OLSHAN
OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP
PARK AVENUE TOWER
65 EAST 55TH STREET
NEW YORK, NEW YORK 10022
TELEPHONE: 212.451.2300
August 31, 2005 FACSIMILE: 212.451.2222
WWW.OLSHANLAW.COM
DIRECT DIAL: 212-451-2232
EMAIL: JATKINS@OLSHANLAW.COM
VIA FACSIMILE
- -------------
Ms. Cheryl Grant
Mail Stop 0407 (1 Station Place)
450 Fifth St., N.W.
Washington, D.C. 20549
Facsimile No. (202) 772-9205
RE: LYNCH INTERACTIVE CORPORATION
AMENDED PRELIMINARY PROXY MATERIALS
Dear Ms. Anderson:
We are securities counsel to Lynch Interactive Corporation (the
"Company") and are submitting, on behalf of the Company, its responses to oral
comments we received from the Securities and Exchange Commission (the
"Commission") in a telephone conversation with you on August 26, 2005, relating
to the filing of the Company's amended preliminary proxy materials. Pursuant to
our telephone conversation with you, we are attaching only the relevant pages of
the Company's amended preliminary proxy statement (the "Amended Preliminary
Proxy Statement") as indicated below, marked to show changes from the last draft
that we filed on August 19, 2005 where applicable.
SCHEDULE 14A
------------
1. PLEASE SUBMIT THE PERFORMANCE GRAPH REQUIRED BY ITEM 402(E) OF
REGULATION S-K PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "ACT").
NEW JERSEY OFFICE
2001 ROUTE 46 / SUITE 202
PARSIPPANY, NEW JERSEY 07054
TELEPHONE: 973.335.7400
FACSIMILE: 973.335.8018
August 31, 2005
Page 2
This information appears in the clean Amended Preliminary Proxy
Statement; the relevant page of the clean version is attached hereto.
2. THERE ARE A FEW INSTANCES IN THE AMENDED PRELIMINARY PROXY STATEMENT
WHERE DISCLOSURES ARE MADE AS OF MARCH 31, 2005. PLEASE UPDATE ALL
SUCH DISCLOSURES TO REFLECT THE INFORMATION AS OF A MORE RECENT
DATE.
The Amended Preliminary Proxy Statement has been amended to update
this information, and all marked pages reflecting these changes are
attached hereto.
3. THROUGHOUT THE DOCUMENT, YOU REFER TO CERTAIN TRANSACTIONS AS
"FAIR." PLEASE INDICATE THAT THESE TRANSACTIONS ARE "SUBSTANTIVELY
AND PROCEDURALLY FAIR."
The Amended Preliminary Proxy Statement has been amended to reflect
this requested change, and all marked pages reflecting these changes
are attached hereto.
4. THE COMMISSION IS CONCERNED THAT THE COMPANY'S DECISION TO "GO DARK"
IS MOTIVATED BY A DIP IN THE PRICE OF THE COMPANY'S COMMON STOCK,
PAR VALUE $0.0001 PER SHARE (THE "COMMON STOCK"). PLEASE ELABORATE
ON THE REASONS THAT THE COMPANY IS DECIDING TO DELIST AND DEREGISTER
THE COMMON STOCK AT THIS TIME.
As indicated in the Amended Preliminary Proxy Statement, the
Company's choice to "go dark" at this time is motivated by the
imminent applicability to the Company of Section 404 of the
Sarbanes-Oxley Act of 2002. We have highlighted the discussion of
this decision in the clean version of the Amended Preliminary Proxy
Statement and attached these pages for your reference. The Company's
decision to delist and deregister is unrelated to movements in the
price of the Common Stock.
CLOSING
We welcome a further discussion on any of our points addressed
within this response letter. I may be reached at (212) 451-2232.
Very truly yours,
/s/ Jessica L. Atkins
---------------------
Jessica L. Atkins
cc: Robert E. Dolan
John A. Cole
Paul Goldstein
David J. Adler
RESPONSE TO QUESTION #1
PERFORMANCE
PERFORMANCE GRAPH
The graph below compares the cumulative total stockholder return on
our Common Stock for the period January 1, 2000 through December 31, 2004, with
the cumulative total return over the same period on the broad market, as
measured by the American Stock Exchange Market Value Index, and on a peer group.
The peer group index is based on the total returns earned on the stock of the
publicly-traded companies included in the Media General Financial Services
database under SIC Code 4813, Telephone Communications, except Radio Telephone
(135 companies). The data presented in the graph assumes that $100 was invested
in our Common Stock and in each of the indexes on January 1, 2000 and that all
dividends were reinvested. The stock price performance shown on the following
graph is not necessarily indicative of future price performance.
[OBJECT OMITTED]
53
RESPONSES TO QUESTIONS #2 AND #3
MARKED PAGES
As of August 26, 2005 there were approximately 2,752,251 shares of
our Common Stock outstanding and approximately 889 holders of record. As of such
date, approximately 690 holders of record held fewer than 100 shares of our
Common Stock. As a result, we believe that the reverse stock split will reduce
the number of our holders of record to approximately 200, while only reducing
the number of outstanding shares to approximately 27,410 (2,741,000 on a
pre-reverse stock split basis).
EFFECTS ON STOCKHOLDERS WITH FEWER THAN 100 SHARES OF COMMON STOCK
If the reverse stock split is implemented, stockholders holding
fewer than 100 shares of our Common Stock immediately before the reverse stock
split, sometimes referred to as Cashed Out Stockholders, will:
o not receive a fractional share of Common Stock as a result of the
reverse stock split;
o receive cash equal to the fair market value of the shares of our
Common Stock they held immediately before the reverse stock split in
accordance with the procedures described in this proxy statement;
o not be required to pay any service charges or brokerage commissions
in connection with the reverse stock split;
o not receive any interest on the cash payments made as a result of
the reverse stock split; and
o have no further ownership interest in our Corporation and no further
voting rights.
Cash payments to Cashed Out Stockholders as a result of the reverse
stock split will be subject to income taxation. For a discussion of the federal
income tax consequences of the reverse stock split, please see the section of
this proxy statement entitled "Material Federal Income Tax Consequences."
If you do not currently hold at least 100 shares of Common Stock in
a single account and you want to continue to hold shares of our Common Stock
after the reverse stock split, you may do so by taking any of the following
actions:
1. Purchasing a sufficient number of additional shares of our Common
Stock in the open market or privately and having them registered in
your name and consolidated with your current record account, if you
are a record holder, or having them entered in your account with a
nominee (such as your broker or bank) in which you hold your current
shares so that you hold at least 100 shares of our Common Stock in
your account immediately before the effective time of the reverse
stock split;
2. If you hold an aggregate of 100 or more shares in two or more
accounts, consolidating your accounts so that you hold at least 100
shares of our Common Stock in one account immediately before the
effective time of the reverse stock split; or
3. Transferring your shares into an account with a broker or bank so
that the shares are held in "street name," and if the nominee holds
at least 100 shares and does not receive instructions from you to
cash out your position, your beneficial interest will continue.
