SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 5)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
CUMBERLAND TECHNOLOGIES, INC.
------------------------------
(Name of Registrant as Specified In Its Charter)
CUMBERLAND TECHNOLOGIES, INC. AND FRANCIS M. WILLIAMS
------------------------------
(Name of Person(s) Filing Proxy Statement
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1. Title of each class of securities to which transaction applies:
2. Aggregate number of securities to which transaction applies:
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined.):
4. Proposed maximum aggregate value of transaction:
5. Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1. Amount Previously Paid:
2. Form, Schedule or Registration Statement No.:
3. Filing Party:
4. Date Filed:
CUMBERLAND TECHNOLOGIES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on March 16, 2004
TO THE SHAREHOLDERS
OF CUMBERLAND TECHNOLOGIES, INC.
NOTICE IS HEREBY GIVEN that the Special Meeting of Shareholders of
Cumberland Technologies, Inc., a Florida corporation (the "Company"), will be
held at 9:00 AM, local time, on March 16, 2004, at the Company's headquarters at
4311 W. Waters Avenue, Tampa, Florida 33614 to approve an amendment to the
Company's Amended and Restated Articles of Incorporation (the "Articles") which
will effect a 1-to-150 reverse stock split of the Company's common stock.
Fractional shares resulting from the reverse stock split will be cancelled
and converted into the right to receive a minimum of $0.70 per share (on a
pre-reverse stock split basis). The reverse stock split will have the effect of
allowing the Company to terminate its registration under the Securities Exchange
Act of 1934.
The Board of Directors has fixed the close of business on February 5, 2004
as the record date for determining those shareholders entitled to notice of, and
to vote at, the Special Meeting and any adjournments or postponements thereof.
Whether or not you expect to be present, please sign, date and return the
proxy form sent to you as promptly as possible.
By Order of the Board of Directors,
/s/ Joseph M. Williams
-------------------------------------
Joseph M. Williams
Secretary/Treasurer
Tampa, Florida 33605
ALL SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. THOSE SHAREHOLDERS
WHO ARE UNABLE TO ATTEND ARE URGED TO EXECUTE AND RETURN THE PROXY FORM AS
PROMPTLY AS POSSIBLE. SHAREHOLDERS WHO EXECUTE A PROXY FORM MAY NEVERTHELESS
ATTEND THE MEETING, REVOKE THEIR PROXY AND VOTE THEIR SHARES IN PERSON.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THIS TRANSACTION, PASSED UPON THE MERITS OR FAIRNESS OF THIS TRANSACTION, OR
PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
PAGE
INTRODUCTION.................................................................. 1
INFORMATION CONCERNING PROXY.................................................. 1
PURPOSE OF THE MEETING........................................................ 1
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS............................... 1
REQUIRED VOTE................................................................. 1
REVOCATION OF PROXY........................................................... 2
REVERSE STOCK SPLIT PROPOSAL.................................................. 3
Summary of Reverse Stock Split Proposal.................................... 3
Exchange of Stock Certificates and Payment for Fractional Shares........... 5
Company Stock Options and Warrants......................................... 5
SPECIAL FACTORS............................................................... 5
Background................................................................. 5
Purpose and Reasons for the Reverse Stock Split............................ 6
Fairness of Reverse Stock Split Proposal................................... 8
Potential Detriments of Reverse Stock Split Proposal to Shareholders;
Accretion in Ownership and Control of Certain Shareholders...............12
Consideration for Determining Current Market Price.........................13
Consideration for Determining Minimum Fixed Price..........................14
Conduct of the Company's Business after Reverse Stock Split................19
Structure of Reverse Stock Split...........................................20
Certain Effects of Reverse Stock Split Proposal on the
Company's Shareholders...................................................21
Interests of Certain Persons in the Proposed Transaction...................22
Material Federal Income Tax Consequences...................................22
Appraisal Rights; Escheat Laws.............................................23
Intention to Terminate Public Registration.................................24
MANAGEMENT....................................................................25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................27
CERTAIN MARKET INFORMATION....................................................29
Dividends..................................................................29
SHAREHOLDER PROPOSALS.........................................................30
SELECTED FINANCIAL DATA.......................................................30
FINANCIAL AND OTHER INFORMATION...............................................32
Appendix A ARTICLES OF AMENDMENT TO THE AMENDED AND
RESTATED ARTICLES OF INCORPORATION OF
CUMBERLAND TECHNOLOGIES, INC...................................33
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SPECIAL MEETING OF SHAREHOLDERS
OF CUMBERLAND TECHNOLOGIES, INC.
PRELIMINARY PROXY STATEMENT
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Cumberland Technologies, Inc., a Florida corporation
(the "Company"), of proxies from the holders of the Company's common stock (the
"Stock") for use at the Special Meeting of Shareholders of the Company to be
held at the corporate headquarters of Cumberland Technologies, Inc., 4311 W.
Waters Avenue, Tampa, Florida 33614 at 9:00 AM, local time, on March 16, 2004 or
at any adjournments or postponements thereof (the "Special Meeting"). The
approximate date that this Proxy Statement and the enclosed form of proxy are
first being sent or given to holders of common stock is February 14, 2004. The
Company's principal executive offices are located at its corporate offices at
4311 W. Waters Avenue, Tampa, Florida 33614, and its telephone number is (813)
885-2112.
INFORMATION CONCERNING PROXY
The enclosed proxy is solicited on behalf of the Company's Board of
Directors (the "Board") and its majority shareholder and the Chairman of its
Board of Directors, Francis M. Williams. The cost of preparing, assembling and
mailing this Proxy Statement, the Notice of Special Meeting of Shareholders and
the enclosed proxy will be borne by the Company. The Company may request banks,
brokers and other custodians, nominees and fiduciaries to forward copies of the
proxy material to their principals and to request authority for the execution of
proxies.
PURPOSE OF THE MEETING
At the Special Meeting, the Company's shareholders will consider and vote
to approve an amendment to the Company's Amended and Restated Articles of
Incorporation (the "Articles") which will effect a 1-for-150 reverse stock split
of the Company's common stock.
The reverse stock split will have the effect of allowing the Company to
terminate its registration under the Securities Exchange Act of 1934.
Unless contrary instructions are indicated on the enclosed proxy, all
shares represented by valid proxies received pursuant to this solicitation will
be voted in favor of the amendment to the Articles as described herein. In the
event a shareholder specifies a different choice by means of the enclosed proxy,
his or her shares will be voted in accordance with the specifications so made.
OUTSTANDING VOTING SECURITIES AND VOTING RIGHTS
The Board of Directors has set the close of business on February 5, 2004 as
the record date (the "Record Date") for determining shareholders of the Company
entitled to notice of and to vote at the Special Meeting. As of the Record Date,
there were 5,597,244 shares of common stock outstanding, all of which are
entitled to one vote on the proposed amendment to the Articles.
REQUIRED VOTE
Pursuant to the Articles and the Florida General Corporation law, the
affirmative vote of the holders of a majority of the common shares that are
present in person or by proxy, and voting, at the Special Meeting is required to
approve the proposed amendment. The representation in person or by proxy of a
majority of the issued and outstanding shares of common stock entitled to be
cast is necessary to provide a quorum at the Special Meeting. Broker non-votes
are treated as shares as to which voting power has been withheld by the
beneficial owners thereof and, therefore, as shares not entitled to be cast
thereon. Thus, although broker non-votes have no effect on the vote, they have
the practical effect of reducing the number of affirmative votes required to
approve the proposed amendment to the Articles by reducing the total number of
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shares entitled to vote thereon. Proxies sent to the Company that are marked
"abstain" with respect to the approval of the proposed amendment will be counted
for the purpose of determining the number of common shares represented at the
Special Meeting, but will have no effect in determining whether the requisite
vote has been obtained for approval of the proposed amendment other than the
practical effect of reducing the number of affirmative votes required to approve
the proposed amendment to the Articles by reducing the total number of shares
entitled to vote thereon.
Francis M. Williams, a Director of the Company, directly or indirectly owns
or by irrevocable proxy controls, the voting rights of 2,747,711 shares, or
49.1%, of the common stock eligible to vote on the approval of the proposed
amendment to the Articles (excluding shares held by Kimmins Corp. described
below). Kimmins Corp., a Florida corporation ("Kimmins"), a major shareholder of
the Company, directly or indirectly owns or by irrevocable proxy controls, the
voting rights of 1,723,290 shares, or 30.8%, of the common stock eligible to
vote on the approval of the proposed amendment to the Articles. Mr. Williams is
Chairman and majority shareholder of Kimmins. Collectively, Mr. Williams and
Kimmins control 4,471,001 shares, or 79.9%, of the common stock eligible to vote
on the proposal. Mr. Williams and Kimmins have advised the Company that they
intend to be present at the meeting, and currently intend to vote their shares
for the approval of the Reverse Stock Split proposal. Since the number of shares
of common stock held or controlled by these two shareholders represent a
majority of the votes that may be cast at the Special Meeting, these
shareholders will be able to approve the proposed amendment to the Articles,
regardless of how the other holders of common stock vote their shares.
REVOCATION OF PROXY
The giving of a proxy does not preclude the right to vote in person should
any shareholder giving the proxy so desire. Shareholders have a right to revoke
their proxy at any time prior to the exercise thereof, either in person at the
Special Meeting, or by filing with the Company's Secretary at the Company's
principal executive offices a written revocation or duly executed proxy bearing
a later date; however, no such revocation will be effective until written notice
of the revocation is received by the Company at or prior to the Special Meeting.
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REVERSE STOCK SPLIT PROPOSAL
SUMMARY OF REVERSE STOCK SPLIT PROPOSAL
On December 10, 2002, the Board discussed the mechanics and anticipated
effects of a possible reverse stock split of the Company's common stock (the
"Reverse Stock Split"). On December 12, 2002, the Board adopted a resolution,
subject to shareholder approval, that the Articles be amended to effect a
1-for-150 reverse stock split of the Company's common stock, such that each 150
shares of existing common stock will be respectively combined into one share of
post-reverse stock split common stock. There are no material differences between
the respective rights, preferences, or limitations of the existing common stock
and the post-reverse stock split common stock. The form of amendment to the
Articles to effect this transaction is attached hereto as Appendix A (the
"Amendment").
In order to complete the Reverse Stock Split, a majority of the
shareholders entitled to vote and voting at the Special Meeting must approve an
amendment to the Articles. By approving this proposal, the shareholders
authorize the Board to implement the Reverse Stock Split by filing the Amendment
with the Florida Secretary of State's office within ten business days following
the proposal's approval at the Special Meeting (hereinafter referred to as the
"Effective Date"). The shareholders may not rescind their vote even if the
timing of the Amendment may adversely affect any particular shareholder.
o Our Board of Directors has authorized a 1-for-150 reverse stock split
of our common stock and recommends that all shareholders approve the
proposal by voting for an amendment to our Articles of Incorporation.
See also the information under the caption "Special Factors -
Background."
o A majority of the shares represented at the Special Meeting must vote
in favor of the reverse stock split for the proposal to be
implemented; however, since the members of the Board have indicated
their intention to vote their shares for the approval of such
proposal, and such members hold or control a majority of the votes
that may be cast at the Special Meeting, approval of the proposed
reverse stock split is assured. See also the information under the
caption "Required Vote."
o The reverse stock split will not become effective until the amendment
is filed with the Florida Secretary of State's office. The Company
will file the amendment within ten business days following the
proposal's approval at the Special Meeting. See also the information
under the caption "Special Factors - Structure of Reverse Stock
Split."
o Once the reverse stock split becomes effective, you will receive one
post-reverse split share of common stock for each 150 shares of the
common stock that you may own at that time.
o For those who hold fewer than 150 shares or those who do not hold
shares in an even multiple of 150 shares, you will receive a cash
payment of a minimum of $0.70 per share for those shares which would
otherwise be converted into a fraction of a share of the post-reverse
split stock. See also the information under the caption "Exchange of
Stock Certificates and Payment for Financial Shares."
o The reverse stock split is not expected to affect our current business
plan or operations. See also the information under the caption
"Conduct of the Company's Business after Reverse Stock Split."
o Each member of the Board of Directors has indicated that he intends to
vote in favor of the reverse stock split. See also the information
under the caption "Fairness of Reverse Stock Split Proposal."
o If the reverse stock split is approved, we will probably be eligible
to cease filing periodic reports with the SEC and we intend to cease
public registration of our common stock. However, the Board has
reserved the right to maintain registration, even after implementing
the reverse stock split, if it deems that continued registration is in
the best interests of the Company and the shareholders at the time.
See also the information under the caption "Purpose and Reasons for
the Reverse Stock Split."
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o Our Board of Directors did not engage an investment bank or other
financial adviser to render a report or fairness opinion in connection
with the Reverse Stock Split. See also the information under the
caption "Fairness of Reverse Stock Split Proposal."
o We expect that the reverse stock split should be treated as a tax-free
"recapitalization" for federal income tax purposes. For those holders
that receive a cash payment in lieu of fractional shares, you will
recognize income for the difference between the amount of cash
received and the portion of the aggregate tax basis in your shares of
common stock which was not converted. See the information under the
caption "Material Federal Income Tax Consequences."
o There are no appraisal rights for any shareholder who dissents from
approval of the reverse stock split under the Company's governance
documents. We have also concluded that there are no appraisal rights
under Florida General Corporation law. We refer you, however, to
Sections 607.1302 and 607.0604 of the Florida Statutes which
respectively prescribe the rights of shareholders to dissent and
treatment of fractional shares. There may exist other rights or
actions under state law for shareholders who are aggrieved by reverse
stock splits generally. See also the information under the caption
"Appraisal Rights; Escheat Laws."
