UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. 3)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
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[ ] Preliminary Proxy Statement
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[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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[X] Definitive Proxy Statement
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[ ] Definitive Additional Materials
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[ ] Soliciting Material Pursuant to Section 240.14a-12
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Horizon Telcom, Inc.
(Name of Registrant as Specified In Its Charter)
Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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[X] No fee required.
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[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
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1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee previously paid with preliminary materials.
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[ ] 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
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4) Date Filed:
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[Horizon Telcom, Inc. Logo]
Horizon Telcom, Inc.
68 East Main Street
Chillicothe, Ohio 45601-0480
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 16, 2005
To the Stockholders of Horizon Telcom, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Horizon Telcom, Inc. (the "Company") will be held at the
offices of Horizon Technology, Inc., 1410 Industrial Drive, Gateway Industrial
Park, Chillicothe, Ohio on March 16, 2005 at 3:00 p.m. (Cincinnati time) for the
following purposes:
o The approval of amendments to the Company's Amended and Restated
Articles of Incorporation whereby the Company would effect a
1-for-125 reverse stock split of its shares of Class B common stock
("Class B Shares"), such that holders of less than 125 Class B
Shares would have their Class B Shares cancelled and converted into
the right to receive the cash consideration set forth herein,
followed immediately by a 125-for-1 forward stock split of the Class
B Shares (the aforesaid reverse and forward stock splits being
hereinafter collectively referred to as the "Reverse/Forward Stock
Splits") and
o Such other business as may properly come before the Special Meeting
and any adjournment or postponement thereof.
The foregoing matters are described in more detail in the proxy
statement dated February 17, 2005 (the "Proxy Statement") which follows.
The Company's board of directors (the "Board") has fixed the close
of business on February 17, 2005 as the record date for determining the record
holders of the Class B Shares and the Company's shares of Class A common stock
(collectively with the Class B Shares, the "Shares") entitled to notice of, and
to vote at, the Special Meeting and any adjournment or postponement thereof.
THE BOARD HAS DETERMINED THAT THE REVERSE/FORWARD STOCK SPLITS
PROPOSAL AS DESCRIBED IN THE PROXY STATEMENT IS IN THE BEST INTEREST OF THE
COMPANY AND ITS STOCKHOLDERS AND HAS DIRECTED THAT THE PROPOSAL BE SUBMITTED TO
THE COMPANY'S STOCKHOLDERS FOR THEIR APPROVAL. THE BOARD UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR THE PROPOSAL.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE
SPECIAL MEETING, PLEASE MARK, DATE, SIGN AND RETURN PROMPTLY THE ENCLOSED PROXY
CARD IN THE RETURN STAMPED ENVELOPE PROVIDED. A PROXY IS REVOCABLE AT ANYTIME
BEFORE IT IS VOTED AT THE SPECIAL MEETING BY EXECUTION AND DELIVERY OF A
LATER-DATED PROXY CARD; VOTING BY BALLOT AT THE SPECIAL MEETING; OR DELIVERY OF
WRITTEN NOTICE TO THE INSPECTORS OF ELECTION IN CARE OF THE SECRETARY OF THE
COMPANY AT THE ADDRESS LISTED ABOVE. YOUR PROMPT RETURN OF THE ENCLOSED PROXY
CARD WILL BE OF GREAT ASSISTANCE IN PREPARING FOR THE SPECIAL MEETING AND IS
THEREFORE STRONGLY REQUESTED.
FOR SPECIFIC INSTRUCTIONS ON HOW TO VOTE YOUR SHARES, PLEASE REFER
TO THE SECTION CONTAINED IN THE PROXY STATEMENT ENTITLED "GENERAL VOTING
INFORMATION" AND THE INSTRUCTIONS ON THE ENCLOSED PROXY CARD.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THE PROXY STATEMENT AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
By Order of the Board:
Jack E. Thompson
Date: February 17, 2005 Secretary
This notice of special meeting, the Proxy Statement and the enclosed
proxy are first being distributed to the Company's stockholders on or about
February 18, 2005.
[Horizon Telcom, Inc. Logo]
Horizon Telcom, Inc.
Proxy Statement
Special Meeting of Stockholders
To the Stockholders of Horizon Telcom, Inc.:
This proxy statement dated February 17, 2005 ("Proxy Statement") and
the enclosed proxy card are being mailed to the stockholders of Horizon Telcom,
Inc., an Ohio corporation (the "Company"), in connection with the solicitation
of proxies by the board of directors (the "Board") of the Company for use at the
special meeting (the "Special Meeting") of the stockholders to be held at the
offices of Horizon Technology, Inc., 1410 Industrial Drive, Gateway Industrial
Park, Chillicothe, Ohio on March 16, 2005 at 3:00 p.m. (Cincinnati time), and at
any adjournment or postponement thereof.
The Company's shares of Class A common stock ("Class A Shares") and
Class B common stock ("Class B Shares" and collectively with the Class A Shares,
the "Shares") are eligible for voting at the Special Meeting. Although the Class
B Shares are, as a general matter, non-voting, these shares are entitled to vote
at the Special Meeting under Ohio law since the Board is seeking approval of
amendments to the Company's Amended and Restated Articles of Incorporation
relating solely to the Class B Shares.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION
PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO
THE CONTRARY IS UNLAWFUL.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY.
Statements contained herein that are not purely historical are
forward-looking statements, including, but not limited to, statements regarding
the Company's expectations, hopes, beliefs, intentions or strategies regarding
the future. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Actual results
could differ materially from those projected in any forward-looking statement as
a result of a number of factors. The forward-looking statements are made as of
the date of this Proxy Statement and the Company undertakes no obligation to
update or revise the forward-looking statements.
We caution you not to place undue reliance on any forward-looking
statement made by, or on behalf of, the Company in this Proxy Statement or in
any of our filings with the Commission or otherwise. Information with respect to
factors that may cause the results to differ materially from those contemplated
by forward-looking statements is included in our current and subsequent filings
with the Commission. See "Available Information."
SUMMARY TERM SHEET
The following is a summary of the material terms of the
Reverse/Forward Stock Splits (as defined below) upon which the Company's
stockholders shall vote at the Special Meeting. While this summary describes
what we believe are the most material terms and conditions of the
Reverse/Forward Stock Splits, this Proxy Statement contains a more detailed
description of the terms and conditions of the Reverse/Forward Stock Splits. We
urge you to review this Proxy Statement in its entirety and the documents it
incorporates by reference carefully before voting your Shares.
Reverse/Forward Stock Splits
As used throughout this Proxy Statement, the term "Reverse/Forward
Stock Splits" refers to a transaction consisting of the following steps:
o The Reverse/Forward Stock Splits of the Class B Shares will take
effect on the date (the "Effective Date") the Secretary of State of
the State of Ohio accepts for filing Certificates of Amendment to
our Amended and Restated Articles of Incorporation (one Certificate
of Amendment effecting the reverse stock split, the other effecting
the forward stock split).
o On the Effective Date, the Company will first effect a 1-for-125
reverse stock split of the Class B Shares.
o Each holder of 125 or more Class B Shares immediately before the
reverse stock split will receive eight thousandths (0.008) of a
Class B Share for each Class B Share so held.
o Each holder of less than 125 Class B Shares immediately before the
reverse stock split will receive cash instead of a fractional Class
B Share. The Company will pay each of these holders an amount in
cash (the "Cash Out Price") equal to $165 per Class B Share held by
such holder immediately before the reverse stock split.
o On the Effective Date, following the completion of the reverse stock
split, the Company will effect a 125-for-1 forward stock split of
the Class B Shares. Each holder of 125 or more Class B Shares
immediately before the reverse stock split will participate in the
forward stock split, which will result in such holder holding the
same number of Class B Shares after the forward stock split as held
immediately before the reverse stock split.
Please see the sections of this Proxy Statement entitled "Special
Factors--Effects of the Reverse/Forward Stock Splits" and "Reverse/Forward Stock
Splits Proposal--Summary and Structure" for a more detailed discussion of the
foregoing.
The Class A Shares will not be included within the Reverse/Forward
Stock Splits.
o The Board has set the Cash Out Price of $165 per share as the amount
to be paid for fractional Class B Shares (i.e., less than one whole
Class B Share) resulting from the reverse stock split of the Class B
Shares. The Board made this determination in good faith and received
a fairness opinion (the "Fairness Opinion") prepared by Legg Mason
Wood Walker, Incorporated (the "Financial Advisor"), an independent
financial advisor, and other factors the Board deemed relevant, as
described in greater detail in the sections of this Proxy Statement
entitled, "Special Factors--Fairness of the Transaction," "Special
Factors--Opinion of Financial Advisor" and "Reverse/Forward Stock
Splits Proposal--Recommendation of the Board."
o The Fairness Opinion was delivered to the Board and a special
committee (the "Special Transactions Committee") of three (3)
independent directors formed to assist the Board in establishing the
terms and conditions of the Reverse/Forward Stock Splits. The
Fairness Opinion states that based upon and subject to the factors
and assumptions set forth therein, the Cash Out Price is fair from a
financial point of view, as of December 7, 2004, to those holders
whose Class B Shares will be cashed out pursuant to such reverse
stock split.
o The full text of the Fairness Opinion, dated December 7, 2004, which
sets forth the assumptions made, procedures followed, matters
considered and limitations on the review undertaken in connection
with the opinion, is annexed to this Proxy Statement as Exhibit A.
The Company's stockholders should read the Fairness Opinion in its
entirety. The Financial Advisor provided the Fairness Opinion for
the information
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and assistance of the Board and Special Transactions Committee in
connection with their consideration of the Reverse/Forward Stock
Splits. The Fairness Opinion is not a recommendation as to how any
stockholder should vote with respect to the Reverse/Forward Stock
Splits.
Purpose of and Reasons for the Reverse/Forward Stock Splits
o The principal purpose of the Reverse/Forward Stock Splits is to
acquire for cash Class B Shares from those holders of less than 125
Class B Shares.
o The Reverse/Forward Stock Splits are intended to reduce the number
of holders of record of the Class B Shares to below 300 and thereby
enable the Company to terminate the registration of the Class B
Shares under Section 12(g) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Company's termination of the
registration of the Class B Shares under the Exchange Act does not
require the approval of the holders of Class A Shares or Class B
Shares and will not be voted upon at the Special Meeting. Upon such
termination, the Company's duty to file periodic reports with the
Commission will be suspended, and the Company will no longer be
classified as a public reporting company. Notwithstanding such
termination, the Company will continue to be subject to the general
anti-fraud provisions of federal and applicable state securities
laws. Please see the section of this Proxy Statement entitled
"Special Factors--Effects of the Reverse/Forward Stock Splits" for a
more detailed discussion of the foregoing.
o The following are the principal reasons the Board considered in
pursuing the Reverse/Forward Stock Splits:
-- the cost savings of approximately $565,000 per year that the
Company expects to realize in the future as a result of the
suspension of its periodic reporting obligations under the
Exchange Act due to the deregistration of the Class B Shares
under the Exchange Act, including the cost savings resulting
from no longer being subject to the public company provisions
of the Sarbanes-Oxley Act of 2002, as amended (the
"Sarbanes-Oxley Act");
-- the additional savings in terms of management's and employees'
time that will no longer be spent preparing the periodic
reports required of public companies under the Exchange Act
and managing stockholder relations and communications;
-- the reduced premiums for the Company's directors' and
officers' insurance policies as a result of the Company no
longer being a public reporting company;
-- the decrease in expenses resulting from no longer being
required to service holders with small positions in the Class
B Shares;
-- the ability of the Company to control the dissemination of
certain business information, which is currently disclosed in
the Company's periodic reports and accordingly available to
the Company's competitors, vendors, customers and other
interested parties, potentially to the Company's detriment;
-- the ability of the Company to gain greater operational
flexibility by being able to focus on long-term growth without
an undue emphasis on current earnings and other short-term
metrics;
-- the belief of the Board that the Reverse/Forward Splits
constitute the most expeditious, efficient, cost effective and
fairest method to convert the Company from a public reporting
company to a privately-held, non-reporting company in
comparison to other alternatives considered by the Board;
-- the fact that the Company has not realized many of the
benefits normally presumed to result from being a public
reporting company (such as enhanced stockholder value,
enhanced corporate image, access to capital markets, active
trading market, analysts' reports, ability to use company
stock to attract, retain and incentivize employees, and
ability to use company stock as currency for acquisitions) due
to the relatively limited liquidity of the Class A Shares and
Class B Shares; and
-- the ability to provide holders of less than 125 Class B Shares
with liquidity, without the payment of brokerage commissions
or other transaction fees, by allowing them to liquidate their
Class B Shares for cash at a fair market value.
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Please see the sections of this Proxy Statement entitled "Special
Factors--Purpose of the Reverse/Forward Stock Splits" and "Special
Factors--Reasons for the Reverse/Forward Stock Splits" for a more detailed
discussion of the foregoing.
Fairness of the Transaction
o The Company, Board and Special Transactions Committee believe that
the Reverse/Forward Stock Splits are in the best interest of the
Company and are substantively and procedurally fair to the
affiliated and unaffiliated holders of Class A Shares and Class B
Shares, including both those holders ("Cashed Out Holders") whose
Class B Shares will be cashed out pursuant to the Reverse/Forward
Stock Splits and those ("Continuing Holders") who will remain
holders of Class B Shares after the Reverse/Forward Stock Splits.
o Each of the Board and the Special Transactions Committee has
unanimously approved the Reverse/Forward Stock Splits.
o The Special Transactions Committee was authorized to engage, and did
engage, (i) the Financial Advisor to render a fairness opinion and
(ii) independent legal counsel to furnish advice regarding the
fiduciary obligations of the Special Transactions Committee.
o The Financial Advisor rendered a fairness opinion stating that the
Cash Out Price is fair from a financial point of view.
o The Cash Out Price represents a premium of 90% over the (i) closing
price for the Class B Shares on August 18, 2004 (i.e., the date
immediately preceding the date on which the Reverse/Forward Stock
Splits were first publicly announced) and (ii) average closing price
of the Class B Shares over the 30 trading days prior to and
including August 18, 2004.
o The Board and Special Transactions Committee have each reviewed and
considered the analyses and conclusions of the Financial Advisor
contained in the Fairness Opinion.
Please see the sections of this Proxy Statement entitled "Special
Factors-- Fairness of the Transaction," "Opinion of Financial Advisor," and
"Reverse/Forward Stock Splits Proposal--Recommendation of the Board" for a more
detailed discussion of the foregoing.
Certain Federal Income Tax Consequences
As a result of the Reverse/Forward Stock Splits, no gain, loss or
deduction will be recognized by the Company or the holders of Class A Shares for
federal income tax purposes. Continuing Holders will not recognize any gain or
loss for federal income tax purposes. Cashed Out Holders will generally
recognize a gain or loss for federal income tax purposes equal to the difference
between the amount of cash received and the aggregate tax basis in the Class B
Shares that are redeemed for cash. Please see the section of this Proxy
Statement entitled "Reverse/Forward Stock Splits Proposal--Material Federal
Income Tax Consequences" for a more detailed discussion of the foregoing.
Unavailability of Appraisal or Dissenters' Rights
A holder of Class B Shares does not have the right under Ohio law,
which governs the Reverse/Forward Stock Splits, or the Company's Amended and
Restated Articles of Incorporation or Code of Regulations to demand the
appraised value of such shares or any other dissenters' rights if such holder
votes against the Reverse/Forward Stock Splits. Please see the section of this
Proxy Statement entitled "Reverse/Forward Stock Splits Proposal--Unavailability
of Appraisal or Dissenters' Rights" for a more detailed discussion of the
foregoing.
Escheat Laws
All cash amounts payable to Cashed Out Holders will be subject to
applicable state laws relating to abandoned property. Please see the section of
this Proxy Statement entitled "Reverse/Forward Stock Splits Proposal--Escheat
Laws" for a more detailed discussion of the foregoing.
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TABLE OF CONTENTS
SUMMARY TERM SHEET.............................................................2
SPECIAL FACTORS................................................................6
Purpose of the Reverse/Forward Stock Splits..................................6
Reasons for the Reverse/Forward Stock Splits.................................6
Effects of the Reverse/Forward Stock Splits..................................8
Alternatives to the Reverse/Forward Stock Splits............................10
Fairness of the Transaction.................................................11
OPINION OF FINANCIAL ADVISOR..................................................16
GENERAL VOTING INFORMATION....................................................21
Stockholders Entitled to Vote at the Special Meeting........................21
How to Vote Your Shares.....................................................22
How to Revoke Your Proxy....................................................22
Voting at Special Meeting...................................................22
Vote Required to Approve Each Item..........................................22
REVERSE/FORWARD STOCK SPLITS PROPOSAL.........................................23
Summary and Structure.......................................................23
Background of the Reverse/Forward Stock Splits..............................23
Potential Detriments of the Reverse/Forward Stock Splits to Stockholders....26
Financial Information.......................................................26
Recommendation of the Board.................................................35
Stock Certificates..........................................................35
Material Federal Income Tax Consequences....................................35
Unavailability of Appraisal or Dissenters' Rights...........................37
Reservation of Rights.......................................................37
Price Range of Class A Shares and Class B Shares............................38
Dividends on Class B Shares.................................................38
Escheat Laws................................................................38
Regulatory Approvals........................................................38
Interest of Certain Persons in Matters to be Acted Upon.....................39
OTHER MATTERS.................................................................40
PERSONS MAKING THE PROXY SOLICITATION AND THE COSTS ASSOCIATED THEREWITH......40
PROPOSALS OF STOCKHOLDERS.....................................................40
COMMISSION HOUSEHOLDING RULES.................................................41
INFORMATION ABOUT THE COMPANY.................................................41
Business Overview...........................................................41
Management of the Company...................................................41
AVAILABLE INFORMATION.........................................................43
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................43
EXHIBIT A -- FAIRNESS OPINION ...............................................A-1
EXHIBIT B -- FORM OF REVERSE STOCK SPLIT AMENDMENT ..........................A-2
EXHIBIT C -- FORM OF FORWARD STOCK SPLIT AMENDMENT ..........................A-3
5
SPECIAL FACTORS
Purpose of the Reverse/Forward Stock Splits
The purpose of the Reverse/Forward Stock Splits is to acquire for
cash Class B Shares from Cashed Out Holders (i.e., those holders who immediately
before the Reverse/Forward Stock Splits hold fewer than 125 Class B Shares). The
purchase price is $165 per Class B Share owned by Cashed Out Holders immediately
before the Reverse/Forward Stock Splits. The Reverse/Forward Stock Splits have
been structured to enable the Cashed Out Holders to receive cash for all of
their Class B Shares without having to pay brokerage commissions or other
transaction fees, as we will pay all transaction costs in connection with the
Reverse/Forward Stock Splits.
Reasons for the Reverse/Forward Stock Splits
Reduced Costs and Expenses
We incur direct and indirect costs associated with compliance with
the Exchange Act's filing and reporting requirements imposed on public
companies. The cost of this compliance has increased significantly with the
implementation of the public company provisions of the Sarbanes-Oxley Act. In
addition, we pay substantially higher premiums for our directors' and officers'
insurance policies as a public reporting company than we would if we were not
registered under the Exchange Act. We also incur substantial indirect costs as a
result of, among other things, the executive time expended to prepare and review
our public filings.