15
ALTERNATIVE TRANSACTIONS CONSIDERED
In making the determination to submit the reverse stock split for
approval by our stockholders, our Board of Directors considered the feasibility
of certain other alternative transactions, as described below, each of which was
ultimately rejected because of its disadvantages:
o ISSUER TENDER OFFER. Our Board of Directors considered the
feasibility of an issuer tender offer to repurchase the shares of
our Common Stock held by our unaffiliated stockholders. A principal
disadvantage of this type of transaction relates to our ability to
secure the debt financing needed to effect a tender offer in which
there is full participation by unaffiliated stockholders. We
recently replaced our $5 million of line of credit from First
National Bank of Omaha with a $10 million line of credit from
Webster Bank, N.A. The purpose of this line of credit is to supply
us with needed working capital. Our Board does not believe, given
our leveraged capital structure, that additional debt is desirable
at this time, even if it could be obtained in amounts sufficient to
purchase the shares of every stockholder that might want to
participate. In addition, although the voluntary nature of such a
transaction is an advantage for our stockholders, we would have no
assurance that the transaction would result in a sufficient number
of shares being tendered. Finally, the going private rules regarding
the treatment of our stockholders in a tender offer, including
pro-rata acceptance of offers from our stockholders, make it
difficult to ensure that we would be able to significantly reduce
the number of holders of record to a level below 300.
o TRADITIONAL STOCK REPURCHASE PROGRAM. In September 1999, subsequent
to our spin-off from Lynch Corporation, the Board of Directors
authorized the purchase by the Corporation of up to 100,000 shares
of our Common Stock. Through January 5, 2005, when all purchases
stopped, the Corporation had purchased 72,700 shares at an average
price of $32.26 per share, with prices ranging from $20.10 on May 5,
2003 to $53.97 on January 28, 2002. Our Board of Directors
considered increasing the number of shares subject to this stock
repurchase plan. However, repurchasing enough shares in this manner
to enable us to deregister under the Exchange Act would likely take
an extended period of time, would have no assurance of success and
would be of indeterminate cost.
The Corporation was not considering going dark in September 1999
when it approved the repurchase plan and did not consider this step
until August 2004. Also, shares purchased since July 2004 were made
automatically pursuant to a non-discretionary arrangement until
January 5, 2005, when all purchases stopped.
The Corporation reserves the right to recommence purchases following
the reverse stock split under the present Board authorization and
has made no decision as to whether or not to ask the Board to
increase the number of shares authorized for purchase in the future.
o ODD-LOT REPURCHASE PROGRAM. Our Board of Directors also considered
the feasibility of a transaction in which we would announce to our
stockholders that we would repurchase, at a designated price per
share, the shares of our Common Stock held by any stockholder who
holds fewer than a specified number of shares and who offers such
shares for sale pursuant to the terms of the program. The voluntary
nature of such an approach would be an advantage for our
stockholders. However, because our stockholders would not be
required to participate in the program, we could not be certain at
the outset whether a sufficient number of odd-lot stockholders would
participate and thereby result in the number of holders of record
being reduced to below 300. In terms of timing, such a program,
especially after giving effect to any extensions of deadlines for
29
tendering into the program, would likely necessitate a longer time
frame than that of the reverse stock split.
o MAINTAINING THE STATUS QUO. Our Board of Directors also considered
maintaining the status quo. In that case, we would continue to incur
the expenses of being a public reporting company without enjoying
the benefits traditionally associated with public reporting company
status.
Expense reductions may be achievable through centralization of
various functions (e.g., accounting, receivables and payables, etc.)
and moving financing activities up to the parent level. This
approach has always been rejected in favor of a decentralized
approach which maintains autonomy for management at the
Corporation's operating subsidiaries. Both management and the Board
of Directors believe this distinguishes the Corporation from its
competitors and makes it an attractive company to sell a privately
owned business to. Despite this, the Board of Directors recently
approved a $10 million capital budget for 2005, as compared to $22
million for 2004. However, the Corporation continues to face
significant cash expenditures in defending the Taylor False Claims
Act case disclosed in the Corporation's Annual Report on Form 10-K,
which expenditures to date are approximately $5,000,000. Although we
believe that this lawsuit is completely without merit, the alleged
damages sought by plaintiff in this case are in excess of $1
billion, an indeterminate proportion of which might have to be borne
by the Company, making us an unattractive candidate for a third
party buy-out at this time.
FAIRNESS OF THE REVERSE STOCK SPLIT
Our Board of Directors has fully reviewed and considered the terms,
purpose, alternatives and effects of the reverse stock split and has unanimously
determined (including by a majority of directors who are not our employees) that
the transaction is in our best interests and is substantively and procedurally
fair to the unaffiliated stockholders.
The reverse stock split is not structured in such a way so as to
require the approval of at least a majority of our unaffiliated stockholders,
because our affiliated stockholders only own approximately 26% of our voting
securities. Despite the foregoing, our Board of Directors believes that the
reverse stock split is substantively and procedurally fair to each
differently-impacted group of stockholders - those unaffiliated stockholders who
will be cashed-out and those unaffiliated stockholders who will be Continuing
Stockholders - due to: (i) the requirement that the proposal receive a majority
vote, including a substantial portion of the unaffiliated stockholders, in order
to be approved and (ii) the ability of the unaffiliated stockholders, by taking
the steps described in the eighth and ninth questions and answers under
"Questions and Answers about the Meeting and Proposals," to switch their status
from Cashed Out Stockholder to Continuing Stockholder (or vice versa) as they
see fit. Further, Continuing Stockholders have the advantage of continuing as
stockholders in a company that will not be subject to the costs associated with
compliance with Section 404 of Sarbanes-Oxley. This savings will significantly
decrease our ongoing expenses, which will improve our liquidity.
In evaluating the fairness of the reverse stock split with respect
to the unaffiliated stockholders in particular, our Board of Directors also
noted that the transaction would not differentiate among stockholders on the
basis of affiliate status. The sole determining factor in whether a stockholder
will become a Cashed Out Stockholder or a Continuing Stockholder as a result of
the reverse stock split is the number of shares held by such stockholder
immediately before the effective time of the reverse stock split. For this
reason the Board did not consider it necessary to appoint an unaffiliated
representative to act solely on behalf of the unaffiliated stockholders in
negotiating or preparing a report on the transaction. Our Board of Directors
30
also noted that the percentage ownership of each Continuing Stockholder, whether
affiliated or unaffiliated, will be approximately the same as it was prior to
the reverse stock split.
Our Board of Directors considered the advantages and disadvantages
of the reverse stock split discussed in the sections "Advantages of the
Proposal" and "Disadvantages of the Proposal" in reaching its conclusion as to
the substantive and procedural fairness of the reverse stock split to our
unaffiliated stockholders. Our Board of Directors did not assign specific weight
to each advantage and disadvantage in a formulaic fashion, but did place special
emphasis on the opportunity for unaffiliated stockholders, if they hold fewer
than 100 shares immediately before the effective time for the reverse stock
split, to sell their holdings without brokerage fees or commissions, as well as
the significant cost and time savings for us.
In considering the formula to be used for determining the price paid
to Cashed Out Stockholders, the Board of Directors considered the going concern
value, the current market value and the historical market value of the
Corporation's Common Stock, but did not consider firm offers, because the
Corporation had received no firm offers during the past two years. The Board of
Directors also considered the opinion and report of the Corporation's financial
advisor, Caymus Partners, LLC. The Board believed that Caymus Partners'
discounted cash flow analysis presented the most accurate measure of going
concern value because such a measure attempts to value the Company, not in
comparison to other companies or transactions, but as a company that will
continue to operate. Using the discounted cash flow analysis, Caymus Partners
determined that the implied equity value per share for the Company ranged from
$24.05 to $33.96 (with a mean value of $29.00).
In addition, Caymus Partners calculated the book value per share,
$12.56 as of December 31, 2004, and the liquidation value per share, $-20.90 as
of April 20, 2005, which analysis was adopted by the Board of Directors. Caymus
Partners focused its analysis on current and historical market values, on the
values of comparable companies and transactions, and on the present discounted
value of projected cash flows of the Corporation (as described above in "Opinion
of Financial Advisor"), each of which it felt was a more accurate indicator of
going concern value than either book value per share or liquidation value per
share.