The following table presents a summary of the effect of the Reverse Stock
Split proposal on the Company's shareholders. Please note that we refer herein
to our shareholders whose shares are registered in their own names as
"Registered Shareholders."
Shareholders as of Net Effect After Reverse
Effective Date Stock Split
-------------- -----------
Registered Shareholders holding 150 shares Shares of common stock will be converted into one
of common stock. whole share of post-reverse stock split common
stock.
Registered Shareholders holding more than Shares of common stock will be respectively
150 shares of common stock. converted into one or more shares of post-reverse
stock split common stock on a 1-for-150 basis,
with a cash payment for any shares that would
otherwise result in fractional shares.
Registered Shareholders holding fewer than Shares of common stock will be exchanged for a
150 shares of common stock. cash payment of a minimum of $0.70 per share.
Shareholders holding common stock in Nominees (such as a bank or broker) may have
street name through a nominee, such as a required procedures, and the Company shareholder
bank or broker. holding common stock in street name should
contact their nominees to determine how the
Reverse Stock Split will affect them.
Following the Reverse Stock Split, shareholders will no longer have access
to annual and quarterly reports. In addition, the Company's common stock will no
longer be quoted on OTC Bulletin Board, and there will be no active trading
market for the shares. This means that the common stock will be less liquid.
In lieu of the issuance of any fractional shares, the Company will pay a
minimum of $0.70 per share for those shares of common stock that would otherwise
be converted into fractional shares as a result of the Reverse Stock Split. The
Board has determined that the fair value of such stock shall be the greater of
(i) the "Minimum Fixed Price" which has been set as $0.70 per share (on a
pre-reverse stock split basis) or (ii) the "Current Market Price," which is
determined by reference to the prices quoted on the OTC Bulletin Board over a 20
trading day period, as described at "Consideration for Determining Current
Market Price." Because the Current Market Price cannot be determined until after
the Special Meeting, shareholders will be asked to approve the merger without
knowing the final consideration for the fractional shares. However, that
consideration will not be less than the $0.70 per share Minimum Fixed Price.
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After the Special Meeting, management will issue a press release to announce the
final consideration, and will send each shareholder a letter of transmittal with
instructions for receiving the consideration. Payment in lieu of issuance of a
fractional share will be made promptly after receipt of a properly completed
letter of transmittal and stock certificates (see also the information under the
caption "Exchange of Stock Certificates and Payment for Fractional Shares"
below).
There will be no service charge payable by shareholders in connection with
the exchange of certificates or in connection with the payment of cash in lieu
of the issuance of a fractional share.
EXCHANGE OF STOCK CERTIFICATES AND PAYMENT FOR FRACTIONAL SHARES
Continental Stock and Transfer have been appointed the Company's agent (the
"Transfer Agent") to carry out the exchange of certificates for the post-reverse
split common stock. Registered shareholders will receive a letter of transmittal
after the Reverse Stock Split is completed. These shareholders must complete and
sign the letter of transmittal and return it with their stock certificate(s) to
the Transfer Agent before they can receive post-reverse split common stock
and/or the cash payment for those shares. You should not submit any certificates
until requested to do so. The post-reverse split common stock will be assigned a
new CUSIP number.
If the Reverse Stock Split is effected, each Registered Shareholder who
holds fewer than 150 common shares immediately prior to the effectiveness of the
Reverse Stock Split will cease to have any rights with respect to such common
shares and will have only the right to receive the cash payment in lieu of the
fractional share to which such shareholder of record would otherwise be
entitled. No service charges will be payable by shareholders in connection with
the exchange of certificates or the issuance of post-reverse split stock or cash
payments, all the expenses of which will be borne by the Company. Promptly
following the Effective Date, you will be furnished the necessary materials and
instructions to effect such exchange (and to receive the cash payment, if
applicable). These materials will include an explanation of the consideration to
be received by shareholders for their factional shares. The Company anticipates
that you will receive the exchange materials within approximately one week after
the Effective Date. Certificates representing shares of common stock
subsequently presented for transfer to a third party will not be transferred on
the books and records of the Company until the certificates representing the
shares have been exchanged for the cash payment or certificates representing
shares of post-split common stock (as applicable). The Company anticipates that
the Transfer Agent will exchange the shares and remit the cash within one week
after receipt of the completed documents from you. No interest will be paid on
the cash payments pending receipt of the cash payments by shareholders.
COMPANY STOCK OPTIONS AND WARRANTS
At the Effective Date, each option outstanding of common stock shall be
adjusted to reflect the right to receive one or more shares of common stock on a
1-for-150 basis. There are no outstanding warrants.
SPECIAL FACTORS
BACKGROUND
The Company has approximately 811 Registered Shareholders holding common
stock. Approximately 583 of these shareholders hold 150 shares or less of the
common stock (the "Small Shareholders"). In the aggregate, the Small
Shareholders own approximately 25,000 shares, or less than 0.42% of the common
stock. In early 2002, the Company recognized that the cost of management and
communication to the Small Shareholders on an annual basis exceeded the value of
the securities they held. For instance, the cost of printing and mailing a proxy
statement and annual report to these shareholders each year is approximately
$19,000 compared to a total value of these shares of less than $6,000 (based on
the closing price of $0.21 on July 31, 2003).
The Company's common stock was delisted from the NASDAQ SmallCap Market in
September 2002. Since that time, the price of the stock as quoted on the OTC
Bulletin Board has shown a significant decline, and the stock has low trading
volumes.
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The Board initially discussed a possible Reverse Stock Split on September
13, 2002. The Board also met in October and November 2002 to continue discussion
of a Reverse Stock Split. The Board met in December 2002 and approved a Reverse
Stock Split with a Minimum Fixed Price of $0.60. After the filing with the SEC
of a preliminary proxy statement in December 2002, the implementation of the
Reverse Stock Split was delayed while the Company completed its year-end closing
and SEC filings for 2002. Management of the Company distributed updated
information on the Company to the directors in July 2003. The updated
information consisted of the Supplement described below and the Company's recent
SEC filings. The Board met via teleconference on July 25, 2003 to discuss the
updated information. All directors were in attendance, and Joseph Williams also
attended to respond to questions. The updated information indicated that the
Company's financial performance had shown some improvement. Management
re-performed its calculations under the various methods of valuation using the
updated financial information, and the net book value, discounted book value,
and comparative company value all increased from the prior calculations, as
detailed under "Consideration for Determining Minimum Fixed Price". After
evaluating updated financial results and analysis by management, as detailed
below, the Board decided to increase the Minimum Fixed Price to $0.70.
The determination of the revised Minimum Fixed Price was made based on
management's recommendations contained in the Supplement, after discussion with
the Board. Although management did not make a determination as to fairness, the
Board used management's analysis in determining that the Minimum Fixed Price was
fair. A more detailed summary of the Board's determination in this regard is
included at "Consideration for Determining Minimum Fixed Price" below.
The Board met again via telephone on October 7, 2003 with all directors and
Joseph Williams in attendance, to discuss the SEC's comments on the proxy
statement, and reviewed the revised preliminary proxy statement as subsequently
filed on October 8, 2003. The Board agreed on the language in the proxy
statement and decided to proceed with the Reverse Stock Split with Minimum Fixed
Price of $0.70.
The Board met again via telephone on November 12, 2003 and discussed the
additional comments from the SEC. The Board revisited the issue of having a
separate vote of unaffiliated shareholders and decided against such a vote due
to the additional time and cost involved, as discussed in more detail at
"Fairness of Reverse Stock Split Proposal."
PURPOSE AND REASONS FOR THE REVERSE STOCK SPLIT
The low trading prices and the low trading volumes in the common stock
following its delisting from NASDAQ, and also resulting from generally poor
financial performance of the Company as well as other companies in its industry,
led the Board to consider the continued desirability of remaining a publicly
traded company.
The purpose of the Reverse Stock Split proposal is to reduce the number of
Small Shareholders and permit the Company to cease registration of the common
stock under the Securities Exchange Act of 1934 (the "1934 Act"). The Board
recommends that the Company shareholders approve the Reverse Stock Split
proposal to achieve this purpose for the reasons set forth below.
For the Small Shareholders, typical transaction costs for public sale of
common stock significantly reduce the liquidity of the shares, since in most
cases these transaction costs represent a large percentage of the value of their
holdings (at current stock pricing trends). The Reverse Stock Split proposal
will allow such shareholders to liquidate their holdings at a fair value without
these transaction costs.
For shareholders of the Company other than the Small Shareholders, reducing
such a large number of Small Shareholders (over 70% of the existing registered
shareholders) will result in savings to the Company by reducing the
administrative costs of providing annual reports, proxy information and other
shareholder services. In addition, since it is important in certain corporate
transactions to be able to quickly communicate with its company shareholders,
reducing such a large number of Company shareholders that cannot be easily
contacted reduces delays in implementing corporation strategies.
As mentioned above, the Reverse Stock Split will position the Company for
terminating registration of its common stock under the 1934 Act. As a registered
company, the Company is subject to the periodic reporting and proxy solicitation
6
requirements of the Securities and Exchange Commission (the "SEC"). There is a
significant likelihood that the purchase of the fractional shares following the
Reverse Stock Split will reduce the number of Registered Shareholders of common
stock to fewer than 300. We estimate that the number of Registered Shareholders
of common stock would be reduced to 228 following the completion of the Reverse
Stock Split. If this occurs, the Company will be in a position to elect to cease
registration of its common stock under the 1934 Act. The Company calculated the
1-to-150 ratio to reduce the number of shareholders below 300.
As part of its 1934 Act registration, the Company incurs direct and
indirect costs associated with compliance with the filing and reporting
requirements imposed on public companies. Examples of direct costs savings from
terminating registration of the common stock include lower printing and mailing
costs, less complicated disclosure due to the Company's private status;
reduction in direct miscellaneous clerical and other expenses (e.g., the word
processing, EDGARizing, telephone and fax charges associated with SEC filings)
and elimination of the charges of brokers and transfer agents in forwarding
materials to beneficial holders.
The Company also incurs substantial indirect costs due to the 1934 Act
registration as a result of the executive time expended to prepare and review
such filings. In addition, compliance with the new requirements of the
Sarbanes-Oxley Act of 2002 increases these costs and makes it difficult for the
Company to recruit senior executives for the Company because it requires time
and increases risk to the executive. Ceasing registration of the common stock
will reduce or eliminate these costs, as well as lower the risk of liability
that typically attends public (as distinguished from private) company status.
Based on its experience in prior years, the Company's direct costs, which
include the fees and expenses of independent auditors, SEC legal counsel,
directors' and officers' liability insurance coverage, printing, mailing, and
SEC filing fees, were initially estimated at approximately $150,000 annually.
However, the Company recently became aware that there will be a substantial
increase in audit fees and liability insurance, and management believes that the
cost savings may exceed $250,000 per year after these increases take effect.
These amounts, however, are just estimates, and the actual savings to be
realized may be higher or lower than such estimates. It is expected that the
majority of the estimated savings will be not be realized until the fiscal year
ending December 31, 2004.
Another aspect of public registration is the disclosure of proprietary
information, such as material contracts, acquisitions, growth strategies, and
financial information regarding overall operations. Ceasing registration of the
common stock will increase the confidentiality of such proprietary information,
which the Company believes can be analyzed by its competitors to place the
Company at a competitive disadvantage.
There are many advantages to being a publicly traded company, including
stock value, stock liquidity, and use of company stock to raise capital or make
acquisitions. In the opinion of the Board, however, the pricing trends and
trading volume of the common stock have not allowed the Company to effectively
take advantage of these benefits, at least to the extent of justifying the
continuing direct and indirect costs of public registration. In particular,
because of the low trading volumes in the stock, the Company is not able to
effectively market the stock to raise capital. The volume is typically less than
1,000 shares per day and frequently there are several consecutive trading days
with no trades. The Company is not aware of any analysts who actively cover the
Company, and there is no institutional investor interest in the stock. The Board
does not believe that there will be a significant change in this equation in the
near term.
Another factor that has impaired the Company's ability to effectively take
advantage of the benefits of public registration is the September 13, 2002
delisting of the Company's common stock from trading on the NASDAQ SmallCap
Market. Although the common stock continues to be traded in the OTC Bulletin
Board, management believes that the delisting has had detrimental effects on the
trading volume and pricing of the common stock, which contributes to the failure
to realize some of the benefits of the Company's continued registration of the
common stock under the 1934 Act.
Shareholders should note that the decision by the Board to terminate 1934
Act registration does not require shareholder approval and will not be voted on
at the Special Meeting. Further, there is no assurance that the number of such
shareholders will be fewer than 300 following the Effective Date. If the number
of shareholders remains at 300 or above after the Reverse Stock Split, the
Company will not be able to terminate its registration under the 1934 Act. While
the Company intends to cease public registration of its common stock following
the Reverse Stock Split, the Board may choose not to implement this strategy if
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the Board determines that it is not then in the best interests of the Company
and its shareholders given the then existing market conditions. The Board will
make this determination only if the trading price and volume of the common stock
shown an unexpected increase, or if it appears that the Company will be unable
to terminate its 1934 Act registration despite the Reverse Stock Split. If the
Company does not terminate its 1934 Act registration, the expected benefits of
the Reverse Stock Split may not be achieved.
