SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. 1)
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 August __, 2003
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 ________ PM, local time, on August ___, 2003, 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 $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 August ___, 2003
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
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 OF 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....................................7
CONSIDERATION FOR DETERMINING CURRENT MARKET PRICE.........................11
CONSIDERATION FOR DETERMINING MINIMUM FIXED PRICE..........................12
POTENTIAL DETRIMENTS OF REVERSE STOCK SPLIT PROPOSAL TO SHAREHOLDERS;
ACCRETION IN OWNERSHIP AND CONTROL OF CERTAIN SHAREHOLDERS...............16
CONDUCT OF THE COMPANY'S BUSINESS AFTER REVERSE STOCK SPLIT................16
STRUCTURE OF REVERSE STOCK SPLIT...........................................16
CERTAIN EFFECTS OF REVERSE STOCK SPLIT PROPOSAL ON THE
COMPANY'S SHAREHOLDERS...................................................17
INTERESTS OF CERTAIN PERSONS IN THE PROPOSED TRANSACTION...................18
MATERIAL FEDERAL INCOME TAX CONSEQUENCES...................................19
APPRAISAL RIGHTS; ESCHEAT LAWS.............................................20
INTENTION TO TERMINATE PUBLIC REGISTRATION.................................20
MANAGEMENT....................................................................21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................23
CERTAIN MARKET INFORMATION....................................................25
DIVIDENDS.....................................................................25
SHAREHOLDER PROPOSALS.........................................................26
SELECTED FINANCIAL DATA.......................................................26
FINANCIAL AND OTHER INFORMATION...............................................28
APPENDIX A ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF CUMBERLAND TECHNOLOGIES, INC.........29
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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 __________ PM, local time, on August__,
2003 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 August __, 2003. 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 August __, 2003 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 2,729,416 shares, or
48.8%, 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 4,452,706 shares, or 79.6%, 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 "Summary of Reverse Stock
Split Proposal."
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
captions "Required Vote" and "Summary of Reverse Stock Split
Proposal."
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 (10) business days following the
proposal's approval at the Special Meeting. See also the information
under the caption "Summary of Reverse Stock Split Proposal."
o Once the reverse stock split becomes effective, you will receive one
new share of common stock for each 150 shares of the common stock that
you may own at that time.
o For those who hold less than 150 shares or those who do not hold
shares in an even multiple of 150 of either class, you will receive a
cash payment for those shares which would otherwise be converted into
a fraction of a share of the new stock. See also the information under
the caption "Summary of Reverse Stock Split Proposal."
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.
Shareholders holding common stock in street Nominees (such as a bank or broker) may have
name through a nominee, such as a bank or broker. required procedures, and the Company shareholder
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 Bulleting Board, and there will be no active trading
market for the shares.
In lieu of the issuance of any fractional shares, the Company will pay
$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
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consideration will not be less than the $0.70 per share Minimum Fixed Price.
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 new 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 of Fractional Shares"
contained in this Proxy Statement).
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 new share.
EXCHANGE OF STOCK CERTIFICATES AND PAYMENT OF 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-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-split common stock and/or the cash
payment for those shares. You should not submit any certificates until requested
to do so. The post-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 only have the right to receive the cash payment cash 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 new 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 affect 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 $.21 on July 31, 2003).
The Company's common stock was delisted from the NASDAQ SmallCap Market in
July 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 met in November 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. After evaluating updated financial results and analysis by
management, the Board decided to increase the Minimum Fixed Price to $0.70.
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 1934 Securities Exchange Act (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.
Another intended effect of the Reverse Stock Split is to 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 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 218 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. 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, are estimated at approximately $150,000 annually. This amount,
however, is just an estimate, and the actual savings to be realized may be
higher or lower than such estimate. It is expected that the majority of the
estimated savings will be not be realized until the fiscal year ending December
31, 2004.