Neither the Board of Directors nor the financial advisor separately
considered prices paid by the Corporation under its stock repurchase plan,
because such prices were market prices that had already been considered
directly. However, through January 5, 2005, when all purchases stopped, the
Corporation repurchased such shares at an average price of $32.26 per share,
which is more than $3.00 per share over the $29.00 "floor" established for the
reverse stock split. This disparity is explained completely by changes in the
price of the Corporation's Common Stock on the AMEX at different times.
The Board of Directors, in developing the pricing formula to be
used, considered market prices of the Common Stock over the 12-month period
ending March 31, 2005. During that period, the market price of the Common Stock
ranged from high of $37.95 to a low of $19.25. If the reverse stock split had
taken place on January 18, 2005, the Company's stockholders would have received
$30.25 per share based on the market price of the Common Stock, a $1.25 premium
over the $29.00 per share "floor" price. However, if the reverse stock split had
taken place on March 31, 2005, stockholders would have received $24.00 per share
based on the market price of the Common Stock, a $5.00 discount from the $29.00
per share "floor" price. The Board also considered recent declines in market
prices of the Common Stock as compared to the higher prices during certain
periods of the first quarter of 2005. In an effort to take into account the
discount that the cash payable in the reverse stock split represents as compared
to the recent higher market prices, while also taking into account the general
downward trend of the Corporation's stock price, the Board of Directors settled
on a 20% premium over the 20-day average closing price formula and added a
"floor" price of $29 per share. The Board felt that such a formula provided a
31
PROPOSAL NO. 1
AMENDMENT TO
RESTATED CERTIFICATE ON INCORPORATION
TO EFFECT A REVERSE STOCK SPLIT
We are seeking approval of the reverse stock split described above.
If approved by our stockholders, and upon subsequent final action of our Board
of Directors, we will file an amendment to our Restated Certificate of
Incorporation to effect a 1-for-100 reverse stock split of our Common Stock.
The following discussion, together with the "Special Factors"
section set forth above in this proxy statement, describes in more detail the
reverse stock split.
SPECIAL INTERESTS OF AFFILIATED PERSONS IN THE TRANSACTION
In considering the recommendation of our Board of Directors with
respect to the reverse stock split, our stockholders should be aware that our
executive officers and directors have interests in the transaction, which are in
addition to, or may be different from, our stockholders generally. These
interests may create potential conflicts of interest including, but not limited
to, the significant increase in legal exposure for members of boards of
directors of public reporting companies, especially in the aftermath of recent
legislation and related regulations. While there are still significant controls,
regulations and liabilities for directors and executives officers of
unregistered companies, the legal exposure for the members of our Board of
Directors and our executive officers will be reduced after the reverse stock
split.
Each of the directors and officers has indicated to us that it will
vote its shares of our Common Stock in favor of authorizing the reverse stock
split. Such directors and officers will receive cash or not solely basis of the
number of shares held by them immediately prior to the effective time, just like
unaffiliated stockholders.
COSTS/SOURCE OF FUNDS AND EXPENSES
Based on estimates of the record ownership of shares of our Common
Stock, the number of shares outstanding and other information as of June 30,
2005, and assuming that 10,000 shares are cashed out, we estimate that the total
funds required to consummate the reverse stock split will be approximately
$512,000, of which approximately $340,000 will be used to pay the consideration
to stockholders entitled to receive cash for their shares of our Common Stock
and $172,000 will be used to pay the costs of the reverse stock split, as
follows:
Legal fees and expenses $135,000
Financial consulting 30,000
Proxy solicitation and
transfer agent fees 7,000
--------
$172,000
========
34
These expenses do not include the normal costs of conducting the
annual meeting of stockholders, because those costs would be incurred in the
normal course of business of a public reporting company.
We intend to fund these costs using cash on hand and, if necessary,
by accessing our credit line. As of June 30, 2005, the Corporation had $27.7
million in cash and cash equivalents on a consolidated basis. Much of this cash
is held at subsidiaries. In order to manage its liquidity the Corporation has
recently negotiated a $10 million, 3-year line of credit with Webster Bank,
National Association to be used for general corporate purposes. The line of
credit is unsecured, contains typical representations and covenants and provides
for interest at 1.5% above the greater of (i) Webster Bank's "prime rate" (as
defined therein) and (ii) the Federal Funds rate plus 0.5%.
FEDERAL INCOME TAX CONSEQUENCES
Summarized below are material federal income tax consequences to us
and to our stockholders resulting from the reverse stock split, if it is
consummated. This summary is based on the provisions of the Internal Revenue
Code of 1986, as amended, more commonly referred to as the Code, the Treasury
Regulations, issued pursuant thereto, and published rulings and court decisions
in effect as of the date hereof, all of which are subject to change. This
summary does not take into account possible changes in such laws or
interpretations, including amendments to the Code, other applicable statutes,
Treasury Regulations and proposed Treasury Regulations or changes in judicial or
administrative rulings; some of which may have retroactive effect. No assurance
can be given that any such changes will not adversely affect the federal income
tax consequences of the reverse stock split.
This summary does not address all aspects of the possible federal
income tax consequences of the reverse stock split and is not intended as tax
advice to any person or entity. In particular, and without limiting the
foregoing, this summary does not consider the federal income tax consequences to
our stockholders in light of their individual investment circumstances nor to
our stockholders subject to special treatment under the federal income tax laws
(for example, tax exempt entities, life insurance companies, regulated
investment companies and foreign taxpayers), or who hold, have held, or will
hold our Common Stock as part of a straddle, hedging, or conversion transaction
for federal income tax purposes. In addition, this summary does not address any
consequences of the reverse stock split under any state, local or foreign tax
laws.
We will not obtain a ruling from the Internal Revenue Service or an
opinion of counsel regarding the federal income tax consequences to our
stockholders as a result of the reverse stock split. Accordingly, you are
encouraged to consult your own tax advisor regarding the specific tax
consequences of the proposed transaction, including the application and effect
of state, local and foreign income and other tax laws.
This summary assumes that you are one of the following: (i) a
citizen or resident of the United States, (ii) a domestic corporation, (iii) an
estate the income of which is subject to United States federal income tax
regardless of its source, or (iv) a trust if a United States court can exercise
primary supervision over the trust's administration and one or more United
States persons are authorized to control all substantial decisions of the trust.
This summary also assumes that you have held and will continue to hold your
shares as capital assets for federal income tax purposes.
You should consult your tax advisor as to the particular federal,
state, local, foreign, and other tax consequences, applicable to your specific
circumstances.
35
APPRAISAL RIGHTS
Under the Delaware General Corporation Law, our Restated Certificate
of Incorporation and our Bylaws, our stockholders are not entitled to appraisal
rights. We are not aware of any similar rights available under any applicable
law, regulation, custom or contract to security holders who object to the
transaction.
VOTES REQUIRED
In order to approve the reverse stock split, stockholders holding a
majority of the shares of our Common Stock outstanding and entitled to vote at
the Annual Meeting of stockholders, voting together as a single class, must
approve the filing of the certificate of amendment to our Restated Certificate
of Incorporation to effect the reverse stock split. Following this stockholder
approval, our Board of Directors will determine when, and if, to file the
amendment with the Secretary of State of the State of Delaware. Mr. Gabelli has
indicated that he intends to vote shares beneficially owned by him in favor of
the proposal.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
Our Board of Directors has unanimously determined that the reverse
stock split is substantively and procedurally fair to, and in the best interests
of, us and our stockholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR"
THE APPROVAL AND ADOPTION OF THE CERTIFICATE OF AMENDMENT TO LYNCH INTERACTIVE'S
RESTATED CERTIFICATE OF INCORPORATION TO EFFECT THE REVERSE STOCK SPLIT.