FAIRNESS OF REVERSE STOCK SPLIT PROPOSAL
The Board believes that the Reverse Stock Split proposal is fair to and in
the best interests of the Company and its shareholders, including unaffiliated
shareholders, those shareholders who will receive the cash payment and those
shareholders who will receive shares of post-reverse split common stock. The
Board also believes that the process by which the Reverse Stock Split is to be
approved is fair. Francis M. Williams, individually, believes that the Reverse
Stock Split is fair to the shareholders of the Company, including unaffiliated
shareholders, those shareholders who will receive the cash payment and those
shareholders who will receive shares of post-reverse split common stock, and
considered the same factors as the Board considered in reaching that conclusion.
All references to considerations and conclusions by the Board as to fairness and
to factors considered by the Board apply as well to Francis M. Williams. The
Board unanimously approved the Reverse Stock Split proposal and recommends that
the shareholders vote for its approval and adoption. Francis Williams also,
individually, recommends that shareholders vote in favor of the Reverse Stock
Split proposal. Each member of the Board and each member of management who owns
shares of common stock have indicated that they intend to vote in favor of the
Reverse Stock Split proposal, including the Board members who are not employees
of the Company.
In anticipation of the Board's consideration of the Reverse Stock Split in
November 2002, the Board had a report provided by management of the Company (the
"Management Report"), to analyze the factors affecting the value of the common
stock. In August 2003, management provided the Board with a supplement to the
Management Report (the "Supplement") to update the analysis. The Board's
analysis of the value is based upon the data provided in the Management Report
and the Supplement. The Management Report and the Supplement were prepared by
Joseph M. Williams, Secretary and Treasurer, and Carol Black, Chief Financial
Officer. Joseph Williams is also the nephew of Francis Williams, the Chairman of
the Board, Chief Executive Officer and controlling shareholder of the Company.
The Board is responsible for determining the fairness of the Reverse Stock Split
to the shareholders. In accordance with Section 607.0830 of the Florida Statues,
the directors have relied in good faith upon the information and analysis
contained in the Management Report and the Supplement to assist them in making
that determination. The Board also reviewed the historical financial information
of the Company. Copies of the Management Report and the Supplement will be
available at the meeting. The Board and Mr. Williams relied on the Management
Report and the Supplement in making their determinations that the transaction
was fair.
The Management Report included copies of:
o the Company's Form 10-K for the year ended December 31, 2001,
o the Company's Form 10-Q for the quarter ended September 30, 2002,
o historical price data for the Company's common stock,
o estimates of number of shares to be cashed out and the resulting
number of shareholders assuming a 1-for-150 reverse stock split,
o summary financial data for seven property and casualty surety
companies which management considered comparable to the Company in
terms of lines of business,
o financial analyses of:
>> market price,
8
>> book value,
>> discounted book value,
>> comparable company value.
The Supplement included copies of:
o Updates to the analyses of:
>> market price,
>> book value,
>> discounted book value,
>> comparable company value,
o Updated comparable company data.
The analysis in the Management Report and the Supplement formed the basis
for the discussion below regarding the fairness of the transaction. In addition,
management had previously made available to the Board the current SEC filings
and reports.
In reviewing the historical financial information of the Company, the Board
noted that the Company's financial performance has deteriorated significantly
over the past several quarters. In particular, from September 30, 2001 to June
30, 2003, the Company's shareholders equity declined from $8,296,737 to
$6,369,721, and the Company has incurred net losses totaling $1,927,016 during
that time. In addition, the Company's losses and loss adjustment expenses
increased from $3.4 million to $8.5 million for the years ended December 31,
2000 to 2002, respectively, and for those year ends the reserve for losses
increased from $5.2 million to $8.9 million and the derivative liability
increased from $0 to $4.3 million. See "Selected Financial Data." The Board
concluded that the Company's financial performance would make it difficult to
market the Company as a business unit.
Management recommended the 1-for-150 ratio based on calculations to reduce
the number of shareholders to less than 300. The Board decided to use this ratio
based on management's recommendation. The Board did not consider any alternative
ratios.
The Board considered a number of factors in determining the fairness of the
Reverse Stock Split prior to approval of the proposed transaction. These factors
are discussed below in this section and under "--Consideration for Determining
Minimum Fixed Price." The Board recognized the existing liquidity concerns of
the Small Shareholders. It recognized that reducing the number of Small
Shareholders would decrease (but not necessarily eliminate) the problems
associated with not being able to readily communicate with a large portion of
its shareholders. See "Potential Detriments of Reverse Stock Split Proposal to
Shareholders; Accretion in Ownership and Control of Certain Shareholders."
It also recognized that the Reverse Stock Split will likely enable the
Company to cease public registration of the common stock, so in making its
determination of the fairness of the Reverse Stock Split proposal, the Board
also factored in the added administrative costs and resources involved in
providing annual reports, proxy information, and other shareholder services to
such a large proportion of shareholders holding fewer than 150 shares. Although
public registration has some benefits, in the Company's situation the costs and
burdens associated with the public registration harm the shareholders who would
not be cashed out in the Reverse Stock Split, and the elimination of those costs
will benefit those shareholders. However, even if termination of 1934 Act
registration is not implemented, the Board still concluded that the elimination
of the Small Shareholders is in the best interests of the Company and its
shareholders, when taken as a whole. The Board noted that the unaffiliated
holders of 150 or more shares will not benefit from the proceeds of the cash out
of the Small Shareholders' shares. In addition, these shareholders will bear the
9
burden of the lack of access to Company information, unlike affiliated
shareholders who will continue to have access to this information. However,
these remaining shareholders will benefit from the cost savings and reduced
burdens on the Company associated with the Reverse Stock Split, as discussed
above at "Purpose and Reasons for the Reverse Stock Split". Based on these
benefits, as well as the fairness of the consideration to be paid to the Small
Shareholders, the Board concluded that the Reverse Stock Split is fair to the
unaffiliated shareholders with 150 or more shares.
The Board did not retain either an investment bank or other financial
adviser to render a report or opinion with respect to the fairness of the
Reverse Stock Split proposal to the Company or its shareholders. Management
estimated that the cost of such report or opinion would exceed $80,000. The
Board determined that this expense was unwarranted since it concluded that the
Board itself could adequately establish the fairness of the Reverse Stock Split
proposal, without such report or opinion, by addressing the factors and
considerations described in this section. However, there is a risk that in the
absence of an opinion from an independent party, the Board may have over or
underestimated the value to be paid to Small Shareholders in the Reverse Stock
Split. If this value is over estimated, the Company may pay too much to the
Small Shareholders, to the detriment of the Company and the remaining
shareholders. The maximum amount the Company would over pay, assuming the
Minimum Fixed Price, overstates the value by 100% of the Minimum Fixed Price,
would be approximately $50,000. If the Minimum Fixed Price understates the
value, the Small Shareholders would not receive the full value for their shares.
The Board concluded that the Reverse Stock Split is procedurally fair to
non-affiliated shareholders for the following reasons. The Board did not
establish an unaffiliated representative to represent the unaffiliated
shareholders of the Company in determining the terms of the Reverse Stock Split
proposal because the Board concluded that there was sufficient representation in
the decision making at the Board level to protect the interests of unaffiliated
shareholders. This decision was based on the fact that two of the three Board
members are not controlled by, or under common control with, the Company, and
these Board members are not employees of the Company. In addition, no
independent committee of the Board has reviewed the fairness of the Reverse
Stock Split proposal because the Board concluded that such unaffiliated Board
members could adequately convey their opinions and concerns to the entire Board
without the need for the establishment of such a committee. The Board recognized
that there was an inherent conflict of interest in Mr. Williams' position as a
director, on the one hand, and a major shareholder, on the other hand. The
other, independent directors did not act formally as an independent committee,
but did unanimously approve the transaction with Mr. Williams abstaining. None
of the Board members are Small Shareholders, although Francis Williams does have
some family members who are Small Shareholders and who will have their shares
cashed out. The independent directors will continue to have access to Company
information after the Reverse Stock Split, unlike the unaffiliated shareholders,
who will no longer have access to information after the Company terminates its
SEC reporting. However, the Board concluded that it was more important to have
independent directors to represent the interests of all shareholders as opposed
to having Small Shareholders on the Board. In addition, it would be impractical
and time consuming to restructure the Board to add Small Shareholder
representatives. Since each Small Shareholder has very little at stake, the
Board considered the possibility that it may be difficult to identify a Small
Shareholder who is willing to undertake this task given the time involved and
potential liability.
The Board determined that the Reverse Stock Split proposal was
substantively fair to all unaffiliated shareholders. In reaching this
determination, the Board considered the following supporting factors:
The Small Shareholders will be allowed to liquidate their holdings in
a cost-effective manner, a task that they could not otherwise accomplish
since all of the Small Shareholders own less than 150 shares of common
stock (one Small Shareholder owns one share), with a total estimated market
value for each ten shares of less than $3.00 (based on $0.30 price per
share - the highest closing price for common stock during the third
calendar quarter of 2002). On November 14, 2002, management conducted a
summary review of the current pricing of transaction fees, and found that
the lowest transaction fee for a stock trade was approximately $11.65 per
trade. (The sole purpose of identifying estimated transaction fees was to
provide a context for establishing the approximate low-end cost of selling
small stock holdings of common stock in the public market relative to the
estimated value of such holdings; its purpose was not to identify the
absolute lowest cost or the best value with regard to brokerage services.)
The Reverse Stock Split will not change the rights, preferences or
limitations of unaffiliated shareholders, with the exception of the Small
Shareholders.
10
No shareholder, whether affiliated or unaffiliated (other than the
Small Shareholders), will have a material decrease in their percentage of
ownership interest of the Company following the Reverse Stock Split, and
any decrease that will occur will apply equally to affiliated and
unaffiliated shareholders. Any shareholder whose holdings are not in even
multiples of 150 shares will experience a slight relative decrease in their
percentage of interest after the split, but the maximum number of shares
that could be affected would be 149. As an example, the percentage
ownership interest of a shareholder with 3,149 shares would experience a
relative decrease of 0.0025% of his or her interest following the Reverse
Stock Split due to the cancellation of the 149 odd-lot shares in return for
a cash payment. We have qualified the foregoing statements as "relative
decreases" because the percentage of ownership of the remaining
shareholders following the split, affiliated and unaffiliated, will be
slightly increased to the extent of the cancellation of the Small
Shareholders' holdings and any other odd-lot holdings that are not in an
even multiple of 150 shares.
Small Shareholders may retain their ownership in the Company by
increasing their number of shares to 150. The highest closing price for
common stock during the third quarter 2002 on the OTC Bulletin Board was
$0.30 per share and the lowest closing price during such period was $0.14
per share. Consequently, using the foregoing pricing, a Small Shareholder
could remain a shareholder of the Company for a maximum cost estimated at
or between $21.00 and $45.00, plus transaction fees.
Only the Small Shareholders will cease to be shareholders of the
Company following the split, and they are the only shareholders who will
lose a significant percentage of their existing ownership interest in the
Company. As generally described in the information contained herein in the
sections captioned "Background" and "Purpose and Reason for the Reverse
Stock Split," locating and communicating with the Small Shareholders is no
longer economically feasible. The Board concluded that conditioning the
approval of the Reverse Stock Split transaction on the affirmative by
majority vote of the unaffiliated shareholders might not reflect the
collective judgment of the Small Shareholders because in the Board's
opinion it would be unlikely that a large number of such shareholders would
vote (in person or by proxy) due to the inconsequential financial impact on
the shares they hold. The Board therefore concluded that the interests of
the unaffiliated shareholders who were directly impacted by the split would
not be represented because they would not likely be aware of the importance
of the vote and, even if they were aware, their interests would represent a
minority of the unaffiliated shareholders. Since, unlike the Board, the
unaffiliated shareholders have no fiduciary duty to fellow shareholders,
the Board decided that it should not grant the veto on the Reverse Stock
Split to the unaffiliated shareholders. Even if the Small Shareholders
could be effectively communicated with, so as to allow such shareholders to
convey the interests of the majority of this group, the holdings of the
Small Shareholders represent less than 0.42% of the ownership interests of
the Company. Since the Board has a fiduciary duty to the Company and its
shareholders, it determined that an abrogation of the responsibility for
the decision to move forward on the Reverse Stock Split transaction to a
group holding such a small interest in the Company would also not be in the
best interest of the Company and its shareholders.
The Board also considered that a large number of unaffiliated
shareholders holding more than 150 shares would likely not vote on this or
any proposal given the low values and trading volume in the common stock.
Over the past several years, none of these shareholders has attended
meetings and many of them do not vote their shares. The Board also noted
that there is no permissible procedure under the Bylaws to allow a vote by
only the shareholders holding more than 150 shares. Allowing a vote by only
unaffiliated shareholders would probably require the use of proxy
solicitation firms at additional cost and delay to the Company and may
result in a lack of quorum for the meeting. If the Board allowed a vote of
only those unaffiliated shareholders who vote, this likely would mean that
the decision would be determined by small numbers of unaffiliated
shareholders who hold larger blocks and who would not necessarily be
concerned about the fairness to the Small Shareholders. The Board concluded
that this burden would not be a cost-effective use of Company resources,
and concluded that the Company's need to move forward with the transaction
was urgent given the significant cost savings to the Company given its size
and recent financial performance. The Board also concluded that, despite
Francis Williams' ability to control the outcome of the vote and the
absence of a separate vote by the unaffiliated shareholders, the Reverse
Stock Split was procedurally fair to those shareholders because of the
review by the transaction by the independent directors. The Board concluded
11
that the Reverse Stock Split was substantively fair to the unaffiliated
shareholders holding more than 150 shares because those shareholders will
benefit from the cost savings to the Company and because the price paid to
Small Shareholders will be appropriate based on the analysis provided below
under "Consideration for Determining Minimum Fixed Price."
