporated by referenced to the same exhibit number filed
with the Registrant's Registration Statement on Form 10
(File No. 0-19727).
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 14, 2003 By: /s/ Joseph M. Williams
--------------------------------------------
Joseph M. Williams
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2003 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 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
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
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(a) Designed such disclosures controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 14, 2003 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 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
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
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(a) Designed such disclosures controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluations; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 14, 2003 By: /s/ Carol S. Black
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Carol S. Black
Secretary and Chief Financial Officer