Please note that voting "FOR" the proposal does not mean that the
reverse stock split will be consummated. By voting "FOR" the proposal, you are
giving our Board of Directors the discretion to reject (and not implement) the
reverse stock split (even after the amendment is approved by the stockholders).
If for any reason the reverse stock split is not approved, or, if approved, not
implemented, the shares of our Common Stock will not be deregistered under the
Exchange Act or delisted from the AMEX, unless and until such time as we are
eligible to do so and our Board of Directors decides to do so.
PLEASE NOTE THAT BOTH PROPOSAL NO. 1, THE REVERSE STOCK SPLIT, AND
PROPOSAL NO. 2 BELOW, THE OPTION TO REPURCHASE SHARES, MUST BOTH BE APPROVED BY
OUR STOCKHOLDERS OR NEITHER PROPOSAL WILL TAKE EFFECT.
PROPOSAL NO. 2
AMENDMENT TO
RESTATED CERTIFICATE ON INCORPORATION
TO GRANT OPTION TO REPURCHASE SHARES
In connection with the reverse stock split described above, we are
seeking approval of an amendment to our Restated Certificate of Incorporation
granting to us an option to repurchase any shares of Common Stock proposed to be
transferred if the proposed transfer would cause the number of holders of record
of our Common Stock to equal or exceed 300. The purpose of the option is to
ensure that the Corporation does not, inadvertently, become subject to federal
securities law reporting requirements and Section 404 in the future. If approved
by our stockholders, and upon subsequent final action of our Board of Directors,
38
FORM AND PAYMENT OF ANNUAL BONUS
With respect to each participant, payment under the Principal
Executive Bonus Plan will be made in cash in an amount equal to the achieved
annual bonus and may be made only after attainment of the performance goals has
been certified in writing by the subcommittee. Unless otherwise determined by
the subcommittee in its sole discretion, each participant shall, to the extent
the applicable performance goals with respect to the annual bonus pool are
attained at the end of each calendar year, have the right to receive payment of
a prorated portion of such participant's annual bonus under the Principal
Executive Bonus Plan for any calendar year during which the participant's
employment with us is terminated for any reason other than for "cause" (as
determined by the subcommittee in its sole discretion).
AMENDMENT AND TERMINATION OF PRINCIPAL EXECUTIVE BONUS PLAN
The subcommittee may at any time and from time to time alter, amend,
suspend or terminate the Principal Executive Bonus Plan in whole or in part;
provided, that no amendment shall, without the prior approval of our
stockholders to the extent required under Code Section 162(m): (i) materially
alter the performance goals, (ii) increase the maximum annual bonus for any
calendar year, (iii) change the class of persons eligible to participate in the
Principal Executive Bonus Plan, or (iv) implement any change to a provision of
the Principal Executive Bonus Plan requiring stockholder approval in order for
the Principal Executive Bonus Plan to continue to comply with the requirements
of Section 162(m) of the Code. Notwithstanding the foregoing, no amendment shall
affect adversely any of the rights of any participant, without such
participant's consent, under an award theretofore granted under the Principal
Executive Bonus Plan.
PERFORMANCE AWARDS
Mr. Gabelli, the only participant in the Principal Executive Bonus
Plan, did not receive a bonus in respect of 2004. For a description of awards
made over the last five years under the Principal Executive Bonus Plan, see
"Executive Compensation and Benefits Committee Report on Executive Compensation
- - Executive Officer Compensation Program," and " - Chief Executive Officer
Compensation."
VOTES REQUIRED
Approval of this Proposal requires the affirmative vote of a
majority of the shares of our Common Stock voting on the proposition, excluding
any abstentions. Mr. Gabelli has indicated he intends to vote the shares
beneficially owned by him in favor of the proposal.
RECOMMENDATION OF OUR BOARD OF DIRECTORS
THE BOARD OF DIRECTORS (OTHER THAN MR. GABELLI, WHO IS MAKING NO
RECOMMENDATION) RECOMMENDS A VOTE "FOR" THE RE-APPROVAL OF THE PRINCIPAL
EXECUTIVE BONUS PLAN.
MARKET RELATED INFORMATION
MARKET FOR COMMON STOCK
Our Common Stock currently trades on the AMEX under the symbol
"LIC". On August 26, 2005, the most recent practicable date prior to the
printing of this proxy statement, the closing price for our Common Stock was
$25.55 per share, and there were 889 stockholders of record. The following table
lists the high and low sales prices of our Common Stock for the periods
indicated below.
42
Period High Low
------ ---- ---
Fiscal Year Ended December 31, 2003
1st Quarter $28.00 $21.50
2nd Quarter 24.80 19.50
3rd Quarter 27.75 23.95
4th Quarter 27.41 21.80
Fiscal Year Ended December 31, 2004
1st Quarter $27.50 $21.50
2nd Quarter 37.95 28.00
3rd Quarter 36.50 29.50
4th Quarter 34.75 30.45
Fiscal Year Ending December 31, 2005
1st Quarter $31.99 $19.25
2nd Quarter $30.75 $20.25
3rd Quarter (through August 26,
2005) $26.00 $22.00
DIVIDEND POLICY
We have not paid cash dividends on our Common Stock since our
inception and intend to continue to retain earnings for operations.
PROPOSAL NO. 4
ELECTION OF DIRECTORS
Upon the recommendation of our nominating committee, our Board of
Directors has nominated Morris Berkowitz, Paul J. Evanson, John C. Ferrara,
Mario J. Gabelli, Daniel R. Lee, Lawrence R. Moats and Salvatore Muoio to be
elected at the 2005 Annual Meeting as members of our Board of Directors, to
serve until the next Annual Meeting and until their respective successors are
elected. If for any reason any nominee does not stand for election, the proxies
solicited by this proxy statement will be voted in favor of the remainder of
those named and may be voted for a substitute nominee in place of such nominee.
Our management, however, has no reason to expect that any of the nominees will
not stand for election.
Our Bylaws provide that our Board of Directors shall consist of no
less than two and no more than nine members and that any vacancies on our Board
of Directors, from whatever cause arising, including newly-created
directorships, may be filled by the remaining directors until the next meeting
of our stockholders.
Biographical summaries and ages of the nominees as of June 30, 2005,
are set forth below. Data with respect to the number of shares of our Common
Stock beneficially owned by each of them appears elsewhere in this proxy
statement. All such information has been furnished to us by the nominees.
Director
Nominee Age Professional Background
------- --- -----------------------
43
discretion of the committee to award annual bonuses above the established
maximum annual bonus. The Principal Executive Bonus Plan is designed to satisfy
an exemption from Section 162(m) of the Code, which denies a deduction by an
employer for certain compensation in excess of $1,000,000 per year. In 2002,
from the annual bonus pool of $310,000, Mr. Gabelli was awarded a bonus of
$195,000. In 2003, from the annual bonus pool of $1,600,000 Mr. Gabelli was paid
a bonus of $850,000. In 2004, from an annual bonus pool of $265,000, Mr. Gabelli
was paid no bonus.
LYNCH INTERACTIVE CORPORATION 401(K) SAVINGS PLAN
All our employees are eligible to participate in our 401(k) Savings
Plan, after having completed one year of service and having reached the age of
18.
Our 401(k) Savings Plan permits employees to make contributions by
deferring a portion of their compensation. We may make discretionary
contributions to our 401(k) Savings Plan accounts of participating employees. A
participant's interest in both employee and employer contributions and earnings
thereupon are fully vested at all times.
Employee and employer contributions are invested in certain mutual
funds or our Common Stock, as determined by the participants. With respect to
the individuals listed in the Summary Compensation Table, each of Messrs.