The Board ascertained to its satisfaction that this transaction was
not the typical Rule 13e-3 "going private" transaction, which involves the
involuntary or threat of involuntary purchase of all of the ownership
interests of the unaffiliated shareholders. In the Reverse Stock Split
transaction the unaffiliated shareholders, other than the Small
Shareholders, will retain their percentage ownership in the Company in all
material respects. The ownership interests of the Small Shareholders will
be terminated as a result of the Reverse Stock Split (unless they purchase
additional shares as described above), but the Board concluded that the
completion of the split would be an overall benefit to the Small
Shareholders because of the illiquidity issues discussed above.
As part of its considerations, the Board considered the following negative
consequences:
o potential liquidity concerns of the unaffiliated minority shareholders
after the Reverse Stock Split should the Company, as expected, cease
public registration of the common stock;
o possible negative impact on the stock price caused by the announcement
of the Reverse Stock Split;
o decreased access to Company information by shareholders, especially
given that the Company will no longer be required to file periodic
reports under the 1934 Act.
Excluding the holdings of the officers and other "affiliates" of the
Company (as defined in Rule 144 under the Securities Act of 1933), almost all of
the outstanding shares of common stock are available for resale without
registration. While this issue relates to the ceasing of public registration,
rather than the Reverse Stock Split, the Board acknowledged that the split
facilitates this action and therefore the Board identified it as a contradicting
factor. The Board weighed these contradicting factors against what it had
determined were the overall benefits to the shareholders and the Company for
this Reverse Stock Split and concluded that they were insufficient to outweigh
such benefits in light of the considerations and conclusions stated in this
section.
The Board believes that it determined in good faith that the cash payment
to be paid for stock in lieu of issuance of fractional shares constitutes a fair
value. Section 607.0604(5) of the Florida Statutes states that, "When a
corporation is to pay in money the value of fractions of a share, the good faith
judgment of the board of directors as to the fair value shall be conclusive."
The Board believes that its review of the Management Report and the Supplement,
including the analysis described below under "Consideration for Determining the
Minimum Fixed Price," satisfies this statutory provision because the review
demonstrated that the Board used due care and the decision was made by
independent directors who acted in good faith.
The Board adopted the higher of the Minimum Fixed Price or Current Market
Price methodology (both as described below) as the most appropriate measure of
cash payment in lieu of issuance of fractional shares. Francis M. Williams
reviewed the Management Report and the Supplement and the conclusions of the
Board, and agreed with and adopted those conclusions in determining that the
Reverse Stock Split is procedurally and substantively fair to the shareholders.
POTENTIAL DETRIMENTS OF REVERSE STOCK SPLIT PROPOSAL TO SHAREHOLDERS; ACCRETION
IN OWNERSHIP AND CONTROL OF CERTAIN SHAREHOLDERS
The potential detriments to shareholders who remain as holders of
post-reverse split common stock after effecting the Reverse Stock Split and
termination of registration under the 1934 Act include decreased liquidity and
decreased access to information about the Company. Upon termination of
registration of the common stock, the Company will no longer be subject to the
periodic reporting requirements and the proxy rules of the 1934 Act. This means
that unaffiliated shareholders who are not cashed out in the Reverse Stock Split
will lose the benefits of the greater financial transparency associated with SEC
reporting companies. Only shareholders who are officers and directors of the
Company will have regular access to information about the Company. These
shareholders will own approximately 88.1% of the outstanding shares after the
12
Reverse Stock Split. Unaffiliated shareholders will hold approximately 11.9% of
the outstanding shares after the Reverse Stock Split. The Company's major
subsidiary, Cumberland Casualty & Surety Company ("Cumberland Casualty") will
continue to file publicly available financial statements with the Florida
Department of Insurance. Under Sections 607.1601 and 607.1602 of the Florida
Statutes, the Company must continue to maintain accurate accounting records and
make these records available for inspection by shareholders, although such an
inspection would require the shareholder to visit the offices of the Company.
Since there will no longer be a public market for the purchase and sale of the
stock, the liquidity and market value of the shares of common stock will be
adversely affected.
The Small Shareholders will have their shares cashed out and will no longer
have an ownership interest in the Company. The Small Shareholders will not have
the opportunity to benefit from the reduced costs resulting from the termination
of the 1934 Act registration. If the Company otherwise improves, they also will
not benefit.
The Company will incur approximately $118,000 in costs as a result of the
Reverse Stock Split. In addition, the Company will no longer have its stock
posted on the OTC Bulletin Board and thus will lose the potential opportunity to
offer and sell its stock in that market.
If the Reverse Stock Split proposal is effected, the Company believes that
228 Registered Shareholders of common stock will remain (based on the Company's
current shareholder records). In addition, individuals who are members of the
Board and executive officers of the Company now owning approximately 86.8% of
the common stock will own approximately 88.1% of the common stock after the
Reverse Stock Split (the proportionate holdings of the common stock will not be
affected). Control of the Company by Francis M. Williams as generally described
in the information contained herein in the section captioned "Security Ownership
of Certain Beneficial Owners and Management" will not be materially affected by
the Reverse Stock Split. As a result of the Reverse Stock Split, Mr. Williams'
beneficial ownership will increase from 79.9% to 81.1% of the outstanding common
stock.
CONSIDERATION FOR DETERMINING CURRENT MARKET PRICE
The Board considered current market price as a stand-alone factor and
decided to use the greater of (i) the average of the closing market price for
the 20-day period immediately ending on the date of the filing of the initial
preliminary Schedule 14a Proxy Statement, on December 23, 2002, which is $0.14,
or (ii) the 20-day period ending the day before the meeting date for the final
vote on the definitive proxy matter (Current Market Price). This analysis and
discussion ensued and was treated separately from fixed price. The Board felt
that in the event the market determines that a Reverse Stock Split and the
intent of the Company to cease registration of the common stock under the 1934
Securities Act results in a higher trading value for the stock of the Company,
it was appropriate that the fractional shareholders be paid that increased
value. If the Current Market Price were calculated based on the 20-day period
ending September 30, 2003 it would be $0.20. This amount is considerably lower
than the fixed price. In addition, if for any reason the stock on the 20-day
period prior to the filing of the preliminary proxy should increase in value
above the fixed number, and at a later date decrease as a result of this proxy
statement, the Board felt that the higher number should be fair and appropriate
to pay the Small Shareholders. Because the Current Market Price cannot be
determined until after the special meeting, shareholders will be asked to
approve the merger without knowing the final consideration for the fractional
shares. However, that consideration will not be less than the $0.70 per share
Minimum Fixed Price.
The Board further considered the possible effect on stock pricing caused by
the disclosure of the Company's intention to terminate public registration of
the common stock. Consequently, the Board adopted the 20-day period immediately
prior to the initial preliminary filing of this Proxy Statement because this
would reflect market valuation prior to the disclosure. The Board also concluded
that the Current Market Price should not be less than the market value
immediately prior to the meeting date since this date constitutes the date of
approval of the purchase of the stock and hence the purchase price should at
least reflect the market valuation as close to this time as practical given the
stock volatility issues described in the foregoing paragraph. Because of the
uncertainty inherent in any valuation, the Board also concluded that the Current
Market Price should constitute the greater value of the two established periods
to ensure maximum fairness to the Small Shareholders, since their ownership
interest in the Company would be terminated (absent any action on their behalf
to remain shareholders by purchasing additional shares). Therefore, the Board
determined that the Current Market Price should be determined by the greater of
(i) the average closing price of common stock for the 20 trading days
immediately preceding the initial preliminary filing of this Proxy Statement,
13
and (ii) the average of bid and asked prices of common stock for the 20 trading
days immediately preceding the meeting date.
In considering the structure of the Reverse Stock Split, management
reviewed the structure used by another small public company based in Florida,
Lucor, Inc. The Lucor transaction was selected for comparison by management
after looking for small public companies based in Florida who had completed a
"going private" transaction. The Lucor transaction was of interest because it
used a reverse stock split structure similar to the one considered by the
Company and Lucor was a Florida corporation. Management did not do search of
comparable transactions for valuation purposes. This transaction was reviewed to
consider the structure and methodology for implementing a reverse stock split.
For this reason, no non-Florida companies were reviewed.
After establishing the Current Market Price of the common stock as a
stand-alone method of calculating the cash payment, the Board focused on
identifying the appropriate data or time period to apply this method. After
reviewing the method used in the Lucor transaction, management informed the
Board that although five to ten trading days is sometimes used to minimize
temporary fluctuations in pricing which do not reflect the true market valuation
of the stock, a longer period may be appropriate in the case of the Company. The
Board noted that the historic volatility of the common stock, due to its low
trading volume, dictated that a longer period should be adopted to minimize
these effects and chose 20 days as a fairer measure.
CONSIDERATION FOR DETERMINING MINIMUM FIXED PRICE
In order to determine the Minimum Fixed Price, the Board considered several
methods of valuation (based upon the data and analysis contained in the
Management Report and the Supplement) to the price of the fractioned
shareholders and concluded that the $0.70 as a minimum price (Minimum Fixed
Price) was fair to the Small Shareholders. The following is a discussion of the
analysis the Board reviewed to determine the valuation of the amount to be paid
for the fractional shares.
In determining the Minimum Fixed Price, the Board considered the following
methods of valuation. They then used an average of those values to determine
what the Minimum Fixed Price should be. The Board considered weighing the
various factors based on what it believed was important and should be considered
more heavily. After a discussion among the members of the Board, and the broad
spectrum each of the values created, the Board determined that the fairest value
would be a simple average without attempting to weight any individual item
greater than any other.
Historical market prices - For purposes of assessing an average market
price over an extended period of time, management reviewed the stock price over
the 12 months prior to the announcement of the Reverse Stock Split. The stock
had been declining steadily to a level of $0.13 on November 6, 2002. Management
believes this decline occurred primarily because the Company has failed to
perform over the past two years and has incurred losses of approximately $1.9
million. This coupled with our de-listing from the NASDAQ SmallCap Market and
ultimate listing on the OTC Bulletin Board, has caused the stock price to
decline steadily. In the assessment of the historical market price, management
believes that these closing prices must be weighted in reverse order so that the
most current price is weighted the highest and the oldest price was weighted the
least. The closing prices from each period were weighted and averaged on that
basis. In determining the historical market price, the Board looked at the
average closing price for the previous 12 months on a monthly basis, that being
the last day of each trading month. Management used 12 months of stock price
history and weighted each month such that the most recent month had a weighting
of 12, the next most recent month had a weighting of 11, and so on through the
12 months. Management used this weighting because it believed that the more
recent price data was more relevant to the current financial condition of the
Company, and that each month going backward in time was incrementally less
relevant than the more recent month. This weighting mathematically captured this
concept of relevance. The data in the original Management Report yielded an
average on a weighted basis of $0.41, as follows:
MONTH PRICE WEIGHT WEIGHTED PRICE
----- ----- ------ --------------
November 2001 $0.86 1 0.86
December 2001 $0.92 2 1.84
January 2002 $0.95 3 2.85
14
February 2002 $0.95 4 3.80
March 2002 $0.84 5 4.20
April 2002 $0.65 6 3.90
May 2002 $0.49 7 3.43
June 2002 $0.43 8 3.44
July 2002 $0.22 9 1.98
August 2002 $0.15 10 1.50
September 2002 $0.21 11 2.31
October 2002 $0.13 12 1.56
Totals for Average 78 31.67
Weighted Average $0.41
The updated data for the Supplement indicated a weighted average of $0.19,
as follows:
MONTH PRICE WEIGHT WEIGHTED PRICE
----- ----- ------ --------------
April 2002 0.65 1 0.65
May 2002 0.49 2 0.98
June 2002 0.43 3 1.29
July 2002 0.22 4 0.88
August 2002 0.15 5 0.75
September 2002 0.21 6 1.26
October 2002 0.13 7 0.91
November 2002 0.15 8 1.20
December 2002 0.08 9 0.72
January 2003 0.18 10 1.80
February 2003 0.20 11 2.20
March 2003 0.20 12 2.40
----
Totals for Average 3.09 78 15.04
====
Months 12
AVERAGE MARKET PRICE FOR
LAST 12 MONTHS $0.26
=====
WEIGHTED AVERAGE $0.19
=====
The Board adopted management's analysis on historical prices and considered
this factor important because it believes market prices are an objective measure
of value. This factor in isolation would indicate that the price paid should be
lower than the Minimum Fixed Price. However, the Board concluded that this
measure cannot be viewed in isolation and must be considered with the other
factors. As part of the combined analysis of the Minimum Fixed Price, the Board
concluded that this factor supports the fairness of the Minimum Fixed Price.
Net book value - As of September 30, 2002, the Company had a net book value
of $5,546,823. As of the same date, there were 5,596,744 shares of outstanding
common stock. The net book value per share as a result of these numbers at
September 30, 2002 was $0.99 per share. As of March 31, 2003, the Company had a
net book value of $6,319,967. The net book value per share as of that date was
$1.13.