The Board believes that by deregistering the Class B Shares and
suspending the Company's periodic reporting obligations under the Exchange Act,
the Company will experience recurring annual cost savings of approximately
$565,000, consisting of (i) $315,000 in fees and expenses historically incurred
(other than those relating to the Sarbanes-Oxley Act) and (ii) $250,000 in fees
that would otherwise be expected to be incurred annually due to compliance with
the requirements imposed by the Sarbanes-Oxley Act. In addition, the Board
believes deregistering the Class B Shares will also provide the Company with a
non-recurring savings of approximately $775,000 in fees and expenses that would
otherwise be expected to be incurred due to initial compliance with requirements
of the Sarbanes-Oxley Act. Such estimated fees are further described in greater
detail below:
HISTORICAL FEES:
Legal fees: ................................................. $100,000
Printing, mailing and filing costs: ......................... $ 20,000
Audit fees: ................................................. $ 45,000
Internal personnel fees: .................................... $150,000
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Total: ...................................................... $315,000
NON-RECURRING SARBANES-OXLEY ACT COMPLIANCE FEES:
Third party planning, testing & documentation: .............. $500,000
Audit fees: ................................................. $200,000
Internal personnel fees: .................................... $ 75,000
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Total: ...................................................... $775,000
RECURRING SARBANES-OXLEY ACT COMPLIANCE FEES:
Legal fees: ................................................. $ 25,000
Audit fees: ................................................. $150,000
Internal personnel fees: .................................... $ 75,000
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Total: ...................................................... $250,000
Such estimated cost savings reflect, among other things: (i) a
reduction in auditing and related fees; (ii) a reduction in legal fees related
to securities law compliance; (iii) the elimination of costs associated with
filing periodic reports and other documents (such as proxy statements) with the
Commission; (iv) the savings in fees charged by the Company's transfer agent
(the "Transfer Agent"), National City Bank of Ohio, that are expected because of
the reduction in the number of stockholder accounts to be handled by the
Transfer Agent; (v) the lower printing and mailing costs attributable to such
reduction and the less complicated and extensive disclosure required
6
by our private status; (vi) the reduction in management time spent on compliance
and disclosure matters attributable to our Exchange Act filings; (vii) the lower
risk of liability that is associated with non-reporting (as distinguished from
public reporting) company status and the reduced premiums for directors' and
officers' liability insurance expected to result; (viii) the cost savings due
the Company's not being subject to the public company provisions of the
Sarbanes-Oxley Act; and (ix) the reduction in direct miscellaneous clerical and
other expenses.
The cost savings figures set forth above are only estimates. The
actual savings we realize from going private may be higher or lower than such
estimates. Estimates of the annual savings to be realized if the Reverse/Forward
Stock Splits are consummated are based upon the (i) actual costs to us of the
services and disbursements in each of the categories listed above that were
reflected in our recent financial statements and (ii) 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.
It is important to note that in addition to the above-referenced
annual estimated cost savings, the consummation of the Reverse/Forward Stock
Splits and the subsequent deregistration of the Class B Shares under the
Exchange Act would result in a significant one-time cost savings due to the
Company not being subject to the new internal control audit requirements imposed
by Section 404 of the Sarbanes-Oxley Act. Preparing the Company to be able to
comply with Section 404 of the Sarbanes-Oxley Act would require significant
expenditures including, without limitation, fees to third parties for compliance
planning, assessment, documentation and testing.
In some instances, management's cost saving expectations were based
on information provided or upon verifiable assumptions. For example, our
auditors have informed us, informally, that there will be a reduction in
auditing fees if we cease to be a public reporting company due to the
elimination of fees for interim services. In addition, the costs associated with
retaining legal counsel to assist with complying with the Exchange Act reporting
requirements will be eliminated if we no longer file reports with the Commission
and are otherwise not required to comply with the disclosure requirements that
apply to public reporting companies.
Operational Flexibility
Another reason for the Reverse/Forward Stock Splits relates to
operational flexibility. The Board believes that effecting the Reverse/Forward
Stock Splits and ceasing to be a public reporting company would enable
management to concentrate its efforts on the long-term growth of the Company's
business free from the constraints of public ownership, which the Board believes
often places undue emphasis on quarter-to-quarter earnings at the expense of
long-term growth. The Board believes that the Company will benefit if business
decisions can be made with a view toward long-term growth and with less emphasis
on the effect of decisions upon current earnings and other short-term metrics.
Benefits Normally Associated with Public Reporting Company Status Have Not Been
Realized
A significant reason for the Reverse/Forward Stock Split relates to
the Company not realizing many of the benefits normally presumed to result from
being a public reporting company, such as the following:
o A typical advantage of being a public company comes from the ability
to use company stock, as opposed to cash or other consideration, to
effect acquisitions. The Company has not found the occasion to
acquire other businesses using stock as consideration and does not
presently intend to do so.
o Public companies can also obtain financing by issuing securities in
a public offering. The Company has not accessed the capital markets
in such a manner in recent years and does not presently intend to do
so.
o Public companies often endeavor to use company stock to attract,
retain and incentivize employees. In recent years, due to the
limited liquidity of the Class A Shares and Class B Shares, the
Company has found limited success in using the Class A Shares and
Class B Shares in such a manner.
o An enhanced corporate image often accompanies public company status.
The Company has determined that due to its size and other factors,
the Company has not enjoyed an appreciable enhancement in corporate
image as a result of its public company status.
Ability to Control the Dissemination of Certain Business Information
Currently, the disclosure contained in our Exchange Act filings,
including information related to our business operations and financial
condition, is available to the public and thus can be readily analyzed by
various interested parties, such as our competitors, vendors and customers.
These entities can potentially use the Company's publicly
7
disclosed information to the detriment of the Company. In addition, the current
public disclosure of information puts the Company at a competitive disadvantage
compared to the Company's non-public competitors, in part because the Company
does not have access to similar information concerning those companies. Upon the
termination of the registration of the Class B Shares under the Exchange Act and
the suspension of our duty to file periodic reports with the Commission, we will
be better able to control the dissemination of certain business information.
In light of the foregoing, the Board believes the benefits
associated with maintaining our status as a public reporting company and
maintaining our small Class B Share accounts are substantially outweighed by the
associated financial and operational costs. The Board believes that it is in the
best interest of the Company to eliminate the administrative burden and costs
associated with maintaining its status as a public reporting company and its
small Class B Share accounts.
Reasons for the Forward Stock Split
The forward stock split, which is scheduled to occur immediately
after the reverse stock split, is intended to (i) prevent the Class B Shares
from having an unusually high per share value, which would tend to further
decrease the liquidity of the Class B Shares and (ii) avoid adjusting the
exercise price of any awards previously granted under the Company's 1999 Stock
Option Plan.
Effects of the Reverse/Forward Stock Splits
If the Reverse/Forward Stock Splits are consummated, we intend to
apply for termination of registration of the Class B Shares under the Exchange
Act as soon as practicable after completion of the Reverse/Forward Stock Splits.
The Reverse/Forward Stock Splits are expected to reduce significantly the number
of holders of record of the Class B Shares from approximately 648 to
approximately 240. The Class A Shares and Class B Shares have traded principally
in local transactions without the benefit of an established public trading
market or an organized system for reporting prices paid, such as the Pink
Sheets(R) (i.e., a centralized quotation service that collects and publishes
market maker quotes for securities). The completion of the Reverse/Forward Stock
Splits and the termination of our reporting obligations under the Exchange Act
will likely cause the existing limited trading market for the Class A Shares and
Class B Shares to be further reduced or eliminated.
Effects on Class B Shares
There will be no differences with respect to dividend, voting,
liquidation or other rights associated with the Class B Shares before and after
the Reverse/Forward Stock Splits. The Reverse/Forward Stock Splits will have no
net effect upon the exercise price of, or the number of Class B Shares subject
to, any outstanding option or warrant. The fractional Class B Shares purchased
by the Company as part of the Reverse/Forward Stock Splits will be held in the
Company's treasury.
Effects on Class A Shares
The Class A Shares will not be included within the Reverse/Forward
Stock Splits. Accordingly, there will be no difference with respect to dividend,
voting, liquidation or other rights associated with the Class A Shares before
and after the Reverse/Forward Stock Splits. The Class A Shares are not
registered under the Exchange Act.
Effects on Cashed Out Holders
If the Reverse/Forward Stock Splits are implemented, Cashed Out
Holders (i.e., holders of less than 125 Class B Shares immediately before the
consummation of the Reverse/Forward Stock Splits):
o Will not have the opportunity to liquidate their Class B Shares at a
time and for a price of their choosing;
o Will not receive a fractional Class B Share as a result of the
Reverse/Forward Stock Splits;
o Will instead receive cash, in a taxable transaction, equal to $165
for each Class B Share held immediately before the Reverse/Forward
Stock Splits in accordance with the procedures described in this
Proxy Statement;
o Will have no further ownership interest in the Company on account of
Class B Shares;
8
o Will not have to pay any brokerage commissions or other transaction
fees in connection with the Reverse/Forward Stock Splits; and
o Will not receive any interest on cash payments owed as a result of
the Reverse/Forward Stock Splits.
For a discussion of the federal income tax consequences of the
Reverse/Forward Stock Splits, please see the section of this Proxy Statement
entitled "Reverse/Forward Stock Splits Proposal--Material Federal Income Tax
Consequences."
NOTE: If you would otherwise be a Cashed Out Holder as a result of
holding less than 125 Class B Shares, but you would rather continue to hold
Class B Shares after the Reverse/Forward Stock Splits and not be cashed out, you
may do so by taking either of the following actions far enough in advance so
that it is complete by the Effective Date:
1. Purchase a sufficient number of additional Class B Shares, to the extent
available, on the open market and have them registered in your name and
consolidated with your current record account, if you are a record holder,
or have 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
125 Class B Shares in your record account immediately before the Effective
Date. Due to the limited trading market for Class B Shares, however, you
may have difficulty purchasing enough Class B Shares to remain a
stockholder of the Company.
2. If applicable, consolidate your accounts so that together you hold at
least 125 Class B Shares in one record account immediately before the
Effective Date.
Effects on Continuing Holders
If the Reverse/Forward Stock Splits are implemented, Continuing
Holders (i.e., holders of 125 or more Class B Shares immediately before the
Reverse/Forward Stock Splits):
o Will not be affected in terms of the number of Class B Shares held
before and after the Reverse/Forward Stock Splits;
o Will not receive cash for any portion of their Class B Shares;
o Will likely experience a further reduction in liquidity with respect
to the Class A Shares and Class B Shares; and
o Will not experience a significant increase in their respective
ownership percentages of Class B Shares.
Upon the termination of the registration of the Class B Shares under
the Exchange Act, the Class A Shares and Class B Shares will cease to be
eligible for trading on any securities market, except the Pink Sheets(R). This
source of liquidity has historically not been available to the Company. In order
for the Class A Shares and Class B Shares to be quoted on the Pink Sheets(R),
one or more broker-dealers would need to act as market makers and sponsor the
Class A Shares and Class B Shares on the Pink Sheets(R). Following the
consummation of the Reverse/Forward Stock Splits and the absence of current
information about the Company being filed under the Exchange Act, there can be
no assurance that any broker-dealer would be willing to act as a market maker in
the Class A Shares or Class B Shares. There is also no assurance that Class A
Shares or Class B Shares will be available for purchase or sale after the
Reverse/Forward Stock Splits.
Effects on Holders with Certificated Class B Shares
If you are a Cashed Out Holder with a stock certificate representing
your Class B Shares, you will receive a letter of transmittal from us as soon as
practicable after the Reverse/Forward Stock Splits are effected. The letter of
transmittal will contain instructions on how to surrender your existing
certificate(s) to the Transfer Agent for your cash payment. You will not receive
your cash payment until you surrender your outstanding certificate(s) to the
Transfer Agent, together with a completed and executed copy of the letter of
transmittal. Please do not send your certificate(s) until you receive your
letter of transmittal.
If you are a Continuing Holder with a stock certificate representing
your Class B Shares, your stock certificate will continue to evidence ownership
of the same number of Class B Shares as is set forth on the face of the
certificate.
9
Effects on the Company and its Executive Officers, Directors and Affiliates
If consummated, the Reverse/Forward Stock Splits will affect the
registration of the Class B Shares under the Exchange Act, as we intend to apply
for termination of such registration as soon as practicable after the
Reverse/Forward Stock Splits. Upon such termination, our duty to file periodic
reports with the Commission will be suspended, and we will no longer be
classified as a public reporting company. In addition, we will be relieved of
the obligation to comply with the requirements of the proxy rules under Section
14 of the Exchange Act. Our executive officers, directors and stockholders
owning more than ten percent (10%) of the Class B Shares will be relieved from
complying with the stock ownership reporting requirements and "short swing
profit" trading restrictions under Section 16 of the Exchange Act, as well as
many of the provisions of the Sarbanes-Oxley Act. Our affiliates will lose the
ability to dispose of their Class A Shares and Class B Shares pursuant to Rule
144 under the Securities Act of 1933, as amended (the "Securities Act").
Notwithstanding the foregoing, we will continue to be subject to the general
anti-fraud provisions of federal and applicable state securities laws.
The Reverse/Forward Stock Splits will reduce significantly the
number of stockholders of the Company. The completion of the Reverse/Forward
Stock Splits and the termination of our reporting obligations under the Exchange
Act will render the Class A Shares and Class B Shares ineligible for listing or
quotation on any stock exchange or other automated quotation system, except the
Pink Sheets(R). As a result, the existing limited trading market for the Class A
Shares and Class B Shares will likely be further reduced or eliminated. This
reduction or elimination may result in the Company having less flexibility in
attracting and retaining executives and other employees since equity-based
incentives (such as stock options) tend not to be viewed as having the same
value in a private company.
We have no current plans to issue Class A Shares or Class B Shares
after the Reverse/Forward Stock Splits other than pursuant to our existing 1999
Stock Option Plan, but we reserve 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 interest of the Company. Holders of Class A Shares will have preemptive
rights with respect to future issuances of our equity securities other than
Class B Shares. Holders of Class B Shares will not have any preemptive or other
preferential rights to purchase any of our equity securities that we may issue
in the future, unless such rights are specifically granted to such holders.
While the Company has no present plan to do so, after the
Reverse/Forward Stock Splits have been consummated, the Company may, from time
to time, repurchase Class A Shares and Class B Shares pursuant to an odd-lot
repurchase program, privately negotiated sales or other transactions. Whether or
not the Company seeks to purchase shares in the future will depend on a number
of factors, including the Company's financial condition, operating results and
available capital at the time.
We expect that upon the completion of the Reverse/Forward Stock
Splits, the Class B Shares beneficially owned by our executive officers and
directors will comprise approximately 42.2% of the then outstanding Class B
Shares, as compared to approximately 40.3% of the Class B Shares outstanding
immediately prior to the Reverse/Forward Stock Splits.
We expect our business and operations to continue as they are
presently being conducted and, except as disclosed in this Proxy Statement, the
Reverse/Forward Stock Splits are not anticipated to have any effect upon the
conduct of our business. The Company expects to realize time and cost savings as
a result of terminating its public company status. The Company intends to invest
those savings in other areas of its business operations with the hope of
improving service for its customers and the Company's profitability. 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 the Company's assets; to change the composition of the Board
or the Company's management; to change materially the Company's indebtedness or
capitalization; to change the Company's dividend policy; or otherwise to effect
any material change in the Company's corporate structure or business.
Alternatives to the Reverse/Forward Stock Splits
In making the determination to proceed with the Reverse/Forward
Stock Splits, the Board considered the potential feasibility of certain other
alternative transactions, as described below:
10
o Management Buyout. The Board considered, as a possible alternative
to the Reverse/Forward Stock Splits, the feasibility of a
transaction in which all or a portion of the senior executive
officers of the Company would form an acquisition vehicle to secure
financing and purchase the Shares of the Company's unaffiliated
stockholders. None of the executive officers of the Company,
however, was interested in engaging in such a transaction.
o Issuer Tender Offer. The Board considered the feasibility of an
issuer tender offer to repurchase Class B Shares. A principal
disadvantage of this type of transaction is that, due to its
voluntary nature, the Company would have no assurance that the
transaction would result in a sufficient number of shares being
tendered. Moreover, the going private rules regarding the treatment
of stockholders in a tender offer, including pro rata acceptance of
offers from stockholders, make it difficult to ensure that the
Company would be able to significantly reduce the number of the
holders of record of the Class B Shares. In terms of timing, this
type of transaction, especially after giving effect to any
extensions of deadlines for tendering, would likely necessitate a
longer time frame than that of a reverse stock split. As a result of
these disadvantages, the Board determined not to pursue this
alternative.
o Traditional Stock Repurchase Program. The Board considered a plan
whereby the Company would periodically repurchase Class B Shares on
the open market at then-current market prices. The Board rejected
this type of transaction since repurchasing enough shares in this
manner so as to enable the Company to deregister under the Exchange
Act would likely take an extended period of time, have no assurance
of success and be of undeterminable cost.
o Odd-Lot Repurchase Program. The Board considered the feasibility of
a transaction whereby the Company would announce to its stockholders
that it would repurchase, at a designated price per share, Class B
Shares held by any holder of less than a specified number of shares
(such as 100). A principal disadvantage of this type of transaction
is that, due to its voluntary nature, the Company would have no
assurance that the transaction would result in a sufficient number
of shares being tendered. In terms of timing, this type of
transaction, especially after giving effect to any extensions of
deadlines for tendering, would likely necessitate a longer time
frame than that of a reverse stock split. As a result of these
disadvantages, the Board rejected this alternative.
o Maintaining the Status Quo. The Board considered maintaining the
status quo. In that case, the Company would continue to incur the
expenses of being a public reporting company without enjoying the
benefits traditionally associated with public company status. The
Board believes that maintaining the status quo is not in the best
interest of the Company and rejected this alternative.
Fairness of the Transaction
The Company is seeking approval of the Reverse/Forward Stock Splits
through a formal stockholders' meeting. This approval mechanism is intended to
afford the Company's stockholders with the time and opportunity to express their
views regarding the Reverse/Forward Stock Splits.
No appraisal or dissenters' rights are available under Ohio law, or
the Company's Amended and Restated Articles of Incorporation or Code of
Regulations to stockholders who dissent from the Reverse/Forward Stock Splits.
The Company has not specifically provided unaffiliated stockholders with access
to its corporate files or with an opportunity to obtain counsel or appraisal
services at the Company's expense. In addition, no unaffiliated representative
was retained by the Company to act solely on behalf of the unaffiliated
stockholders in connection with the Reverse/Forward Stock Splits to negotiate
the terms and conditions thereof or prepare a report concerning their fairness
because each of the Board and the Special Transactions Committee views the (i)
Fairness Opinion, (ii) need to obtain the affirmative vote of the holders of at
least two-thirds (2/3) of the (a) Class A Shares and (b) Class B Shares, voting
separately as a class, and (iii) other matters discussed in this Proxy Statement
as affording adequate procedural safeguards to unaffiliated stockholders without
the extraordinary expense of multiple financial or legal advisors.
The Reverse/Forward Stock Splits are not structured in such a way so
as to require the approval of at least a majority of the unaffiliated
stockholders of the Company. Each of the Board and the Special Transactions
Committee based its decision not to seek such approval due to the (i) aforesaid
supermajority vote (i.e., affirmative vote of two-thirds (2/3) of the Class A
Shares and Class B Shares) required for approval of the Reverse/Forward Stock
11
Splits; (ii) Reverse/Forward Stock Splits' treatment of affiliated holders of
Class B Shares in the same manner as unaffiliated holders of Class B Shares; and
(iii) prohibition against the disparate treatment of shares of the same class or
series contained in the Ohio General Corporation Law. In determining not to seek
such approval, each of the Board and the Special Transactions Committee was
aware that the executive officers and directors of the Company, who together own
approximately 41.1% and 40.3%, respectively, of the voting power of the Class A
Shares and Class B Shares outstanding and entitled to vote at the Special
Meeting, have indicated that they will vote in favor of the Reverse/Forward
Stock Splits at the Special Meeting. Except for the unanimous vote of the Board
to approve the Reverse/Forward Stock Splits, the Company is not aware that any
of its executive officers, directors or affiliates has made a recommendation
either in support of or opposed to the Reverse/Forward Stock Splits.