Gabelli and Dolan deferred $12,000 under the 401(k) Savings Plan during 2004,
which amounts have been included for each individual in the Summary Compensation
Table.
BENEFITS
We provide medical, life insurance and disability benefits to the
executive officers that are generally available to all of our employees. The
amount of perquisites, as determined in accordance with the rules of the SEC
relating to executive compensation, did not exceed 10% of salary and bonus for
2004.
CHIEF EXECUTIVE OFFICER COMPENSATION
The following table sets forth compensation received by Mr. Gabelli
for the last five years, for serving as our Chief Executive Officer:
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Salary $350,000 $350,000 $350,000 $250,000 $350,000
Bonus $ 0 $ 0 $195,000 $850,000 $ 0
Mr. Gabelli performs the usual functions of a chief executive
officer and is particularly involved in the development of acquisition,
investment and financial strategies. The compensation committee considers a
number of factors in determining the compensation of the Chief Executive
Officer, including our size and scope, the role of leadership, particularly that
of Mr. Gabelli, in developing existing businesses and in making strategic
acquisitions, our financial performance as reflected by the increase in our
internally estimated private market value as well as our public market value,
and return on stockholders' equity. Effective in 2000, Mr. Gabelli's prior
$500,000 salary was reduced to $350,000, in connection with our spin off from
Lynch Corporation, with no raise until 2004. Following Mr. Gabelli's resignation
as Chairman and his appointment as Vice Chairman, effective January 1, 2003, Mr.
Gabelli's salary was reduced to $250,000. In 2003, based on the formula set
51
forth in the Principal Executive Bonus Plan, the annual bonus pool was
$1,600,000, with the maximum bonus payable to Mr. Gabelli not to exceed 80% of
the annual bonus pool. The compensation committee, which has the discretion to
reduce the bonus payable to Mr. Gabelli, approved a bonus of $850,000,
representing approximately 53.1% of the annual bonus pool, to be paid to Mr.
Gabelli. In 2004, Mr. Gabelli's salary was increased to $350,000 following his
resumption of his Chief Executive Officer duties, but he was awarded no bonus in
respect of 2004.
Morris Berkowitz (Member)
Paul J. Evanson (Member)
Lawrence R. Moats (Member)
John C. Ferrara (Retired Member)
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of August 29, 2005, the most
recent practicable date, certain information with respect to all persons known
to us to each beneficially own more than 5% of our shares of Common Stock, which
is our only class of voting stock outstanding. The table also sets forth
information with respect to our Common Stock beneficially owned by the
directors, by each nominee for director, by each of the executive officers named
in the Summary Compensation Table, and by all directors, nominees for director
and executive officers as a group. The number of shares beneficially owned is
determined under 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 a person has the sole or
shared voting or investment power or any shares that the person can acquire
within 60 days, such as through exercise of stock options or conversions of
securities. Except as otherwise indicated, our stockholders listed in the table
have sole voting and investment powers with respect to the Common Stock set
forth in the table. The following information is either reflected in filings
with the SEC or has otherwise been furnished to us by persons named in the
table. Unless otherwise indicated, the address of each entity listed in the
table is c/o 401 Theodore Fremd Avenue, Rye, New York 10580.
Name of Amount and Nature Percent
Beneficial Owner Of Beneficial Ownership Of Class
- ---------------- ----------------------- --------
Kinetics Asset Management, Inc. .................
470 Park Avenue South
New York, New York 10016 ........................ 209,000(1) 7.6%
MJG-IV Limited Partnership ...................... 620,000(2) 22.5%
Mario J. Gabelli ................................ 658,583(2)(3) 23.9%
Morris Berkowitz ................................ 504 *
Paul J. Evanson ................................. 11,304 *
John C. Ferrara ................................. 2,828 *
Daniel R. Lee ................................... 0 0
Lawrence R. Moats ............................... 27,700(4) 1.0%
Salvatore Muoio ................................. 16,004(5) *
Robert E. Dolan ................................. 960(6) *
Evelyn C. Jerden ................................ 105 *
John A. Cole .................................... 0 0
All directors and named executive officers
as a group (10 persons) ..................... 717,988 26.1%
52
Based on the foregoing reviews and discussions, the audit committee
recommended to our Board of Directors that our 2004 audited financial statements
be included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2004.
Morris Berkowitz (Member)
Lawrence R. Moats (Chairman)
Salvatore Muoio (Member)
John C. Ferrara (Retired Chairman and Member)
PROPOSALS OF STOCKHOLDERS
If our Exchange Act registration is not terminated in connection
with the reverse stock split, proposals of stockholders intended to be presented
at our 2006 Annual Meeting must be received by the Corporate Secretary, Lynch
Interactive Corporation, 401 Theodore Fremd Avenue, Rye, NY 10580, no later than
December 15, 2005, for inclusion in our proxy statement and form of proxy
relating to that meeting.
MISCELLANEOUS
Our Board of Directors knows of no other matters that are likely to
come before the Annual Meeting. If any other matters should properly come before
the Annual Meeting, it is the intention of the persons named in the accompanying
form of proxy to vote on such matters in accordance with their best judgment.
ANNUAL REPORT
Our Annual Report for the fiscal year ended December 31, 2004, on
Form 10-K/A, has been sent to each stockholder. The Form 10-K/A was amended on
or about August 31, 2005. The Form-10-K/A, as amended and the Form 10-Q for the
quarter ended June 30, 2005 are incorporated herein by reference.
58
RESPONSE TO QUESTION #4
HIGHLIGHTED INFORMATION REGARDING
REASONS FOR DELISTING AND DEREGISTERING
of $_____ per share for each share held on such date. Stockholders
who own 100 or more shares of our Common Stock at the effective time
of the reverse stock split will remain stockholders, will continue
to hold whole and fractional shares, and will not be entitled to
receive any cash for their fractional share interests resulting from
the reverse stock split.
o The amendment to our Restated Certificate of Incorporation that
would effect the 1-for-100 reverse split, a form of which is
attached as Exhibit A, would also include a standing option for us
to repurchase any shares of Common Stock proposed to be transferred
by a remaining stockholder if after such proposed transfer the
number of holders of record of our Common Stock would equal or
exceed 300. The price to be paid for the shares purchased upon
exercise of this option would be equal to (i) the mean between the
bid and asked prices (as published in the pink sheets) averaged over
the 20 trading days on which the shares of Common Stock were
actually quoted immediately preceding the date of exercise of the
option or (ii) if the Common Stock is not then quoted in the pink
sheets, or if such determination cannot otherwise be made, the fair
market value of such shares as determined in good faith by our Board
of Directors.
* * *
o If consummated, the reverse stock split would be part of a "going
dark" plan. Following the reverse stock split, we would have fewer
than 300 holders of record and we would delist our Common Stock from
the American Stock Exchange (the "AMEX"). We would also terminate
the registration of our Common Stock under the Securities Exchange
Act of 1934 (the "Exchange Act"). We would "go dark," I.E., become a
---- non-reporting company for purposes of the Exchange Act. This
will eliminate the significant expense required to comply with
public reporting and related requirements including, but not limited
to, those of the Sarbanes-Oxley Act of 2002. Our Board of Directors
has concluded that the cost associated with being a reporting
company is not justified by its benefits in view of the limited
trading activity in our Common Stock, and has determined that the
reverse stock split is fair to and in the best interests of our
stockholders, including our unaffiliated stockholders. See also the
information in the sections "Recommendation of Our Board of
Directors" and "Fairness of the Reverse Stock Split."