The Board adopted management's analysis of this factor. This factor in
isolation would indicate a higher Minimum Fixed Price; however, the Board
considered that it would be difficult to sell the net assets at full book value
in the foreseeable future, because many of the assets are based on a going
concern, accrual basis and are not readily saleable, and the assets are subject
to substantial insurance regulatory reserves which are based on actuarial
estimates and would have to be settled prior to any sale. Therefore, the Board
concluded that it was appropriate to merely include this factor with the others
15
in the overall determination of a fair price but not to consider book value as
the determinative factor. As part of the combined analysis of the Minimum Fixed
Price, the Board concluded that this factor supports the fairness of the Minimum
Fixed Price.
Discounted book value - In order to ascertain what a cash book value was as
of the date of this transaction, management developed a discounted book value.
This would be the book value in the event of the sale of the assets after
discounting those assets that have a limited value as a result of the period of
time it would take to convert those assets into assets utilizable by the
business. Cumberland has four assets on its balance sheet that would basically
not be utilized by the business in a sale, and management discounted these
assets. The Management Report analyzed the assets as of September 30, 2002. The
deferred tax asset of approximately $640,872 will be realized over the next two
years and, as a result, management established a discount factor of 12%,
resulting in a discounted value of approximately $483,000. Management believes
that 12% represents a low estimate of the rate of return demanded by most
investors in small cap stocks. The Company has intangible assets and goodwill of
approximately $444,000. These intangibles and goodwill, in the event of a sale
of the Company's assets, would carry no value. The Company currently has an
investment in an agency that is not consistent with its line of business.
Although the investment has a book value of $640,000, in the event of a sale
management believes this asset would be discounted over the five years it would
take to recover the investment value. As a result, this discount reduces that
asset from $641,000 to $338,209. The Company has approximately $355,000 in fixed
and other assets that consist primarily of computer hardware and software. These
assets have little or no value in the event of an asset sale. After adjusting
the discounted book value for the discounts, the discounted book value was
$4,291,330 for a per share value of $.77 as of September 30, 2002. In the
Supplement, the analysis was updated through March 31, 2003. The discounted
value of the deferred tax asset had declined to $376,355 and the discounted
value of the investment in the agency had increased to $690,284. The resulting
discounted book value per share as of March 31, 2003 was $.93. This value is
higher than the Minimum Fixed Price.
The Board adopted management's analysis of this factor. The Board concluded
that, although discounting the asset values probably yields a more accurate
approach than straight book value, the issue of saleability of the assets
continues to mitigate against viewing this factor as determinative. In addition,
there is uncertainty involving the valuation of the reserves for insurance and
derivative losses. The Board decided to use this factor as one of the several
factors to consider in the overall conclusion of fair value. As part of the
combined analysis of the Minimum Fixed Price, the Board concluded that this
factor supports the fairness of the Minimum Fixed Price.
Comparative Company Value - The Board reviewed management's assessment of
publicly traded insurance companies, included in the Management Report. The
Company reviewed 105 companies that were listed as insurance industry, property
and casualty insurers. It narrowed down that list to 11 that had market
capitalizations of $5 million or less. Of the 11, six were eliminated on the
basis that they were either not property or casualty insurance companies, or had
ceased writing insurance. The remaining five companies were Alkity Insurance
Company, Gainsco, Inc., Goran Capital Inc., Symons International Group, and
Universal Insurance Holdings, Inc. Of these five, management determined that the
price to sales ratio and the price to book ratio of the comparable entities
provided a meaningful comparable valuation factor. A sixth company, CNA Surety
Company, was not considered comparable because it has a much larger scale than
the Company and unlike the Company, has remained profitable over the past
several years. After applying the price to book ratio, only three resulted in a
positive ratio and the two with negative ratios were excluded. On the price to
sales ratio, all five were meaningful. The average price to sale ratio of the
five comparable companies resulted in a 6.39% ratio, which would reflect a $.20
value on the price of Cumberland. In the valuation of price to book, it resulted
in a 26.33 ratio, which would translate into $.26 per share. Taking an average
of the two resulted in a valuation of the Cumberland stock at $.23 per share on
a comparable company basis. Management believed that this was a meaningful
analysis as it relates to the value of Cumberland. In the Supplement update,
this average was determined to be $.31. Management was not familiar with any
recent merger and acquisition transactions among small insurance companies and
therefore did not perform a comparable transaction analysis.
The Board adopted management's analysis of this factor. This factor in
isolation would indicate that the price paid should be lower than the Minimum
Fixed Price. The Board considered this factor somewhat important because
comparable companies provide an objective measure of value. However, the
usefulness of this factor is mitigated by the difficulty in ascertaining true
comparability in companies. The Board therefore used this as merely one of the
16
several factors in its fairness determination. As part of the combined analysis
of the Minimum Fixed Price, the Board concluded that this factor supports the
fairness of the Minimum Fixed Price.
Liquidation Value. In consideration of the Minimum Fixed Price of
Cumberland's common stock, the value of the Company in the case of liquidation
was determined. The balance sheet was analyzed for items where immediate cash
value was not equal to the value recorded on the books. The items that would not
have the same cash value versus book value were deemed inconsequential in the
analysis. Inasmuch as the majority of the assets of the business are cash,
accounts receivables or payables, management determined that the utilization of
liquidation value would simply develop a second value that would be identical to
discounted book value, and as a result, did not add anything to the analysis of
determination of a true fair market value for the odd lot shareholders as part
of the reverse stock split. In addition, management recognized that the primary
operating asset of the business is an insurance company and as a result,
liquidation is not a viable alternative in light of the fact that it would take
some 5-7 years for all the liabilities of the insurance company to expire and
pay all of the liabilities of the business. Management considered that taking
the book value and discounting it back five years would yield a significantly
reduced cash value today. This reduced cash value is approximately $2,576,000
using a 12% discount rate (the low end of an equity investors' expected yield in
small cap stocks). This would result in a per share value of approximately $.46,
skewing the discounted book value downward and adding in an average that
management believes doesn't add to the assessment and determination of what the
fair value should be for purposes of purchasing the odd lot shareholders' stock.
This factor in isolation would indicate that the price paid should be lower than
the Minimum Fixed Price. The Board considered and adopted management's analysis
and decided not to consider liquidation value in its determination of the
Minimum Fixed Price. The Board considered that this factor was not material to
the fairness of the Minimum Fixed Price.
Going Concern Value. As a separate analysis, management performed a
separate Discounted Cash Flow, or Going Concern, analysis. This analysis was not
initially performed in connection with the Management Report, but was added by
management to the Supplement after receiving comments from the SEC on the
initial filing of the proxy statement. The Discounted Cash Flow Analysis (or
Going Concern) approach utilizes the concept that the value of a business is
represented by discounting the cash flow streams it is estimated to generate.
The estimated cash flow streams of a business enterprise are then present valued
to reflect the time value of money as well as the associated business and
economic risks of that enterprise. Annual cash flows were based on EBITDA less
scheduled debt principal payments. A terminal value was computed on the basis of
an EBITDA multiple of 3.5 X, plus net working capital, less remaining debt
outstanding and minority interest in the Company's subsidiary. Management
utilized discount rates of 18%, 20%, and 25% to account for risks typically
associated with equity investments in small-cap companies because management
reviewed these as rates that were indicative of those risks. Management and the
Board concluded that based on their knowledge and experience in dealing with
investors in small-cap companies, investors generally demand returns in this
range. Management used multiple discount rates to understand the sensitivity of
the value to changes in the rate. This yielded per share values of $0.76, $0.65
and $0.61, respectively. The average of these results is $0.67. The Board
concluded that this factor supported the fairness of the Minimum Fixed Price.
The Board adopted management's analysis of the going concern value. The Board
reviewed these calculations and determined that they were not inconsistent with
the $0.70 Minimum Fixed Price based upon the Supplement. This average was not
factored into the $0.70 Minimum Fixed Price because it would not have materially
changed the result.
Reconciliation of Board's determination on minimum fixed price - After the
assessment of the Board and the review of the market price, book value,
discounted book value, and comparative company value, the Board determined that
there was no one factor that should be more significant than the others in the
assessment and determination of the fair value for purposes of the odd-lot
shareholders. As a result, the Board made a determination that what was fair was
the average of the valuation methods applied. As of December 2002, this average
is the sum of market price ($.41), book value ($.99), discounted book value
($.77), comparative company value ($.23), divided by four, resulting in a value
per share of $.60. In the August 2003 Supplement, the average is the sum of
market price ($.19), book value ($1.13), discounted book value ($.93),
comparative company value ($.31), divided by four, resulting in a value per
share of $.64. Management recommended as a matter of judgment that this value be
increased to $.70 to provide additional assurance that the Small Shareholders
were being adequately compensated for their shares, and the Board adopted this
recommendation. The Board did not discuss other alternative minimum prices.
17
The Company and its affiliates are not aware of any firm offers to purchase
the Company that have been made during the past two years by any unaffiliated
person. Consequently, the Board did not consider this factor in establishing the
fair value of the stock for the cash payment.
The Company has not engaged in a merger or consolidation with another
company or in the sale or other transfer of a substantial part of its assets in
the last two years, so the Board did not consider this factor in establishing
the fair value of the stock for the cash payment.
The Company has not purchased any of its shares during the past two years.
Francis Williams made two isolated private purchases during 2002 at prices of
$2.77 and $2.94 per share, as described under "Security Ownership of Certain
Beneficial Owners and Management." Although these purchases were at a higher
price than the Minimum Fixed Price of $0.70 per share, the Board did not
consider these purchases as a material factor because of the isolated nature of
these purchases and the Company's financial condition has deteriorated since
these purchases in April and July 2002.
The Board considered an independent analysis and evaluation of the fair
market value of the common stock that would be converted into a fractional
share, but, as noted earlier, determined that the time and expense of an
independent analysis and evaluation were unjustified in the circumstances
because the Board concluded that the method of valuation chosen by the Board was
a fair representation of value of the stockholdings for the reasons stated
above. Although the Board relied on the financial data provided by management,
the Management Report and the Supplement did not contain a determination of
fairness, and management did not make a conclusion as to the fairness. The Board
came to its conclusion as to fairness as described in this proxy statement after
reviewing all of the data provided. The absence of a fairness determination by
management did not impact the Board's final determination of fairness.
In its November 2002 meeting, the Board discussed two alternative
transactions for reducing or eliminating the Small Shareholders, a tender offer
and open market purchases. The Board, however, determined that either of these
alternatives would not result in shares being tendered by a sufficient number of
record shareholders so as to accomplish the Company's objectives. This
determination was based upon the low trading volumes in the common stock. The
Board considered that given the large number of holders of small numbers of
shares, even if they were aware of the offer, it is unlikely that they would
make the effort to tender their shares in sufficient numbers to accomplish the
Company's objective. For instance, there are over 580 shareholders each holding
less than 150 shares; and each of those holdings is worth less than $40 at the
average market price of $0.26 noted above. Management did not think that the
Company had sufficient resources to purchase all the shares, even if tendered.
In addition, management did not believe that it would be good use of resources
to attempt to offer a substantial premium to purchase some of the shares if such
a premium was necessary to attract otherwise uninterested Small Shareholders.
The Board adopted Management's analysis on these points. The Board ultimately
determined that the Reverse Stock Split proposal was the preferred method.
In addition, the Board discussed the possibility of selling the Company or
its assets. The Board concluded that selling the Company as a business unit was
not a viable alternative because of the following factors:
o The Company's recent financial performance (as discussed above)
o The recent increase in the level of reserves for the derivative
instrument and policy losses, which increased in the aggregate from
$5.2 million to $8.9 million from year end 2000 to 2002, and the
uncertainty surrounding potential losses from the derivative
o The general state of the economy and particularly the pattern of
losses in the indemnity business, as indicated in the Management
Report and discussed below under Comparable Companies
The Board noted in this connection that the Company has not received any
offers to buy the business in the last several years. The same factors also
indicated that selling the assets would be difficult, and in addition the
illiquid nature of the assets and the difficulty in resolving all of the
liabilities underlying the reserves would make selling the assets more
difficult, as discussed above under "Consideration for determining the Minimum
Fixed Price - Discounted Book Value." The Board discussed this alternative at
its meeting in November 2002. Because the sale of the Company did not appear
18
feasible, the Board did not explore the advantages and disadvantages of the sale
of the Company as compared to the other alternatives.
The Board also weighed all the alternatives against the prospect of
remaining a public company and maintaining the Company's posting on the OTC
Bulletin Board. For the reasons described at "Purpose and Reasons for the
Reverse Stock Split." the Board concluded that this would not be in the best
interest of the either the Small Shareholders or the unaffiliated shareholders
who will remain after the Reverse Stock Split. The Board concluded that the
Small Shareholders would be better served by having their shares cashed out due
to the current low market price and low volumes, and the other unaffiliated
shareholders would be better served by realizing the cost savings to the Company
which are expected from the Reverse Stock Split.
After consideration of all the foregoing factors, all of the directors,
including those who are not employees of the Company, have determined that the
Reverse Stock Split proposal is procedurally and substantively fair to the
shareholders of the Company, including the unaffiliated shareholders and the
Small Shareholders.
The Board also considered the timing of implementation of the Reverse Stock
Split proposal and the intended termination of the Company's 1934 Act
registration for the common stock. The Board concluded that the continued
monetary and human resource expense of such registration was unjustified given
the Company's inability to effectively take advantage of many of the benefits of
public registration. To achieve the savings from termination, the Board
instructed management to implement the Reverse Stock Split proposal and
termination of registration of the common stock as soon as practicable. Please
see the section contained herein captioned "Purpose and Reason for the Reverse
Stock Split Proposal" for further discussion of the expenses of registration and
the Company's experiences with respect to the benefits of such registration.