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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
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 as 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-split common stock. The Board also
believes that the process by which the Reverse Stock Split is to be approved is
also fair. Francis M. Williams, individually, believes that the Reverse Stock
Split is fair to the shareholders of the Company, including unaffiliated
shareholders, 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 2002, 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. The Board is responsible for determining the fairness of the Reverse
Stock Split to the shareholders. In accordance with Section 607.0830 of the
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Florida Statues, the directors have relied in good faith upon the Management
Report and the Supplement to assist it in making that determination. The Board
also reviewed comparable transactions conducted by other companies, and 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,
>> 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 reviewing the historical financial information in the Company, the Board
noted that the Company's financial performance has deteriorated significantly
over the past several quarters. The Company's loss reserves and liability for
derivative instruments have increased significantly due to higher losses in its
insurance portfolios. The Board concluded that the Company's financial
performance would make it difficult to market the Company as a business unit.
8
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. 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.
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 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 $60,000. 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.
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 $.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.)
9
The Reverse Stock Split will not change the rights, preferences or
limitations of unaffiliated shareholders, with the exception of the Small
Shareholders.
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
$.30 per share and the lowest closing price during such period was $.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 not
economically feasible any longer. 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 numbers 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 .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 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 certain minority shareholders should
the Company, as expected, cease public registration of the common
stock;
10
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 publicly registered. 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 the Reverse Stock Split is also substantively fair
because the Board 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 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 adopted those conclusions in determining that the Reverse Stock Split
is procedurally and substantively fair to the shareholders.
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 July 31, 2003 it would be $0.19. 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,
and (ii) the average of bid and asked prices of common stock for the 20 trading
days immediately preceding the meeting date.
11
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 other transactions by other publicly traded companies, management
informed the Board that five to ten trading days is the typical period used to
minimize temporary fluctuations in pricing which do not reflect the true market
valuation of the stock. 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 $.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 for the past nine months
of approximately $2.4 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. 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
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
12
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
=====
Net book value - As of September 30, 2002, Cumberland 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, Cumberland had a
net book value of $6,319,967. The net book value per share as of that date was
$1.13.
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. The Company has
intangible 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 $690,284. The resulting discounted book value per share as of
March 31, 2003 was $.93.
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. Of the remaining five, management determined that the
price to sales ratio and the price to book ratio of the comparable entities
provided a meaningful valuation factor. After applying the price to book ratio,
13
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.
Liquidation Value. In consideration of the minimum 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.
The Board considered and adopted management's analysis and decided not to
consider liquidation value in its determination of the minimum price.
Going Concern Value. As a separate analysis, management performed a
separate Discounted Cash Flow, or Going Concern, analysis. 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. This
yielded per share values of $.76, $.65 and $.61, respectively. The Board
reviewed these calculations and determined that they were not inconsistent with
the $.70 Minimum Fixed Price based upon the Supplement.
Reconciliation of Board's determination on minimum fixed price - After the
assessment of the Board and the review of the market price, book value,
discounted book value, and comparative company value, the Board determined that
there was no one factor that should be more significant than the others in the
assessment and determination of the fair value for purposes of the odd-lot
shareholders. As a result, the Board made a determination that what was fair was
the average of the valuation methods applied. As of December 2002, this average
is the sum of market price ($.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 that this value be increased to $.70, and
the Board adopted this recommendation.
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.
14
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, 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.
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. 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. The Board
ultimately determined that the Reverse Stock Split proposal was the preferred
method.
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 new 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."
15
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 new
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 shareholders
who are not cashed out in the Reverse Stock Split will lose the benefits of
financial transparency associated with SEC reporting companies. 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.
If the Reverse Stock Split proposal is effected, the Company believes that
218 Registered Shareholders of new 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
86.9% of the common stock will own approximately 87.3% of the new 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 69.6% to 70.7% of
the outstanding common stock.
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 new 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
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 new common stock. After the reverse split, you
will have no further interest in the new 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
16
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 new
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 new 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 new
common stock or the cash payment, as applicable, will be administered in
accordance with the relevant abandoned property laws. Until new 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.
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-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 - $35,000; 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. We will use
the Company's cash-on-hand and investments as the sole source of funds for the
expenditures 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 39,435 218
17
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. Securities Laws Relating to the Post-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-split common stock to be
issued and exchanged pursuant to the Reverse Stock Split proposal. Instead, the
post-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-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-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.