* * *
o Subsequent to the reverse split, our shares may be quoted in the
"pink sheets," but initially at a price approximately 100 times
their current price on the AMEX. In addition, the spread between the
bid and asked prices of our Common Stock in the pink sheets may be
wider than on the AMEX and the liquidity of our shares may be
reduced. In order to facilitate future quotation of our Common Stock
in the pink sheets and to eliminate any then existing fractional
shares, at some time after the reverse stock is completed, we may
effect a forward stock split.
o If we "go dark," we intend voluntarily to disseminate press
releases, quarterly financial statements and audited annual
financial statements to our stockholders and the investment
community generally to facilitate quotation of our shares in the
pink sheets.
o The members of our Board of Directors, including Mario J. Gabelli
(who may be deemed to be a controlling stockholder of ours), have
indicated that they intend to vote, or cause to be voted, the shares
of our Common Stock that they directly or indirectly control in
favor of the reverse stock split. The shares of our Common Stock
beneficially owned by directors represent approximately 26% of our
outstanding voting securities.
o The reverse stock split is not expected to affect our current
business plan or operations, except for the anticipated cost and
management time savings associated with termination of our
2
QUESTIONS AND ANSWERS ABOUT THE MEETING AND THE PROPOSALS
Q: WHAT IS THE TIME AND PLACE OF THE ANNUAL MEETING?
A: The Annual Meeting will be held at __________________, Greenwich,
Connecticut, on ______, ___, 2005, at 8:30 a.m. Eastern time.
Q: WHAT PROPOSALS WILL BE VOTED ON AT THE ANNUAL MEETING?
A: You are being asked to vote on the approval of a proposed amendment
to our Restated Certificate of Incorporation that will provide for a 1-for-100
reverse stock split and to vote on the approval of a proposed amendment to our
Restated Certificate of Incorporation that will grant to the Company the right
of first refusal option subsequent to the reverse stock split. You are also
being asked to re-approve the Principal Executive Bonus Plan, which was first
approved in 2000, to elect seven directors, to adjourn the meeting if necessary
to solicit additional proxies, and to transact such other business as may
properly come before the meeting.
* * *
Q: WHAT DOES IT MEAN TO "GO DARK" AND WHAT ARE ITS BENEFITS?
A: If the reverse stock split is consummated, we would have fewer than
300 holders of record, and we would be eligible to delist from the AMEX and to
terminate the registration of our Common Stock under the Exchange Act, so that,
among other things, we would not have to comply with the requirements of the
Sarbanes-Oxley Act of 2002. Additionally, the shares of our Common Stock would
trade, if at all, only in the pink sheets or in privately negotiated sales. If
we delist and deregister our Common Stock, we currently intend voluntarily to
disseminate press releases, quarterly financial statements and audited annual
financial statements to our stockholders and the investment community generally.
The benefits of delisting and deregistering include:
o Eliminating the costs associated with filing documents under the
Exchange Act with the SEC;
o Eliminating the costs of compliance with Sarbanes-Oxley and related
regulations;
o Reducing the direct and indirect costs of administering our
stockholder accounts and responding to stockholder requests;
o Affording our stockholders who hold fewer than 100 shares
immediately before the reverse stock split the opportunity to
receive cash for their shares without having to pay brokerage
commissions and other transaction costs; and
o Permitting our management to focus its time and resources on our
long-term business goals and objectives.
* * *
Q: WHAT ARE THE DISADVANTAGES TO "GOING DARK"?
A: Some of the disadvantages include:
o Stockholders owning fewer than 100 shares of our Common Stock
immediately before the reverse stock split will not have an
opportunity to liquidate their shares after the reverse stock split
at a time and for a price of their own choosing; instead, they will
be cashed out and will no longer be our stockholders and will not
have the opportunity to participate in or benefit from any future
potential appreciation in our value.
o Stockholders who will continue to be our stockholders following the
reverse stock split will no longer have available all of the
information regarding our operations and results that is currently
available in our filings with the SEC, although, as indicated above,
we currently intend to continue voluntarily to disseminate press
releases, quarterly and audited annual financial statements; we will
no longer be subject to the liability provisions of the Exchange
Act; we will no longer be subject to the provisions of
Sarbanes-Oxley, including those requiring our officers to certify
the accuracy of our financial statements;
4
o Our stockholders following the reverse stock split will no longer be
able to trade our securities on the AMEX, but only in the pink
sheets or in privately negotiated transactions, the effect of which
may be a significant reduction in liquidity;
o We may have less flexibility in attracting and retaining executives
and other employees because equity-based incentives (such as stock
options, if we ever choose to use them) tend not to be viewed as
having the same value in a non-reporting company; and
o We will be less likely to be able to use shares of our Common Stock
to acquire other companies.
See "Fairness of the Reverse Stock Split."
Q: IS THERE A METHOD TO PREVENT THE NUMBER OF HOLDERS OF RECORD FROM
REACHING 500, THEREBY MAKING US A REPORTING COMPANY AGAIN?
A: We need to be able to keep the number of holders of record of our
Common Stock below 500 in order to avoid re-registering under the Exchange Act,
filing public reports and complying with Sarbanes-Oxley. Therefore, the
amendment to our Restated Certificate of Incorporation that would effect the
1-for-100 reverse stock split would also include a standing option for us to
repurchase any shares of Common Stock proposed to be transferred by a remaining
stockholder if, after such proposed transfer the number of holders of record of
our Common Stock would equal or exceed 300. The price to be paid for the shares
pursuant to this option would be equal to (i) the mean between the bid and asked
prices (as published in the pink sheets) averaged over the 20 trading days
immediately preceding the date of exercise of the option on which the shares of
Common Stock were actually traded or (ii) if the Common Stock is not then traded
in the pink sheets, or if such determination can not otherwise be made, the fair
market value for such shares as determined by our Board of Directors in good
faith.
* * *
Q: LYNCH INTERACTIVE HAS BEEN PUBLICLY HELD SINCE 1999; WHAT ARE SOME
OF THE REASONS FOR DELISTING AND DEREGISTERING NOW?
A: Our Board of Directors believes that we currently derive no material
benefit from our status as a public reporting company. The low trading volume in
our Common Stock has not provided significant liquidity to our stockholders. Our
Board of Directors does not expect that we will use our shares of Common Stock
as consideration for acquisitions or other transactions in the foreseeable
future and we have no present intention of raising capital through a public
offering. Finally, the low trading volume in our Common Stock results in
substantial spikes in the trading price when actual trades are made on the AMEX.
The costs of remaining a public company (principally compliance with section 404
of Sarbanes-Oxley) will be substantial for the Corporation. See "Background of
the Proposal."
* * *
Q: AS A STOCKHOLDER, WHAT WILL I RECEIVE IN THE TRANSACTION?
A: If the reverse stock split is consummated and if you own fewer than
100 shares of our Common Stock immediately before the effective time of the
reverse stock split, you will receive cash equal to the fair market value,
without interest, of the shares of Common Stock that you own and you will cease
to be our stockholder. The fair market value to be received for fractional
shares will be equal to the greater of (i) $29.00 per share and (ii) 120% of the
average of the closing price per share of our Common Stock on the AMEX over the
20 trading days immediately preceding the Effective Date on which the shares of
Common Stock were actually traded. As our Board of Directors has retained the
authority to determine when, and if, to consummate the transaction, the exact
amount of cash you would receive will depend on the selected Effective Date. If
you own 100 or more shares of our Common Stock immediately before the effective
time of the reverse stock split you will continue to be our stockholder, holding
whole and fractional shares (if your holdings are not divisible evenly by 100),
and you will not receive any cash payment for any of your shares in connection
with the transaction.