With respect to its intent to terminate the Company's 1934 Act
registration, the Board has considered and will continue to consider the effect
that terminating the registration of the common stock might have on the market
for the holders of the common stock and the ability of those shareholders to buy
and sell their shares. The Board also has considered and will continue to
consider whether the value of the common stock is being fully recognized in the
public market, and as a result, whether the Company can effectively take
advantage of a public market for its stock. The Board also has considered and
will continue to consider the need to protect the confidentiality of the
Company's proprietary information, along with the potential direct cost savings
and savings related to the time and effort currently required of management to
comply with the reporting and other requirements associated with a reporting
company. After taking into account all of the considerations and conclusions
described herein with respect to the benefits and disadvantages of registration
of the common stock under the 1934 Act at the present time, the Board has
determined that it will terminate registration of common stock under the 1934
Act as soon as practical following the Reverse Stock Split absent any
significant changes in the foregoing considerations that would result in the
Board determining that the benefits of continued registration would outweigh the
disadvantages. The Board does not foresee any such change in circumstance in the
reasonably near future. See also the section contained herein captioned "Purpose
and Reason for the Reverse Stock Split Proposal."
CONDUCT OF THE COMPANY'S BUSINESS AFTER REVERSE STOCK SPLIT
The Company expects its business and operations to continue as they are
currently being conducted and, except as disclosed below, the Reverse Stock
Split is not anticipated to have any effect upon the conduct of its business.
Other than as described in this Proxy Statement, neither the Company nor
its management has any current plans or proposals to effect any extraordinary
corporate transaction, such as a merger, reorganization or liquidation; to sell
or transfer any material amount of its assets; to change its Board or
management; to change materially its indebtedness or capitalization; or
otherwise to effect any material change in its corporate structure or business.
See also the information contained herein in the section captioned "Purpose and
Reasons for the Reverse Stock Split."
As a result of the Reverse Stock Split, the Company plans to become a
privately held company by termination of registration of the common stock under
the 1934 Act, if the number of Registered Shareholders is fewer than 300. In
addition, because the common stock will be held by fewer than 300 registered
holders, the Company will be relieved of the obligation to comply with the proxy
rules of Regulation 14A under Section 14 of the 1934 Act, its officers and
19
directors and shareholders owning more than 10% of the common stock will be
relieved of certain reporting obligations under the 1934 Act, and the Company
will cease filing periodic reports under the 1934 Act.
STRUCTURE OF REVERSE STOCK SPLIT
The Reverse Stock Split is of the common stock. If the Reverse Stock Split
proposal is approved and occurs, the Reverse Stock Split will occur on the
Effective Date, unless management elects to abandon the Reverse Stock Split.
Assuming shareholder approval of the Reverse Stock Split proposal is obtained,
the Company will file the Amendment within 10 business days of the proposal's
approval at the Special Meeting. The structure of the Reverse Stock Split, for
each shareholder is as follows:
1. Registered Shareholders with Fewer Than 150 shares. If the Reverse Stock
Split proposal is implemented and you are a Registered Holder of fewer than 150
shares of common stock of the Effective Date, you will receive a cash payment
instead of a fractional share of common stock. After the reverse split, you will
have no further interest in the common stock. You will not have to pay any
service charges or brokerage commissions in connection with the Reverse Stock
Split or the cash payments. Because the Current Market Price cannot be
determined until after the special meeting, shareholders will be asked to
approve the merger without knowing the final consideration for the fractional
shares. However, that consideration will not be less than the $0.70 per share
Minimum Fixed Price.
2. Registered Holder With 150 or More Shares. If the Reverse Stock Split
proposal is implemented and you are a Registered Holder of 150 or more shares of
common stock as of the Effective Date, we will convert your shares into 1/150 of
the number of shares you held immediately prior to the reverse split, with a
cash payment for any shares that would otherwise result in fractional shares.
For example, if you are a Registered Holder of 10,010 shares of common stock
immediately prior to the Effective Date, your shares will be converted to 66
shares of common stock and you will receive a cash payment for 110 shares.
3. Beneficial Owners of the Company Stock. Nominees (such as a bank or
broker) may have required procedures, and shareholders holding common stock in
street name should contact their nominees to determine how they will be affected
by the Reverse Stock Split. NOTE: If you are a beneficial owner of fewer than
150 shares of common stock or the beneficial owner of more than 150 shares of
common stock, but not in an even multiple of 150, and you want to have your
shares exchanged for cash payment, you should instruct your nominee to transfer
your shares into a record account in your name in a timely manner so that you
will be considered a holder of record immediately prior to the Effective Date.
In the event any certificate representing shares of common stock is not
presented for exchange or cash payment upon request by the Company, the common
stock or the cash payment, as applicable, will be administered in accordance
with the relevant abandoned property laws. Until the common stock or cash
payments have been delivered to the public official pursuant to the abandoned
property laws, such cash payments or certificates will be paid to the holder
thereof or his designee, without interest, at such time as the stock certificate
has been properly presented for exchange or cash payment.
The Reverse Stock Split is structured to be a "going private" transaction
as defined in Rule 13e-3 promulgated under the 1934 Act because it is intended
to, and, if completed, will likely terminate the Company's reporting
requirements under the 1934 Act. In connection with the Reverse Stock Split
proposal, the Company has filed with the SEC a Schedule 13E-3 pursuant to Rule
13e-3 under the 1934 Act.
Even if the Reverse Stock Split is approved, the Board may abandon the
proposed Reverse Stock Split at any time before or after the meeting and prior
to the filing of the amendment if for any reason the Board deems it advisable to
do so. In addition, the Board may make any and all changes to the amendment that
it deems necessary to file the amendment with the Florida Secretary of State and
give effect to the Reverse Stock Split.
20
CERTAIN EFFECTS OF REVERSE STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS
1. Rights, Preferences and Limitations. There are no material differences
between the respective rights, preferences or limitations of the existing common
stock and the "post-reverse split" common stock.
2. Financial Effect. The Reverse Stock Split and the expenditures for
professional fees and other expenses related to the transaction will not have a
material effect on the Company's balance sheet, statement of income, earnings
per share, ratio of earnings to fix charges or book value per share. The
expenditures have been estimated as follows: cash payment for fractional shares
- $50,000; fees and expenses of legal counsel - $40,000; fees and expenses of
accountants - $8,000; printing and postage - $10,000; and miscellaneous -
$10,000. The only consideration to be paid will be the cash payment, to be paid
for shares that would otherwise be converted into fractional shares. The Company
will use its cash-on-hand and investments as the sole source of funds for the
expenditures for the cash payout to the small stockholders and for professional
fees and other expenses related to the transaction. Management believes that the
Company has sufficient liquid assets to cover these payments, even if there is
an increase in the amount needed to cash out fractional shares.
3. Effect on Market for Shares. The Company estimates that the number of
shares of common stock outstanding after the Reverse Stock Split, if effected,
will be as follows:
CLASS NUMBER OF SHARES NUMBER OF SHAREHOLDERS
----- ---------------- ----------------------
Common 39,435 228
The termination will also cause the common stock to be ineligible to trade
on the OTC Bulletin Board. Although the Company believes that the common stock
may be listed on the Pink Sheets, there can be no assurance that it will be
listed. In addition, management believes that trading volumes are generally
lower on Pink Sheets, which may reduce the market for the common stock.
The Company has no current plans to issue additional shares of stock, but
the Company reserves the right to do so at any time and from time to time at
such prices and on such terms as the Board determines to be in the best
interests of the Company and its then shareholders. Persons who continue as
shareholders following implementation of the Reverse Stock Split proposal will
not have any preemptive or other preferential rights to purchase any of the
Company's stock that may be issued by the Company in the future, unless such
rights are currently specifically granted to such shareholder.
4. As a result of the Reverse Stock Split, Mr. Williams' beneficial
ownership will increase from 79.9% to 81.1% of the outstanding common stock. As
a result of the Reverse Stock Split, Mr. Williams' interest in the net book
value and net earnings of the Company also will increase from 79.9% to 81.1%
causing his interest to increase as shown below:
F. Williams' F. Williams'
Interest Before Interest After
Company Total Reverse Stock Split Reverse Stock Split
------------------ --------------------- ---------------------
Net loss for year ended 12/31/02....... $1,569,169 $1,253,766 $1,272,596
Book value as of 12/31/02.............. 6,487,279 5,183,336 5,261,183
Book value as of 9/30/03............... 6,303,427 5,036,438 5,112,079
There will not be a significant income tax effect on Francis Williams. Mr.
Williams and his family members collectively will receive approximately $700 for
small holdings beneficially owned by him through family members and trusts. The
record holder will pay capital gains tax on the proceeds from these shares. See
"Material Federal Income Tax Consequences".
5. Securities Laws Relating to the Post-Reverse Split Common Stock. The
Company has not filed with the SEC a registration statement under the Securities
Act of 1933 (the "1933 Act") for the registration of the post-reverse split
21
common stock to be issued and exchanged pursuant to the Reverse Stock Split
proposal. Instead, the post-reverse split common stock will be issued in
reliance on exemptions contained in Section 3(a)(9) and Rule 145(a)(1) under the
1933 Act. Upon consummation of the Reverse Stock Split, the shares of
post-reverse split common stock are expected to be freely transferable under the
1933 Act by those shareholders of the Company not deemed to be "affiliates" of
the Company. Shares of post-reverse split common stock acquired by persons who
are "affiliates" of the Company will be subject to the resale restrictions of
Rule 144 under the 1933 Act.
6. Termination of 1934 Act Registration of common stock. The Reverse Stock
Split proposal will affect the public registration of the common stock with the
SEC under the 1934 Act, as the Company intends to terminate this registration as
soon as practicable after approval of the Reverse Stock Split proposal by the
shareholders. Registration under the 1934 Act may be terminated by the Company
if the common stock is no longer held by 300 or more shareholders of record.
Termination of registration of the common stock under the 1934 Act would
substantially reduce the information required to be furnished by the Company to
its shareholder and to the SEC and would make certain provisions of the 1934
Act, such as proxy statement disclosure in connection with shareholder meetings
and the related requirement of an annual report to shareholders, no longer
applicable to the Company.
The termination will also cause the common stock to be ineligible to trade
on the OTC Bulletin Board. Although the Company believes that the common stock
may be listed on the Pink Sheets, there can be no assurance that it will be so
listed. In addition, management believes that trading volumes are generally
lower on Pink Sheets, which will substantially reduce the market for the common
stock.
With respect to the executive officers and directors of the Company, in the
event of the intended termination of registration of the common stock under the
1934 Act: (a) executive officers, directors and other affiliates would no longer
be subject to many of the reporting requirements and restrictions of the 1934
Act, including without limitation the reporting and short-swing profit
provisions of Section 16 of the 1934 Act, and (b) executive officers, directors
and other affiliates of the Company may be deprived of the ability to dispose of
shares of common stock pursuant to Rule 144 under the 1933 Act. Upon termination
of 1934 Act registration, the Company will continue to be subject to the general
anti-fraud provisions of federal and applicable state securities laws. See also
the information contained above in the section captioned "Securities Laws
Relating to the Post-Reverse Split Common Stock."
INTERESTS OF CERTAIN PERSONS IN THE PROPOSED TRANSACTION
Upon completion of the Reverse Stock Split, the percentage beneficial
ownership of the outstanding shares of the directors will increase. This
increase is summarized in the table below:
Percentage Ownership
--------------------------------------
Pre-Split Post-Split
----------------- -----------------
Francis M. Williams 79.9% 81.1%
Joseph M. Williams 6.4% 6.5%
Andrew J. Cohen * *
R. Donald Finn * *
--------------------
*less than 1%
See also "Security Ownership of Certain Beneficial Owners and Management."
The directors also will receive cash for their fractional shares, estimated
to be less than $700 in the case of Francis Williams and less than $100 for each
of the other directors.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
We summarize below the material federal income tax consequences to the
Company and shareholders resulting from the Reverse Stock Split proposal. This
summary is based on existing U.S. federal income tax law, which may change, even
retroactively. This summary is not binding on the Internal Revenue Service (the
"IRS"). The applicable laws may be changed, possibly retroactively, resulting in
22
United States federal tax consequences different from those set forth below. The
Company has not sought, and will not seek, any ruling from the IRS or opinion of
counsel with respect to the statements made in the following summary, and there
can be no assurance that the IRS will not take a position contrary to such
statements or that any such contrary position taken by the IRS would not be
sustained by a court. There can be no assurance and none is given that the IRS
or the courts will not adopt a position that is contrary to the statements
contained in this summary. This summary does not discuss all aspects of federal
income taxation, which may be important to you in light of your individual
circumstances, and many shareholders may be subject to special tax rules. In
addition, this summary does not discuss any state, local, foreign, or other tax
considerations. You should consult your tax advisor as to the particular
federal, state, local, foreign, and other tax consequences, in light of your
specific circumstances.
This summary also assumes that you are a one of the following: (i) a
citizen or resident of the United States; (ii) a corporation or other entity
taxable as a corporation created or organized under U.S. law (federal or state);
(iii) an estate the income of which is subject to U.S. federal income taxation
regardless of its sources; (iv) a trust if a U.S. court is able to exercise
primary supervision over administration of the trust and one or more U.S.
persons have authority to control all substantial decisions of the trust; or (v)
any other person whose worldwide income and gain is otherwise subject to U.S.
federal income taxation. This summary also assumes that you have held and will
continue to hold your shares as capital assets for investment purposes under the
Internal Revenue Code of 1986, as amended.