5. Termination of 1934 Act Registration of common stock. The Reverse Stock
Split proposal will affect the public registration of the new 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-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:
18
Percentage Ownership
--------------------------------------
Pre-Split Post-Split
---------------- ------------------
Francis M. Williams 69.6% 70.7%
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
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 new 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 new
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 new 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 new
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.
19
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.
INTENTION TO TERMINATE PUBLIC REGISTRATION
The Company intends to terminate public registration of the new 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.
20
MANAGEMENT
The current directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Francis M. Williams 60 Chairman of the Board of Directors
Joseph M. Williams 45 President and Treasurer
Andrew J. Cohen 48 Director
R. Donald Finn 58 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 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 & Surety since 1988. He held the position of
President of Cumberland Casualty & Surety from 1991 through August of 1996. From
1989 through 1990 he held the position of Secretary and Treasurer of Cumberland
Casualty & Surety 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.
21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and its subsidiaries have entered into transactions with
Kimmins and companies affiliated through common ownership. Cumberland Casualty
writes surety bonds for Kimmins and its affiliates. Qualex Consulting Group,
Inc., a subsidiary of the Company, performs consulting services for Kimmins and
affiliates. Other income from affiliates in the accompanying consolidated
statements of operations consist primarily of consulting services provided to
Kimmins.
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 consulting services for Kimmins and affiliates.
Revenue attributable to transaction with affiliates were $16,586, $121,089 and
$171,292 for years ended December 31, 2002, 2001 and 2000, respectively.
22
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 Cumberland on June 30, 2003,
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 SHARES PERCENTAGE OF
OF CUMBERLAND STOCK OUTSTANDING SHARES
BENEFICIAL OWNER (1)(2) BENEFICIALLY OWNED OF CUMBERLAND STOCK
----------------------- ------------------ -------------------
Francis M. Williams
c/o Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605................. 3,897,145 (3) 69.6%
Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605................. 1,723,290 30.8%
Joseph M. Williams.................... 360,493 (4) 6.4%
Andrew J. Cohen....................... 47,590 (5) *
R. Donald Finn........................ 7,131 (6) *
All current Directors and Executive
Officers as a group (4 persons)....... 4,886,213 (7) 87.3%
* Ownership represents less than 1% of outstanding Cumberland common stock.
(1) The address of all Officers and Directors of Cumberland listed above,
unless listed separately, are in care of Cumberland at 4311 West Waters
Avenue, Suite 401, Tampa, Florida 33614.
(2) Cumberland 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; 1,149,434 shares
allocated to Mr. Williams based on his 66.7% ownership of 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) 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
23
held by the ESOP, of which Mr. Williams is a trustee; Mr. Williams
disclaims beneficial ownership of these shares.
(5) 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.
(6) Includes 2,131 shares owned by R. Donald Finn; and options to acquire 5,000
shares of Cumberland common stock.
(7) Includes 1,723,290 shares held by Kimmins and options to acquire 30,000
shares of Cumberland common stock.
Upon completion of the Reverse Stock Split, the beneficial ownership of
these persons will be as follows:
PERCENTAGE OF
NUMBER OF SHARES OF OUTSTANDING
CUMBERLAND STOCK SHARES OF
BENEFICIAL OWNER (1)(2) BENEFICIALLY OWNED CUMBERLAND STOCK
----------------------- ------------------ ----------------
Francis M. Williams
c/o Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605............... 25,980 70.7%
Kimmins Corp.
1501 2nd Avenue
Tampa, Florida 33605............... 11,488 31.3%
Joseph M. Williams.................. 2,269 6.5%
Andrew J. Cohen..................... 316 *
R. Donald Finn...................... 47 *
All current Directors and Executive
Officers as a group (4 persons)..... 32,570 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
24
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
As of June 30, 2003, 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 & Surety 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 & Surety 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 & Surety
obtains prior approval from the insurance commissioner. Cumberland Casualty &
Surety does not anticipate paying any dividends on Cumberland Casualty & Surety
common stock in the near future.
25
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.
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-K for the year ended December 31, 2002, copies of which
are mailed with this proxy statement.