5
SPECIAL FACTORS
BACKGROUND OF THE PROPOSAL
* * *
In recent years, our Common Stock has attracted only limited market
research attention. There has been low trading volume on the AMEX, resulting in
an inefficient market for our shares. Due to the low trading volume and our
small market capitalization we do not have the ability to use our Common Stock
as a significant part of our employee compensation and incentives strategy or as
consideration for acquisitions. Our Board of Directors does not foresee
opportunities to raise capital through sales of equity securities in a public
offering. Also, our Board of Directors has determined that given our size and
the absence of sustained interest by securities research analysts and other
factors, we have not enjoyed an appreciable enhancement in our company image,
which usually results from having reporting company status.
We incur substantial direct and indirect costs associated with
compliance with the Exchange Act's filing and reporting requirements imposed on
reporting companies. The cost of this compliance has increased significantly
with the implementation of the provisions of Sarbanes-Oxley, including but not
limited to, significant costs and burdens of compliance with the forthcoming
internal control audit requirements of Section 404 of Sarbanes-Oxley, more
commonly referred to in this proxy statement as Section 404. While the SEC has
deferred for another year the application of Section 404 to non-accelerated
filers including the Corporation, the cost of implementing Section 404's
internal control procedures is expected to be unduly burdensome and costly,
considering our size and our decentralized control environment. We have already
incurred, and would continue to incur, substantial costs to implement these
procedures unless and until we delist and deregister. In addition, we incur
direct and indirect expenses associated with listing the shares of our Common
Stock on the AMEX. We have also incurred substantial indirect costs as a result
of, among other things, the executive time expended to prepare and review our
public filings.
In light of these circumstances, our Board of Directors believes
that it is in our best interest to undertake the reverse stock split, enabling
us to deregister our Common Stock under the Exchange Act. Deregistering will
relieve us of the administrative burden, cost and competitive disadvantages
associated with filing reports and otherwise complying with the requirements
imposed under the Exchange Act and Sarbanes-Oxley.
Our management retained consultants, starting in July 2004, to
assist us in preparing to comply with the requirements of Section 404, including
expending approximately $300,000 in preparing a preliminary project and cost
plan and documentation of the internal control procedures at one of our seven
principal subsidiaries.
Our Chairman of the Board had certain concerns that he first voiced
in August 2004 which, over time, resulted in this proposal. He had recently
overseen Section 404 compliance implementation at another company, of which he
is chief executive officer. He recognized that the significant costs (both
out-of-pocket and internal) that were being incurred at this other company would
be magnified for the Corporation due to its management philosophy and business
plan. We have primarily grown through the acquisition of small, stand-alone,
non-publicly reporting companies. When we acquire local telephone subsidiaries,
our philosophy is to maintain decentralized operations and to allow these
subsidiaries to maintain their administrative office locations, staffing and
business systems as they were prior to their acquisition. In particular, the
accounting personnel have generally been retained in such local office locations
to insure continuity of operations. Management believes that having individuals
who record the accounting entries for a subsidiary in close proximity to the
subsidiary's operations helps to insure accuracy of financial reporting.
However, this decentralization leads to a lack of standardization of procedures
11
and processes and a limited number of employees at each location. As a result,
our Chairman believed that the Corporation would require significantly greater
resources, both in terms of dollars spent and management time diverted, to
accomplish the detailed documentation, as well as management and auditor testing
requirements required by Section 404, than would be the case for companies of
similar overall size with centralized organizations. In addition, he was
concerned that the steps to implement these requirements could impair our local,
customer-driven focus and would divert employees of our operating subsidiaries
from running their businesses. Finally, the Chairman posited that the
significant time requirements relating to Section 404 compliance, which would be
imposed on our corporate officers and independent directors, would not be
justified by their benefits and would divert management's attention from other
matters.
In response to his concerns, our officers and directors began to
evaluate whether we were achieving the benefits of being a publicly traded
company when weighed against the costs of maintaining our public reporting
obligations. As discussed above, because of the nature of the trading market in
our stock and our small market capitalization, we do not have the ability to use
our Common Stock as consideration for acquisitions. Further, we do not currently
have viable opportunities to raise capital through a public offering of our
Common Stock. We have also been limited in our ability to use our Common Stock
as a significant part of our employee compensation and incentive strategy.
In addition to the limited benefits we have realized from having
reporting company status, we have determined that 8 of our 14 local telephone
companies, three of which had revenues in the $5 million revenue range, with
limited support staffs, would be required to implement full documentation and
testing under Section 404. When it considered the constraints imposed by the
limited liquidity and trading volatility associated with the low trading volume
of our Common Stock on the AMEX, as well as the significant costs of Section 404
compliance, the Board viewed the Chairman's concerns as well-founded.
At our December 2004 Board meeting, the directors informally
approved the preliminary steps taken by management to develop a specific
proposal to delist and deregister, including a review of publicly available
documents of other companies that had recently undertaken "going private"
transactions, and a determination of the compatibility of such approaches with
the Corporation's situation. With the assistance of counsel, management
evaluated the alternatives presented in such documents and filings and developed
a recommendation to be presented to the Board. Also in December 2004, management
consulted with counsel about alternative methods and procedures for delisting
and deregistering our shares.
On January 12, 2005, at a meeting of the Audit Committee of our
Board of Directors, our independent auditors, Deloitte & Touche LLP, discussed
new accounting pronouncements regarding the SEC's final rules for implementing
Section 404. In the course of that meeting, Deloitte & Touche expressed concern
over the Corporation's readiness to comply with Section 404, even with the
assistance of consultants already retained by the Corporation. Specifically,
Deloitte & Touche was concerned that the limited personnel resources at each of
the Corporation's subsidiaries, coupled with the geographically dispersed
operations, the lack of centralization of subsidiary processes and controls, and
the use of primarily internal resources to document key processes and controls,
could make Section 404 compliance difficult. Deloitte & Touche advised the audit
committee to consider expanding its use of external resources to supplement the
Corporation's efforts.
* * *
Following this audit committee meeting, management continued to
refine the proposal and directors had informal discussions among themselves,
which discussions involved the alternatives to the reverse stock split,
including an issuer tender offer, a traditional stock repurchase program and an
odd-lot repurchase program. (The alternatives are discussed in greater detail in
12
directors) have elected, pursuant to the provisions of the Corporation's 401k
plan, to have a portion of their contributions to that plan used to purchase
shares of the Corporation's Common Stock while the transaction is pending. Such
purchases are made by the trustee of the plan at prevailing market prices on a
non-discretionary basis. Except as set forth above, the Corporation is not aware
that any directors or officers intend to acquire shares while the proposed
reverse stock split is pending. See "Special Interests of Affiliated Persons in
the Transaction."
The par value of the shares of our Common Stock will be $0.01 per
share following consummation of the reverse stock split.
SCHEDULE 13E-3 FILING
The reverse stock split is considered a "going private" transaction
as defined in Rule 13e-3 promulgated under the Exchange Act, because it is
intended to terminate the registration of our Common Stock under Section 12(b)
of the Exchange Act and suspend our duty to file periodic reports with the SEC.
Consequently, we have filed a Rule 13e-3 Transaction Statement on Schedule 13E-3
with the SEC.
* * *
ADVANTAGES OF THE PROPOSAL
COST SAVINGS
As a result of recent corporate governance scandals and the
legislative and litigation environment resulting from those scandals, the costs
of being a public reporting company have increased for those companies subject
to Section 404 requirements, and the costs of our remaining a public reporting
company are expected to increase substantially in the near future. Legislation
such as Sarbanes-Oxley will continue to have the effect of increasing the
compliance burdens and potential liabilities of being a public reporting
company. It will increase audit fees and other costs of compliance, such as
securities counsel fees, as well as outside director fees and potential
liability faced by our officers and directors. We also incur substantial
indirect costs as a result of, among other things, our management's time
expended to prepare and review our public filings.