We believe that the Reverse Stock Split proposal should be treated as a
tax-free "recapitalization" for federal income tax purposes. This should result
in no material federal income tax consequences to the Company. If you continue
to hold common stock after the Reverse Stock Split, you should not recognize any
gain or loss in the Reverse Stock Split, and you should have the same adjusted
tax basis and holding period in your new stock as you had in your stock
immediately prior to the Reverse Stock Split.
The receipt by a shareholder of a cash payment in lieu of a fractional
share pursuant to the Reverse Stock Split will be a taxable transaction for
federal income tax purposes. Accordingly, a shareholder who receives cash in
lieu of a fractional share should recognize gain or loss equal to the difference
between the amount of cash received and the portion of the aggregate tax basis
in his or her shares of common stock allocable to the fractional share interest
for which he or she received cash. If the shares of your stock were held as a
capital asset on the Effective Date, then the shareholder's gain or loss will be
a capital gain or loss. Such capital gain or loss will be a long-term capital
gain or loss if the shareholder's holding period for the shares of common stock
is longer than one year.
APPRAISAL RIGHTS; ESCHEAT LAWS
There are no appraisal rights for any shareholder who dissents from
approval of the Reverse Stock Split proposal under the Company's governance
documents. Also, the Company concluded that there are no appraisal rights for
any shareholder who dissents from approval of the Reverse Stock Split proposal
under Florida General Corporation law. We refer you, however, to Sections
607.1302 and 607.0604 of the Florida Statutes which respectively prescribe the
rights of shareholders to dissent and general treatment of fractional shares.
Section 607.0604 (5) of the Florida Statutes states that, "when a corporation is
to pay in money the value of fractions of a share, the good faith judgment of
the Board of Directors as to the fair value shall be conclusive." The absence of
appraisal rights does not limit any other rights or actions under state law for
shareholders who are aggrieved by reverse stock splits generally.
Shareholders whose shares are eliminated and whose addresses are unknown to
the Company, or who do not return their stock certificates and request payment,
generally have a certain number of years from the date of the Reverse Stock
Split to claim the cash payment payable to them. If no claim is made within this
period, state law generally provides that these payments are deemed abandoned
and forfeited to the state. The state law of the state of the last known
residence of the shareholder, as shown on Company records, usually governs. In
Florida, this holding period is 5 years, but the exact number of years may vary
from state to state.
23
INTENTION TO TERMINATE PUBLIC REGISTRATION
The Company intends to terminate public registration of the common stock
with the SEC under the 1934 Act as soon as practicable after approval of the
Reverse Stock Split proposal by the shareholders. Shareholders should note that
the decision by the Board to terminate 1934 Act registration does not require
shareholder approval and will not be voted on at the Special Meeting. Further,
there is no assurance that the number of such shareholders will be fewer than
300 following the Effective Date. While the Company intends to cease public
registration of its common stock following the Reverse Stock Split, the Board
may choose not to implement this strategy if the Board determines that it is not
then in the best interests of the Company and its shareholders given the then
existing market conditions. See also the discussion of this issue in the section
contained herein captioned "Fairness of Reverse Stock Split Proposal."
The termination will also cause the common stock to be ineligible on the
OTC Bulletin Board. Although the Company believes that the common stock may be
listed on the Pink Sheets, there can be no assurance that it will be so listed.
In addition, management believes that trading volumes are generally lower on
Pink Sheets, which will substantially reduce the market for the common stock.
The Board recommends that you vote FOR the Reverse Stock Split proposal.
Proxies solicited by the Board will be voted FOR this Reverse Stock Split
proposal, unless you specify otherwise in your proxy.
24
MANAGEMENT
The current directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Francis M. Williams 62 Chairman of the Board of Directors
Joseph M. Williams 47 President and Treasurer
Andrew J. Cohen 49 Director
R. Donald Finn 60 Director
All Directors of the Company hold office until the next annual meeting of
shareholders and the election and qualification of their successors. Officers of
the Company are elected annually by the Board of Directors and hold office at
the discretion of the Board.
Set forth below is information regarding the directors and executive
officers of the Company:
Francis M. Williams has been Chairman of the Board of the Company since its
inception and, until June 1992, was President of the Company. In addition, Mr.
Williams has been Chairman of the Board and Director of Cumberland Casualty &
Surety Company ("Cumberland Casualty") and Surety Specialists, Inc., wholly
owned subsidiaries of the Company, from inception and President and Chairman of
the Board of Kimmins since its inception in 1979. Prior to November 1988, Mr.
Williams was the Chairman of the Board and Chief Executive Officer of Kimmins
Corp. and its predecessors and sole owner of K Management Corp. From June 1981
until January 1988, Mr. Williams was the Chairman of the Board of Directors of
College Venture Equity Corp., a small business investment company; and since
June 1981, he has been Chairman of the Board, Director, and sole shareholder of
Kimmins Coffee Service, Inc., an office coffee service company. Mr. Williams has
also been a director of the National Association of Demolition Contractors and a
member of the executive committee of the Tampa Bay International Trade Council.
Joseph M. Williams has served as the Treasurer and President of the Company
since June 1992. He also served as Vice President and Secretary of the Company
from its inception on November 18, 1991 through June 1992. Mr. Williams served
as a member of the Board of Directors of the Company from November 18, 1991
through February 24, 1997. In addition, Mr. Williams has been the Secretary and
Treasurer of Kimmins Corp. since October 1988 and a member of the Board of
Directors of Cumberland Casualty since 1988. He held the position of President
of Cumberland Casualty from 1991 through August of 1996. From 1989 through 1990
he held the position of Secretary and Treasurer of Cumberland Casualty and from
1991 through 1994 served as Treasurer of Cumberland Casualty. Mr. Williams has
been employed by the Company and Kimmins Corp. in various capacities since 1994.
From January 1982 to December 1983, he was managing partner of Williams and
Grana, a firm engaged in public accounting. From January 1978 to December 1981,
Mr. Williams was employed as a senior tax accountant with Price Waterhouse &
Company. Joseph M. Williams is the nephew of Francis M. Williams.
Andrew J. Cohen was elected as a Director to the Company's Board effective
February 24, 1997. Mr. Cohen currently is Co-President and Chief Executive
Officer of ABC Capital Corp., an investment management firm based in Tampa,
Florida and also acts as Co-Chairman on its Board of Directors. In addition, Mr.
Cohen is President of Albany Associates, Inc., a Tampa based management
consulting firm. From June of 1972 through 1997, Mr. Cohen was co-President of
ABC Fabric of Tampa, Inc. which was the fourth largest private retail fabric
company in the United States.
R. Donald Finn was elected as a Director to the Company's Board effective
September 9, 1999. For more than the last five years, Mr. Finn has been a
partner in the law firm of Gibson, McAskill & Crosby, located in Buffalo, New
York, where Mr. Finn has practiced law for more than the last 25 years.
25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and its subsidiaries have entered into transactions with
Kimmins and companies affiliated through common ownership. Kimmins owns
approximately 30% of the Company's outstanding common stock. In addition,
Francis Williams, a Director of the Company, owns approximately 66.7% of the
outstanding common stock of Kimmins and serves as its Chairman of the Board and
Chief Executive Officer. Cumberland Casualty writes surety bonds for Kimmins and
its affiliates. Qualex Consulting Group, Inc. ("Qualex"), a subsidiary of the
Company, performs consulting services for Kimmins and affiliates. For the years
ended December 31, 2002 and 2001, the Company and its subsidiaries received
$16,586 and $121,089, respectively, in revenue from Kimmins. Other income from
affiliates in the accompanying consolidated statements of operations consists
primarily of claims consulting services as well as commission income from the
Company's subsidiary agencies on bonds sold through carriers other than
Cumberland Casualty.
The Company's operating subsidiaries rent or lease office space in the
cities in which they are located. Cumberland Casualty and Qualex lease office
space in Tampa, Florida from a company owned by Francis Williams, the Chairman
of the Board of the Company, at a monthly rate of $10,885, pursuant to a lease
that was executed June 1, 1999 and is effective through May 31, 2009.
In 1988, Cumberland Casualty issued a surplus debenture to Kimmins in
exchange for $3,000,000 which bears interest at 10 percent per annum. In 1992,
the debenture due to Kimmins from Cumberland Casualty was assigned to the
Company. Interest and principal payments are subject to approval by the Florida
Department of Financial Services. On April 1, 1997, the Company forgave $375,000
of its $3,000,000 surplus debenture due from Cumberland Casualty. As a result,
Cumberland Casualty increased paid-in-capital by $375,000. As of December 31,
1999, no payments could be made under the terms of the debenture. On June 30,
1999, the Company forgave $576,266 of its $2,625,000 surplus debenture due from
Cumberland Casualty. As a result, Cumberland Casualty increased paid-in-capital
to $1,000,000 from $423,734. As of December 31, 2002, no payments could be made
under the terms of the debenture. In 2003, the Company forgave the balance of
its surplus note to Cumberland Casualty in the amount of $2,048,734. As a
result, paid-in and contributed surplus of Cumberland Casualty increased to
$3,048,734.
Effective November 10, 1988, the Company entered into a $1,000,000
convertible term note agreement with TransCor Waste Services, Inc., a subsidiary
of Kimmins. The note, originally due November 10, 2001, has been extended to
November 10, 2004. The annual rate of interest is equal to one half of one
percent per annum in excess of the stated interest rate established by the Bank
of America. The average interest rate for 2002 was 8.6%. On December 26, 2001,
the Company made a principal note payment of $395,945 reducing 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 close of business on the maturity date.
Cumberland Casualty writes surety bonds for Kimmins and its affiliates.
Revenues attributable to transactions with Kimmins and its affiliates were $264,
$88 and $7,816 for the years ended December 31, 2002, 2001 and 2000,
respectively. Qualex performs claims consulting services for Kimmins and its
affiliates and other surety carriers. Revenues attributable to transaction with
affiliates were $16,586, $121,089 and $171,292 for years ended December 31,
2002, 2001 and 2000, respectively.
26
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The name and address of each person or entity who owned beneficially 5% or
more of the outstanding shares of common stock of the Company on January 31,
2004, together with the number of shares owned and the percentage of outstanding
shares that ownership represents is set forth in the following table. The table
also shows information concerning beneficial ownership by the President of the
Company, the President of Cumberland Casualty, and by all directors and
executive officers as a group. The number of shares beneficially owned is
determined under the rules of the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual has the sole
or shared voting power or investment power and also any shares which the
individual has the right to acquire within 60 days after the date hereof through
the exercise of any stock option or other right. Unless otherwise indicated,
each person has sole investment and voting powers (or shares such powers with
his or her spouse) with respect to the shares set forth in the following table:
NUMBER OF PERCENTAGE OF
SHARES OF CUMBERLAND STOCK OUTSTANDING SHARES OF
BENEFICIAL OWNER (1)(2) BENEFICIALLY OWNED CUMBERLAND STOCK
----------------------- ------------------ ----------------
Francis M. Williams
c/o Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605................... 4,471,001 (3) 79.9%
Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605................... 1,723,290 (4) 30.8%
Joseph M. Williams...................... 360,493 (5) 6.4%
Andrew J. Cohen......................... 47,590 (6) *
R. Donald Finn.......................... 7,131 (7) *
All current Directors and Executive
Officers as a group (4 persons)......... 4,886,213 (8) 86.8%
* Ownership represents less than 1% of outstanding Company common stock.
(1) The address of all Officers and Directors of the Company listed above,
unless listed separately, are in care of Cumberland Technologies, Inc. at
4311 West Waters Avenue, Suite 401, Tampa, Florida 33614.
(2) The Company believes that the persons named in the table have sole voting
and investment power with respect to all shares of common stock
beneficially owned by them, unless otherwise noted.
(3) Includes 2,677,322 shares owned by Francis Williams; 1,723,290 shares held
by Kimmins; 29,345 shares owned by Mr. Williams' wife; 22,748 shares held
by Mr. Williams as trustee for his wife and children and 18,296 shares held
by Mr. Williams as custodian under the New York Uniform Gifts to Minors Act
for his children. Mr. Williams owns 66.7% of the outstanding common stock
of Kimmins Corp. and is its Chairman and Chief Executive Officer.
(4) Francis Williams has investment and voting control over these shares.
(5) Includes 133,500 shares owned by Joseph M. Williams; 1,010 shares held by
Mr. Williams as trustee for his children; 219 shares held by the Kimmins
401(k) Plan and ESOP of which Mr. Williams is fully vested. Also includes
205,764 shares held by Kimmins 401(k) Plan, Profit Participation Plan and
ESOP, and options to acquire 20,000 shares of the Company's common stock
held by the ESOP, of which Mr. Williams is a trustee; Mr. Williams
disclaims beneficial ownership of these shares.
27
(6) Includes 50% of the 72,540 shares owned by C&C Properties, a partnership in
which Mr. Cohen has a 50% ownership, 6,320 shares held in trust for Mr.
Cohen's minor children and options to acquire 5,000 shares of Cumberland
common stock.
(7) Includes 2,131 shares owned by R. Donald Finn; and options to acquire 5,000
shares of Company common stock.
(8) Includes 1,723,290 shares held by Kimmins and options to acquire 30,000
shares of Company common stock.