Three Months Year Ended December 31,
Ended --------------------------------------------------------------------
March 31, 2003 2002 2001 2000 1999 1998
--------------------------------------------------------------------
(In Thousands - except per share data)
Statement of Operations Data:
Net premium income............. $ 2,236 $ 13,432 $ 13,641 $ 12,128 $ 9,618 $ 7,534
Net investment income.......... 87 486 605 576 333 377
Net realized capital gains 7 66 306 38 129 (437)
(losses)....................
Commission and other income.... 561 2,256 1,909 1,683 1,375 1,537
Total revenue............... 2,890 16,241 16,461 14,425 11,455 9,011
Benefits and expenses.......... 3,136 18,660 16,034 12,416 10,056 9,214
Impairment of long-lived assets - - 437 - - -
Interest expense............... 12 62 166 203 214 118
Income (loss) from continuing
operations before
extraordinary item.......... (258) 2,481 (176) 1,806 1,185 (321)
Income tax (benefit) expense... (97) 912 (76) 764 37 -
Extraordinary gain on
restructuring of note, net
of tax...................... - - 158 - - -
Net income (loss).............. (171) (1,569) 58 1,042 1,148 (321)
Income (loss) per common share -
diluted ....................... $ (0.03) $ (0.28) $ 0.01 $ 0.19 $ 0.21 $ (0.06)
As of December 31,
As of March 31, --------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
--------------------------------------------------------------------
(In Thousands)
Assets Balance Sheet Data:
Investments.................... $ 7,770 $ 9,269 $ 10,815 $ 9,955 $ 8,394 $ 3,987
Cash and cash equivalents...... - 593 2,654 694 2,000 4,202
Accrued investment income...... 105 124 154 185 66 55
Accounts receivable............ 2,254 2,518 4,687 4,258 3,301 3,105
Reinsurance recoverable........ 11,660 12,089 6,634 5,970 4,730 2,306
Deferred policy acquisition
costs....................... 1,594 1,665 1,904 1,955 1,601 1,247
Intangibles.................... 267 441 534 1,115 1,267 1,456
Other investment............... 691 700 641 583 559 553
Deferred tax asset............. 472 401 499 175 305 -
Income tax recoverable......... 1,008 1,073 - 168 - -
Other assets................... 243 302 372 311 315 354
Total assets................... $ 26,217 $ 29,178 $ 28,894 $ 25,369 $ 22,538 $ 17,265
26
As of December 31,
As of March 31, --------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
--------------------------------------------------------------------
(In Thousands)
Policy Liabilities and Accruals:
Unearned premiums.............. $ 4,289 $ 4,587 $ 5,583 $ 5,775 $ 4,844 $ 3,750
Losses and LAE................. 7,078 8,896 5,285 6,246 6,409 3,220
Derivative instruments......... 4,382 4,346 3,598 - - -
Ceded reinsurance and accounts
payable..................... 3,106 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............. 437 455 652 1,103 1,281 1,331
Total liabilities.............. 19,987 22,691 20,977 17,483 15,846 11,916
Total shareholders' equity..... $ 6,320 $ 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) (2.47) for the fiscal quarter ended March 31, 2003.
The book value per share was $1.16 as of December 31, 2002 and $1.13 as of
March 31, 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.
27
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 for
the quarter ended March 31, 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 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
28
APPENDIX A
ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
CUMBERLAND TECHNOLOGIES, INC.
Pursuant to General Corporation Law 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, (i) 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
such share's fair value as determined in the good faith judgment of the
Corporation's Board of Directors.
4. The date of adoption of the resolution approving the combination of
shares of this Corporation set forth in the foregoing amendment is August
___, 2003.
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 cause these Articles of Amendment to the Amended and
Restated Articles of Incorporation of Cumberland Technologies, Inc., as of this
____ day of _______________.
CUMBERLAND TECHNOLOGIES, INC.
By:______________________________________
Francis M. Williams,
Chairman
ATTEST:
By:_______________________________
Carol Black
Secretary [CORPORATE SEAL]
29
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
__________ p.m., local time, on August __, 2003, 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
____________________________________________
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