Our Board of Directors believes that by deregistering our shares of
Common Stock and suspending our periodic reporting obligations, we will realize
annual cost savings of approximately $1.7 million as follows:
Estimated Ongoing
Estimated Ongoing Annual Cost Savings
Annual Costs of Remaining Listed
Remaining Listed from Delisting
Public Company Fees and Costs: and Registered and Deregistering
----------------------------- -------------- -----------------
AMEX listing fees $ 15,000 $ 15,000
Printing, mailing and filing costs 9,000 5,000
Audit fees 1,310,000 400,000
Other fees 15,000 10,000
---------- ----------
Subtotal $1,349,000 $ 430,000
Sarbanes-Oxley Compliance Fees:
Attestation fees $1,000,000 $1,000,000
Consultants fees 270,000 270,000
---------- ----------
$1,270,000 $1,270,000
---------- ----------
$2,619,000 $1,700,000
========== ==========
17
These estimated annual cost savings reflect, among other things: (i)
a reduction in audit, attestation and related fees, (ii) the elimination of
costs associated with filing periodic reports with the SEC, (iii) the
elimination of costs associated with the listing of shares of our Common Stock
on the AMEX and (iv) the reduction in direct miscellaneous clerical and other
expenses, including printing, stock transfer and proxy solicitation expenses.
Compliance with Section 404 would require significant expenditures
during the initial fiscal year of compliance, including costs related to
computer software and hardware and fees to third parties for compliance
planning, assessment, documentation and testing. Management estimates the
increased fees to third parties during the initial year of compliance at
approximately $500,000. The initial year will require significant consulting
costs to help the Corporation document control narratives and control matrices,
remediate where controls are considered less than adequate, and determine which
controls should be tested. In 2004, the Company incurred $300,000 in external
consulting costs to document the controls at one subsidiary. The Corporation's
management expects to be able to utilize the work performed at the subsidiary to
serve as a model for the other subsidiaries. However, due to the Corporation's
limited personnel resources, it would take two consultants more than six months
to complete the initial documentation and remediation required. The Corporation
estimates that two consultants would be retained for 1,250 hours each at a cost
of $200 per hour, for a total of $500,000. This is in addition to the $300,000
spent in 2004. The Corporation believes the $500,000 amount represents costs
that are over and above the ongoing annual cost to update the documentation and
perform required testing. In addition, the estimated annual costs and cost
savings do not include other costs that management and the Board of Directors
believe are substantial, though difficult or impossible to quantify, such as
internal and outside legal expenses related to being a public reporting company,
management and internal clerical support time devoted to this area, and the
increased risk of liability associated with being a reporting company.
* * *
The cost savings figures set forth above are only estimates. The
actual savings we realize from the transaction may be higher or lower than such
estimates, depending, among other things, on how promptly we consummate the
reverse stock split. Estimates of the annual savings to be realized are based
upon (i) the actual costs to us of the services and disbursements in each of the
categories listed above that are reflected in our financial records and (ii) the
allocation to each category of management's estimates of the portion of the
expenses and disbursements in such category believed to be solely or primarily
attributable to our public reporting company status. In some instances,
management's cost saving expectations were based on information provided or upon
verifiable assumptions. For example, our auditors, Deloitte & Touche, have
informally advised us that there will be a reduction in auditing fees if we no
longer continue as a public reporting company, though the estimated annual
savings were developed by management.
OPPORTUNITY FOR CASHED OUT STOCKHOLDERS TO SELL THEIR HOLDINGS AT OR
ABOVE THE THEN CURRENT MARKET TRADING PRICE, WITHOUT BROKERAGE FEES OR
COMMISSIONS
In connection with the reverse stock split, our Board of Directors
determined that a fair price for this transaction to Cashed Out Stockholders is
the fair market value as set forth in the section "Background of the Proposal"
of this proxy statement, because it provides them an opportunity to liquidate
their holdings at a fair price without brokerage commissions.
ABILITY TO CONTROL DECISION WHETHER TO REMAIN AS A STOCKHOLDER
Another factor considered by our Board of Directors in determining
the fairness of the transaction to our unaffiliated stockholders is that current
holders of fewer than 100 shares of our Common Stock can remain as our
stockholders, even if the reverse stock split is consummated, by acquiring
additional shares so that they own at least 100 shares of our Common Stock
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tendering into the program, would likely necessitate a longer time
frame than that of the reverse stock split.
o MAINTAINING THE STATUS QUO. Our Board of Directors also considered
maintaining the status quo. In that case, we would continue to incur
the expenses of being a public reporting company without enjoying
the benefits traditionally associated with public reporting company
status.
Expense reductions may be achievable through centralization of
various functions (e.g., accounting, receivables and payables, etc.)
and moving financing activities up to the parent level. This
approach has always been rejected in favor of a decentralized
approach which maintains autonomy for management at the
Corporation's operating subsidiaries. Both management and the Board
of Directors believe this distinguishes the Corporation from its
competitors and makes it an attractive company to sell a privately
owned business to. Despite this, the Board of Directors recently
approved a $10 million capital budget for 2005, as compared to $22
million for 2004. However, the Corporation continues to face
significant cash expenditures in defending the Taylor False Claims
Act case disclosed in the Corporation's Annual Report on Form 10-K,
which expenditures to date are approximately $5,000,000. Although we
believe that this lawsuit is completely without merit, the alleged
damages sought by plaintiff in this case are in excess of $1
billion, an indeterminate proportion of which might have to be borne
by the Company, making us an unattractive candidate for a third
party buy-out at this time.
FAIRNESS OF THE REVERSE STOCK SPLIT
Our Board of Directors has fully reviewed and considered the terms,
purpose, alternatives and effects of the reverse stock split and has unanimously
determined (including by a majority of directors who are not our employees) that
the transaction is in our best interests and is substantively and procedurally
fair to the unaffiliated stockholders.
* * *
The reverse stock split is not structured in such a way so as to
require the approval of at least a majority of our unaffiliated stockholders,
because our affiliated stockholders only own approximately 26% of our voting
securities. Despite the foregoing, our Board of Directors believes that the
reverse stock split is substantively and procedurally fair to each
differently-impacted group of stockholders - those unaffiliated stockholders who
will be cashed-out and those unaffiliated stockholders who will be Continuing
Stockholders - due to: (i) the requirement that the proposal receive a majority
vote, including a substantial portion of the unaffiliated stockholders, in order
to be approved and (ii) the ability of the unaffiliated stockholders, by taking
the steps described in the eighth and ninth questions and answers under
"Questions and Answers about the Meeting and Proposals," to switch their status
from Cashed Out Stockholder to Continuing Stockholder (or vice versa) as they
see fit. Further, Continuing Stockholders have the advantage of continuing as
stockholders in a company that will not be subject to the costs associated with
compliance with Section 404 of Sarbanes-Oxley. This savings will significantly
decrease our ongoing expenses, which will improve our liquidity.
* * *
In evaluating the fairness of the reverse stock split with respect
to the unaffiliated stockholders in particular, our Board of Directors also
noted that the transaction would not differentiate among stockholders on the
basis of affiliate status. The sole determining factor in whether a stockholder
will become a Cashed Out Stockholder or a Continuing Stockholder as a result of
the reverse stock split is the number of shares held by such stockholder
immediately before the effective time of the reverse stock split. For this
reason the Board did not consider it necessary to appoint an unaffiliated
representative to act solely on behalf of the unaffiliated stockholders in
negotiating or preparing a report on the transaction. Our Board of Directors
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