In order to provide a fair consideration of the terms and conditions
of the Reverse/Forward Stock Splits, the Board created the Special Transactions
Committee consisting of independent directors John E. Herrnstein, Joel Gerber
and Jerry B. Whited. Messrs. Herrnstein, Gerber and Whited have served on the
Board since 1996, 2003 and 2001, respectively, and are familiar with the
Company's business and prospects. These individuals also constitute all of the
members of the Company's audit committee. Neither Mr. Gerber nor Mr. Whited
beneficially owns any Class A Shares or Class B Shares. As of the date of this
Proxy Statement, Mr. Herrnstein beneficially owned 105 Class A Shares and 495
Class B Shares.
Messrs. Herrnstein, Gerber and Whited are "independent directors" as
defined by Rule 4200(a)(14) of the National Association of Securities Dealers'
listing standards. None of the members of the Special Transactions Committee is
currently, nor in the past three years has been, employed as an officer or
employee of the Company or held any other relationship which, in the opinion of
the Board, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
The Special Transactions Committee was empowered by the Board to
assist the Board in establishing the terms and conditions of the Reverse/Forward
Stock Splits. The Special Transactions Committee was also empowered by the Board
to engage advisors to assist the committee members in connection therewith. The
Special Transactions Committee retained the services of the Financial Advisor to
provide a written opinion with respect to the fairness, from a financial point
of view, of the consideration to be paid to Cashed Out Holders. The Special
Transactions Committee also retained the services of independent legal counsel
to advise the committee members with respect to their fiduciary obligations.
Each member of the Special Transactions Committee was present at all meetings of
the Special Transactions Committee.
The Board and the Special Transactions Committee each believe that
the Reverse/Forward Stock Splits are in the best interest of the Company and are
substantively and procedurally fair to the affiliated and unaffiliated holders
of Class A Shares and Class B Shares, including the Cashed Out Holders and
Continuing Holders. After studying the Reverse/Forward Stock Splits and their
anticipated effects on holders of Class B Shares, the Board and the Special
Transactions Committee each unanimously approved the Reverse/Forward Stock
Splits.
Each of the Board and the Special Transactions Committee considered
the factors in support of and in opposition to the Reverse/Forward Stock Splits
discussed below in reaching its conclusion as to the substantive fairness of the
Reverse/Forward Stock Splits. The Board and the Special Transactions Committee
did not assign specific weight to the following factors in a formulaic fashion,
but each did place special emphasis on the opportunity for unaffiliated holders
of Class B Shares to sell their shares at a significant premium, as well as the
significant cost and time savings for the Company.
Factors in Support of the Reverse/Forward Stock Splits
1. Opportunity for Holders of Less than 125 Class B Shares to Sell at a
Significant Premium
Given the lack of liquidity with respect to the Class B Shares, the
Board and the Special Transactions Committee believed that the trading price of
the Class B Shares was not necessarily an accurate indicator of the "fair value"
of the Class B Shares. In light of the foregoing, the Financial Advisor was
retained by the Special Transactions Committee to assist it in considering the
Reverse/Forward Stock Splits.
The Cash Out Price of $165 per Class B Share owned by a Cashed Out
Holder represents a premium of 90% over the (i) closing price for the Class B
Shares on August 18, 2004 (i.e., the date immediately preceding the date on
which the Reverse/Forward Stock Splits were first publicly announced) as
reported on the Pink Sheets(R), which
12
was $87 per share, and (ii) average closing price of the Class B Shares over the
30 trading days prior to and including August 18, 2004 as reported on the Pink
Sheets(R), which was $87 per share. During such 30-trading day period, a total
of approximately 2,200 Class B Shares were traded in five (5) separate
transactions. The Special Transactions Committee accepted the proposal made by
the management of the Company that $165 per share be established as the Cash Out
Price for the Class B Shares. The Special Transactions Committee, in the
exercise of its business judgment, adopted such recommendation since the Cash
Out Price for the Class B Shares represented fair consideration at a significant
premium to the current and historical market prices of the Class B Shares while
also being consistent with the valuation analysis of the Financial Advisor.
The Board and the Special Transactions Committee believe that the
Cash Out Price is fair to the Cashed Out Holders. There are no indications that
without effecting the Reverse/Forward Stock Splits the market price for the
Class B Shares would meet or exceed the Cash Out Price at any time in the
foreseeable future. Each of the Board and Special Transactions Committee
determined the Reverse/Forward Stock Splits are fair to Cashed Out Holders in
part because they provide Cashed Out Holders with an opportunity to liquidate
their holdings of Class B Shares, without payment of brokerage commissions or
other transaction fees, at a premium above the current and historical market
prices of the Class B Shares.
While performing its analysis for the Fairness Opinion, the
Financial Advisor selected the valuation analyses (i.e., Comparable Public
Company, Comparable M&A Transaction and Discounted Cash Flow) it deemed most
relevant based on its knowledge of the Company and the Company's expressed
intent to continue as an operating entity and not liquidate. Please see "Opinion
of Financial Advisor" for a discussion of these analyses.
Neither the Board nor the Special Transactions Committee considered
the Company's net book value or liquidation value material or relevant in the
context of the Reverse/Forward Stock Splits. Neither the Board nor the Special
Transactions Committee calculated the Company's liquidation value, on a per
share basis or otherwise. Although not calculated by the Board or Special
Transactions Committee, the liquidation value of the Company would likely
reflect an arbitrarily low valuation, and thus using liquidation value to help
set the Cash Out Price would have supported a price lower than the price the
Board and Special Transactions Committee believed would be appropriate in light
of their desire to ensure that Cashed Out Holders receive fair value for their
Class B Shares.
The Board and Special Transactions Committee believe that the
Company's net book value per share does not properly reflect the Company's
earnings stream and cash flow, two factors such persons consider critical for a
meaningful valuation of the Class B Shares. Net book value is an accounting
construct, the calculation of which is determined in accordance with United
States generally accepted accounting principles. Net book value is based on the
historical cost of a company's assets, and it may or may not properly reflect
the economic value to a company's stockholders of those assets or of such
company on a going concern basis. Such economic value is customarily determined
based on the company's prospective earnings and net cash flow on a going-forward
basis. Thus, the Financial Advisor based its analysis on the Company's
historical and prospective operating performance. As set forth in greater detail
in the section of this Proxy Statement entitled "Reverse/Forward Stock Splits
Proposal--Financial Information--Summary Financial Information," the Company's
book value per Class B Share as of September 30, 2004 was negative $1,207. The
Board and Special Transactions Committee believe that the valuation range of the
Class B Shares, as determined by the Financial Advisor, as well as the market
price of the Class B Shares on September 30, 2004 (i.e., $87 per share), are
significantly greater than the aforesaid book value per Class B Share due to the
inclusion of Horizon PCS, Inc., a former subsidiary of the Company.
The disparity between the Company's book value per Class B Share as
of September 30, 2004 and the valuation range of the Class B Shares, as
determined by the Financial Advisor on a going concern basis, as well as the
market price of the Class B Shares on September 30, 2004 are due mainly to the
fact that the book value is reflective of the Company's cumulative historical
earnings and the other values are based on the anticipated or projected earnings
capability of the Company. The book value of the Company is also further reduced
by the historical losses from Horizon PCS, Inc., a former subsidiary of the
Company no longer included in the results of operations of the Company.
2. Significant Cost and Time Savings for the Company
By deregistering the Class B Shares and suspending our periodic
reporting obligations under the Exchange Act, we expect to realize recurring
annual cost savings of approximately $565,000, consisting of (i) $315,000 in
fees and expenses historically incurred (other than those relating to the
Sarbanes-Oxley Act) and (ii) $250,000 in
13
fees that would otherwise be expected to be incurred annually due to compliance
with the requirements imposed by the Sarbanes-Oxley Act. In addition, we expect
deregistering the Class B Shares will also provide the Company with a
non-recurring savings of approximately $775,000 in fees and expenses that would
otherwise be expected to be incurred due to compliance with requirements of the
Sarbanes-Oxley Act. The termination of our reporting obligations under the
Exchange Act will also alleviate a significant amount of time and effort
previously required of our executive officers to prepare and review the reports
required to be filed under the Exchange Act. See "Special Factors--Reasons for
the Reverse/Forward Stock Splits" for a more detailed discussion of these cost
savings.
3. Equal Treatment of Affiliated and Unaffiliated Holders of Class B Shares
The Reverse/Forward Stock Splits will not impact affiliated holders
of Class B Shares differently from unaffiliated holders of Class B Shares on the
basis of affiliate status. The sole determining factor in whether a holder of
Class B Shares will become a Cashed Out Holder or Continuing Holder as a result
of the Reverse/Forward Stock Splits is the number of Class B Shares held by such
holder immediately prior to the Reverse/Forward Stock Splits.
4. No Effect Upon Voting Power
The Reverse/Forward Stock Splits will have no effect upon the voting
power of the Company's stockholders. Although the Class B Shares are eligible
for voting at the Special Meeting, these shares, as a general matter, are
non-voting. The vote of the Class B Shares is required only under a limited
number of special circumstances prescribed by the Ohio General Corporation Law.
Absent these special circumstances, the Class A Shares are the only equity
securities of the Company eligible to vote upon matters submitted by the Board
for stockholder approval. The Class A Shares will not be included within the
Reverse/Forward Stock Splits.
5. No Material Change in Percentage Ownership of Executive Officers and
Directors
Since only an estimated 12,000 out of 271,983 outstanding Class B
Shares will be eliminated as a result of the Reverse/Forward Stock Splits, the
percentage ownership of the Continuing Holders will be approximately the same as
it was prior to the Reverse/Forward Stock Splits. For example, our executive
officers and directors currently beneficially own approximately 40.3% of the
outstanding Class B Shares, and will beneficially own approximately 42.2% of the
outstanding Class B Shares following completion of the Reverse/Forward Stock
Splits. The Class A Shares will not be included within the Reverse/Forward Stock
Splits.
6. Potential Ability to Control Decision to Remain a Holder of Class B Shares
or Liquidate Class B Shares
Another factor considered by the Board and Special Transactions
Committee in determining the fairness of the Reverse/Forward Stock Splits to the
holders of the Class B Shares is that current holders of fewer than 125 Class B
Shares can seek to remain stockholders of the Company following the
Reverse/Forward Stock Splits by acquiring additional shares so that they own at
least 125 Class B Shares immediately before the Reverse/Forward Stock Splits.
Conversely, stockholders that own 125 or more Class B Shares who desire to
liquidate their shares in connection with the Reverse/Forward Stock Splits at
the premium price offered can seek to reduce their holdings to less than 125
Class B Shares by selling shares prior to the Reverse/Forward Stock Splits. The
Board and Special Transactions Committee did not place undue emphasis on this
factor due to the limited trading market for the Class B Shares.
Factors Not in Support of the Reverse/Forward Stock Splits
1. Substantial or Complete Reduction of Public Sale Opportunities
Following the Reverse/Forward Stock Splits and the deregistration of
the Class B Shares under the Exchange Act, we anticipate that the public market
for Class A Shares and Class B Shares will be substantially reduced or
eliminated altogether. The Board and the Special Transactions Committee,
however, considered this factor to be a minor consequence since the Class A
Shares and Class B Shares historically have traded principally in local
transactions without the benefit of an established public trading market or an
organized system for reporting prices paid.
14
2. Termination of Publicly Available Information
Upon termination of the registration of the Class B Shares under the
Exchange Act, our duty to file periodic reports with the Commission will be
suspended. Information regarding our operations and financial results that is
currently available to the general public and our investors will not be
available after we have terminated such registration. Following such
termination, investors seeking information about us will have to contact us
directly to receive such information. We may or may not provide investors with
requested information. While the Board and Special Transactions Committee
acknowledge the circumstances in which such termination of publicly available
information may be disadvantageous to our stockholders, such persons believe
that the overall benefits to the Company of no longer being a public reporting
company substantially outweigh the disadvantages thereof. The Reverse/Forward
Stock Splits will not affect the right of the Continuing Holders to obtain
certain information from the Company under Ohio law. Under Ohio law, a
stockholder has the right to make a written request to inspect a company's books
and records (including, without limitation, annual financial statements) and
receive copies thereof for any purpose reasonably related to such person's
interest as a stockholder.
3. Possible Significant Decline in Price of the Class A Shares and Class B
Shares
Due to the limited liquidity of the Class A Shares and Class B
Shares (as described in paragraph 1 above), the termination of the Company's
obligation to make public financial and other information following the
Reverse/Forward Stock Splits (as described in paragraph 2 above), and the
diminished opportunity for stockholders of the Company to monitor the management
of the Company due to the lack of public information, the stockholders of the
Company remaining after the consummation of the Reverse/Forward Stock Splits may
experience a significant decrease in the price at which they may sell their
Class A Shares and/or Class B Shares.
4. Inability to Participate in any Future Increases in Value of the Class B
Shares or Payments of Dividends Thereon
Following the Reverse/Forward Stock Splits, Cashed Out Holders will
have no further financial interest in the Company with respect to their Class B
Shares and thus will not have the opportunity to participate in the potential
appreciation in the value of such shares or the payment of dividends thereon.
The Board and Special Transactions Committee determined that this factor does
not make the Reverse/Forward Stock Splits unfair to the Cashed Out Holders since
there are no indications that without effecting the Reverse/Forward Stock Splits
the market price for the Class B Shares would meet or exceed the Cash Out Price
at any time in the foreseeable future.
The Board and Special Transactions Committee believe that the
factors mentioned above, when viewed together, support a conclusion that the
Reverse/Forward Stock Splits are substantively fair to the affiliated and
unaffiliated holders of Class A Shares and Class B Shares, including the Cashed
Out Holders and Continuing Holders.
Other Factors
The factors set forth below were not considered by the Board or the
Special Transactions Committee in reaching their respective conclusions as to
the substantive fairness of the Reverse/Forward Stock Splits. These factors were
either inapplicable or not considered material.
o Redemptions - We have not purchased any Class B Shares during the
past two calendar years or during the current calendar year.
o Firm Offers - We are not aware of any firm offers to purchase us
that have been made during the past two calendar years or during the
current calendar year by any unaffiliated person.
o Prior Public Offerings - We have not made any underwritten public
offering of the Class B Shares during the past three calendar years
or during the current calendar year.
o Merger, Consolidation or Other Extraordinary Transaction - We have
not engaged in a merger or consolidation with another company or in
any other extraordinary transaction, such as the sale or other
transfer of all, or a substantial part of our assets, during the
past two calendar years or during the current calendar year.
o Securities Purchases - There have not been any purchases of our
Class A Shares or Class B Shares that would enable the holder to
exercise control over us.
o Liquidation Value - As discussed above, the liquidation value of the
Company was not deemed relevant since we plan to continue to operate
as a going concern following the Reverse/Forward Stock Splits.
15
OPINION OF FINANCIAL ADVISOR
The Special Transactions Committee retained the Financial Advisor to
provide the Fairness Opinion. On December 7, 2004, the Financial Advisor
delivered the Fairness Opinion to the Board and Special Transactions Committee.
The Fairness Opinion states that based upon and subject to the factors and
assumptions set forth therein, the Cash Out Price to be paid to Cashed Out
Holders pursuant to the Reverse/Forward Stock Splits is fair from a financial
point of view as of December 7, 2004. The Financial Advisor also presented to
the Board and Special Transactions Committee a summary of the analyses described
below.
The Fairness Opinion was prepared for use by the Board and Special
Transactions Committee, and was directed only to the fairness from a financial
point of view, as of the date thereof, of the Cash Out Price. The Financial
Advisor was not involved in structuring the Reverse/Forward Stock Splits and its
opinion does not compare the relative merits of the Reverse/Forward Stock Splits
with those of any other transaction or business strategy which were or might
have been available to or considered by the Company, the Board or the Special
Transactions Committee as alternatives to the Reverse/Forward Stock Splits and
does not address the underlying business decision by the Board or Special
Transactions Committee to proceed with or effect the Reverse/Forward Stock
Splits. The Fairness Opinion is for the information of, and directed to, the
Board and Special Transactions Committee in their evaluation of the
Reverse/Forward Stock Splits. The Fairness Opinion does not constitute a
recommendation to the Board or Special Transaction Committee as to how they
should vote on the Reverse/Forward Stock Splits or to any stockholder as to how
such stockholder should vote at any stockholders' meeting at which the
Reverse/Forward Stock Splits are considered. In furnishing the Fairness Opinion,
the Financial Advisor did not admit that it is an expert within the meaning of
the term "expert" as used in the Securities Act nor did it admit that its
opinion serves as a report or valuation within the meaning of the Securities
Act.
The full text of the Fairness Opinion is annexed as Exhibit A to
this Proxy Statement and is incorporated herein by reference. The summary of the
Fairness Opinion set forth in this Proxy Statement is qualified in its entirety
by reference to the full text of the Fairness Opinion. Stockholders are urged to
read the Fairness Opinion carefully and in its entirety for a discussion of the
procedures followed, assumptions made, other matters considered and limits of
the review by the Financial Advisor in connection with the Fairness Opinion. The
Financial Advisor has consented to the use of the Fairness Opinion in this Proxy
Statement.
The Special Transactions Committee selected the Financial Advisor as
its financial advisor because it is a nationally recognized investment banking
firm that has substantial experience in the communications industry and is
familiar with the Company and its business. As part of its investment banking
business, the Financial Advisor is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuation for corporate and other purposes. In the
ordinary course of the Financial Advisor's business, the Financial Advisor may,
from time to time, trade in the securities of the Company for its own account,
the accounts of investment funds and other clients under the management of the
Financial Advisor or its affiliates and/or the accounts of customers and,
accordingly, may at any time hold a long or short position in those securities.
In arriving at the Fairness Opinion, the Financial Advisor reviewed
the terms of the Reverse/Forward Stock Splits and also reviewed financial and
other information that was publicly available, or furnished to the Financial
Advisor by the Company's management, including information and financial
projections provided during discussions with the management of the Company. In
addition, the Financial Advisor reviewed certain publicly available operational,
financial and stock market data relating to selected public companies. The
Financial Advisor also reviewed the financial terms, to the extent publicly
available, of certain corporate acquisition transactions and conducted other
financial studies, analyses and investigations as the Financial Advisor deemed
necessary or appropriate for purposes of rendering the Fairness Opinion, as more
fully set forth therein.
In rendering the Fairness Opinion, the Financial Advisor assumed and
relied upon, without independent verification, the accuracy and completeness of
all financial and other information that was publicly available, supplied or
otherwise communicated to the Financial Advisor by or on behalf of the Company
and the Financial Advisor further relied upon the assurances of the Company's
management that they are unaware of any facts that would make the information
provided to the Financial Advisor incomplete or misleading. The Financial
Advisor also assumed, with the consent of the Company's management, that any
material liabilities (contingent or otherwise, known or unknown) of the Company
were set forth in the Company's financial statements.