Upon completion of the Reverse Stock Split, the beneficial ownership of
these persons will be as follows:
NUMBER OF SHARES OF PERCENTAGE OF
CUMBERLAND STOCK OUTSTANDING SHARES OF
BENEFICIAL OWNER (1)(2) BENEFICIALLY OWNED CUMBERLAND STOCK
----------------------- ------------------ ----------------
Francis M. Williams
c/o Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605............... 29,806 81.1%
Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605............... 11,488 31.3%
Joseph M. Williams.................. 2,402 6.5%
Andrew J. Cohen..................... 316 *
R. Donald Finn...................... 47 *
All current Directors and Executive
Officers as a group (4 persons)..... 32,571 88.1%
There have been no purchases of the Company's common stock by officers or
directors within the last sixty days. During the past two years, Francis
Williams made the following purchases:
PERIOD NO. OF SHARES PRICE RANGE AVERAGE PRICE
------ ------------- ----------- -------------
Second Quarter 2002 6,000 2.77 2.77
Third Quarter 2002 9,650 2.94 2.94
28
CERTAIN MARKET INFORMATION
The common stock trades on the OTC Bulletin Board. Prior to September 12,
2002, the common stock traded on the NASDAQ SmallCap Market. The following is
the high and low sales prices for the common stock for each quarter during the
past two years:
QUARTER HIGH LOW
------- ---- ----
First 2001 1.91 1.38
Second 2001 1.10 1.10
Third 2001 .98 .90
Fourth 2001 .95 .95
First 2002 1.00 .75
Second 2002 .59 .35
Third 2002 .30 .14
Fourth 2002 .16 .06
First 2003 .51 .08
Second 2003 .25 .17
Third 2003 .51 .18
Fourth 2003 1.30 .20
As of January 31, 2004, there were 5,597,244 outstanding shares of common
stock, $0.001 par value per share.
DIVIDENDS
The payment by the Company of dividends, if any, in the future is within
the discretion of its Board of Directors and will depend upon the Company's
earnings, capital requirements (including working capital needs), and other
financial needs. The Company did not declare or pay dividends in 2002 and does
not anticipate paying any dividends on the Company's common stock in the near
future.
The future payment of dividends, if any, by Cumberland Casualty is within
the discretion of its Board of Directors and will depend upon Cumberland
Casualty's earnings, statutory limitations, capital requirements (including
working capital needs) and financial condition, as well as other relevant
factors. Applicable state laws and regulations restrict the payment of dividends
by Cumberland Casualty to the extent of surplus profits less any dividends that
have been paid in the preceding twelve months or net investment income for the
year, whichever is less, unless Cumberland Casualty obtains prior approval from
the insurance commissioner. Cumberland Casualty does not anticipate paying any
dividends on Cumberland Casualty common stock in the near future.
29
SHAREHOLDER PROPOSALS
Shareholders of the Company may submit proposals on matters appropriate for
shareholder action at meetings of the Company's shareholders in accordance with
Rule 14a-8 promulgated under the Exchange Act ("Rule 14a-8"). If the Reverse
Stock Split is effected, the Company will no longer be subject to Rule 14a-8.
Rule 14a-8 allows certain shareholder proposals to be included in Company proxy
statements relating to annual meetings of the shareholders, if submitted to the
Company in a timely manner. The Company is not required to hold annual meetings
of the shareholders and has no current plans to do so in 2003. In the event an
annual meeting is held, in order for the Company to consider including a
shareholder proposal in its proxy materials relating to such meeting pursuant to
Rule 14a-8, the proposal must be received within a reasonable time before the
Company begins to print and mail proxy materials by the Secretary of the Company
at 4311 W. Waters Avenue, Tampa, Florida 33614. If the Company fails to receive
notice of a shareholder proposal within a reasonable time before it mails proxy
materials for an annual meeting, the proposal will not be considered timely, in
which case proxies for that meeting may confer discretionary authority to vote
on the proposal. If the Company fixes a date for an annual meeting in 2003, it
will notify you of the meeting date and deadlines for delivering any shareholder
proposals.
If you want to present a proposal under Rule 14a-8 of the Exchange Act at
our 2004 Annual Meeting of Shareholders, send the proposal in time for us to
receive it by October 17, 2004. If the date of our 2004 Annual Meeting is
subsequently changed by more than 30 days from the date of this year's meeting,
we will inform you of the change and the date by which we must receive
proposals. If you want to present business at our 2004 Annual Meeting outside of
the shareholder proposal rules of Rule 14a-8 of the Exchange Act, the Secretary
must receive notice of your proposal by December 31, 2004, and you must be a
shareholder of record on the date notice to shareholders is mailed and on the
record date for determining shareholders entitled to notice of the meeting and
to vote.
SELECTED FINANCIAL DATA
The following selected financial data are taken from the Company's
consolidated financial statements. The data should be read in conjunction with
the accompanying consolidated financial statements and the related notes,
Management's Discussion and Analysis and other financial information included in
the Company's Form 10-Q (as amended by form 10-Q/A) for the quarter ended
September 30, 2003 and Form 10-K for the year ended December 31, 2002, copies of
which are mailed with this proxy statement.
Nine Months Ended Year Ended December 31,
--------------------- -----------------------------------------------------
9/30/03 9/30/02 2002 2001 2000 1999 1998
---------- ---------- --------- ---------- ---------- ---------- ----------
(In Thousands - except per share data)
Statement of Operations Data:
Net premium income....................... $ 6,084 $ 11,104 $ 13,432 $13,641 $ 12,128 $ 9,618 $ 7,534
Net investment income.................... 209 373 486 605 576 333 377
Net realized capital gains (losses)...... 70 15 66 306 38 129 (437)
Commission and other income.............. 1,536 1,612 2,256 1,909 1,683 1,375 1,537
Total revenue......................... 7,899 13,104 16,241 16,461 14,425 11,455 9,011
Benefits and expenses.................... 8,094 16,835 18,660 16,034 12,416 10,056 9,214
Impairment of long-lived assets.......... - - - 437 - - -
Interest expense......................... 25 27 62 166 203 214 118
Income (loss) from continuing
operations before extraordinary item.... (220) (3,758) (2,481) (176) 1,806 1,185 (321)
Income tax (benefit) expense............. (75) (1,179) (912) (76) 764 37 -
Extraordinary gain on restructuring of
note, net of tax...................... - - - 158 - - -
Net income (loss)........................ (145) (2,579) (1,569) 58 1,042 1,148 (321)
Income (loss) per common share - diluted .... $ (0.03) $ (0.46) $ (0.28) $ 0.01 $ 0.19 $ 0.21 $ (0.06)
30
As of As of December 31,
September 30, ---------------------------------------------------------------
2003 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------
(In thousands)
Assets Balance Sheet Data:
Investments.................... $ 6,452 $ 9,269 $ 10,815 $ 9,955 $ 8,394 $ 3,987
Cash and cash equivalents...... 190 593 2,654 694 2,000 4,202
Accrued investment income...... 88 124 154 185 66 55
Accounts receivable............ 1,499 2,518 4,687 4,258 3,301 3,105
Reinsurance recoverable........ 13,310 12,089 6,634 5,970 4,730 2,306
Deferred policy acquisition
costs........................ 1,613 1,665 1,904 1,955 1,601 1,247
Intangibles.................... 376 441 534 1,115 1,267 1,456
Other investment............... 700 700 641 583 559 553
Deferred tax asset............. 411 401 499 175 305 -
Income tax recoverable......... 99 1,073 - 168 - -
Other assets................... 186 302 372 311 315 354
Total assets................... $ 24,924 $ 29,178 $ 28,894 $ 25,369 $ 22,538 $ 17,265
As of As of December 31,
September 30, ---------------------------------------------------------------
2003 2002 2001 2000 1999 1998
-------------------------------------------------------------------------------
(In thousands)
Policy Liabilities and Accruals:
Unearned premiums.............. $ 4,313 $ 4,587 $ 5,583 $ 5,775 $ 4,844 $ 3,750
Losses and LAE................. 6,615 8,896 5,285 6,246 6,409 3,220
Derivative instruments......... 4,131 4,346 3,598 - - -
Ceded reinsurance and accounts
payable....................... 2,557 3,803 5,142 3,359 2,277 2,615
Income tax payable............. - - 113 - 35 -
Term note to affiliate......... 604 604 604 1,000 1,000 1,000
Non affiliate debt............. 401 455 652 1,103 1,281 1,331
Total liabilities.............. 18,621 22,691 20,977 17,483 15,846 11,916
Total shareholders' equity..... $ 6,303 $ 6,487 $ 7,917 $ 7,886 $ 6,692 $ 5,349
The ratio of earnings to fixed charges was (i) (4.46) and 0.07 for the
fiscal years ended December 31, 2002 and December 31, 2001, respectively, and
(ii) (0.91) for the nine months ended September 30, 2003.
The book value per share was $1.16 as of December 31, 2002 and $1.13 as of
September 30, 2003.
Pro Forma Information. The transaction will not have a material effect on
the Company's balance sheet, statement of income, earnings per share, ratio of
earnings to fix charges or book value per share.
31
FINANCIAL AND OTHER INFORMATION
The information contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002 and Quarterly Report on Form 10-Q (as
amended by Form 10-Q/A) for the quarter ended September 30, 2003, including the
financial statements contained under the caption "Selected Financial Data" on
page 10 of the Form 10-K, and in the Company's Quarterly Reports, has been filed
with the Securities and Exchange Commission and is incorporated herein by
reference. Copies of the Form 10-K and Form 10-Q/A accompany this proxy
statement. You may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that
contains information that we file electronically with the SEC.
By Order of the Board of Directors,
/s/ Joseph M. Williams
------------------------------------
Joseph M. Williams,
President and Treasurer
Tampa, Florida
32
APPENDIX A
ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
CUMBERLAND TECHNOLOGIES, INC.
Pursuant to the Florida Business Corporation Act of the State of Florida,
the undersigned, being the Chairman of the Board of Directors of Cumberland
Technologies, Inc., a Florida corporation (the "Corporation"), does hereby
execute these Articles of Amendment to the Amended and Restated Articles of
Incorporation of Cumberland Technologies, Inc., on behalf of the Corporation,
and certify as follows:
1. The name of the corporation is Cumberland Technologies, Inc. (the
"Corporation").
2. Article IV of the Corporation's Amended and Restated Articles of
Incorporation is hereby deleted in its entirety, with the following
substituted in its place:
This corporation is authorized to issue 10,000,000 shares of
Common Stock, $.15 par value, and 1,000,000 shares of Preferred
Stock, $.15 par value, with such rights and privileges as
determined by the Directors of the corporation. The Common Shares
and Preferred Shares shall be issued at such times and for such
consideration as determined by the Board of Directors of the
Corporation.
3. Upon the effectiveness of the foregoing amendment, each 150
outstanding shares of Common Stock of the Corporation, par value
$.001, shall be combined into one share of Common Stock of the
Corporation, par value $.15. Outstanding shares of Common Stock with a
par value of $.001, which would otherwise be respectively converted
into a fractional share of Common Stock of the Corporation, each with
a par value of $.15, will be cancelled, with the holders of such
shares receiving cash payment equal to $0.70 per share. The amendment
will become effective on _______, 2004.
4. The date of adoption of the resolution approving the combination of
shares of this Corporation set forth in the foregoing amendment is
March 16, 2004.
5. The foregoing amendment was required to be approved by the
shareholders of the Corporation and the number of votes cast for the
amendment by the shareholders was sufficient for approval in
accordance with Florida General Corporation Law.
IN WITNESS WHEREOF, the undersigned Chairman of the Board of Directors of
the Corporation has caused these Articles of Amendment to the Amended and
Restated Articles of Incorporation of Cumberland Technologies, Inc., as of this
____ day of __________, 2004.
CUMBERLAND TECHNOLOGIES, INC.
By:______________________________________
Francis M. Williams,
Chairman
ATTEST:
By: _______________________________
Carol Black
Secretary
[CORPORATE SEAL]
33
CUMBERLAND TECHNOLOGIES, INC.
PROXY SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF CUMBERLAND TECHNOLOGIES, INC.
The undersigned hereby appoints Joseph M. Williams as proxy, with power of
substitution, to represent the undersigned at the Special Meeting of
Shareholders of Cumberland Technologies, Inc. (the "Company"), to be held at
9:00 AM local time, on March 16, 2004, at the Company's headquarters located at
4311 W. Waters Avenue, Tampa, Florida 33614, and at any adjournments thereof, to
vote the number of shares which the undersigned would be entitled to vote if
present in person in such manner as such proxies may determine, and to vote on
the following proposals as specified below by the undersigned.
(1) Reverse Stock Split 1-for-150
_____VOTE FOR ____VOTE AGAINST ___ABSTAIN
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder. IN THE ABSENCE OF SPECIFIED DIRECTIONS,
THIS PROXY WILL BE VOTED IN FAVOR OF THE APPROVAL OF THE AMENDMENT DESCRIBED IN
THIS PROXY. The proxies are also authorized to vote in their discretion upon
such other matters as may properly come before the meeting or any adjournment
thereof, and which were not known within a reasonable time before the meeting.
If signing as attorney, administrator, executor, guardian, trustee or as a
custodian for a minor, please add your title as such. If a corporation, please
sign in full corporate name and indicate the signer's office. If a partner,
please sign in the partnership's name.
X_________________________________________________________
Printed
Name______________________________________________________
X_________________________________________________________
Printed
Name______________________________________________________
Dated
__________________________________________________________
34