16
With respect to financial projections of the Company, the Financial
Advisor relied upon the management of the Company as to the reasonableness and
achievability of the financial forecasts and projections (and the assumptions
and bases therein), and assumed such forecasts and projections were reasonably
prepared on bases reflecting the best currently available estimates and
judgments of management as to the future operating and financial performance of
the Company. Such forecasts and projections were based on numerous variables and
assumptions that are inherently uncertain including, without limitation, facts
related to general economic and business conditions. Accordingly, actual results
could vary significantly from the projections, and the Financial Advisor assumed
no responsibility for the accuracy or completeness of the projections.
THE COMPANY DOES NOT AS A MATTER OF COURSE MAKE PUBLIC PROJECTIONS
OR FORECASTS AS TO FUTURE OPERATIONS. THE MANAGEMENT OF THE COMPANY, HOWEVER,
DID PREPARE CERTAIN PROJECTIONS WHICH WERE PROVIDED TO THE FINANCIAL ADVISOR FOR
USE IN CONNECTION WITH THE FAIRNESS OPINION ANALYSES. THE SUMMARY OF THE
PROJECTIONS SET FORTH BELOW IS INCLUDED IN THIS PROXY STATEMENT SOLELY BECAUSE
THE PROJECTIONS WERE FURNISHED TO THE FINANCIAL ADVISOR. THEREFORE, SUCH SUMMARY
SHOULD BE USED BY STOCKHOLDERS OF THE COMPANY SOLELY FOR DECIDING HOW MUCH
WEIGHT TO GIVE TO THE FAIRNESS OPINION AND FOR NO OTHER PURPOSE.
The summary of the projections set forth below was not prepared with
a view toward public disclosure, and stockholders of the Company should not rely
upon such summary. Management of the Company prepared the projections for
internal purposes. The projections were not prepared in compliance with the
published guidelines of the Commission, Public Company Accounting Oversight
Board or American Institute of Certified Public Accountants regarding
prospective financial information. The projections were not prepared with the
assistance of, nor were they reviewed, compiled or examined by, the Company's
attorneys or independent accountants.
The projections reflect numerous assumptions, all made by the
management of the Company, about industry performance, general business
conditions, economic market and financial condition, and various other matters.
All of these matters are difficult or impossible to predict and many of them are
beyond the Company's ability to control. Accordingly, the Company offers no
assurance that the assumptions made in preparing the projections will prove
accurate, and actual results may differ materially and adversely from those
contained in the summary of the projections set forth below. Stockholders of the
Company should not view the inclusion of such summary as an indication that the
Company or its financial advisors, accountants, attorneys, officers or directors
consider the projections an accurate predictor of future events or that the
Company believes they are necessarily achievable. In light of the uncertainties
inherent in the projections, the Company strongly cautions its stockholders
against relying on the summary of the projections set forth below. The
projections were prepared in November 2004 and the Company has not updated them
since such date.
Projected Summary Consolidated Income Statement
Q4 2004 2004 2005 2006 2007 2008 2009
------- ---- ---- ---- ---- ---- ----
Total operating revenues ..... 12,504,565 50,618,139 50,267,123 50,314,679 50,549,534 50,384,302 50,314,409
Total operating expenses(1) .. 9,235,291 37,824,194 34,156,397 34,282,861 34,480,244 34,670,151 34,886,669
---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA (Cash flow) ........... 3,269,274 12,793,945 16,110,725 16,031,817 16,069,289 15,714,151 15,427,740
Interest and other ......... 594,265 1,629,884 2,260,398 2,079,571 1,799,289 1,364,852 691,474
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating cash flow .......... 2,675,009 11,164,061 13,850,327 13,952,246 14,270,000 14,349,300 14,736,266
Depreciation ............... 2,285,500 9,175,195 9,077,715 8,958,390 8,852,281 8,758,119 8,691,049
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income before income
taxes ...................... 389,509 1,988,865 4,772,612 4,993,857 5,417,719 5,591,181 6,045,217
Income taxes ............... 187,934 920,474 1,914,772 2,019,729 2,202,639 2,280,184 2,469,782
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income ................... 201,575 1,068,391 2,857,841 2,974,128 3,215,080 3,310,997 3,575,435
========== ========== ========== ========== ========== ========== ==========
(1) Includes $500,000 projected annual savings in the form of reduced audit
and legal expenses as a result of going private, beginning in 2005.
17
Projected Capital Expenditures
2005 2006 2007 2008 2009
---- ---- ---- ---- ----
Total Consolidated Capital Budget ................... $9,173,394 $9,704,000 $7,404,000 $7,614,000 $7,834,000
========== ========== ========== ========== ==========
The Financial Advisor was not requested to make, and did not make,
an independent evaluation or appraisal of the assets, properties, facilities or
liabilities (contingent or otherwise) of the Company, and was not furnished with
any such appraisals or evaluations. Estimates of values of companies and assets
do not purport to be appraisals or necessarily reflect the prices at which
companies and assets may actually be sold. Because such estimates are inherently
subject to uncertainty, the Financial Advisor assumes no responsibility for
their accuracy. The Financial Advisor's opinion is necessarily based upon
financial, economic, market and other conditions and circumstances existing and
disclosed to the Financial Advisor on the date of the Fairness Opinion.
Subsequent developments may affect the conclusions reached in the Fairness
Opinion and the Financial Advisor has no obligation to update, revise or
reaffirm the Fairness Opinion. The Financial Advisor relied as to certain legal
matters on advice of counsel to the Special Transactions Committee and the
Company.
In preparing the Fairness Opinion, the Financial Advisor conducted
the following three principal analyses: (i) a comparison of the Company with
certain publicly traded companies deemed comparable to the Company; (ii) a
comparison of the Reverse/Forward Stock Splits with merger and acquisition
transactions involving certain rural local exchange companies deemed comparable
to the Company; and (iii) an analysis of the present value of the Company's
projected future cash flows available for distribution to its equity and debt
security holders. The Financial Advisor believes that the principal benchmarks
for comparing companies in the rural local exchange carrier business are
enterprise value divided by the Company's EBITDA for the most recently reported
twelve-month period and enterprise value divided by the number of total access
lines. The resulting quotients are referred to as an EBITDA multiple and access
line multiple, respectively. For purposes of the Financial Advisor's analysis,
the Financial Advisor defined enterprise value as the market value of
fully-diluted common equity plus the book value of long-term debt and the
liquidation value of outstanding preferred stock, if any, minus cash. EBITDA is
a measure of a company's pre-tax operating cash flow calculated by adding to a
company's net income its interest expense, income taxes, depreciation,
amortization and extraordinary items and deducting its interest income. In
performing its analyses, the Financial Advisor applied an estimated 15% discount
to the price of the Class B Shares due to the lack of voting and pre-emptive
rights associated with such shares, as well as the relative illiquidity of such
shares.
No company or transaction used in any analysis as a comparison is
identical to the Company or the Reverse/Forward Stock Splits, and they all
differ in material ways. As a result, the Financial Advisor applied its
experience and professional judgment to determine an appropriate reference range
of the indicated values or multiples in connection with its analyses of
comparable companies and transactions. Accordingly, an analysis of the results
is not mathematical; rather it involves complex considerations and judgments
concerning differences in financial and trading value of the comparable
companies or transactions to which they are being compared. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analyses or summary description. In arriving at the Fairness Opinion,
the Financial Advisor considered the results of all of its analyses as a whole
and did not attribute any particular weight to any analysis or factor considered
by it. The Financial Advisor believes that the summary provided and the analyses
described above must be considered as a whole and that selecting portions of
these analyses, without considering all of them, would create an incomplete view
of the process underlying its analyses and opinion. In addition, the Financial
Advisor may have given various analyses and factors more or less weight than
other analyses and factors and may have deemed various assumptions more or less
probable than other assumptions. Therefore, the range of valuations resulting
from any particular analysis described above should not be taken to be the
Financial Advisor's view of the actual value of the Company.
The following is a summary of the material financial analyses
performed by the Financial Advisor in connection with the preparation of the
Fairness Opinion. These summaries of financial analyses alone do not constitute
a complete description of the financial analyses the Financial Advisor employed
in reaching its conclusions. The order of analyses described does not represent
relative importance or weight given to those analyses by the Financial Advisor.
Some of the summaries of the financial analyses include information presented in
tabular format. The tables must be read together with the full text of each
summary and are alone not a complete
18
description of the Financial Advisor's financial analyses. Except as otherwise
noted, the following quantitative information, to the extent that it is based on
market data, is based on market data as it existed on or before December 6, 2004
and is not necessarily indicative of current market conditions.
Public Comparables Analysis
The Financial Advisor analyzed selected current and historical
operating information and valuation data for certain publicly traded rural local
exchange carriers that the Financial Advisor deemed comparable to the Company.
Particular emphasis was placed on rural local exchange carriers with similar
sources of revenues. The rural local exchange carriers that the Financial
Advisor used for its analysis were:
- Commonwealth Telephone Enterprises, Inc.
- CT Communications, Inc.
- D&E Communications, Inc.
- HickoryTech Corporation
- North Pittsburgh Systems, Inc.
The Financial Advisor divided the enterprise value of each of the
comparable companies by the company's EBITDA for the most recently reported
twelve-month period to produce an EBITDA multiple. In addition, the Financial
Advisor divided the enterprise value of each of the comparable companies by its
number of total access lines to produce an access line multiple. The result of
this analysis was a range of EBITDA multiples and a range of access line
multiples for companies comparable to the Company. The Financial Advisor then
multiplied the Company's EBITDA for the most recently reported twelve-month
period and the number of total access lines of the Company by these respective
multiples to derive a range of estimated enterprise values of the Company. These
analyses resulted in an implied valuation reference range for the Company as
shown in the following tables:
- -----------------------------------------------------------------------------------------------------
Implied
Company Comparable Enterprise Value Implied
EBITDA From Company (EBITDA times Equity Value per
Last 12 Months* Multiple** Multiple)* Class B Share
- -----------------------------------------------------------------------------------------------------
High ..................... $12.9 7.0x $90.0 $178.75
Mean ..................... $12.9 6.9x $88.2 $173.99
Low ...................... $12.9 5.5x $70.7 $127.78
Reverse/Forward Stock .... $12.9 6.6x $84.8 $165.00
Splits Price
- -----------------------------------------------------------------------------------------------------
* In millions
** Range of comparable company's enterprise value divided by last 12 months
EBITDA.
- -----------------------------------------------------------------------------------------------------
Implied
Comparable Enterprise Value
Company (Access Lines Implied
Company Value per times Value per Equity Value per
Access Lines Access Line* Access Line)** Class B Share
- -----------------------------------------------------------------------------------------------------
High ..................... 36,658 $3,240 $118.8 $254.67
Mean ..................... 36,658 $2,565 $94.0 $189.30
Low ...................... 36,658 $1,889 $69.2 $123.83
Reverse/Forward Stock .... 36,658 $2,314 $84.8 $165.00
Splits Price
- -----------------------------------------------------------------------------------------------------
* Range of comparable company's enterprise value divided by access lines.
** In millions
Comparable Acquisition Analysis
The Financial Advisor reviewed five acquisitions involving rural
local exchange carriers that the Financial Advisor deemed to be comparable to
the Company. The transactions used in the Financial Advisor's analysis were:
- Consolidated Communications' acquisition of TXU Communications
19
- FairPoint Communications' acquisition of Community Service
Communications
- Nemont Telephone Cooperative's acquisition of Citizens' access lines
in North Dakota
- Consolidated Communications' acquisition of Illinois Consolidated
Telephone Company
- Telephone & Data Systems' acquisition of MCT
For each of these acquisitions where the information was publicly
available, the Financial Advisor divided the enterprise value of the target
implied in the acquisition by the target's EBITDA for the most recently reported
twelve-month period to produce an EBITDA multiple. In addition, the Financial
Advisor divided the target's enterprise value by its number of total access
lines to produce an access line multiple. The result of this analysis was a
range of EBITDA multiples and a range of access line multiples for acquisitions
of companies comparable to the Company. The Financial Advisor then multiplied
the Company's EBITDA for the most recently reported twelve-month period and the
number of total access lines of the Company by these respective multiples to
derive a range of estimated enterprise values of the Company. These analyses
resulted in an implied enterprise valuation reference range for the Company as
shown in the following tables:
- --------------------------------------------------------------------------------------------------------
Implied
Company Comparable Enterprise Value Implied
EBITDA From Acquisition (EBITDA times Equity Value per
Last 12 Months* Multiple** Multiple)* Class B Share
- --------------------------------------------------------------------------------------------------------
High ...................... $12.9 9.0x $115.8 $246.71
Mean ...................... $12.9 8.1x $104.6 $217.15
Low ....................... $12.9 7.0x $90.0 $178.75
Reverse/Forward Stock ..... $12.9 6.6x $84.8 $165.00
Splits Price
- --------------------------------------------------------------------------------------------------------
* In millions
** Range of comparable acquisition's enterprise value divided by the last 12
months EBITDA.
- -----------------------------------------------------------------------------------------------------
Implied
Comparable Enterprise Value
Acquisition (Access Lines Implied
Company Value per times Value per Equity Value per
Access Lines Access Line* Access Line)** Class B Share
- -----------------------------------------------------------------------------------------------------
High ..................... 36,658 $3,389 $124.2 $269.10
Mean ..................... 36,658 $2,839 $104.1 $215.84
Low ...................... 36,658 $2,245 $82.3 $158.31
Reverse/Forward Stock .... 36,658 $2,314 $84.8 $165.00
Splits Price
- -----------------------------------------------------------------------------------------------------
* Range of comparable acquisition's enterprise value divided by access
lines.
** In millions
Discounted Cash Flow Analysis
The Financial Advisor performed a discounted cash flow analysis of
the Company for the period commencing January 1, 2005 and ending December 31,
2009 using the Company's projected operating results. The discounted cash flow
analysis estimated the value of the Company by taking the Company's projected
future cash flows available for distribution to its equity and debt security
holders and dividing the cash flows generated each year by a number dependent
upon a discount rate to derive a present value of these cash flows. The
Financial Advisor selected a range of discount rates for this analysis based on
an estimate of the Company's weighted average cost of capital. The value of
these discounted cash flows was then added to the Company's discounted estimated
terminal value to determine a total enterprise value for the Company. The
projected future cash flows were discounted using a discount rate ranging from
9.5% to 10.5%. The Company's terminal value was estimated by multiplying its
projected EBITDA for the year ending December 31, 2009 by multiples ranging from
5.5x to 6.5x. From this analysis, the Financial Advisor derived an implied
enterprise valuation reference range for the Company as shown in the following
table:
20
- --------------------------------------------------------------------------------
Terminal Implied Implied
Discount EBITDA Enterprise Equity Value per
Rate Multiple Value* Class B Share
- --------------------------------------------------------------------------------
High ................... 9.5% 6.5x $81.6 $156.40
Mean ................... 10.0% 6.0x $75.1 $139.29
Low .................... 10.5% 5.5x $68.9 $122.87
Reverse/Forward Stock $84.8 $165.00
Splits Price
- --------------------------------------------------------------------------------
* In millions
Conclusion
Based upon the foregoing analyses and the assumptions and
limitations set forth in full in the text of the Fairness Opinion, the Financial
Advisor is of the opinion that, as of the date of the Fairness Opinion, the Cash
Out Price to be paid by the Company to the Cashed Out Holders pursuant to the
Reverse/Forward Splits is fair to the Cashed Out Holders from a financial point
of view.
Engagement of the Financial Advisor
The Company has agreed to pay the Financial Advisor a fee of
$250,000 and to reimburse the Financial Advisor for its reasonable out-of-pocket
expenses related to its engagement, including the reasonable fees and expenses
of counsel, whether or not the Reverse/Forward Stock Splits are consummated. The
Company has also agreed to indemnify the Financial Advisor for certain
liabilities relating to or arising out of its engagement. No compensation
received or to be received by the Financial Advisor is based on or is contingent
on the results of the Financial Advisor's engagement. There are no other current
arrangements to compensate the Financial Advisor, its affiliates or unaffiliated
representatives for any services rendered to the Company, its executive
officers, directors or affiliates. The Financial Advisor has not previously
provided financial advisory services to the Company, and none of the Financial
Advisor's employees who worked on the engagement has any known financial
interest in the assets or equity of the Company or the outcome of the
engagement.
GENERAL VOTING INFORMATION
This Proxy Statement and the enclosed proxy card are being furnished
to all stockholders of the Company in connection with the Special Meeting. Your
proxy is being solicited by the Board and is subject to revocation at any time
prior to the voting of the proxy as provided below. Unless a contrary choice is
indicated, all duly executed proxies received by the Company will be voted for
the following proposal:
o The approval of amendments to the Company's Amended and Restated
Articles of Incorporation whereby the Company would effect a
1-for-125 reverse stock split of its Class B Shares, such that
holders of less than 125 Class B Shares would have their Class B
Shares cancelled and converted into the right to receive the Cash
Out Price, followed immediately by a 125-for-1 forward stock split
of the Class B Shares.
The Class A Shares and Class B Shares are eligible for voting at the
Special Meeting. Although the Class B Shares, as a general matter, are
non-voting, these shares are entitled to vote at the Special Meeting under Ohio
law since the Board is seeking approval of amendments to its Amended and
Restated Articles of Incorporation relating to the Class B Shares.
Shares cannot be voted at the Special Meeting unless the holder
thereof is present or represented by proxy. When the enclosed proxy card is
properly executed and timely returned, the Shares represented thereby will be
voted as specified therein. Any holder of Shares giving a proxy has the right to
revoke it at any time prior to its exercise as provided below.
Stockholders Entitled to Vote at the Special Meeting
Only holders of record of Shares at the close of business on
February 17, 2005 are entitled to notice of, and to vote at, the Special Meeting
and any adjournment or postponement thereof. On that date, there were 90,561
Class A Shares and 271,983 Class B Shares outstanding. Such holders of record
are entitled to one vote on each matter considered and voted upon at the Special
Meeting for each Share held of record at the close of business on the record
date. The Company currently has no other outstanding class of securities
entitled to vote at the Special Meeting.
21
How to Vote Your Shares
Your vote is important. Your Shares can be voted at the Special
Meeting only if you are present in person or represented by proxy. Even if you
plan to attend the Special Meeting, we urge you to vote now by completing and
submitting the enclosed proxy card. You may cast your vote simply by marking
your proxy card, and then dating, signing and returning it in the postage-paid
envelope provided. No provision has been made by the Company for Internet or
telephone voting of your Shares.
How to Revoke Your Proxy
You may revoke your proxy at any time before it is voted at the
Special Meeting by:
o Properly executing and delivering a later-dated proxy;
o Voting by ballot at the Special Meeting; or
o Sending a written notice of revocation to the inspectors of election
in care of the Secretary of the Company at the address listed above.
Voting at Special Meeting
Voting by proxy will in no way limit your right to vote at the
Special Meeting if you later decide to attend in person. Your Shares are either
held of record by you or in street name. Shares held of record are registered
directly in your name with the Transfer Agent. As the stockholder of record, you
have the right to grant your proxy directly to the Company or to vote in person
at the Special Meeting. Shares held in street name are shares held beneficially
for you through a broker, trustee or other nominee (such as a bank). Since you
are not the holder of record with respect to your Shares held in street name,
you may not vote these Shares without first obtaining a proxy executed in your
favor from your nominee.
Your Shares will be voted at the Special Meeting as directed by the
instructions on your proxy card if: (i) you are entitled to vote; (ii) your
proxy card was properly executed; (iii) we received your proxy card prior to the
Special Meeting; and (iv) you did not revoke your proxy card prior to the vote.
If you send a properly executed proxy card without specific voting
instructions, your Shares represented by that proxy card will be voted, as
recommended by the Board, in favor of the Reverse/Forward Stock Splits.
Vote Required to Approve Each Item
The presence at the Special Meeting (in person or by proxy) of the
holders of at least a majority of the Class A Shares and Class B Shares
outstanding on the record date, February 17, 2005, is necessary to have a quorum
allowing us to conduct business at the Special Meeting.
The following votes are required to approve each item of business at
the Special Meeting:
Reverse/Forward Stock Splits. The affirmative vote of the holders of
at least two-thirds (2/3) of the Class A Shares and Class B Shares, voting
separately as a class, outstanding on the record date, February 17, 2005. If you
do not vote your Shares, such inaction will have the same effect as a vote
"AGAINST" the Reverse/Forward Stock Splits.
Other Items. The affirmative vote of the holders of at least a
majority of the Class A Shares represented in person or by proxy at the Special
Meeting.
The executive officers and directors of the Company, who together
own approximately 41.1% and 40.3%, respectively, of the voting power of the
Class A Shares and Class B Shares outstanding and entitled to vote at the
Special Meeting, have indicated that they will vote in favor of the
Reverse/Forward Stock Splits at the Special Meeting.
Broker "non-votes" and abstentions have the effect of a negative
vote on the Reverse/Forward Stock Splits proposal. Broker "non-votes" occur when
a nominee (such as a bank) returns a proxy card, but does not have the authority
to vote on a particular proposal because it has not received voting instructions
from the beneficial owner.
22
REVERSE/FORWARD STOCK SPLITS PROPOSAL
Summary and Structure
The Board has authorized the Reverse/Forward Stock Splits, and
recommends the transaction for your approval. The Reverse/Forward Stock Splits
consist of a 1-for-125 reverse stock split of the Class B Shares, such that
holders of less than 125 Class B Shares would have their Class B Shares
cancelled and converted into the right to receive the Cash Out Price of $165 per
share, followed immediately by a 125-for-1 forward stock split of the Class B
Shares. The Reverse/Forward Stock Splits are intended to take effect on the
Effective Date (i.e., the date the Secretary of State of the State of Ohio
accepts for filing Certificates of Amendment to our Amended and Restated
Articles of Incorporation). The proposed amendments to our Amended and Restated
Articles of Incorporation are annexed to this Proxy Statement as Exhibit B and
Exhibit C and are incorporated herein by reference.
On the Effective Date, the Company will first effect a 1-for-125
reverse stock split of the Class B Shares. Any holder of 125 or more Class B
Shares immediately before the reverse stock split will receive eight thousandths
(0.008) of a Class B Share for each Class B Share so owned. Any holder of less
than 125 Class B Shares immediately before the reverse stock split will receive
cash instead of a fractional Class B Share. On the Effective Date following the
completion of the reverse stock split, the Company will effect a 125-for-1
forward stock split of the Class B Shares.
The Board has set the Cash Out Price at $165 per Class B Share. The
Board made this determination in good faith, based upon the recommendation of
the Special Transactions Committee, the Fairness Opinion and other factors the
Board and the Special Transactions Committee deemed relevant. The Company
currently estimates that Cashed Out Holders will receive cash consideration for
their Class B Shares within approximately three weeks after the Effective Date.
In order to complete the Reverse/Forward Stock Splits, at least
two-thirds (2/3) of the Class A Shares and Class B Shares, voting separately as
a class, outstanding and entitled to vote at the Special Meeting must approve
the Certificates of Amendment to our Amended and Restated Articles of
Incorporation. The executive officers and directors of the Company, who together
own approximately 41.1% and 40.3%, respectively, of the voting power of the
Class A Shares and Class B Shares outstanding and entitled to vote at the
Special Meeting, have indicated that they will vote in favor of the
Reverse/Forward Stock Splits proposal at the Special Meeting. The Board has
retained for itself the absolute authority to reject (and not implement) the
Reverse/Forward Stock Splits (even after approval thereof) if it subsequently
determines that the Reverse/Forward Stock Splits for any reason are not then in
the best interest of the Company. See "Reverse/Forward Stock Splits
Proposal--Reservation of Rights."
The Reverse/Forward Stock Splits are considered a "going-private"
transaction as defined in Rule 13e-3 promulgated under the Exchange Act because
they are intended to, and, if completed, will likely terminate the registration
of the Class B Shares under Section 12(g) of the Exchange Act and suspend the
Company's filing and reporting obligations under the Exchange Act. In connection
with the Reverse/Forward Stock Splits, we have filed, as required by the
Exchange Act, the Rule 13e-3 Transaction Statement on Schedule 13E-3 (the
"Schedule 13E-3") with the Commission.
Background of the Reverse/Forward Stock Splits
Our Class A Shares and Class B Shares have historically attracted
limited institutional investors or market research attention which could have
created a more active and liquid market for such shares. Relatively low trading
volume and low market capitalization have reduced the liquidity benefits to the
stockholders of the Company and mitigated the ability to use the Class A Shares
and Class B Shares as a significant part of our employee compensation and
incentive strategy. In addition, because we have not been active in the
corporate merger and acquisition market, the benefit of a publicly-traded stock
to use in conjunction with acquisitions or other stock transactions has never
been realized.
We incur direct and indirect costs associated with compliance with
the Exchange Act's filing and reporting requirements imposed upon public
companies. The cost of this compliance has increased significantly with the
implementation of the provisions of the Sarbanes-Oxley Act.
23
In addition, we pay substantially higher premiums for our directors'
and officers' insurance policies as a public reporting company than we would if
we were not registered under the Exchange Act. We also incur substantial
indirect costs as a result of, among other things, the time executive officers
expend to prepare and review our public filings. In addition, the public
disclosure we are required to make under the Exchange Act places us at a
competitive disadvantage by providing our non-public competitors with detailed
information about our operations and financial results while we do not have
access to similar information about these competitors.
We have not derived significant benefits from maintaining a public
trading market. The Board does not presently intend to raise capital through
sales of securities in a public offering or to acquire other business entities
using stock as consideration. Accordingly, we are not likely to make use of many
advantages (for raising capital, effecting acquisitions or other purposes) that
our status as a reporting company may offer. For a more detailed discussion of
the ways in which the Company has not enjoyed the benefits typically afforded
public company status, please see "Special Factors--Reasons for the
Reverse/Forward Stock Splits."
In light of these circumstances, the Board believes that it is in
our best interest to undertake the Reverse/Forward Stock Splits at this time to
enable us to deregister the Class B Shares under the Exchange Act, which 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. Although Continuing Holders and holders of Class
A Shares will indirectly bear the costs associated with taking the Company
private, the Board believes that such expenses will be offset by the anticipated
savings of being a private company.
The Board reached its conclusion regarding the advisability of the
Reverse/Forward Stock Splits after an evaluation process that began informally
in the second quarter of 2004 to explore the going-private transaction
structures available to the Company. The evaluation process was initiated after
the Chief Financial Officer of the Company advised the Company's President that
the Company could benefit from engaging in a going-private transaction. On
August 18, 2004, the Board held a meeting at which the directors discussed the
costs and benefits, both financial and non-financial, of remaining a public
reporting company. At this meeting, the management of the Company presented the
Board with a written report (the "Management Report") discussing the potential
benefits and alternative transaction structures of a going-private transaction.
The transaction structures considered were a management buyout, an issuer tender
offer, a stock repurchase program and reverse and forward stock splits. Please
see "Special Factors--Alternatives to the Reverse/Forward Stock Splits" for a
discussion of the advantages and disadvantages of these structures. The
Management Report recommended that the Company engage in reverse and forward
stock splits of its Class B Shares utilizing reverse stock split and forward
stock split ratios of 1-for-125 and 125-for-1, respectively. The Management
Report further recommended that the cash amount to be paid to stockholders
receiving cash in lieu of fractional Class B Shares should range between $86 and
$151 per share. In establishing this range, the management of Horizon utilized
valuation methodologies based upon (i) recent Class B Share market prices, (ii)
the Company's EBITDA and (iii) the number of Company's telephone access lines.
Management of the Company also provided the Board with estimates of the legal
and accounting costs and expenses associated with a going-private transaction.
At this meeting, the Board was also presented with a memorandum prepared by
Herrick, Feinstein LLP, outside counsel to the Company, addressing the (x)
duties of directors under Ohio law in evaluating a going-private transaction;
(y) various federal and state law requirements associated with effecting such a
transaction; and (z) specific actions required to effect reverse and forward
stock splits of the Class B Shares. Members of Herrick, Feinstein LLP were
present at this meeting to answer questions and otherwise assist the Board in
its consideration of the memorandum. After due deliberation of the written
materials supplied to it, the Board unanimously determined at this meeting that
the Company should be taken private by means of reverse and forward stock splits
of its Class B Shares. In furtherance thereof, the Board created the Special
Transactions Committee to assist in establishing the specific terms and
conditions of a going-private transaction for the Company involving reverse and
forward stock splits of its Class B Shares.
The Special Transactions Committee was given the authorization to
engage a financial advisor and any other advisors or experts as the Special
Transactions Committee deemed necessary in order for it to make its
recommendation to the Board. On September 14, 2004, the Special Transactions
Committee retained its own legal counsel. Legal counsel for the Special
Transactions Committee was present at all meetings of the Special Transactions
Committee.
On September 22, 2004, the Special Transactions Committee held a
meeting for the purpose of selecting a financial advisor to act on behalf of and
with the Special Transactions Committee. At this meeting, presentations were
made to the Special Transactions Committee by three investment banking firms.
After due deliberation of the
24
aforesaid presentations and the informational materials supplied in connection
therewith, the Special Transactions Committee unanimously determined to use the
services of the Financial Advisor in connection with the Reverse/Forward Stock
Splits.
On October 14, 2004, the Special Transactions Committee entered into
an engagement agreement with the Financial Advisor and the Company whereby the
Financial Advisor was engaged to deliver the Fairness Opinion. Shortly
thereafter, the Special Transactions Committee requested that the management of
the Company replace the price range contained in the Management Report for the
purchase of Class B Shares with a single purchase price. In response thereto,
the management of the Company proposed that $86 (the "Management Cash Out
Price") be used as the per share purchase price for the Class B Shares.
On October 28, 2004, the Special Transactions Committee held a
meeting for the purpose of receiving a status report from the Financial Advisor.
At this meeting, representatives of the Financial Advisor provided the members
of the Special Transactions Committee with an overview of the due diligence
process, evaluation analyses and transaction timetable. These representatives
also stated that a preliminary analysis indicated that it was unlikely that the
Financial Advisor could opine that the Management Cash Out Price was fair to the
Cashed Out Holders from a financial point of view. The members of the Special
Transactions Committee responded by reiterating their desire to achieve a fair
price for the Cashed Out Holders and further stated that they were prepared to
negotiate the per share price to be paid to Cashed Out Holders with the Board.
On November 23, 2004, the Special Transactions Committee held a
meeting for the purpose of receiving a further status report from the Financial
Advisor. At this meeting, representatives of the Financial Advisor stated that
the tasks required to issue the Fairness Opinion were nearly complete. Such
representatives also explained the three principal analyses being conducted with
respect to the Company. Please see "Opinion of the Financial Advisor" for a
discussion of these analyses.
On November 30, 2004, the Special Transactions Committee held a
meeting for the purpose of discussing a preliminary evaluation analysis
conducted by the Financial Advisor, including: (i) the stock trading prices of
other comparable public companies; (ii) merger and acquisition transactions
involving rural local exchange carriers similar to the Company; and (iii) the
present value of the Company's projected cash flows. Please see "Opinion of
Financial Advisor" for a more detailed discussion of these analyses. The
proposed Management Cash Out Price of $86 was at the low end of the range of
prices yielded by the Financial Advisor's analysis, which led the Special
Transactions Committee to conclude that the Management Cash Out Price was
inadequate. The Special Transactions Committee then resolved to provide the
management of the Company with the Financial Advisor's preliminary valuation
analysis in order to facilitate discussions at a meeting of the Special
Transactions Committee and management of the Company scheduled for December 1,
2004.
On December 1, 2004, the Special Transactions Committee met with the
management of the Company for the purpose of discussing the preliminary
valuation analysis conducted by the Financial Advisor. Following a presentation
by the Financial Advisor of the three principal analyses it employed, a general
discussion of the price range for the per share price to be paid to the Cashed
Out Holders ensued. Management of the Company focused on the recent trading
prices of the Class B Shares, but the Financial Advisor pointed out that the
lack of liquidity and trading volume may have had a depressive effect on such
trading prices. The meeting concluded with the Special Transactions Committee
agreeing to deliver a letter to the management of the Company specifying the
Special Transactions Committee's proposed per share price to be paid to the
Cashed Out Holders.
On December 2, 2004, the Special Transactions Committee met with the
Financial Advisor for the purpose of establishing the Special Transactions
Committee's proposed per share price to be paid to the Cashed Out Holders. The
Special Transactions Committee engaged in further discussion with the Financial
Advisor regarding the analyses conducted by the Financial Advisor with respect
to the Company. As a result of this discussion, the Special Transactions
Committee decided that it would be appropriate to propose a price range instead
of a specific per share price to be paid to the Cashed Out Holders. The Special
Transactions Committee determined that a per share price range of $160 to $180
was at the midpoint of the comparable public company trading price analysis,
exceeded the high end of the results of the discounted cash flow analysis and
was at the low end of the range of the mergers and acquisitions analysis. This
price range exceeded the Management Cash Out Price significantly and was within
the range of prices yielded by the analyses prepared by the Financial Advisor.
The meeting concluded
25
with the Special Transactions Committee directing Mr. Whited to deliver a letter
to the management of the Company setting forth the Special Transaction
Committee's proposed price range of $160 to $180 per share. Mr. Whited delivered
the letter to Thomas McKell, the Company's President, later that day.
On December 3, 2004, the Special Transactions Committee met with the
management of the Company to agree upon the per share price to be paid to the
Cashed Out Holders. Once agreed upon, this price would then be submitted to the
Board for approval. The management of the Company proposed that the per share
price to be paid to the Cashed Out Holders be set at $165. The Special
Transactions Committee pointed out that the proposed price exceeded recent
trading prices for the Class B Shares and was at the high end of the Financial
Advisor's discounted cash flow analysis. The Special Transactions Committee then
unanimously approved $165 as the per share price to be paid to the Cashed Out
Holders.
On December 7, 2004, a special meeting of the Board was held to
consider and approve the per share price to be paid to the Cashed Out Holders.
The Special Transactions Committee made a presentation regarding the analyses
and other actions undertaken in connection with establishing the Special
Committee's proposed price range of the per share price to be paid to the Cashed
Out Holders (and subsequent agreement with the management of the Company that
the price per share to be paid to the Cashed Out Holders be set at $165). Upon
the conclusion of its presentation, the Financial Advisor delivered the Fairness
Opinion stating that the Cash Out Price of $165 to be paid by the Company to the
Cashed Out Holders pursuant to the Reverse/Forward Splits is fair to the Cashed
Out Holders from a financial point of view as of December 7, 2004. The Special
Transactions Committee then recommended that the Board approve $165 as the per
share price to be paid to the Cashed Out Holders. After a discussion of the
factors supporting the Special Committee's recommendation by all members of the
Board, the Board unanimously approved the Reverse/Forward Stock Splits at a per
share price of $165 per Class B Share; (ii) directed that the management of the
Company establish the stock split ratios for the Reverse/Forward Stock Splits;
(iii) directed that the terms and conditions of the Reverse/Forward Stock Splits
be submitted for approval at the Special Meeting; (iv) approved the preliminary
form of this Proxy Statement and the Schedule 13E-3; and (v) directed that such
preliminary form of this Proxy Statement and the Schedule 13E-3 be filed with
the Commission.
Potential Detriments of the Reverse/Forward Stock Splits to Stockholders
As described under "Special Factors--Fairness of the
Transaction--Factors Not in Support of the Reverse/Forward Stock Splits" above,
potential detriments to the Company and holders of Class A Shares and Continuing
Holders include decreased dissemination of information and decreased liquidity.
If the Reverse/Forward Stock Splits are effected, we intend to terminate the
registration of the Class B Shares under the Exchange Act. As a result of such
termination, we will no longer be subject to the filing and reporting
requirements of the Exchange Act. The liquidity of the Class A Shares and Class
B Shares held by the holders of Class A Shares and Continuing Holders will be
further adversely affected by the lack of publicly available information about
the Company following the termination of the registration of the Class B Shares
under the Exchange Act. This decrease in liquidity may have an adverse effect on
the market value of the Class A Shares and Class B Shares. In addition, once the
Class B Shares cease to be registered under the Exchange Act, the (i) Company
will no longer be subject to the Exchange Act or the public company provisions
of the Sarbanes-Oxley Act and (ii) executive officers of the Company will no
longer be required to certify the accuracy of the Company's financial
statements.
Financial Information
Summary Financial Information
The following summary consolidated financial information was derived
from the Company's audited consolidated financial statements as of and for each
of the years ended December 31, 2003, 2002, 2001, 2000 and 1999, and from
unaudited consolidated interim financial statements as of and for the nine
months ended September 30, 2004 and 2003. The statement of operations data for
the nine months ended September 30, 2004 is not necessarily indicative of
results for a full year. This financial information is only a summary and should
be read in conjunction with our historical financial statements and the
accompanying footnotes, which are incorporated herein by reference into this
Proxy Statement. See "Incorporation of Certain Documents by Reference."
On August 15, 2003, Horizon PCS, Inc., a former subsidiary of the
Company, filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. Therefore, the results include the operations of Horizon PCS,
Inc. through August 14, 2003. The Company no longer includes the results of
Horizon PCS, Inc. in its consolidated results.
26
For the Nine Months Ended,
September 30, For the Year Ended December 30,
2004 2003 2003 2002 2001 2000 1999
----------- ------------- ------------- ------------- ------------- ------------ -----------
Results of Operations:
Operating revenues ...... $40,880,359 $ 194,309,669 $ 207,644,833 $ 264,706,821 $ 170,140,016 $ 73,999,642 $49,406,480
Operating expenses ...... 38,373,182 321,284,449 332,627,489 377,444,034 252,829,902 111,142,565 53,910,943
----------- ------------- ------------- ------------- ------------- ------------ -----------
Operating income
(loss) ................ 2,507,177 (126,974,780) (124,982,656) (112,737,213) (82,689,886) (37,142,923) (4,504,463)
Non-operating expense ... (1,086,350) (50,840,817) (51,521,319) (72,202,998) (35,331,433) (10,240,920) (2,135,466)
Income (loss) before
income tax and
minority interest ..... 1,420,827 (177,815,597) (176,503,975) (184,940,211) (118,021,319) (47,383,843) (6,639,929)
----------- ------------- ------------- ------------- ------------- ------------ -----------
Income tax benefit
(expense) ............. (709,397) 5,199,801 6,148,844 (1,160,192) (1,783,166) 895,576 2,158,831
Minority interest ....... -- 24 24 -- 983,883 2,301,344 --
Net income (loss) before
extraordinary item .... 711,430 (172,615,772) (170,355,107) (186,100,403) (118,820,602) (44,186,923) (4,481,098)
----------- ------------- ------------- ------------- ------------- ------------ -----------
Extraordinary loss,
net of $261,863
tax benefit ........... -- -- -- -- -- (486,323) --
Net income (loss) ....... $ 711,430 $(172,615,772) $(170,355,107) $(186,100,403) $(118,820,602) $(44,673,246) $(4,481,098)
=========== ============= ============= ============= ============= ============ ===========
Basic income (loss)
per share of
common stock .......... 1.96 (476.20) (469.96) (513.48) (329.59) (129.03) (11.23)
Diluted income (loss)
per share of
common stock .......... 1.96 (476.20) (469.96) (513.48) (329.59) (129.03) (11.23)
Cash dividends on
common stock .......... 1,413,922 1,413,687 1,884,920 1,812,204 1,767,088 1,793,038 1,815,014
Dividends per share on
common stock .......... 3.90 3.90 5.20 5.00 4.90 4.60 4.55
27
As of September 30, As of December 30,
2004 2003 2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- ------------ ------------ ------------
Balance Sheet:
Current assets .......... $ 28,753,266 $ 24,080,977 $ 28,300,383 $ 157,627,751 $185,171,912 $218,511,034 $ 15,282,280
Other assets ............ 6,253,700 4,548,077 6,879,704 72,201,255 103,464,734 72,247,070 9,319,250
Property, plant
and equipment
in-service, net ....... 75,839,780 75,809,174 75,848,610 315,921,107 289,277,220 175,541,739 77,111,835
Total assets ............ 110,846,746 104,438,228 111,028,697 545,750,113 577,913,866 466,299,843 101,713,365
Current liabilities ..... 9,266,122 7,950,572 9,788,243 56,797,791 80,781,136 64,854,808 16,587,261
Long-term debt and
other liabilities ..... 539,116,025 545,326,782 537,810,011 597,213,577 428,260,050 224,404,856 57,432,352
Total liabilities ....... 548,382,147 553,277,354 547,598,254 654,011,368 509,041,186 289,259,664 74,019,613
Minority interest ....... -- -- -- -- -- 983,883 --
Convertible preferred
stock of subsidiary -
book value ............ -- -- -- 157,105,236 145,349,043 134,421,881 --
Stockholders' equity
(deficit) ............. (437,535,401) (448,839,126) (436,569,557) (265,366,491) (76,476,363) 41,634,415 27,693,752
Total liabilities
and stockholders'
equity (deficit) ...... $ 110,846,746 $ 104,438,228 $ 111,028,697 $ 545,750,113 $577,913,866 $466,299,843 $101,713,365
The Company's book value per share, as set forth above, has been
derived from financial statements prepared by management of the Company relating
to the fiscal periods set forth above. As required by Exchange Act Rule
13a-14(a), the Company's Chief Executive Officer and Chief Financial Officer
have certified that such financial statements, and the financial information
included in the periodic reports in which such financial statements appear,
fairly present in all material respects the financial condition, results of
operation and cash flows of the Company as of, and for, the periods presented in
such periodic reports.
Certain Financial Effects of the Reverse/Forward Stock Splits
We do not expect the Reverse/Forward Stock Splits or our use of
approximately $2,500,000 to complete the Reverse/Forward Stock Splits (which
amount includes payments to be made to Cashed Out Holders and professional fees
and other expenses related to the transaction) to have any material adverse
effect on our capitalization, liquidity, results of operations or cash flow. See
"Persons Making the Proxy Solicitation and the Costs Associated Therewith." We
expect to finance the Reverse/Forward Stock Splits with cash on hand.
If the Reverse/Forward Stock Splits are consummated, Cashed Out
Holders will receive cash from us in the amount of $165 per Class B Share. The
repurchase of the fractional Class B Shares resulting from the Reverse/Forward
Stock Splits is estimated to cost approximately $2,000,000 and would reduce the
number of holders of record of Class B Shares from approximately 648 to
approximately 240.
We expect that, as a result of the Reverse/Forward Stock Splits and
the cashing out of fractional Class B Shares held by the Cashed Out Holders:
o Our aggregate stockholders' equity will change from approximately
negative $437,535,401 (as of September 30, 2004) to approximately
negative $439,773,189 and
o Book value per Class B Share would change from negative $1,207 to
negative $1,255 assuming the cash out of fractional Class B Shares
had occurred on September 30, 2004.
28
Ratio of Earnings to Fixed Charges
For the Nine
Months Ended For the Year Ended December 31,
2004 2003 2002 2001 2000 1999
------------ ------------- ------------- ------------- ------------ -----------
Income (loss) before income
tax and minority interest .......... $1,420,827 $(176,503,975) $(184,940,211) $(118,021,319) $(47,383,843) $(6,639,929)
Earnings ............................. 4,482,195 (126,287,973) (113,381,758) (82,377,619) (31,196,145) (2,596,988)
Fixed charges:
Interest ........................... 2,132,818 45,100,360 67,975,927 36,595,552 14,161,101 3,983,546
Amortization of loan
acquisition costs ................ 24,451 32,601 37,245 18,634 18,634 18,634
Interest element of
rental expense ................... 806,937 5,032,582 6,923,964 4,481,130 1,252,567 84,401
---------- ------------- ------------- ------------- ------------ -----------
Total Fixed charges ................. $2,964,205 $ 50,165,543 $ 74,937,136 $ 41,095,316 15,432,301 $ 4,086,580
---------- ------------- ------------- ------------- ------------ -----------
Deficiency of earnings to
fixed charges ...................... $(176,453,516) $(188,318,895) $(123,472,934) $(46,628,446) $(6,683,569)
Ratio of earnings to
fixed charges ...................... 1.5
Pro Forma For
the Nine Pro Forma For
Months Ended the Year Ended
2004 2003
------------- --------------
Income (loss) before income
tax and minority interest .................. $ 908,052 $(177,028,575)
Earnings ..................................... 3,969,420 (126,812,573)
Fixed charges:
Interest ................................... 2,132,818 45,100,360
Amortization of loan
acquisition costs ........................ 24,451 32,601
Interest element of
rental expense ........................... 806,937 5,032,581
---------- -------------
Total Fixed charges ......................... $2,964,205 $ 50,165,543
========== =============
Deficiency of earnings to
fixed charges .............................. $(176,978,116)
Ratio of earnings to
fixed charges .............................. 1.3
Pro Forma Financial Information
The following pro forma consolidated information has been derived
from the financial statements of the Company. The financial statements for the
year ended December 31, 2003 have been audited by independent certified public
accountants. The financial statements for the quarterly periods ended September
30, 2004 and 2003 are unaudited. In the opinion of the Company's management,
these quarterly financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the results of
these quarters.
The pro forma consolidated financial statements have been prepared
with the assumption that the Reverse/Forward Stock Splits were completed
effective the first day of the period presented for the income statement and as
of the date of the balance sheet, and all fractional Class B Shares under one
are repurchased. The pro forma consolidated financial statements are not
necessarily indicative of the results that would have occurred had the
Reverse/Forward Stock Splits actually taken place at the respective time periods
specified nor do such financial statements purport to project the results of
operations for any future date or period. Based on information from various
external sources, the Company believes that approximately 12,000 pre-split Class
B Shares will be repurchased at $165 per Class B Share for a total purchase
price of approximately $2,000,000.
29
The pro forma results are not indicative of future results because
the Company's public reporting costs for the periods presented include only the
historic public costs.
The unaudited pro forma financial statements should be read in
conjunction with our historical financial statements and the accompanying
footnotes, which are incorporated herein by reference into this Proxy Statement.
See "Incorporation of Certain Documents by Reference."
On August 15, 2003, Horizon PCS, Inc. filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. Therefore, the
results include the operations of Horizon PCS, Inc. through August 14, 2003. The
Company no longer includes the results of Horizon PCS, Inc. in its consolidated
results.
30
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(Unaudited)
Pro forma
Historical Adjustments Pro forma
---------- ----------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 19,626,291 $ (2,237,788)(1-5) $ 17,388,503
Accounts receivable - subscriber, less allowance
for doubtful accounts ................................ 904,784 -- 904,784
Accounts receivable - interexchange carriers,
access charge pools and other, less allowance for
doubtful accounts .................................... 2,489,758 -- 2,489,758
Accounts receivable - Horizon PCS ...................... 38,856 -- 38,856
Inventories ............................................ 2,072,779 -- 2,072,779
Investments, available-for-sale, at fair value ......... 943,338 -- 943,338
Prepaid expenses and other current assets .............. 2,677,460 -- 2,677,460
------------ ------------ ------------
Total current assets ............................. 28,753,266 (2,237,788) 26,515,478
------------ ------------ ------------
OTHER ASSETS:
Debt issuance costs, net ............................... 312,545 -- 312,545
Prepaid pension costs .................................. 3,569,456 -- 3,569,456
Intangible assets - pension ............................ 2,371,699 -- 2,371,699
------------ ------------ ------------
Total other assets ............................... 6,253,700 -- 6,253,700
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET ........................ 75,839,780 -- 75,839,780
------------ ------------ ------------
Total assets ................................ $110,846,746 $ (2,237,788) $108,608,958
============ ============ ============
Pro forma
Historical Adjustments Pro forma
---------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ....................................... $ 2,864,601 $ -- $ 2,864,601
Accrued personal property, real estate and other
taxes ................................................ 1,901,743 -- 1,901,743
Accrued interest, payroll and other current
liabilities .......................................... 4,499,778 -- 4,499,778
------------ ------------ ------------
Total current liabilities ........................ 9,266,122 -- 9,266,122
------------ ------------ ------------
LONG-TERM DEBT AND OTHER LIABILITIES:
Long-term debt ......................................... 42,000,000 -- 42,000,000
Deferred income taxes, net ............................. 10,973,874 -- 10,973,874
Postretirement benefit obligation ...................... 10,315,190 -- 10,315,190
Accrued pension costs .................................. 2,804,302 -- 2,804,302
Investment in Horizon PCS .............................. 470,934,704 -- 470,934,704
Other long-term liabilities ............................ 2,087,955 -- 2,087,955
------------ ------------ ------------
Total long-term debt and other liabilities ....... 539,116,025 -- 539,116,025
------------ ------------ ------------
Total liabilities .............................. 548,382,147 -- 548,382,147
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
0STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - class A, no par value, 200,000
shares authorized, 99,726 shares issued and
90,561 shares outstanding, stated at $4.25 per
share ................................................ 423,836 -- 423,836
Common stock - class B, no par value, 500,000
shares authorized, 299,507 shares issued and
271,983 shares outstanding (259,983 pro forma),
stated at $4.25 per share ............................ 1,272,905 -- 1,272,905
Treasury stock - 36,689 shares (48,689 pro forma),
at cost .............................................. (5,504,700) (1,980,000)(1) (7,484,700)
Accumulated other comprehensive income (loss), net ..... 49,748 -- 49,748
Additional paid-in capital ............................. 73,200,389 -- 73,200,389
Deferred stock compensation ............................ (13,587) -- (13,587)
Retained deficit ....................................... (506,963,992) (257,788)(2-5) (507,221,780)
------------ ------------ ------------
Total stockholders' equity (deficit) ........... (437,535,401) (2,237,788) (439,773,189)
------------ ------------ ------------
Total liabilities and stockholders'
equity (deficit) ............................ $110,846,746 $ (2,237,788) $108,608,958
============ ============ ============
31
Pro Forma Adjustments:
(1) $1,980,000 cash outlay for fractional shares at $165 per share,
approximately 12,000 shares.
(2) $495,000 in legal, financial advisor, accounting and other fees
related to the transactions.
(3) Dividends paid are reduced by $46,800, due to less outstanding
shares, 12,000 shares at $1.30 per quarter.
(4) Interest income is reduced by $17,775 due to lower cash balance.
(5) Income tax adjustment of 40.6%, or $208,167.
Pro forma adjustments for the nine months ended September 30, 2004
exclude $252,500 of estimated fee savings during the period due to no longer
being subject to periodic reporting obligations under the Exchange Act.
32
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited)
- --------------------------------------------------------------------------------
Pro forma
Historical Adjustments Pro forma
---------- ----------- ---------
OPERATING REVENUES:
Basic local and long-distance service ................ $11,333,094 $ -- $11,333,094
Network access ....................................... 15,549,161 -- 15,549,161
Other local exchange services ........................ 7,410,423 -- 7,410,423
Internet access and information services ............. 2,852,235 -- 2,852,235
All other ............................................ 3,735,446 -- 3,735,446
----------- --------- -----------
Total operating revenues ....................... 40,880,359 -- 40,880,359
----------- --------- -----------
OPERATING EXPENSES:
Cost of goods sold ................................... 852,172 -- 852,172
Cost of services (exclusive of items shown
separately below) .................................. 13,288,035 -- 13,288,035
Selling and marketing ................................ 1,459,332 -- 1,459,332
General and administrative (exclusive of items
shown separately below) ............................ 15,854,916 495,000 (1) 16,349,916
Non-cash compensation ................................ 1,935 -- 1,935
Depreciation and amortization ........................ 6,916,792 -- 6,916,792
----------- --------- -----------
Total operating expenses ....................... 38,373,182 495,000 38,868,182
----------- --------- -----------
OPERATING INCOME (LOSS) ................................... 2,507,177 (495,000) 2,012,177
----------- --------- -----------
NONOPERATING INCOME (EXPENSE):
Interest expense, net ................................ (2,101,445) -- (2,101,445)
----------- --------- -----------
Gain (loss) on sale of investment .................... 753,282 -- 753,282
Interest income and other, net ....................... 261,813 (17,775)(2) 244,038
----------- --------- -----------
Total nonoperating income (expense) ............ (1,086,350) (17,775) (1,104,125)
----------- --------- -----------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE) ......... 1,420,827 (512,775) 908,052
INCOME TAX BENEFIT (EXPENSE) .............................. (709,397) 208,167(4) (501,230)
----------- --------- -----------
NET INCOME (LOSS) ......................................... $ 711,430 $(304,608) $ 406,822
=========== ========= ===========
Net income (loss) per share:
Basic ..................................................... $ 1.96 $ (0.80) $ 1.16
=========== ========= ===========
Diluted ................................................... $ 1.96 $ (0.80) $ 1.16
=========== ========= ===========
Weighted-average common shares outstanding:
Basic ..................................................... 362,538 (12,000)(3) 350,538
=========== ========= ===========
Diluted ................................................... 362,699 (12,000)(3) 350,699
=========== ========= ===========
Pro Forma Adjustments:
(1) $495,000 in legal, financial advisor, accounting and other fees
related to the transactions.
(2) Interest income is reduced by $17,775 due to a lower cash
balance.
(3) Buy back fractional shares totaling 12,000 shares.
(4) Income tax adjustment of 40.6%, or $208,167.
Pro forma adjustments for the nine months ended September 30, 2004,
exclude $252,500 in fee savings due to no longer being subject to periodic
reporting obligations under the Exchange Act.
33
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(Unaudited)
- --------------------------------------------------------------------------------
Pro forma
Historical Adjustments Pro forma
---------- ----------- ---------
OPERATING REVENUES:
PCS subscriber and roaming ............................. $ 151,897,229 $ -- $ 151,897,229
PCS equipment .......................................... 4,408,297 -- 4,408,297
Basic local and long-distance .......................... 18,289,457 -- 18,289,457
Network access ......................................... 21,901,539 -- 21,901,539
Equipment systems sales, information services,
Internet access and other ............................ 11,148,311 -- 11,148,311
------------- --------- -------------
Total operating revenues ........................... 207,644,833 -- 207,644,833
------------- --------- -------------
OPERATING EXPENSES:
Cost of goods sold ..................................... 12,548,365 -- 12,548,365
Cost of services (exclusive of items shown
separately below) .................................... 133,765,571 -- 133,765,571
Selling and marketing .................................. 30,380,651 -- 30,380,651
General and administrative (exclusive of items
shown separately below) .............................. 42,568,330 495,000 (1) 43,063,330
Non-cash compensation .................................. 278,275 -- 278,275
(Gain) Loss on sale of property and equipment .......... 216,312 -- 216,312
Impairment of intangible assets and property and
equipment ............................................ 73,760,278 -- 73,760,278
Depreciation and amortization .......................... 34,600,579 -- 34,600,579
PCS restructuring charges .............................. 4,509,128 -- 4,509,128
------------- --------- -------------
Total operating expenses ........................... 332,627,489 495,000 333,122,489
------------- --------- -------------
OPERATING LOSS ............................................ (124,982,656) (495,000) (125,477,656)
------------- --------- -------------
NONOPERATING INCOME (EXPENSE):
Interest expense, net .................................. (44,374,286) -- (44,374,286)
Subsidiary preferred stock dividends ................... (7,815,505) -- (7,815,505)
Interest income and other, net ......................... 668,472 (29,600)(2) 638,872
------------- --------- -------------
Total non-operating expense ........................ (51,521,319) (29,600) (51,550,919)
------------- --------- -------------
LOSS BEFORE INCOME TAX BENEFIT (EXPENSE) AND MINORITY
INTEREST ............................................... (176,503,975) (524,600) (177,028,575)
INCOME TAX BENEFIT (EXPENSE) .............................. 6,148,844 212,988(4) 6,361,832
MINORITY INTEREST IN LOSS ................................. 24 -- 24
------------- --------- -------------
NET LOSS .................................................. $(170,355,107) $(311,612) $(170,666,719)
============= ========= =============
Basic and diluted net loss per share ...................... $ (469.96) $ (16.98)(3) $ (486.94)
============= ========= =============
Weighted-average common shares outstanding ................ 362,487 (12,000) 350,487
============= ========= =============
Pro Forma Adjustments:
(1) $495,000 in legal, financial advisor, accounting and other fees
related to the transactions.
(2) Interest income is reduced by $29,600 due to a lower cash
balance.
(3) Buy back fractional shares.
(4) Income tax adjustment of 40.6%, or $212,988.
Pro forma adjustments for the twelve months ended December 31, 2003
exclude $315,000 in estimated fee savings due to no longer being subject to
periodic reporting obligations under the Exchange Act.
34
Recommendation of the Board
Based upon the recommendation of the Special Transactions Committee
and upon its own evaluation, the Board has unanimously determined that the
Reverse/Forward Stock Splits are in the best interest of the Company and are
fair to the affiliated and unaffiliated holders of Class A Shares and Class B
Shares, including the Cashed Out Holders and Continuing Holders.
Stock Certificates
We have appointed the Transfer Agent to act as exchange agent to
carry out the exchange of certificates held by Cashed Out Holders for cash. On
the Effective Date, all stock certificates evidencing ownership of Class B
Shares held by Cashed Out Holders shall be deemed cancelled without further
action by the holders thereof. Thereafter, such certificates, rather than
representing an ownership interest in the Company, will represent only the right
to receive cash upon the exchange of such certificates equal to $165 per Class B
Share.
The Transfer Agent will furnish Cashed Out Holders with the
necessary materials and instructions to effect the surrender of their Class B
Share stock certificate(s) promptly following the Effective Date. The letter of
transmittal will direct how such certificates are to be surrendered for cash.
Cashed Out Holders must complete and sign the letter of transmittal and return
it with their Class B Share stock certificate(s) to the Transfer Agent in
accordance with the instructions set forth on the letter of transmittal before
they can receive cash payment for their Class B Shares. Do not send your stock
certificates to us, and do not send them to the Transfer Agent until you have
received a letter of transmittal and followed the instructions therein.
In connection with the Reverse/Forward Stock Splits, the Class B
Shares will be identified by a new Committee on Uniform Securities
Indentification Procedures, or CUSIP, number. This new CUSIP number will appear
on all stock certificates representing Class B Shares issued after the Effective
Date.
No service charges will be payable by holders of Class B Shares in
connection with the exchange of certificates or the payment of cash in lieu of
issuing fractional shares. All expenses of the Reverse/Forward Stock Splits will
be borne by us.
Material Federal Income Tax Consequences
We summarize below the material federal income tax consequences to
the Company and to holders of Class B Shares resulting from the Reverse/Forward
Stock Splits. This summary is based on the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the Treasury Department Regulations (the
"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, applicable statutes,
Regulations and proposed 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 this summary. This summary is
not binding on the Internal Revenue Service.
This summary does not address all aspects of the possible federal
income tax consequences of the Reverse/Forward Stock Splits 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
holders of Class B Shares in light of their individual investment circumstances
nor to holders of Class B Shares 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, 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/Forward Stock Splits 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 the holders
of Class B Shares as a result of the Reverse/Forward Stock Splits. 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.
35
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
Class B 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.
We believe that the Reverse/Forward Stock Splits will be treated as
a tax-free "recapitalization" for federal income tax purposes. This treatment
will result in no material federal income tax consequences to the Company.
However, you may not qualify for tax free "recapitalization" treatment for
federal income tax purposes, depending on whether you are receiving cash or
stock pursuant to the Reverse/Forward Stock Splits.
Federal Income Tax Consequences to Continuing Holders
If you (i) continue to hold Class B Shares directly immediately
after the Reverse/Forward Stock Splits and (ii) you receive no cash as a result
of the Reverse/Forward Stock Splits, you should not recognize any gain or loss
in the Reverse/Forward Stock Splits for federal income tax purposes. Your
aggregate adjusted tax basis in your Class B Shares held immediately after the
Reverse/Forward Stock Splits will be equal to your aggregate adjusted tax basis
in your Class B Shares held immediately prior to the Reverse/Forward Stock
Splits. You will have the same holding period in your Class B Shares held
immediately after the Reverse/Forward Stock Splits as you had in your Class B
Shares immediately prior to the Reverse/Forward Stock Splits.
Federal Income Tax Consequences to Cashed Out Holders
If you (i) receive cash in exchange for fractional Class B Shares as
a result of the Reverse/Forward Stock Splits; (ii) you do not continue to hold
any stock of the Company directly immediately after the Reverse/Forward Stock
Splits; and (iii) you are not related to any person or entity that holds stock
of the Company immediately after the Reverse/Forward Stock Splits, you will
recognize capital gain or loss on the Reverse/Forward Stock Splits for federal
income tax purposes, with such gain measured by the difference between the cash
you receive for your cashed out Class B Shares and your aggregate adjusted tax
basis in such shares.
If you receive cash in exchange for fractional Class B Shares as a
result of the Reverse/Forward Stock Splits, but either continue to directly own
stock of the Company immediately after the Reverse/Forward Stock Splits, or are
related to a person or entity who continues to hold stock of the Company
immediately after the Reverse/Forward Stock Splits, you will recognize capital
gain or loss in the same manner as set forth in the previous paragraph, provided
that your receipt of cash either (i) is "not essentially equivalent to a
dividend" or (ii) constitutes a "substantially disproportionate redemption of
stock," as described below.
"Not Essentially Equivalent to a Dividend." You will satisfy the
"not essentially equivalent to a dividend" test if the reduction in your
proportionate interest in the Company resulting from the Reverse/Forward Stock
Splits (taking into account for this purpose the stock of the Company owned by
persons related to you) is considered a "meaningful reduction" given your
particular facts and circumstances. The Internal Revenue Service has ruled that
a small reduction by a minority stockholder whose relative stock interest is
minimal and who exercises no control over the affairs of the corporation will
satisfy this test.
"Substantially Disproportionate Redemption of Stock." The receipt of
cash in the Reverse/Forward Stock Splits will be a "substantially
disproportionate redemption of stock" for you if the percentage of the
outstanding shares of stock of the Company owned by you (and by persons related
to you) immediately after the Reverse/Forward Stock Splits is (a) less than 50%
of all outstanding shares and (b) less than 80% of the percentage of shares of
stock owned by you immediately before the Reverse/Forward Stock Splits.
In applying these tests, you will be treated as owning shares of
stock of the Company actually or constructively owned by certain individuals and
entities related to you. If your receipt of cash in exchange for stock is not
treated as capital gain or loss under any of the tests, it will be treated first
as ordinary dividend income
36
to the extent of your ratable share of the Company's current and accumulated
earnings and profits, then as a tax-free return of capital to the extent of your
aggregate adjusted tax basis in your shares, and any remaining amount will be
treated as capital gain. See "Capital Gain and Loss" and "Special Rate for
Certain Dividends," below.
Capital Gain and Loss
For individuals, net capital gain (defined generally as your total
capital gains in excess of capital losses for the year) recognized upon the sale
of capital assets that have been held for more than 12 months generally will be
subject to tax at a rate not to exceed 15%. Net capital gain recognized from the
sale of capital assets that have been held for 12 months or less will continue
to be subject to tax at ordinary income tax rates. Capital gain recognized by a
corporate taxpayer will continue to be subject to tax at the ordinary income tax
rates applicable to corporations. There are limitations on the deductibility of
capital losses.
Special Rate for Certain Dividends
In general, dividends are taxed at ordinary income rates. However,
you may qualify for a 15% rate of tax on any cash received in the
Reverse/Forward Stock Splits that is treated as a dividend as described above,
if (i) you are an individual or other non-corporate stockholder; (ii) you have
held the share of stock of the Company with respect to which the dividend was
received for more than 60 days during the 120-day period beginning 60 days
before the ex-dividend date, as determined under the Code; and (iii) you were
not obligated during such period (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property. You are urged to consult with your tax advisor regarding your
applicability for, and the appropriate federal, state, local, foreign or other
tax treatment of, any such dividend income.
Backup Withholding
Holders of Class B Shares will be required to provide their social
security or other taxpayer identification numbers (or, in some instances,
additional information) to the Transfer Agent in connection with the
Reverse/Forward Stock Splits to avoid backup withholding requirements that might
otherwise apply. The letter of transmittal will require each holder of Class B
Shares to deliver such information when the Class B Share certificates are
surrendered following the Effective Date of the Reverse/Forward Stock Splits.
Failure to provide such information may result in backup withholding.
As explained above, the amounts paid to you as a result of the
Reverse/Forward Stock Splits may result in dividend income, capital gain income,
or some combination of dividend and capital gain income to you depending on your
individual circumstances. You should consult your tax advisor as to the
particular federal, state, local, foreign, and other tax consequences of the
transaction, in light of your specific circumstances.
Unavailability of Appraisal or Dissenters' Rights
No appraisal or dissenters' rights are available under Ohio law, or
the Company's Amended and Restated Articles of Incorporation or Code of
Regulations to holders of Class B Shares who vote against the Reverse/Forward
Stock Splits. There may exist other rights or actions under Ohio law or federal
and state securities laws for stockholders who can demonstrate that they have
been damaged by the Reverse/Forward Stock Splits. Although the nature and extent
of such rights or actions are uncertain and may vary depending on facts or
circumstances, stockholder challenges to corporate action in general are related
to the fiduciary responsibilities of corporate directors and officers and to the
fairness of corporate transactions.
Reservation of Rights
Although we are requesting your approval of the proposed amendments
to our Amended and Restated Articles of Incorporation, the Board reserves the
right to decide, in its discretion, to withdraw the proposed amendments from the
agenda of the Special Meeting prior to any vote thereon or to abandon the
Reverse/Forward Stock Splits after such vote and before the Effective Date even
if the proposal is approved. Although the Board presently believes that the
proposed amendments are in the best interest of the Company, and thus has
recommended a vote for the proposed amendments, the Board nonetheless believes
that it is prudent to recognize that, between the date of this Proxy Statement
and the Effective Date, factual circumstances could possibly change such that it
might not be
37
appropriate or desirable to effect the Reverse/Forward Stock Splits at that
time. Such reasons include any change in the nature of the stockholdings of the
Company prior to the Effective Date which would result in the Company being
unable to reduce the number of holders of record of Class B Shares to below 300
as a result of the Reverse/Forward Stock Splits. If the Board decides to
withdraw the proposed amendment from the agenda of the Special Meeting, the
Board will notify the Company's stockholders of such decision promptly by mail
and by announcement at the Special Meeting. If the Board decides to abandon the
Reverse/Forward Stock Splits after the Special Meeting and before the Effective
Date, the Board will notify the Company's stockholders of such decision promptly
by mail or by press release and any other appropriate public disclosure.
Price Range of Class A Shares and Class B Shares
There is currently no market for the Class A Shares and Class B
Shares. The Class A Shares and Class B Shares historically have traded
principally in local transactions without the benefit of an established public
trading market or an organized system for reporting prices paid.
On February 17, 2005, there were 90,561 Class A Shares and 271,983
Class B Shares outstanding held by approximately 338 and 648 holders of record,
respectively. Such number of holders of record of Class A Shares and Class B
Shares does not include beneficial owners of Class A Shares and Class B Shares
whose shares are held in street name through a broker, trustee or other nominee.
Dividends on Class B Shares
We paid quarterly dividends on the Class B Shares during the
calendar years 2004, 2003 and 2002 as follows:
2004 2003 2002
---- ---- ----
First Quarter ......... $1.30 $1.30 $1.25
Second Quarter ........ $1.30 1.30 1.25
Third Quarter ......... $1.30 1.30 1.25
Fourth Quarter ........ $1.30 1.30 1.25
Dividends are paid only as and when declared by the Board, in its
sole discretion, based on our financial condition, results of operation, market
conditions and such other factors as it may deem appropriate.
Escheat Laws
The unclaimed property and escheat laws of each state provide that
under circumstances defined in that state's statutes, holders of unclaimed or
abandoned property must surrender that property to the state. Cashed Out Holders
whose addresses are unknown to the Company, or who do not return their stock
certificates and request payment therefor, generally will have a period of years
from the effective time in which to claim the cash payment payable to them. For
example, with respect to Cashed Out Holders whose last known addresses are in
Ohio, as shown by the records of the Company, the period is five years.
Following the expiration of that five-year period, the relevant provisions the
Ohio Revised Code would likely cause the cash payments to escheat to the State
of Ohio. For Cashed Out Holders who reside in other states or whose last known
addresses, as shown by the records of the Company, are in states other than
Ohio, such states may have abandoned property laws which call for such state to
obtain either (i) custodial possession of property that has been unclaimed until
the owner reclaims it or (ii) escheat of such property to the state. Under the
laws of such other jurisdictions, the "holding period" or the time period which
must elapse before the property is deemed to be abandoned may be shorter or
longer than five years. If the Company does not have an address for a Cashed Out
Holder, then the unclaimed cash out payment would be turned over to its state of
incorporation, the state of Ohio, in accordance with its escheat laws.
Regulatory Approvals
The Company is not aware of any material governmental or regulatory
approval required for completion of the Reverse/Forward Stock Splits, other than
compliance with the relevant federal and state securities laws and the corporate
laws of Ohio.
38
Interest of Certain Persons in Matters to be Acted Upon
The number of Class A Shares and Class B Shares beneficially owned
by the executive officers and directors of the Company are set forth in the
table below. The Class A Shares will not be included within the Reverse/Forward
Stock Splits. The Reverse/Forward Stock Splits will not impact affiliated
holders of Class B Shares differently from unaffiliated holders of Class B
Shares on the basis of affiliate status. The sole determining factor in whether
a holder of Class B Shares will become a Cashed Out Holder or Continuing Holder
as a result of the Reverse/Forward Stock Splits is the number of Class B Shares
held by such holder immediately prior to Reverse/Forward Stock Splits. The
executive officers and directors of the Company will receive no extra or special
benefit not shared on a pro rata basis by all other holders of the Class B
Shares, except that by deregistering the Class B Shares under the Exchange Act
subsequent to the consummation of the Reverse/Forward Stock Splits, the Company
will no longer be prohibited, pursuant to Section 402 of the Sarbanes-Oxley Act,
from making personal loans to its executive officers and directors. The Company
does not have a present intention of making loans to its executive officers and
directors, nor was the ability to make such loans a reason considered by the
Board or the Special Transactions Committee in evaluating the benefits of the
Reverse/Forward Stock Splits. If the Reverse Stock Splits are implemented, the
executive officers and directors of the Company will not benefit by any material
increase in their percentage ownership of Class B Shares. See "Special
Factors--"Fairness of the Transaction--Factors in Support of the Reverse/Forward
Stock Splits--No Material Change in Percentage Ownership of Executive Officers
and Directors."
The following table sets forth information regarding the beneficial
ownership of the Class A Shares and Class B Shares, as of September 30, 2004, by
(i) each person who, to our knowledge, is the beneficial owner of 5% or more of
a class of our outstanding common stock; (ii) each of our directors and
executive officers; and (iii) all of our executive officers and directors as a
group.
Beneficial ownership is determined in accordance with Rule 13d-3 of
the Exchange Act. A person is deemed to be the beneficial owner of Shares if
that person has or shares voting power or investment power with respect to such
Shares, or has the right to acquire beneficial ownership of such Shares at any
time within 60 days of the date of the table. "Voting power" is the power to
vote or direct the voting of Shares and "investment power" is the power to
dispose or direct the disposition of Shares. Except as noted below, to the best
of the Company's knowledge, each of the persons listed in the table has sole
voting and investment powers with respect to the Class A Shares and Class B
Shares beneficially owned. For purposes of the table, we have used the number of
Class A Shares and Class B Shares outstanding as of September 30, 2004 (i.e.,
90,561 and 271,983, respectively).
Class A Shares (1) Class B Shares (1)
------------------ ------------------
Name and Address (2) Number Percent Number Percent
- -------------------- ------ ------- ------ -------
Robert McKell....................... 2,019 2.2% 4,463 1.6%
Thomas McKell (3)................... 7,638 8.4% 22,620 8.3%
Jack E. Thompson (4)................ 423 * 1,368 *
Phoebe H. McKell (5)................ 2,625 2.9% 7,969 2.9%
Joseph S. McKell (6)................ 8,993 9.9% 26,979 9.9%
David McKell (7).................... 9,294 10.3% 27,882 10.3%
Helen M. Sproat (8)................. 6,165 6.8% 17,375 6.4%
John E. Herrnstein (9).............. 105 * 495 *
Jerry B. Whited..................... -- -- -- --
Donald L. McNeal.................... -- -- 500 *
Joel Gerber........................ -- -- -- --
All Executive Officers and Directors
as a Group (11 persons)............. 37,262 41.1% 109,651 40.3%
- ----------
* Less than one percent.
(1) Holders of Class A Shares are entitled to one vote per share. Holders of
Class B Shares do not have voting rights, except as required by law.
(2) The address for Horizon Telcom, Inc. and each executive officer and
director is 68 East Main Street, Chillicothe, Ohio 45601-0480.
(3) Includes 6,623 Class A Shares and 19,575 Class B Shares held by a trust.
Mr. McKell shares voting and investment power over these shares. A
separate trust owns 1,015 Class A Shares and 3,045 Class B Shares. Mr.
39
McKell's wife shares voting and investment power over these shares. Mr.
McKell disclaims beneficial ownership of the shares owned by his wife.
(4) Includes 213 Class A Shares and 639 Class B Shares owned by Mr. Thompson's
wife. Mr. Thompson disclaims beneficial ownership of these shares.
Includes 57 Class B Shares issuable upon exercise of stock options that
are presently exercisable or exercisable within 60 days of the date
hereof.
(5) Includes 80 Class A Shares and 240 Class B Shares held by Ms. McKell's
husband. Ms. McKell disclaims beneficial ownership of these shares.
Includes 57 Class B Shares issuable upon exercise of stock options that
are presently exercisable or exercisable within 60 days of the date
hereof.
(6) Includes 415 Class A Shares and 1,245 Class B Shares owned by Dr. McKell's
wife. Dr. McKell disclaims beneficial ownership of these shares.
(7) These shares are owned by a trust. Dr. McKell shares voting and investment
powers over these shares. Dr. McKell disclaims beneficial ownership of
these shares.
(8) Includes 385 Class A Shares and 1,155 Class B Shares held by Ms. Sproat's
husband. Ms. Sproat disclaims beneficial ownership of these shares.
(9) Includes 94 Class B Shares issuable upon exercise of stock options that
are presently exercisable or exercisable within 60 days of the date
hereof.
THE BOARD UNANIMOUSLY RECOMMENDS
A VOTE "FOR" APPROVAL OF THE REVERSE/FORWARD STOCK SPLITS.
OTHER MATTERS
The Board is not aware of other matters that are likely to be
brought before the Special Meeting. However, in the event that any other matters
properly come before the Special Meeting that were unknown to the Company a
reasonable time before the solicitation of proxies hereunder, the persons named
in the enclosed proxy are expected to vote the Shares represented thereby on
such matters in accordance with their best judgment in the interest of the
Company.
PERSONS MAKING THE PROXY SOLICITATION
AND THE COSTS ASSOCIATED THEREWITH
The enclosed proxy is solicited on behalf of the Board. We will pay
the cost of preparing, assembling, printing, mailing and distributing these
Special Meeting materials and soliciting votes. In addition to solicitation by
mail, telephone, facsimile, electronic communication or personal solicitation
may also be undertaken by our directors, executive officers or regular
employees, for which they will receive no additional compensation. Brokerage
houses and other nominees, fiduciaries, and custodians nominally holding Shares
as of the record date will be requested to forward proxy soliciting material to
the beneficial owners of such Shares, and will be reimbursed by us for their
reasonable expenses.
The repurchase of the Cashed Out Holders' fractional Class B Shares
resulting from the Reverse/Forward Stock Splits is estimated to cost
approximately $2,000,000. The following is an estimate of the costs incurred or
expected to be incurred by us in connection with the Reverse/Forward Stock
Splits. Final costs of the transaction may be greater than the estimates shown
below.
Purchase of Cashed Out Holder's Fractional Class B Shares: $2,000,000
Legal fees: .................................................... $ 200,000
Financial Advisor fees: ........................................ $ 250,000
Accounting fees: ............................................... $ 25,000
Filing fees: ................................................... $ 15,000
Printing, mailing and other costs: ............................. $ 5,000
----------
Total fees: ............................................... $ 495,000
----------
Grand Total: ................................... $2,495,000
==========
We intend to finance the Reverse/Forward Stock Splits by using cash
on hand.
PROPOSALS OF STOCKHOLDERS
In the event that the Reverse/Forward Stock Splits are not
consummated and we remain a public reporting company, proposals of stockholders
intended to be presented at the next Annual Meeting of Stockholders must be
received within a reasonable time before solicitation of proxies for such
meeting is made pursuant to Rule 14a-8
40
promulgated under the Exchange Act. If we remain a public reporting company and
fix a date for such Annual Meeting of Stockholders, we will notify you of the
meeting date and deadlines for delivering any stockholder proposals.
COMMISSION HOUSEHOLDING RULES
As permitted by the Commission's "householding" rules, if you share an
address with another stockholder, you may receive only one set of this Proxy
Statement and the other Special Meeting materials unless you have provided
contrary instructions. Any record stockholder who shares an address with another
record stockholder and has received only one set of the Special Meeting
materials, may receive a separate set of such materials, without charge, upon
written request addressed to:
Horizon Telcom, Inc.
68 East Main Street
Chillicothe, Ohio 45601-0480
Attn: Ms. Betty Uhrig
INFORMATION ABOUT THE COMPANY
Business Overview
The Company, through its operating subsidiaries, is a
facilities-based telecommunications carrier that provides a variety of voice and
data services to commercial, residential/small business and local market
segments. The Company provides landline telephone service, very-high digital
subscriber line television service and Internet access services to the southern
Ohio region, principally in and surrounding Chillicothe, Ohio. The Company is
incorporated under the laws of Ohio and was organized in 1996 pursuant to the
corporate reorganization of The Chillicothe Telephone Company ("Chillicothe
Telephone") into a holding company structure. Chillicothe Telephone began its
operations in 1895. The Company's principal executive offices are located at 68
East Main Street, Chillicothe, Ohio 45601-0480. The telephone number of the
Company's principal executive offices is (740) 772-8200.
Management of the Company
The executive officers and directors of the Company are set forth
below.
o Executive Officers
Robert McKell, Chairman of the Board
Thomas McKell, President
Jack E. Thompson, Chief Financial Officer, Treasurer and Secretary
o Directors
Robert McKell
Thomas McKell
Jack E. Thompson
Joseph S. McKell
David McKell
Helen M. Sproat
John E. Herrnstein
Jerry B. Whited
Donald L. McNeal
Joel Gerber
Robert McKell, Thomas McKell, David McKell and Joseph McKell are
brothers. Ms. Sproat is their sister.
The address of each executive officer and director of the Company is
c/o Horizon Telcom, Inc., 68 East Main Street, Chillicothe, Ohio 45601-0480.
Information regarding the background of the Company's executive
officers and directors is set forth below.
41
Robert McKell has served as Chairman of the Board and a director of
Horizon since its inception in 1996, Chairman of Chillicothe Telephone from 1988
to 1996, and President of Chillicothe Telephone from 1962 to 1998. He received a
Bachelor of Science degree in Electrical Engineering from the University of
Colorado, served as a second lieutenant in the Army Signal Corps during World
War II, and has close to 60 years of telecommunications experience.
Thomas McKell has served as President and a director of Horizon
since its inception in 1996 and of Chillicothe Telephone from 1988 to 1996. He
was Vice President of Chillicothe Telephone from 1962 to 1988. He received a
Bachelor of Science degree in Electrical Engineering from the University of
Colorado and has close to 50 years of telecommunications experience. Tom is a
member of the Advisory Board of the Huntington National Bank in Chillicothe,
Ohio.
Jack E. Thompson has been Secretary and a director of Horizon since
its inception in 1996 and was its Chief Financial Officer from 1996 until 2000.
In October 2004, Mr. Thompson was appointed as Chief Financial Officer and
Treasurer of the Company. He was Treasurer of Chillicothe Telephone from 1975 to
1996, and has served as Secretary and a director of Chillicothe Telephone since
1982. Jack received a Bachelor of Science degree in Accounting from The Ohio
State University and has close to 40 years of telecommunications experience.
John E. Herrnstein has been a director of Horizon since its
inception in 1996 and was a director of Chillicothe Telephone from 1981 to 1996.
He is Chairman of the Compensation Committee and a member of the Audit
Committee. John has been a registered representative and financial consultant
for 21 years and is currently working for McDonald Financial Group. He is a
graduate of the University of Michigan.
David McKell has been a director of Horizon since its inception in
1996 and was a director of Chillicothe Telephone from 1966 to 1996. He received
his Bachelor of Arts degree from Miami (Ohio) University and M.D. degree from
the University of Cincinnati. Dr. McKell has retired after a career of
practicing family medicine in Chillicothe, Ohio. He is a member of the Board of
Directors of the Ross County Health District.
Joseph S. McKell has been a director of Horizon since its inception
in 1996 and was a director of Chillicothe Telephone from 1983 to 1996. Dr.
McKell, a physician, has practiced medicine in Chillicothe, Ohio for more than
40 years. He was awarded a Purple Heart during his service in the Army of the
United States during World War II. He received his Bachelor of Science degree
and M.D. degree from the University of Colorado.
Donald L. McNeal was appointed a director of Horizon in November
2002. Don joined the Mead Corporation in 1962 and retired in 1992 as Vice
President of Mead's Human Resources School and Office Products Division after
working his entire business career in Mead's Human Resources Department. Don is
a member of the Compensation Committee. After graduating from The Ohio State
University in 1959 with a Bachelors Degree in Industrial Management, he served
as a captain in the United States Air Force.
Helen M. Sproat has been a director of Horizon since its inception
in 1996 and a director of Chillicothe Telephone since 1988. She has been the
owner and manager of Hidden Hill Gallery in Springboro, Ohio, since 1970. She
has been a United States equestrian judge for about 30 years. Helen is Secretary
and a trustee of the Springboro Area Historical Society and director of their
Underground Railroad tours and educational programs. She attended the University
of Colorado.
Jerry B. Whited has been a director of Horizon since November 2001
and is Chairman of the Audit Committee. Jerry is a partner in the CPA firm of
Whited, Seigneur, Sams and Rahe. He is a member of the board of directors of the
Citizens National Bank and serves on various boards and committees of local
non-profit organizations. Jerry is a graduate of Bowling Green State University.
Joel Gerber was appointed a director of Horizon in May 2003. He is
Agency Principal/President of Gerber Insurance and Financial Services and a
partner in Timberidge Heights, a real estate development company. Joel is a
member of the Audit Committee and the Compensation Committee. He serves on the
advisory board of the Huntington National Bank in Chillicothe, Ohio. Joel
attended Ohio University and The American College after serving in the United
States Navy. He was recognized as the 2000 "Citizen of the Year" by the
Chillicothe, Ohio Jaycees.
To the Company's knowledge, none of the Company's executive officers
or directors has been convicted in a criminal proceeding during the past five
years (excluding traffic violations or similar misdemeanors) or has been a party
to any judicial or administrative proceeding during the past five years (except
for matters that were
42
dismissed without sanction or settlement) that resulted in a judgment, decree or
final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
Each of the Company's executive officers and directors is a citizen
of the United States of America.
AVAILABLE INFORMATION
The Reverse/Forward Stock Splits will constitute a "going-private"
transaction for purposes of Rule 13e-3 of the Exchange Act. As a result, the
Company has filed the Schedule 13E-3 which contains additional information about
the Company. Copies of the Schedule 13E-3 are available for inspection and
copying at the principal executive offices of the Company during regular
business hours by any interested stockholder of the Company, or a representative
who has been so designated in writing, and may be inspected and copied, or
obtained by mail, by written request addressed to:
Horizon Telcom, Inc.
68 East Main Street
Chillicothe, Ohio 45601-0480
Attn: Ms. Betty Uhrig
The Company is currently subject to the information requirements of
the Exchange Act and files periodic reports, proxy statements and other
information with the Commission relating to its business, financial and other
matters.
Copies of such reports, proxy statements and other information, as
well as the Schedule 13E-3, may be copied (at prescribed rates) at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. For further information
concerning the Commission's public reference rooms, you may call the Commission
at 1-800-SEC-0330. Some of this information may also be accessed on the World
Wide Web through the Commission's Internet address at "http://www.sec.gov."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In our filings with the Commission, information is sometimes
incorporated by reference. This means that we are referring you to information
that we have filed separately with the Commission. The information incorporated
by reference herein should be considered part of this Proxy Statement, except
for any information superceded by information contained directly in this Proxy
Statement.
This Proxy Statement incorporates by reference the following
documents that we have previously filed with the Commission. They contain
important information about the Company and its financial condition.
o Our 2003 Report on Form 10-K for the year ended December 31, 2003
and
o Our Quarterly Report on Form 10-Q for the quarter ended September
30, 2004.
We also incorporate by reference any additional documents that we
may file with the Commission under Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act between the date of this Proxy Statement and the date of the
Special Meeting.
We will provide, without charge, to each person to whom this Proxy
Statement is delivered, upon written or oral request of such person and by first
class mail or other equally prompt means within one business day of receipt of
such request, a copy of any and all information that has been incorporated by
reference, without exhibits, unless such exhibits are also incorporated by
reference in this Proxy Statement. You may obtain a copy of these documents by
written request addressed to:
Horizon Telcom, Inc.
68 East Main Street
Chillicothe, Ohio 45601-0480
Attn.: Ms. Betty Uhrig
Dated: February 17, 2005 By Order of the Board
/s/ Jack E. Thompson
---------------------
Jack E. Thompson
Secretary
43
EXHIBIT A
FAIRNESS OPINION
Legg Mason Investment Banking
Legg Mason Wood Walker, Incorporated
31st Floor
100 Light Street
Baltimore, Maryland 21202
December 7, 2004
The Special Transactions Committee of Horizon Telcom, Inc.
The Board of Directors of Horizon Telcom, Inc.
68 East Main Street
Chillicothe, Ohio 45601-0480
Attn: Chairman of the Special Transactions Committee
Dear Sirs:
We have been advised that Horizon Telcom, Inc., ("Horizon" or the
"Company") is considering making an amendment to the Company's Amended and
Restated Articles of Incorporation ("Amendment") whereby Horizon would effect a
1-for-125 reverse stock split of its shares of Class B common stock ("Class B
Shares"), such that holders of less than 125 Class B Shares (the "Cashing Out
Holders") would have their Class B Shares cancelled and converted into the right
to receive cash consideration equal to $165 per Class B Share ("Consideration")
held by such holder immediately before the reverse stock split. We have also
been advised that, immediately following the reverse stock split, Horizon will
then complete a 125-for-1 forward stock split of the Class B Shares. The reverse
stock split and forward stock split are referred to herein as "the Transaction."
It is our understanding that approximately 10,000 to 15,000 Class B Shares will
be cashed out in the Transaction.
You have requested our opinion, as investment bankers, as to the
fairness to the Cashing Out Holders, from a financial point of view, of the
amount of Consideration they are to receive from Horizon in the Transaction.
In connection with our opinion, we have, among other things:
(i) reviewed the Amended and Restated Articles of Incorporation of
the Company;
(ii) reviewed and analyzed draft copies of the Amendment;
(iii) reviewed and analyzed the audited consolidated financial
statements of the Company contained in its Annual Report on Form 10-K for the
fiscal years ended December 31, 2001, 2002 and 2003 and the unaudited
consolidated financial statements of the Company contained in its Quarterly
Report on Form 10-Q for the three months and nine months ended September 30,
2004;
(iv) reviewed and analyzed certain internal information, primarily
financial in nature, concerning the business and operations of the Company
prepared and provided by the management of Horizon;
(v) reviewed and analyzed financial projections for the Company as
prepared by the management of Horizon;
(vi) held meetings and discussions with certain members of the Board
of Directors and management of the Company concerning the past and current
operations, financial condition and prospects of Horizon;
(vii) reviewed the reported stock prices and trading activity of the
publicly-traded common stock of the Company;
(viii) reviewed and analyzed certain publicly available operational,
financial and stock market data relating to selected public companies that we
deemed relevant to our inquiry;
(ix) reviewed the financial terms, to the extent publicly available,
of certain corporate acquisition transactions that we deemed relevant to our
inquiry; and
(x) conducted such other financial studies, analyses and
investigations and considered such other information as we deemed necessary or
appropriate for purpose of our opinion.
A-1
In connection with our review, we assumed and relied, without
independent verification, on the accuracy and completeness of all information
that was publicly available, supplied or otherwise communicated to Legg Mason by
or on behalf of the Company and we have further relied on the assurance of the
management of the Company that they are unaware of any facts that would make the
information provided to us incomplete or misleading. Legg Mason assumed, with
the consent of the Company's management, that any material liabilities
(contingent or otherwise, known or unknown) of the Company are set forth in its
financial statements.
Legg Mason has also relied upon the management of the Company as to
the reasonableness and achievability of the financial forecasts and projections
(and the assumptions and bases therein) provided to us for Horizon, and we have
assumed such forecasts and projections were reasonably prepared on bases
reflecting the best currently available estimates and judgments of management as
to the future operating performance of Horizon. Such forecasts and projections
were not prepared with the expectation of public disclosure. The forecasts and
projections are based on numerous variables and assumptions that are inherently
uncertain, including, without limitation, facts related to general economic and
business conditions. Accordingly, actual results could vary significantly from
those set forth in such forecasts and projections. Legg Mason has relied on
these forecasts, without independent verification, and does not in any respect
assume any responsibility for the accuracy or completeness thereof.
Legg Mason has not been requested to make, and has not made, an
independent evaluation or appraisal of the assets, properties, facilities, or
liabilities (contingent or otherwise) of the Company, and we have not been
furnished with any such appraisals or evaluations. Estimates of values of
companies and assets do not purport to be appraisals or necessarily reflect the
prices at which companies and assets may actually be sold. Because such
estimates are inherently subject to uncertainty, Legg Mason assumes no
responsibility for their accuracy. Our opinion is necessarily based upon
financial, economic, market and other conditions and circumstances existing and
disclosed to us on the date hereof. It is understood that subsequent
developments may affect the conclusions reached in this opinion and that we have
no obligation to update, revise or reaffirm this opinion. We have assumed that
the final Amendment will not differ in any material respect from the draft
Amendment we reviewed. We have also assumed that the Transaction will be
consummated on the terms and conditions described in the Amendment, without any
waiver of material terms or conditions, and that any necessary regulatory
approvals or satisfaction of any other conditions for consummation of the
Transaction will be obtained and will not have an adverse effect on the Company.
We have acted as financial advisor to the Special Transactions
Committee (the "Special Committee") of the Board of Directors (the "Board") of
the Company and will receive a fee for our services. In addition, the Company
has agreed to indemnify us for certain liabilities arising out of our
engagement. It is understood that this letter is solely for the information of,
and directed to, the Special Committee and the Board in their evaluation of the
Transaction and is not to be relied upon by any shareholder of the Company or
any other person or entity. Our opinion does not constitute a recommendation to
the Special Committee or the Board as to how the Special Committee or the Board
should vote on the Transaction or to any shareholder of the Company as to how to
vote at any shareholders' meeting at which the Transaction is considered.
Additionally, we have not been involved in structuring the Transaction and our
opinion does not compare the relative merits of the Transaction with those of
any other transaction or business strategy which were or might have been
available to or considered by the Company, the Special Committee or the Board as
alternatives to the Transaction and does not address the underlying business
decision by the Special Committee or the Board to proceed with or effect the
Transaction. This letter is not to be quoted or referred to, in whole or in
part, in any registration statement, prospectus, proxy statement or in any other
document used in connection with the offering or sale of securities or to seek
shareholder approval of the Transaction, nor shall this letter be used for any
other purposes, without the prior written consent of Legg Mason.
Based upon and subject to the foregoing, we are of the opinion that,
as of the date hereof, the amount of Consideration to be paid by the Company to
the Cashing Out Holders in the Transaction is fair to such Cashing Out Holders,
from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker, Incorporated
A-2
EXHIBIT B
FORM
OF
REVERSE STOCK SPLIT AMENDMENT
Article SIXTH of the Amended and Restated Articles of Incorporation
of Horizon Telcom, Inc. is hereby amended and restated as follows:
SIXTH:
A. The total number of shares of all classes of capital stock which
the corporation is authorized to issue and have outstanding is 700,000 shares,
consisting of 200,000 shares of Class A Common Stock, without par value ("Class
A Common Stock"), and 500,000 shares of Class B Common Stock, without par value
("Class B Common Stock").
B. Except with respect to voting rights and preemptive rights as
provided below in this paragraph, the shares of Class A Common Stock and the
shares of Class B Common Stock shall have identical terms and shall be deemed a
single class of capital stock for all purposes. The following terms apply with
respect to the voting and preemptive rights of the Class A Common Stock and the
Class B Common Stock:
1. Voting Rights: Only the holders of Class A Common Stock shall be
entitled to vote on matters to be voted upon by the stockholders (including,
without limitation, the election of directors of the corporation) and the
holders of shares of Class B Common Stock shall not have any voting rights.
2. Preemptive Rights: No holder of shares of Class B Common Stock
shall, as such holder, have any preemptive or preferential right to purchase or
subscribe to any shares of any class of the corporation, whether now or
hereafter authorized, whether unissued or in the treasury, or to purchase any
obligations convertible into shares of any class of the corporation, which at
any time may be proposed to be issued by the corporation or subjected to rights
or options to purchase granted by the corporation. No holder of Class A Common
Stock shall have preemptive rights to the issue of any Class B Stock. Nothing in
this subparagraph shall serve to limit the aforesaid rights as to the holders of
shares of Class A Common Stock, except as to shares of Class B Common Stock.
C. Effective on the date of approval of this certificate of
amendment by the Secretary of State of the State of Ohio, each one hundred
twenty-five (125) shares of Class B Common Stock then outstanding shall be
automatically combined into one (1) fully paid and non-assessable share of Class
B Common Stock (the "Reverse Stock Split"). In lieu of the issuance of any
fractional shares of Class B Common Stock that would otherwise result from the
Reverse Stock Split to holders ("Cashed Out Holders") who held less than one
hundred twenty-five (125) shares of Class B Common Stock immediately before the
Reverse Stock Spit, each Cashed Out Holder shall be entitled to receive One
Hundred and Sixty-Five Dollars ($165) in cash for each share of Class B Common
Stock held immediately before the Reverse Stock Split.
Upon the completion of the Reverse Stock Split, Cashed Out Holders
shall cease to be stockholders of the corporation.
B-1
EXHIBIT C
FORM
OF
FORWARD STOCK SPLIT AMENDMENT
Paragraph C of Article SIXTH of the Amended and Restated Articles of
Incorporation of Horizon Telcom, Inc. is hereby amended and restated as follows:
C. Effective on the date of approval of this certificate of
amendment by the Secretary of State of the State of Ohio, each share of Class B
Common Stock then outstanding shall be automatically reclassified and changed
without any further act into one hundred and twenty-five (125) fully paid and
non-assessable shares of Class B Common Stock without increasing or decreasing
the amount of stated capital or paid-in surplus of the corporation.
C-1
FOLD AND DETACH HERE
- --------------------------------------------------------------------------------
HORIZON TELCOM, INC.
PROXY - CLASS A AND CLASS B COMMON STOCK
SPECIAL MEETING MARCH 16, 2005
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned, revoking all prior proxies, hereby appoints Jack E.
Thompson and Thomas McKell, and each of them, as proxies, each with the power to
appoint his substitute, and hereby authorizes each of them to represent and to
vote, as designated herein, all the shares (the "Shares") of Class A and/or
Class B common stock of Horizon Telcom, Inc. ("Horizon") held of record by the
undersigned on February 17, 2005, at the Special Meeting of Stockholders to be
held on March 16, 2005 and any adjournment or postponement thereof (the "Special
Meeting").
THE BOARD OF DIRECTORS UNANIMIOUSLY RECOMMENDS A VOTE "FOR" APPROVAL
OF THE REVERSE/FORWARD STOCK SPLITS.
1. The approval of amendments to Horizon's FOR AGAINST ABSTAIN
Amended and Restated Articles of [ ] [ ] [ ]
Incorporation whereby Horizon would effect a
1-for-125 reverse stock split of its shares
of Class B common stock, such that holders
of less than 125 shares of Class B common
stock would have their shares cancelled and
converted into the right to receive cash
consideration equal to $165 per share,
followed immediately by a 125-for-1 forward
stock split of the shares of Class B common
stock (the "Reverse/Forward Stock Splits").
2. In the discretion of the proxies, upon such
other business as may properly come before
the Special Meeting or any adjournment or
postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE THIS
PROXY WILL BE VOTED IN FAVOR OF THE REVERSE/FORWARD STOCK SPLITS.
FOLD AND DETACH HERE
- --------------------------------------------------------------------------------
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE
ENCLOSED ENVELOPE.
The undersigned acknowledges receipt from Horizon, prior to the
execution of this proxy, of a notice of the Special Meeting and the proxy
statement relating to the Special Meeting.
Dated: _____________________, 2005
______________________________
______________________________
Signature(s)
(Holders of Shares should sign
exactly as name appears on
stock certificate. Where there
is more than one holder, each
should sign. Executors,
administrators, trustees and
others signing in a
representative capacity should
so indicate.)
If the address shown is
incorrect, please make changes
below:
______________________________
Street
______________________________
City
______________________________
State & Zip Code